-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OxA6XVXZdCF0731rtvHC9aLIevT+mNV37lptlvaifJXx+lk7tStBWtwPtqHHE32U Po6q3p0kgx6B+TXZ4JfP3g== 0000002491-98-000009.txt : 19980928 0000002491-98-000009.hdr.sgml : 19980928 ACCESSION NUMBER: 0000002491-98-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04281 FILM NUMBER: 98714871 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7028967700 MAIL ADDRESS: STREET 1: 4380 BOULDER HIGHWAY CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from _____ to _____ Commission File Number 0-4281 ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0104066 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 6601 S. Bermuda Rd. Las Vegas, Nevada 89119 (Address of principal executive offices) Registrant's telephone number: (702) 270-7600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common equity held by non-affiliates of the registrant was approximately $76,697,000 as of September 21, 1998. The number of shares of Common Stock, $0.10 par value, outstanding as of September 21, 1998 according to the records of registrant's registrar and transfer agent, was 34,261,167. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year and are incorporated by reference into Part III of this Form 10-K. 1 ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 1998 PART I ITEM 1. BUSINESS Introduction Alliance is a diversified, worldwide gaming company that (i) designs, manufactures and distributes 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 and Systems the Company is the second largest gaming machine manufacturer in North America, having marketed approximately 90,000 gaming machines during the past five years; it also designs, integrates and sells highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with approximately 90,000 game monitoring units ("GMUs") installed worldwide. The Company also owns, operates and services an installed base of over 7,700 slot and video gaming machines that 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 dockside casino in Vicksburg, Mississippi and a locals casino in Sparks, Nevada, which together have 21 table games and 1,200 gaming machines (collectively, "Casino Operations"). In addition, operating under the Bally Wulff name, the Company believes that it is a leading supplier of wall-mounted gaming machines and amusement 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 Bally Gaming International, Inc. which includes the Bally Gaming 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. Business Units Bally Gaming and Systems Prior to May 1998, the operations of Bally Gaming and Systems were managed separately without substantial integration. The market has seen a convergence of the game management systems and the games themselves. Therefore, in May 1998 the Company consolidated the operations of Bally Gaming and Systems. 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 Percentage of New Gaming Units Sold Year ended Six months Years ended December 31, ended June 30, June 30, 1995 1996 1997 1998 Nevada and Atlantic City 42% 37% 47% 25% International 30 45 40 49 Riverboats 12 11 5 15 Indian Gaming 14 7 7 10 Other (principally VLTs) 2 - 1 1 ---- ---- ---- ----- 100% 100% 100% 100% === === === === Markets for Bally Gaming. 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, 1998. The Company estimates that Atlantic City, the second largest market, had an installed base of approximately 35,000 machines as of June 30, 1998. Product sales of the Company's casino-style gaming equipment in these markets are primarily to established casino customers either to replace existing machines or as par 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 tended to increase 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 and dockside casinos began operating in 1991 and, as of June 30, 1998, riverboat and dockside casinos were operating in Indiana, Iowa, Illinois, Mississippi, Missouri and Louisiana. The estimated installed base of gaming machines on riverboats or dockside casinos is approximately 85,000 machines as of June 30, 1998. 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 sells machines to 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 Bally 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 estimated base of all Native American gaming machines as of June 30, 1998 was approximately 80,000 units. Currently casino gaming also is legal in Colorado and South Dakota. The estimated installed base of machines in these markets as of June 30, 1998 was approximately 15,000 machines. In 1997, Michigan voters approved the establishment of three casinos in the city of Detroit. Although voters recently reaffirmed the first vote, there could be other legal challenges before temporary or permanent casinos open. There is no gaming presently in Detroit. 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 conducts its business in Canada through its staff in the United States. The Company has begun, and plans to continue, expansion into the Australian market, and has an office in Sydney, Australia. In July 1998, the Company's Australian subsidiary, BGI Australia Pty, Ltd., was approved for licensing by the New South Wales Liquor Administration Board which licenses gaming operators and suppliers in New South Wales. The New South Wales market is the second largest gaming machine market in the world with an estimated installed base of 70,000 units at June 30, 1998. The Company also distributes gaming machines, manufactured by Bally Gaming, through its direct and indirect subsidiaries, Bally Gaming International, GmbH ("GmbH"), from its sales office in Hannover, Germany principally to customers in Europe and Russia, through Bally Gaming Africa, Pty. Ltd., from its sales office in Johannesburg, South Africa, principally to customers on the African continent and Bally Gaming de Puerto Rico, Inc., principally to customers in Puerto Rico. The percentage of Bally Gaming's international revenues by geographic area for the periods indicated are set forth below: New Units by Geographic Area Percentage of New Gaming Units Sold Year ended Six months Years ended December 31, ended June 30, June 30, 1995 1996 1997 1998 ---- ---- ---- ---- Europe 51% 40% 33% 37% Canada 22 31 26 35 Latin America 20 25 39 22 Far East 4 2 2 2 Other 3 2 - 4 ----- ----- ---- ----- 100% 100% 100% 100% === === === === 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, New Jersey, 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. Gaming Products. Bally Gaming designs, manufactures and distributes a variety of electronic slot and video gaming machines. Gaming machines are differentiated from one another by graphic design and theme, cabinet style and size, pay table, reel-type design, betting denomination 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. Bally Gaming's video gaming machines are designed to (i) simulate various live card games, video reel-spinning games and keno through a video display and (ii) for GameMaker(R) gaming machines, offer the player the chance to play up to ten different 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 GameMaker(R), during late 1994. In March 1998 the Company introduced the first major upgrade to both the ProSeries and GameMaker product lines. The GameMaker 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 600 games. The games simulate various card games, keno and popular reel-spinning games. The GameMaker machines contain bill acceptors and many other features believed to be popular with casinos and their customers. The GameMaker machines are available in upright, bar top and slant top cabinets. Revenues from sales of GameMaker machines were approximately $27.4 million during the year ended December 31, 1995, $12.9 million for the six months ended June 30, 1996 and $34.9 million and $22.7 million for the years ended June 30, 1997 and 1998, respectively. The ProSeries 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 machines were approximately $57.1 million during the year ended December 31, 1995, $38.5 million for the six months ended June 30, 1996 and $66.6 million and $45.8 million for the years ended June 30, 1997 and 1998, respectively. Bally 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. Bally Gaming provides several after-sale, value-added services to its customers including customer education programs, a 24-hour customer service telephone hot-line, an internet web site for technical support and field service support programs and spare parts programs. Bally Gaming's historical warranty expense as a percentage of revenues has been less than 1%. In addition, Bally Gaming sells and services used gaming machines and sells parts for existing machines. Bally 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 $9.2 million during the year ended December 31, 1995, $2.0 million for the six months ended June 30, 1996 and $5.4 million and $3.6 million for the years ended June 30, 1997 and 1998, respectively. The following table sets forth the percentages of revenues provided by each of Bally Gaming's major product lines for the periods indicated: Percentage of Revenues Year ended Six months Years ended December 31, ended June 30, June 30, 1995 1996 1997 1998 Slot machines 53% 63% 55% 53% Video gaming machines 31 24 30 30 Other (primarily used machines, parts and services) 16 13 15 17 --- --- --- --- 100% 100% 100% 100% === === === === The Company believes that video gaming products and second feature bonus games will continue to gain floor space in casinos. Gaming machines have a mechanical life that can exceed 10 years. However, in the established markets, Bally 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 entertaining 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. System Products. Bally Systems designs, integrates, and sells a computerized monitoring system ("SDS 6000") for slot and video gaming machines which provide casino operators with on-line real time data relative to a machine's accounting, security and cash monitoring functions. The SDS 6000, when purchased along with other third party player tracking applications, also provides data to, and receives data from casinos to track their players to establish and compile individual player profitability and other demographic information. SDS 6000 is comprised primarily of (1) hardware consisting of microcontroller-based printed circuit boards which are installed within the slot and video machines as well as card readers, 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) firmware developed by Systems which provides access to the slot machine's and player's activity data gathered by the microcontroller hardware, and (3) business applications software developed by Systems which manages the slot machine's and player's activity information. This software resides on Unix or PC based servers. Systems also provides software and hardware support services, including maintenance, repair and training for purchasers of its monitoring systems. Product Development. The Company believes that providing games and systems with high entertainment value that are preferred by the casino patron is a key to meeting the demands of casinos. The Company believes that the use of existing computer technology is accelerating which can give gaming machines and systems a competitive advantage in the gaming industry. Total spending on product research and development by Bally Gaming and Systems was $5.6 million during the year ended December 31, 1995, $2.9 million during the six months ended June 30, 1996, and $6.7 million and $12.7 million during the years ended June 30, 1997 and 1998, respectively. The increase in research and development spending in the year ended June 30, 1998 resulted from increasing the number of new product platforms introduced, product development efforts and growth in the number of products to support with ongoing development. Bally Gaming develops its products for both the domestic and international market. Bally 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 and coin and currency handling. 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 tend to deploy similar hardware and related technology. Ideas for new models are generated internally, from customers and other third parties, many of whom have entered into strategic relationships with the Company. On an annual basis, Bally Gaming expects to introduce approximately 25 new models to the market. However, no assurance can be made with respect to the rate of new model introductions or the obtaining of regulatory approvals in respect thereof. Bally Gaming continues to focus on development of new innovative gaming machines. Key members from the marketing and design groups meet to analyze machines currently being marketed by Bally Gaming 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 further developed. Bally Gaming typically pursues 15 to 20 projects at any given time, and approximately 2 to 3 machines are submitted for licensin each year. These new machines are built in limited quantities and then test marketed in various locations throughout the U.S. 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 Gaming's machines and their continued acceptance and success in the marketplace. All new or modified hardware and software are designed to satisfy all applicable testing standards. Typically, new products require regulatory approval for most North American and Australian jurisdictions, but generally no approval is needed for other jurisdictions. Each jurisdiction that requires regulatory approval of new products has its own filing requirements and process. For Nevada, new gaming machine platforms must be filed with the state gaming laboratory that will test the products from 60 days to three months or more before a mandatory 30 to 60 day field test is conducted in a casino. For new product platforms, the Nevada State Gaming Control Board and the Nevada Gaming Commission must each approve these products at their meetings which are held monthly. For modifications of existing products or casino associated equipment, the process in Nevada is similar to new platforms, except a field test is usually not required and the product can be approved administratively by the Nevada State Gaming Control Board staff. Once products are approved by the gaming regulators, customers will typically require a 30 to 90 day field trial of the product in their casinos with the right to return the product at any time during the field trial period. The Company does not recognize revenue until the customer has agreed to end the field trial and has accepted the gaming machines. During the year ended June 30, 1998, the Company received regulatory approval in certain jurisdictions to manufacture and distribute several new gaming machines. Roll The Dice(R) is the Company's first in a series of second feature bonus games to be distributed on a recurring revenue basis. The Company intends to introduce new games for this platform every four to six months. Feature Frenzy(R), the Company's first nine-line, multi-coin video gaming machine was developed based on successful games in the Australian market. Shipments to customers for trial of both of these products began in the quarter ended June 30, 1998. The Company recently began the field trial in Nevada for GameMagic(R), a high-resolution graphics multi-game video gaming machine offering up to ten different games and is awaiting regulatory approval in Nevada and other jurisdictions. Shipments of GameMagic to customers in jurisdictions which do not require regulatory approval of the games (primarily certain European markets and the Caribbean) began in June 1998. The Company will seek regulatory approval for all of the products in other gaming jurisdictions during fiscal 1999. In May 1998, the Company began the field test required by the Nevada Gaming Control Board of its wide-area progressive jackpot system named "Thrillions(TM)" at Hilton Gaming Corporation's Bally's Las Vegas casino under its proprietary name "Pay Day". The system has been designed to allow patrons playing nickel, quarter, dollar etc. machines to compete for the same progressive jackpot with different odds of winning. The system also permits the casino patron to play for more than one jackpot meter with a single play of the machine. The system has been designed to allow casinos to use their own branding for the product. The Company will begin deployment of the Thrillions product once it receives approvals from gaming regulators. The Company has filed the Thrillions system with the New Jersey regulators and plans to apply for approval with regulators of other gaming jurisdictions in fiscal 1999. In March 1998, Bally Gaming introduced a product called Cash Cage(TM), which dispenses paper tokens (currency or casino customized scrip) from a bill hopper in partial substitution for complete coin payouts. Cash Cage will be marketed as a means to reduce hopper fills and jackpots paid by hand . This new technology should benefit casinos in several ways: improve customer satisfaction by eliminating the need for customers to wait for a slot attendant to fill a coin hopper or pay certain levels of jackpots; reduce operating costs through fewer coin hopper fills and hand payouts; improve casino cage accounting efficiency and increase security due to fewer operations performed by hand. The Company has filed the Cash Cage system with the Nevada Gaming Control Board and plans to apply for approval with regulators of other gaming jurisdictions in fiscal 1999. Pursuant to a long term agreement, the Company has agreed to license JCM American, a U.S. subsidiary of Japan Coin Machine Company, a leading supplier of bill acceptors to the gaming industry, to be its worldwide exclusive manufacturer and distributor of the Cash Cage technology, for which the Company will receive a royalty for each Cash Cage unit shipped. Systems' product development is also divided into 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. Systems has developed a modular and extendible hardware and software architecture which allows new development to be focused upon achieving greater functionality, product reliability and ease of maintenance for the casino operator and achieving greater visua appeal and ease of use for the slot customer. In addition, the architecture allows customers to upgrade existing components or add new components with minimal impact. Development cycles for hardware can vary between a few months for minor revisions to more than a year for major design changes or for changes made by various slot manufacturers with which Systems' product must communicate and be physically integrated. Software development results in (1) periodic product releases that include new features which extend and enhance the SDS 6000 product, (2) periodic maintenance releases which enable casino operators to correct problems or improve the usability of the system and (3) documentation needed to install and use the system. In 1995, the hardware and software groups from Systems, as well as engineers from Bally Gaming, coordinated efforts to develop a form of cashless wagering that uses bar-coded coupons which can be read by the bill validators in Bally Gaming's slot machines which are connected to an SDS 6000 system. Bally 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 system. The bar-coded coupon product is currently in regulatory field test in New Jersey, and has been submitted to the regulators in Nevada. Sales and Marketing. Bally Gaming and Systems uses a direct sales force and an independent distributor network to distribute its products. Bally Gaming and Systems North America sales staff consists of approximately 28 people and operates offices in Nevada, New Jersey, Mississippi, Illinois, Colorado and Florida. Approximately 78% of new unit machine sales over the calendar year 1995, 81% for the six months ended June 30, 1996 and 89% and 80% for the years ended June 30, 1997 and 1998, respectively were generated by Bally Gaming's direct sales force other than those at GmbH. On a limited basis, Bally Gaming uses distributors for sales to certain international jurisdictions. Bally Gaming's agreements with distributors do not specify minimum purchases but generally provide that Bally Gaming may terminate such agreements if certain performance standards are not met. Approximately 8% of new gaming machine unit sales for the calendar year 1995, 2% for the six months ended June 30, 1996 and 4% and 6% for the years ended June 30, 1997 and 1998, respectively, were generated through independent distributors. Approximately 8% of new gaming machine unit sales for the calendar year 1995, 2% for the six months ended June 30, 1996 and 7% and 14% for the years ended June 30, 1997 and 1998, respectively, were generated through GmbH. Systems has approximately 90,000 game monitoring units installed, of which approximately 78,000 are in the United States. At June 30, 1998, Systems had 92 installed locations. Approximately 78% of System's sales over the calendar year 1995, 93% for the six months ended June 30, 1996 and 92% and 96% for the years ended June 30, 1997 and 1998, respectively were generated by the Bally Gaming and Systems direct sales force. In addition to offering an expansive product line, Bally 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. Bally Gaming also offers customized design services that utilize computer aided design and studio software programs. Bally Gaming's design department can generate a casino floor layout and can create a proposed slot mix for customers. I many of the emerging markets, Bally 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. For the year ended June 30, 1998, approximately 83% of Bally Gaming's slot and video gaming machine sales were on terms of 90 days or less. Approximately 17% of Bally 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 three years or less. In addition, in certain situations Bally Gaming has participated in the financing of other gaming related equipment manufactured by third parties in the emerging markets. 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. Management believes that financing of customer sales is an important factor in certain emerging markets. 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. 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 years ended June 30, 1997 and 1998, Bally Gaming's largest customer accounted for approximately 5%, 8%, 11% and 7% respectively of Bally Gaming's revenues, while Bally Gaming's 10 largest customers accounted for approximately 25%, 42%, 45% and 48% of Bally Gaming's revenues during such periods, respectively. 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 years ended June 30, 1997 and 1998, Systems' ten largest customers (which include certain multi-site casino operators that have corporate agreements with Systems) accounted for approximately 92%, 84%, 70% and 53% 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 of Bally Gaming and Systems will be based on penetration of the international markets, further expansion in the established and emerging markets, as well as continued development efforts to provide customers with new and innovative hardware and software product offerings. Assembly Operations. Bally Gaming and Systems Las Vegas facility was completed in 1990 specifically for the design, assembly 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 Bally Gaming and Systems to increase production without significant capital expenditures. Effective July 1, 1998 all assembly of Systems' products are being performed in the Las Vegas facility. 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. Bally Gaming keeps an inventory of parts that allow machines to be altered quickly to conform with a particular customer's design/feature request. Bally Gaming produces products for individual customer orders and therefore finished goods inventories are kept low. Bally Gaming designs all of the major assemblies that are incorporated into the final machine configuration. Competition. The market for gaming machines and progressive systems in North America is dominated by a single competitor, International Game Technology, Inc. ("IGT"). Management believes based on industry estimates made by analysts that Bally Gaming has the second largest market share in North America. Worldwide there are a number of other well established, well-financed and well-known companies producing gaming machines that compete with each of Bally Gaming's lines in each of Bally Gaming's markets. The other major competitors are AC Slot and Coin, Anchor Gaming, Casino Data Systems, ("CDS"), Innovative Gaming Corporation of America, Mikohn Gaming Corporation, Powerhouse Technologies, Inc., Shuffle Master, Inc., Sigma Games, Inc., Silicon Gaming, Universal Distributing of Nevada, Inc. and WMS Industries, Inc., ("WMS"), and companies that market gaming machines under the brand names of Aristocrat, Atronic, Cirsa, Novomatic and Sega Enterprises Ltd. Many of these companies look to expand their market share by decreasing the Company's and IGT's current market share. Other companies may enter the gaming machine business and several of these companies offer or plan to offer second feature bonus games. Only IGT and CDS currently offer wide-area progressive systems, although others may enter this area. Competition among gaming product manufacturers, particularly with respect to sales of gaming machines into new and emerging markets, is vigorous and is based on which machines generate the most net win to the casinos, competitive customer pricing and financing terms, quality of the product and having an extensive distribution and sales network. Systems' main competition currently consists of IGT, CDS, and to a lesser extent Gaming Systems International, Mikohn Gaming Corporation, Acres Gaming, Inc. and Logical Solutions International and companies marketing systems under the brand names of Aristocrat and Grips. 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. Management 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 56,000 token machine units in Germany. German regulations currently limit the useful life of wall machines to a period of four years. As a result, annual market demand for wall machines in Germany approximates 40,000 to 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. 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. Management believes that the size of the wall machine market has declined slightly from prior years due to changes in the arcade and tavern markets, as well as the impact from the overall slowdown in the German economy. A portion of this annual demand is not available to the Company as it relates to machines i arcades operated by the Company's two main German competitors. 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 the 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 the years ended December 31, 1995 and 1996, and was 33% and 30% for the years ended June 30, 1997 and 1998, respectively. 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. 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 $0.22 at the exchange rate of $1.00=DM 1.81 prevailing as of June 30, 1998, which rate is used hereinafter) to play, although the player may deposit larger amounts to provide continuous play but not to increase payoffs. German regulations limit the maximum payout to ten times the player's stake (DM 4.00 or approximately $2.22 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 wager. 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 be a full service provider 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. The following table sets forth the percentage of Bally Wulff's revenues by product line for the periods indicated: Percentage of Revenues Year ended Six months Years ended December 31, ended June 30, June 30, 1995 1996 1997 1998 ---- ---- ---- ---- Sale of wall machines manufactured by Wulff 39% 42% 52% 44% Leasing of wall machines manufactured by Wulff 3 4 6 10 Recreational and amusement machines and third party wall machines distributed 23 22 25 26 Other (primarily used machines, parts and service) 35 32 17 20 --- --- --- --- 100% 100% 100% 100% === === === === 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. Total spending on product research and development by Bally Wulff was $3.6 million during the year ended December 31, 1995, $1.8 million during the six months ended June 30, 1996, and $3.3 million and $3.0 million during the years ended June 30, 1997 and 1998, respectively. Sales and Marketing. Bally Wulff sells approximately 93% of its products through its own sales force of 58 individuals located in 22 regional sales offices. Independent German distributors account for approximately 7% of sales. Approximately 99% 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 held in Frankfurt, Germany, at which Bally Wulff introduces new products. The next Amusement Game Fair will be held in November 1998. The wall machines manufactured and sold by Bally Wulff generally sell for prices ranging from DM 5,500 to DM 6,200 (approximately $3,000 to $3,500). Due to price competition among the three largest manufacturers, selling prices have declined from 1997. Management believes that such declines in prices may continue in the future. For the year ended June 30, 1998 approximately 85% of Bally Wulff machine sales were on terms of 90 days or less. 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 15% of its sales, and management expects this practice to increase during fiscal 1999. Leasing machines to customers accounted for 10% of total revenues for the year ended June 30, 1998 compared to 3%, 4% and 6% during the year ended December 31, 1995, the six months ended June 30, 1996, and the year ended June 30, 1997, respectively. The leasing market is the fastest growing revenue segment and the management expects a continued increase for the months ahead. In approximately 70% 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 10 customers in 1998 has maintained its relationship with Bally Wulff for over four years. For the year ended June 30, 1998, no single customer accounted for more than 3% of Bally Wulff's revenues, while Bally Wulff's top 10 largest customers accounted for approximately 11% of Bally Wulff's revenues. For the year ended December 31, 1995, the six months ended June 30, 1996 and the year ended June 30, 1997, Bally Wulff's top ten customers accounted for approximately 10%, 15% and 12% of Bally Wulff's revenues, respectively, while no single customer accounted for more than 3%, 6% and 3% 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 hel 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 approximately 95% 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 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 Nevada 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: 1996 1997 1998 Average number of gaming machines owned 5,290 5,660 6,460 Average number of locations 524 562 624 Average win per day per gaming machine $48.60 $52.40 $53.70 At June 30, 1998 the Company operated approximately 7,060 machines on its Nevada route. The Company has grown the number of gaming machines owned and operated principally through the strategic takeover of contracts at locations operated by several mid-sized route operators. Such acquisitions have added approximately 230 and 580 gaming machines to the Nevada route during the years ended June 30, 1997 and 1998, respectively. 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 net win 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 amount to the owner of the local establishment and the Company receives all of the net win 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 85%, 85%, and 87% of revenues and 77%, 77%, and 77% of installed machines, respectively, in the Company's Nevada route operations for the years ended June 30, 1996, 1997, and 1998. At June 30, 1998, the weighted average remaining term of the Company's revenue sharing arrangements was approximately 3.0 years. Space lease arrangements accounted for approximately 15%, 15%, and 13% of revenues and 23%, 23%, and 23% of installed machines, respectively, in the Company's Nevada route operations for the years ended June 30, 1996, 1997, and 1998. At June 30, 1998, the weighted average remaining term of the Company's space leases was 2.8 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 support for marketing promotional allowances and using its advanced design capabilities to provide electronic gaming machines with features customized to customers' needs. The Company developed and continues to implement a system called "Gamblers Bonus". Gamblers Bonus is 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 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 t members of 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, 1998, the Company had the Gamblers Bonus installed in over 2,000 gaming machines at approximately 180 locations or 30 percent of the installed base of 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. The Company has benefited from the growth in population in Nevada, as with growth more gaming venues are created. Certain local politicians have proposed limiting or curtailing the number or type of venues where gaming is authorized. Management does not believe the outcome of these proposals will have a material impact on financial results of the Company. Customers. The Company believes it has a diversified customer base with no one customer accounting for more than 10%, 6% and 5% of the Company's revenues generated from Nevada route operations during the years ended June 30, 1996, 1997 and 1998, although approximately 14%, 13% and 11% 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, 1997 and 1998, the ten largest customers accounted for approximately 26%, 23% and 20% of Nevada route operations revenues, respectively. Assembly Operations. In previous years, the Company manufactured electronic gaming machines for use in its Nevada route operations. The Company manufactured approximately 64% 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. In July 1998, the Company received regulatory approval to begin using the Bally GameMaker platform for gaming machines deployed on the Nevada route. 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, Jackpot Enterprises, Inc., Anchor Gaming, ET&T and Southwest Gaming 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 can reduce the Company's gross margin on such operations if the percentage of the gaming machine revenues retained by local establishment increases. 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, and its affiliates, 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 (OTB's) in the greater New Orleans area. The Company operates the game rooms where the video poker machines are located for 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, 1998 the Company had approximately 710 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 common 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 all of its officers and directors are Company employees. The Company has a 71% interest in dividends o 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 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. T 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 OTB's 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 OTB' in this parish accounted for $2.2 million of revenues and approximately 9% of operating income for VSI during the year ended June 30, 1998. After June 30, 1999, the Company plans to redeploy the video poker machines from these two closed sites to six other sites, pending appropriate approvals. The Louisiana legislature has considered other legislation to curtail video poker in the past and may do so again in the future. 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. While the Company has investigated the addition of new locations under its current contract with the Fair Grounds in areas where competitive factors are favorable, no plans currently exist to add new locations. 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, 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 three riverboats are currently operating in the greater New Orleans area. 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 anticipated that the land-based casino will reopen following reorganization but completion of the facility is not expected to occur until October 1999. Casino Operations Overview. Rainbow Casino. On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. The project includes the Rainbow Casino, which is a 24,000-square foot casino owned and operated by the Company which as of June 30, 1998, operated approximately 780 gaming machines and 15 table games as well as a 245-seat restaurant. The facility also includes the 89-room Rainbow 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 Company has a signed a letter of intent to acquire the entertainment park for $0.5 million. The park closed in September 1998 and management is evaluating alternative uses for the facility once the purchase is consummated. Rainbow Casino is marketed as a "locals" casino and draws its customers principally from within a 75-mile radius of Vicksburg. The Vicksburg casino market generated approximately $192.2 million in gaming revenue in the twelve months ended June 30, 1998. 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, an independent company that was the former general partner of RCVP became a limited partner entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of such amount when revenues exceed $35.0 million but only on such incremental amount), for a period of 15 years. The Company holds the remaining economic interest in the partnership. As part of the refinancing completed in August 1997, the Company purchased notes payable to HFS Gaming Corporation ("HFS") and National Gaming Mississippi, Inc. ("NGM") and acquired the casino royalty previously due to HFS. 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, 1998 operated approximately 420 gaming machines, 6 table games, and keno. In addition, Rail City Casino includes a 300-seat restaurant, which was fully remodeled in th year ended June 30, 1998, 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 the 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 the Lady Luck Gaming Corporation and Horseshoe Gaming, LLC were going to form a joint venture to develop a project that would include a dockside casino, hotel and relate amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel and auto racing complex on the Big Black River which is between Vicksburg and Jackson, Mississippi. The legality of that site for gaming is currently in litigation. At this time management does not know which, if any, of these sites will be developed. Both of these projects will be contingent on several factors including regulatory approval and financing. Patents, Copyrights and Trade Secrets Bally Gaming is the copyright owner of both the source code and the video presentation of its games and has registered many of these copyrights with the U.S. Copyright Office. Game version upgrades and new games are registered with the U.S. Copyright office as they are finalized. The copyrights expire at various dates from the year 2000 through 2072. Some games, cash handling mechanisms, and other gaming device mechanisms (either currently used or reserved for future development) are covered either by pending patent applications or issued patents, both foreign and domestic. The expiration dates of these patents vary and are based upon their filing dates or issue date. In addition, some of the games have trademarks registered with the U.S. Patent and Trademark Office, state trademark registries, or both. Bally Gaming is obligated under several patent agreements to pay royalties ranging from approximately $25 to $100 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, Bally Gaming is obligated to pay a royalty of $35 per machine on new machines sold 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 Bally Gaming for the year ended December 31, 1995, the six months ended June 30, 1996 and the years ended June 30, 1997 and 1998 was $3.0 million, $1.1 million, $3.0 million and $2.2 million, respectively. The Company has over two hundred registered or pending trademark applications in the United States and around the world, including the registered U.S. trademark, Gamblers Bonus. Employees and Labor Relations As of June 30, 1998, the Company employed approximately 1,270 persons in the State of Nevada, VSI employed 80 persons in the State of Louisiana, RCVP employed 480 persons in the State of Mississippi, the Company employed approximately 40 persons in various other states and 20 persons in various other countries and Bally Wulff employed 460 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 that 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 collectively 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 Gamin Commission (the "Nevada Commission"), the Clark 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 on declarations of public policy concerned with, among other things: (i) the prevention of unsavory and unsuitable persons from having any involvement with gaming; (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 Company's gaming-related operations. The Company is registered with the Nevada Commission as a publicly traded corporation (a "Registered Corporation"). The Company's direct and indirect subsidiaries that conduct gaming operations at various locations, conduct gaming machine operations (collectively, the "Nevada Subsidiaries") are required to be licensed by the Nevada Gaming Authorities. The licenses held by the Nevada Subsidiaries require periodic payments of fees and taxes and are not transferable. The Company, through registered intermediary companies (individually an "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 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 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 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 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 to determine whether that 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 are or may be require to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause 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 that 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. Licensing and suitability determinations 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 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 nonrestricted licenses must be reported to or approved by the Nevada Commission. If it were determined that a Corporate Licensee had violated the Nevada Act, the licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and 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 Nevad 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 property) 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 or the New Notes, to file applications, be investigated, and be found suitable to own the security of the Company if the Nevada Commission has reason to believe that the holder's ownership would be inconsistent with the declared policies 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 written notice requiring such filing. If there is a default in the payment of dividends fo six consecutive dividend payment dates for the Company's 11 1/2% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E (the "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, that 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 finding of suitability if the 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 the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities that 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 investment only 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. The Nevada Commission may in its discretion require the holder of any debt securities of a Registered Corporation 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 be inconsistent with the declared policies 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 in Nevada a current stock ledger, 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. 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 o 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. 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 before 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 promote 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 (commonly called " greenmail") and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's board of directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purpose 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 on either (i) a percentage of the gross revenues received, (ii) the number of gaming devices operated, or (iii) the number of games operated. 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 gaming device route operator licenses or manufacturer or distributor licenses 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, "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 $10,000 revolving fund to pay the expenses of investigation by the Nevada Board of the Licensee's 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 on 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") and 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 on policies of maintaining the health, welfare and safety of the general public and 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. VSI and SVS, the indirect operating subsidiaries for the Company's gaming operations in Louisiana, has each 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 (the "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, denial, suspension or revocation is deemed a pure and absolute privilege and is a the discretion of the Louisiana Board under the provisions of the Louisiana Act. A license is not property or a protected interest under the constitution of either the United States or 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 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 at least two years prior to the date of the application. In addition to being licensed as a manufacturer of devices under the Louisiana Act, Bally 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 bankruptc 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 and 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 by 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 that 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 o 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 each of those counties have not voted to prohibit gaming in that county. Currently, dockside gaming was permissible in nine of the 14 eligible counties in the state and gaming operations had commenced in Adams, Coahoma, Hancock, Harrison, Tunica, Warren and 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 an Vicksburg, Mississippi, where the Rainbow Casino, operated by RCVP, is located. A Hinds County Circuit Court has ruled that the subject site is legal and suitable for gaming and the Mississippi Commission has appealed the decision to the Mississippi Supreme Court. The law permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space that may be utilized for gaming. There are no limitations on the number of gaming licenses that may be issued in Mississippi. The Company, RCVP, Bally Gaming, Inc. ("BGI") 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 BGI is required to periodically submit detailed financial and operating reports to the Mississippi Commission and furnish any other information 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 BGI 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 every two years thereafter. RCVP was granted a renewal of its gaming license by the Mississippi Commission in 1998 and the license must be renewed in June 2000. BGI was granted a renewal of its manufacturer and distributor license in 1998 and such license must be renewed in June 2000. 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 the necessary 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 BGI, 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 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 can 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. The Mississippi Commission may, at any time, 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 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. 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 on 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 t 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 fair market value. 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. The Company may be required to disclose to the Mississippi Commission on request the identities of the holders of any 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 the investigation. RCVP and BGI 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 list 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 identity 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 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. 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 upo Mississippi's gaming industry and to promote 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 (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. The Mississippi Commission could also 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 or BGI's manufacturer and distributor operations, as the case may be. 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 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 on (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 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 licensing 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. In Mississippi, two referenda have been proposed which, if approved, would repeal legalized gaming in Mississippi and impose a two year period for all gaming operations to terminate. A Mississippi State Circuit Court ruled that the first of the proposed referenda was invalid because, among other reasons, it failed to include required information regarding its anticipated affect on state government revenues. Proponents of the referenda have filed an appeal with the Mississippi State Supreme Court to review the Circuit Court ruling. The second referendum proposal included the same language on government revenues as the first and similarly was ruled invalid by a Mississippi State Circuit Court on the same grounds as the first. Any such referendum may be resubmitted, but first must be approved by the Mississippi Secretary of State and signatures of approximately 98,000 registered voters must be gathered and certified by October 7, 1998, in order for the proposal to be included on the November 1999 ballot. If the October 7, 1998 deadline is not met, however, the proponents could attempt to place such a proposal on the November 2000 ballot or the ballot during another statewide election in subsequent years. 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 on 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. BGI 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 BGI as a result of the merger with Alliance Gaming Corporation, and by operation of state law, BGI's CSI license was deemed to have lapsed. Prior to the change of ownership of BGI and in anticipation of same, the Company submitted an application for qualification. The New Jersey Commission deemed the application complete and as a result thereof, since the merger, the Company's operations in New Jersey continue uninterrupted by full regulatory consent, to transactional waivers which have been granted by the New Jersey Casino Control Commission with consent of the New Jersey Division of Gaming Enforcement, and which the Company believes should continue to be granted by the New Jersey Casino Control Commission on six-month blanket terms for parts and service and on a sale-by-sale basis for all other products pending final regulatory action on the Company's now pending application for CSI qualification. In considering the qualifications of an applicant for a CSI license, the New Jersey Commission may require 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 to 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 register 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. The United States 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. 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 and the use, installation, operation and taxation of machines. Wall machine manufacturers are dependent on 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 after the initial date of sale, after which it may not be used in Germany. In Germany, wall machines sold via the secondary market may be operated by a new owner but only for the residual time remaining on each machine's four-year life. In addition to licensing requirements for manufacturers, any person or entity that 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 people under 18 years old. 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 $2.22) 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 that specify how many machines may operate within defined square foot areas (15 square meters per machine, with a maximum of ten machines per location). 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 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 the 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, a value-added tax (VAT) of 16% 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 13.79%. 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 VAT Depending on the municipality in which machine is located, operators may also have to pay a monthly leisure tax on each machine of up to DM 600 (approximately $332). The government in the German state of North Rhine Westfalia recently modified regulations that permitted local municipalities to independently impose rate increases on taxes on gaming machine operators beginning January 1, 1999. 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. The German tax authorities have not yet issued the final assessment from their quadrennial audit. 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 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, distribution and, where permitted, operation of their gaming machines in the jurisdictions in which the Company 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 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 authorities 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 licensing, findings of qualification or other approvals. ln some cases this process may require the holder or prospective holder to disclose 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. ITEM 2. PROPERTIES The following table sets forth information regarding the Company's leased properties (exclusive of space leases in connection with its gaming device routes) as of June 30, 1998, all of which are fully utilized unless otherwise noted: Annual Building Rental Location Use Square Feet Payments (In 000s) Las Vegas, NV Subleased 72,000 $ 515 Las Vegas, NV Nevada route operations 18,500 182 Las Vegas, NV Advanced Product Development Group 7,100 85 Sparks, NV Administrative offices and warehousing 38,300 274 Sparks, NV Sales offices and warehousing 11,000 122 Absecon, NJ Sales offices and warehousing 15,800 54 Carson City, NV Proprietary gaming development 1,500 15 Biloxi, MS Sales offices 6,400 24 Golden, CO Sales offices 1,500 17 Rosemont, IL Sales offices 4,900 23 Dania, FL Sales offices 3,400 37 Elko, NV Sales office and route operations 4,200 22 Laughlin, NV Sales offices 600 9 Atlantic City, NJ Administrative offices 750 9 San Juan, Puerto Rico Sales offices 1,000 12 Sidney, Australia Sales offices 1,700 56 Johannesburg, So. Sales offices 1,000 28 Las Vegas, NV Warehousing 103,500 390 Berlin, Germany Administrative offices and manufacturing 108,500 520 Hannover, Germany Administrative offices and warehousing 20,100 217 Sparks, NV Route operations 12,100 77 Carson City, NV Route operations 2,500 9 Winnemucca, NV Route operations 1,200 5 Pahrump, NV Route operations 800 5 Las Vegas, NV Route location 8,000 453 Las Vegas, NV (1) Ground lease --- 330 Sparks, NV (2) Ground lease --- 5 Vicksburg, MS Administrative offices 2,700 19 Vicksburg, MS Administrative offices 1,200 9 New Orleans, LA Louisiana route operations 6,000 57 Covington, LA OTB operation 2,500 36 Metairie, LA OTB operation 11,000 54 New Orleans, LA OTB operation 5,100 26 (1) Lease consists of ground lease for parking at the Trolley Stop. (2) Lease consists of long-term land lease for parking at Rail City Casino. The following table sets forth information regarding properties owned by the Company as of June 30, 1998, all of which are fully utilized unless otherwise noted: Building Location Use Square Feet (In 000s) Las Vegas, NV Administrative offices and manufacturing (a) 150,000 Reno/Sparks, NV Casino (a) 35,000 Vicksburg, MS Casino 24,000 Vicksburg, MS Administrative offices 3,200 Vicksburg, MS Vacant- Land --- Las Vegas, NV Tavern/Land 5,000 No Las Vegas, NV Land/Parking --- (a) These facilities are mortgaged collateral for the Company's Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". In addition, the Company leases 21 bar and tavern properties that have been subleased to other operators in connection with its Nevada route operations. The properties range in size from approximately 1,750 square feet to 7,700 square feet. The remaining terms of the leases range from 10 months to 13 years with monthly payments ranging from approximately $1,800 to $10,500. In addition to the principal facilities, the Company has 21 leased locations and two owned locations in Germany which are primarily used for sales and service offices as well as for warehousing purposes. The properties range in size from approximately 3,300 square feet to 14,200 square feet. The leased locations have terms of occupancy varying from 6 months to eight years with monthly payments ranging from approximately $1,000 to $9,000. See Note 8 of Notes to Consolidated Financial Statements for information as to the Company's lease commitments with respect to the foregoing rental properties. The Company believes its facilities are suitable for its needs and the Company has no future expansion plans that would make these properties inadequate. ITEM 3. LEGAL PROCEEDINGS Litigation 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 a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people into playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $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 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, in federal district court for the Southern District of New York relating to loan commitment letters from August 1995, contemplating that the plaintiffs would lend approximately $30 million to partially fund the Company's then pending hostile tender offer for BGII. In August 1998 the Company and the plaintiffs settled the litigation for approximately $2.0 million 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Common Stock is traded on the Nasdaq National Market under the symbol "ALLY". The following table sets forth the high and low closing bid price of the Common Stock as reported by Nasdaq for the periods indicated. These prices reflect inter-dealer prices, without retail mark-up or mark-down or commissions and may not necessarily represent actual transactions. Price Range of Common Stock High Low Fiscal Year Ended June 30, 1997 1st Quarter $ 4.00 $ 2.00 2nd Quarter 4.38 3.00 3rd Quarter 4.56 3.38 4th Quarter 4.00 3.07 Fiscal Year Ended June 30, 1998 1st Quarter $6.31 $3.63 2nd Quarter 6.44 4.00 3rd Quarter 5.94 4.75 4th Quarter 5.37 3.87 As of September 8, 1998 the Company had approximately 1,700 holders of record of its Common Stock. There is currently no established public trading market for the Company's Series E Special Stock. The Company has never declared or paid cash dividends on its Common Stock. The indenture for the Company's 10% Senior Subordinated Notes (the "Indenture") and the credit agreement for the Company's credit facility each restrict the Company's ability to pay any dividends or make any other payment or distribution of any of its Restricted Subsidiaries' Equity Interests (as defined). The Company intends to follow a policy of retaining earnings, if any, to finance growth of its business and does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on the Common Stock will be at the sole discretion of the Board of Directors and will depend on the Company's profitably, ability to pay dividends under the terms of the Indenture and the Company's financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data have been derived from the audited financial statements of the Company. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto.
Fiscal Years Ended June 30, 1994 1995(1) 1996(2) 1997(5) 1998 (In 000's, Except Per Share Amounts) Statements of Operations Data Revenues: Gaming equipment and systems $ 65 $ --- $ 10,575 $134,734 $109,597 Wall machines and amusement games --- --- 3,356 131,934 98,611 Route operations 102,830 106,854 109,938 127,028 148,507 Casino operations 20,159 25,134 48,509 51,450 60,657 ------- ------- ------- ------- ------- 123,054 131,988 172,378 445,146 417,372 Costs and expenses: Cost of gaming equipment and systems 20 --- 7,213 84,496 61,684 Cost of wall machines and amusement games --- --- 2,022 68,426 54,241 Cost of route operations 76,332 79,887 84,212 95,716 114,645 Cost of casino operations 14,955 14,231 22,046 22,269 25,930 Selling, general and administrative 23,334 28,649 31,640 109,474 102,096 Depreciation and amortization 9,530 9,520 10,988 22,606 22,838 Direct acquisition costs (3) --- 1,669 55,843 --- --- Unusual items 6,351 2,293 5,498 700 (325) ------- ------- ------- ------- ------ 130,522 136,249 219,462 403,687 381,109 ------- ------- ------- ------- ------- Operating income (loss) (7,468) (4,261) (47,084) 41,459 36,263 Other income (expense) Interest income 2,084 2,798 1,571 1,620 813 Interest expense (6,830) (8,133) (8,897) (23,626) (28,600) Rainbow royalty (4) --- (810) (4,070) (4,722) (587) Rainbow Royalty Buyout (4) --- --- --- --- (19,000) Minority interest (506) (397) (963) (1,092) (2,002) Other, net (167) 317 301 139 1,025 ------ ---- ---- ----- ------ Income (loss) before income taxes (12,887) (10,486) (59,142) 13,778 (12,088) Income tax provision (241) (265) (755) (7,993) (3,185) Income (loss) before extraordinary item (13,128) (10,751) (59,897) 5,785 (15,273) Extraordinary loss without tax benefit --- --- --- --- (42,033) Net income (loss) (13,128) (10,751) (59,897) 5,785 (57,306) Special stock dividends --- --- (362) (11,264) (3,551) Premium on repurchase/redemption of Series B Special Stock --- --- --- (710) (16,553) Net loss applicable to common shares $(13,128) $(10,751) $(60,259) $(6,189) $(77,410) Basic net loss per common share $ (1.28) $ (0.95) $ (4.64) $ (0.19) $ (2.42) ======== ======== ======== ======== ======== Other Data Operating income (loss) before unusual items and direct acquisition costs$ (1,117) $ (299) $ 14,257 $ 42,159 $35,938
ITEM 6. SELECTED FINANCIAL DATA (continued)
As of June 30, . --------------------------------------- 1994 1995 1996 1997(5) 1998 ---- ---- ---- ------ ---- (In 000's) Balance Sheet Data Cash and cash equivalents and securities available for sale $49,574 $37,414 $48,057 $28,924 $23,487 Working capital 50,926 31,476 111,009 110,795 119,480 Total assets 119,416 126,348 375,504 352,016 366,837 Total long term debt, including current maturities 90,726 101,397 191,344 173,839 325,953 Series B Special Stock --- --- 51,552 58,981 --- Total stockholders' equity (deficiency) 15,099 9,985 69,846 53,555 (23,748)
(1) The Company acquired the general partnership interest in the Rainbow Casino Vicksburg Partnership, L.P. (RCVP) on March 29, 1995 and began consolidating the results of RCVP on that date. (2) 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 that fiscal year. See note 2 to the Consolidated Financial Statements. (3)Includes non-cash accounting loss on debenture conversion of $30.1 million in fiscal year 1996 as a result of the conversion of the Company's Convertible Debentures into equity securities. (4) Represents royalty fee related to the HFS financing at the Rainbow Casino. The Company repurchased this royalty obligation from HFS on August 12, 1997. (5) See discussion of refinancing transaction completed in August 1997 in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources In August 1997 the Company completed a series of related transactions as described below (the "Refinancing") which consisted of the private placement of $150.0 million of Senior Subordinated Notes and the closing of $230.0 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 a $25.0 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility," and together with the Tranche B Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a $90.0 million revolving credit facility with a 6-year term (the "Revolving Credit Facility"). The borrowing base for the revolving credit facility consists of eligible receivables and inventory, as defined in the credit agreement and at June 30, 1998 totaled $72.1 million. As part of the Refinancing, the Company used the proceeds of the Senior Subordinated Note offering, together with borrowings under the Revolving Credit Facility and the Term Loan Facilities 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 purchase of related debt owed to an HFS affiliate, National Gaming Mississippi, Inc. on August 12, 1998 totaling $26.3 million and (d) the payment of transaction fees and expenses totaling $16.5 million. Additionally, in July 1997 the Company redeemed the remaining balance of its 7 1/2 Convertible Debentures at a price of 104, or a total of $1.7 million. On a pro forma basis for the year ended June 30, 1998, assuming the Refinancing had occurred on July 1, 1997, the Company would have reported net income available to common shares of $0.8 million and net income per share of $0.02 or a $2.44 improvement over the reported net loss per share of $2.42. In conjunction with the Refinancing, the Company incurred charges of approximately $77.6 million, including the $27.7 million premium on the repurchase of the 12 7/8% Notes, $16.6 million for the difference between the carrying value and the liquidation value of the Series B Preferred Stock and $19.0 million for the Rainbow Casino royalty buyout. On an ongoing basis the Company will continue to be highly leveraged and will have significant interest costs; however, in the near term the Company will have lower overall fixed costs and only limited principal payments required on its long-term indebtedness. At June 30, 1998, the Company had $23.5 million in cash and cash equivalents and $37.1 million in unborrowed availability on its revolving lines of credit in accordance with borrowing base limitations in the credit agreement. In addition the Company had working capital of approximately $119.5 million, an increase of approximately $8.7 million from June 30, 1997 which is explained below. Consolidated cash and cash equivalents at June 30, 1998 includes approximately $14.4 million of cash which is utilized in Casino and Route Operations which is held in vaults, cages or change banks. The Credit Agreement for the bank financing has both financial and operational covenants. On August 31, 1998, the Company obtained a consent from its bank group which cured a technical default under the Credit Agreement related to the transfer of assets from a non-domestic subsidiary to a domestic subsidiary related to the formation of a wholly-owned subsidiary, Bally Gaming Africa Pty. Ltd., as well as a consent to a change in the definition of Restricted Payments to allow for an unrestricted amount of up to $7.0 million of Restricted Payments (as defined in the Credit Agreement). As of June 30, 1998 the Company is in compliance with these covenants. The Company is also in compliance with the operational covenants contained in the indenture for the Senior Subordinated Notes. Management believes that cash flow from operating activities, cash and cash equivalents held and the $90.0 million Revolving Credit Facility, as limited by the borrowing base, will provide the Company with sufficient capital resources and liquidity. At June 30, 1998, the Company did not have any significant commitments for capital expenditures. Working Capital The following table presents the components of consolidated working capital at June 30, 1997 and 1998: Balances at June 30, 1997 1998 Change (In $000's) Cash and cash equivalents $28,924 $23,487 $(5,437) Accounts and notes receivable, net 87,701 93,459 5,758 Inventories, net 37,329 42,418 5,089 Other current assets 9,627 11,711 2,084 Total current assets 163,581 171,075 7,494 Accounts payable 14,270 10,477 3,793 Accrued liabilities 37,392 39,122 (1,730) Current maturities of long-term debt 1,124 1,996 (872) Total current liabilities 52,786 51,595 1,191 Net working capital $110,795 $119,480 $8,685 ======== ======== ====== The primary fluctuations contributing to the increase in working capital were: (i) reductions in accounts payable based on timing of payments, (ii) a net increase in accounts receivable resulting from the reversal of the provision for doubtful receivables related to the Alpha Hospitality obligation discussed below, partially offset by decreases in accounts receivable due to cash collections and lower revenues, (iii) an increase in inventory due to new product sales expected in the first quarter o fiscal year 1999, (iv) an increase in prepaid assets due to higher prepaid gaming taxes and insurance, (v) an increase in accrued liabilities due to higher accrued interest payable, (vi) the impact of foreign exchange fluctuations between the dollar and the deutschemark on all working capital categories, and (vii) the corresponding impact of the above listed items on cash and cash equivalents. Cash Flow During the year ended June 30, 1998, the Company used $8.7 million of cash in operating activities resulting from a net loss less an extraordinary loss and depreciation and amortization, offset by an increase in inventories primarily at Bally Gaming and Systems, increases in prepaid taxes and insurance, and a net reduction in accounts payable and accrued expenses and a net increase in accounts receivable. During the year ended June 30, 1998, the Company used $25.1 million of cash in investing activities primarily resulting from $15.5 million in capital expenditures and cash payments made related to taking over the contracts of locations operated by several mid-sized route operators. During the year ended June 30, 1998, $28.5 million was provided by financing activities. The refinancing transaction provided proceeds of $303.7 million, of which $175.8 million was used to repay outstanding debt, $77.6 million was used to repurchase the Series B Special Stock, and $44.2 million was used to pay other transaction fees and expenses. Additionally, during the year ended June 30, 1998, the Company had a net increase in borrowings on its credit line of $25.4 million. The Company believes that the analysis of EBITDA 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. Customer Financing Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Bally Gaming and Systems and Wall Machine and Amusement Games business units, respectively. Competitive conditions sometimes require Bally Gaming and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale valu of the collateral in the event of default may be less than the amount financed. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. Bally Wulff provides customer financing for approximately 15% of its sales and also provides lease financing to its customers. Lease terms are generally for six months, but are also available for 12 and 43 month terms. Year 2000 The Year 2000 readiness issue, which is common to most businesses, arises from the inability of information systems, and other time and date sensitive products and systems, to properly recognize and process date-sensitive information on and beyond January 1, 2000. The result could create errors in information or system failures. Assessments of the potential cost and effects of Year 2000 issues vary significantly among businesses, and it is extremely difficult to predict the actual impact. Recognizing this uncertainty, management has and is continuing to actively analyze, assess and plan for various Year 2000 issues across its businesses. The Year 2000 issue has an impact on both information technology ("IT") systems and non-IT systems, such as its manufacturing systems and physical facilities including, but not limited to, security systems and utilities. Although management believes that a majority of the Company's IT systems are Year 2000 ready, such systems still have to be tested for Year 2000 readiness. The Company plans to replace or upgrade those systems that are identified as non-Year 2000 ready during calendar 1999. Certain IT systems previously identified as non-Year 2000 compliant are being upgraded or replaced which should be complete by June 30, 1999. Non-IT system issues are more difficult to identify and resolve. The Company is actively identifying non-IT Year 2000 issues concerning its products and services, as well as its physical facility locations. As non-IT areas are identified, management formulates the necessary actions to ensure minimal disruption to its business processes. Management is in the process of engaging outside consultants to assist and advise management in this assessment process. Although management believes that its efforts will be successful and the costs will be immaterial to its consolidated financial position and results of operations, it also recognizes that any failure or delay could cause a disruption in its business and have a significant financial impact. To minimize this potential impact, the Company is actively planning and designing a contingency plan to support critical business processes. The Company has also initiated efforts to ensure the Year 2000 readiness of its products and services. The Company is actively evaluating its strategy and legal obligations for any communication to its customers. As part of its assessment of current products and services, the Company is currently upgrading all Bally Systems SDS customers to version 7.0 software, for which the Company has developed a year 2000 compliance "patch" which is currently being distributed. The Company plans to have all customers upgraded to version 7.0 by December 1998, and have the patch installed by July 1999. The Company is currently shipping version 7.1 of the software, which is also year 2000 compliant. Customers are also being advised that the IBM or Unix operating systems they are using must also be upgraded to versions that are year 2000 compliant. Bally Systems has obtained the operating system upgrades from the vendors and has offered to assist users in installing the upgrade. The Company has also tested most of the products manufactured in the United states and Germany in recent years to determine compliance with Year 2000 and plans to advise customers what, if any, non-compliance issues exist before December 31, 1998. Based upon the results of research and investigation, management will formulate further plans as necessary. The Year 2000 readiness of its customers varies, and the Company is encouraging its customers to evaluate and prepare their own systems. These efforts by customers to address Year 2000 issues may affect the demand for certain products and services; however, the impact to the revenue or any change in revenue patterns is highly uncertain. The Company has also initiated efforts to assess the Year 2000 readiness of its key suppliers and business partners. The Company's direction in this effort is to ensure the adequacy of resources and supplies to minimize any potential business interruptions. Management plans to complete this part of its Year 2000 readiness plan in the earlier part of calendar 1999. As part of the Company's contingency plans, management will begin to identify and solidify relationships with and access to alternative suppliers and resources to ensure the support and continuation of its critical business operations. The Year 2000 issue presents a number of other risks and uncertainties that could impact the Company, such as public utility failures, potential claims against it for damages arising from products and services that are not Year 2000 compliant, and the response ability of certain government and gaming commissions of the various jurisdictions where the Company conducts business. While the Company continues to believe the Year 2000 issues described above will not materially affect its consolidated financial position or results of operations, it remains uncertain as to what extent, if any, the Company may be impacted. Results of Operations The following table presents the Company's revenues, earnings before interest, taxes, depreciation and amortization ("EBITDA") and operating income by business unit: Years Ended June 30, 1996(a) 1997 1998 (In $000's) Revenues by business unit: Bally Gaming and Systems $132,329 $134,734 $109,597 Wall Machines and Amusement Games 107,094 131,934 98,611 Route Operations 109,938 127,028 148,507 Casino Operations 48,509 51,450 60,657 Total Revenues $397,870 $445,146 $417,372 EBITDA by business unit: Bally Gaming and Systems $15,716 $16,671 $10,808 Wall Machines and Amusement Games 13,376 29,719 18,661 Route Operations 16,691 20,200 24,577 Casino Operations 15,107 17,352 20,781 Corporate expenses (17,108) (19,177) (16,051) Unusual item (8,827) (700) 325 Total EBITDA $34,955 $64,065 $59,101 Operating income by business unit: Bally Gaming and Systems $13,836 $10,616 $ 5,238 Wall Machines and Amusement Games 7,628 23,332 13,094 Route Operations 9,268 13,082 16,432 Casino Operations 13,041 15,407 18,736 Corporate expenses (19,759) (20,278) (17,562) Unusual items (8,827) (700) 325 Total Operating Income $15,187 $41,459 $36,263 (a) To enhance the comparability, the operating results for 1996 are presented on a pro forma basis assuming the BGII acquisition had occurred prior to the start of the 1996 year. The acquisition of BGII actually occurred on June 18, 1996. 1998 Compared with 1997 Bally Gaming and Systems For the year ended June 30, 1998, Bally Gaming and Systems reported revenues of $109.6 million, a decrease of 19%, compared to revenues of $134.7 million in the prior year. The decrease is due primarily to a 26% decrease in shipments of new gaming machines to approximately 13,400 units compared to shipments of approximately 18,200 in the prior year. The volume decline resulted primarily from customers delaying purchase until the upgraded products were made available in March 1998 and a lower number of new casino openings compared to the prior year. By market segment, Bally Gaming's unit sales for the current year consisted of approximately 3,300 units to the Nevada and Atlantic City markets, 6,600 units to international markets and 3,500 units to riverboats, Native American and other domestic markets. Bally Gaming reported revenues from the sale of new gaming machines of $68.9 million, a decrease of 29%, compared to $96.7 million in the prior year due to lower unit volume and a 3% decrease in the average selling prices of new machines due to a higher percentage of international sales which tend to be lower priced. Bally Systems reported revenues of $22.0 million, a decrease of 1%, compared to revenues of $22.3 million in the prior year period. Bally Systems revenues resulted primarily from shipments to new installations such as Casino Windsor, John Ascuaga's Nugget, Flamingo Hilton- Laughlin and Harrah's Cherokee Smokey Mountain. For the year ended June 30, 1998, gross profit margins improved to 44% from 37% in the prior year period. The gross margin improvement resulted primarily from a greater proportion of higher margin Systems sales and lower provisions for inventory obsolescence in the current year period. Bally Gaming and Systems reported operating income of $5.2 million, a decrease of 51%, compared to operating income of $10.6 million in the prior year period. The operating income decrease resulted primarily from lower revenues and higher selling, general and administrative expenses, principally a $6.0 million increase in research and development, partially offset by the gross margin improvement. Wall Machines and Amusement Games For the year ended June 30, 1998, Wall Machines and Amusement Games reported revenues of $98.6 million, a decrease of 25%, compared to revenues of $131.9 million in the prior year. The decrease in revenues resulted primarily from a 24% decrease in shipments of new wall machine units, a 18% decrease in average selling price of new machines and a 13% decrease in amusement game revenues, partially offset by a 29% increase in leased wall machine revenues. The prior year period was favorably affected by a change in German regulations effective January 1, 1997, requiring all wall machines to have internal meters to track play. 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. The Wall Machines and Amusement Games business unit continued to expand 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. As of June 30, 1998, a total of 5,700 wall machines were deployed in the leasing program compared to 4,800 at June 30, 1997, an increase of 21%. For the year ended June 30, 1998, gross profit margin decreased to 45% from 48% in the prior year. The gross margin decrease resulted primarily from the unfavorable impact of lower production volume at the Wall Machines and Amusement Games' production facility and an 18% decrease in average selling price for new wall machines, partially offset by an increase in higher margin lease revenue. Wall Machines and Amusement Games reported operating income of $13.1 million, a decrease of 44%, compared to $23.3 million in the prior year period. The decrease in operating income resulted primarily from the aforementioned decrease in revenues and gross margins, partially offset by a decrease in selling, general and administrative expenses, principally lower marketing costs, a lower provision for doubtful receivables and lower depreciation expense. Route Operations For the year ended June 30, 1998, the Route Operations business unit reported total revenues of approximately $148.5 million, an increase of 17%, compared to revenues of $127.0 million in the prior year. Revenues from Nevada route operations increased to approximately $127.4 million or 18% over the prior year. This improvement was attributable to an increase in the average net win per gaming machine per day of 3% to $53.70 from $52.40 in the prior year and an increase in the weighted average number of gaming machines during the current year of 14% to 6,460 units as compared to 5,660 units in the prior year. Gamblers' Bonus, a cardless slot players club and player tracking system, continued to have a favorable impact on the net win per day. As of June 30, 1998, the Gamblers' Bonus product was installed in over 2,000 gaming machines at approximately 180 locations statewide or 30% of its installed base of gaming machines. Revenues from route operations in Louisiana improved to $21.1 million, an increase of 12% compared to the prior year. This increase was the result primarily of an improvement in the net win per gaming machine per day of 4% to $77.40 from $74.10 in the prior year and a 7% increase in the average number of machines to 750 from 700 in the prior year. For the year ended June 30, 1998, cost of revenues for Route Operations totaled $114.6 million, an increase of 20% compared to costs of $95.7 million in the prior year. As a percentage of revenues, costs of revenues increased to 77% from 75% in the prior year. Cost of revenues for Nevada route operations increased, as a percent of related revenues, to 79% from 77% in the prior year. The increase was due primarily to lower margins on new and renewed locations (due to competitive pressures) and higher payroll benefit costs coupled with an increase in direct labor costs associated with the recent contracts taken over from other route operators. Costs of revenues for route operations in Louisiana, as a percent of related revenues, remained relatively flat at 64% between periods as the increase in costs were in line with the increase in revenues. Cost of route revenues for Route Operations includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor including payroll taxes and benefits. For the fiscal year ended June 30, 1998, the Route Operations business unit reported operating income of $16.4 million, an increase of 26% compared to operating income of $13.1 million in the prior year. The operating income improvement resulted from the aforementioned increase in revenues, an improvement in selling, general, and administrative expenses as a percentage of revenues, and a lower provision for doubtful receivables for the Nevada route operations, partially offset by the aforementioned increase in operating costs as a percentage of revenues and an increase in depreciation as the result of the increased number of gaming machines deployed. Casino Operations For the year ended June 30, 1998, the Casino Operations business unit reported revenues of $60.7 million, an increase of 18%, compared to revenues of $51.5 million in the prior year. This improvement is due to a 19% increase in revenues at the Rainbow Casino and a 14% increase in revenues at the Rail City Casino. The improvement at the Rainbow Casino was attributable to an increase in the average gaming machine net win per day of 14% to $150 from $131 in the prior year. The improvement at the Rail City Casino was attributable to the enhanced marketing programs including the new Rail City Casino Players Club which led to an increase in the average gaming machine net win per day of 23% to $60 from $49 in the prior year. For the year ended June 30, 1998, the cost of revenues for Casino Operations increased 16% to $25.9 million compared to $22.3 million in the prior year. As a percentage of revenues, the costs of revenues remained relatively flat at 43% for both periods. As a percent of related revenues, cost of revenues for the Rainbow Casino remained relatively flat at 37% between periods as the increase in costs were in line with the increase in revenues.. Cost of revenues for the Rail City Casino, as a percent of related revenues, improved to 62% from 64% in the prior year due primarily to the achievement of higher revenues without a corresponding increase in direct gaming costs. Cost of casino revenues includes cost of goods sold, gaming taxes, rent and direct labor including payroll taxes and benefits. For the year ended June 30, 1998, the Casino Operations business unit reported operating income of $18.7 million, an increase of 22%, compared to operating income of $15.4 million in the prior year. The operating income improvement is due primarily to the aforementioned increase in revenues while both operating costs and selling, general and administrative costs, as percentages of revenues, remained flat between periods. Unusual Items During the year ended June 30, 1998, the Company recorded the following unusual items: (1) The Company settled a dispute with Alpha Hospitality and General Electric Credit Corporation concerning certain customer notes receivable on which the Company had certain recourse obligations. The Company contributed $2.5 million to the final settlement with the holder of the notes, and reversed $6.0 million of reserves previously established for these recourse obligations. In addition, as part of the settlement the Company became the sole owner of approximately 566,000 shares of Alpha Hospitality common stock which trades on the NASDAQ Small Cap market. Pursuant to the limitations provided for in the settlement agreement, the Company has sold 235,000 shares of Alpha Hospitality through June 30, 1998. (2) As a result of settling a dispute over the exclusive use of certain technologies and changes in gaming regulations, the Company evaluated the cash flow of certain of its technology assets, in accordance with the provisions of Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," and determined certain items met the definition of having become impaired. During the year ended June 30, 1998 the Company recorded write-downs totaling $2.8 million for these items. (3) The Company accrued $0.7 million for the present value of contractual payments due to a former member of the board of directors who was not re-elected to the board at the December 1997 annual shareholders meeting. (4) The Company accrued $0.6 million as restructuring charges for Bally Gaming and Systems. (5) The Company recorded a $1.6 million charge for final settlement of litigation related to the acquisition of BGII. 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 BGII acquisition. Consolidated Total revenues for the year ended June 30, 1998 were approximately $417.4 million, a decrease of 6% compared to revenues of $445.1 million in the prior year. The decrease is primarily due to the decreases in revenues at the Bally Gaming and System and Wall Machines and Amusement Games business units, partially offset by the increases in revenues at the Route Operations and Casino Operations business units. Cost of revenues for the year ended June 30, 1998 was approximately $256.5 million, a decrease of 5% compared to costs of $270.9 million in the prior year. This decrease is due to the decreases in costs at the Bally Gaming and System and Wall Machines and Amusement Games business units, partially offset by increases in costs at the Route Operations and Casino Operations business units. Cost of revenues as a percentage of total revenues increased slightly to 62% from 61% in the prior year period. Selling, general and administrative expenses for the year ended June 30, 1998 were approximately $86.3 million, a decrease of 13% compared to costs of $99.5 million in the prior year. This decrease is due to the decreases in expenses at the Bally Gaming and Systems, Wall Machines and Amusement Games and Route Operations business units, a decrease in corporate administrative costs, principally lower payroll and related expenses, and a lower provision for doubtful receivables, partially offset by an increas in expenses at the Casino Operations business unit. Research and development costs for the year ended June 30, 1998 were approximately $15.8 million, an increase of 59% compared to costs of $10.0 million in the prior year. This increase is due to an increase in costs at the Bally Gaming and Systems business unit to develop and support a greater number of products, partially offset by a decrease in costs at the Wall Machines and Amusement Games business unit. Depreciation and amortization for the year ended June 30, 1998 was $22.8 million, an increase of 1% compared to depreciation and amortization of $22.6 million in the prior fiscal year. This increase is due primarily to an increase in amortization of deferred financing costs and an increase in depreciation related to the growth in the number of gaming machines deployed for the Route Operations, partially offset by a decrease at the Wall Machines and Amusement Games business unit. As a result of the refinancing transaction, the Company recorded an extraordinary loss of $42.0 million, which included $27.7 million for the premium on the 12 7/8% Senior Notes, $5.0 million in transaction fees and expenses, and $9.3 million for the write-off of deferred financing costs. The Company also recorded a $19.0 million charge for the cost of the Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6 million charge to equity and a corresponding increase in the net loss applicable to common shares for the difference between the carrying value and the liquidation value of the Series B Special Stock, all of which was redeemed on September 8, 1997 at the liquidation price of $100 per share, plus accrued dividends. Interest Income and Expense and Income Taxes Net interest expense in the year ended June 30, 1998, increased to $27.8 million, an increase of 26% compared to the net interest expense of $22.0 million in the prior year. The increase is primarily due to a higher level of debt resulting from the Company's new 10% Senior Subordinated Notes due 2007 and the Term Loan Facilities and revolving credit facility which replaced the Company's 12 7/8% Senior Secured Notes and the 15% Series B Special Stock as part of the refinancing of the Company's capital structure completed in September 1997, resulting in substantially lower overall fixed charges. The Company recorded an income tax provision of $3.2 million in the year ended June 30, 1998, compared to a provision of $8.0 million in the prior year. The current year provision is due primarily to income taxes for the Wall Machines and Amusement Games business unit and domestic state income taxes. At June 30, 1998, the Company has net operating loss carry forwards for federal income tax purposes of approximately $44.2 million which are available to offset future federal taxable income, if any, expiring in the years 2007 through 2013. At June 30, 1998 the Company has foreign tax credit carry forwards of approximately $12.8 million and alternative minimum tax credit (AMT) carry forwards of approximately $1.7 million. Foreign tax credits are available to offset future taxes due in the U.S. on future foreign taxable income and expire between 1999 and 2003 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, approximately $21.3 million of the net operating loss carryforwards are limited to annual utilization of $4.7 million per year subject to certain carryover provisions pursuant to Section 382 of the Internal Revenue Code. 1997 Compared with 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 BGII acquisition had occurred prior to the start of the 1996 year. The acquisition of BGII actually occurred on June 18, 1996. Bally Gaming and Systems For the year ended June 30, 1997, Bally Gaming 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 and Systems 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, 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 and Systems 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 ne 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. Bally Gaming 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 BGII 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 $109.9 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 machin per day of 8% to $74.10 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 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 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 Casino, 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 taxes and benefits. For the year ended June 30, 1997, the Casino Operations business unit reported operating income of $15.4 million, an increase of 14%, compared to operating income of $13.5 million in the prior year excluding operating from closed casinos and taverns. 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 marketin efforts at both locations. The Rainbow Casino royalty fees paid to HFS 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 Bally Gaming 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 Bally Gaming and Systems 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, an increase of $155.4 million (135%) compared to $115.5 in prior year. This increase is due to the incremental cost of revenues of $143.7 million and from Bally Gaming and Systems 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 $99.5 million, an increase of $68.2 million (218%) compared to costs of $31.3 for the prior year. This increase is due to the impact of including the Bally Gaming and Systems and the Wall Machines and Amusement Games business units expenses for the entire year and higher legal and professional fees in the current year, partially offset by cost savings such as elimination of certain duplicative costs. Research and development costs for the year ended June 30, 1997 were $10.0 million, an increase of $9.6 million from the prior year. The increase was due to the impact of including the research and development costs of the Bally Gaming and Systems and the Wall Machines and Amusement Games business units for the entire year. 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 Bally Gaming 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 BGI acquisition. During the year ended June 30, 1996, the Company expensed direct acquisition costs related to the acquisition of BGII, 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 BGII 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. 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 is due primarily to interest on the Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June 1996, partially offset by lower interest expense on the Company's 7 1/2% Convertible Debentures due 2003, substantially all of which were converted into equity as part of the financing of the BGII 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 has 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. At June 30, 1997 the Company has 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. In addition, the Company's annual limitation with respect to net operating losses is limited pursuant to Section 382 of the Internal Revenue Code. Risk Factors Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The information contained in this Form 10-K and the Company's other filings with the Securities Exchange Commission may contain "forward-looking" statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1933, as amended, and is subject to the safe harbor created thereby. Such information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements herein. Future operating results may be adversely affected as a result of a number of factors. Set forth below are certain important factors that could cause actual results to differ materially from those in such "looking forward" statements. High Leverage; Ability to Service Debt After the completion of the Refinancing, the Company has a substantially increased amount of indebtedness. As of June 30, 1998 the aggregate outstanding principal amount of the Company's long-term indebtedness including current maturities was $326.0 million. The Company also has available to it up to $37.1 million in unborrowed capacity under the Revolving Credit Facility. On a pro forma basis after giving effect to the Refinancing (assuming the Refinancing occurred June 30, 1997) and the use of proceed 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 1.1x for the year ended June 30, 1998. The Company had a net capital deficiency at June 30, 1998 of $23.7 million. The Company's credit facility and 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) 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. 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 Senior Subordinated Notes, any of which would be an event of default under the Senior Subordinated 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. 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 expenditures, 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. Operating History--Recent Losses The Company incurred a net loss of $59.9 million (including $55.8 million of costs related to the BGII acquisition) for the year ended June 30, 1996, net income of $5.8 million for the year ended June 30, 1997 and a net loss of $57.3 million (including $61.0 million of costs related to the Refinancing) for the fiscal year ended June 30, 1998. During the year ended June 30, 1998, the Bally Gaming and Systems and Wall Machine and Amusement Games business units experienced a decrease in revenues of 19% and 25%, respectively, which adversely effected the Company's financial results from operations. 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 Bally Gaming 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 Bally Gaming's product lines in each of Bally 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 entere 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 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., Mikohn Gaming Corporation and Logical Solutions International. 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 i 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 95% 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 truck stops and locations with liquor licenses throughout the New Orleans area, as well as riverboat gaming and one land-based casino which may re-open in New Orleans. Casino Operations. The operation of casinos is also a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and success of marketing programs. In Sparks, 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. In August 1997 it was announced the Lady Luck Gaming Corporation and Horseshoe Gaming, LLC were going to form a joint venture to develop a project that would include a dockside casino, hotel and related amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel and auto racing complex on the Big Black River which is between Vicksburg and Jackson, Mississippi. The legality of that site for gaming is currently in litigation. At this time management does not know which, if any, of these sites will be developed. Both of these projects will be contingent on several factors including regulatory approval and financing. 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 attempt to respond quickly with its own competing products. Response speed is lower in jurisdictions requiring product approvals prior to commercialization. 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. Although the Company is developing a number of new products, there can be no guarantee of commercial acceptance of any of it products. The gaming industry is employing new technology in many new areas, and the Company and its competitors continue to file for patents protecting such technologies. Although the Company is not aware of any patent violations, there can be no assurances that patents currently pending may be determined to have infringed upon an existing patent held by a third party. 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 into foreign exchange contracts to hedge its exposure to foreign exchange rate fluctuations. 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 President and Chief Executive Officer stepped down as the Company's strategic direction changed after the BGII acquisition. In June, 1997, the Company named Morris Goldstein as its President and 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 Bally Gaming as a result of the BGII acquisition, Bally Gaming's New Jersey license was invalidated. Prior to the change of ownership of Bally 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 BGII 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 has benefited from the growth in population in Nevada, as with growth more gaming venues are created. Certain local politicians have proposed limiting or curtailing the number or type of venues where gaming is authorized. 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, 1998, the two off-track betting locations in this parish accounted for $2.2 million of revenues and approximately 9% of operating income of the Company's Route Operations in Louisiana or less than 1 of the Company's operating income. 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."). During 1995, Bally Wulff increased the amount of V.A.T. reserves by $1.0 million as a result of development 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 government in the German State of North Rhine Westphalia recently modified its regulations that permit local municipalities to independently impose additional taxes on gaming machine operators beginning January 1, 1999. In the past, the imposition of tax rate increases 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. Change of Control Upon the occurrence of a Change of Control (as defined), each holder of the Senior Subordinated Notes may require the Company to repurchase the Senior Subordinated 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 Senior Subordinated 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 Senior Subordinated Notes. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Senior Subordinated Notes. In such case, the Company's failure to repurchase tendered Senior Subordinated 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 Senior Subordinated 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. Currency Rate Fluctuations The company derives revenues from its non-U.S. subsidiaries, all of which revenues are denominated in their local currencies, and their results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Most of the currencies in countries in which the Company has foreign operations weakened versus the U.S. dollar in 1997 and 1998, which resulted in assets and liabilities denominated in local currencies to be translated into fewer dollars. The currency rate changes also resulted in an unfavorable impact on consolidated revenues of approximately $12.1 million or 3% and $12.2 million or 3% and on operating income (loss) of $2.2 million or 5% and $1.6 million or 4% during the years ended June 30, 1997 and 1998, respectively. Transaction losses, resulting from transactions denominated in currencies other than the functional currencies of the Company or its subsidiaries, totaled less than $1.0 million for each of the years ended June 30, 1997 and 1998. The Company does not currently utilize hedging instruments. Market risks During the normal course of business the Company is routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest and currency rate movements, collectibility of accounts and notes receivable, and recoverability of residual values on leased assets. The Company constantly assesses these risks and has established policies and practices to protect against the adverse effects of these and other potential exposures. Although the Company does not anticipate any material losses in these risk areas, no assurances can be made that material losses will not be incurred in these areas in the future. The Company has performed a sensitivity analysis of its financial instruments which consist of the Company's cash and cash equivalents and debt. The Company has no derivative financial instruments. In performing the sensitivity analysis, the Company defines risk of loss as the hypothetical impact on earnings, resulting from changes in the market interest rates or currency exchange rates. The results of the sensitivity analysis at June 30, 1998, are as follows: Interest Rate Risk: The Company had total debt as of June 30, 1998 of $326.0 million, of which $139.1 million of borrowings under the Term Loan Facilities and $22.7 million of borrowings on the Revolving Credit Facility are at a floating rate based on LIBOR and $12.3 million of German borrowings on revolving credit facilities are at a floating rate based on the Eurodeutschmark borrowing rate. Although the maturity dates for these borrowings are in excess of five years, the Credit Agreement generally requires that the Compan borrow in individual tranches, each not to exceed six months, which subjects the Company to interest rate risks. If the LIBOR and Eurodeutschmark rates were each to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would decrease or increase by approximately $1.8 million on a pre-tax basis, all other factors remaining constant. Foreign Currency Exchange Rate Risk: The Company has subsidiaries with the following functional currencies: German Deutschemark, Australian Dollar and South African Rand, although the only subsidiaries currently with material amounts of assets, liabilities and revenues are in Germany. If the German deutschemark was to decline 10 percent against the U.S. dollar, there be a corresponding decrease in earnings reported in the consolidated group, when compared to the equivalent level of German deutschemark earnings, of approximately $0.9 million. Such a change in the German deutschemark would result in an immaterial transaction loss, but would result in a charge to the cumulative translation account, which is a component of stockholder's equity, of approximately $7.3 million, all other factors remaining constant. ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to Item 6 of this Report- "Risk Factors- Currency Rate Fluctuations and Market Risks." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements, including the notes thereto, and supplementary financial information are listed in Part IV, Item 14, of this Report and included after the signature page beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: Page 1. Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets as of June 30, 1997 and 1998 F-2 Consolidated Statements of Operations for the Years Ended June 30, 1996, 1997 and 1998 F-3 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1996, 1997 and 1998 F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1997 and 1998 F-5 Notes to Consolidated Financial Statements F-6 2. Consolidated Supplemental Schedules: Not applicable. 3. Exhibits: Exhibit Number Description 2.1 Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII,dated as of October 18, 1995, as amended and restated (incorporated herein by reference to Annex I to the prospectus included in Alliance's Form S-4, Registration Number 333-02799 ). 2.2 Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 2.3 Consolidation Agreement, dated March 29, 1995 among United Gaming Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 3.1 Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to Alliance's Form S-2, Registration Number 33-72990). 3.2 Revised and Amended By-Laws of the Registrant (incorporated herein by reference to Alliance's Form 10-Q for the quarter ended December 31, 1997.) 3.3 Certificate of Designations, Preferences, and Relative, Participating, Optional and Other Special Rights of Special Stock and Qualifications, Limitations and Restrictions of 11 1/2% Non-Voting, Pay-in-Kind Special Stock, Series E (incorporated herein by reference to Exhibit 9(c)(5) to Amendment No. 1 to Alliance's Schedule S-4 dated May 9, 1996). Exhibit Number Description 4.1 Form of Indenture among the Company, certain Guarantors referred to therein and United States Trust Company of New York, as Trustee, in respect of Alliance's 10% Senior Subordinated Notes due 2007 (including form of Senior Subordinated Note and Guarantee) (incorporated by reference to Alliance's Form S-4 dated December 1, 1997). 4.2 Credit Agreement among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston, dated August 8, 1997 (incorporated herein by reference to the Company's annual report on Form 10-K dated June 30 1997). 4.3 First Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston, dated August 8, 1997 (incorporated herein by reference). 4.4 Rights Agreement dated as of March 9, 1998 between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to Form 8-A dated March 10, 1998). 4.11 First Amendment to the Rights Agreement dated as of September 15, 1998 between the Company and American Stock Transfer & Trust Company (incorporated herein by reference). 4.12 Form of Certificate of Designations with respect to Series F Special Stock (attached as Exhibit A to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998). 4.13 Form of Right Certificate (attached as Exhibit B to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998). 4.14 Summary of Rights to Purchase Series F Special Shares (attached as Exhibit C to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998). 10.4 Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated herein by reference to the Company's Form S-8 filed August 12, 1997).* 10.5 Letter of Agreement dated June 25, 1993 among United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation and as to certain provisions, Alfred H. Wilms, including Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of Stockholders Agreement), Exhibit C (Form of Certificate of Designations of Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.6 Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A (Form of Warrant Agreement) and Exhibit B (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.7 United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308).* 10.8 Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 2-98777).* Exhibit Number Description 10.9 Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investments Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.10 Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P. relating to warrants to purchase 2.75 million shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.11 Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Gaming Systems Advisors, L.P. relating to warrants to purchase 1.25 million shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.12 Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.13 Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308). 10.14 Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by reference to Alliance's Form S-3 Registration Number 33-58233). 10.15 Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.19 Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.22 Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990). 10.28 Letter Agreement, dated as of June 29,1994, among United Gaming, Inc., Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.29 Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., Rainbow Casino Corporation,John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.30 Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.31 Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994 (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). Exhibit Number Description 10.32 Second Amended and Restated Agreement of Limited Partnership, dated March 29,1995, between United Gaming Rainbow and Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.43 Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.44 Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.45 Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.46 Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.50 Trademark License Agreement, dated November 11, 1991 between Bally Manufacturing Corporation and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(i)(d) included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991). 10.51 Amended and Restated Trademark License Agreement, dated July 8, 1992, by and between Bally Gaming International, Inc. and Bally Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(d) included in BGII's Registration Statement on Form S-1 No. 33-48347 filed on July 9, 1992). 10.53 Second Amendment to Trademark License Agreement and Settlement Agreement, dated March 31, 1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc. (incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K dated April 3, 1995). 10.54 Third Amendment to Trademark License Agreement and Settlement Agreement, dated May 10, 1996, by and between Bally Entertainment Corporation, Alliance Gaming Corporation and BGII Acquisition Corp. (incorporated by reference to exhibit 10.77 to S-2 Registration Statement No. 333-02147). 10.55 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(a) included in BGII's Registration Statement No. 33-42227 on Form S-1, effective November 8, 1991).* 10.56 Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International, Inc. effective February 6, 1993 (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's Registration Statement No. 33-42227 on Form S-1 effective November 1, 1991).* 10.57 Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated herein by reference to exhibit 99(e) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993).* Exhibit Number Description 10.58 Amendment No 3 to 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated by reference to Annex III of S-4 registration statement No. 333-01527).* 10.59 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(f) included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).* 10.60 Amendment No. 1 to the 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).* 10.61 Amendment No. 2 to the 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated by reference to S-4 registration statement No. 333-01527).* 10.62 Amendment No. 3 to the 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated by reference to Annex IV of S-4 registration statement No. 333-01527).* 10.64 Bally Gaming International, Inc. 1994 Stock Option Plan for Non-employee Directors, as amended (incorporated herein by reference to exhibit 10(iii)(k) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994.) 10.65 Employment Agreement between Hans Kloss and Alliance Gaming Corporation dated July 1, 1998 (incorporated herein by reference).* 10.72 Employment Agreement Supplement, dated as of August 29, 1996, between the Company and Joel Kirschbaum (incorporated by reference to the Company quarterly report on Form 10-Q for March 31, 1997).* 10.73 Employment Agreement Supplement, dated as of August 29, 1996, between the Company and Anthony DiCesare (incorporated by reference to the Company quarterly report on Form 10-Q for March 31, 1997).* 10.74 Employment Agreement, dated as of June 24, 1996, between the Company and Scott D. Schweinfurth (incorporated by reference to the Company quarterly report on Form 10-Q for March 31, 1997).* 10.75 Employment Agreement, dated as of June 17, 1997 between the Company and Morris Goldstein. (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997).* 10.76 Employment Agreement, dated July 1, 1997 between the Company and Joel Kirschbaum (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997).* 10.77 Employment Agreement, dated July 1, 1997 between the Company and Anthony DiCesare (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997).* Exhibit Number Description 10.78 Agreement, between the Company and Kirkland Investment Corporation dated July 1, 1997 (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997). 10.79 Amendment Number 1 to the agreement between the Company and Kirkland Investment Corporation dated July 1, 1997 (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997). 10.80 Employment Agreement, dated July 1, 1997 between the Company and Robert L. Miodunski. (incorporated by reference to the Company quarterly report on Form 10-Q for March 31, 1998).* 10.81 Employment Agreement, dated July 1, 1997 between the Company and John Hudson (incorporated herein by reference).* 11 Computation of earnings (loss) per share. 21 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: There were no reports filed on Form 8-K for the three months ended June 30, 1998. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE GAMING CORPORATION DATED: September 22, 1998 By /s/ Morris Goldstein Morris Goldstein, Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ Morris Goldstein Director, President and Chief September 22, 1998 Morris Goldstein Officer (Principal Executive Officer) /s/ Scott D. Schweinfurth Sr. Vice President, Treasurer September 22, 1998 Scott D. Schweinfurth Financial Officer (Principal Financial and Accounting Officer) /s/ Jacques Andre Director September 22, 1998 Jacques Andre /s/ Anthony DiCesare Director September 22, 1998 Anthony DiCesare /s/ Michael Hirschfeld Director September 22, 1998 Michael Hirschfeld /s/ Joel Kirschbaum Director September 22, 1998 Joel Kirschbaum /s/ David Robbins Director and Chairman of the September 22, 1998 David Robbins Borad /s/ Morton Topfer Director September 22, 1998 Morton Topfer 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, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended June 30, 1998. 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, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Las Vegas, Nevada August 14, 1998 F-1 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In 000's except share amounts) ASSETS June 30, June 30, 1997 1998 Current assets: Cash and cash equivalents $28,924 $23,487 Accounts and notes receivable, net of allowance for doubtful accounts of $21,929 and $11,932 87,701 93,459 Inventories, net of reserves of $8,856 and $6,797 37,329 42,418 Other current assets 9,627 11,711 ------ ------- Total current assets 163,581 171,075 ------- ------- Long-term notes receivable, net of allowance for doubtful accounts of $1,972 and $1,109 8,981 7,931 Leased gaming equipment, net of accumulated depreciation of $4,116 and $4,020 7,902 7,325 Property, plant and equipment, net of accumulated depreciation and amortization of $39,695 and $46,090 74,647 77,905 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $1,723 and $3,199 62,098 59,952 Intangible assets, net of accumulated amortization of $9,626 and $13,358 18,231 26,732 Deferred tax assets, net of valuation allowance 11,776 11,467 Other assets, net of reserves of $3,502 and $3,488 4,800 4,450 ------ ------ $352,016 $366,837 LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIENCY) Current liabilities: Accounts payable $14,270 $10,477 Accrued liabilities 37,392 39,122 Current maturities of long term debt 1,124 1,996 ------ ------ Total current liabilities 52,786 51,595 Term loan facilities - 137,800 Senior Subordinated Notes due 2007, net - 149,245 Senior Secured Notes, net 151,224 - Other long term debt, less current maturities 21,491 36,912 Other liabilities 12,433 12,718 ------- ------- Total liabilities 237,934 388,270 ------- ------- Minority interest 1,546 2,315 Series B Special Stock, $.10 par value, $100 liquidation value; 754,198 shares issued and outstanding as of June 30, 1997 58,981 - Commitments and contingencies Stockholders' equity (deficiency): Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 123,689 shares and 137,317 shares issued and outstanding 12,368 13,732 Common Stock, $.10 par value; 175,000,000 shares authorized,31,852,000 shares and 32,122,000 shares issued and outstanding 3,185 3,212 Additional paid-in capital 138,590 122,980 Cumulative translation adjustment (11,719) (13,946) Accumulated deficit (88,869) (149,726) Total stockholders' equity (deficiency) 53,555 (23,748) ------ ------ $352,016 $366,837 See accompanying notes to consolidated financial statements. F-2 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except per share amounts) Years Ended June 30, 1996 1997 1998 Revenues: Gaming equipment and systems $10,575 $134,734 $109,597 Wall machines and amusement games 3,356 131,934 98,611 Route operations 109,938 127,028 148,507 Casino operations 48,509 51,450 60,657 ------- ------- ------- 172,378 445,146 417,372 ------- ------- ------- Costs and expenses: Cost of gaming equipment and systems 7,213 84,496 61,684 Cost of wall machines and amusement games 2,022 68,426 54,241 Cost of route operations 84,212 95,716 114,645 Cost of casino operations 22,046 22,269 25,930 Selling, general and administrative 31,270 99,520 86,318 Research and development costs 370 9,954 15,778 Depreciation and amortization 10,988 22,606 22,838 Direct acquisition costs 55,843 - - Unusual items 5,498 700 (325) ------- ------ ------ 219,462 403,687 381,109 ------- ------- ------- Operating income (loss) (47,084) 41,459 36,263 Other income (expense): Interest income 1,571 1,620 813 Interest expense (8,897) (23,626) (28,600) Rainbow royalty (4,070) (4,722) (587) Rainbow royalty buyout - - (19,000) Minority interest (963) (1,092) (2,002) Other, net 301 139 1,025 ----- ----- ------ Income (loss) before income taxes (59,142) 13,778 (12,088) Income tax provision (755) (7,993) (3,185) -------- -------- -------- Net income (loss) before extraordinary item (59,897) 5,785 (15,273) Extraordinary loss, without tax benefit - - (42,033) Net income (loss) (59,897) 5,785 (57,306) Special Stock dividends (362) (11,264) (3,551) Premium on repurchase/redemption of Series B Special Stock - (710) (16,553) Net loss applicable to common shares $(60,259) $(6,189) $(77,410) Basic and diluted loss per share: Loss before extraordinary item $(4.64) $(0.19) $(1.11) Extraordinary loss - - (1.31) ------ ------ ----- Net loss $(4.64) $(0.19) $(2.42) ====== ====== ====== Weighted average common shares outstanding 13,000 31,822 31,998 ====== ====== ====== See accompanying notes to consolidated financial statements. F-3 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (In 000's)
Total Initial Series Stock- and Series E Additional Unrealized Cumulative holders' Common Stock Special Stock Paid-in Accum. Loss on Translation Equity Shares Dollars Shares Dollars Capital Deficit Securities Adjustment (Deficiency) 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 Net loss -- -- -- -- -- (57,306) -- -- (57,306) Shares issued upon exercise of options 250 25 -- -- 830 -- -- -- 855 Special Stock dividends -- -- 14 1,479 -- (3,551) -- -- (2,072) Conversion of Series E Special Stock to common stock 20 2 -- (115) 113 -- -- -- -- Special Stock redemption premium -- -- -- -- (16,553) -- -- -- (16,553) Foreign currency translation adjustment -- -- -- -- -- -- -- (2,227) (2,227) --------- --------- --------- --------- --------- --------- --------- --------- --------- Balances at June 30, 1998 32,122 $ 3,212 137 $ 13,732 $ 122,980 $(149,726) $ -- $ (13,946) $ (23,748) ========= ========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's) Years Ended June 30, 1996 1997 1998 Cash flows from operating activities: Net income (loss) $ (59,897) $ 5,785 $(57,306) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 10,988 22,606 22,838 Amortization of debt discounts 245 807 44 Extraordinary item --- --- 42,033 Loss on debenture conversion 30,079 --- --- Write down of other assets 6,095 1,075 2,329 Loss on sale of assets 105 1,233 133 Provision for losses on (recovery of) receivables 1,020 9,059 (7,194) Other 1,544 (651) (51) Change in operating assets and liabilities, net of effects of businesses acquired: Accounts and notes receivable (5,934) (4,601) 1,946 Inventories 5,844 (6,898) (9,221) Other current assets (95) (1,549) (3,012) Accounts payable (1,889) (1,970) (3,793) Accrued liabilities 12,780 (760) 2,594 ------ ------ ------ Net cash provided by (used in) operating activities 885 24,136 (8,660) Cash flows from investing activities: Acquisitions of businesses, net of cash acquired (79,209) --- --- Additions to property, plant and equipment (8,101) (13,257) (15,541) Proceeds from disposal of property, plant and equipment 2,282 254 55 Proceeds from sales of securities available for sale 13,516 --- --- Additions to other long-term assets (5,091) (8,574) (9,633) ------ ------ ------ Net cash used in investing activities (76,603) (21,577) (25,119) Cash flows from financing activities: Conversion/refinancing fees and expenses (3,333) --- (32,752) Capitalized debt issuance costs (10,472) --- (11,456) Proceeds from long-term debt 155,892 --- 303,734 Reduction of long-term debt (51,446) (6,774) (179,747) Net change in credit lines --- (11,578) 25,398 Issuance of Series B Special Stock, net of discount 15,000 --- --- Issuance of common stock 4,400 --- --- Repurchase/redemption of Series B Special Stock --- (3,879) (77,568) Proceeds from exercise of stock options --- 767 855 ------ ----- ------ Net cash provided by (used in) financing activities 110,041 (21,464) 28,464 Effect of exchange rate changes on cash --- (228) (122) ------ ------ ------ Cash and cash equivalents: Increase (decrease) for year 34,323 (19,133) (5,437) Balance, beginning of year 13,734 48,057 28,924 ------ ------ ------ Balance, end of year $48,057 $28,924 $23,487 ======= ======= ======= See accompanying notes to consolidated financial statements. ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 1996, 1997 and 1998 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 June 18, 1996, the Company acquired Bally Gaming International, Inc. ("BGII"); the results of operations o 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. Also, includes $14.4 million which is utilized in Casino and Route Operations which is held in vaults, cages or change banks. 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, net of reserves, consist of the following at June 30, 1997 and 1998: 1997 1998 (In 000's) Raw materials $9,356 $12,075 Work-in-process 1,683 2,668 Finished goods 26,290 27,675 ------ ------ Total $37,329 $42,418 ======= ======= Property, plant and equipment and leased gaming 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, 3-7 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements, 5-20 years. Leased gaming equipment is stated at cost and depreciated over estimated useful lives ranging from 3-4 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. Property, plant and equipment consists of the following at June 30, 1997 and 1998: 1997 1998 (In 000's) Land and land improvements $21,610 $21,058 Buildings and leasehold improvements 30,027 29,926 Gaming equipment 46,247 50,341 Furniture, fixtures and equipment 16,458 22,670 Less accumulated depreciation and amortization (39,695) (46,090) ------ ------ Property, plant and equipment, net $74,647 $77,905 ======= ======= Excess of costs over net assets of acquired businesses The excess of the cost over the fair value of net assets of acquired businesses 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 financings which are amortized over the life of the related financing. Accrued liabilities Accrued liabilities consists of the following at June 30, 1997 and 1998: 1997 1998 (In 000's) Payroll and related costs $ 6,974 $ 9,150 Interest 566 8,782 Professional and consulting fees 1,564 3,569 Sales, use and income taxes 7,922 3,380 Litigation settlement 428 2,000 Other 19,938 12,241 ------ ------ Total $37,392 $39,122 ======= ======= 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, 1998. Revenue recognition The Company sells equipment and systems on normal credit terms (90 days or less), or over terms of generally up to 36 months or more or through payments from 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. 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 machines 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, 1998, the Company recorded the following unusual items: (1) The Company settled a dispute with Alpha Hospitality and General Electric Credit Corporation concerning certain customer notes receivable on which the Company had certain recourse obligations. The Company contributed $2.5 million to the final settlement with the holder of the notes, and reversed $6.0 million of reserves previously established for these recourse obligations. In addition, as part of the settlement the Company became the sole owner of approximately 566,000 shares of Alpha Hospitality common stock which trades on the NASDAQ Small Cap market. Pursuant to the limitations provided for in the settlement agreement, the Company has sold 235,000 shares of Alpha Hospitality through June 30, 1998. (2)As a result of settling a dispute over the exclusive use of certain technologies and changes in gaming regulations, the Company evaluated the cash flow of certain of its technology assets, in accordance with the provisions of Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," and determined certain items met the definition of having become impaired. During the year ended June 30, 1998 the Company recorded write-downs totaling $2.8 million for these items. (3) The Company accrued $0.7 million for the present value of contractual payments due to a former member of the board of directors who was not re-elected to the board at the December 1997 annual shareholders meeting. (4) The Company accrued $0.6 million as restructuring charges to more fully integrate Bally Gaming and Systems. (5) The Company recorded a $1.6 million charge for final settlement of litigation related to the acquisition of BGII. 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. 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 (deficiency). 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 In February 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which supersedes APB Opinion No. 15. This statement replaces primary EPS with basic EPS, and generally requires dual presentation of basic and diluted EPS. For the years ended June 30, 1996 and 1997, the basic EPS does not differ from the primary EPS and dilutive EPS does not differ from the basic EPS because for these periods the Company reported net losses which would result in anti-dilution. The following securities were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the period presented: Fiscal Years ended June 30, 1996 1997 1998 (in 000's) Stock options 2,832 4,647 5,434 Warrants 10,125 10,125 10,125 Convertible preferred stock 1,924 2,041 2,335 ------ ------ ------ 14,881 16,813 17,894 ====== ====== ====== Adjusted for application of the treasury stock method 1,045 596 2,028 ===== ===== ===== 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, 1998 for the Company's financial instruments approximate fair value. Recently Issued Accounting Pronouncements 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. ACQUISITION 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 Special Stock. The acquisition was 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. During the year ended June 30, 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. During the year ended June 30, 1996, the Company incurred direct costs including a $30.1 million non-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. 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. 3. RECEIVABLES The Gaming Equipment and Systems and Wall Machines and Amusement Games business units grant customers 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% and 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 November 1998 to July 2011. The following table represents, at June 30, 1998, scheduled collections of accounts and notes receivable (net of allowances for doubtful accounts) by fiscal year: Years ending June 30, (In 000's) 1999 2000 2001 2002 2003 Thereafter Total $93,459 $5,400 $1,219 $364 $232 $716 $101,390 ================================================================== 4. DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION In August 1997 the Company effected a series of related transactions (as described below, the "Refinancing"). Long-term debt and lines of credit at June 30, 1997, prior to the Refinancing and at June 30, 1998, after the refinancing, consisted of the following: 1997 1998 (In 000's) 10 % Senior Subordinated Notes due 2007, net of $ - $149,245 unamortized discount of $755 Term loan facilities: Tranche B Term Loan - 74,438 Tranche C Term Loan - 39,700 Delayed Draw Term Facility - 25,000 Revolving Credit Facility - 34,971 12 7/8% Senior Secured Notes due 2003, net of unamortized discount of $2,776 151,224 - 7 1/2% Convertible subordinated debentures due 2003, unsecured 1,642 - National Gaming Mississippi, Inc., note payable, secured by the assets of the Rainbow Casino 6,569 - Bally Wulff revolving lines of credit 9,611 - Other, secured by related equipment 4,793 2,599 ----- ----- 179,839 325,953 Less current maturities 1,124 1,996 ----- ----- $172,715 $323,957 The Refinancing consisted of the private placement of $150.0 million of Senior Subordinated Notes and the closing of $230.0 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 a $25.0 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility" and together with the Tranche B Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a $90.0 million revolving credit facility (the "Revolving Credit Facility") with a 6-year term. Each of these credit facilities is 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: Initial Maturity Rate Date 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, 2005 The Revolving Credit Facility also allows for German Deutschemark borrowings at the Eurodeutschemark rate plus 2.25% (or 5.9% at June 30, 1998). 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 cash on hand to fund (a) the repurchase at a premium of substantially all of the Company's 12 7/8% Senior Secured 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 Special Stock on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming Corporation ("HFS") of the right to receive royalty payments based on revenues of the Rainbow Casino for $19.0 million (the "Rainbow Royalty Buyout"), (d) the repayment of related debt owed to an HFS affiliate, National Gaming Mississippi, Inc. ("NGM"), on August 12, 1997 totaling $7.3 million, (e) repayment of amounts outstanding under the domestic and foreign revolving lines of credit and (f) the payment of transaction fees and expenses totaling $16.5 million. At June 30, 1998, borrowings under the $90.0 million Revolving Credit Facility totaled $35.0 million, of which $12.3 million were German Deutschemark borrowings. Based on the terms of the Revolving Credit Facility, the Company would have been able to borrow an additional $37.1 million as of June 30, 1998. 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 % Convertible Debentures at a price of 104%, or a total of $1.7 million. The bank facility is collateralized by substantially all domestic property and 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 secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and it and the indenture 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 acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. 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 bank financing. 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 to the date of purchase. As a result of the Refinancing described above, the Company recorded an extraordinary loss of $42.0 million consisting of the $27.7 million premium paid to repurchase the Senior Secured Notes, the payment of related transaction fees and expenses (including $2.0 million paid to related parties pursuant to employment agreements), and the charge-off of the unamortized debt discount and deferred financing fees. There was no tax benefit recognized for the extraordinary item as a valuation allowance was recorded to fully reserve the net operating losses created. The Company also recorded a $19.0 million charge for the cost of the Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6 million charge to equity and a corresponding increase in the net loss applicable to common shares for the difference between the carrying value and the liquidation value of the Series B Special Stock, all of which was redeemed on September 8, 1997 at the liquidation price of $100 per share, plus accrued dividends. 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. As part of the Refinancing, the 12 7/8% Notes were repaid and the Series B Preferred Stock was redeemed. During 1995, HFS and its affiliate, 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 were purchased by the Company as part of the Refinancing. 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. Prior to the refinancing, the Bally Wulff entities held three bank lines of credit which provided for borrowings of DM16,300,000, DM16,000,000 and DM750,000. These lines of credit were repaid with proceeds from the new Revolving Credit Facility. Maturities of long-term debt, for each of the five fiscal years ending subsequent to June 30, 1998 are as follows: Years ending June 30, (In 000's) 1999 2000 2001 2002 2003 Thereafter Total $1,996 $1,954 $1,954 $2,142 $14,304 $303,603 $325,953 ================================================================ 5. STOCKHOLDERS' EQUITY, OPTIONS, WARRANTS AND RIGHTS 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 four series of Special Stock authorized for issuance: the Initial Series, the Series B, the Series E and the Series F. 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 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B (the "Series B Special Stock"). The Series B Special Stock was also issued as part of the consideration in the BGII acquisition. During fiscal year 1997 the Company repurchased a total of 18,000 shares of Series B Special 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 Special Stock at their liquidation price of $100 per share, plus accrued dividends. The Company recorded non-cash dividends in the form of additional shares of Series B Special Stock totaling $10.2 million and $2.0 million for years ended June 30, 1997 and 1998, respectively. In June 1996, the Company issued 113,160 shares of Series E Special Stock to certain holders of the Company's 71/2% Convertible Subordinated Debentures who elected to receive such stock in lieu of receiving common stock. Each share of Series E Special Stock accrues cumulative dividends until June 18, 1999 at an annual rate of 111/2%, 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 17.007 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. The holders of shares of Series E Special Stock have no voting rights except as required by law. 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 "1991 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 expire on 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 the closing date of the BGII acquisition, 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 Weighted-Average Shares Exercise Price 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 Granted 1,466,904 4.37 Exercised (250,084) 3.80 Canceled (399,334) 6.95 --------- ---- Balance, June 30, 1998 5,433,803 $3.77 ---------------------- ========= ===== Exercisable at June 30, 1998 3,286,086 $3.73 ========= ===== The following options were outstanding as of June 30, 1998: Options Outstanding Options Exercisable Weighted-Avg. Weighted-Avg. Range of Remaining Outstanding Remaining Outstanding Exercise Prices Contractual Life Shares Contractual Life Shares $2.25 - $3.00 2.47 89,500 2.47 89,500 $3.01 - $4.00 4.16 3,808,399 3.77 2,948,298 $4.01 - $5.00 4.40 1,392,904 4.33 198,288 over $5.01 3.17 143,000 1.30 50,000 -------- ------- 5,433,803 3,286,086 ========= ========= At June 30, 1998, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $2.25 - $8.375 and 4.16 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, from a loss of $6.2 million (or $(0.19) per share) to $8.3 million (or $(0.26) per share) on a pro forma basis for the year ended June 30, 1997 and from a loss of $77.4 million (or ($2.42) per share) to $79.3 million (or $2.48 per share) on a pro forma basis for the year ended June 30, 1998. The pro forma net loss reflects only options granted in 1996, 1997 and 1998. 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, 1997 and 1998 was $5.80, $1.43 and $1.71 respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1996, 1997 and 1998: expected dividend yield of 0%, risk free interest rates ranging from 5.0% to 6.5%, a volatility factor of .79, .51 and .69 for 1996, 1997 and 1998, respectively, and expected lives varying from 3 to 10 years. Warrants 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. 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. Under certain circumstances the expiration date on a portion of the above warrants may be extended. Pursuant to employment agreements, the holders of approximately 1,400,000 of the warrants can extend the expiration date of their warrants until June 30, 2002 by paying an aggregate of approximately $1.1 million in cash or foregoing cash bonuses of an equal amount prior to September 21, 1999. All of these warrants became exercisable one year after the grant dates and vest in three equal increments only after the market price of the Common Stock reaches $11, $13 and $15. 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 commencement of employment with the Company, the then Board Chairman and then Vice-Chairman each 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, except with an expiration date of June 18, 2002. 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, 1998. Prior to the merger, BGII had issued warrants to purchase 1,200,000 shares of BGII common stock at a purchase price of $12.50 per share. Pursuant to the merger agreement, the Company assumed BGII's obligation with respect to each warrant, which are exercisable for the merger consideration per share of BGII common stock subject to such warrants. During July 1998, the holders exercised these warrants resulting in the Company issuing 94,680 shares of common stock and $0.3 million in cash. At June 30, 1998, shares of the Company's Common Stock were reserved for future issuance as follows: Shares underlying stock options issued or issuable under the 1984 Plan 107,000 Shares underlying stock options issued or issuable under the 1991 Plan 2,934,000 Shares underlying stock options issued or issuable under the 1996 Plan 3,000,000 Shares underlying all warrants issued 10,125,000 Shares for former BGII option holders 202,500 --------- Total (see below) 16,368,500 ========== Included in the warrants above are warrants held by Mr. Alfred Wilms to purchase 2,000,000 shares of Common Stock at $2.50 per share, subject to adjustment, that were to expire September 1, 1998. These warrants were issued in connection with the funding of a $6.5 million five year subordinated loan for VSI which has since been repaid. On August 25, 1998, (after the date of the auditors' report) Mr. Wilms exercised these warrants. Stockholder Rights Plan In February 1998, the Company's Board of Directors adopted a Stockholder Rights Plan ("Plan"). The Plan is designed to preserve the long-term value of the shareholders' investment in the Company. Pursuant to the Plan, each shareholder received a distribution of one Right for each share of the Company's outstanding common stock of record on March 12, 1998. Each Right expires on March 12, 2008, and entitles the holder to purchase one one-hundredth (1/100) of a share of a Series F Special Stock for $25 Initially the Rights are represented by the Company's common stock certificates and are not exercisable. The Rights become exercisable only after a person or group acquires beneficial ownership of 10% or more of the Company's Common Stock (or 15% if the acquirer is an institutional investor) or publicly announces its intention to commence a tender offer that would result in that beneficial ownership level. Under certain circumstances involving a buyer's acquisition of 10% of the Company's Common Stock (or 15% in the case of an institutional investor), all Rights holders except the buyer will be entitled to purchase Common Stock at half price. If the Company is acquired through a merger, after such an acquisition, all Rights holders except the buyer will be entitled to purchase stock in the buyer at half price. The Company may redeem the rights at $0.001 at any time before a buyer acquires 10% (or 15% in the case of an institutional investor) of the Company's Common Stock. 6. INCOME TAXES The components of the Company's income tax expense for the years ended June 30, 1996, 1997 and 1998 are as follows: 1996 1997 1998 (In 000s) Current tax expense: U. S. Federal $ 533 $ 225 $ - Foreign 172 7,701 2,743 State 50 750 568 755 8,676 3,311 Deferred tax expense U. S. Federal - - - Foreign - (683) (126) State - - - ----- ---- ----- Total provision for income taxes $ 755 $7,993 $3,185 ===== ===== ===== 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, 1996, 1997 and 1998 are as follows:
1996 1997 1998 (In 000's) Computed expected income tax expense (benefit) at 35% $(20,700) $4,826 $(18,942) Change in valuation allowance (6,453) 169 17,613 Change in estimates, principally due to changes in estimated tax depreciation and NOL's 1,166 686 - State income taxes, net of federal benefit 33 488 369 Tax gain on conversion of debt to equity, net 18,265 - - Acquisition costs not currently deductible 7,102 - - Foreign taxes, net of federal benefit - 1,940 754 Foreign tax credits - - 1,770 Other, net 1,342 (116) 1,621 ----- ----- ----- $ 755 $7,993 $3,185 ===== ===== =====
The major components of the deferred tax assets and liabilities as of June 30, 1997 and 1998 are presented below. 1997 1998 (In 000's) Deferred Tax Assets: Net operating loss carry forwards $ 6,049 $15,254 Foreign tax credit carry forwards 11,843 12,816 Inventory obsolescence reserves 4,008 3,582 Bad debt reserves 6,359 2,056 Accruals not currently deductible for tax purposes 3,585 4,108 Refinancing costs being amortized for tax purposes - 13,125 Other 9,404 7,611 Total gross deferred tax assets 41,248 58,552 Less: Valuation allowance 29,472 47,085 ------ ------ Deferred tax assets $11,776 $11,467 ======= ======= Deferred Tax Liabilities: Property and equipment, principally due to depreciation differences $ 3,703 $ 4,762 Other 6,662 5,168 Total gross deferred tax liabilities (a) 10,365 9,930 ------ ----- Net deferred tax assets $ 1,411 $ 1,537 ======= ======= (a) Included in the other non-current liabilities in the accompanying consolidated balance sheets. 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, 1998, the Company had net operating loss carry forwards for federal income tax purposes of approximately $44.2 million which are available to offset future federal taxable income, if any, expiring in the years 2007 through 2013. In addition, approximately $21.3 million of the Company's net operating loss carryforwards are limited to annual utilization of $4.7 million per year subject to certain carryover provisions pursuant to Section 382 of the Internal Revenue Code. At June 30, 1998 the Company has foreign tax credit carry forwards of approximately $12.8 million and alternative minimum tax credit (AMT) carry forwards of approximately $1.7 million. Foreign tax credits are available to offset future taxes due in the U.S. on future foreign taxable income and expire between 1999 and 2003 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 AM calculations. 7. 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, 1996, 1997 and 1998: 1996 1997 1998 (In 000's) Reclassify inventory to property, plant and equipment and leased gaming equipment $ - $9,642 $4,132 Dividends for Series E and Series B Special Stock - 11,264 3,551 Translation rate adjustment - 11,204 2,105 Reclassify other assets to property, plant and equipment - 1,818 - Reclassify receivables to other assets - 1,837 540 Reclassify excess costs over net assets of acquired business to property, plant and equipment - 1,436 - Convertible debentures converted to equity securities 83,358 - - Common and Series B Special 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 - - Payments for interest expense in fiscal years 1996, 1997 and 1998 were approximately $8.0 million, $22.5 million and $19.9 million, respectively. Payments for income taxes in fiscal years 1996, 1997 and 1998 were approximately $0.3 million, $3.5 million and $7.3 million, respectively. 8. 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 years ended June 30, 1997 and 1998 was $1.0 million. 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, 1998 are: Years ended June 30, (In 000's) 1999 2000 2001 2002 2003 Thereafter Total Minimum rentals $13,039 $9,106 $7,099 $4,984 $3,490 $38,297 $76,015 Total sublease income (1,314) (915) (566) (535) (462) (1,959) (5,751) ------------------------------------------------------- Net minimum rentals $11,725 $8,191 $6,533 $4,449 $3,028 $36,338 $70,264 ======================================================== Operating lease rental expense, including contingent lease rentals, for years ended June 30, 1996, 1997 and 1998 was as follows: 1996 1997 1998 (In 000's) Minimum rentals $10,194 $15,126 $15,534 Contingent rentals 60,525 70,744 85,915 ------ ------ ------ 70,719 85,870 101,449 Sublease rental income (1,487) (1,606) (2,136) ------ ------ ------ $69,232 $84,264 $99,313 ======= ======= ======= 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. In addition, the agreement with RCC 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 the year ended June 30, 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. The German tax authorities have not yet issued the final assessment from their quadrennial audit. Litigation 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 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, relating to loan commitment letters from 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. In August 1998 the Company and the plaintiffs settled the litigation for approximately $2.0 million which has been accrued for at June 30, 1998 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. 9. CONCENTRATION OF CREDIT RISK The financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts and notes receivable. Each of the Company's business units conducts business in and the resulting receivables are concentrated in specific legalized gaming regions. The ComAt June 30, 1998 net accounts and notes receivable by region as a percentage of total net receivables are as follows:
Gaming Wall Machines Equipment and Amusement Route Casino and Systems Games Operations Operations Total Germany 0.3 45.6% --% --% 45.9% Other international jurisdictions 25.7 0.5 -- -- 26.2 Nevada 9.1 -- 5.7 -- 14.7 Michigan 5.7 -- -- -- 5.7 Mississippi 1.1 -- 0.1 1.2 Atlantic City 1.0 -- -- -- 1.0 Others individually less than 5% 5.3 -- -- -- 5.3 ---- ---- ---- ---- ---- 48.2% 46.1% 5.7% 0.1% 100.0% ==== ==== ==== ==== =====
Receivables from emerging market customers contain increased risk factors compared to receivables at the Bally Wulff entities or other traditional markets for Bally Gaming. 10. 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 and revenues, operating income, capital expenditures and depreciation and amortization by geographic region for the years ended June 30, 1997 and 1998. At June 30, 1997 1998 (In 000's) Identifiable assets: Germany $110,371 $106,886 United States 242,450 265,922 Eliminations (805) (5,971) ------- ------- Consolidated $352,016 $366,837 ======== ======== Year ended June 30, 1997 (In 000's) Operating Capital Depreciation and Revenues Income Expenditures Amortization 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 ======== ======= ======= ======= Year ended June 30, 1998 (In 000's) Operating Capital Depreciation and Revenues Income Expenditures Amortization Germany $111,505 $13,978 $ 1,372 $ 5,747 United States 314,100 22,311 14,169 17,091 Eliminations (8,233) (26) - - ------- ------ ------ ------ Consolidated $417,372 $36,263 $15,541 $22,838 ======== ======= ======= ======= 11. INTERIM FINANCIAL INFORMATION (Unaudited) Following is the unaudited quarterly results of the Company for the years ended June 30, 1997 and 1998. This information is not covered by the Independent Auditors' Report.
Quarter First Second Third Fourth (In 000's, except per share data) 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 $(0.07) $0.03 $(0.08) $(0.08)
Quarter First Second Third Fourth (In 000's, except per share data) 1998 Revenues $97,971 $106,714 $102,226 $110,461 Operating income 7,444 11,442 7,988 9,389 Net income (loss) (60,909) 3,346 (731) 988 Net income (loss) applicable to common shares (79,862) 2,973 (1,115) 594 Income (loss) per share $(2.51) $0.09 $(0.03) $0.02
12. 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. CONSOLIDATING BALANCE SHEETS June 30, 1997 (In 000's) ASSETS
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries 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 Investments in subsidiaries 100,605 - (100,605) - Deferred tax assets 6,265 5,511 - 11,776 Other assets, net 16,045 (11,269) 24 4,800 ------- ------- ------- ------- $394,373 $149,118 $(191,475) $352,016 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY) 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, net 151,224 - - 151,224 Other long-term debt, less current maturities 87,924 22,676 (89,109) 21,491 Other liabilities 9,366 3,500 (433) 12,433 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 (deficiency): 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) (88,742) 25,954 (26,081) (88,869) Total stockholders' equity (deficiency) 53,682 100,605 (100,732) 53,555 ------ ------- ------- ------ $394,373 $149,118 $(191,475) $352,016 ======== ======== ======== ========
See accompanying notes. CONSOLIDATING BALANCE SHEETS June 30, 1998 (In 000's) ASSETS
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries Current assets: Cash and cash equivalents $ 8,609 $ 14,878 $ - $ 23,487 Accounts and notes receivable, net 44,757 52,380 (3,678) 93,459 Inventories, net 27,957 14,990 (529) 42,418 Other current assets 7,998 3,713 - 11,711 ------ ------ -------- ------- Total current assets 89,321 85,961 (4,207) 171,075 Long-term notes receivable, net 95,036 1,926 (89,031) 7,931 Leased equipment, net 2 7,323 - 7,325 Property, plant and equipment, net 45,052 32,853 - 77,905 Excess of costs over net assets of acquired businesses, net 39,963 19,989 - 59,952 Intangible assets, net 26,248 484 - 26,732 Investments in subsidiaries 104,219 - (104,219) - Deferred tax assets 7,123 4,344 - 11,467 Other assets, net 15,330 (5,468) (5,412) 4,450 ------- ------ --------- ------- $422,294 $147,412 $(202,869) $366,837 ======== ======== ========== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 7,373 $ 3,104 $ - $ 10,477 Accrued liabilities 26,415 13,705 (998) 39,122 Current maturities of long-term debt 6,912 3,176 (8,092) 1,996 ------ ------ ------- ------ Total current liabilities 40,700 19,985 (9,090) 51,595 Term loan facilities 137,800 - - 137,800 Senior Subordinated Notes due 2007, net 149,245 - - 149,245 Other long-term debt, less current maturities 105,279 20,878 (89,245) 36,912 Other liabilities 10,729 2,330 (341) 12,718 Total liabilities 443,753 43,193 (98,676) 388,270 ------- ------ -------- ------- Minority interest 2,315 - - 2,315 Commitments and contingencies Stockholders' equity ( deficiency): Series E Special Stock 13,732 - - 13,732 Common Stock 3,212 17,832 (17,832) 3,212 Additional paid-in capital 122,980 68,700 (68,700) 122,980 Cumulative translation adjustment (13,946) (14,140) 14,140 (13,946) Retained earnings (accumulated deficit)(149,752) 31,827 (31,801) (149,726) Total stockholders' equity (deficiency) (23,774) 104,219 (104,193) (23,748) ------ ------- ------- ------ $422,294 $147,412 $(202,869) $366,837 ======== ======== ======== ========
See accompanying notes. CONSOLIDATING STATEMENTS OF OPERATIONS Year ended June 30, 1996 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries 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 19,652 11,710 (92) 31,270 Research and development 236 134 - 370 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 income (loss) applicable to common shares $(60,259) $ 8,378 $ (8,378) $(60,259) ======== ======= ======= ========
See accompanying notes. CONSOLIDATING STATEMENTS OF OPERATIONS Year ended June 30, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries 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 53,913 45,616 (9) 99,520 Research and development 6,701 3,253 - 9,954 Depreciation and amortization 13,390 9,216 - 22,606 Unusual items 700 - - 700 ------ ------- ------ ------- 248,497 162,183 (6,993) 403,687 ------- ------- ------ ------- Operating income (loss) 2,153 39,433 (127) 41,459 Earnings in consolidated subsidiaries 23,624 - (23,624) - 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 5,413 32,116 (23,751) 13,778 Income tax benefit (provision) 499 (8,492) - (7,993) ----- ------- ------ ------ Net income 5,912 23,624 (23,751) 5,785 Special Stock dividends (11,974) - - (11,974) ------- ------ ------ ------- Net income (loss) applicable to common shares $(6,062) $23,624 $(23,751) $(6,189) ======= ======= ======= =======
See accompanying notes. CONSOLIDATING STATEMENTS OF OPERATIONS Year ended June 30, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries Revenues: Gaming equipment and systems $104,141 $ 13,455 $(7,999) $109,597 Wall machines and amusement games - 98,759 (148) 98,611 Route operations 127,424 21,083 - 148,507 Casino operations 13,426 47,231 - 60,657 ------- ------- ------ ------- 244,991 180,528 (8,147) 417,372 ------- ------- ------ ------- Costs and expenses: Cost of gaming equipment and systems 60,154 9,555 (8,025) 61,684 Cost of wall machines and amusement games - 54,389 (148) 54,241 Cost of route operations 101,052 13,593 - 114,645 Cost of casino operations 8,278 17,652 - 25,930 Selling, general and administrative 47,066 39,252 - 86,318 Research and development 12,739 3,039 - 15,778 Depreciation and amortization 14,181 8,657 - 22,838 Unusual items (370) 45 - (325) ------ ------- ------ ------ 243,100 146,182 (8,173) 381,109 ------- ------- ------ ------- Operating income 1,891 34,346 26 36,263 Earnings in consolidated subsidiaries 22,844 - (22,844) - Other income (expense): Interest income 1,339 418 (944) 813 Interest expense (27,581) (1,963) 944 (28,600) Rainbow royalty 4,884 (5,471) - (587) Rainbow royalty buyout (19,000) - - (19,000) Minority interest (2,002) - - (2,002) Other, net 1,136 (111) - 1,025 ------ ----- ------ ------ Income (loss) before income taxes (16,489) 27,219 (22,818) (12,088) Income tax (provision) benefit 1,190 (4,375) - (3,185) ------ ------ ------ ------- Net income (loss) before extraordinary item (15,299) 22,844 (22,818) (15,273) Extraordinary loss, without tax benefit(42,033) - - (42,033) Net income (loss) (57,332) 22,844 (22,818) (57,306) Special Stock dividends (3,551) - - (3,551) Premium on repurchase of Series B Special Stock (16,553) - - (16,553) ------- ------ ------- ------- Net income (loss) applicable to common shares $(77,436) $22,844 $(22,818) $(77,410) ======== ======= ======== ========
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF CASH FLOWS Year ended June 30, 1996 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries 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 assets (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 businesses 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 accoumts (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: Acquisitions of businesses, 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 Proceeds from sales 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 155,236 1,301 (645) 155,892 Capitalized debt issuance costs (10,472) - - (10,472) Reduction of long-term debt (47,233) (4,834) 621 (51,446) Issuance of Series B Special Stock, net of discount 15,000 - - 15,000 Issuance of common stock 4,400 - - 4,400 Convertible debentures conversion fees (3,333) - - (3,333) ------ ----- ----- ------- 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 ======= ======= ======= =======
See accompanying notes. CONSOLIDATING STATEMENTS OF CASH FLOWS Year ended June 30, 1997 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries Cash flows from operating activities: Net income $ 5,912 $23,624 $(23,751) $ 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 assets 503 730 - 1,233 Provision for doubtful receivables 5,049 4,010 - 9,059 Other 32 (683) - (651) Net change in operating assets and liabilities: 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 (20,472) 5,673 14,799 - 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, plant and equipment 78 176 - 254 Other additions to long-term assets (8,375) (199) - (8,574) ------ ------ ----- ------ Net cash used in investing activities (17,495) (4,082) - (21,577) Cash flows from financing activities: Reduction of long-term debt (767) (6,751) 744 (6,774) Net change in credit lines (7,525) (4,053) - (11,578) Repurchase of Series B Special Stock (3,879) - - (3,879) Proceeds from exercise of stock options 767 - - 767 Dividends received (paid) 10,051 (10,051) - - ------- ------- ---- ------- Net cash used in financing activities (1,353) (20,855) 744 (21,464) Effect of exchange rate changes on cash - (228) - (228) Cash and cash equivalents: Increase (decrease) for period (20,492) 1,359 - (19,133) Balance, beginning of period 36,954 11,103 - 48,057 ------- ------- ---- ------- Balance, end of period $16,462 $12,462 $ - $28,924 ======= ======= ====== =======
See accompanying unaudited note. CONSOLIDATING STATEMENTS OF CASH FLOWS Year ended June 30, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries Cash flows from operating activities: Net income (loss) $(57,332) $22,844 $(22,818) $(57,306) Adjustments to reconcile net income (loss)to net cash provided by (used in) operating activities: Depreciation and amortization 14,181 8,657 - 22,838 Amortization of debt discounts 44 - - 44 Extraordinary item 42,033 - - 42,033 Write down of other assets 2,447 - (118) 2,329 (Gain) loss on sale of assets 185 (52) - 133 Provision for losses on (recovery of) receivables (8,278) 1,084 - (7,194) Other (140) (3) 92 (51) Net change in operating assets and liabilities: Accounts and notes receivable (4,795) 3,318 3,423 1,946 Inventories (8,870) (200) (151) (9,221) Other current assets (1,100) (1,912) - (3,012) Intercompany accounts (17,688) (430) 18,118 - Accounts payable (2,563) (1,158) (72) (3,793) Accrued liabilities 6,150 (3,022) (534) 2,594 ------- ------ ----- ----- Net cash provided by (used in operating activities (35,726) 29,126 (2,060) (8,660) Cash flows from investing activities: Additions to property, plant and equipment (11,534) (4,007) - (15,541) Proceeds from disposal of property, plant and equipment (88) 143 - 55 Additions to long-term assets (9,263) (5,873) 5,503 (9,633) Net cash used in investing activities (20,885) (9,737) 5,503 (25,119) ------- ------ ----- ------- Cash flows from financing activities: Refinancing fees and expenses (32,752) - - (32,752) Capitalized debt issuance costs (11,456) - - (11,456) Proceeds from long-term debt 309,318 - (5,584) 303,734 Reduction of long-term debt (179,348) (2,540) 2,141 (179,747) Net change in credit lines 22,738 2,660 - 25,398 Redemption of Series B Special Stock (77,568) - - (77,568) Proceeds from exercise of stock options 855 - - 855 Dividends received (paid) 16,971 (16,971) - - ------- ------- ------ ------- Net cash provided by (used in) financing activities 48,758 (16,851) (3,443) 28,464 Effect of exchange rate changes on cash - (122) - (122) Cash and cash equivalents: Increase (decrease) for period (7,853) 2,416 - (5,437) Balance, beginning of period 16,462 12,462 - 28,924 ------ ------- ------ ------ Balance, end of period $ 8,609 $14,878 $ - $23,487 ======= ======= ====== =======
See accompanying unaudited note. 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, 1998 consist of the following : Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount $149,245 $ - $ - $149,245 Term loan facilities: Tranche B Term Loan 74,438 - - 74,438 Tranche C Term Loan 39,700 - - 39,700 Delayed Draw Term Facility 25,000 - - 25,000 Revolving Credit Facility 22,700 12,271 - 34,971 Intercompany notes payable 88,096 9,241 (97,337) - Other 57 2,542 - 2,599 ------- ------ ------- ------- 399,236 24,054 (97,337) 325,953 Less current maturities 6,912 3,176 (8,092) 1,996 ------- ------ ------- ------- Long-term debt, less current maturities $392,324 $20,878 $(89,245) $323,957 ======== ======= ======== ======== 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, 1997 are as follows (in 000's):
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries Deferred Tax Assets: Net operating loss carry forwards $ 6,049 $ $ $ 6,049 Foreign tax credit carry forwards 11,843 11,843 Inventory obsolescence reserves 3,360 648 4,008 Bad debt reserves 6,359 6,359 Accruals not currently deductible for tax purposes 3,585 3,585 Other 4,541 4,863 9,404 ----- ------ ----- ----- Total gross deferred tax assets 35,737 5,511 41,248 Less: Valuation allowance 29,472 29,472 ------ ------ ----- ------ Deferred tax assets $6,265 $ 5,511 $ - $ 11,776 ------ ------- ------ --------
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries 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 ====== ====== ==== ======
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, 1998 are as follows (in 000's):
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries Deferred Tax Assets: Net operating loss carry forwards $15,254 $ $ $15,254 Foreign tax credit carry forwards 12,816 12,816 Inventory obsolescence reserves 2,729 853 3,582 Bad debt reserves 2,045 11 2,056 Accruals not currently deductible for tax purposes 3,809 299 4,108 Refinancing costs being amortized for tax purposes 13,125 13,125 Other 4,430 3,181 7,611 ------ ----- ----- ----- Total gross deferred tax assets 54,208 4,344 58,552 Less: Valuation allowance (47,085) (47,085) ------ ----- ----- ------ Deferred tax assets $ 7,123 $ 4,344 $ - $11,467 ------- ------- ----- ------- Deferred Tax Liabilities: Property and equipment, principally due to depreciation differences $ 3,268 $ 1,494 $ $ 4,762 Other 4,332 836 5,168 ----- ----- ----- ----- Total gross deferred tax liabilities 7,600 2,330 9,930 ----- ----- ----- ----- Net deferred tax assets (liabilities) $ (477) $ 2,014 $ - $ 1,537 ======= ======= ====== =======
13. RESERVES AND ALLOWANCES The following tables represent the activity for each of the fiscal years ended June 30, 1996, 1997 and 1998 for each of the valuation reserve and allowance accounts (in 000,s):
Balance at Balance at Beginning of End of Year Additions Deductions Year Allowance for doubtful accounts: Year ended June 30, 1998 $23,901 $ 2,722 $13,582 (b) $13,041 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 Inventory valuation allowance: Year ended June 30, 1998 $8,856 $ 355 $2,414 $6,797 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, 1998 $3,502 $ 18 $ 32 $3,488 Year ended June 30, 1997 3,679 162 339 3,502 Year ended June 30, 1996 631 4,629 1,581 3,679
_______________ (a) Includes reserves assigned to BGII receivables and inventory in purchase accounting of $17.6 million and $9.8 million, respectively. (b) Includes the $6.0 million net reversal of bad debt reserves related to the resolution of certain receivables sold with recourse to General Electric Capital Corporation. Such amount was included in unusual items in the accompanying consolidated statement of operations. EX-4.3 2 EXHIBIT 4.3 Exibit 4.3 FIRST AMENDMENT AND CONSENT FIRST AMENDMENT AND CONSENT (this "Amendment"), dated as of August 31, 1998, among ALLIANCE GAMING CORPORATION, a Nevada corporation (the "U.S. Borrower"), BALLY WULFF VERTRIEBS GMBH, a company with limited liability organized under the laws of the Federal Republic of Germany ("Bally Wulff Vertriebs"), BALLY WULFF AUTOMATEN GMBH, a company with limited liability organized under the laws of the Federal Republic of Germany ("Bally Wulff Automaten" and, together with Bally Wulff Vertriebs, the "German Borrowers," and each a "German Borrower" and the German Borrowers, together with the U.S. Borrower, the "Borrowers," and each a "Borrower"), the Lenders party to the Credit Agreement referred to below (the "Lenders") and CREDIT SUISSE FIRST BOSTON, as Administrative Agent. Unless otherwise defined herein, all capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S S E T H : WHEREAS, the Borrowers, the Lenders and the Administrative Agent are parties to a Credit Agreement, dated as of August 8, 1997 (the "Credit Agreement"); WHEREAS, Bally Gaming, Inc., a Wholly-Owned Subsidiary of the U.S. Borrower, has formed a new Wholly-Owned Subsidiary, Bally Gaming Africa Pty, Ltd. ("Bally Gaming Africa"); WHEREAS, Bally Gaming Africa has purchased assets consisting of cash, equipment, inventories and trade receivables from Bally Gaming International GmbH ("Bally Gaming Intl."), a Wholly-Owned Subsidiary of Bally Wulff Vertriebs, in exchange for an intercompany payable from Bally Gaming Africa in favor of Bally Gaming Intl.; and WHEREAS, (i) the Borrowers have requested that the Lenders grant and the Lenders hereby agree to grant (subject to the terms and conditions hereof) the consent provided herein and (ii) the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: 1. Notwithstanding the provisions of Sections 9.02 and 9.05 of the Credit Agreement, the Lenders hereby consent to Bally Gaming Africa's purchase of the assets described above from Bally Gaming Intl. in exchange for an intercompany obligation as described above. 2. Section 9.03 of the Credit Agreement is hereby amended by (x) deleting the text "and" appearing at the end of the clause (vii) thereof and inserting a semicolon in lieu thereof, (y) deleting the period appearing at the end of clause (viii) thereof and inserting the text "and" in lieu thereof and (z) inserting the following new clause (ix) immediately following existing clause (viii) thereof: "(ix) so long as no Default or Event of Default is in existence (or will exist after giving effect to the respective Restricted Payment), the U.S. Borrower may make Restricted Payments to (x) repurchase certain warrants issued by the U.S. Borrower currently held by Fred Willms and (y) repurchase outstanding shares of its common stock, provided that the aggregate amount of Restricted Payments made pursuant to this clause (ix) shall not exceed $7,000,000." 3. This Amendment shall become effective on the date (the "First Amendment Effective Date") when each Borrower and the Required Lenders have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office. 4. In order to induce the Lenders to enter into this Amendment, each Borrower hereby represents and warrants that (i) the representations and warranties contained in Section 7 of the Credit Agreement are true and correct in all material respects on and as of the First Amendment Effective Date after giving effect to this Amendment (it being understood and agreed that, as to any representation or warranty which by its terms is made as of a specified date, each Borrower represents and warrants that such representation and warranty is true and correct in all material respects only as of such specified date) and (ii) there exists no Default or Event of Default on the First Amendment Effective Date, after giving effect to this Amendment. 5. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 6. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the U.S. Borrower and the Administrative Agent. 7. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 8. From and after the First Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. * * * IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Amendment as of the date first above written. ALLIANCE GAMING CORPORATION, as an Assignor By_______________________________ Name: Title: BALLY WULFF VERTRIEBS GMBH By_______________________________ Name: Title: BALLY WULFF AUTOMATEN GMBH By_______________________________ Name: Title: CREDIT SUISSE FIRST BOSTON, as Collateral Agent By_______________________________ Title: By_______________________________ Title: THE BANK OF NOVA SCOTIA By_______________________________ Name: Title: KZH ING-1 LLC By_______________________________ Name: Title: SUMITOMO BANK OF CALIFORNIA By_______________________________ Name: Title: THE MITSUBISHI TRUST AND BANKING CORP. By_______________________________ Name: Title: SOUTHERN PACIFIC BANK By_______________________________ Name: Title: CRESCENT/MACH I PARTNERS By: TCW Asset Management Company, Its Investment Advisor By_______________________________ Name: Title: MERRILL LYNCH SENOIR FLOATING RATE FUND, INC. By_______________________________ Name: Title: TCW LEVERAGED INCOME TRUST, L.P. By_______________________________ Name: Title: VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By_______________________________ Name: Title: VAN KAMPEN CLO1, LIMITED By: Van Kampen American Capital Management, Inc., as Collateral Manager By_______________________________ Name: Title: INDOSUEZ CAPITAL FUNDING III, LIMITED By_______________________________ Name: Title: DEEPROCK & COMPANY By: Eaton Vance Management As Investment Advisor By_______________________________ Name: Title: PILGRIM AMERICA PRIME RATE TRUST By_______________________________ Name: Title: DEAN WITTER INTERCAPITAL By_______________________________ Name: Title: ROYALTON COMPANY By: Pacific Investment Management Company as its Investment Advisor By_______________________________ Name: Title: SENIOR DEBT PORTFOLIO By: Boston Management and Research as Investment Advisor By_______________________________ Name: Title: KZH-CRESCENT CORP. By_______________________________ Name: Title: PAMCO CAYMAN LTD. By_______________________________ Name: Title: CYPRESSTREE INVESTMENT PARTNERS I, LTD., By: Cypresstree Investment Management Company, Inc., as Portfolio Manager By_______________________________ Name: Title: TEXAS COMMERCE BANK By_______________________________ Name: Title: ARCHIMEDES FUNDING, L.L.C. By: ING Capital Advisors, Inc., as Collateral Manager By_______________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By_______________________________ Name: Title: EX-4.11 3 EXHIBIT 4.11 Exhibit 4.11 AMENDMENT NO. 1 DATED SEPTEMBER 15, 1998 TO RIGHTS AGREEMENT, dated as of March 9, 1998 between ALLIANCE GAMING CORPORATION, a Nevada corporation, and AMERICAN STOCK TRANSFER & TRUST COMPANY as Rights Agent (the "Agreement", terms defined therein having the same meanings when used herein). The parties desire to amend the Agreement as follows: Section 1. Amendments. 1.1. Section 1 of the Agreement is amended by adding the following definition following the definition of "Common Stock": "Continuing Director" shall mean (i) any member of the Board of Directors, while such Person is a member of the Board of Directors, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person, or of any such Affiliate or Associate, and was a member of the Board prior to the date of this Agreement, (ii) any Person who subsequently becomes a member of the Board of Directors, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board of Directors is recommended or approved by a majority of the Continuing Directors or (iii) any Person who has been a member of the Board of Directors for a period of a full consecutive year." 1.2. Section 23(a) of the Agreement is amended by adding after the first sentence thereof the following: "If the Board of Directors of the Corporation authorized redemption of the Rights in the circumstances set forth in this Section 23, then there must be Continuing Directors then in office and such authorization shall require only the concurrence of a majority of such Continuing Directors if such authorization occurs on or after the date of a change (resulting from a proxy or consent solicitation) in a majority of the directors in office at the commencement of such solicitation if any Person who is a participant in such solicitation has stated (or, if upon the commencement of such solicitation, a majority of the Board of Directors of the Corporation has determined in good faith) that such Person (or any of its Affiliates or Associates) intends to take, or may consider taking, any action which would result in such Person becoming an Acquiring Person or which would cause the occurrence of an event referred to in Sections 11(a)(ii) or 13." Section 2. Miscellaneous. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. ALLIANCE GAMING CORPORATION By:__________________________ Title: AMERICAN STOCK TRANSFER & TUST COMPANY By:_________________________ Title: EX-10.65 4 EXHIBIT 10.65 Exhibit 10.65 EXECUTIVE EMPLOYMENT AGREEMENT dated as of July 1, 1998, by and among ALLIANCE GAMING CORPORATION, 6601 South Bermuda Road, Las Vegas, Nevada 89119 (with its subsidiaries, "Alliance"); ALLIANCE AUTOMATEN GmbH & CO. KG, Maybachufer 48B51, 12045 Berlin, Germany (with its subsidiaries, "Automaten", and together with Alliance, the "Companies"); and HANS KLOSS, Kronprinzenstrasse 48, 13589 Berlin, Germany (the "Executive"). The parties agree as follows: 1. Employment. The Companies employ the Executive, and the Executive accepts employment by the Companies, on the terms and conditions set forth in this Agreement. 2. Term; Extension. The term of this Agreement shall begin on July 1, 1998, and, unless terminated earlier pursuant to this Agreement, shall expire on December 31, 2000. During the term of this Agreement the parties shall negotiate in good faith for an agreement for Executive to serve as a consultant to the Companies for two years or more beginning at the expiration of this Agreement, which agreement shall include restrictive covenants comparable to those contained in section 6 and such additional terms and conditions as the parties may in good faith agree. 3. Position and Duties. The Executive shall report to the president of Alliance. The Executive's duties and responsibilities shall be limited to: serving as fully authorized General Representative ("Generalbevollmachtigter") of Automaten; serving as international executive team member for Alliance and directing development in Europe, Australia, South Africa, and such other jurisdictions as the president of Alliance may designate from time to time; serving as new product development team member for Alliance subsidiary Bally Gaming, Inc. (including its Bally Systems division); assisting the managing directors of Automaten in political and industry relations and undertaking special assignments and such other duties as the managing directors may assign from time to time; and undertaking special assignments and such other duties as may be assigned from time to time by the president of Alliance. The Executive shall perform the duties contemplated by the foregoing and such other duties, consistent with his experience and abilities, as may be assigned to the Executive by the president of Alliance. The Executive shall use his best efforts to the business and affairs of and to further the interests of the Companies, and at all times conduct himself in a manner that reflects credit on the Companies, provided, however, that it is contemplated that the Executive shall not be required to devote more than one-half his normal working time to the business and affairs of the Companies. It is contemplated that the Executive shall render services under this Agreement from Berlin, Germany, to Automaten and KG only, but outside of Germany to Alliance as required; however, the parties acknowledge and agree that the Executive may be required to travel extensively in fulfilling his duties hereunder. 4. Compensation. (a) Salary. The Companies shall pay the Executive a base salary of DM954,600 a year in installments on the regularly recurring paydays in accordance with the Companies' practice, with a 4 percent increase at the end of each year of the Executive's employment under this Agreement. (b) Bonuses. The Executive shall not be eligible to receive any cash or other bonuses from the Companies, except that the Executive shall be eligible to receive a cash bonus with respect to and after the close of the 1997/1998 business year in connection with the Executive's employment with Bally Wulff during that time, provided, that neither the Companies nor Bally Wulff shall be obligated to pay any bonus, and the payment, if any, and amount and timing of any such bonus shall be solely within the discretion of the Companies and may be based on any criteria the Companies deem relevant. (c) Reimbursement of expenses. In accordance with established policies and procedures of the Companies as in effect from time to time, the Companies shall pay to or reimburse the Executive for all reasonable and actual out-of-pocket expenses including but not limited to travel, hotel, and similar expenses, incurred by the Executive from time to time in performing his obligations under this Agreement. (d) Options. The Executive shall be eligible to receive options (the Options) to acquire shares of the publicly-traded common stock of Alliance, provided, however, that the Companies shall not be obligated to award any Options and the award, if any, and amount, timing, and terms of any such Options shall be solely within the discretion of the Companies and may be based on any criteria the Companies deem relevant. (e) Vacation. The Executive shall be entitled to six weeks annual paid vacation time, prorated for any partial employment year. The Executive may accumulate and carry forward unused vacation days from year to year consistent with the Companies policy for senior executives as in effect from time to time. The Executive shall also be entitled to reasonable periods of sick leave with compensation and all paid holidays given by the Companies to their senior executive officers. (f) Other benefits. The Executive shall be entitled to other employment benefits, including but not limited to the Companies existing life insurance, medical and hospitalization, disability, and retirement benefits, consistent with the benefits provided to other senior executives of the Companies. (g) Car allowance. The Companies, at their expense, shall furnish the Executive with a company car (in or comparable to a car in the five-liter engine class) for business travel and personal use. Without diminishing the Executive's responsibility for taxes on other portions of his compensation under this Agreement, the Executive shall be responsible for any taxes associated with his receipt of this benefit. (h) No Reduction. There shall be no material reduction or diminution of the benefits provided in this section during the term of this Agreement unless (i) the Executive consents, (ii) an equitable arrangement (embodied in a substitute or alternative benefit or plan) is made with respect to such benefit or plan, or (iii) the reduction is part of a program of across-the-board benefit reductions similarly affecting the senior executive officers of the Companies. 5. Termination. This Agreement cannot be terminated by either party before the expiration of this Agreement pursuant to section 2, except as follows: (a) Disability. If the Executive, because of illness or incapacity, fails to discharge his duties under this Agreement for nine or more consecutive months or for noncontinuous periods aggregating to twenty-two weeks in any twelve-month period, the Companies may terminate this Agreement on thirty days notice, whereupon the obligations of the Companies and the rights of the Executive under this Agreement shall terminate, except that: (1) The Companies shall pay the Executive's salary on a pro-rata basis for six months after the date of disability, offset by any benefits payable to the Executive under any disability insurance policy paid for by the Companies; and (2) The Executive shall have the right, at the Executive's expense, to the assignment of any and all insurance policies or health protection plans in accordance with the terms and conditions of those plans. (b) Death. In the event of the Executive's death, this Agreement shall terminate as of the date of his death, in which case the obligations of the Companies and the rights of the Executive under this Agreement shall terminate except that: (1) The Companies shall continue to pay the Executive's salary for twelve months after the date of death, offset by any benefits payable to the Executive or the Executive's estate under any life insurance policy paid for by the Companies; and (2) The Companies shall reimburse the Executive's estate for all expenses incurred and reimbursable under to section 4(c). (c) Termination by either party with cause. Subject to the prerequisites of applicable law, either party may terminate this Agreement at any time without notice, with cause, including but not limited to, in the case of the Companies termination of this Agreement, the Executives insubordination, fraud, disloyalty, dishonesty, or willful misconduct, and, in the case of either party's termination of this Agreement, the other party's material breach of any provision of this Agreement. If either party terminates this Agreement for cause, the Companies obligations and the Executive's rights under this Agreement shall terminate, except that, if the Executive terminates this Agreement for cause, the Companies shall continue to pay the Executive's salary and furnish the benefits described in paragraph 4(f) for twelve months after the date of termination, offset by any compensation and benefits received by the Executive from other employment during that period. Any termination for cause shall not limit any other right or remedy the terminating party may have under this Agreement or otherwise. (d) Termination by Companies without cause. The Companies may terminate this Agreement at any time without cause (as defined in paragraph 5(c)), whereupon the Companies obligations and the Executive's rights under this Agreement shall terminate, except that the Companies shall continue to pay the Executive's salary and furnish the benefits described in paragraph 4(f) for twelve months after the date of termination, offset by any compensation and benefits received by the Executive from other employment during that period. (1) Termination by Executive without cause. If the Executive resigns without cause (as defined in paragraph 5(c)), this Agreement shall terminate as of the date of his resignation, and the Companies obligations and the Executive's rights under this Agreement shall terminate. (2) Survival of restrictive covenants. Notwithstanding the expiration or termination of this Agreement for any reason, the Executive's covenants in section 6 and his obligations under that section shall survive the termination of this Agreement as set forth in that section. 6. Restrictive covenants. (a) Covenant not to compete. (1) During the term of this Agreement and for twelve months after its termination for any reason (other than its expiration at the end of its term pursuant to section 2, except as otherwise provided in paragraph 6(a)(2)), the Executive will not, directly or indirectly, whether as employee, owner, partner, agent, employee, officer, consultant, advisor, stockholder (except as the beneficial owner of not more than 5 percent of the outstanding shares of a corporation, any of the capital stock of which is listed on any national or regional securities exchange or quoted in the daily listing of over-the-counter market securities and, in each case, in which the Executive does not undertake any management or operational or advisory role) or in any other capacity, for the Executive's own account or for the benefit of any person or entity, establish, engage, or be connected with any person or entity that is at the time engaged in a business then in competition with the business of the Companies (which, for purposes of this paragraph, shall include any of the Companies subsidiaries or affiliates) in any area where the Companies are doing business at the time of termination. The Companies and the Executive acknowledge and agree that the Companies market is unlimited geographically and that the scope and duration of the covenant in this paragraph are reasonable and fair; however, if a court of competent jurisdiction determines that this covenant is overbroad or unenforceable in any respect, the Companies and the Executive acknowledge and agree that the covenant shall be enforced to the greatest extent any such court deems appropriate, and such court may modify this covenant to that extent. (2) At the expiration of this Agreement at the end of its term under section 2, until the parties enter into a consulting agreement as contemplated under section 2, the Companies may, in their sole and absolute discretion, continue to pay the Executive the base salary set forth in paragraph 4(a) and the other benefits set forth in paragraph 4(f), in which case, and for so long as the Companies continue to do so, the Executive shall be bound by the covenant set forth in paragraph 6(a)(1). (3) Executive's ownership interest in the Beromat GmbH, Berlin, shall not be deemed a violation of paragraph 6(a)(1) as long as Beromat devotes its services exclusively to Automaten and its subsidiaries and other affiliates. (4) Executive shall keep detailed records of the work he performs for Alliance and their subsidiaries, supported by time reports, travel and expense reports, diaries, and similar documentation showing the time, work, and expenses attributable to each company. (b) Covenant not to solicit customers, employees, or consultants. Executive shall not, directly or indirectly, during the term of this Agreement and for twelve months after its expiration or termination for any reason, (i) solicit the trade or patronage of any of the customers or prospective customers of the Companies (which, for purposes of this paragraph, shall include any of the Companies subsidiaries or affiliates) or of anyone who has heretofore traded or dealt with the Companies, regardless of the location of such customers or prospective customers of the Companies with respect to any technologies, services, products, trade secrets, or other matters in which the Companies are active, or (ii) aid or endeavor to solicit or induce any other employee or consultant of the Companies to leave the Companies to accept employment of any kind with any other person or entity. (c) Confidential Information and Non-Disparagement. (1) In accordance with NRS 600A.010 et seq. (the so-called Uniform Trade Secrets Act), the Executive shall hold in a fiduciary capacity for the benefit of the Companies and their stockholders all secret, confidential, and proprietary information, knowledge, and data relating to the Companies (and any of their subsidiaries or affiliates), obtained by the Executive during or by reason of the Executive=s employment by the Companies. During the term of this Agreement and after its expiration or termination for any reason, the Executive shall not, without the prior written consent of the Companies or except as may be required by law, communicate or divulge any such information, knowledge, or data to any person or entity other than the Companies (or as applicable their subsidiaries or affiliates) and those designated by them that would result in any misappropriation under and as defined in such Act, except that, while employed by the Companies, in furtherance of the business and for the benefit of the Companies, the Executive may provide confidential information as appropriate to attorneys, accountants, financial institutions, and other persons or entities engaged in business with the Companies from time to time. It shall not be a violation of this provision for the Executive to take Companies documents to his home in the course of and for the purpose of performing under this Agreement, provided that the Executive shall maintain and keep such documents confidential as required by this provision and shall promptly return all such documents to the Companies at their request or on the expiration or other termination of this Agreement. (2) Each party agrees that, after the expiration or termination of this Agreement for any reason, neither shall, publicly or privately, disparage or make any statements (written or oral) that could impugn the integrity, acumen (business or otherwise), ethics, or business practices of the other (including, in the case of the Companies, their affiliates and subsidiaries), except, in each case, to the extent (but solely to the extent) necessary (i) in any judicial or arbitration action to enforce the provisions of this Agreement, or (ii) in connection with any judicial or administrative proceeding to the extent required by applicable law. (d) Standstill. During the term of this Agreement and for twelve months after its expiration or termination for any reason, the Executive shall not, singly or with any other person, directly or indirectly: (1) Propose, enter into, agree to enter into, or encourage any other person to propose, enter into, or agree to enter into (i) any form of business combination, acquisition, or other transaction relating to the Companies or any of their subsidiaries or affiliates, or (ii) any form of restructuring, recapitalization, or similar transaction with respect to the Companies or any of their subsidiaries or affiliates; or (2) Acquire, or offer, propose, or agree to acquire, by tender offer, purchase, or otherwise, any voting securities of the Companies or of their subsidiaries or affiliates, except through the exercise of options or warrants beneficially owned as of the date of this Agreement; or (3) Make or in any way participate in any solicitation of proxies or written consents with respect to voting securities of the Companies or any of their affiliates or subsidiaries (it being understood that the mere execution of a proxy or written consent for his own securities beneficially owned shall not be treated as constituting participation in such a solicitation); or (4) Become a participant in any election contest with respect to the Companies or a nominee to or member of their board of directors or the board of directors of any affiliate or subsidiary of the Companies or any of their affiliates or subsidiaries; or (5) Seek to influence any person with respect to the voting or disposition of any voting securities of the Companies or any of their affiliates or subsidiaries; or (6) Demand a copy of the list of stockholders or other books and records of the Companies or any of their subsidiaries or affiliates; or (7) Participate in or encourage the formation of any partnership, syndicate, or other group that owns or seeks or offers to acquire beneficial ownership of any voting securities of the Companies or any of their affiliates or subsidiaries or that seeks to affect control of the Companies or any of their affiliates or subsidiaries or for the purpose of circumventing any provision of this Agreement; or (8) Propose or support any director or slate of directors for nomination, appointment, or election to the board of directors of the Companies or any of their affiliates or subsidiaries (it being understood that the mere execution of a proxy or written shareholder consent for his own securities beneficially owned shall not be treated as constituting such support); or (9) Otherwise act to seek or to offer to control or influence, in any manner, the management, the board of directors, or the policies of the Companies or any of their affiliates or subsidiaries; or (10) Seek to amend or change this provision. (e) Injunctive relief. The Executive acknowledges that the Companies will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if the Executive breaches any of his obligations under this section. Accordingly, the Executive agrees that the Companies will be entitled, at the Companies option, to injunctive relief against any breach or prospective breach by the Executive of the Executive's obligations under this section, in addition to monetary damages and any other remedies available at law or in equity. (f) Material Inducements. The restrictive covenants and other provisions in this section are material inducements to the Companies entering into and performing this Agreement. Accordingly, in the event of any breach of the provisions of this section by the Executive, in addition to all other remedies at law or in equity possessed by the Companies, (i) the Companies shall have the right to terminate and not pay any amounts payable to the Executive under this Agreement, (ii) any options held by the Executive, however acquired, to purchase stock of the Companies or any of their affiliates or subsidiaries that are unexercised shall be immediately forfeited and returned to the Companies, and (iii) the Executive shall immediately account to the Companies and return to the Companies an amount in cash equal to all profits or benefits obtained or realized by the Executive by virtue of the ownership or disposition of any such options. 7. Indemnification and Liability Insurance. If the Executive is or during the term of this Agreement becomes a director of or holds a corporate office with the Companies: (a) Indemnification. The Companies shall indemnify and hold the Executive harmless, to the fullest extent legally permitted by Section 78.751 of the Nevada Corporation Code (as amended and in effect from time to time) against any and all expenses, liabilities, and losses (including without limitation, reasonable attorneys fees and disbursements of counsel reasonably satisfactory to the Companies), incurred or suffered by him in connection with his service as a director or officer of the Companies under this Agreement, in each case, except to the extent of the Executive's intentional misconduct, fraud, or knowing violation of law. (b) Insurance. The Companies shall maintain, for the benefit of the Executive, a directors and officers liability insurance policy insuring the Executive's service as a director or officer or both of the Companies (or any affiliate or subsidiary of the Companies) during the term of this Agreement in accordance with their customary practices as in effect from time to time. The parties acknowledge and agree that the policy may cover other officers and directors of the Companies in addition to the Executive. 8. Licenses and approvals. This Agreement is contingent on any necessary approvals and licenses from any regulatory authorities having jurisdiction over the parties or the subject matter of this Agreement. Each party shall promptly apply to the appropriate regulatory authorities for any licenses and approvals necessary for that party to perform under this Agreement, shall diligently pursue its applications and pay all associated costs and fees, and shall otherwise cooperate with any requests, inquiries, or investigations of any regulatory authorities or law enforcement agencies in connection with the Companies, their affiliates, or this Agreement. If any license or approval necessary for either party to perform under this Agreement is denied, suspended, or revoked, this Agreement shall be void, provided, however, that if the denial, suspension, or revocation affects performance of the Agreement in part only, the parties may by mutual agreement continue to perform under this Agreement to the extent it is unaffected by the denial, suspension, or revocation. 9. Compliance program. The parties acknowledge that Alliance, as a company that operates and as the parent of companies that operate under privileged licenses in a highly regulated industry, maintains a compliance program to protect and preserve the name, reputation, integrity, and good will of Alliance and its subsidiaries and affiliates through a thorough review and determination of the integrity and fitness, both initially and thereafter, of any person or company that performs work for those companies or with which those companies are otherwise associated, and to monitor compliance with the requirements established by gaming regulatory authorities in various jurisdictions around the world. This Agreement and the association of the Companies and their affiliates with the Executive are contingent on the continued approval of Alliance and its compliance committee under the Alliance compliance program. The parties shall cooperate with Alliance and its compliance committee as reasonably requested by Alliance or the committee and shall provide the committee with such information as it may request. If Alliance, acting on the recommendation of the committee, withdraws its approval of this Agreement or one or more of the other parties, then this Agreement shall be void and neither party shall have any rights thereunder. 10. General Provisions. (a) Further assurances. Each party shall execute all documents and take all other actions necessary to effect the provisions and purposes of this Agreement. (b) Entire agreement. This Agreement contains the entire agreement between the parties and supersedes all other oral and written agreements previously entered into by the parties concerning the same subject matter. (c) Modification, rescission, and assignment. This Agreement may be modified or rescinded only with the written consent of both parties. Neither this Agreement nor any right or interest under this Agreement shall be assignable by either party without the written consent of the other, provided, that (i) if the Executive dies during the term of this Agreement, the Executive's estate and his heirs, executors, administrators, legatees, and distributees shall have the rights and obligations as provided in this Agreement, and (ii) nothing contained in this Agreement shall limit or restrict the Companies ability to merge or consolidate or effect any similar transaction with any other entity, irrespective of whether either of the Companies is the surviving entity (including a split up, spin off, or similar type transaction), provided that one or more of such surviving entities continues to be bound by the provisions of this Agreement now binding on the Companies. (d) Severability. If any provision is unenforceable for any reason, it shall be deemed stricken from the Agreement but shall not otherwise affect the intention of the parties or the remaining provisions of the Agreement. (e) Binding effect. This Agreement shall bind and inure to the benefit of each of the parties and their respective heirs, successors, administrators, executors, and assigns. (f) No third party benefits. This Agreement is for the benefit of the parties and their permitted successors and assigns. The parties intend neither to confer any benefit hereunder on any person, firm, or corporation other than the parties hereto, nor that any such third party shall have any rights under this Agreement. (g) Indulgence. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power, or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege, nor shall any waiver of any right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power, or privilege with respect to any other occurrence. (h) Notices. All notices required by this Agreement must be in writing and must be delivered, mailed, or telecopied to the addresses given above or such other addresses as the parties may designate in writing. (i) Counterparts; facsimiles. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which, taken together, shall constitute one and the same instrument. This Agreement may be executed and delivered by exchange of facsimile copies showing the signatures of the parties, and those signatures need not be affixed to the same copy. The facsimile copies so signed will constitute originally signed copies of the same consent requiring no further execution. (j) Captions; construction; drafting ambiguities. The captions in this Agreement are for convenience only and shall not be used in interpreting it. In interpreting this Agreement any change in gender or number shall be made as appropriate to fit the context. Each party has reviewed and revised this Agreement with independent counsel or has had the opportunity to do so. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or of any amendments or exhibits to this Agreement. (k) Acknowledgment of Executive's service. The Companies and Alliance acknowledge that the Executive has been employed by the Companies or their affiliates or predecessors continuously since April 1970. 11. Conditions precedent. This Agreement is subject to approval by the Companies board of directors and shall be of no force and effect until that approval is given and is evidenced by a written resolution of the board. This Agreement is further subject to the Companies receipt of the Executive's written resignation as co-managing director of Bally Wulff and from all other offices and positions held in the Companies and any of their subsidiaries, except offices and positions to which the Executive is appointed under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. ALLIANCE GAMING CORPORATION By: Morris Goldstein, President Hans Kloss ALLIANCE AUTOMATEN GmbH & CO. KG By: Print name, title EX-10.81 5 EXHIBIT 10.81 Exhibit 10.81 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT dated as of January 19, 1998, by and between ALLIANCE GAMING CORPORATION, a Nevada corporation, 6601 South Bermuda Road, Las Vegas, Nevada 89119 (the "Company"), and JOHN HUDSON, 250 East Flamingo Road #2-236, Las Vegas, Nevada 89109 (the "Executive"). The parties agree as follows: 1. Employment. The Company employs the Executive, and the Executive accepts employment by the Company, on the terms and conditions set forth in this Agreement. 2. Term. The term of this Agreement shall begin on January 19, 1998, and, unless terminated earlier pursuant to this Agreement, shall expire on January 19, 2001. 3. Position and Duties. The Executive shall serve as Vice President of Human Resources and shall report to the President. The Executive shall perform the duties contemplated by such title and such other duties, consistent with his experience and abilities, as may be assigned to the Executive by the President. The Executive shall devote his full time and efforts to the business and affairs of the Company, use his best efforts to further the interests of the Company, and at all times conduct himself in a manner that reflects credit on the Company. It is contemplated that the Executive shall render services to the Company from the Company's principal place of business; however, the parties acknowledge and agree that the Executive may be required to travel from time to time in fulfilling his duties hereunder. 4. Compensation. (a) Salary. The Company shall pay the Executive a base salary of $190,000 a year in installments on the regularly recurring paydays in accordance with the Company's practice. Increases in the base salary shall be considered by the Company at least annually, beginning with the completion of the first year of employment and will be based on criteria applicable to other senior executives of the Company, provided, however, that the award of any such increase shall be at the sole discretion of the Company. (b) Bonuses. The Executive shall be eligible to receive a cash bonus from the Company each year, provided, however, that the Company shall not be obligated to pay any bonus, and the payment, if any, and amount and timing of any such bonus shall be solely within the discretion of the Company and may be based on any criteria the Company deems relevant or pursuant to such bonus plan as the Company may adopt. (c) Options. The Executive shall be entitled to receive options (the "Options") to acquire an aggregate of 100,000 shares of the publicly-traded common stock of Alliance Gaming Corporation. The exercise price of the Options shall be equal to the closing market price on the date the term of this Agreement begins under paragraph. The Options shall "vest" (that is, become exercisable by the Executive) in four installments of 25,000 shares each, with the first installment vesting on the date the term of this Agreement begins under paragraph , and with each successive installment vesting after the Executive completes each successive year of employment, provided, however, that except as expressly provided in this Agreement, no Options shall vest after this Agreement expires or terminates for any reason, and provided further that any vested Options that have not been exercised within ten years after the date of this Agreement shall expire without further action by the Company. (d) Reimbursement of expenses. In accordance with established policies and procedures of the Company as in effect from time to time, the Company shall pay to or reimburse the Executive for all reasonable and actual out-of-pocket expenses including but not limited to travel, hotel, and similar expenses, incurred by the Executive from time to time in performing his obligations under this Agreement. The Company shall also reimburse the Executive for reasonable and actual out-of-pocket costs of moving and interim housing. (e) Vacation. The Executive shall be entitled to four weeks annual paid vacation time, prorated for any partial employment year. The Executive may accumulate and carry forward unused vacation days from year to year consistent with the Company's policy for senior executives as in effect from time to time. The Executive shall also be entitled to reasonable periods of sick leave with compensation and all paid holidays given by the Company to its senior executive officers. (f) Other benefits. The Executive shall be entitled to other employment benefits, including but not limited to life insurance, medical and hospitalization, disability, and retirement benefits, consistent with the benefits provided to other senior executives of the Company. (g) No Reduction. There shall be no material reduction or diminution of the benefits provided in this section during the term of this Agreement unless (i) the Executive consents, (ii) an equitable arrangement (embodied in a substitute or alternative benefit or plan) is made with respect to such benefit or plan, or (iii) the reduction is part of a program of across-the-board benefit reductions similarly affecting the senior executive officers of the Company. 5. Termination. (a) Disability. If the Executive, because of illness or incapacity, fails to discharge his duties under this Agreement for six or more consecutive months or for noncontinuous periods aggregating to twenty-two weeks in any twelve-month period, the Company may terminate this Agreement on thirty days' notice, whereupon the obligations of the Company and the rights of the Executive under this Agreement shall terminate, except that: (1) The Company shall pay the Executive's salary on a pro-rata basis through the date of termination, offset by any benefits payable to the Executive under any disability insurance policy paid for by the Company; and (2) One-half of any unvested Options shall vest and become exercisable by the Executive's estate for two years after the date of termination; and (3) The Executive shall have the right, at the Executive's expense, to the assignment of any and all insurance policies or health protection plans in accordance with the terms and conditions of those plans. (b) Death. In the event of the Executive's death, this Agreement shall terminate as of the date of his death, in which case the obligations of the Company and the rights of the Executive under this Agreement shall terminate except that: (1)The Company shall continue to pay the Executive's salary for twelve months after the date of death, offset by any benefits payable to the Executive or the Executive's estate under any life insurance policy paid for by the Company; and (2) The Company shall reimburse the Executive's estate for all expenses incurred and reimbursable under paragraph ; and (3) One-half of any unvested Options shall vest and become exercisable by the Executive's estate for two years after the date of the Executive's death. (c)Termination by Company for Cause. (1)The Company may terminate this Agreement for cause at any time immediately on notice to the Executive, in which case the Company's obligations and the Executive's rights under this Agreement shall terminate. For purposes of this provision, the term "cause" includes, but is not limited to: (i) The Executive's insubordination, fraud, disloyalty, dishonesty, willful misconduct, or gross negligence in the performance of the Executive's duties under this Agreement, including willful failure to perform such duties as may properly be assigned to the Executive under this Agreement. (ii) The Executive's material breach of any provision of this Agreement. (iii) The Executive's failure to qualify (or having so qualified being thereafter disqualified) under any suitability or licensing requirement of any jurisdiction or regulatory authority to which the Executive may be subject by reason of his position with the Company and its affiliates or subsidiaries. (iv) The Executive's commission of a crime against the Company or violation of any law, order, rule, or regulation pertaining to the Company's business. (v) The Executive's inability (other than because of death or disability under paragraphs and ) to perform the job functions and responsibilities assigned in accordance with standards established, whether or not in writing, from time to time by the Company, in its sole discretion. (vi) The Company obtains from any source information with respect to the Executive or this Agreement that would, in the opinion of the Company, jeopardize the gaming licenses, permits, or status of the Company or any of its subsidiaries or affiliates with any gaming commission, board, or similar regulatory or law enforcement authority. (2) Any termination by the Company for cause shall not be in limitation of any other right or remedy the Company may have under this Agreement or otherwise. (d)Termination by Company without cause. The Company may terminate this Agreement at any time without cause (as defined in paragraph ), whereupon the Company's obligations and the Executive's rights under this Agreement shall terminate, except that: (1)The Company shall continue to pay the Executive's salary and furnish the benefits described in paragraph for twelve months after the date of termination, offset by any compensation and benefits received by the Executive from other employment during that period; and (2) One-half of any unvested Options shall vest and become exercisable by the Executive for two years after the date of termination. (e) Termination by Executive with cause. If the Executive resigns with cause, the Company's obligations and the Executive's rights under this Agreement shall terminate, except that: (1) The Company shall continue to pay the Executive's salary and furnish the benefits described in paragraph for twelve months after the date of termination, offset by any compensation and benefits received by the Executive from other employment during that period; and (2)One-half of any unvested Options shall vest and become exercisable by the Executive for two years after the date of termination. As used in this provision, "cause" is limited to the Company's failure to cure either of the following within thirty days after demand by the Executive: (i) the Company's failure to pay any portion of the base salary within thirty days after it is due, and (ii) the assignment to the Executive of duties materially inconsistent with the duties and position set forth in this Agreement. (f) Termination by Executive without cause. If the Executive resigns without cause (as defined in paragraph ), this Agreement shall terminate as of the date of his resignation, and the Company's obligations and the Executive's rights under this Agreement shall terminate. (g) Survival of restrictive covenants. Notwithstanding the expiration or termination of this Agreement for any reason, the Executive's covenants in section and his obligations under that section shall survive the termination of this Agreement as set forth in that section. 6. Restrictive covenants. (a)Covenant not to compete. (1) During the term of this Agreement and for twelve months after its termination for any reason (other than its expiration at the end of its term pursuant to paragraph , except as otherwise provided in paragraph ), the Executive will not, directly or indirectly, whether as employee, owner, partner, agent, employee, officer, consultant, advisor, stockholder (except as the beneficial owner of not more than 5 percent of the outstanding shares of a corporation, any of the capital stock of which is listed on any national or regional securities exchange or quoted in the daily listing of over-the-counter market securities and, in each case, in which the Executive does not undertake any management or operational or advisory role) or in any other capacity, for the Executive's own account or for the benefit of any person or entity, establish, engage, or be connected with any person or entity that is at the time engaged in a business then in competition with the business of the Company (which, for purposes of this paragraph, shall include any of the Company's subsidiaries or affiliates) in any area where the Company is doing business at the time of termination. The Company and the Executive acknowledge and agree that the Company's market is unlimited geographically and that the scope and duration of the covenant in this paragraph are reasonable and fair; however, if a court of competent jurisdiction determines that this covenant is overbroad or unenforceable in any respect, the Company and the Executive acknowledge and agree that the covenant shall be enforced to the greatest extent any such court deems appropriate, and such court may modify this covenant to that extent. (2)At the expiration of this Agreement at the end of its term under paragraph , the Company may, in its sole and absolute discretion, continue to pay the Executive the base salary set forth in paragraph and the other benefits set forth in paragraph , in which case, and for so long as the Company continues to do so, the Executive shall be bound by the covenant set forth in paragraph . (b)Covenant not to solicit customers, employees, or consultants. Executive shall not, directly or indirectly, during the term of this Agreement and for twelve months after its expiration or termination for any reason, (i) solicit the trade or patronage of any of the customers or prospective customers of the Company (which, for purposes of this paragraph, shall include any of the Company's subsidiaries or affiliates) or of anyone who has heretofore traded or dealt with the Company, regardless of the location of such customers or prospective customers of the Company with respect to any technologies, services, products, trade secrets, or other matters in which the Company is active, or (ii) aid or endeavor to solicit or induce any other employee or consultant of the Company to leave the Company to accept employment of any kind with any other person or entity. (c) Confidential Information and Non-Disparagement. (1) In accordance with NRS 600A.010 et seq. (the so-called Uniform Trade Secrets Act), the Executive shall hold in a fiduciary capacity for the benefit of the Company and its stockholders all secret, confidential, and proprietary information, knowledge, and data relating to the Company (and any of its subsidiaries or affiliates), obtained by the Executive during or by reason of the Executive's employment by the Company. During the term of this Agreement and after its expiration or termination for any reason, the Executive shall not, without the prior written consent of the Company or except as may be required by law, communicate or divulge any such information, knowledge, or data to any person or entity other than the Company (or as applicable its subsidiaries or affiliates) and those designated by them that would result in any misappropriation under and as defined in such Act, except that, while employed by the Company, in furtherance of the business and for the benefit of the Company, the Executive may provide confidential information as appropriate to attorneys, accountants, financial institutions, and other persons or entities engaged in business with the Company from time to time. (2)Each party agrees that, after the expiration or termination of this Agreement for any reason, neither shall, publicly or privately, disparage or make any statements (written or oral) that could impugn the integrity, acumen (business or otherwise), ethics, or business practices of the other (including, in the case of the Company, its affiliates and subsidiaries), except, in each case, to the extent (but solely to the extent) necessary (i) in any judicial or arbitration action to enforce the provisions of this Agreement, or (ii) in connection with any judicial or administrative proceeding to the extent required by applicable law. (d) Standstill. During the term of this Agreement and for twelve months after its expiration or termination for any reason, the Executive shall not, singly or with any other person, directly or indirectly: (1) Propose, enter into, agree to enter into, or encourage any other person to propose, enter into, or agree to enter into (i) any form of business combination, acquisition, or other transaction relating to the Company or any of its subsidiaries or affiliates, or (ii) any form of restructuring, recapitalization, or similar transaction with respect to the Company or any of its subsidiaries or affiliates; or (2) Acquire, or offer, propose, or agree to acquire, by tender offer, purchase, or otherwise, any voting securities of the Company or of its subsidiaries or affiliates, except through the exercise of options or warrants beneficially owned as of the date of this Agreement; or (3) Make or in any way participate in any solicitation of proxies or written consents with respect to voting securities of the Company or any of its affiliates or subsidiaries (it being understood that the mere execution of a proxy or written consent for his own securities beneficially owned shall not be treated as constituting participation in such a solicitation); or (4) Become a participant in any election contest with respect to the Company or a nominee to or member of its board of directors or the board of directors of any affiliate or subsidiary of the Company or any of its affiliates or subsidiaries; or (5) Seek to influence any person with respect to the voting or disposition of any voting securities of the Company or any of its affiliates or subsidiaries; or (6) Demand a copy of the list of stockholders or other books and records of the Company or any of its subsidiaries or affiliates; or (7) Participate in or encourage the formation of any partnership, syndicate, or other group that owns or seeks or offers to acquire beneficial ownership of any voting securities of the Company or any of its affiliates or subsidiaries or that seeks to affect control of the Company or any of its affiliates or subsidiaries or for the purpose of circumventing any provision of this Agreement; or (8) Propose or support any director or slate of directors for nomination, appointment, or election to the board of directors of the Company or any of its affiliates or subsidiaries (it being understood that the mere execution of a proxy or written shareholder consent for his own securities beneficially owned shall not be treated as constituting such support); or (9) Otherwise act to seek or to offer to control or influence, in any manner, the management, the board of directors, or the policies of the Company or any of its affiliates or subsidiaries; or (10) Seek to amend or change this provision. (e) The Executive acknowledges that the Company will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if the Executive breaches any of his obligations under this section. Accordingly, the Executive agrees that the Company will be entitled, at the Company's option, to injunctive relief against any breach or prospective breach by the Executive of the Executive's obligations under this section in any federal or state court of competent jurisdiction sitting in the State of Nevada, in addition to monetary damages and any other remedies available at law or in equity. The Executive hereby submits to the jurisdiction of such courts for the purposes of any actions or proceedings instituted by the Company to obtain such injunctive relief, and agrees that process may be served on the Executive by registered mail, addressed to the last address of the Executive known to the Company, or in any other manner authorized by law. (f) Material Inducements. The restrictive covenants and other provisions in this section are material inducements to the Company entering into and performing this Agreement. Accordingly, in the event of any breach of the provisions of this section by the Executive, in addition to all other remedies at law or in equity possessed by the Company, (i) the Company shall have the right to terminate and not pay any amounts payable to the Executive under this Agreement, (ii) all Options that are unexercised shall be immediately forfeited and returned to the Company, and (iii) the Executive shall immediately account to the Company and return to the Company an amount in cash equal to all profits or benefits obtained or realized by the Executive by virtue of the ownership or disposition of the Options. 7. Indemnification and Liability Insurance. If the Executive is or during the term of this Agreement becomes a director of or holds a corporate office with the Company: (a)Indemnification. The Company shall indemnify and hold the Executive harmless, to the fullest extent legally permitted by Section 78.751 of the Nevada Corporation Code (as amended and in effect from time to time) against any and all expenses, liabilities, and losses (including without limitation, reasonable attorneys' fees and disbursements of counsel reasonably satisfactory to the Company), incurred or suffered by him in connection with his service as a director or officer of the Company under this Agreement, in each case, except to the extent of the Executive's intentional misconduct, fraud, or knowing violation of law. (b) Insurance. The Company shall maintain, for the benefit of the Executive, a directors' and officers' liability insurance policy insuring the Executive's service as a director or officer or both of the Company (or any affiliate or subsidiary of the Company) during the term of this Agreement in accordance with its customary practices as in effect from time to time. The parties acknowledge and agree that the policy may cover other officers and directors of the Company in addition to the Executive. 8. Licenses and approvals. This Agreement is contingent on any necessary approvals and licenses from any regulatory authorities having jurisdiction over the parties or the subject matter of this Agreement. Each party shall promptly apply to the appropriate regulatory authorities for any licenses and approvals necessary for that party to perform under this Agreement, shall diligently pursue its applications and pay all associated costs and fees, and shall otherwise cooperate with any requests, inquiries, or investigations of any regulatory authorities or law enforcement agencies in connection with the Company, its affiliates, or this Agreement. If any license or approval necessary for either party to perform under this Agreement is denied, suspended, or revoked, this Agreement shall be void, provided, however, that if the denial, suspension, or revocation affects performance of the Agreement in part only, the parties may be mutual agreement continue to perform under this Agreement to the extent it is unaffected by the denial, suspension, or revocation. 9. Compliance program. The parties acknowledge that Alliance Gaming Corporation, as a company that operates and as the parent of companies that operate under privileged licenses in a highly regulated industry, maintains a compliance program to protect and preserve the name, reputation, integrity, and good will of Alliance and its subsidiaries and affiliates through a thorough review and determination of the integrity and fitness, both initially and thereafter, of any person or company that performs work for those companies or with which those companies are otherwise associated, and to monitor compliance with the requirements established by gaming regulatory authorities in various jurisdictions around the world. This Agreement and the association of the Company and its affiliates with the Executive are contingent on the continued approval of Alliance and its compliance committee under the Alliance compliance program. The parties shall cooperate with Alliance and its compliance committee as reasonably requested by Alliance or the committee and shall provide the committee with such information as it may request. If Alliance, acting on the recommendation of the committee, withdraws its approval of this Agreement or one or more of the other parties, then this Agreement shall be void and neither party shall have any rights thereunder. 10. General Provisions. (a) Arbitration. Any controversy or claim arising out of or relating to this Agreement or its breach (except, at the option of the Company, a controversy or claim arising out of or relating to section , which the Company may choose to be adjudicated in a federal or state court sitting in Las Vegas, Nevada), shall be settled by arbitration in Las Vegas, Nevada, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. If any arbitration or other legal or equitable action or proceeding is instituted to enforce any provisions of this Agreement, the prevailing party shall be entitled to recover as costs such amounts as the court or arbitrator may judge to be reasonable, including costs and attorneys' fees. (b) Further assurances. Each party shall execute all documents and take all other actions necessary to effect the provisions and purposes of this Agreement. (c) Entire agreement. This Agreement contains the entire agreement between the parties and supersedes all other oral and written agreements previously entered into by the parties concerning the same subject matter. (d) Modification, rescission, and assignment. This Agreement may be modified or rescinded only with the written consent of both parties. Neither this Agreement nor any right or interest under this Agreement shall be assignable by either party without the written consent of the other, provided, that (i) if the Executive dies during the term of this Agreement, the Executive's estate and his heirs, executors, administrators, legatees, and distributees shall have the rights and obligations as provided in this Agreement, and (ii) nothing contained in this Agreement shall limit or restrict the Company's ability to merge or consolidate or effect any similar transaction with any other entity, irrespective of whether the Company is the surviving entity (including a split up, spin off, or similar type transaction), provided that one or more of such surviving entities continues to be bound by the provisions of this Agreement now binding on the Company. (e) Controlling law; severability. Nevada law shall govern this Agreement and its interpretation. If any provision is unenforceable for any reason, it shall be deemed stricken from the Agreement but shall not otherwise affect the intention of the parties or the remaining provisions of the Agreement. (f) Binding effect. This Agreement shall bind and inure to the benefit of each of the parties and their respective heirs, successors, administrators, executors, and assigns. (g) No third party benefits. This Agreement is for the benefit of the parties and their permitted successors and assigns. The parties intend neither to confer any benefit hereunder on any person, firm, or corporation other than the parties hereto, nor that any such third party shall have any rights under this Agreement. (h) Indulgence. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power, or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege, nor shall any waiver of any right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power, or privilege with respect to any other occurrence. (i) Notices. All notices required by this Agreement must be in writing and must be delivered, mailed, or telecopied to the addresses given above or such other addresses as the parties may designate in writing. (j) Counterparts; facsimiles. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which, taken together, shall constitute one and the same instrument. This Agreement may be executed and delivered by exchange of facsimile copies showing the signatures of the parties, and those signatures need not be affixed to the same copy. The facsimile copies so signed will constitute originally signed copies of the same consent requiring no further execution. (k) Captions; construction; drafting ambiguities. The captions in this Agreement are for convenience only and shall not be used in interpreting it. In interpreting this Agreement any change in gender or number shall be made as appropriate to fit the context. Each party has reviewed and revised this Agreement with independent counsel or has had the opportunity to do so. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or of any amendments or exhibits to this Agreement. 11. Condition precedent. This Agreement is subject to approval by the Company's board of directors and shall be of no force and effect until that approval is given and is evidenced by a written resolution of the board. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. ALLIANCE GAMING CORPORATION By: ------------------------- ------------- Morris Goldstein, President John Hudson EX-11 6 EXHIBIT 11 Exhibit 11 Loss per share of common stock In February 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS No. 128). Under FAS No. 128, basic and diluted earnings per hare are computed based on the weighted average number of shares of Common Stock outstanding as follows: Fiscal Year ended June 30, 1996 (a) Net Income Average (loss) Shares EPS (In 000's except share data) Basic EPS Loss before extraordinary item $(60,259) 13,000 $(4.64) Extraordinary loss -- -- -- Loss applicable to common shares (60,259) 13,000 (4.64) Effect of Dilutive Securities -- -- -- Diluted EPS $(60,259) 13,000 $(4.64) Fiscal Year ended June 30, 1997 (a) Net Income Average (loss) Shares EPS (In 000's except share data) Basic EPS Loss before extraordinary item $(6,189) 31,822 $(0.19) Extraordinary loss -- -- -- Loss applicable to common shares ((6,189) 31,822 (0.19) Effect of Dilutive Securities -- -- -- Diluted EPS $(6,189) 31,822 $(0.19) Fiscal Year ended June 30, 1998 . Net Income Average (loss) Shares EPS (In 000's except share data) Basic EPS Loss before extraordinary item $(35,377) 31,998 $(1.11) Extraordinary loss (42,033) -- (1.31) Loss applicable to common shares (77,410) 31,998 (2.42) Effect of Dilutive Securities -- -- -- Diluted EPS $(77,410) 31,998 $(2.42) (a) The restatement of the Basic and Dilutive EPS for these periods resulted in no change to the amounts previously reported. EX-21 7 EXHIBIT 21 Exhibit 21 Subsidiaries All subsidiaries are wholly owned except as indicated. Alliance Gaming Corporation Alliance Holding Company Bally Gaming International, Inc. Bally Gaming, Inc. Bally Gaming de Puerto Rico, Inc. BGI Australia Pty. Limited Bally Gaming Africa Pty. Limited Alliance Automaten GmbH & Co. KG (99%) APT Games, Inc. Plantation Investments, Inc. United Coin Machine Co. Bally Gaming Missouri, Inc. Casino Electronics, Inc. Foreign Gaming Ventures, Inc. Alpine Willow Investments, Inc. Kansas Alliance Corporation Kansas Gaming Ventures, Inc. Kansas Financial Partners, LLC (50%) Kansas Gaming Partners, LLC (50%) Louisiana Ventures, Inc. Southern Video Services, Inc. (49%) Video Distributing Services, Inc. (49%) Video Services, Inc. (49%) Mississippi Ventures, Inc. United Gaming Rainbow Rainbow Casino-Vicksburg Partnership, L.P. (a) United Native American, Inc. Native American Investment, Inc. Alliance Automaten Verwaltungs GmbH Alliance Automaten GmbH & Co. KG (1%) Bally Wulff Automaten GmbH Bally Wulff Vertriebs GmbH Bally Gaming International GmbH Bally Wulff Beteiligungs GmbH Erkens Vertriebs GmbH Geda Automaten GmbH Grosshandel Kupper GmbH Westav Automaten GmbH (a) There is a limited minority interest holder. For further information see Item 1 - "Business - Casino Operation". EX-23.1 8 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Alliance Gaming Corporation We consent to incorporation by reference in the registration statements (Nos. 33-45811, 33-45810, 333-25515, 333-20685, 333-10011 and 333-34077) on Forms S-3 and S-8 of Alliance Gaming Corporation of our report dated August 14, 1998, relating to the consolidated balance sheets of Alliance Gaming Corporation and Subsidiaries as of June 30, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of Alliance Gaming Corporation. KPMG Peat Marwick LLP Las Vegas, Nevada September 23, 1998 EX-27 9 FDS --
5 This schedule contains summary information excerpted from Form 10-K for the year ended 6/30/98 1,000 12-MOS JUN-30-1998 JUN-30-1998 23,487 0 105,391 11,932 42,418 171,075 135,340 50,110 366,786 51,595 0 0 13,732 3,212 (40,692) 366,786 208,208 417,382 115,925 256,500 100,880 1,216 28,600 (12,088) 3,185 (15,273) 0 (42,033) 0 (77,410) (2.42) (2.42)
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