-----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, EUffoM4NC4zumkyyVDTwAK/VGEcc2iVhvufybNwfGdPEhAxTRb84kM8Bn6RTOHlS jyRm0T/O2c6wN/MmE7g09A== 0000912057-96-005886.txt : 19960403 0000912057-96-005886.hdr.sgml : 19960403 ACCESSION NUMBER: 0000912057-96-005886 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960402 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: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02147 FILM NUMBER: 96543650 BUSINESS ADDRESS: STREET 1: 4380 BOULDER HGWY CITY: LAS VEGAS STATE: NV ZIP: 89121 BUSINESS PHONE: 7024354200 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 S-2 1 S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0104066 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
4380 BOULDER HIGHWAY, LAS VEGAS, NEVADA 89121 (702) 435-4200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ALLIANCE GAMING CORPORATION SUBSIDIARIES BGII Acquisition Corp. Applied For Delaware APT Games, Inc. 88-0161456 Nevada Casino Electronics, Inc. 88-0151764 Nevada Foreign Gaming Ventures, Inc. 88-0274702 Nevada United Coin Machine Co. 88-0085163 Nevada APT Coin Machines, Inc. 88-0161523 Nevada Trolley Stop, Inc. 88-0245311 Nevada Plantation Investments, Inc. 88-0250243 Nevada Mizpah Investments, Inc. 88-0251796 Nevada United Games, Inc. 88-0245642 Nevada Slot Palace, Inc. 88-0245274 Nevada WCAL, Inc. 88-0245271 Nevada Double Eagle Hotel & Casino, Inc. 88-0251585 Nevada FCJI, Inc. 88-0268512 Nevada United Native American, Inc. 88-0315171 Nevada Native American Investments, Inc. 33-0589929 Delaware Oregon Ventures, Inc. 88-274703 Nevada Indiana Gaming Ventures, Inc. 88-0307743 Nevada Mississippi Ventures, Inc. 88-0307742 Nevada United Gaming of Iowa, Inc. 88-0318560 Nevada United Gaming Rainbow 88-0307744 Nevada Mississippi Ventures II, Inc. 88-0321191 Nevada Vermont Financial Ventures, Inc. 88-0329758 Nevada Missouri Ventures II, Inc. 88-0336728 Nevada Louisiana Ventures, Inc. 88-0274662 Nevada Video Distributing Services, Inc. 72-1206323 Louisiana Southern Video Services, Inc. 72-1206324 Louisiana Alpine Willow Investments, Inc. Applied For California Kansas Gaming Ventures, Inc. 88-0322395 Nevada Pennsylvania Gaming Ventures I, Inc. 88-0349632 Nevada
(State or other jurisdiction of (Exact name of registrants as (I.R.S. Employer incorporation or specified in their charters) Indentification Nos.) organization) (State or other jurisdiction of (Exact name of registrants as (I.R.S. Employer incorporation or specified in their charters) Indentification Nos.) organization)
-------------------------- JOHN W. ALDERFER CHIEF FINANCIAL OFFICER 4380 BOULDER HIGHWAY LAS VEGAS, NEVADA 89121 (702) 435-4200 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: LAWRENCE LEDERMAN, Esq. NICHOLAS P. SAGGESE, Esq. ARNOLD B. PEINADO, III, Esq. Skadden, Arps, Slate, Meagher & Flom Milbank, Tweed, Hadley & McCloy 300 South Grand Avenue 1 Chase Manhattan Plaza Los Angeles, California 90071 New York, New York 10005 (213) 687-5000 (212) 530-5000
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If the registrant elects to deliver its latest annual report to security-holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration number for the same offering. / / ________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE % Senior Secured Notes due 2003.......... $75,000,000 100% $75,000,000 $25,862 Guarantees (2).............................. -- -- -- -- (1) Estimated solely for purposes of calculating the registration fee. (2) BGII Acquisition Corp., APT Games, Inc., Casino Electronics, Inc., Foreign Gaming Ventures, Inc., United Coin Machine Co., APT Coin Machines, Inc., Trolley Stop, Inc., Plantation Investments, Inc., Mizpah Investments, Inc., United Games, Inc., Slot Palace, Inc., WCAL, Inc., Double-Eagle Hotel and Casino, Inc., FCJI, Inc., United Native American, Inc., Native American Investments, Inc., Oregon Ventures, Inc., Indiana Gaming Ventures, Inc., Mississippi Ventures, Inc., United Gaming of Iowa, Inc., United Gaming Rainbow, Mississippi Ventures II, Inc., Vermont Financial Ventures, Inc., Missouri Ventures II, Inc., Louisiana Ventures, Inc., Video Distributing Services, Inc., Southern Video Services, Inc., Alpine Willow Investments, Inc., Kansas Gaming Ventures, Inc. and Pennsylvania Gaming Ventures I, Inc. are direct and indirect subsidiaries of Alliance Gaming Corporation and each is registering its Guarantee of payment of the principal of, premium, if any, and interest on the Notes being registered hereby. Pursuant to Rule 457(a) under the Securities Act of 1933, no registration fee is required with respect to the Guarantees.
ALLIANCE GAMING CORPORATION CROSS REFERENCE SHEET SHOWING LOCATION OF INFORMATION IN PROSPECTUS REQUIRED BY FORM S-2
FORM S-2 LOCATION OR HEADING ITEM CAPTION IN PROSPECTUS - --------- -------------------------------------------------- -------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus................... Forepart of the Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors; Selected Historical Financial Information of Alliance; Selected Historical Financial Information of BGII 4. Use of Proceeds................................... The Merger and Related Financings; Use of Proceeds; Capitalization 5. Determination of Offering Price................... Underwriting 6. Dilution.......................................... * 7. Selling Security Holders.......................... * 8. Plan of Distribution.............................. Outside and Inside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered........ Outside Front Cover Page of Prospectus; Prospectus Summary; Description of the Notes 10. Interest of Named Experts and Counsel............. * 11. Information with Respect to the Registrant........ Outside Front Cover Page of Prospectus; Prospectus Summary; The Company; The Merger and Related Financings; Use of Proceeds; Capitalization; Unaudited Pro Forma Condensed Combined Financial Information; Supplemental Analysis of Adjusted Operating Cash Flow; Forecast of Operating Income and Adjusted Operating Cash Flow; Selected Historical Financial Information of Alliance; Selected Historical Financial Information of BGII; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Security Ownership of Certain Beneficial Holders and Management; Certain Relationships and Related Transactions; Description of Certain Other Indebtedness; Description of the Notes; Consolidated Financial Statements of Alliance; Consolidated Financial Statements of BGII 12. Incorporation of Certain Information by Reference........................................ Incorporation by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... *
- ------------------------ * Not Applicable. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 1, 1996 PROSPECTUS , 1996 $75,000,000 ALLIANCE GAMING CORPORATION % SENIOR SECURED NOTES DUE 2003 The % Senior Secured Notes (the "Notes") due 2003 are being offered (the "Note Offering") by Alliance Gaming Corporation ("Alliance"). The Notes are being issued as part of the financing of the merger (the "Merger") of a wholly-owned subsidiary of Alliance with and into Bally Gaming International, Inc. ("BGII"), pursuant to which BGII will become a wholly-owned subsidiary of Alliance. See "The Merger and Related Financings" and "Use of Proceeds." Alliance's payment obligations under the Notes will be fully and unconditionally guaranteed on a senior secured basis by all existing and future Subsidiaries (as defined) of Alliance, other than (i) the partially-owned entities through which its Mississippi casino and Louisiana gaming machine management operations are conducted and (ii) specified entities through which its German operations are owned (collectively, the "Guarantors"). Concurrently with the Note Offering, Alliance is issuing (i) $60,000,000 of its Common Stock (together with up to an additional 15% subject to an over-allotment option, the "Common Stock Offering") and (ii) $15,000,000 of its 15% Non-Voting Junior Pay-in-Kind Special Stock, Series B (together with up to an additional 15% subject to an over-allotment option, the "Preferred Stock Offering" and, together with the Common Stock Offering, the "Stock Offerings" and, together with the Note Offering, the "Offerings"). In addition, Alliance previously agreed to issue $5,000,000 of its Common Stock to an institutional investor in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), which issuance (the "Private Placement") will close simultaneously with and be contingent upon the consummation of the Merger and the Offerings. Consummation of the Note Offering is subject to the consummation of the Common Stock Offering, Preferred Stock Offering and the Private Placement and is also contingent upon consummation of the Merger. Interest on the Notes is payable semi-annually in arrears on and of each year, commencing , 1996. The Notes will mature on , 2003. The Notes will be redeemable at the option of Alliance, in whole or in part, at any time on or after , 200 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption, and will be redeemable at any time pursuant to a Required Regulatory Redemption (as defined). Upon the occurrence of a Change of Control (as defined), Alliance is required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. See "Description of the Notes." The Notes and the guarantees thereof will be secured by liens on certain assets of Alliance and its Subsidiaries as described herein and by all equity interests directly or indirectly owned by Alliance other than 1/3 of its equity interests in its German operations. The Notes and guarantees will rank PARI PASSU in right of payment with existing and future senior indebtedness of Alliance and the Guarantors, as applicable, and senior to all subordinated indebtedness of such persons. After giving effect to the Merger, the Offerings and the transactions contemplated thereby, at December 31, 1995, on a pro forma basis, subsidiaries of Alliance would have had outstanding approximately $15.1 million of senior indebtedness, substantially all of which was secured indebtedness. SEE "RISK FACTORS" COMMENCING ON PAGE 18 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL COMMISSION NOR THE REGULATORY AUTHORITY OF ANY OTHER STATE HAS PASSED UPON OR CONFIRMED THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - --------------------------------------------------------------------------------------------------------- Per Note........................................... $ $ $ Total(3)........................................... $ $ $ - ---------------------------------------------------------------------------------------------------------
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE. (2) ALLIANCE AND ITS SUBSIDIARIES HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT. SEE "UNDERWRITING." (3) BEFORE DEDUCTING EXPENSES PAYABLE BY ALLIANCE, ESTIMATED AT $ . The Notes are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York on or about , 1996. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION JEFFERIES & COMPANY, INC. LADENBURG, THALMANN & CO. INC. IN CONNECTION WITH THE OFFERING OF THE SECURITIES OFFERED HEREBY, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM, IN THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. [ART WORK] INCORPORATION BY REFERENCE The following documents filed with the Securities and Exchange Commission (the "Commission") by Alliance pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") are incorporated by reference in this Prospectus: (1) Alliance's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, as amended and restated by Form 10-K/A Amendment No. 3 dated March 6, 1996; (2) Alliance's Quarterly Reports on Form 10-Q for the quarters ended September 30, 1995 and December 31, 1995, respectively. This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. These documents (other than exhibits to documents unless such exhibits are specifically incorporated by reference) are available, without charge, to any person to whom this Prospectus is delivered, on written or oral request, to Alliance Gaming Corporation, 4380 Boulder Highway, Las Vegas, Nevada 89121 (telephone number (702) 435-4200), Attention: John W. Alderfer, Senior Vice President-- Finance and Administration, Chief Financial Officer and Treasurer. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS OR IN DOCUMENTS AND FINANCIAL STATEMENTS INCORPORATED IN THIS PROSPECTUS BY REFERENCE. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE TERM "ALLIANCE", AS USED IN THIS PROSPECTUS, MEANS ALLIANCE GAMING CORPORATION AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, PRIOR TO THE MERGER, (II) THE TERM THE "COMPANY", AS USED IN THIS PROSPECTUS, MEANS ALLIANCE GAMING CORPORATION AND ITS SUBSIDIARIES, INCLUDING BGII, TAKEN AS A WHOLE, UPON CONSUMMATION OF THE MERGER, AND INFORMATION WITH RESPECT TO THE COMPANY IN THIS PROSPECTUS IS PRESENTED AFTER GIVING EFFECT TO THE MERGER, THE OFFERINGS AND THE PRIVATE PLACEMENT, (III) THE TERM "BGII" MEANS BALLY GAMING INTERNATIONAL, INC. AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, PRIOR TO THE MERGER AND (IV) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTIONS IN THE STOCK OFFERINGS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES AND THAT IS SUBJECT TO THE ASSUMPTIONS SET FORTH IN CONNECTION THEREWITH AND THE INFORMATION CONTAINED HEREIN. THE COMPANY BACKGROUND Alliance is a diversified gaming company that currently operates approximately 6,000 electronic gaming machines (primarily video poker machines and slot machines) and also owns and operates a small casino in each of Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest gaming machine management operator in Nevada and is the exclusive operator of video poker devices at the only racetrack and ten associated off-track betting parlors ("OTBs") in the greater New Orleans area. As part of its long-term growth strategy, Alliance entered into an Agreement and Plan of Merger in October 1995, as amended in January 1996 (the "Merger Agreement"), with BGII pursuant to which BGII will become a wholly-owned subsidiary of Alliance. BGII, through subsidiaries in the United States and Germany, is a leading designer, manufacturer and distributor of electronic gaming machines. BGII also designs, assembles and sells computerized monitoring systems for slot and video gaming machines which provide casino operators with on-line real time player tracking, security and maintenance capabilities. BGII is currently the second largest manufacturer of casino-style electronic gaming machines in North America and since 1993 has made significant inroads in recapturing a portion of its once dominant market share of the late 1970s. Unit sales of electronic gaming machines by BGII's domestic subsidiary have approximately doubled from the level of unit sales in 1993. Although BGII sells electronic gaming machines to most of the major participants in the United States casino industry, the Company hopes to continue to increase its penetration in such casinos by capitalizing on Alliance's and BGII's managements' relationships within the gaming industry together with the performance capabilities of its current products. Alliance believes that the Merger represents an opportunity to acquire an established electronic gaming machine manufacturer with a well-recognized presence in the gaming industry and a significant base of assets and experience. Management estimates that the installed base of casino-style electronic gaming machines (for these purposes, primarily slot and video machines) is approximately 650,000 units, of which approximately 50% are located in North America, and that annual sales in North America have grown from approximately 30,000 units in 1991 to approximately 89,000 units in 1995, reflecting a period of accelerated growth in the number and size of casinos in North America. Historically, growth in the gaming machine market has been principally fueled by sales to new casinos and to a lesser degree by replacement of machines (which have an average replacement cycle of three to seven years) and the application of new technology. In the future, management believes that annual sales growth resulting from replacement requirements and the application of new technology should outpace growth in demand generated by new casino openings, which growth rate is expected to decline. Management believes that the Merger provides Alliance with an avenue for entering a business historically characterized by effective barriers to entry in that the BGII assets being acquired are difficult to replicate and would require significant time and investment to develop successfully. 3 For the twelve-month period ended December 31, 1995, on a pro forma basis after giving effect to the Merger and the related transactions described herein, the Company would have had revenues and Adjusted Operating Cash Flow (as defined: see the introduction to "Summary Financial Information") of approximately $401.0 million and $47.3 million, respectively. BUSINESS STRATEGY The Company's strategic objective is to build a pre-eminent gaming entertainment company to capitalize on what management believes to be gaming's continuing growth within the entertainment industry. In addition to continuing the development of the Company's existing business units, the Company's strategic focus will be on BGII's domestic subsidiary, key elements of which include: - to capitalize on BGII's strong product line and current sales momentum as represented by unit sales of electronic gaming machines by BGII's domestic subsidiary which have approximately doubled from the level of unit sales in 1993; - to develop and market premier gaming entertainment products employing available information technology currently in common use in other segments of the entertainment industry, but not yet prevalent in the gaming industry; - to reduce costs through enhanced operating efficiencies while improving the quality of products and services; and - to capitalize on relationships and enter into alliances with technology and entertainment companies, with a particular focus on the application of technology in the gaming entertainment business. The Company believes it has assembled a strong and experienced management team to implement its strategy and capitalize on the opportunities in the gaming industry. Steve Greathouse, Chairman of the Board of Directors, President and Chief Executive Officer of Alliance, has over 20 years of experience in the gaming industry and has strong relationships with many casino operators. Prior to joining Alliance in 1994, Mr. Greathouse was President of the Harrah's Casino Hotels Division of The Promus Companies Incorporated. Craig Fields, Vice Chairman of the Board of Directors of Alliance, who will assume a senior management position upon consummation of the Merger, has over 20 years of experience with advanced information technology from his work with several leading companies and government agencies including Perot Systems Corp. and the United States Department of Defense. Dr. Fields has been active in developing the Company's strategic focus on the application of technology to gaming entertainment products. In addition, Hans Kloss, currently the President and Chief Operating Officer of BGII and long-time managing director of BGII's German operations, will join the senior management team and continue to run the BGII operations. Since becoming President of BGII in 1993, Mr. Kloss has been instrumental in implementing changes in BGII's United States-based operations resulting in improvements in its results of operations. See "Management." BUSINESS UNITS Following the Merger, the Company will operate through four business units: (i) casino-style electronic gaming machine manufacturing and systems, (ii) German operations (consisting of the manufacture and distribution of wall-mounted gaming machines and the distribution of other recreational and amusement machines), (iii) gaming machine management operations and (iv) casino operations. GAMING MACHINE MANUFACTURING AND SYSTEMS. BGII's United States subsidiary, Bally Gaming, Inc., currently has two components: a domestic-based electronic gaming machine manufacturing unit ("Gaming") and a data systems and software and hardware support service unit ("Systems"). Gaming designs, manufactures and distributes a variety of slot machines and video gaming machines. Gaming is the second largest electronic gaming machine manufacturer in North America, and has significantly increased its penetration in the gaming machine market with the successful introduction of its ProSeries-TM- and Game Maker-Registered Trademark- lines in 1993 and 1994, respectively. In the United States, Gaming historically has marketed electronic gaming machines, primarily to casinos in Atlantic City and Nevada and more recently in other jurisdictions. Gaming also distributes electronic gaming machines outside the United States, principally in 4 Europe through Bally Gaming International GmbH ("GmbH") and, to a lesser extent, in Canada, the Far East, Latin America and the Caribbean. Systems designs, assembles and sells, primarily to casino operators in the United States, computerized player tracking, cash monitoring, accounting and security data systems for electronic gaming machines. Since the introduction of its SDS 6000 system in the first quarter of 1993 and subsequent upgrades, Systems has rapidly expanded its presence in casinos. By the end of 1993, Systems had 40,000 of its game monitoring units ("GMUs") installed in 33 casino properties worldwide. This has since increased to 60,000 GMUs installed in 55 casino properties as of February 1996. For the twelve-month period ended December 31, 1995, EBITDA (as defined: see footnote (1) to "Summary Historical Financial Information -- Alliance Gaming Corporation") for the gaming machine manufacturing and systems unit was approximately $11.7 million. GERMAN OPERATIONS. BGII's German subsidiaries, which operate under the name Bally Wulff (collectively, "Wulff"), design, manufacture and distribute coin-operated, wall-mounted, electronic gaming machines known as wall machines. Management estimates that Wulff has approximately 25% of the installed base of the wall machine market which exists almost exclusively in Germany and that Wulff and the two other major competitors have a greater than 90% market share. Wulff markets its wall machines as well as wall machines and other recreational and amusement machines manufactured by third parties, including pool tables, air-hockey and pinball machines, jukeboxes and arcade games, to operators of arcades, taverns, hotels and restaurants primarily in Germany. For the twelve-month period ended December 31, 1995, EBITDA for the German operations unit was approximately $15.2 million. GAMING MACHINE MANAGEMENT OPERATIONS. Alliance's Nevada gaming machine management operations, which are the largest in Nevada, involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other electronic gaming machines in local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores operated by third parties. Alliance enters into contracts with these parties whereby Alliance either receives a portion of the revenue generated by the machines or pays rent and receives all of the revenues generated by the machines. In Nevada, Alliance operated approximately 5,300 units installed in 520 locations as of March 1, 1996. Alliance's customer and machine base has remained relatively stable over the last five years. These operations target local residents who generally frequent establishments close to their homes. In December 1995, Alliance launched Gambler's Bonus, a proprietary product which brings large casino gaming amenities to local establishments, such as multi-location progressive jackpots, bigger jackpot payouts and traditional players' club enhancements. Since launching Gambler's Bonus, the gaming machines linked to Gambler's Bonus have experienced an increase in average net win per day per machine. As of March 1, 1996, Alliance had 286 machines linked to the Gambler's Bonus system, and management expects to have Gambler's Bonus installed in approximately 88 locations or a total of 980 machines by June 1996. In 1992, Alliance expanded its machine management operations to Louisiana, where it has an exclusive 10-year contract (seven years remaining, plus a five-year right of first refusal thereafter) to operate approximately 700 video poker devices at the only racetrack and 10 associated OTBs in the greater New Orleans area. For the twelve-month period ended December 31, 1995, EBITDA for the gaming machine management operations unit was $18.3 million. CASINO OPERATIONS. Alliance owns and operates two small full-service casinos. In Mississippi, the Company's Rainbow Casino is part of the Vicksburg Landing facility which opened in July 1994 and is the only casino/family entertainment complex of its kind in Mississippi. The Rainbow Casino currently has approximately 589 electronic gaming machines and 28 table games. In addition to the approximately 24,000-square foot Rainbow Casino, Vicksburg Landing opened an 89-room hotel and a 10-acre indoor/ outdoor amusement park in May 1995. Although the hotel and amusement park are not owned or operated by Alliance, management believes that such facilities have contributed significantly to the recent strong financial results of the Rainbow Casino. Alliance's Plantation Station Casino located in Reno/Sparks, Nevada is a 20,000-square foot casino which currently contains approximately 453 electronic gaming machines, keno and 10 table games in addition to a 300-seat restaurant owned by Alliance. For the twelve-month period ended December 31, 1995, EBITDA for the casino operations unit was $10.5 million. 5 Alliance is a Nevada corporation organized in 1968. The Company's principal executive offices are located at 4380 Boulder Highway, Las Vegas, Nevada 89121, and its telephone number is (702) 435-4200. 6 THE MERGER AND RELATED FINANCINGS Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Alliance will acquire all of the stock of BGII as set forth below. In addition, the Company will generally assume BGII's obligations with respect to each outstanding BGII stock option and warrant, subject to certain modifications being presented for approval by BGII stockholders, and will retire approximately $70.7 million of outstanding debt of BGII (including prepayment premium and original issue discount), plus accrued interest. The Merger and related transactions will be financed through (i) the Common Stock Offering and the Private Placement of an aggregate of $65.0 million of Common Stock, $0.10 par value per share, of Alliance (the "Common Stock"), (ii) the Preferred Stock Offering of $15.0 million of 15% Non-voting Junior Pay-in- Kind Special Stock, Series B, liquidation value $100 per share (the "Preferred Stock"), and (iii) the Note Offering. The Common Stock Offering, the Preferred Stock Offering, the Note Offering and the Private Placement are contingent upon and will close simultaneously with the Merger. See "The Merger and Related Financings." The Common Stock Offering, the Preferred Stock Offering and the Note Offering are each being made by the Company exclusively pursuant to separate prospectuses. A financial institution has agreed to purchase privately at the time of consummation of the Merger $5.0 million of the equity of Alliance at a price equal to the lower of $4.56 (the average trading price of the Common Stock for the five trading day period immediately preceding the agreement) and the price of the Common Stock issued in the Common Stock Offering. This Private Placement would be in the form of Common Stock to the extent of 4.9% of the total Common Stock outstanding at the time, taking into account Common Stock to be issued in the Merger and the Common Stock Offering, with the remainder to be in the form of non-voting special stock convertible into Common Stock. The Company anticipates, and it is assumed for all purposes herein, that all of the $5.0 million will be issued in the form of Common Stock. The Merger, the Offerings, the Private Placement and the specified uses of proceeds therefrom are collectively referred to herein as the "Transaction." SOURCES AND USES OF FUNDS The following table sets forth the anticipated sources and uses of funds to be used to consummate the Merger and related transactions, based on the Company's cash and debt balances as of December 31, 1995. The actual balances and number of shares outstanding will vary based on the date of consummation of the Transaction. (IN MILLIONS) ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS CASH SOURCES: CASH USES:
Notes................................... $ 75.0 Cash to BGII Stockholders(a)............ $ 76.7 Retire BGII Debt (includes prepayment premium and original issue Preferred Stock......................... 15.0 discount)(b)............................ 70.7 Common Stock (Private Placement/ Common Employee Contract Termination Costs and Stock Offering)........................ 65.0 Performance Unit Awards(c).............. 7.6 Available Cash.......................... 20.0 Fees and Expenses(d).................... 20.0 --------- --------- Total Cash Sources.................. 175.0 Total Cash Uses......................... 175.0 --------- --------- NON-CASH SOURCES: NON-CASH USES: Preferred Stock to BGII Preferred Stock......................... 35.0 Stockholders(e)......................... 35.0 Common Stock............................ 2.9 Common Stock to BGII Stockholders(f).... 2.9 Common Stock Issued in Partial Common Stock Issued in Partial Satisfaction of Employee Contract Satisfaction of Employee Contract Termination Costs and Performance Unit Termination Costs and Performance Unit Awards(c).............................. 4.0 Awards(c)............................... 4.0 --------- --------- Total Non-Cash Sources................ 41.9 Total Non-Cash Uses..................... 41.9 --------- --------- Total Sources....................... $ 216.9 Total Uses.............................. $ 216.9 --------- --------- --------- ---------
(FOOTNOTES ON FOLLOWING PAGE) 7 - ------------------------ (a) Represents the cash consideration to be paid to BGII stockholders in the Merger consisting of approximately $7.83 per share of BGII common stock, calculated in accordance with the terms of the Merger Agreement. (b) Represents retirement of the following debt of BGII outstanding at December 31, 1995: (i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a prepayment premium of 101% plus original issue discount of $0.3 million; (ii) $15.9 million under Wulff bank lines of credit; (iii) $9.4 million under Bally Gaming Inc.'s bank revolving line of credit; and (iv) Other notes of BGII payable, aggegating $5.0 million. Accrued and unpaid interest on such debt is not reflected as such amounts will be paid using available cash and are not considered material. (c) Includes $5.0 million payable in cash to Richard Gillman, Chairman of the Board and Chief Executive Officer of BGII, and $1.3 million payable to Neil Jenkins, Executive Vice President and Secretary of BGII, consisting of $0.8 million in cash and $0.5 million in Common Stock, all pursuant to agreements with Alliance in connection with the termination of their respective employment agreements and performance unit awards. Additionally, Hans Kloss, President and Chief Operating Officer of BGII and Managing Director of Wulff, who will remain with the Company, will receive a total of $4.5 million consisting of $1.5 million in cash and $3.0 million in Common Stock, and Robert Conover, President of Systems, who will remain with the Company, will receive a total of $0.7 million consisting of $0.2 million in cash and $0.5 million in Common Stock, in connection with their employment agreements and performance unit awards. The Common Stock portion of each of such payments will be valued at the Alliance Average Trading Price (as defined) but in no event more than $6.00 nor less than $4.25 per share. See "The Merger and Related Financings." (d) Total estimated Alliance and BGII Transaction-related fees and expenses are $32.0 million, of which $12.0 million has been paid through December 31, 1995. (e) Represents the Preferred Stock consideration to be paid to BGII stockholders in the Merger consisting of approximately $3.57 per share of BGII common stock, calculated in accordance with the terms of the Merger Agreement to equate to the value per share of Preferred Stock obtained in the Preferred Stock Offering. (f) Represents the Common Stock consideration to be paid to BGII stockholders in the Merger consisting of approximately $0.30 per share of BGII common stock valued at the Alliance Average Trading Price (as defined). PRO FORMA BUSINESS STRUCTURE OF THE COMPANY The following chart presents the principal elements of the business structure of the Company as management currently intends to operate following the Merger, but does not reflect the legal structure of Alliance or BGII. [GRAPH] (1) Not wholly-owned. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 8 THE NOTE OFFERING Issuer............................ Alliance Gaming Corporation. Principal Amount.................. $75,000,000. Maturity Date..................... , 2003. Interest.......................... The Notes will bear interest at % per annum, payable semi-annually in arrears on and , commencing . The Company has agreed to use commercially reasonable good faith efforts to cause all of its obligations in respect of the Notes to be assumed by a Subsidiary of the Company, which Subsidiary would own all assets currently owned by the Company (other than the Company's Equity Interests (as defined) in such Subsidiary), but which would not have any obligations in respect of the Company's $85,000,000 principal amount of Convertible Subordinated Debentures due 2003 (the "Con- vertible Debentures"). In the event the Company is unable, including because of gaming regulatory restrictions, to cause such a Subsidiary to assume its obligations in respect of the Notes by , 1997, then until the first full semi-annual interest payment period during which such an assumption of obligations has occurred, the Notes will bear interest at the increased rate of % per annum. Interest is calculated on the basis of a 360-day year consisting of twelve 30-day months. Security.......................... Subject to certain limited exceptions, the Notes will be secured by a security interest in the following: (i) an exclusive pledge of all Equity Interests directly or indirectly owned by the Company, other than 1/3 of its Equity Interests in specified entities through which the Company's German operations are directly or indirectly held; (ii) an exclusive assignment of all intercompany notes of the Company and its Subsidiaries; (iii) an exclusive Lien on substantially all of the Company's unencumbered assets, which currently include the assets comprising Alliance's Nevada gaming machine management and casino operations and BGII's headquarters site; and (iv) a PARI PASSU or junior Lien on certain other assets of the Company and its Subsidiaries (to the extent permitted by the other security arrangements in respect thereof), but not including assets of the Company's Mississippi casino or its Louisiana gaming machine management operations (which are conducted through partially owned entities) or of its German operations. Guarantors........................ The Notes will be fully and unconditionally guaranteed on a joint and several, senior secured basis by each present and future Subsidiary (which term excludes "Unrestricted Subsidiaries") of the Company, other than (i) the partially-owned entities through which its Mississippi casino and Louisiana gaming machine man- agement operations are conducted and (ii) specified entities through which its German operations are owned. Mandatory Redemption.............. None.
9 Optional Redemption............... The Notes will be redeemable in cash at the option of the Company, in whole or in part, at any time on or after , at the redemption prices set forth herein, together with accrued and unpaid interest through the redemption date. In addition, the Notes are subject at any time to a Required Regulatory Redemp- tion. Change of Control................. Upon the occurrence of a Change in Control (as defined), the Company is required to offer to repurchase all outstanding Notes at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. Excess Cash Flow Offer............ The Company is required annually to offer to repurchase, at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase, such principal amount of Notes as may be purchased using 50% of the Company's Excess Available Cash Flow (as defined) for its most recently ended fiscal year, commencing by September 30, 1997. Certain Covenants................. The Indenture will contain certain covenants which, among other things, will restrict and regulate the Company's and its Subsidiaries' ability to (i) incur additional Indebtedness or issue Disqualified Capital Stock; (ii) make Restricted Payments; (iii) create encumbrances on the ability of the Company's Subsidiaries to pay dividends or make other distributions; (iv) engage in certain lease transactions; (v) permit the existence of Liens on assets of the Company and its Subsidiaries; (vi) use the proceeds from certain asset sales by the Company and its Subsidiaries other than in connection with certain redemptions of or offers to repurchase Notes; (vii) enter into transactions with affiliates of the Company or pay any amounts pursuant to any management agreements with Kirkland, KIC (each as defined) or their respective affiliates, under certain circumstances; (viii) merge, consolidate or sell all or substantially all of its assets; (ix) engage in new lines of business; and (x) issue or sell Equity Interests of any of the Company's Subsidiaries (except to the Company or a Wholly-owned Subsidiary Guarantor). Events of Default................. Events of Default will include (i) default in payment of interest when due for a period of 30 days; (ii) default in payment of principal or premium, if any, when due; (iii) default in the performance or breach of certain specified covenants, including those relating to merger, consolidation or sale of assets, failure to make or consummate a Change of Control Offer (as defined) or an Asset Sale Offer (as defined) as required; (iv) default in the performance or breach of such other covenants of the Company and its Subsidiaries in the Indenture for 30 days after notice; (v) certain events of bankruptcy, insolvency or reorganization relating to the Company or its Significant Subsidiaries (as defined); (vi) a default in other indebtedness of the Company or its Subsidiaries with an aggregate principal amount of $ million; (vii) final unsatisfied judgements not covered by insurance
10 aggregating in excess of $ million not otherwise stayed, bonded or discharged within 60 days; and (viii) certain events of default under the Collateral Agreements (as defined). Modification of Indenture......... Amendments to the Indenture will be permitted with the consent of the holders of not less than a majority of the principal amount of the outstanding Notes; PROVIDED, however, that the consent of all holders affected thereby will be required to release any of the collateral from the Liens created by the Collateral Agreements, other than in accordance with terms thereof, or to make certain changes, including those that would change the time of payment of interest or principal or reduce the principal amount or interest rate payable on any Note or that would reduce the percentage in principal amount of outstanding Notes, the consent of whose holders is required for any such modification or waiver; PROVIDED further, that the holders of at least two-thirds in aggregate principal amount will be required to approve any change in the obligations of the Company to make an offer to repurchase holders' Notes upon a Change of Control. Certain changes may be made without the consent of holders of the Notes, including for example to cure any ambiguities in the documents that do not materially adversely affect the rights of the holders. Risk Factors...................... For a discussion of certain factors that should be considered in connection with an investment in the Notes, see "Risk Factors."
11 SUMMARY FINANCIAL INFORMATION The following tables set forth a Summary Forecast of Operating Income and Adjusted Operating Cash Flow (the "Summary Forecast") based on the expected combined operating data for the Company for the twelve-month period ending December 31, 1996. The Summary Forecast, which consists of forward-looking statements, is qualified by, and subject to, the assumptions set forth below and the other information contained in this Prospectus, and should be read in conjunction with the Summary of Significant Assumptions and Accounting Policies for the Forecast. The following Summary Historical Financial Information tables set forth summary consolidated financial information of Alliance, and has been derived from the audited consolidated financial statements of Alliance, including the notes thereto, for the fiscal years ended June 30, 1993, 1994 and 1995, and the unaudited interim condensed consolidated financial statements of Alliance, including the notes thereto, as of December 31, 1995 and for the six month periods ended December 31, 1994 and 1995, which are included elsewhere in this Prospectus. The following Summary Historical Financial Information tables also set forth summary consolidated financial information of BGII, which has been derived from the audited consolidated financial statements of BGII, including the notes thereto, as of December 31, 1995 and for the years ended December 31, 1993, 1994 and 1995, which are included elsewhere in this Prospectus. The following tables also set forth Summary Unaudited Pro Forma Condensed Combined Financial Information. The Pro Forma Statements of Operations Data presents results of operations of the Company assuming the Transaction occurred on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and December 31, 1995 and for the six months ended December 31, 1995, and on July 1, 1993 for the statements for the six months ended December 31, 1994, and that the Rainbow Casino operations were consolidated. The detailed presentation of revenues is derived from internally prepared supporting schedules not otherwised presented or incorporated herein. The Pro Forma Balance Sheet Data presents the financial position of the Company assuming the Transaction occurred on December 31, 1995. The Summary Unaudited Pro Forma Condensed Combined Financial Information does not purport to present the financial position or results of operations of the Company had the Transaction and events assumed therein occurred on the dates specified, nor is it necessarily indicative of the results of operations of the Company as they may be in the future or as they may have been had the Transaction and the consolidation of the Rainbow Casino operating results been consummated on the dates described above. The Summary Unaudited Pro Forma Condensed Combined Financial Information is based on certain assumptions and adjustments described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information and should be read in conjunction therewith. The following tables also set forth Summary Supplemental Analysis of Adjusted Operating Cash Flow, which is based on combining Alliance and BGII historical information. Alliance management has made certain adjustments to the combined operating income and has made further adjustments thereto to arrive at a measure of adjusted operating cash flow ("Adjusted Operating Cash Flow"). As is more fully described below, such adjustments consist of the elimination of certain charges that management has determined to be one-time or unusual, as well as adjustments made to reflect the most recent operating results of the Rainbow Casino by annualizing the most recent six month operating results after considering seasonality, which was immaterial, and presenting such results as if they had occurred for each period presented. In making these adjustments, management considered all items deemed non-recurring, revenues as well as expenses. The tables should be read in conjunction with "Unaudited Pro Forma Condensed Combined Financial Information," "Supplemental Analysis of Adjusted Operating Cash Flow," "Forecast of Operating Income and Adjusted Operating Cash Flow," "Selected Historical Financial Information of Alliance," "Selected Historical Financial Information of BGII," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the audited consolidated financial statements of Alliance, including the notes thereto, the unaudited interim condensed consolidated financial statements of Alliance, including the notes thereto, and the audited consolidated financial statements of BGII, including the notes thereto, and other financial and operating information included elsewhere in this Prospectus. 12 SUMMARY FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW (1)
COMPARATIVE ANALYSIS OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW (2) -------------------------- TWELVE MONTHS FORECASTED OPERATING INCOME ENDED DECEMBER 31, AND ADJUSTED OPERATING CASH -------------------------- FLOW FOR THE TWELVE MONTHS 1994 1995 ENDING DECEMBER 31, 1996 ------------ ------------ ------------------------------ (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS INFORMATION: Total Revenues...................................... $ 373,031 $ 400,964 $ 425,957 Total Operating Costs............................... 361,806(3) 381,773(3) 398,889(3) ------------ ------------ -------- Operating Income.................................. 11,225 19,191 27,068 ------------ ------------ -------- SUPPLEMENTAL INFORMATION: Depreciation and Amortization....................... 22,536 22,637 23,192 Casino Royalty...................................... (1,670) (3,674) (4,368) Minority Interest................................... (675) (504) (920) ------------ ------------ -------- Subtotal.......................................... 31,416 37,650 44,972 Adjustments: Rainbow Operations................................ -- 1,912(4) -- Other Unusual or Non-recurring Charges.......................................... 2,856(5) 7,783(5) 1,000(6) Direct Merger Costs............................... -- -- 8,944(7) ------------ ------------ -------- Adjusted Operating Cash Flow........................ $ 34,272(8) $ 47,345(8) $ 54,916(8) ------------ ------------ -------- ------------ ------------ -------- OTHER DATA: Net Interest Expense................................ $ 16,300 -------- -------- Mandatory Principal Payments........................ $ 3,957(9) -------- -------- Capital Expenditures................................ $ 13,485(10) -------- -------- Ratio of Adjusted Operating Cash Flow to Net Interest Expense................................... 3.4x Ratio of Long-Term Debt to Adjusted Operating Cash Flow............................................... 3.2x
- -------------------------- (1) The Summary Forecast, which consists of forward-looking statements, is based upon a number of estimates and assumptions that, while presented with numerical specificity and considered reasonable by management of the Company, are inherently subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of the Company. The Summary Forecast is necessarily speculative in nature, and it is usually the case that one or more of the assumptions do not materialize. The Summary Forecast and actual results will vary, and those variations may be material. Accordingly, the inclusion of the Summary Forecast herein should not be regarded as a representation by the Company or any other person (including the Underwriters) that the Summary Forecast will be achieved. In addition, because the Summary Forecast has been prepared on a consolidated basis, the Summary Forecast does not account for the Company's holding company structure, which may result in cash flows earned at some subsidiaries being unavailable for distribution to the Company, including to service indebtedness of the Company. Prospective investors are cautioned not to place undue reliance on the Summary Forecast. (2) See Note 2--Presentation of Supplemental Comparative Information of the "Summary of Significant Assumptions and Accounting Policies for the Forecast" elsewhere in the Prospectus. (3) Includes selling, general and administrative costs for the twelve months ended December 31, 1994 and 1995 net of the following: direct Merger costs, the business development costs over the $3.0 million budgeted amount and forecasted synergy cost savings. See note (7) below for the 1996 presentation which includes direct Merger costs. (4) Represents adjustment to reflect Rainbow Casino's annualized results for the period net of incremental royalty. (5) Reflects items determined by management to be unusual or non-recurring (which are also included in Total Operating Costs). The concept of one-time or unusual charges is not defined in generally accepted accounting principles ("GAAP"). (6) For 1996, the non-recurring charges consist of the $1.0 million of one-time charges (which are included in Total Operating Costs) to implement the expected annual synergy cost savings (which are reflected in Total Operating Costs as well). 13 (7) Direct Merger costs for 1996 have been included in Total Operating Costs and presented as an adjustment in computing the Adjusted Operating Cash Flow. See note (3) above for the presentation of direct Merger costs in 1994 and 1995. (8) The following is a reconciliation of the historical EBITDA (as defined) by business unit to the combined Adjusted Operating Cash Flow:
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING ---------------------- DECEMBER 31, 1994 1995 1996 ---------- ---------- ------------ (IN THOUSANDS) EBITDA by Business Unit: Gaming Machine Management................................... $ 17,159 $ 18,260 $ 19,957 Casinos..................................................... 2,927 10,546 14,958 Gaming...................................................... 7,004(a) 5,905(a) 10,750 Systems..................................................... 3,593 5,788 6,303 Wulff....................................................... 15,575 15,172 16,836 Alliance Corporate Administrative Expense................... (10,609) (8,912) (5,800) Alliance Development Expense................................ (7,694) (15,072) (10,944) BGII Corporate Administrative Expense....................... (4,520) (3,732) (4,800) Discontinued Operations..................................... (1,378) (933) -- Casino Royalty.............................................. -- (2,718) (4,368) Minority Interests.......................................... (675) (504) (920) BGII Unusual Charges........................................ -- (5,816) (2,000) ---------- ---------- ------------ Combined...................................................... 21,382 17,984 39,972 Adjustments: Direct Merger Costs......................................... -- 13,106(b) 8,944(b) Alliance Development Expense Reductions..................... 4,694 966 -- Rainbow Operations.......................................... 340(c) 2,506(c) -- Unusual or Nonrecurring Charges............................. 2,856(d) 7,783(e) 1,000(f) Synergy Cost Savings........................................ 5,000 5,000 5,000 ---------- ---------- ------------ Adjusted Operating Cash Flow.................................. $ 34,272 $ 47,345 $ 54,916 ---------- ---------- ------------ ---------- ---------- ------------
- ------------------------ (a) Includes certain charges incurred by Gaming and not reflected as "BGII Unusual Charges" above, consisting of costs relating to a regulatory investigation and legal proceedings in Louisiana totalling $0.3 million and $1.4 million for the years ended December 31, 1994 and 1995 respectively. (b) For the twelve months ended December 31, 1995, $11.1 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges. For the Forecasted Twelve Months Ending December 31, 1996, $6.9 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges. (c) To adjust to reflect the operating results of the Rainbow Casino as if owned during 1994 and 1995 and to reflect the most recent operating results of the Rainbow Casino, as if such results had occurred for all of 1995 (including an adjustment for additional casino royalty expense of approximately $1.7 million and $1.0 million, respectively). (d) Includes legal costs included as BGII Corporate Administrative Expense related to a former executive totalling $0.5 million and $0.3 million incurred by Gaming relating to a regulatory investigation and legal proceedings in Louisiana and a reserve for discontinued operations of $2.0 million for Alliance included in Alliance Corporate Administrative Expense. (e) Includes one-time charges included in Alliance Corporate Administrative Expense consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain officers and directors, which were incurred during the quarter ended June 30, 1995. Also includes $1.4 million incurred by Gaming relating to a regulatory investigation and legal proceedings in Louisiana, and $0.2 million included in BGII Corporate Administrative Expense for legal costs related to the "Bally" trade name litigation. Also includes BGII unusual charges of $2.0 million in costs related to the merger agreement with WMS, a provision of $0.8 million at Wulff to writedown to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for V.A.T. (f) Includes $1.0 million of one-time charges to implement the expected annual synergy cost savings. (9) All of such mandatory principal payments relate to indebtedness of subsidiaries of the Company. (10) See Note 3 -- Operating Assumptions -- Capital Expenditures of the Summary of Significant Assumptions and Accounting Policies for the Forecast. 14 SUMMARY HISTORICAL FINANCIAL INFORMATION ALLIANCE GAMING CORPORATION
FISCAL YEARS SIX MONTHS ENDED JUNE 30, ENDED DECEMBER 31, ---------------------------------- -------------------- 1993 1994 1995 1994 1995 ---------- ---------- ---------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net Revenues................................................ $ 113,091 $ 123,054 $ 131,988 $ 62,338 $ 76,229 Operating Loss.............................................. (52) (7,468) (4,261) (1,861) (3,524) Net Interest Expense........................................ (4,048) (4,746) (5,335) (2,411) (3,470) Net Loss.................................................... $ (3,650) $ (13,128) $ (10,751) $ (5,017) $ (9,431) ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- OTHER DATA: Gaming Machine Management: Units..................................................... 5,868 5,889 5,902 5,976 5,951 Locations................................................. 518 506 526 528 531 Casinos: Tables.................................................... 9 9 37 9 38 Slots Operated............................................ 428 434 1,005 433 1,042 Revenues: Gaming Machine Management................................. $ 96,282 $ 102,830 $ 106,827 $ 52,511 $ 52,621 Casinos................................................... 11,286 12,046 19,668 6,612 22,352 Discontinued Operations................................... 5,523 8,178 5,493 3,215 1,256 ---------- ---------- ---------- --------- --------- Total Revenues.......................................... $ 113,091 $ 123,054 $ 131,988 $ 62,338 $ 76,229 EBITDA (1): Gaming Machine Management................................. $ 14,564 16,820 18,562 8,800 8,498 Casinos (2)............................................... 1,963 2,190 5,359 1,713 6,900 Corporate Development Expenses (3)........................ (900) (1,192) (7,843) (3,508) (10,737) Corporate Administrative Expenses (4)..................... (6,191) (7,882) (10,177) (4,252) (2,987) Discontinued Operations (5)............................... (770) (7,874) (642) (1) (292) Casino Royalty............................................ -- -- (810) -- (1,908) Minority Interest......................................... -- (506) (397) (169) (276) ---------- ---------- ---------- --------- --------- Total EBITDA (1)........................................ $ 8,666 $ 1,556 $ 4,052 $ 2,583 $ (802) ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- Depreciation and Amortization............................... $ 8,718 $ 9,530 $ 9,520 $ 4,613 $ 4,906 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- Capital Expenditures........................................ $ 5,092 $ 7,022 $ 7,880 $ 3,338 $ 7,478 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- ---------
AT DECEMBER 31, 1995 --------------- BALANCE SHEET DATA: Cash and Cash Equivalents and Securities Available for Sale...................................... $ 29,468 Working Capital.................................................................................. 20,109 Total Assets..................................................................................... 116,872 Long-term Debt, Including Current Maturities..................................................... 100,106 Stockholders' Deficiency......................................................................... (717)
- ------------------------ (1) EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization ("EBITDA"). When presented for each business unit, EBITDA excludes corporate expenses, casino royalty and minority interest. EBITDA should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of Alliance's performance or to cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Management believes that EBITDA is a useful adjunct to net income and other measurements under GAAP and is a conventionally used financial indicator. (2) Since March 29, 1995, the Rainbow Casino operations have been consolidated with Alliance. (3) Includes direct Merger costs of $1.7 million and $9.4 million for the fiscal year ended June 30, 1995 and the six months ended December 31, 1995, respectively. (4) Includes one-time charges incurred by Alliance consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain officers and directors, which were incurred during the quarter ended June 30, 1995. (5) Includes businesses now or previously considered as discontinued operations. 15 BALLY GAMING INTERNATIONAL, INC.
FISCAL YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Revenues............................................. $ 168,707 $ 236,192 $ 249,312(1) Operating Income (Loss).............................. (18,536 (2) 13,381 (4) 8,364 (6) Interest Expense..................................... 4,424 6,768 6,853 Net Income (Loss).................................... $ (23,443) $ 3,793 $ (3,393) ---------- ---------- ---------- ---------- ---------- ---------- OTHER DATA: Unit Sales: Gaming............................................. 10,156 21,625 18,084 Wulff.............................................. 12,552 13,100 12,000 Revenues: Gaming (7)......................................... $ 49,298 $ 118,659 $ 111,849(1) Systems............................................ 12,748 13,386 20,681 ---------- ---------- ---------- Gaming Machine Manufacturing and Systems......... 62,046 132,045 132,530 Wulff.............................................. 106,661 104,147 116,782 ---------- ---------- ---------- Total Revenues................................... $ 168,707 $ 236,192 $ 249,312 EBITDA (8): Gaming (7)......................................... $ (24,747 (2) $ 7,004(3) $ 5,905 (5) Systems............................................ 3,829 3,593 5,788 ---------- ---------- ---------- Gaming Machine Manufacturing and Systems......... (20,918) 10,597 11,693 Wulff.............................................. 15,959 15,575 15,172 Parent (7)......................................... (5,473) (4,520 (4) (3,732 (4) Unusual Charges.................................... -- -- (5,816 (6) ---------- ---------- ---------- Total EBITDA (8)................................. $ (10,432) $ 21,652 $ 17,317 ---------- ---------- ---------- Depreciation and Amortization........................ $ 8,103 $ 8,271 $ 8,953 ---------- ---------- ---------- Capital Expenditures................................. $ 6,467 $ 9,537 $ 8,240 ---------- ---------- ---------- ---------- ---------- ----------
AT DECEMBER 31, 1995 --------------- BALANCE SHEET DATA: Cash and Cash Equivalents........................................................................ $ 5,526 Working Capital.................................................................................. 97,357 Total Assets..................................................................................... 194,316 Long-term Debt, Including Current Maturities..................................................... 69,944 Stockholders' Equity............................................................................. 88,410
- ------------------------ (1) Includes the impact of sales returns of $0.3 million by Gaming related to two riverboats at the River City Complex in New Orleans which filed for bankruptcy. (2) Includes $6.2 million in charges to increase inventory valuation reserves in 1993 principally related to inventory originally intended for sale in the Louisiana video lottery terminal market. Includes $1.2 million in charges related to a management reorganization at Gaming in 1993. Includes a provision for doubtful receivables totaling $5.1 million recorded by Gaming in 1993 related to a former distributor who filed for bankruptcy during the second quarter of 1993. (3) Includes certain charges incurred by Gaming, and not reflected as "Unusual Charges" under Other Data, consisting of costs relating to a regulatory investigation and legal proceedings in Louisiana totalling $0.3 million and $1.4 million for the years ended December 31, 1994 and 1995, respectively. (4) Includes legal costs related to a former executive totalling $0.5 million during the year ended December 31, 1994 and legal costs related to the "Bally" trade name litigation totalling $0.2 million during the year ended December 31, 1995. (5) Includes a provision for doubtful receivables of $0.9 million related to the bankruptcy described in note (1) above. (6) Includes $2.0 million in Merger transaction costs and related litigation expenses, $2.0 million in costs related to the merger agreement with WMS Industries, Inc. ("WMS"), a provision of $0.8 million at Wulff to write-down to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for German value added taxes ("V.A.T."). (7) Includes results of GmbH and BGI Australia Pty Limited in Gaming's results, along with certain reclassifications from historical presentation. (8) See note (1) to "Summary Historical Financial Information -- Alliance Gaming Corporation." 16 SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
FISCAL YEAR SIX MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------- DECEMBER 31, 1995 1994 1995 1995 ----------- ---------- ---------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues..................................................... $ 400,821 $ 187,863 $ 188,006 $ 400,964 Operating Income............................................. 22,540 8,460 5,111 19,191 Net Interest Expense......................................... (15,323) (7,659) (7,970) (15,634) Casino Royalty............................................... (3,431) (1,665) (1,908) (3,674) Minority Interest............................................ (397) (169) (276) (504) Other, net................................................... (823) (213) 535 (75) ----------- ---------- ---------- -------------- Income (Loss) Before Taxes................................... 2,566 (1,246) (4,508) (696) Provisions for Income Taxes.................................. (2,555) (1,202) (1,289) (2,642) ----------- ---------- ---------- -------------- Net Income (Loss)............................................ $ 11 $ (2,448) $ (5,797) $ (3,338) ----------- ---------- ---------- -------------- ----------- ---------- ---------- -------------- Preferred Stock Dividend (1)................................. $ (7,783) $ (3,751) $ (3,751) $ (7,783) ----------- ---------- ---------- -------------- ----------- ---------- ---------- -------------- OTHER DATA: Depreciation and Amortization................................ $ 22,779 $ 12,064 $ 11,922 $ 22,637 Capital Expenditures......................................... 16,742 7,769 11,287 20,260
AT DECEMBER 31, 1995 --------------- BALANCE SHEET DATA: Cash and Cash Equivalents and Securities Available for Sale...................................... $ 6,854 Working Capital.................................................................................. 107,457 Total Assets..................................................................................... 335,002 Long-term Debt, Including Current Maturities..................................................... 175,106 Stockholders' Equity............................................................................. 59,611
- ------------------------ (1) Dividends on the Preferred Stock are compounded semi-annually at a rate of 15% per annum; however, such dividends are permitted to be paid in kind for the first five years after issuance and partially in kind for the next two years. 17 SUMMARY SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW
FISCAL YEAR SIX MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------- DECEMBER 31, 1995 1994 1995 1995 ----------- ---------- ---------- -------------- (DOLLARS IN THOUSANDS) HISTORICAL COMBINED INFORMATION (1): Operating Income (Loss) (2)(3)(4)(5)......................... $ 13,701 $ 4,822 $ (6,439) $ 2,440 Depreciation and Amortization................................ 18,002 9,221 9,985 18,766 Minority Interest............................................ (397) (169) (276) (504) Casino Royalty............................................... (810) -- (1,908) (2,718) ----------- ---------- ---------- -------------- Subtotal................................................... $ 30,496 $ 13,874 $ 1,362 $ 17,984 ----------- ---------- ---------- -------------- ADJUSTMENTS TO HISTORICAL COMBINED INFORMATION: Direct Merger Costs (4)...................................... $ 1,919 $ -- $ 11,187 $ 13,106 Rainbow Operations (6)....................................... 6,121 3,615 -- 2,506 Other Unusual or Non-recurring Charges (2)(3)................ 4,317 800 4,266 7,783 Alliance Development Expense Reductions (5).................. 3,174 2,008 (200) 966 Synergy Cost Savings......................................... 5,000 2,500 2,500 5,000 ----------- ---------- ---------- -------------- Adjusted Operating Cash Flow (7)............................. $ 51,027 $ 22,797 $ 19,115 $ 47,345 ----------- ---------- ---------- -------------- ----------- ---------- ---------- -------------- Pro Forma Net Interest Expense (8)........................... $ 15,323 $ 7,659 $ 7,970 $ 15,634 ----------- ---------- ---------- -------------- ----------- ---------- ---------- -------------- Ratio of Adjusted Operating Cash Flow to Pro Forma Net Interest Expense............................................ 3.1x Ratio of Pro Forma Long-Term Debt to Adjusted Operating Cash Flow........................................................ 3.6x
- -------------------------- (1) The information is derived from the historical financial information of Alliance and BGII, which has been combined for purposes of this summary. (2) Includes certain charges incurred by BGII consisting of costs relating to a regulatory investigation and legal proceedings in Louisiana, legal costs related to a former executive, legal costs related to the "Bally" trade name litigation that were directly caused by the investigation, and certain unusual charges consisting of costs related to the merger agreement with WMS, reserve for German V.A.T. and the write-down of a building in Germany. There can be no assurance that other unusual charges will not occur in the future. (3) Includes one-time charges incurred by Alliance consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain directors, which charges were incurred during the quarter ended June 30, 1995. (4) Includes direct costs related to the Merger consisting of legal, accounting, and investment banking fees and related costs. (5) Reflects the reduction of Alliance Development Expense, which relates to mergers, acquisitions and joint ventures, to $3.0 million annually. The reduction to $3.0 million reflects the anticipated elimination of expenses that were being incurred prior to Alliance's accomplishment of its strategic plan to acquire a major gaming machine manufacturing company. The adjustment to eliminate direct costs related to the Merger is shown in note (4) above. For the six months ended December 31, 1995, Alliance Development Expense was below the $3.0 million annual rate. (6) For purposes of this summary the Rainbow Casino is presented as if owned from the beginning of each period presented. Also, as the final elements of the Rainbow Casino facility were not completed until July 1995, Alliance management believes that the results of operations for the six months ended December 31, 1995 after considering seasonality (which was immaterial), are more reflective of the property's ongoing results of operations. Accordingly, such results have been annualized based on the actual results for the six months ended December 31, 1995, as Alliance management believes that such results better portray the Rainbow Casino's expected contribution to Adjusted Operating Cash Flow. This annualization constitutes forward-looking statements that involve risks and uncertainties, including the risks of competition, gaming regulation and other risks detailed in this Prospectus, including under "Risk Factors." (7) Adjusted Operating Cash Flow should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Management believes that Adjusted Operating Cash Flow is a useful adjunct to net income and other GAAP measurements. (8) The information is derived from the Unaudited Pro Forma Condensed Combined Financial Information, and is included here to provide potential investors with additional comparative information. 18 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. HIGH LEVERAGE AND FIXED CHARGES AFTER THE MERGER; HOLDING COMPANY STRUCTURE; WORKING CAPITAL The Company will have a substantial amount of indebtedness after the Transaction. As of December 31, 1995, on a pro forma basis after giving effect to the Transaction, the Company would have had outstanding debt of approximately $175.1 million and a long-term debt to equity ratio of 2.9 to 1. If the Preferred Stock is included in debt the long-term debt to equity ratio would be 3.8 to 1. See "The Merger and Related Financings," "Use of Proceeds," "Capitalization" and "Unaudited Pro Forma Condensed Combined Financial Information." The high level of indebtedness and amount of Preferred Stock of the Company outstanding following the Transaction will have important consequences, including without limitation the following: (i) significant interest expense, cash dividend requirements (after five years), principal repayment (primarily after seven years) and Preferred Stock redemption obligations (after eight years) resulting in substantial annual fixed charges and significant repayment and redemption obligations; (ii) significant limitations on the Company's ability to obtain additional financing, make capital expenditures, make acquisitions and take advantage of other business opportunities that may arise; and (iii) increased vulnerability to adverse general economic and industry conditions. In addition, the indenture pursuant to which the Notes will be issued (the "Indenture") will include change of control provisions and restrictive covenants prohibiting or limiting, among other things, the sale of assets, the incurrence of additional debt and liens and the payment of dividends, non-compliance with which could result in the acceleration of the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of the Company (Pro Forma)." On a pro forma basis after giving effect to the Transaction and the use of proceeds thereof, the Company's earnings would have exceeded fixed charges by approximately $2.6 million for the year ended June 30, 1995 and would have been inadequate to cover fixed charges by approximately $4.5 million for the six-month period ended December 31, 1995. In addition, if the maximum amount of dividends on the Preferred Stock were paid in kind, the liquidation value of the Preferred Stock would accrete to $120.6 million after seven years. On a pro forma basis after giving effect to the Transaction, the Company would have annual fixed charges of approximately $40.3 million, plus $7.8 million of dividends on the Preferred Stock (permitted to be paid in kind for the first five years after issuance and partially in kind for the next two years) for the 12-month period ended December 31, 1995. Future operating results are subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond the control of the Company. There can be no assurance that the Company will be able to generate the cash flow necessary to permit the Company to meet its fixed charges and repayment obligations. If the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. Any inability of the Company to service its fixed charges and repayment obligations would have a significant adverse effect on the Company and the market value and marketability of the Notes. Alliance is a holding company, the only material assets of which are equity interests in its subsidiaries (including, after the Merger, BGII and its subsidiaries). The ability of Alliance to make interest and principal payments on its obligations, including the Notes, will depend on the subsidiaries' ability to generate sufficient cash flow from operations and distribute such amounts to Alliance. Such entities' ability to make these distributions is restricted by, among other things, the indebtedness of Alliance's Video Services, Inc. ("VSI") and Rainbow Casino-Vicksburg Partnership, L.P. ("RCVP") subsidiaries, and may be restricted by other obligations which may be incurred in the future and by restrictions imposed by gaming authorities on licensed enterprises. The Company believes that its consolidated cash flow needs for the next 12 months will increase as a result of an increase in accounts receivable relating to the introduction of new machines and the expected 18 increases in production and sales levels from recent historical levels. The Company expects that cash flow generated by operations and other available cash will be sufficient to satisfy the Company's normal working capital needs, although there can be no assurance the Company will generate such available cash. See "-- Implementation of the Merger." In order to be competitive in meeting the growing customer demand for financing of gaming equipment in emerging gaming markets, the Company also plans to continue to involve third-party finance companies and secure additional financing; however, there can be no assurances that such additional financing will be obtained. Failure to obtain such financing on terms acceptable to the Company could impair the Company's operations and ability to pursue its business strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OPERATING HISTORY--RECENT LOSSES Alliance incurred net losses of $3.7 million, $13.1 million and $10.8 million during its fiscal years ended June 30, 1993, 1994 and 1995, respectively, and a net loss of $9.4 million during the six months ended December 31, 1995, whereas BGII had net income of $5.3 million, a net loss of $23.4 million, net income of $3.8 million and a net loss of $3.4 million for its fiscal years ended December 31, 1992, 1993, 1994 and 1995, respectively. On a pro forma basis after giving effect to the Transaction, for the 12-month period ended June 30, 1995 the Company would have had net income, prior to accruing dividends on the Preferred Stock, of $11,000 and for the six months ended December 31, 1995 the Company would have had a net loss of $5.8 million. Dividends on the Preferred Stock will be approximately $7.8 million in the first 12-month period. Management believes that of the losses of Alliance during its fiscal years ended June 30, 1993, 1994 and 1995, approximately $900,000, $6.4 million and $2.4 million, respectively, were attributable to items that management considers to be non-recurring, primarily reflecting the discontinuance of certain businesses and prior management strategies. Of BGII's loss for its fiscal year ended December 31, 1995, $5.8 million was attributable to certain unusual charges incurred by BGII related to a reserve for German V.A.T., the write-down of a building in Germany to be sold to its net realizable value, and transaction costs relating to the Merger, the previous tender offer and consent solicitation by Alliance, and the proposed merger with WMS. Nevertheless, there can be no assurance that the Company will be profitable in the future, that there will not be similar unusual or non-recurring charges in the future, or that future results will improve as a result of the Merger. See "Unaudited Pro Forma Condensed Combined Financial Information," "Selected Historical Financial Information of Alliance" and "Selected Historical Financial Information of BGII." The new wall machine unit sales of Wulff decreased by approximately 8% in the year ended December 31, 1995 as compared to the year ended December 31, 1994. Management believes new wall machine revenues for the last six months of 1995 were adversely affected by an industry downturn caused by regulations imposed in Germany limiting the number of wall machines per square meter in arcade locations effective January 1, 1996, thereby reducing sales opportunities. Management expects the adverse impact of such regulations to continue during the first six months of 1996; however, there can be no assurance that this impact will only be temporary. IMPLEMENTATION OF THE MERGER The Company's future operations and earnings will be largely dependent upon the Company's ability to integrate the businesses separately conducted by Alliance and BGII prior to the Merger. Alliance and BGII currently operate in different areas of the gaming entertainment industry, with only modest overlap in their activities. There can be no assurance that the Company will successfully integrate the businesses of Alliance and BGII, and a failure to do so would have a material adverse effect on the Company's financial position, results of operations and cash flows. Additionally, although the Company does not currently have any specific acquisition plans other than the Merger, the need to focus management's attention on integration of the separate businesses may limit the Company's ability to successfully pursue acquisitions or other opportunities related to its business for the foreseeable future. Although the Company plans to introduce more sophisticated technology into BGII's electronic gaming machines, there is no assurance that it will succeed in doing so or that it will be able to enter into alliances with technology and entertainment companies. In addition, although management cannot precisely quantify future cost savings, the Company expects to realize cost savings of approximately $5.0 million on an annual basis (primarily through the reduction of duplicative costs, such as facility, legal, accounting and compensation costs) as a result of the Merger. In 19 order to achieve these cost savings, the Company believes it will incur one-time costs of approximately $1.0 million. The achievement of these savings is dependent on, among other things, the successful integration of the businesses of Alliance and BGII. There can be no assurance, however, that such savings will be achieved or sustained. See "Unaudited Pro Forma Condensed Combined Financial Information." BGII currently supplies electronic gaming machines to certain customers which are in competition with Alliance. It is possible that, because of such competition, certain of these customers may cease purchasing electronic gaming machines from BGII after the Merger. Alliance and BGII do not believe that such discontinuations, if at all, will be material. BGII sales to machine management operators have historically been, and are likely to remain, insignificant. Nevertheless, discontinuance of purchases by customers could adversely affect the Company's sales. FINANCIAL FORECAST The Company was the sole preparer of the Forecast set forth under "Forecast of Operating Income and Adjusted Operating Cash Flow." While such Forecast is presented with numerical specificity, it is based on the Company's current best estimates of expected results given the forecasted assumptions described in the Summary of Significant Assumptions and Accounting Policies for the forecast for the period presented. The Forecast, which consists of forward-looking statements, is qualified by and subject to the assumptions set forth therein and the other information contained in this Prospectus. The Company does not intend to update or otherwise revise the Forecast to reflect events or circumstances existing or arising after the date of this Prospectus or to reflect the occurrence of unanticipated events. The Forecast necessarily is based upon a number of estimates and assumptions, that, while presented with numerical specificity and considered reasonable by the Company, are inherently subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of the Company. Financial forecasts are necessarily speculative in nature, and it is usually the case that one or more of the assumptions underlying such projections do not materialize. The Forecast and actual results will vary, and those variations may be material. The inclusion of the Forecast herein should not be regarded as a representation by the Company or any other person (including the Underwriters) that the Forecast will be achieved. Prospective investors are cautioned not to place undue reliance on the Forecast. CHANGE OF CONTROL The Indenture will contain provisions relating to certain changes of control of the Company. Upon the occurrence of such a change of control, the Company would be obligated to make an offer to purchase all of the Notes then outstanding at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. There can be no assurance that funds necessary to effect such a purchase would be available if such an event were to occur. See "Description of the Notes." COMPETITION GAMING MACHINE MANUFACTURING AND SYSTEMS. The market for gaming machines is extremely competitive, and there are a number of established, well-financed and well-known companies producing machines that compete with each of the Company's product lines in each of the markets for the Company's gaming machine manufacturing operations. The domestic market for gaming machines is dominated by a single competitor, International Game Technology ("IGT"), with a number of smaller competitors in the field. In addition, certain technology-oriented companies have recently announced plans to enter the gaming machine market. Management believes that some of these competitors have greater capital resources than the Company. Competition among gaming product manufacturers, particularly with respect to sales of gaming machines into new and emerging markets, is based on competitive customer pricing and financing terms, appeal to the player and quality of the product, and having an extensive distribution and sales network. Sales to established casinos in Nevada normally require completion of a successful trial period for the machines in the casino. The competition for the computerized monitoring systems designed and sold by Systems currently consists of IGT, Casino Data Systems ("CDS"), and, to a lesser extent, Gaming Systems International, Inc. and Acres Gaming, Inc. Competition is keen in this market due to the number of providers and the limited number of casinos and the jurisdictions in which they operate. Pricing, product feature and function, 20 accuracy, and reliability are all main factors in determining a provider's success in selling its system. Systems believes the future success of its operations will be determined by its ability to bring new and innovative products to the marketplace while at the same time maintaining the base of loyal existing customers. GERMAN OPERATIONS. Germany's wall machine manufacturing industry is dominated by Wulff, and two of its competitors. These three entities are believed collectively to account for more than 90% of the entire market for wall machines (which exists almost exclusively in Germany). Wulff's two major competitors have greater resources than the Company and own and operate a significant number of arcades, which may give them a competitive advantage arising from a built-in market for their games and the ability to test market new games in their own arcades. In addition, wall machines compete for floor space in arcades with token machines, the sales of which have expanded rapidly in the last several years, in part as a result of low price competitors from outside Germany. GAMING MACHINE MANAGEMENT OPERATIONS. The competition for obtaining and renewing gaming machine routes in Nevada is high and continues to intensify. Such competition has, over time, reduced Alliance's gross profit margins for such operations. In addition, such competition has required Alliance to provide substantial financial incentives and incur financial risks to retain or obtain certain gaming machine route locations. Such incentives include long-term lease commitments, guarantees of leases in favor of owners of local establishments, substantial advance deposits, payments of lease rentals in advance and loans for buildings and tenant-improvement costs. Although Alliance believes that it now has adequate procedures for evaluating and managing such risks, historically substantial losses have been incurred in connection with such transactions reflecting, in part, former management's willingness to accept higher levels of risk to further its policy of emphasizing market share. Notwithstanding the change in the Company's business strategy to one emphasizing profitability rather than market share, the future success of the Company's machine management operations will continue to be dependent to some extent on its ability and willingness to provide such financial inducements. Although Alliance has historically generated sufficient new machine management contracts to offset the loss of old machine management contracts, due to increased competition, the increased sophistication and bargaining power of customers and possibly other factors not yet known, there can be no assurance that the Company will be able to obtain new machine management contracts or renew or extend its current space leases or revenue-sharing arrangements upon their expiration or termination, or that, if renewed or extended, the terms will be favorable to the Company. In Louisiana, the Company is subject to extensive competition for contracts to operate video poker machines, and the Company's racetrack and OTBs compete with various truck stops and locations with liquor licenses throughout the New Orleans area, as well as riverboat gaming and one land-based casino which may re-open in New Orleans. CASINO OPERATIONS. The operation of casinos is also a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and success of marketing programs. In Sparks/Reno, Nevada, the principal competition for the Company's operations comes from larger casinos focusing on the local market. The Company's one dockside casino in Vicksburg, Mississippi faces substantial direct competition from other dockside gaming facilities in the region. PRODUCT DEVELOPMENT The future success of the Company depends to a large extent upon its ability to design, manufacture and market technologically sophisticated products that achieve high levels of player acceptance. The development of a successful new product or product design by a competitor could adversely affect sales of the Company's products and force it to respond quickly with its own competing products. The Company's plans with respect to the introduction of more sophisticated technology into the electronic gaming machine market are designed to lead to an increase in market share and profitability for the Company. See "Business." However, no products incorporating such technology have reached the development stage, and there is no assurance that any such products will be developed, or that if developed they will receive necessary regulatory approvals or be commercially successful. 21 CUSTOMER FINANCING Management believes that customer financing terms have become an increasingly important competitive factor in certain emerging markets. Competitive conditions sometimes require Gaming to grant extended payment terms on electronic gaming machines and other gaming equipment. Approximately 75% of Gaming's slot and video gaming machine customers pay within 90 days or less. Approximately 25% of Gaming's sales, primarily in certain emerging gaming markets such as riverboat casinos and Indian gaming casinos, are financed over extended periods as long as 36 months and bear interest at rates ranging from 8% to 14%. While customer financings are normally collateralized by such equipment, the resale value of the collateral in the event of a default may be less than the amount financed. Accordingly, Gaming has greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. In addition, in certain situations, Gaming has participated in the financing of other gaming-related equipment manufactured by third parties in the emerging North American gaming markets. International sales by Gaming are generally consummated on a cash basis or financed over a period of one year or less. Wulff provides customer financing for approximately 20% of its sales, and management expects this practice to increase during the latter half of 1996. See "Business--German Operations--Operations of Wulff--Sales and Marketing." SALES TO NON-TRADITIONAL GAMING MARKETS The continued growth of the non-traditional markets outside of Nevada and Atlantic City, New Jersey for electronic gaming machines is contingent upon the public's acceptance of these markets and an ongoing regulatory approval process by Federal, state and local governmental authorities. The Company cannot predict which new jurisdictions or markets, if any, will approve the operation of electronic gaming machines, the timing of any such approval or the level of the Company's participation in any such markets. INVESTMENT IN MINORITY-OWNED SUBSIDIARY Alliance invested $1,580,000 for a 50% interest in Kansas Financial Partners, L.L.C. ("KFP") in 1994. KFP owns a second mortgage in the amount of $3,205,000, plus accrued interest, secured by a greyhound racing facility in Frontenac, Kansas owned by Camptown Greyhound Racing, Inc. ("Camptown"). Camptown filed for protection under Chapter 11 of the U.S. Bankruptcy Code in January of 1996. KFP intends to pursue its rights to protect its collateral, including foreclosing on the second mortgage, which would require KFP to assume or pay the first mortgage of approximately $2,000,000. There can be no assurance that KFP will be able to gain control of the greyhound racing facility and obtain a license to operate the facility, or that Alliance will be able to recover its investment in KFP. Additionally, Alliance owns a 50% interest in Kansas Gaming Partners, L.L.C. ("KGP") which owns the rights to operate gaming machines and/or casino style gaming at the greyhound racing facility if and when such gaming becomes legal in Kansas. The Kansas legislature has considered gaming bills during the 1996 session although none have passed. There can be no assurance that gaming of any type will ever be legalized in Kansas and management intends to continue to evaluate the recoverability of its investment. FOREIGN OPERATIONS The Company's business in foreign markets is subject to the risks customarily associated with such activities. These risks include fluctuations in foreign currency exchange rates and controls, expropriation, nationalization and other economic, tax and regulatory policies of local governments as well as the laws and policies of the United States affecting foreign trade and investment. BGII does not generally enter into foreign exchange contracts to hedge its exposure to foreign exchange rate fluctuations. KEY PERSONNEL The success of the Company will be dependent, to a significant extent, upon the continued services of a relatively small group of executive personnel. The loss or unavailability of one or more of such executive officers or the inability to attract or retain key employees in the future could have an adverse effect upon the Company's operations. See "Management." 22 STRICT REGULATION BY GAMING AUTHORITIES The manufacture and distribution of gaming machines and the conduct of gaming operations is subject to extensive Federal, state, local and foreign regulation by various gaming authorities (each, a "Gaming Authority"). Although the laws and regulations of the various jurisdictions in which the Company operates vary in their technical requirements and are subject to amendment from time to time, virtually all of these jurisdictions require licenses, permits, documentation of the qualification, including evidence of integrity and financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines and gaming operations as well as for the officers, directors, major stockholders and key personnel of such companies. Alliance and BGII and their key personnel have obtained, or applied for, all government licenses, registrations, finding of suitability, permits and approvals necessary for the manufacture and distribution, and operation where permitted, of their gaming machines in the jurisdictions in which Alliance and BGII currently do business. However, there can be no assurance that such licenses, registrations, finding of suitability, permits or approvals will be given or renewed in the future or that the Company will obtain the licenses necessary to operate in emerging markets. The Company was pursuing a permanent manufacturer's license for Gaming as it relates to the land-based casino in New Orleans. However, in November 1995, the operator of the land-based casino in New Orleans filed for bankruptcy reorganization and ceased operations. That action resulted in the termination of funding for the regulatory operations of the Louisiana Economic Development Gaming Corporation ("LEDGC") and, shortly thereafter, the Attorney General of Louisiana took control of the agency and effectively closed its operations and dismissed its President and employees. The foregoing occurred prior to completion of review of Gaming's pending application. In addition, the Company's application for renewal of Gaming's license as a gaming-related casino service industry in New Jersey is pending before the New Jersey Casino Control Commission (the "New Jersey Commission"). See "--Ongoing BGII Regulatory Investigations" and "Gaming Regulation and Licensing." The Company currently has an agreement with Fair Grounds Corporation, Jefferson Downs Corporation and Finish Line Management Corporation (collectively, "Fair Grounds") to be the exclusive operator of video poker machines at the only racetrack and ten associated OTBs in the greater New Orleans area. The governor of Louisiana has proposed a referendum on the legality of gaming activities in Louisiana, which proposal is scheduled to be considered at the special session of the legislature which convened on March 25, 1996. Any such referendum which did not specifically exclude OTBs would, if passed, have a material adverse effect on the operations of the Company. OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY The Gaming Authorities may, in their discretion, require the holder of any debt security of the Company, such as the Notes, to file applications, be investigated and be found suitable to own such debt security of the Company. If a record or beneficial owner of the Notes is required by a Gaming Authority to be found suitable, such owner will be required to apply for a finding of suitability within 30 days after request by such Gaming Authority, or within such earlier time as required by such Gaming Authority. The applicant for a finding of suitability generally must pay all costs of the investigation for such finding of suitability and in Nevada must provide an initial deposit as determined by the Nevada State Gaming Control Board to pay the anticipated costs and charges incurred in the investigation and deposit such additional sums as are required by the Nevada State Gaming Control Board to pay final costs and charges. If a Gaming Authority determines that a holder is unsuitable to own the Notes or to have any other relationship with the Company, then the Company can be sanctioned, including by the loss of its approvals, if without the prior approval of the Gaming Authorities, it; (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company will be permitted to repurchase a holder's Note pursuant to a Required Regulatory Redemption. See "Description of the Notes-- Optional Redemption." 23 Any person who fails or refuses to apply for a finding of suitability within the period of time required or prescribed by a Gaming Authority may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any holder of the Notes found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Notes beyond such period of time prescribed by a Gaming Authority may be guilty of a criminal offense. See "Gaming Regulation and Licensing." ONGOING BGII REGULATORY INVESTIGATIONS In May 1994, an investigation of BGII's former VLT Louisiana distributor culminated in the indictment by a United States grand jury and subsequent conviction in New Orleans of 18 individuals including certain of the former distributor's officers, directors, employees and others. In addition, Alan Maiss, a former director and president of BGII, pled guilty to misprision of a felony in connection with such investigation. BGII, its subsidiaries and its current employees were not subject to such investigation. BGII's activities with regard to its former VLT distributor in Louisiana have been the subject of current inquiries by gaming regulators. The gaming authorities in Ontario, Canada, who have investigated the matter, issued a gaming registration to Bally Gaming, Inc. on February 8, 1996. The New Jersey Commission is currently reviewing such proceedings in connection with Gaming's application for a license renewal. An adverse determination by a gaming regulator in any jurisdiction could result in the loss of the Company's ability to do business in that jurisdiction and could have the effect of discouraging gaming operators from doing business with the Company. In addition, further regulatory scrutiny in other jurisdictions may follow any such adverse determination. See "Business--Other Litigation" and "Gaming Regulation and Licensing." CERTAIN LITIGATION; BALLY TRADE NAME Bally Entertainment Corporation ("BEC"), the licensor of the "Bally" trade name, has claimed that a merger between BGII and the Merger Subsidiary will result in the loss of BGII's right to use such trade name. The "Bally" trade name is an important component of the Company's marketing strategy. On November 20, 1995, Alliance, the Merger Subsidiary and BGII commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment that the Company will be permitted to use the "Bally" trade name subsequent to the Merger. On November 28, 1995, BEC commenced an action against BGII, Gaming, Alliance and the Merger Subsidiary in Federal District Court in New Jersey seeking to enjoin such parties from using the "Bally" trade name. On February 16, 1996 BGII received notice from BEC alleging that BGII had violated the license agreement relating to such trade name by, among other things, granting to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which provides Bally Gaming, Inc.'s revolving line of credit, a security interest in general intangibles. In such notice, BEC also stated that as a result of the foregoing, it was immediately terminating the License Agreement. Loss of the "Bally" trade name, should such loss occur, may have a material adverse effect on the business, results of operations and financial condition of the Company, taken as a whole. WMS has instituted a lawsuit in New York State Court against BGII alleging, among other things, that $4.8 million is due and payable from BGII to WMS as a result of the termination of BGII's merger agreement with WMS. Pursuant to the Merger Agreement, Alliance has agreed to indemnify BGII against such a claim under certain circumstances. Prospective purchasers should read the description of these and other litigation proceedings currently pending against Alliance and BGII, as well as certain purported class actions, under the captions "Business--Litigation Relating to the Merger" and "--Other Litigation." GAMING TAXES AND VALUE ADDED TAXES Gaming operators are typically subject to significant taxes and fees in addition to corporate income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees, which could occur prospectively or retroactively, would adversely affect the Company. Sales of Wulff's products in Germany are generally subject to V.A.T. The operations of Wulff had benefitted from a special tax rebate that was phased out from January 1, 1992 to January 1, 1994. See "Gaming Regulation and Licensing--Germany." In addition, during 1995, Wulff increased the amount of V.A.T. reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's tax returns for the years 24 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. The Company pays and expects to continue to pay substantial taxes and fees in Nevada, Louisiana and Mississippi and expects to pay substantial taxes and fees in any other jurisdiction in which it conducts gaming operations. FRAUDULENT TRANSFER CONSIDERATIONS The obligations of the Company under the Notes may be subject to review under state or Federal fraudulent transfer laws in the event of the bankruptcy or other financial difficulty of the Company. Under those laws, if a court in a lawsuit by an unpaid creditor or representative of creditors of the Company, such as a trustee in bankruptcy, or the Company as debtor-in-possession, were to find that at the time the Company incurred its obligations under the Notes, it (a) did so with actual intent to hinder, delay or defraud its creditors or (b) did not receive reasonably equivalent value or fair consideration therefor, and either (i) was insolvent, (ii) was rendered insolvent, (iii) was engaged in a business or transaction for which its remaining unencumbered assets constituted unreasonably small capital or (iv) intended to incur or believed that it would incur debts beyond its ability to pay as such debts matured, such court could avoid the Company's obligations under the Notes and direct the return of any amounts paid thereunder to the Company or to a fund for the benefit of its creditors. Similarly, the obligations of each Guarantor under its guarantee of the Notes, as well as the security interest granted by such Guarantor in its assets to secure the Notes and such guarantee, may be subject to review under such laws in the event of the bankruptcy or other financial difficulty of such Guarantor. In the event that a court were to find that at the time such Guarantor incurred such obligations or granted such security interest the factors set forth in either clause (a) or (b) in the foregoing paragraph applied to such Guarantor, such court could avoid such Guarantor's obligations under its guarantee, as well as the security interests securing such guarantee, and direct the return of any amounts paid under such guarantee to such Guarantor or to a fund for the benefit of its creditors. Among other things, a court might conclude that a Guarantor did not receive reasonably equivalent value or fair consideration for its guarantee to the extent that the economic benefits realized by it in the Transaction were less than the aggregate amount of its liability under its guarantee. The measure of insolvency for purposes of the foregoing will vary depending on the law of the jurisdiction being applied. Generally, however, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its property at a fair valuation or if the present fair salable value of its assets is less than the amount that would be required to pay its probable liability on its existing debts as they become absolute and matured. ABSENCE OF PUBLIC MARKET; POTENTIAL VOLATILITY OF MARKET PRICES The Company does not intend to list the Notes on a national securities exchange or to seek the admission thereof for trading in the National Association of Securities Dealers Automated Quotation System. The Underwriters have advised the Company that, following the consummation of the Note Offering, they intend to make a market in the Notes, but are not obligated to do so and may discontinue any such market making at any time without notice. Further, there can be no assurance as to the liquidity of, or that an active trading market will develop for, the Notes. In addition, factors such as quarterly fluctuations in the Company's financial and operating results, announcements by the Company or others and developments affecting the Company customers or the gaming industry generally could cause the market price of the Notes to fluctuate substantially. 25 THE MERGER AND RELATED FINANCINGS On October 18, 1995, Alliance entered into the Merger Agreement with BGII, a Delaware corporation, and the Merger Subsidiary, a Delaware corporation and wholly-owned subsidiary of Alliance. Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, the Merger Subsidiary will merge into BGII which will become a wholly-owned subsidiary of Alliance. The Merger consideration to BGII stockholders will be approximately $76.7 million in cash, $35.0 million in Preferred Stock and $2.9 million in Common Stock, assuming 10,799,501 shares of BGII common stock outstanding, less 1,000,000 shares owned by Alliance which will be canceled upon consummation of the Merger. Alliance will also retire approximately $70.7 million of BGII's outstanding debt (including prepayment premium and original issue discount), plus accrued and unpaid interest, in connection with the Merger. The Merger Agreement provides that Alliance will honor the terms of all employment agreements to which BGII is a party. Upon consummation of the Merger and the filing of a Certificate of Merger with the Secretary of State of the State of Delaware (the "Effective Time"), the following executive officers of BGII will be entitled, pursuant to the termination of their employment agreements and performance unit awards with BGII, to the following lump-sum payments, without discount to present value, in connection with the termination of their respective employment agreements and performance unit awards: Richard Gillman, $5.0 million payable in cash; and Neil Jenkins, $1.3 million payable $0.8 million in cash and $0.5 million in Common Stock valued at the Alliance Average Trading Price (defined in the Merger Agreement as the average daily closing price per share of the Common Stock as reported through NASDAQ NMS for the ten consecutive trading days ending on (and including) the fifth trading day prior to the Effective Time) but in no event more than $6.00 nor less than $4.25 per share. Robert Conover and Alliance have agreed that at the Effective Time, he will receive $0.7 million, payable $0.2 million in cash and $0.5 million in Common Stock (valued at the Alliance Average Trading Price but in no event greater than $6.00 or less than $4.25 per share), and that he will remain as President of Systems. Hans Kloss and Alliance have agreed that at the Effective Time, Mr. Kloss will receive $1.5 million in cash and $3.0 million in Common Stock (valued at the Alliance Average Trading Price but in no event more than $6.00 nor less than $4.25 per share) and that he will continue as President of BGII for a period of one year. Mr. Kloss and Alliance have also agreed that his current employment arrangement with Wulff will continue until the end of its term in May 1998 and that Mr. Kloss will be entitled to certain bonus payments based on future performance. In addition, the Company will assume BGII's obligations with respect to each outstanding stock option and warrant to purchase shares of BGII common stock, subject to certain modifications being presented for approval by BGII stockholders. The BGII stock options and warrants assumed by Alliance will continue to have the same terms and conditions except that (i) (A) all BGII stock options subject to provisions of stock option plans which shorten the exercise period by reason of the Merger and (B) all BGII stock options held by directors of BGII shall be amended to the extent necessary to permit such BGII stock option to remain exercisable for the lesser of (x) the full option period immediately prior to the Merger, (y) three years after the completion of the Merger or (z) except with respect to options held by Messrs. Gillman, Jenkins and Kloss, the period ending on the date on which the option holders' employment is terminated for cause or voluntarily; and (ii) unless the terms thereof explicitly require otherwise, each BGII stock option and warrant will be exercisable for the Merger consideration per share of BGII common stock subject to such option or warrant at the option price per share of such BGII stock option or warrant in effect immediately prior to the Effective Time, except that at the election of any employee of BGII (other than Messrs. Gillman, Jenkins and Kloss) immediately prior to the Effective Time, any such BGII options held by such person (not more than 552,500 in the aggregate) will be instead exercisable for a number of shares of Common Stock equal to the number of shares of BGII common stock subject thereto at an exercise price equal to the Alliance Average Trading Price. At April 1, 1996, an aggregate of 1,052,500 shares of BGII common stock were subject to options granted to employees and directors under various stock option plans or as replacement options with respect 26 thereto (of which options with respect to 552,500 shares are expectd to remain outstanding after the Merger) and an aggregate of 1,498,000 shares of BGII common stock were subject to warrants issued by BGII in connection with certain financing transactions. A financial institution has agreed to purchase privately at the time of consummation of the Merger $5.0 million of the equity of Alliance at a price equal to the lower of $4.56 (the average trading price of the Common Stock for the five trading day period immediately preceding the agreement) and the price of the Common Stock in the Common Stock Offering. This investment would be in the form of Common Stock to the extent of 4.9% of the total Common Stock outstanding at the time, taking into account Common Stock to be issued in the Merger and the Common Stock Offering, with the remainder to be in the form of non-voting special stock convertible into Common Stock. The Company anticipates, and it is assumed for all purposes herein, that all $5.0 million will be issued in the form of Common Stock. SOURCES AND USES OF FUNDS The following table sets forth the anticipated sources and uses of funds to be used to consummate the Merger and related transactions based on the Company's cash and debt balances as of December 31, 1995. The actual balances and number of shares outstanding may vary based on the date of consummation of the Transaction. (IN MILLIONS)
ANTICIPATED SOURCES OF FUNDS CASH SOURCES: Notes................................ $ 75.0 Preferred Stock...................... 15.0 Common Stock (Private Placement/ Common Stock Offering).............. 65.0 Available Cash....................... 20.0 --------- Total Cash Sources............... 175.0 --------- ANTICIPATED USES OF FUNDS CASH USES: Cash to BGII Stockholders(a)......... $ 76.7 Retire BGII Debt (includes prepayment premium and original issue discount)(b)......... 70.7 Employee Contract Termination Costs and Performance Unit Awards(c)...... 7.6 Fees and Expenses(d):................ 20.0 --------- Total Cash Uses.................... 175.0 ---------
NON-CASH SOURCES: Preferred Stock...................... 35.0 Common Stock......................... 2.9 Common Stock Issued in Partial Satisfaction of Employee Contract Termination Costs and Performance Unit Awards(c)...................... 4.0 --------- Total Non-Cash Sources........... 41.9 --------- Total Sources.................. $ 216.9 --------- --------- NON-CASH USES: Preferred Stock to BGII Stockholders(e)..................... 35.0 Common Stock to BGII Stockholders(f)..................... 2.9 Common Stock Issued in Partial Satisfaction of Employee Contract Termination Costs and Performance Unit Awards(c)...................... 4.0 --------- Total Non-Cash Uses.............. 41.9 --------- Total Uses..................... $ 216.9 --------- ---------
- ------------------------ (a) Represents the cash consideration to be paid to BGII stockholders in the Merger consisting of approximately $7.83 per share of BGII common stock, calculated in accordance with the terms of the Merger Agreement. (b) Represents retirement of the following debt of BGII outstanding at December 31, 1995: (i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a prepayment premium of 101% of the aggregate principal amount thereof plus original issue discount of $0.3 million; (ii) $15.9 million under Wulff bank lines of credit, of which $1.6 million matures ratably per quarter through March 31, 1998 and bears interest at a rate of 6.95% per annum, $11.2 million is due on demand and bears interest at a fluctuating rate tied to an international borrowing rate plus 1% (5.3% per annum at December 31, 1995) and $3.1 million is due on demand and bears interest at a fluctuating rate tied to an international borrowing rate plus 1% (4.8% per annum at December 31, 1995); (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 27 (iii) $9.4 million under Bally Gaming, Inc.'s bank revolving line of credit, which matures on March 31, 1997 and bears interest at a fluctuating rate based on the bank's prime rate plus 1 1/2% (10% per annum at December 31, 1995); and (iv) Other notes of BGII payable aggregating $5.0 million due in varying amounts from 1996 through 1999 bearing interest at rates varying from 5% to 12%. Accrued and unpaid interest on such debt is not reflected as such amounts will be paid using available cash and are not considered material. (c) Includes $5.0 million payable in cash to Richard Gillman and $1.3 million payable to Neil Jenkins consisting of $0.8 million in cash and $0.5 million in Common Stock, all pursuant to agreements with Alliance in connection with the termination of their respective employment agreements and performance unit awards. Additionally, Hans Kloss, who will remain with the Company, will receive a total of $4.5 million consisting of $1.5 million in cash and $3.0 million in Common Stock and Robert Conover, who will remain with the Company, will receive a total of $0.7 million consisting of $0.2 million in cash and $0.5 million in Common Stock, in connection with their employment agreements and performance unit awards. The Common Stock portion of each of such payments will be valued at the Alliance Average Trading Price but in no event more than $6.00 nor less than $4.25 per share. See "The Merger and Related Financings." (d) Total estimated Alliance and BGII Transaction-related fees and expenses are $32.0 million, of which $12.0 million has been paid through December 31, 1995. (e) Represents the Preferred Stock consideration to be paid to BGII stockholders in the Merger consisting of approximately $3.57 per share of BGII common stock, calculated in accordance with the terms of the Merger Agreement to equate to the value per share of Preferred Stock obtained in the Preferred Stock Offering. (f) Represents the Common Stock consideration to be paid to BGII stockholders in the Merger consisting of approximately $0.30 per share of BGII common stock valued at the Alliance Average Trading Price. USE OF PROCEEDS The net proceeds of the Note Offering are estimated to be approximately $ million. The Company intends to use the net proceeds of the Note Offering, together with the net proceeds of the Common Stock Offering, the Private Placement, the Preferred Stock Offering and available cash to consummate the Merger and related transactions. See "The Merger and Related Financings." 28 CAPITALIZATION The following table sets forth the consolidated capitalization as of December 31, 1995 (i) of Alliance on a historical basis, (ii) of BGII on a historical basis, and (iii) of the Company on a pro forma basis as adjusted to reflect the Transaction (including the use of the estimated proceeds from the Offerings and the Private Placement). See "The Merger and Related Financings," "Use of Proceeds," and "Unaudited Pro Forma Condensed Combined Financial Information."
AS OF DECEMBER 31, 1995 -------------------------------------- THE COMPANY ALLIANCE BGII PRO FORMA ACTUAL ACTUAL AS ADJUSTED ---------- ---------- -------------- (IN THOUSANDS) Cash, Cash Equivalents and Securities Available for Sale................. $ 29,468 $ 5,526 $ 6,854 ---------- ---------- -------------- ---------- ---------- -------------- Long-Term Debt: New Senior Secured Notes(1)(2)......................................... $ -- $ -- $ 75,000 Convertible Debentures................................................. 85,000 -- 85,000 Hospitality Franchise Systems.......................................... 8,476 -- 8,476 Due to Stockholder, Net of Unamortized Discount of $0.629 at December 31, 1995.............................................................. 2,797 -- 2,797 10 3/8% Senior Secured Notes due July 1998............................. -- 39,656 -- Wulff Revolving Lines of Credit........................................ -- 15,905 -- Bally Gaming, Inc. Revolving Line of Credit............................ -- 9,400 -- Other Notes Payable.................................................... 3,833 4,983 3,833 ---------- ---------- -------------- Total Long-Term Debt..................................................... 100,106 69,944 175,106 New Preferred Stock(1)................................................... -- -- 50,014 Total Stockholders' Equity (Deficiency)(1)(3)(4)(5)...................... (717) 88,410 59,611 ---------- ---------- -------------- Total Capitalization..................................................... $ 99,389 $ 158,354 $ 284,731 ---------- ---------- -------------- ---------- ---------- --------------
- ------------------------ (1) Issuance costs relative to the Note Offering and the Preferred Stock Offering are assumed to be capitalized and amortized over the relative terms of these instruments. Issuance costs relative to the Common Stock Offering and the Private Placement have been offset against proceeds. (2) Alliance has agreed to use commercially reasonable good faith efforts to cause all of its obligations in respect of the Notes to be assumed by a subsidiary of Alliance, which subsidiary would own all assets then owned by the Company (other than the Company's equity interests in such subsidiary), but which would not have any obligations in respect of the Convertible Debentures. See "Description of the Notes." (3) Excludes up to (i) 2,168,834 shares of Common Stock subject to options issued and outstanding under the United Gaming, Inc. 1991 Long-Term Incentive Plan, as amended ("the Alliance 1991 Stock Option Plan") and the Gaming and Technology 1984 Employee Stock Option Plan (the "the Alliance 1984 Stock Option Plan"), of which options covering 987,310 shares were exercisable as of December 31, 1995; (ii) 2,000,000 shares of Common Stock which will be issuable upon exercise of warrants issued to Alfred H. Wilms; (iii) 2,750,000 shares of Common Stock issuable upon exercise of warrants issued to Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland"); (iv) 1,250,000 shares of Common Stock issuable upon exercise of warrants issued to Gaming Systems Advisors, L.P. ("GSA") on September 21, 1993 and up to 2,500,000 shares of Common Stock which may be issued to GSA upon exercise of additional warrants to be granted upon consummation of the Merger; (v) 8,500,000 shares of Common Stock issuable upon conversion of the Convertible Debentures; and (vi) an aggregate additional 1,780,000 shares issuable upon the exercise of other options, warrants and convertible securities. See "Risk Factors--Outstanding Options and Convertible Securities," "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Holders and Management--Outstanding Options and Convertible Securities." (4) Excludes (i) approximately 12,308 shares of Common Stock issuable to the non-employee directors of BGII upon exercise of options granted under the BGII 1991 Directors' Plan and the BGII 1994 Plan (assuming a price of $4.88 per share of Common Stock) and (ii) 552,500 shares of Common Stock issuable immediately prior to the Effective Time upon the exercise of options held by employees other than Messrs. Gillman, Jenkins and Kloss granted under the BGII 1991 Incentive Plan, based on the assumption that all such employees elect to have their BGII options exercisable for the number of shares of Common Stock equal to the number of shares of BGII common stock subject thereto. See "The Merger and Related Financings" and "Security Ownership of Certain Beneficial Holders and Management--Outstanding Options and Convertible Securities." (5) Includes approximately $4.0 million payable in shares of Common Stock, subject to a collar on the Common Stock price (812,923 shares, assuming a share price of $4.88) to Messrs. Jenkins, Kloss and Conover in connection with employment contract termination payments and performance unit awards. The Company currently anticipates obtaining one or more working capital revolving facilities at Gaming and Wulff (providing up to $ of borrowing availability in aggregate), which would be secured by the inventory and accounts receivable of such entities and their subsidiaries. The Company has not received any commitment for any such facility and no assurance can be given that it will be able to obtain any such facility on terms acceptable to the Company. At closing, even if such facilities are obtained, the Company expects that no borrowings will have been made under such facilities. 29 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The Unaudited Pro Forma Condensed Combined Statements of Operations present results of operations of the Company assuming the Transaction occurred on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and December 31, 1995 and for the six months ended December 31, 1995, and on July 1, 1993 for the statements for the six months ended December 31, 1994 and that the Rainbow Casino operations were consolidated. Adjustments necessary to reflect these assumptions and to restate historical combined results of operations are presented in the Pro Forma Adjustments columns, which are further described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information. The Unaudited Pro Forma Condensed Combined Balance Sheet presents the financial position of the Company assuming the Transaction occurred on December 31, 1995. Adjustments necessary to reflect this assumption and to restate historical combined balance sheets are presented in the Pro Forma Adjustments column, which are further described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information. The historical unaudited financial information for Alliance is derived from the audited financial statements of Alliance for the year ended June 30, 1995, and the unaudited reports of Alliance for the six-month periods ended December 31, 1994 and 1995. The historical unaudited financial information for BGII is derived from the unaudited interim information generated as of and for the periods ended June 30, 1994 and 1995. BGII operating results for the twelve-month period ended June 30, 1995 are calculated by subtracting the unaudited six-month period ended June 30, 1994 results from the audited year ended December 31, 1994 results and adding the unaudited six-month period ended June 30, 1995 results. BGII operating results for the six-month periods ended December 31, 1994 and 1995 are calculated by subtracting the unaudited six-month periods ended June 30, 1994 and 1995 results from the audited years ended December 31, 1994 and 1995 results, respectively. The Supplemental Unaudited Pro Forma Information presents pro forma cash flow and fixed charges information. Additionally, the Supplemental Unaudited Pro Forma Condensed Combined Statements of Operations reflect pro forma earnings for the twelve-month period ended December 31, 1995 assuming the Transaction and the effect of consolidating the Rainbow Casino operating results occurred on January 1, 1995. The related pro forma adjustments are consistent with those assumed elsewhere herein. The following information does not purport to present the financial position or results of operations of the Company had the Transaction and events assumed therein occurred on the dates specified, nor is it necessarily indicative of the results of operations of the Company as they may be in the future or as they may have been had the Transaction and the effect of consolidating the Rainbow Casino operating results been consummated on the dates shown. The Unaudited Pro Forma Condensed Combined Financial Information is based on certain assumptions and adjustments described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information and should be read in conjunction therewith and with "The Merger and Related Financings," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited historical consolidated financial statements and related notes thereto of Alliance and BGII included elsewhere herein. 30 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DECEMBER 31, 1995 (1)(2) (IN THOUSANDS)
HISTORICAL ---------------------- PRO FORMA PRO FORMA ALLIANCE BGII COMBINED ADJUSTMENTS COMBINED ---------- ---------- ---------- -------------- ----------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents and Securities $ 29,468 $ 5,526 $ 34,994 $ 144,975(a) $ 6,854 Available for Sale............................ (70,688)(b) (76,700)(c) (7,559)(c) (10,410)(c) 2,285(d) (10,043)(e) Receivables, Net............................... 3,110 87,176 90,286 90,286 Inventories.................................... 672 51,591 52,263 52,263 Other.......................................... 3,395 3,983 7,378 7,378 ---------- ---------- ---------- ----------- Total Current Assets......................... 36,645 148,276 184,921 156,781 Property and Equipment, Net...................... 50,870 23,244 74,114 74,114 Other Assets: Long Term Receivables, Net..................... 4,809 9,981 14,790 14,790 Excess of Costs over Net Assets of an Acquired 3,733 5,434 9,167 42,974(c) 52,141 Business, Net................................. Intangible Assets, Net......................... 11,638 5,380 17,018 5,202(c) 22,220 Investment in Minority Owned Subsidiary........ 1,585 1,585 1,585 Other, Net..................................... 7,592 2,001 9,593 4,275(a) 13,371 (497)(b) ---------- ---------- ---------- ----------- Total Other Assets........................... 29,357 22,796 52,153 104,107 ---------- ---------- ---------- ----------- Total Assets................................. $ 116,872 $ 194,316 $ 311,188 $ 335,002 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable............................... $ 2,295 $ 18,556 $ 20,851 $ 20,851 Accrued Liabilities............................ 10,187 17,406 27,593 (3,174)(e) 24,419 Current Maturities of Long Term Debt........... 4,054 14,957 19,011 (14,957)(b) 4,054 ---------- ---------- ---------- ----------- Total Current Liabilities.................... 16,536 50,919 67,455 49,324 ---------- ---------- ---------- ----------- Long Term Debt, Less Current Maturities.......... 96,052 54,987 151,039 75,000(a) 171,052 (54,987)(b) Other Liabilities................................ 4,082 4,082 4,082 ---------- ---------- ---------- ----------- Total Liabilities............................ 116,670 105,906 222,576 224,458 Minority Interest................................ 919 919 919 Preferred Stock.................................. 15,000(a) 50,014 35,014(c) STOCKHOLDERS' EQUITY (DEFICIENCY): Common Stock, Par.............................. 1,298 108 1,406 1,341(a) 2,780 60(c) 81(c) (108)(c) Paid-in Capital................................ 32,134 68,345 100,479 57,909(a) 96,805 (68,345)(c) 2,880(c) 3,882(c) Retained Earnings (Accumulated Deficit)........ (32,562) 1,842 (30,720) (744)(b) (39,895) (497)(b) (1,842)(c) 777(d) (6,869)(e) Cumulative Translation Adjustments............. 18,662 18,662 (18,662)(c) Other Stockholders' Equity..................... (1,587) (547) (2,134) 547(c) (79) 1,508(d) ---------- ---------- ---------- ----------- Total Stockholders' Equity (Deficiency)...... (717) 88,410 87,693 59,611 ---------- ---------- ---------- ----------- Total Liabilities and Stockholders' Equity (Deficiency)................................ $ 116,872 $ 194,316 $ 311,188 $ 335,002 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
See Notes To Unaudited Pro Forma Condensed Combined Financial Information 31 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1995(1)(3) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIANCE ----------------------------------- BGII AS ---------- HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ---------- ----------- -------- ---------- REVENUES: Gaming.................................................... $128,114 $14,809(f) $142,923 $ Food and Beverage Sales................................... 3,847 891(f) 4,738 Net Equipment Sales....................................... 27 27 248,701 Other..................................................... 4,432 ---------- -------- ---------- Total Revenues.......................................... 131,988 147,688 253,133 ---------- -------- ---------- OPERATING COSTS: Gaming.................................................... 91,311 2,127(f) 93,438 Food and Beverage......................................... 2,795 334(f) 3,129 Equipment Sales........................................... 12 12 157,538 Selling, General and Administrative....................... 32,611 9,716(f) 39,153 68,651 (3,174)(g) Unusual Charges........................................... 500 Depreciation and Amortization............................. 9,520 893(f) 10,413 8,482 ---------- -------- ---------- Total Operating Costs................................... 136,249 146,145 235,171 ---------- -------- ---------- Operating Income (Loss)..................................... (4,261) 1,543 17,962 OTHER INCOME (EXPENSES): Interest Income........................................... 2,798 2,798 Interest Expense.......................................... (8,133) (988)(f) (9,121) (7,090) Casino Royalty............................................ (810) (2,621)(f) (3,431) Minority Interest......................................... (397) (397) Other, Net................................................ 317 101(f) 418 ---------- -------- ---------- Income (Loss) Before Taxes.................................. (10,486) (8,190) 10,872 Domestic Tax Expense........................................ (265) (265) (290) Foreign Tax Benefit (Expense)............................... (5,779) ---------- -------- ---------- Net Income (Loss)........................................... $(10,751) $ (8,455) $ 4,803 ---------- -------- ---------- ---------- -------- ---------- Preferred Stock Dividend.................................... Net Loss Applicable to Common Shares........................ Income (Loss) Per Common Share(6)........................... $ (.95) $ .45 ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities....................................................................... Cash Flows from Investing Activities....................................................................... Cash Flows from Financing Activities....................................................................... Pro Forma Ratio of Earnings to Fixed Charges................................................................. Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend.................................. AS PRO FORMA ADJUSTED ---------------------- COMBINED ADJUSTMENTS COMBINED -------- ----------- -------- REVENUES: Gaming.................................................... $142,923 $ $142,923 Food and Beverage Sales................................... 4,738 4,738 Net Equipment Sales....................................... 248,728 248,728 Other..................................................... 4,432 4,432 -------- -------- Total Revenues.......................................... 400,821 400,821 -------- -------- OPERATING COSTS: Gaming.................................................... 93,438 93,438 Food and Beverage......................................... 3,129 3,129 Equipment Sales........................................... 157,550 157,550 Selling, General and Administrative....................... 107,804 (5,000)(h) 101,135 (1,669)(i) Unusual Charges........................................... 500 (250)(i) 250 Depreciation and Amortization............................. 18,895 1,132(j) 22,779 2,502(k) (214)(l) 464(m) -------- -------- Total Operating Costs................................... 381,316 378,281 -------- -------- Operating Income (Loss)..................................... 19,505 22,540 OTHER INCOME (EXPENSES): Interest Income........................................... 2,798 2,798 Interest Expense.......................................... (16,211 ) (1,910)(m) (18,121 ) Casino Royalty............................................ (3,431 ) (3,431 ) Minority Interest......................................... (397 ) (397 ) Other, Net................................................ 418 (1,241)(n) (823 ) -------- -------- Income (Loss) Before Taxes.................................. 2,682 2,566 Domestic Tax Expense........................................ (555 ) (555 ) Foreign Tax Benefit (Expense)............................... (5,779 ) 3,779(o) (2,000 ) -------- -------- Net Income (Loss)........................................... $(3,652 ) $ 11 -------- -------- -------- Preferred Stock Dividend.................................... $(7,783 ) -------- Net Loss Applicable to Common Shares........................ $(7,772 ) -------- -------- Income (Loss) Per Common Share(6)........................... $ (.30 ) -------- -------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: $11,092 Cash Flows from Operating Activities...................... -------- -------- $(26,936) Cash Flows from Investing Activities...................... -------- -------- Cash Flows from Financing Activities...................... $ (757 ) -------- -------- Pro Forma Ratio of Earnings to Fixed Charges................ $ 1.06x -------- -------- Pro Forma Deficit of Earnings to Fixed Charges and Preferred $(5,217 ) -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 32 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1995(1)(4) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIANCE ----------------------------------- BGII AS ---------- HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ---------- ----------- -------- ---------- REVENUES: Gaming................................ $74,300 $ $74,300 $ Food and Beverage Sales............... 1,923 1,923 Net Equipment Sales................... 6 6 108,893 Other................................. 2,884 ---------- -------- ---------- Total Revenues...................... 76,229 76,229 111,777 ---------- -------- ---------- OPERATING COSTS: Gaming................................ 50,248 50,248 Food and Beverage..................... 1,426 1,426 Equipment Sales....................... 1 1 71,093 Selling, General and Administrative... 23,172 200(q) 23,372 33,204 Unusual Charges....................... 5,316 Depreciation and Amortization......... 4,906 4,906 5,079 ---------- -------- ---------- Total Operating Costs............... 79,753 79,953 114,692 ---------- -------- ---------- Operating Income (Loss)................. (3,524) (3,724) (2,915) OTHER INCOME (EXPENSES): Interest Income....................... 818 818 Interest Expense...................... (4,288) (4,288) (3,284) Casino Royalty........................ (1,908) (1,908) Minority Interest..................... (276) (276) Other, Net............................ 535 535 ---------- -------- ---------- Income (Loss) Before Taxes.............. (8,643) (8,843) (6,199) Domestic Tax Expense.................... (788) (788) (165) Foreign Tax (Expense) Benefit........... (961) ---------- -------- ---------- Net Loss................................ $(9,431) $(9,631) $ (7,325) ---------- -------- ---------- ---------- -------- ---------- Preferred Stock Dividend................ Net Loss Applicable to Common Shares.... Loss Per Common Share(6)................ $ (.79) $ (.68) ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities.................................................... Cash Flows from Investing Activities.................................................... Cash Flows from Financing Activities.................................................... Pro Forma Deficit of Earnings to Fixed Charges............................................ Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend............... AS PRO FORMA ADJUSTED ---------------------- COMBINED ADJUSTMENTS COMBINED -------- ----------- -------- REVENUES: Gaming................................ $74,300 $ $74,300 Food and Beverage Sales............... 1,923 1,923 Net Equipment Sales................... 108,899 108,899 Other................................. 2,884 2,884 -------- -------- Total Revenues...................... 188,006 188,006 -------- -------- OPERATING COSTS: Gaming................................ 50,248 50,248 Food and Beverage..................... 1,426 1,426 Equipment Sales....................... 71,094 71,094 Selling, General and Administrative... 56,576 (2,500)(r) 44,639 (9,437)(s) Unusual Charges....................... 5,316 (1,750)(s) 3,566 Depreciation and Amortization......... 9,985 566(t) 11,922 1,251(u) (112)(v) 232(w) -------- -------- Total Operating Costs............... 194,645 182,895 -------- -------- Operating Income (Loss)................. (6,639 ) 5,111 OTHER INCOME (EXPENSES): Interest Income....................... 818 818 Interest Expense...................... (7,572 ) (1,216)(w) (8,788 ) Casino Royalty........................ (1,908 ) (1,908 ) Minority Interest..................... (276 ) (276 ) Other, Net............................ 535 535 -------- -------- Income (Loss) Before Taxes.............. (15,042 ) (4,508 ) Domestic Tax Expense.................... (953 ) (953 ) Foreign Tax (Expense) Benefit........... (961 ) 625(x) (336 ) -------- -------- Net Loss................................ $(16,956) $(5,797 ) -------- -------- -------- Preferred Stock Dividend................ $(3,751 ) -------- Net Loss Applicable to Common Shares.... $(9,548 ) -------- -------- Loss Per Common Share(6)................ $ (.36 ) -------- -------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities.. $22,109 -------- -------- Cash Flows from Investing Activities.. $ 215 -------- -------- Cash Flows from Financing Activities.. $(5,357 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(4,508 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(8,259 ) -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 33 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1994(1)(4) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIANCE ----------------------------------- BGII AS ---------- HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ---------- ----------- -------- ---------- REVENUES: Gaming................................ $ 60,372 $ 9,261(p) $ 69,633 $ Food and Beverage Sales............... 1,950 666(p) 2,616 Net Equipment Sales................... 16 16 113,123 Other................................. 2,475 ---------- -------- ---------- Total Revenues.......................... 62,338 72,265 115,598 ---------- -------- ---------- OPERATING COSTS: Gaming................................ 43,867 1,442(p) 45,309 Food and Beverage..................... 1,414 257(p) 1,671 Equipment Sales....................... 9 9 70,835 Selling, General and Administrative... 14,296 6,255(p) 18,543 33,472 (2,008)(q) Depreciation and Amortization......... 4,613 906(p) 5,519 4,608 ---------- -------- ---------- Total Operating Costs................... 64,199 71,051 108,915 ---------- -------- ---------- Operating Income (Loss)................. (1,861) 1,214 6,683 OTHER INCOME (EXPENSES): Interest Income....................... 1,504 1,504 Interest Expense...................... (3,915) (748)(p) (4,663) (3,521) Casino Royalty........................ (1,665)(p) (1,665) Minority Interest..................... (169) (169) Other, Net............................ (286) 73(p) (213) ---------- -------- ---------- Income (Loss) Before Taxes.............. (4,727) (3,992) 3,162 Domestic Tax Expense.................... (290) (290) (170) Foreign Tax (Expense) Benefit........... (2,121) ---------- -------- ---------- Net Income (Loss)....................... $ (5,017) $ (4,282) $ 871 ---------- -------- ---------- ---------- -------- ---------- Preferred Stock Dividend................ Net Loss Applicable to Common Shares.... Income (Loss) Per Common Share(6)....... $ (.45) $ .08 ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities................................................... Cash Flows from Investing Activities................................................... Cash Flows from Financing Activities................................................... Pro Forma Deficit of Earnings to Fixed Charges........................................... Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend.............. AS PRO FORMA ADJUSTED ---------------------- COMBINED ADJUSTMENTS COMBINED -------- ----------- -------- REVENUES: Gaming................................ $69,633 $ $69,633 Food and Beverage Sales............... 2,616 2,616 Net Equipment Sales................... 113,139 113,139 Other................................. 2,475 2,475 -------- -------- Total Revenues.......................... 187,863 187,863 -------- -------- OPERATING COSTS: Gaming................................ 45,309 45,309 Food and Beverage..................... 1,671 1,671 Equipment Sales....................... 70,844 70,844 Selling, General and Administrative... 52,015 (2,500)(r) 49,515 Depreciation and Amortization......... 10,127 566(t) 12,064 1,251(u) (112)(v) 232(w) -------- -------- Total Operating Costs................... 179,966 179,403 -------- -------- Operating Income (Loss)................. 7,897 8,460 OTHER INCOME (EXPENSES): Interest Income....................... 1,504 1,504 Interest Expense...................... (8,184 ) (979)(w) (9,163 ) Casino Royalty........................ (1,665 ) (1,665 ) Minority Interest..................... (169 ) (169 ) Other, Net............................ (213 ) (213 ) -------- -------- Income (Loss) Before Taxes.............. (830 ) (1,246 ) Domestic Tax Expense.................... (460 ) (460 ) Foreign Tax (Expense) Benefit........... (2,121 ) 1,379(x) (742 ) -------- -------- Net Income (Loss)....................... $(3,411 ) $(2,448 ) -------- -------- -------- Preferred Stock Dividend................ $(3,751 ) -------- Net Loss Applicable to Common Shares.... $(6,199 ) -------- -------- Income (Loss) Per Common Share(6)....... $ (.24 ) -------- -------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities.. $10,946 -------- -------- Cash Flows from Investing Activities.. $(11,243) -------- -------- Cash Flows from Financing Activities.. $(1,569 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(1,246 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(4,997 ) -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 34 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995(1)(5) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIANCE ----------------------------------- BGII AS ---------- HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ---------- ----------- -------- ---------- REVENUES: Gaming................................ $142,042 $5,548(y) $147,590 $ Food and Beverage Sales............... 3,820 225(y) 4,045 Net Equipment Sales................... 17 17 244,471 Other................................. 4,841 ---------- -------- ---------- Total Revenues...................... 145,879 151,652 249,312 ---------- -------- ---------- OPERATING COSTS: Gaming................................ 97,692 685(y) 98,377 Food and Beverage..................... 2,807 77(y) 2,884 Equipment Sales....................... 4 4 157,796 Selling, General and Administrative... 41,487 3,461(y) 43,982 68,383 (966)(z) Unusual Charges....................... 5,816 Depreciation and Amortization......... 9,813 (13)(y) 9,800 8,953 ---------- -------- ---------- Total Operating Costs................... 151,803 155,047 240,948 ---------- -------- ---------- Operating Income (Loss)................. (5,924) (3,395 ) 8,364 OTHER INCOME (EXPENSES): Interest Income....................... 2,112 2,112 Interest Expense...................... (8,506) (240)(y) (8,746 ) (6,853) Casino Royalty........................ (2,718) (956)(y) (3,674 ) Minority interest..................... (504) (504 ) Other, Net............................ 1,138 28(y) 1,166 ---------- -------- ---------- Income (Loss) Before Taxes.............. (14,402) (13,041 ) 1,511 Domestic Tax Expense.................... (763) (763 ) (260) Foreign Tax (Expense) Benefit........... (4,644) ---------- -------- ---------- Net Income (Loss)....................... $(15,165) $(13,804) $(3,393) ---------- -------- ---------- ---------- -------- ---------- Preferred Stock Dividend................ Net Loss Applicable to Common Shares.... Loss Per Common Share(6) $ (1.33) $ (.31) ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities................................................... Cash Flows from Investing Activities................................................... Cash Flows from Financing Activities................................................... Pro Forma Deficit of Earnings to Fixed Charges........................................... Pro Forma Deficit of Earnings to Fixed Charges and Preferred Stock Dividend.............. AS PRO FORMA ADJUSTED ---------------------- COMBINED ADJUSTMENTS COMBINED -------- ----------- -------- REVENUES: Gaming................................ $147,590 $ $147,590 Food and Beverage Sales............... 4,045 4,045 Net Equipment Sales................... 244,488 244,488 Other................................. 4,841 4,841 -------- -------- Total Revenues...................... 400,964 400,964 -------- -------- OPERATING COSTS: Gaming................................ 98,377 98,377 Food and Beverage..................... 2,884 2,884 Equipment Sales....................... 157,800 157,800 Selling, General and Administrative... 112,365 (5,000)(aa) 96,259 (11,106)(bb) Unusual Charges....................... 5,816 (2,000)(bb) 3,816 Depreciation and Amortization......... 18,753 1,132(cc) 22,637 2,502(dd) (214)(ee) 464(ff) -------- -------- Total Operating Costs................... 395,995 381,773 -------- -------- Operating Income (Loss)................. 4,969 19,191 OTHER INCOME (EXPENSES): Interest Income....................... 2,112 2,112 Interest Expense...................... (15,599 ) (2,147)(ff) (17,746 ) Casino Royalty........................ (3,674 ) (3,674 ) Minority interest..................... (504 ) (504 ) Other, Net............................ 1,166 (1,241)(gg) (75 ) -------- -------- Income (Loss) Before Taxes.............. (11,530 ) (696 ) Domestic Tax Expense.................... (1,023 ) (1,023 ) Foreign Tax (Expense) Benefit........... (4,644 ) 3,025(hh) (1,619 ) -------- -------- Net Income (Loss)....................... $(17,197) $(3,338 ) -------- -------- -------- Preferred Stock Dividend................ $(7,783 ) -------- Net Loss Applicable to Common Shares.... $(11,121) -------- -------- Loss Per Common Share(6) $ (.42 ) -------- -------- SUPPLEMENTAL INFORMATION:(7) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities.. $22,255 -------- -------- Cash Flows from Investing Activities.. $(15,478) -------- -------- Cash Flows from Financing Activities.. $(4,545 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $ (696 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(8,479 ) -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 35 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION 1. The Unaudited Pro Forma Condensed Combined Financial Statements of Operations are presented as if the combination of Alliance and BGII occurred on July 1, 1994 for the statements of operations for the twelve months ended June 30, 1995 and December 31, 1995 and for the six months ended December 31, 1995, and on July 1, 1994 for the statement of operations for the six months ended December 31, 1994. The Unaudited Pro Forma Condensed Combined Balance Sheet is presented assuming the combination occurred on December 31, 1995 for purposes of presenting the pro forma balance sheet. The combination is expected to be recorded as a purchase transaction in accordance with generally accepted accounting principles and, accordingly, BGII assets and liabilities are presented at their estimated fair values as of that date. The Merger Agreement provides that BGII stockholders will receive in the Merger, in exchange for each of their issued and outstanding shares of common stock, (i) an amount of cash (the "Cash Consideration") determined by dividing $76.7 million by the number of shares of BGII common stock issued and outstanding immediately prior to the Effective Time ($7.83 per share for purposes of presentation of the pro forma financial information), (ii) a fraction of a share of Common Stock equal to the quotient of $0.30 and the Alliance Average Trading Price ($2.9 million in aggregate) and (iii) that number of shares (or fractions thereof) of Preferred Stock having a value as determined in accordance with the Merger Agreement equal to $11.40 less the Cash Consideration of $7.83, or $3.57 per share for purposes of presentation of the pro forma financial information ($35.0 million in aggregate). The price per share of Common Stock used for purposes of these Unaudited Pro Forma Condensed Combined Financial Statements is $4.88, based on the closing price of the Common Stock as reported on the NASDAQ NMS on April 1, 1996. The assumed price per share of the $5.0 million Private Placement is $4.56, based on the average trading price of the Common Stock for the five trading day period immediately preceding the Private Placement agreement. See "The Merger and Related Financings." Foreign taxes result from the income generated by Wulff. Domestic taxes result from Federal consolidated Alternative Minimum Taxes and state and local income taxes. The Rainbow Casino in Vicksburg began operations in July 1994. In March 1995, Alliance completed its acquisition of the general partnership interest in the limited partnership owning the casino and from that point forward the Rainbow Casino's operations have been consolidated with those of Alliance. The Rainbow Casino's operating results have been included in the Pro Forma Condensed Combined Statements of Operations as if it was owned for each period presented. Certain reclassifications of BGII balances have been made to conform to the Alliance reporting format. The following adjustments have been made to arrive at the Unaudited Pro Forma Condensed Combined Financial Information: 2. PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS AT DECEMBER 31, 1995 (a) To adjust for the net cash proceeds of the Offerings and the Private Placement, less estimated fees and expenses which have been capitalized in the case of the Note and Preferred Stock Offerings, and netted against the gross proceeds in the case of the Common Stock Offering and the Private Placement. (b) To adjust for the repayment of $70.7 million of BGII debt as such instruments are intended to be repaid with the proceeds of the Offerings including the remaining original issue discount and other costs associated with the prepayment of the BGII debt totaling $0.8 million. Additionally, certain deferred financing costs related to the BGII debt totaling $0.5 million will be written off. 36 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) (c) The purchase of BGII is presented as follows:
(IN THOUSANDS) CONSIDERATION PAID: Cash paid for original 1 million shares of BGII common stock owned by Alliance..................................................................... $ 10,410 Cash consideration............................................................ 76,700 Value of Common Stock to be exchanged for BGII shares......................... 2,940 Value of Preferred Stock to be exchanged for BGII shares...................... 35,014 Contract termination costs for certain BGII personnel (see below)............. 6,320 -------------- Total consideration........................................................... 131,384 Estimated value of BGII's underlying net assets............................... 88,410 -------------- Excess of costs over the net assets of BGII acquired.......................... $ 42,974 -------------- --------------
The compensation to be paid to BGII personnel consists of cash payable to Messrs. Gillman and Jenkins totaling $5.8 million and Common Stock valued at $0.5 million (the number of shares will be determined using the Alliance Average Trading Price but in no event more than $6.00 nor less than $4.25 per share). As each of the above individuals will not be employed by the Company after the Merger, such costs have been included in the computation of goodwill. Consideration to be paid to Messrs. Kloss and Conover consists of $1.7 million in cash and $3.5 million of Common Stock (the number of shares will be determined using the Alliance Average Trading Price but in no event more than $6.00 nor less than $4.25 per share). As Messrs. Kloss and Conover will remain with the Company, such amounts have been capitalized and will be amortized over the 2.5 and 1 year life of each of their employment agreements, respectively. These transactions have been given simultaneous effect in the Unaudited Pro Forma Condensed Combined Financial Statements since they are conditions of the Merger Agreement. The allocation of purchase cost in the pro forma financial statements is based on available information. After consummation of the Merger, Alliance will arrange for independent appraisal of the significant assets and liabilities of BGII to determine the final allocation of purchase cost. Alliance management does not currently believe that any adjustments to the final allocation of purchase price will have a material effect on the pro forma financial statements. (d) To add back the $1.5 million valuation adjustment net of the tax effect of $0.8 million, for the Alliance-owned BGII common stock, representing the difference between the purchase cost of $10.4 million and the market value at December 31, 1995 of $8.3 million. (e) To record the payment of certain Merger and related expenses assumed to be incurred prior to and concurrent with the pro forma balance sheet date totaling $10.0 million of which $3.2 million has been accrued for at December 31, 1995. 3. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED JUNE 30, 1995 (f) To recognize operations of the Rainbow Casino as if owned for the entire year. (g) Alliance development expenses, which relate to mergers, acquisitions and joint ventures, were reduced to $3.0 million annually resulting in an adjustment of $3.2 million. Such adjustment does not include any effect from the elimination of direct costs related to the Merger shown separately in (i) below. The reduction to $3.0 million reflects the elimination of costs that were being incurred prior to Alliance's accomplishment of its strategic plan to acquire a major gaming machine manufacturing company. To accomplish this reduction Alliance reduced payroll costs and fees paid to consultants and legal costs related to non-BGII transactions it had been pursuing. 37 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) (h) To adjust for synergy cost savings identified to date including elimination of certain duplicative costs, such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. (i) To eliminate costs associated with the Merger incurred by Alliance and BGII totaling $1.7 million and $0.3 million, respectively, consisting of legal, accounting and investment banking fees and related costs. (j) To record the amortization on the goodwill resulting from the Merger. The goodwill is being amortized over 40 years. (k) To amortize the costs associated with the termination of Messrs. Kloss and Conover's existing employment contracts with BGII over the life of their respective employment contracts. (l) To eliminate the amortization of goodwill on the historical financial statements of BGII. (m) To adjust for the interest expense on the $75.0 million of debt which Alliance currently intends to issue as part of the financing of the Merger, and to amortize the debt issuance costs over 7 years, net of the elimination of the interest on the BGII debt being refinanced. For every 0.50% change in the interest rate for the $75.0 million debt financing, the correlating change in interest expense for the year would be $0.4 million on a pre-tax basis. (n) To adjust for the costs associated with BGII's debt prepayment consisting of the original issue discount, prepayment costs and deferred financing costs totaling $1.2 million. (o) To adjust for the effect of foreign income tax savings resulting from acquisition restructuring which will enable Alliance to allocate items such as interest expense to Wulff. 4. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1994 AND 1995 (p) To recognize operations of the Rainbow Casino as if owned for each period. (q) Alliance development expenses, which relate to mergers, acquisitions and joint ventures, were reduced to $3.0 million annually. For the six-month period ended December 31, 1994, Alliance exceeded this $3.0 million annualized amount by $2.0 million, but in the most recent six-month period ended December 31, 1995 Alliance was below this annualized amount by $0.2 million. The elimination of direct costs related to the Merger is shown separately in note (s) below. (r) To adjust for synergy cost savings identified to date including elimination of certain duplicative costs, such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. (s) To eliminate costs associated with the Merger incurred by Alliance and BGII of $9.4 million and $1.8 million, respectively, for the six-month period ended December 31, 1995, consisting of legal, accounting and investment banking fees and related costs. No such merger costs were incurred by either company in the six-month period ended December 31, 1994. (t) To record the amortization of the goodwill resulting from the Merger. The goodwill is being amortized over 40 years. (u) To amortize the costs associated with the termination of Messrs. Kloss and Conover's existing employment contracts with BGII over the life of their respective employment contracts. (v) To eliminate the amortization of goodwill on the historical financial statements of BGII. (w) To adjust for the interest expense on the $75.0 million of debt which Alliance currently intends to issue as part of the financing of the Merger, and to amortize the debt issuance costs over 7 years, net of the elimination of the interest on the BGII debt being refinanced. 38 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) (x) To adjust for the effect of foreign income tax savings resulting from acquisition restructuring which will enable Alliance to allocate items such as interest expense to Wulff. 5. SUPPLEMENTAL PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1995 Alliance management believes that it is useful to present an unaudited pro forma statement of operations for the most recent twelve-month period ended December 31, 1995 in addition to those already presented because it is more representative of the Company's current operations. This presentation assumes that the Transaction occurred on January 1, 1995. All relevant adjustments have been presented consistent with the Pro Forma Adjustments noted above. (y) To recognize operations of the Rainbow Casino as if owned for the entire year. (z) Alliance development expenses, which relate to mergers, acquisitions and joint ventures, were reduced to $3.0 million annually, resulting in a cost reduction on a pro forma basis of $1.0 million for the twelve-month period ended December 31, 1995. The development expenses exceeded this $3.0 million annual amount during the first six-month period ended June 30, 1995 by $1.2 million; however, development expenses were below this annual amount during the six month period ended December 31, 1995 by $0.2 million. The elimination of direct costs related to the Merger is shown separately in (bb) below. (aa) To adjust for synergy cost savings identified to date including elimination of certain duplicative costs, such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. (bb) To eliminate costs associated with the Merger incurred by Alliance and BGII of $11.1 million and $2.0 million, respectively, consisting of legal, accounting and investment banking fees and related costs. (cc) To record the amortization of the goodwill resulting from the Merger. The goodwill is being amortized over 40 years. (dd) To amortize the costs associated with the termination of Messrs. Kloss and Conover's existing employment contracts with BGII over the life of their respective employment contracts. (ee) To eliminate the amortization of goodwill on the historical financial statements of BGII. (ff) To adjust for the interest expense on the $75.0 million of debt which Alliance currently plans to issue as part of the financing of the Merger, and to amortize the debt issuance costs over 7 years, net of the elimination of the interest on the BGII debt being refinanced. (gg) To adjust for the costs associated with the BGII debt consisting of the original issue discount, prepayment costs and deferred financing costs totaling $1.2 million. (hh) To adjust for the effect of foreign income tax savings resulting from acquisition restructuring which will enable Alliance to allocate items such as interest expense to Wulff. 39 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION--(CONTINUED) 6. SHARE INFORMATION The following table reflects computations of the pro forma number of shares of Common Stock outstanding and the per share computations (shares in millions):
12 MONTHS 6 MONTHS 6 MONTHS 12 MONTHS ENDED JUNE 30, ENDED DEC. 31, ENDED DEC. 31, ENDED DEC. 31, 1995 1994 1995 1995 ----------------- ----------------- ----------------- ----------------- Historical weighted average shares outstanding (a)............................................... 11.3 11.1 11.9 11.4 Shares to be sold in the Common Stock Offering and the Private Placement............................. 13.4 13.4 13.4 13.4 Shares to be issued to BGII stockholders........... 0.6 0.6 0.6 0.6 Common Stock to be issued to terminate contracts for certain BGII personnel........................ 0.8 0.8 0.8 0.8 --- --- --- --- Pro forma weighted average shares outstanding................................... 26.1 25.9 26.7 26.2 --- --- --- --- --- --- --- --- Effect of the Merger on the shareholders of Alliance, assuming a stock price of $4.88, is as follows (shares in millions): Shares of Common Stock outstanding at December 31, 1995.............................................. 13.0 Shares of BGII common stock outstanding at December 31, 1995.......................................... 10.8 Less the shares of BGII common stock already owned by Alliance............................. 1.0 --- BGII common stock to be converted............ 9.8 --- --- Common Stock to be issued to BGII shareholders..... 0.6 Common Stock to be issued to terminate contracts for certain BGII personnel........................ 0.8 Common Stock to be sold in Common Stock Offering and/or Private Placement.......................... 13.4 --- Pro forma total outstanding shares............. 27.8 --- ---
- ------------------------ (a) Excludes 1.3 million shares of non-voting special stock held by KIC, which was converted into Common Stock in December 1995. 7. SUPPLEMENTAL PRO FORMA INFORMATION Additional supplemental information regarding cash flow and fixed charges has been presented with adjustments consistent with those shown in the pro forma operating results. The earnings required to cover the Preferred Stock dividend fixed charge have been presented excluding the effects of income taxes due to the fact that the pro forma results of operations reflect losses from continuing operations, resulting in a computed effective tax rate from continuing operations that is not meaningful. 40 SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW The Company believes that it is important to present supplementally an analysis of its Adjusted Operating Cash Flow, given the pro forma leverage ratio of the Company. Reference should be made to the Unaudited Pro Forma Condensed Combined Financial Information presented elsewhere herein. The information presented in the following schedule is being provided solely for the purposes of assisting a prospective investor in making an investment decision. The Company believes that this information is a useful adjunct to net income, cash flows and other GAAP measurements. However, this supplemental information should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Alliance management has made certain adjustments to EBITDA resulting in Adjusted Operating Cash Flow. As is more fully described below, such adjustments consist of the elimination of certain charges that management has determined to be one-time or unusual, as well as adjustments made to reflect the most recent operating results of the Rainbow Casino by annualizing the most recent six month operating results (seasonally adjusted), and presenting such results as if they had occurred for each period presented. The concept of one-time or unusual charges is not defined in GAAP. In making these adjustments, management considered non-recurring revenue items as well as non-recurring expense items. There can be no assurance that other unusual charges will not occur in the future. 41 SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW (DOLLARS IN THOUSANDS)
ALLIANCE BGII SYNERGY ADJUSTED OPERATING -------------------------- ------------- COST CASH FLOW AND PRO FORMA HISTORICAL AS ADJUSTED AS ADJUSTED SAVINGS NET INTEREST EXPENSE ----------- ------------- ------------- ----------- ----------------------- FISCAL YEAR ENDED JUNE 30, 1995 Operating Income (Loss).................. $ (4,261) $ 1,543 $ 17,962 Depreciation and Amortization............ 9,520 10,413 8,482 Minority Interest........................ (397) (397) -- Casino Royalty........................... (810) (3,431) -- ----------- ------------- ------------- $ 4,052 8,128 26,444 ----------- ------------- ------------- ----------- Reclassification of Certain Direct Merger Costs.......................... 1,669 250 ADJUSTMENTS: Rainbow Operations..................... 5,219 -- Other Unusual or Nonrecurring Charges............................... 2,367 1,950 ------------- ------------- Adjusted Operating Cash Flow............. $ 17,383 $ 28,644 $ 5,000 $ 51,027 ------------- ------------- ----------- ------- ------------- ------------- ----------- ------- Pro Forma Net Interest Expense........... $ 15,323 ------- ------- SIX MONTH PERIOD ENDED DECEMBER 31, 1994 Operating Income (Loss).................. $ (1,861) $ 1,214 $ 6,683 Depreciation and Amortization............ 4,613 5,519 4,608 Minority Interest........................ (169) (169) -- Casino Royalty........................... -- (1,665) -- ----------- ------------- ------------- $ 2,583 4,899 11,291 ----------- ------------- ------------- ----------- ADJUSTMENTS: Rainbow Operations..................... 3,307 -- Other Unusual or Nonrecurring Charges............................... -- 800 ------------- ------------- Adjusted Operating Cash Flow............. $ 8,206 $ 12,091 $ 2,500 $ 22,797 ------------- ------------- ----------- ------- ------------- ------------- ----------- ------- Pro Forma Net Interest Expense........... $ 7,659 ------- ------- SIX MONTH PERIOD ENDED DECEMBER 31, 1995 Operating (Loss)......................... $ (3,524) $ (3,724) $ (2,915) Depreciation and Amortization............ 4,906 4,906 5,079 Minority Interest........................ (276) (276) -- Casino Royalty........................... (1,908) (1,908) -- ----------- ------------- ------------- $ (802) (1,002) 2,164 ----------- ------------- ------------- ----------- Reclassification of Certain Direct Merger Costs.......................... 9,437 1,750 ADJUSTMENTS: Other Unusual or Nonrecurring Charges............................... -- 4,266 ------------- ------------- Adjusted Operating Cash Flow............. $ 8,435 $ 8,180 $ 2,500 $ 19,115 ------------- ------------- ----------- ------- ------------- ------------- ----------- ------- Pro Forma Net Interest Expense........... $ 7,970 ------- ------- TWELVE MONTH PERIOD ENDED DECEMBER 31, 1995 Operating Income (Loss).................. $ (5,924) $ (3,395) $ 8,364 Depreciation and Amortization............ 9,813 9,800 8,953 Minority Interest........................ (504) (504) -- Casino Royalty........................... (2,718) (3,674) -- ----------- ------------- ------------- $ 667 2,227 $ 17,317 ----------- ------------- ------------- ----------- Reclassification of Certain Direct Merger Costs.......................... 11,106 2,000 ADJUSTMENTS: Rainbow Operations..................... 1,912 -- Other Unusual or Nonrecurring Charges............................... 2,367 5,416 ------------- ------------- Adjusted Operating Cash Flow............. $ 17,612 $ 24,733 $ 5,000 $ 47,345 ------------- ------------- ----------- ------- ------------- ------------- ----------- ------- Pro Forma Net Interest Expense........... $ 15,634 ------- ------- Ratio of Adjusted Operating Cash Flow to Pro Forma Net Interest Expense.......... 3.1x Ratio of Pro Forma Long-Term Debt to Adjusted Operating Cash Flow............ 3.6x
The above supplemental analysis should be read in conjunction with the Unaudited Pro Forma Condensed Combined Financial Information and the notes thereto. In this regard, for the year ended June 30, 42 1995 the Company's pro forma excess of earnings to fixed charges was $2.6 million, and the pro forma deficit of earnings to fixed charges after the Preferred Stock dividend was $5.2 million. The Company's pro forma deficit of earnings to fixed charges, both before and after the Preferred Stock dividend, for the twelve months ended December 31, 1995 was $0.7 million, and $8.5 million, respectively. The Company's pro forma deficit of earnings to fixed charges, both before and after the Preferred Stock dividend, for the six-month period ended December 31, 1994 was $1.2 million and $5.0 million, respectively. The Company's pro forma deficit of earnings to fixed charges, both before and after the Preferred Stock dividend, for the six-month period ended December 31, 1995 was $4.5 million and $8.3 million, respectively. The direct Merger costs have been reclassified and presented in computing the separate company Adjusted Operating Cash Flow, as management believes that such presentation provides additional relevant information to the potential purchasers of the Company's securities, after eliminating direct costs related to the Merger. DIRECT MERGER COSTS. Both Alliance and BGII have incurred direct costs related to the Merger consisting of legal, accounting, and investment banking fees and related costs. For Alliance, such costs totalled $1.7 million, $9.4 million and $11.1 million for the year ended June 30, 1995, the six months ended the six months ended December 31, 1995 and the twelve-months ended December 31, 1995, respectively. BGII's direct costs incurred relating to the Merger totalled $0.2 million, $1.8 million and $2.0 million for the year ended June 30, 1995, the six months ended December 31, 1995 and the twelve months ended December 31, 1995, respectively. The adjustments which were made in determining the supplemental analysis of Adjusted Operating Cash Flow, which were not considered in the preceding Unaudited Pro Forma Condensed Combined Statements of Operations reflect the following: RAINBOW OPERATIONS. The final elements of the Rainbow Casino facility, consisting of an 89-room motel and an amusement park and the completion of the casino exterior decor, parking, landscaping and signage, were not completed until July 1995, although the Rainbow Casino had been open without these amenities since July 1994. Therefore Alliance management believes that the results of operations for the six months ended December 31, 1995 after considering seasonality (which was immaterial) are more reflective of the property's ongoing results of operations. Accordingly, such results have been annualized based on the actual financial results for the six months ended December 31, 1995, as Alliance management believes that such results better portray the Rainbow Casino's contribution to Adjusted Operating Cash Flow. This annualization involves forward-looking statements that involve risks and uncertainties, including the risks of competition, gaming regulation and the other risks detailed in this Prospectus, including under "Risk Factors." BGII ONE-TIME COSTS. Certain charges incurred by BGII consist of costs relating to a regulatory investigation and legal proceedings in Louisiana totalling $1.0 million, legal costs related to a former executive totaling $0.5 million, and legal costs related to the "Bally" trade name litigation that were directly caused by the investigation totaling $0.2 million during the fiscal year ended June 30, 1995. For the six months ended December 31, 1994, these charges consisted of legal costs relating to Louisiana of $0.3 million and legal costs related to a former executive of $0.5 million. Results for the six months ended December 31, 1995 were adjusted for charges consisting of a reserve for German VAT taxes and the write-down of a building in Germany, which had been acquired in the purchase of a distributor and never used by Wulff, to its net realizable value in anticipation of its sale, totalling $1.8 million, as well as to adjust for legal costs relating to Louisiana of $0.7 million. During the year ended December 31, 1995, legal costs relating to Louisiana totalled $1.4 million, legal costs related to the "Bally" trade name litigation totaled $0.2 million, and charges in Germany were $1.8 million. Such costs are considered to be non-recurring. During the year ended December 31, 1995, BGII entered into a merger agreement with WMS, which was ultimately terminated to enter into the Merger Agreement with Alliance. Based on management's assessment and allocation of the total costs incurred for both the WMS and Alliance merger transactions 43 one-time costs related to the WMS transaction were, $0.2 million, $1.8 million and $2.0 million for the fiscal year ended June 30, 1995, the six months ended December 31, 1995 and the twelve months ended December 31, 1995, respectively. ALLIANCE ONE-TIME COSTS. One-time charges incurred by Alliance consist of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain directors. These charges were incurred during the quarter ended June 30, 1995 and are therefore included as adjustments only for the twelve months ended June 30, 1995 and December 31, 1995. SYNERGY COST SAVINGS. Although management cannot precisely quantify future savings, the Company has identified and expects to realize synergy cost savings of approximately $5.0 million on an annual basis (primarily through the reduction of duplicative costs, such as facility, legal, accounting and compensation costs) as a result of the Merger. The Company further expects to incur approximately $1.0 million in one-time implementation costs in realizing these savings, which expenditures have been added back in arriving at the above supplemental analysis. 44 FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW The following Forecast of Operating Income and Adjusted Operating Cash Flow (the "Forecast") is based on the expected combined operating data for Alliance and BGII for the twelve-month period ending December 31, 1996, to the best of management's knowledge and belief. The Forecast is based on the Company's current best estimates of expected results given the forecasted assumptions described in the Summary of Significant Assumptions and Accounting Policies for the Forecast for the period presented. The Forecast, which consists of forward-looking statements, is qualified by, and subject to, the assumptions set forth below and the other information contained in this Prospectus, and should be read in conjunction with the Summary of Significant Assumptions and Accounting Policies for the Forecast as well as the "Unaudited Pro Forma Condensed Combined Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited historical consolidated financial statements and related notes thereto of Alliance and BGII included elsewhere herein. The Company does not intend to update or otherwise revise the Forecast to reflect events or circumstances existing or arising after the date of this Prospectus or to reflect the occurrence of unanticipated events. BGII's independent accountants, Coopers & Lybrand L.L.P., have neither examined nor compiled nor had any other involvement with the preparation of the Forecast and accordingly do not express an opinion or any other form of assurance with respect thereto, nor do they assume any responsibility for the Forecast. Independent accountants for Alliance, KPMG Peat Marwick LLP, have not examined the Forecast presented herein and, accordingly, do not express an opinion or any other form of assurance with respect thereto, and no other independent expert has examined the Forecast. The Forecast is based upon a number of estimates and assumptions that while presented with numerical specificity and considered reasonable by management of the Company, are inherently subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of the Company. The assumptions disclosed herein are those that the Company believes are significant to the Forecast and reflects management's judgment as of the date hereof. The Forecast is necessarily speculative in nature, and it is usually the case that one or more of the assumptions do not materialize. However, not all assumptions used in the preparation of the Forecast have been set forth herein. In addition, as disclosed elsewhere in this Prospectus under "Risk Factors", the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the Forecast. Many of the factors disclosed under "Risk Factors" in this Prospectus could cause actual results to differ materially from those expressed in the Forecast. The Forecast and actual results will vary, and those variations may be material. Accordingly, the inclusion of the Forecast herein should not be regarded as a representation by the Company or any other person (including the Underwriters) that the Forecast will be achieved. The Forecast is provided solely for the purposes of assisting a prospective investor in making an investment decision, and not for purposes of assessing equity value. Prospective investors are cautioned not to place undue reliance on the Forecast. The Company was the sole preparer of the Forecast, which was prepared in accordance with guidelines established by the American Institute of Certified Public Accountants, except that it combines Alliance and BGII as if the Transaction had occurred and it omits the disclosure of non-operating items, income taxes, extraordinary items, net income and significant changes in financial position. The Forecast indicates Operating Income and Adjusted Operating Cash Flow, but it may not fully reflect the Company's ability to pay cash interest requirements because it does not reflect other cash obligations and requirements, such as mandatory payments on debt principal and preferred stock redemptions and dividends, and operating requirements relating to capital maintenance and expansion. Because the Forecast has been prepared on a combined basis, the Forecast does not account for the Company's holding company structure, which will result in cash flows earned at certain subsidiaries being unavailable for distribution to the Company, including to service indebtedness of the Company. 45 ALLIANCE GAMING CORPORATION FORECAST OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 1996 WITH COMPARATIVE ANALYSIS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND 1995
COMPARATIVE ANALYSIS OF OPERATING INCOME AND ADJUSTED OPERATING CASH FLOW (1) -------------------------- FORECASTED OPERATING INCOME TWELVE MONTHS AND ADJUSTED OPERATING ENDED DECEMBER 31, CASH FLOW FOR THE TWELVE -------------------------- MONTHS 1994 1995 ENDING DECEMBER 31, 1996 ------------ ------------ ------------------------------ (DOLLARS IN THOUSANDS) OPERATING INFORMATION: Revenues Gaming.......................................... $ 129,690 $ 147,590 $ 163,389 Food and Beverage Sales......................... 7,096 4,045 4,189 Net Equipment Sales............................. 236,245 249,329 258,379 ------------ ------------ -------- Total Revenues................................ 373,031 400,964 425,957 ------------ ------------ -------- Operating Costs Gaming.......................................... 90,125 98,377 103,331 Food and Beverage............................... 4,755 2,884 3,150 Equipment Sales................................. 152,582 157,800 158,804 Selling, General and Administrative............. 91,808(2) 96,259(2) 110,412(2) Unusual Charges................................. -- 3,816 -- Depreciation and Amortization................... 22,536 22,637 23,192 ------------ ------------ -------- Total Operating Costs....................... 361,806 381,773 398,889 ------------ ------------ -------- Operating Income.................................. 11,225 19,191 27,068 ------------ ------------ -------- SUPPLEMENTAL INFORMATION: Operating Income.................................. 11,225 19,191 27,068 Depreciation and Amortization..................... 22,536 22,637 23,192 Casino Royalty.................................... (1,670) (3,674) (4,368) Minority Interest................................. (675) (504) (920) ------------ ------------ -------- Subtotal........................................ 31,416 37,650 44,972 Adjustments: Rainbow Operations.............................. -- 1,912(3) -- Other Unusual or Non-recurring Charges.......... 2,856(4) 7,783(4) 1,000(5) Direct Merger Costs............................. -- -- 8,944(6) ------------ ------------ -------- Adjusted Operating Cash Flow...................... $ 34,272 $ 47,345 $ 54,916 ------------ ------------ -------- ------------ ------------ -------- OTHER DATA: Net Interest Expense............................ $ 16,300 -------- -------- Mandatory Principal Payments.................... $ 3,957 -------- -------- Capital Expenditures............................ $ 13,485 -------- -------- Ratio of Adjusted Operating Cash Flow to Net Interest Expense............................... 3.4x Ratio of Long-Term Debt to Adjusted Operating Cash Flow...................................... 3.2x
- ------------------------ (1) See Note 2 -- Presentation of Supplemental Comparative Information of the "Summary of Significant Assumptions and Accounting Policies for the Forecast." (2) Includes selling, general and administrative costs for the twelve months ended December 31, 1994 and 1995 net of the following: direct Merger costs, the business development costs over the $3.0 million budgeted amount and synergy cost savings. See note (6) below for the 1996 presentation which includes direct Merger costs. (3) Represents adjustment to reflect Rainbow Casino's annualized results for the period net of incremental royalty. (4) Reflects items determined by management to be unusual or non-recurring (which are also included in Total Operating Costs). The concept of one-time or unusual charges is not defined in GAAP. (5) For 1996, the non-recurring charges consist of the $1.0 million of one-time charges (which are included in Selling, General and Administrative costs) to implement the expected annual synergy cost savings (which are reflected in Total Operating Costs as well). (6) Direct Merger Costs for 1996 have been included in Total Operating Costs and presented as an adjustment in computing the Adjusted Operating Cash Flow. See note (2) above for the presentation of direct Merger costs in 1994 and 1995. See accompanying Summary of Significant Assumptions and Accounting Policies for the Forecast 46 SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST FOR THE TWELVE-MONTH PERIOD ENDING DECEMBER 31, 1996 NOTE 1. -- INTRODUCTION The Forecast of Operating Income and Adjusted Operating Cash Flow for the twelve-month period ending December 31, 1996 and the accompanying related Summary of Significant Assumptions and Accounting Policies of Alliance Gaming Corporation and subsidiaries, after consummation of the Transaction, represent the Company's best estimate as of the date of the Forecast of Operating Income and Adjusted Operating Cash Flow of the Company for the first twelve months of combined operations (after elimination of all significant intercompany accounts and transactions). The Forecast reflects management's judgment, based on present circumstances, of the expected set of conditions and their expected courses of action, to the extent such conditions or action are anticipated to affect the results described in the Forecast. The assumptions described herein are those that management believes are significant to the Forecast or are the key factors upon which the results shown in the Forecast depend. However, not all assumptions used in the preparation of the forecast have been set forth herein. The estimates and assumptions, which though considered reasonable by management may not be achieved and are inherently subject to significant business, economic, regulatory and competitive uncertainties and contingencies, including possible competitive responses, many of which are not within the control of the Company and are not possible to assess accurately. Therefore, the actual results achieved during the forecast period will vary from those set forth in the Forecast, and the variations may be material. Prospective investors are cautioned not to place undue reliance on the Forecast. The Forecast assumes that, among other things: (i) the proceeds of the Offerings and the Private Placement are used as contemplated in "Use of Proceeds;" (ii) there will be no change in generally accepted accounting principles that may have a direct material effect on the reporting of financial results of the Company; and (iii) there will be no material changes made to gaming regulations that would affect the operations of the Company. Management believes that these assumptions, when taken together with management's extensive experience in operating in such markets, provide a reasonably objective basis to forecast the Company's operations for the period presented. The Company does not intend to update or otherwise revise the Forecast to reflect events or circumstances existing or arising after the date hereof or to reflect the occurrence of unanticipated events. The Forecast is provided solely for the purposes of assisting a prospective investor in making an investment decision, and not for the purposes of assessing equity value. For a discussion of significant accounting policies see Note 1 of the Notes to the Alliance audited consolidated financial statements and the "Summary of Significant Accounting Policies" of the notes to the BGII audited consolidated financial statements included elsewhere in this Prospectus. NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION For the purpose of assisting investors in evaluating the forecasted information, the Company has presented a Comparative Analysis for the twelve-month periods ended December 31, 1994 and 1995. The Statement of Operations Information in the Comparative Analysis for the twelve months ended December 31, 1995 has been derived from the Company's Unaudited Pro Forma Condensed Combined Statements of Operations and the Supplemental Information in the Comparative Analysis for the twelve months ended December 31, 1995 has been derived from the Supplemental Analysis of Adjusted Operating Cash Flow included elsewhere herein. The Comparative Analysis for the twelve months ended December 31, 1994 has been derived using accounting principles and assumptions consistent with those used in deriving the Comparative Analysis for the twelve months ended December 31, 1995, and includes adjustments for the planned reduction of the Company's ongoing development costs to $3.0 million per year, resulting in an adjustment for such period of $4.7 million, certain synergy cost savings (net of one-time implementation costs) and one-time charges totaling $2.8 million, and assumes that the Rainbow Casino was owned since its opening in July 1994. The Comparative Analysis presented for the twelve-month periods ended December 31, 1994 and 1995 has been prepared by management to provide potential investors with additional information to analyze the Forecast and should not be construed as a presentation of actual historical results 47 NOTE 2. -- PRESENTATION OF SUPPLEMENTAL COMPARATIVE INFORMATION (CONTINUED) or expected future results. The "Unaudited Pro Forma Condensed Combined Financial Information," "Supplemental Analysis of Adjusted Operating Cash Flow" and the audited and unaudited historical consolidated financial statements and related notes thereto of Alliance and BGII included elsewhere herein should be read for additional information. NOTE 3. -- OPERATING ASSUMPTIONS The assumptions disclosed herein are those that management believes are significant to the Forecast. There will be differences between forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. REVENUES AND COST OF SALES GAMING MACHINE MANAGEMENT OPERATIONS NEVADA In its Nevada gaming machine management operations, Alliance selects, owns, installs, manages and services gaming devices (approximately 5,250 devices at December 31, 1995) in third-party owned local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores (approximately 520 locations at December 31, 1995). The Company has agreements with local bars, taverns, restaurants and convenience stores for either space leases or revenue-sharing arrangements. Under the revenue-sharing arrangements, the Company shares the revenues from the machines with the location operator, and with space leases the Company pays a fixed rental to the owner of the establishment and then the Company receives all of the revenues derived from the gaming devices. At December 31, 1995, the weighted average remaining term of the Company's revenue-sharing arrangements was approximately 3.9 years, and for space leases was approximately 2.9 years. NEVADA GAMING MACHINE MANAGEMENT OPERATIONS
FORECASTED TWELVE TWELVE MONTHS MONTHS ENDED DECEMBER 31, ENDING -------------------- DECEMBER 31, 1994 1995 1996 --------- --------- ------------ (DOLLARS IN THOUSANDS EXCEPT UNIT DATA) Average Number of Machines............................................. 5,180 5,288 5,482 Average Number of Locations............................................ 504 521 541 Total Revenues......................................................... $90,092 $91,949 $101,579 Costs and Expenses..................................................... $76,248 $77,507 $85,582
Gaming machine management revenues are a function of the average number of machines installed, times the average net win per machine. The revenues are assumed to increase due to the increase in the number of Alliance's machines installed, which reflects increased demand caused in part by Nevada's significant population growth trend. The Forecast assumes the renewal of 80% of the contracts expiring during the forecast period which the Company intends to retain. For the year ended June 30, 1995, the Company did not renew 17% of expiring agreements, including those the Company had determined to allow to lapse. Additionally, in December 1995, the Company implemented the Gambler's Bonus cardless slot player's club and player tracking system. The Company assumes, for the purpose of this Forecast, that there will be 88 locations, or an aggregate of 980 machines, installed at June 1996, increasing to 130 locations, or 1,490 machines, at December 1996. Consistent with results of previously installed machines linked to Gambler's Bonus, the Forecast assumes that there will be an increase in the average net win per machine at these locations. Consistent with contracts signed to date, the Forecast assumes that the contracts with the additional locations will allow the Company to receive a percentage of the increased gaming win generated 48 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) by Gambler's Bonus in addition to its existing revenue participation. Forecasted results of the Nevada gaming operations are directly dependent upon the realization of these assumptions. Variations from the realization of these assumptions will have a material effect upon the forecasted results. The Forecast assumes that the Nevada gaming machine management operations costs and expenses (which include selling, general and administrative costs) related to gaming machine management are relatively stable as a percentage of revenues as compared to the 1995 levels. LOUISIANA VSI operates video poker devices in the greater New Orleans area under an exclusive agreement with the owner of the only full service thoroughbred horse racing facility and its 10 associated OTBs. The tenth OTB location opened in Metairie, Louisiana in October 1995, bringing the total number of machines in operation to approximately 700 (which is the assumed number of machines for the forecasted period). Only the operator of the full service horse racing facility may own OTBs. LOUISIANA GAMING MACHINE MANAGEMENT OPERATIONS
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING -------------------- DECEMBER 31, 1994 1995 1996 --------- --------- ------------ (DOLLARS IN THOUSANDS) Average Number of Machines................................................ 724 702 700 Total Revenues............................................................ $17,196 $15,739 $ 16,946 Cost and Expenses......................................................... $13,882 $11,921 $ 12,985
Revenues are assumed to increase as a result of the full year impact of the Metairie OTB location completed in October 1995. The Forecast assumes that the statute that permits the operation of unlimited numbers of video poker devices in pari-mutuel horse racing tracks and the associated OTB's is not adversely amended in the current Louisiana legislature session or changed by referendum. See "Risk Factors -- Strict Regulation by Gaming Authorities." Forecasted results of the Louisiana gaming operations are directly dependent upon the assumption concerning the pending legislation. An unfavorable result in legislation or referendum will have a material adverse effect upon the forecasted results. Pursuant to the terms of the VSI Loan (as defined), VSI may not pay cash dividends or make any distribution of its property. The loan, which had an outstanding balance of $3.4 million at December 31, 1995, amortizes quarterly until due in full in September 1998 and may be prepaid at any time without penalty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Forecast assumes that costs related to operation of the video poker devices in the greater New Orleans area (which include selling, general and administrative costs) are relatively stable as a percentage of revenues as compared to the 1995 levels. 49 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) CASINO OPERATIONS PLANTATION STATION PLANTATION STATION OPERATIONS
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING -------------------- DECEMBER 31, 1994 1995 1996 --------- --------- ------------ (DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) Average Number of Slot Machines.............................................. 422 462 453 Win/Slot/Day................................................................. $ 46 $ 38 $ 41 Average Number of Table Games................................................ 9 9 9 Win/Table/Day................................................................ $ 260 $ 219 $ 225 Gaming Revenues.............................................................. $ 8,892 $ 8,209 $ 8,645 Total Revenues............................................................... $ 12,847 $ 12,183 $ 12,653 Costs and Expenses........................................................... $ 10,425 $ 10,150 $ 10,555
Total revenues include food and beverage sales, which are assumed to remain relatively stable compared to 1995; however, the food and beverage sales provide only minimal gross profit. The Forecast assumes that total revenues will experience a 4% increase from the previous year. Management assumes that the Sparks, Nevada gaming market will increase by 3% in 1996 compared to 5% growth for calendar 1995 as reported by the Nevada Gaming Control Board. In addition, because the negative impact on Plantation Station of a major street, sidewalk, and landscaping redevelopment project by the City of Sparks ended in December 1995, the Forecast assumes that revenues will increase in 1996. Forecasted results of the Plantation Station operations are directly dependent upon the realization of these assumptions. Variations from these assumptions will have a material effect upon the forecasted results. Management also assumes that the cost of operations at the Plantation Station will remain stable as a percentage at total revenues as compared to the 1995 levels. 50 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) RAINBOW CASINO RAINBOW CASINO OPERATIONS (A)
FORECASTED TWELVE MONTHS ENDED TWELVE MONTHS DECEMBER 31, ENDING -------------------- DECEMBER 31, 1994 1995 1996 --------- --------- ------------ (DOLLARS IN THOUSANDS EXCEPT UNIT DATA) TOTAL VICKSBURG MARKET Number of Slots.............................................................. 2,849 2,847 2,880 Number of Tables............................................................. 152 154 155 Win/Slot/Day................................................................. $ 124 $ 142 $ 153 % CHANGE................................................................... -- 15.2% 7.4% Win/Table/Day................................................................ $ 851 $ 789 $ 730 % CHANGE................................................................... -- -7.2% -7.5% Win/Position/Day............................................................. $ 128 $ 140 $ 145 % CHANGE................................................................... -- 9.2% 4.0% RAINBOW Number of Slots.............................................................. 573 589 589 Number of Tables............................................................. 28 28 25 Win/Position/Day............................................................. $ 72 $ 102 $ 132 % CHANGE................................................................... -- 42.7% 29.2% Total Revenues............................................................... $ 10,433 $ 29,069 $ 36,400 Costs and Expenses........................................................... $ 7,918 $ 18,995 $ 23,540
- ------------------------ (a) The information for 1994 and 1995 represents the historical results of the Rainbow Casino, which opened in July 1994 and was not consolidated with Alliance until March 1995. The total gaming market for the Vicksburg Mississippi area is assumed to increase 5% to approximately $200 million for 1996. Management assumes that its location at Vicksburg Landing and the adjoining amenities enable the Rainbow Casino to attract visitors from the existing tourism market of the historic city of Vicksburg as well as a significant share of the local market. The Rainbow Casino market share is assumed to remain at its current 18% level which is up from 13% prior to the opening of the Days Inn Hotel, the Funtricity Entertainment Center and the restaurant in July 1995. Both the hotel and entertainment park are operated by third parties. Forecasted results of Mississippi gaming operations are directly dependent upon the realization of these assumptions. Variations from these assumptions will have a material effect upon forecasted results. The costs and expenses are assumed to remain stable as a percentage of gaming revenues as compared to the 1995 levels. NET EQUIPMENT SALES Forecasted net equipment sales revenues includes the operating results from Gaming, Systems and Wulff. There are numerous factors which affect any forecast of net gaming equipment sales, including gaming regulatory factors and casino or arcade patron preferences. The impact of such factors on the Company will be material. GAMING Net equipment sales reflect the sales of video and reel-type gaming machines to casinos in various jurisdictions, including casinos in Nevada and Atlantic City, riverboats, Native American casinos, and international markets. Net equipment sales is a function of the number of unit sales and the net sales price per unit. Gaming results include GmbH and BGI Australia Pty Limited along with certain reclassifications from historical presentation. 51 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) GAMING
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING ---------------------- DECEMBER 31, 1994 1995 1996 ---------- ---------- ------------ (DOLLARS IN THOUSANDS) UNIT SALES United States.............................................................. 17,126 12,586 14,991 International.............................................................. 4,499 5,498 5,509 ---------- ---------- ------------ Total.................................................................. 21,625 18,084 20,500 Net Revenues............................................................... $ 118,659 $ 111,849 $ 122,483 Cost and Expenses.......................................................... $ 111,655 $ 105,944 $ 111,733
Although worldwide electronic gaming machine sales (for these purposes, primarily slot and video machines) decreased in 1995, management assumes that 1996 worldwide gaming machine sales will increase as a result of (1) three major casino openings in Las Vegas, (2) the opening of Indiana riverboat casinos and (3) the expansion of certain other markets and the increasing demand for replacement machines. However, particularly in the case of non-traditional gaming markets, the timing and magnitude of electronic gaming machine sales is difficult to predict with accuracy. The Forecast assumes a relatively constant market share during the forecast period while Gaming's share during the past three years has grown significantly. The Forecast assumes gross margin increases during the forecast period due to a 1.5% increase in net unit price, continued reduction in the new material cost per unit (although at a lower rate than experienced during the past two years) and improved manufacturing efficiencies as a result of higher production levels during the forecast period than during the year ended December 31, 1995. Gaming's forecasted operating results are directly dependent upon the realization of these assumptions. The Forecast assumes selling, general and administrative expenses will increase as a result of increased product development and sales efforts. Variations from these assumptions will have a material effect upon forecasted results. As Gaming's manufacturing overhead costs and selling, general and administrative expenses are relatively fixed, variances from the forecasted unit sales impact margins to a greater extent than if such costs were predominantly variable. SYSTEMS Systems' revenues reflect the sales of computer hardware and computer software, as well as maintenance and upgrades of such computer equipment, to casinos in various jurisdictions, including Nevada and Atlantic City, riverboats, Native American casinos and, to a lesser extent, in international markets. Hardware and software sales are based on the contracts that Systems enters into with each of the individual casinos. Such contracts generally reflect pre-determined prices for goods and services provided by Systems. Maintenance revenues are generally a function of the total installed base of Systems' GMUs.
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING ---------------------- DECEMBER 31, 1994 1995 1996 ---------- ---------- ----------------- (IN THOUSANDS) Net Revenues....................................................... $ 13,386 $ 20,681 $ 20,565 Cost and Expenses.................................................. $ 9,793 $ 14,893 $ 14,262
Management assumes that revenues during the forecast period will be comparable to the prior year. The forecasted net revenues assumes that approximately 40% of Systems' sales result from product upgrades and expansions. The Forecast assumes gross margin will increase during the forecast period due to lower average discounts off list price primarily due to a change in customer mix and the absence of a provision for product upgrades which was recorded during the year ended December 31, 1995. The forecast assumes 52 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) selling, general and administrative expenses will increase approximately 13%. Systems' forecasted operating results are directly dependent upon the realization of these assumptions. Variations from these assumptions will have a material effect upon forecasted results. In particular, because Systems' revenues are concentrated in a relatively small number of customers, a circumstantial delay or other change in a small number of orders will materially impact Systems' operating results. WULFF Wulff sales reflect the sales of new and used wall machine units, third-party wall machines, pinball machines and other related amusement devices and used equipment primarily in Germany to various arcades, taverns, hotels and amusement galleries. Wulff's revenues are a function of the number of unit sales and the sales price per unit. WULFF OPERATIONS
FORECASTED TWELVE MONTHS TWELVE ENDED MONTHS DECEMBER 31, ENDING ---------------------- DECEMBER 31, 1994 1995 1996 ---------- ---------- ------------ (DOLLARS IN THOUSANDS) New Wall Machine Units..................................................... 13,100 12,000 12,000 Net Revenues (all machines)................................................ $ 104,147 $ 116,782 $ 115,331 Costs and Expenses......................................................... $ 88,572 $ 101,610 $ 98,495
The Forecast assumes that new wall machine revenues for the first six months of 1996 will be adversely affected by an industry down-turn caused by regulations imposed in Germany limiting the number of wall machines per square meter in arcade locations effective January 1, 1996, thereby reducing sales opportunities. The Forecast assumes demand for new wall machines to continue to be lower during the first half of the forecast period than during the first half of 1995, but to increase, and exceed the 1995 level of demand in the second half of the forecast period principally due to the expected impact of new regulations going into effect on January 1, 1997 which will require all wall machines in use to have meters to monitor the amount inserted by players and paid out by the machine. There can be no assurance that the down-turn in the first half of 1996 will be less than the down-turn in the last half of 1995, nor that the down-turn is solely related to the regulatory change, and, accordingly, temporary in nature. Further, there can be no assurance that the forecasted positive impact of the 1997 regulations will be realized or that demand will increase as forecasted. The Forecast assumes gross margin will increase during the forecast period due to lower raw material costs per unit partially offset by a lower average price per unit. Wulff's forecasted operating results will be directly dependent upon the realization of these assumptions. The Forecast assumes selling, general and administrative expenses will remain relatively constant. Variations from the realization of these assumptions will have a material effect upon forecasted results. As Wulff's manufacturing overhead costs and selling, general and administrative expenses are relatively fixed, variances from forecasted unit sales could impact margins to a greater extent than if such costs were predominantly variable. OTHER OPERATING COSTS AND EXPENSES (ALL BUSINESS UNITS) The Forecast gives effect to assumed cost savings as a result of Merger synergies and further assumes a reduction in corporate development costs, all on the basis reflected under "Supplemental Analysis of Adjusted Operating Cash Flow." In contrast to the actual results presented in the Comparative Analysis for 1995, the Forecast assumes no charges will be incurred of the sort reflected in the "Supplemental Analysis of Adjusted Operating Cash Flow" as "Other Unusual or Non-recurring Charges," although the concept of one-time or unusual charges is not defined under GAAP. In developing the Forecast, management included anticipated Merger costs for the forecast period, and reviewed the Comparative Analysis period for non- 53 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) recurring revenue items as well as non-recurring expense items. The Forecast assumes that sales and distribution expense, research and development and Wulff expenses will increase by $1.5 million, $1.3 million and $1.5 million, respectively, over 1995 levels. The forecast of other operating costs and expenses are particularly dependent upon the assumptions concerning synergy cost savings and reduction of corporate development costs. There is a possibility that a variation from the assumed savings may occur, and the effect may be material. Assumptions for forecasted overhead levels and certain other expenses as reflected above (E.G., for litigation costs) may be subject to factors substantially outside of its control, to a greater degree than assumptions regarding its business units' revenues and cost of sales. DEPRECIATION AND AMORTIZATION Depreciation and amortization are expected to continue to be charged to earnings on substantially the same basis as has been done historically. There are no significant capital additions expected during the forecast period, nor is there any expected material change to depreciation or amortization rates. Capital replacement is expected to continue during the year at a moderate rate. The Forecast also gives effect to expected increases in amortization of goodwill and other assets resulting from the Merger. CAPITAL EXPENDITURES
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING -------------------- DECEMBER 31, 1994 1995 1996 --------- --------- ------------ (IN THOUSANDS) Gaming...................................................................... $ 1,522 $ 879 $ 750 Systems..................................................................... 626 294 276 Wulff....................................................................... 7,389 7,067 5,682 Gaming Machine Management................................................... 6,166 7,773 5,132 Casinos..................................................................... 644 3,803 1,580 Other....................................................................... 1,170 444 65 --------- --------- ------------ Total................................................................... $ 17,517 $ 20,260 $ 13,485 --------- --------- ------------ --------- --------- ------------
Management believes that it has substantial discretion to reduce forecasted levels of capital expenditures without materially reducing operating results for the forecasted period, principally in the case of the Gaming Machine Management and Casino expenditures. The significant capital expenditures in 1994 and 1995, including upgrading the Plantation Casino, completing the Rainbow Casino and upgrading the Gaming Machine Management installed base, are assumed to further enhance the Company's ability to reduce 1996 capital expenditures on a discretionary basis. Management estimates the minimum level of capital expenditures for maintenance purposes is approximately $8.0 million. 54 NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT The following is a reconciliation of the historical EBITDA by business unit to the combined Adjusted Operating Cash Flow:
FORECASTED TWELVE TWELVE MONTHS ENDED DECEMBER MONTHS 31, ENDING ------------------------------ DECEMBER 31, 1994 1995 1996 -------------- -------------- -------------- (IN THOUSANDS) EBITDA by Business Unit: Gaming Machine Management....................................... $ 17,159 $ 18,260 $ 19,957 Casinos......................................................... 2,927 10,546 14,958 Gaming.......................................................... 7,004(a) 5,905(a) 10,750 Systems......................................................... 3,593 5,788 6,303 Wulff........................................................... 15,575 15,172 16,836 Alliance Corporate Administrative Expense....................... (10,609) (8,912) (5,800) Alliance Development Expense.................................... (7,694) (15,072) (10,944) BGII Corporate Administrative Expense........................... (4,520) (3,732) (4,800) Discontinued Operations/Other................................... (1,378) (933) -- Casino Royalty.................................................. -- (2,718) (4,368) Minority Interest............................................... (675) (504) (920) BGII Unusual Charges............................................ -- (5,816) (2,000) -------------- -------------- -------------- Combined EBITDA................................................... 21,382 17,984 39,972 Adjustments: Direct Merger Costs............................................. -- 13,106(b) 8,944(b) Alliance Development Expense Reductions......................... 4,694 966 -- Rainbow Operations.............................................. 340(c) 2,506(c) -- Unusual or Nonrecurring Charges................................. 2,856(d) 7,783(e) 1,000(f) Synergy Costs Savings........................................... 5,000 5,000 5,000 -------------- -------------- -------------- Adjusted Operating Cash Flow...................................... $ 34,272 $ 47,345 $ 54,916 -------------- -------------- -------------- -------------- -------------- --------------
- ------------------------ (a) Includes certain charges incurred by Gaming and not reflected as "BGII Unusual Charges" above, consisting of costs relating to a regulatory investigation and legal proceedings in Louisiana totalling $0.3 million and $1.4 million for the years ended December 31, 1994 and 1995 respectively. (b) For the twelve months ended December 31, 1995, $11.1 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges. For the Forecasted Twelve Months Ending December 31, 1996, $6.9 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges. (c) To adjust to reflect the operating results of the Rainbow Casino as if owned during all of 1994 and 1995 and to reflect the most recent operating results of the Rainbow Casino, presented as if such results had occurred for all of 1995 (including an adjustment for additional casino royalty expense of approximately $1.7 million and $1.0 million, respectively). (d) Includes legal costs included as BGII Corporate Administrative Expense related to a former executive totalling $0.5 million and $0.3 million incurred by Gaming relating to a regulatory investigation and legal proceedings in Louisiana and a reserve for discontinued operations of $2.0 million for Alliance included in Alliance Corporate Administrative Expense. (e) Includes one-time charges included in Alliance Corporate Administrative Expense consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain officers and directors, which were incurred during the quarter ended June 30, 1995. Also includes $1.4 million incurred by Gaming relating to a regulatory investigation and legal proceedings in 55 NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT (CONTINUED) Louisiana, and $0.2 million included in BGII Corporate Administrative Expense for legal costs related to the "Bally" trade name litigation. Also includes BGII unusual charges of $2.0 million in costs related to the merger agreement with WMS, a provision of $0.8 million at Wulff to writedown to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for V.A.T. (f) Includes $1.0 million of one-time charges to implement the expected annual synergy cost savings. NOTE 5. -- MANDATORY PRINCIPAL PAYMENTS Because the Forecast has been prepared on a consolidated basis, the Forecast does not account for the Company's holding company structure, which will result in cash flows earned at certain subsidiaries being unavailable for distribution to the Company, including to service indebtedness of the Company during the forecast period. Mandatory principal payments for the twelve months ending December 31, 1996 (all of which relate to indebtedness of subsidiaries) consist of the following:
(IN THOUSANDS) VSI Loan.......................................................................................... $ 1,074 Rainbow Casino debt............................................................................... 2,810 Other............................................................................................. 73 ------ $ 3,957 ------ ------
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 56 SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE The following table sets forth selected consolidated financial information of Alliance, and has been derived from, and should be read in conjunction with, the audited consolidated financial statements of Alliance, including the notes thereto, as of and for the fiscal years ended June 30, 1991, 1992, 1993, 1994 and 1995, and the unaudited interim condensed consolidated financial statements of Alliance, including the notes thereto, as of and for the six months ended December 31, 1994 and 1995, which are incorporated by reference and/or included elsewhere in this Prospectus. The results for the period ended December 31, 1995 will not necessarily be indicative of the results for the fiscal year ended June 30, 1996, and in the opinion of Alliance, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information set forth herein. The table should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Combined Financial Information," the audited consolidated financial statements of Alliance and the unaudited interim condensed consolidated financial statements of Alliance, including the notes thereto and other financial and operating information included elsewhere in this Prospectus.
SIX MONTHS ENDED DECEMBER 31, FISCAL YEARS ENDED JUNE 30, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1994 1995 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: REVENUES: Gaming: Routes............................................ $ 77,150 $ 77,940 $ 96,282 $ 102,830 $ 106,827 $ 52,511 $ 52,621 Casinos and Taverns............................... 11,281 11,560 12,526 15,679 21,287 7,861 21,679 Food and Beverage Sales............................. 3,120 3,376 4,184 4,480 3,847 1,950 1,923 Net Equipment Sales(1).............................. 214 379 99 65 27 16 6 --------- --------- --------- --------- --------- --------- --------- 91,765 93,255 113,091 123,054 131,988 62,338 76,229 COSTS AND EXPENSES: Cost of Gaming: Routes............................................ 58,299 58,585 72,614 76,332 79,875 39,214 40,361 Casinos and Taverns............................... 8,528 8,459 8,667 11,871 11,436 4,653 9,887 Cost of Food and Beverage........................... 2,249 2,367 2,876 3,084 2,795 1,414 1,426 Cost of Equipment Sales............................. 151 284 49 20 12 9 1 Selling, General and Administrative................. 8,059 8,950 12,667 13,555 14,633 6,486 9,398 Business Development Costs.......................... -- -- 900 1,192 7,843 3,508 10,737 Corporate Expenses.................................. 7,567 5,290 6,191 7,882 9,735 4,302 3,037 Bad Debt Expense.................................... 4,845 539 461 705 400 -- -- Write-off of Inventories, Intangibles and Other Assets............................................. 4,982 -- -- -- -- -- -- Loss on Abandoned Casinos........................... 7,847 2,307 -- 3,713 -- -- -- Loss on Abandoned Taverns........................... -- -- -- 2,638 -- -- -- Depreciation and Amortization....................... 7,092 7,355 8,718 9,530 9,520 4,613 4,906 --------- --------- --------- --------- --------- --------- --------- Total cost and expenses........................... 109,619 94,136 113,143 130,522 136,249 64,199 79,753 --------- --------- --------- --------- --------- --------- --------- Operating Loss........................................ (17,854) (881) (52) (7,468) (4,261) (1,861) (3,524) OTHER INCOME (EXPENSE): Interest Income..................................... 1,750 1,324 998 2,084 2,798 1,504 818 Interest Expense.................................... (4,663) (4,505) (5,046) (6,830) (8,133) (3,915) (4,288) Other Net........................................... (1,007) (618) 450 (673) (890) (455) (1,649) --------- --------- --------- --------- --------- --------- --------- Loss Before Income Taxes.............................. (21,774) (4,680) (3,650) (12,887) (10,486) (4,727) (8,643) Income Tax (Expense) Benefit.......................... 5,958 -- -- (241) (265) (290) (788) --------- --------- --------- --------- --------- --------- --------- Net Loss.......................................... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,751) $ (5,017) $ (9,431) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net Loss Per Common Share............................. $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (0.45) $ (0.79) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted Average Common Shares Outstanding............ $ 9,151 $ 9,248 $ 9,696 $ 10,251 $ 11,300 $ 11,101 $ 11,859 Deficit of Earnings to Fixed Charges.................. $ (21,744) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (4,726) $ (8,644) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro Forma Ratio of Earnings to Fixed Charges(2)....... -- -- -- -- 1.06x -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
57
AT JUNE 30, AT DECEMBER 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1994 1995 --------- --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Cash and Cash Equivalents............................. $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734 $ 28,189 $ 15,729 Securities Available for Sale......................... -- -- -- 12,489 23,680 12,596 13,739 Net Working Capital................................... 10,450 11,557 7,991 50,926 31,552 40,087 20,109 Total Assets.......................................... 79,024 75,594 73,768 119,416 126,348 115,353 116,872 Total Long-term Debt, including Current Maturities................................... 44,450 43,282 44,798 90,726 101,397 89,375 100,106 Total Stockholders' Equity (Deficiency)............... $ 27,008 $ 23,660 $ 22,665 $ 15,099 $ 9,985 $ 13,917 $ (717)
(1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6 (1994), $0 (1995). (2) For the six months ended December 31, 1994 and 1995, the pro forma deficit of earnings to fixed charges was $(1,246) and $(4,508), respectively. 58 SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII The following table sets forth selected financial information of BGII (consolidated for the periods 1992 through 1995 and combined for 1991), which has been derived from, and should be read in conjunction with, the audited consolidated financial statements of BGII, including the notes thereto, as of and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995, of which certain periods are included elsewhere in this Prospectus. See "Basis of Presentation and Description of Business" in BGII's Notes to Consolidated Financial Statements. The selected historical consolidated financial data for periods prior to November 18, 1991 (the date BGII completed its initial public offering of common stock), present, on a historical cost basis, the financial position and results of operations of the subsidiaries and divisions of BEC which formerly conducted operations as Gaming, Systems and Wulff. This table should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Condensed Combined Financial Information" and the audited consolidated financial statements of BGII, including the notes thereto and other financial and operating information included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1991 1992 1993(1) 1994(1) 1995(1) --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Revenues...................................................... $ 153,648 $ 163,781 $ 168,707 $ 236,192 $ 249,312(2) Cost of Sales................................................. 102,357 99,906 121,710(3) 157,059 163,131(2) Selling, General and Administrative Expenses.................. 36,725 46,348 57,357(4) 59,989 65,289 Provision for Doubtful Receivables............................ 2,176 3,597 8,176(5) 5,763 6,712(2) Unusual Charges............................................... -- -- -- -- 5,816(6) Interest Expense, Primarily Charged by BEC in 1991............ 1,602 1,951 4,424 6,768 6,853 Provision for Income Taxes.................................... 5,784 6,725 4,242 2,820 4,904 --------- --------- --------- --------- --------- Income (Loss) before Extraordinary Gain....................... 5,004 5,254 (27,202) 3,793 (3,393) Extraordinary Gain on Early Extinguishment of Debt............ -- -- 3,759 -- -- --------- --------- --------- --------- --------- Net Income (Loss)............................................. $ 5,004 $ 5,254 $ (23,443) $ 3,793 $ (3,393) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (Loss) Per Share before Extraordinary Gain............. $ 0.48 $ 0.50 $ (2.54) $ 0.35 $ (0.31) Extraordinary Gain on Early Extinguishment of Debt Per Share........................................................ -- -- 0.35 -- -- --------- --------- --------- --------- --------- Net Income (Loss) Per Share................................... $ 0.48 $ 0.50 $ (2.19) $ 0.35 $ (0.31) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro Forma Net Income.......................................... 2,435(7) -- -- -- -- Pro Forma Net Income Per Share................................ 0.23(7) -- -- -- -- Average Number of Common Shares Outstanding................... 10,450 10,573 10,685 10,727 10,776 BALANCE SHEET DATA (AT END OF PERIOD): Cash and Cash Equivalents..................................... $ 14,429 $ 9,800 $ 5,436 $ 9,204 $ 5,526 Working Capital............................................... 69,350 82,481 83,009 95,772 97,357 Property, Plant and Equipment, Net............................ 19,650 18,695 24,042 24,358 23,244 Total Assets.................................................. 131,342 150,805 170,830 192,242 194,316 Long-term Debt, Including Current Maturities.................. 7,186 25,950 62,458 69,762 69,944 Stockholders' Equity.......................................... 98,605 101,277 74,879 85,883 88,410
- ------------------------------ (1) Includes results from the acquisition of a distribution business by Wulff in January 1993. (2) Includes the impact of sales returns of $0.3 million and a provision for doubtful receivables of $0.9 million recorded in the second quarter of 1995 by Gaming related to two riverboats at the River City Complex in New Orleans which filed for bankruptcy. (3) Includes $6.2 million in charges to increase inventory valuation reserves in 1993 principally related to inventory originally intended for sale in the Louisiana video lottery terminal market. (4) Includes $1.2 million in charges related to a management reorganization at Gaming in 1993. (5) Includes a provision for doubtful receivables totaling $5.1 million recorded by Gaming in 1993 related to a former distributor who filed for bankruptcy during the second quarter of 1993. (6) Includes $4.0 million in merger transaction costs and related litigation expenses, a provision of $0.8 million at Wulff to writedown to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for value added taxes. (7) Includes pro forma income tax information for the year ended December 31, 1991 to reflect the provision for income taxes and net loss as if Gaming and Systems had filed separate income tax returns. The pro forma information assumes that Gaming and Systems would have been unable to utilize such operating losses on a carry back basis. 59 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion provides an assessment of the liquidity and capital resources of Alliance, the pro forma liquidity and capital resources of the Company, and the results of operations of each of Alliance and BGII. The discussion should be read in conjunction with the audited consolidated financial statements of Alliance and BGII, and the unaudited interim condensed consolidated financial statements of Alliance, in each case including the notes thereto, which are included elsewhere in this Prospectus. LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE At December 31, 1995, Alliance had working capital of approximately $20,109,000, a decrease of approximately $11,637,000 from June 30, 1995. The decrease in working capital is due in part to a decrease in cash and cash equivalents which were used to fund development activities in connection with Alliance's business strategy. As of December 31, 1995, Alliance had $29,468,000 in cash, cash equivalents and securities available for sale, of which approximately $7,000,000 is necessary to fund ongoing gaming operations in the ordinary course of business. At June 30, 1995, Alliance had working capital of approximately $31,746,000 and $37,414,000 in cash, cash equivalents and securities available for sale. For the six months ended December 31, 1995, Alliance incurred development costs associated with pursuing Alliance's business developmental strategy relating to mergers and acquisition of approximately $10,737,000 consisting of $9,437,000 of direct costs incurred related to the Merger and the previous tender offer and consent solicitation by Alliance and $1,300,000 of salaries and administrative costs of the mergers and acquisitions unit. During fiscal 1995, Alliance incurred approximately $7,843,000 in expenses associated with pursuit of Alliance's business strategy, of which $1,669,000 related to the Merger. Alliance's business strategy is to use its strengthened management team, diversified gaming expertise and business and investment community relationships to develop new opportunities in the operation of land-based, dockside and riverboat casinos (including Native American casinos), gaming systems and technology and the supply and management of electronic gaming machines. On July 16, 1994 the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. In connection with the completion of the casino and the acquisition of its original 45% limited partnership interest in RCVP, the partnership which owns the casino, through a wholly-owned subsidiary, Alliance funded a $3,250,000 advance to the Rainbow Casino Corporation, an unaffiliated Mississippi corporation ("RCC"), on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to payments due to HFS and the HFS financing is secured). The HFS financing provided to RCC on August 3, 1993 consisted of a $7.5 million loan secured by a first priority lien on all of the assets of the project. The terms of the HFS financing provide that, in connection with the loan and certain marketing services provided by HFS to RCC, RCC will pay to HFS a royalty based upon the casino's annual gross gaming revenues of 12% on the first $40 million, 11% on the next $10 million, and 10% thereafter. See "Business--Casino Operations." On March 29, 1995, Alliance consummated certain transactions whereby Alliance acquired from RCC the controlling general partnership interest in RCVP and increased its limited partnership interest. In exchange for commitments by Alliance and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, to provide additional financing (up to a maximum of $2,000,000 each) to be used, among other things, for the completion of certain elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy) and for a $500,000 payment paid to HFS as a waiver fee, a commitment by Alliance to fund any additional capital necessary for the completion, upgrading or working capital of the project, the following occurred: (i) a subsidiary of Alliance became the general partner and RCC became the limited partner of RCVP and (ii) the respective partnership interests were adjusted. As of December 31, 1995, amounts outstanding under the HFS facility and the related financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10% of the net available 60 cash flows (which amount shall increase to 20% of cash flow from gaming revenues above $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. In addition, if during any continuous 12-month period until December 31, 1999 the casino achieves earnings from the project of at least $10.5 million before deducting depreciation, amortization, certain debt payments and substantially all taxes, then Alliance will be obligated to pay to certain principals of the original partnership an amount aggregating $1 million in cash or shares of Common Stock. Since March 29, 1995 the results of operations of the Rainbow Casino have been consolidated. Alliance and Casino Magic Corporation, through wholly-owned subsidiaries, are members in KGP and KFP, both Kansas limited liability companies. Under an option agreement (the "Option Agreement") granted to KGP by Camptown and The Racing Association of Kansas-Southeast ("TRAK Southeast"), KGP has been granted the exclusive right, which right expires on September 13, 2013, to operate gaming machines and/or casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. Alliance and Casino Magic Corporation each invested $1,580,000 in KFP which amounts were used by KFP to purchase a certificate of deposit to collateralize its guaranty. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. The racing facility was temporarily closed on November 5, 1995 due to poor financial results. Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated its intention to reopen for business following bankruptcy reorganization. Boatmen's Bank demanded payment of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which is secured by a second mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the Option Agreement. KFP intends to vigorously pursue all of its rights and remedies which may include, among other things, seeking authority from the bankruptcy court to commence a foreclosure action. In the case of a foreclosure action, KFP would be required to assume or pay the existing first mortgage of approximately $2,000,000 if KFP becomes the purchaser at any such sale. Alliance intends to continue to monitor its investment in KFP. The Kansas legislature has considered gaming bills during the 1996 session although none have passed. There can be no assurance that gaming of any type will ever be legalized in Kansas. In March 1992, Alfred H. Wilms committed to provide to VSI, a majority-controlled subsidiary of Alliance, a subordinated loan of up to $6.5 million dollars (the "VSI Loan"). The VSI Loan, as amended, bears interest at a rate equal to the London Interbank Offered Rate for a period of ninety days plus 2%, payable quarterly, and is due on September 21, 1998. The VSI Loan is secured by liens in favor of N.V. Continental Trust Company ("CTC"), an affiliate of Mr. Wilms, on substantially all of VSI's assets. Pursuant to the terms of the VSI Loan, VSI may not pay cash dividends or make any distribution of its property. Alliance also issued to Mr. Wilms warrants to purchase 2,000,000 shares of Common Stock at $2.50 per share in connection with such loan which expire on September 1, 1998 (the "Wilms Warrants"). As of December 31, 1995, there was an outstanding balance of $3.4 million on this loan. See "Certain Relationships and Related Transactions." Cash provided by operations for the six months ended December 31, 1995 decreased by approximately $1,588,000 from amounts reported for the same period in 1994. The change is primarily due to an increase in business development costs over the same period from the prior year of $7,229,000, primarily related to the Merger, partially offset by an increase in cash provided by the casino operations of approximately $5,700,000 attributable to the Rainbow Casino. Cash provided by operations for fiscal 1995 decreased approximately $8,105,000 from fiscal 1994. Included in fiscal 1994's cash provided by operations was a non-recurring gain of $3,600,000 associated with the termination of Alliance's letter agreement with Capital Gaming International, Inc. ("Capital Gaming"), which concerned the Company's proposed equity investment in Capital Gaming, and the payment by Capital Gaming of $4,000,000 (offset by transaction expenses) to the Company in connection therewith, and $6,351,000 of charges related to Alliance's decision to exit the downtown Las Vegas gaming market and 61 dispose of its tavern operations. Exclusive of these items, expenditures related to supporting Alliance's business strategy relating to mergers and acquisitions in fiscal 1995 increased approximately $3,051,000 from fiscal 1994. Long-term accrued expenses decreased by approximately $1,031,000 from fiscal 1994 as Alliance paid rent and other exit expenses against the amounts accrued in fiscal 1994 as noted above. The remaining increase in accrued expenses accounted for the use of cash in the amount of $4,710,000. These uses of cash were partially offset by an increase in cash flows from operations of approximately $2,666,000 from Alliance's ongoing business operations and an operating cash contribution of approximately $3,089,000 from the first year of operations by the Rainbow Casino. Significant non-cash items added back to cash flows from operations for fiscal 1995 include $1,313,000 in non-cash compensation expense and $1,075,000 related to certain service contracts and termination costs. Cash provided by investing activities for the six months ended December 31, 1995 increased $12,403,000 over that in 1994 due primarily to the proceeds from the sale of approximately $8,015,000 of securities. Also, net collections on receivables improved by $3,299,000 over the same period last year. Cash flows used for investing activities in fiscal year 1995 decreased by $5,651,000 from the prior year. Net collections on receivables in fiscal 1995 improved by $2,605,000 over those in fiscal 1994. In fiscal 1994, Alliance funded approximately $7,250,000 in loans to Capital Gaming and the original general partner in RCVP, which additions were partially offset by increased collections of receivables related primarily to the collection of the Capital Gaming loan in fiscal 1994. Cash used in financing activities for the six months ended December 31, 1995 declined $76,000 from the same period in 1994 due primarily to Alliance's borrowing of $682,000 in 1995. Cash flows from financing activities in fiscal year 1995 declined $48,402,000 from fiscal 1994. In fiscal 1994, Alliance completed the private placement of $85,000,000 aggregate principal amount of its Convertible Debentures. Concurrent with the closing of the issuance of the Convertible Debentures, Kirkland invested $5,000,000 in Alliance (the "Kirkland Investment") in exchange for 1,333,333 shares of Alliance's Non-Voting Junior Convertible Special Stock and warrants to purchase up to 2,750,000 shares of Common Stock, subject to certain conditions. A portion of the net proceeds from these transactions was used to repay previously existing debt and accrued interest of approximately $38,245,000. In December 1995, Kirkland elected to convert the entire 1,333,333 shares of Special Stock into an equivalent number of shares of Common Stock. EBITDA (as defined: see Note 1 to the Alliance Summary Historical Financial Information) as a percent of the related revenues changed for Nevada gaming machine management operations from 15.3% in fiscal 1994 to 16.7% in fiscal 1995 and to 14.8% in the first six months of fiscal 1996 and for Louisiana gaming machine management operations from 17.5% to 19.1% and to 20.6% for the same periods. EBITDA as a percent of revenues for casino operations (excluding discontinued operations), excluding certain one-time charges, was 18.2% in fiscal 1994 and 23.2% in fiscal 1995 and 30.9% in the first six months of fiscal 1996. The increase in the first six months of fiscal 1996 was due primarily to the acquisition of the Rainbow Casino. EBITDA should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of Alliance's performance or to cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Management believes that EBITDA is a useful adjunct to net income and other GAAP measurements and is a conventionally used financial indicator. On a pro forma basis, earnings exceeded fixed charges by approximately $2.6 million for the year ended June 30, 1995 and would have been inadequate to cover fixed charges by approximately $4.5 million for the six-month period ended December 31, 1995. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (PRO FORMA) On October 18, 1995 Alliance entered into the Merger Agreement with BGII and the Merger Subsidiary. Pursuant to the Merger, BGII will become a wholly-owned subsidiary of Alliance. The aggregate Merger consideration to BGII stockholders will be approximately $76.7 million in cash, $35.0 million in Preferred Stock and $2.9 million in Common Stock. Alliance will also retire approximately $70.7 million of long-term 62 debt of BGII (including prepayment premium and original issue discount) plus accrued and unpaid interest in connection with the Merger, and will generally assume BGII's obligations with respect to outstanding options and warrants to purchase shares of BGII common stock. See "The Merger and Related Financings." The Company currently anticipates obtaining one or more working capital revolving facilities at Gaming and Wulff (providing up to $ of borrowing availability in aggregate) which would be secured by the inventory and accounts receivable of such entities and their subsidiaries. The Company has not received any commitment for any such facility and no assurance can be given that it will be able to obtain any such facility on terms acceptable to the Company. At closing, even if such facilities are obtained, the Company expects that no borrowings will have been made under such facilities. Following the Transaction, the Company believes that its working capital and funds generated from operations will be sufficient to meet its existing commitments, debt payments and other obligations as they become due; however, the Company expects that it will have to refinance all or a portion of the Convertible Debentures and the Notes at maturity if its cash flow from operations does not increase substantially. On a pro forma basis after giving effect to the Transaction, the Company's earnings would have been inadequate to cover fixed charges and Preferred Stock dividend by approximately $5.2 million and approximately $8.3 million for the 12-month period ended June 30, 1995 and the six-month period ended December 31, 1995, respectively. The Company believes that its cash flow needs for the next 12 months will increase as a result of an increase in accounts receivable relating to the introduction of new gaming machines and the expected increases in production and sales levels from recent historical levels. Following the Transaction, it remains a part of Alliance's business strategy to seek on a more limited basis complementary gaming opportunities, including opportunities in which its gaming machine management and casino experience may be applicable. As part of its business activities, Alliance is regularly involved in the identification, investigation and development of such opportunities. Accordingly, in order to support such activities, Alliance may in the future desire to issue additional debt or equity securities if and when attractive opportunities become available on terms satisfactory to management. However, the terms of the Notes will significantly restrict the Company's ability to incur indedtedness. See "Risk Factors -- High Leverage and Fixed Charges after the Merger; Holding Company Structure; Working Capital" and "Description of the Notes." Management believes that customer financing terms have become an increasingly important competitive factor in certain emerging markets. Competitive conditions sometimes require Gaming and Systems to grant extended payment terms on gaming machines and other gaming equipment. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of a default may be less than the amount financed. In conjunction with sales by Gaming, with recourse to Gaming and/or BGII , of certain trade receivables to third parties, Gaming and/or BGII have guaranteed amounts due from various customers of approximately $18.2 million at December 31, 1995. It is possible that one or more of Gaming's customers whose obligation has been guaranteed by Gaming may be unable to make payments as such become due. In this case Gaming may become responsible for repayment of at least a portion of such amounts over the term of the receivables. In general, under the terms of these contracts, the Company may be responsible for monthly payments of the outstanding obligations. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. Wulff provides customer financing for approximately 20% of its sales, and management expects this practice temporarily to increase during the latter half of 1996. In order to be competitive in meeting customer demand for financing of gaming equipment in emerging markets, the Company plans to continue to evaluate the need to involve third party finance companies or secure additional financing, although there is no assurance that such additional financing will be obtained. 63 ALLIANCE RESULTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1995 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1994 REVENUES Total revenues for the six months ended December 31, 1995 were $76,229,000, an increase of $13,891,000 (22.3%) over those for the same period in 1994. Revenues from all gaming machine management operations increased $110,000 (0.2%) to approximately $52,621,000 in the six months ended December 31, 1995. Revenues from the Louisiana gaming machine management operations increased $147,000 (1.9%) primarily as a result of the opening of a new OTB in October 1995. Revenues from Nevada gaming machine management operations for the six months ended December 31, 1995 decreased approximately $36,000 (0.1%). The decrease in the Nevada gaming machine management revenues was attributable to a $0.52 decrease in the average net win per gaming machine per day for the six months ended December 31, 1995 over the same period in 1994 (accounting for a decrease of approximately $499,000) which exceeded an increase in the weighted average number of gaming machines on location for the six months ended December 31, 1995 over the same period in 1994 (accounting for an increase of approximately $463,000). Revenues from casino and tavern operations, including food and beverage sales, increased approximately $13,791,000 (140.6%) during the six months ended December 31, 1995 over those for the same period in 1994 as revenues recognized from the Rainbow Casino, which were consolidated beginning March 29, 1995, exceeded the revenues lost with the termination of Alliance's lease at the Royal Casino and the reduction of operations at Alliance's tavern locations. COSTS AND EXPENSES COSTS OF REVENUES. Cost of gaming machine management revenues for the six months ended December 31, 1995 increased $1,147,000 (2.9%) over the same period in 1994. Costs of revenues from gaming machine management operations in Louisiana decreased $53,000 (1.1%) over the same period in 1994 as a result of better controlling direct labor costs. Costs of gaming revenues for Nevada gaming machine management revenues for the six months ended December 31, 1995 increased $1,200,000 (3.5%) over the same period in 1994 and increased slightly as a percent of Nevada gaming machine management revenues primarily due to increased costs associated with additional and renewed space lease contracts. Cost of gaming machine management revenues includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenues including costs of food and beverage revenues increased $5,246,000 (86.5%) over the same period in 1994 primarily due to the Rainbow Casino cost of revenues which were consolidated beginning March 29, 1995. This increase was partially offset by the termination of Alliance's lease at the Royal Casino and the reduction of operations at Alliance's tavern locations. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor, including related taxes and benefits. EXPENSES. For the six months ended December 31, 1995 Alliance incurred developmental costs associated with pursuing Alliance's business development strategy relating to mergers and acquisitions of approximately $10,737,000, consisting of $9,437,000 of direct costs incurred related to the Merger and the previous tender offer and consent solicitation by Alliance and $1,300,000 of salaries and administrative costs of the mergers and acquisitions unit, which represented an increase of $7,229,000 (206.1%). These business development expenses include salaries and wages, related taxes and benefits, professional fees, travel expense and other expenses associated with supporting Alliance's strategy. The level of business development activities, exclusive of Merger costs, has been reduced from prior periods due to the termination of two executives in this business unit in order to reduce costs, and the relocation of this unit to lower cost office space. Alliance believes that such reduced level of costs will be adequate to pursue its business development strategies on a more limited basis in accordance with its business plan following consummation of the Merger. Selling, general and administrative expenses for the six months ended December 31, 1995 increased approximately $2,912,000 (44.9%) over the same period in 1994. Expenses for casinos and taverns for the six months ended December 31, 1995 increased $3,629,000 (198.3%) over the prior year primarily due to the Rainbow Casino expenses which were consolidated beginning March 29, 1995. This increase was partially 64 offset by the termination of Alliance's lease at the Royal Casino and the reduction of operations at Alliance's tavern locations. Such expenses related to gaming machine management operations for the six months ended December 31, 1995 decreased $717,000 (15.4%) over the same period in 1994 reflecting steps taken to control costs, including reduced staffing levels. Corporate general and administrative expenses decreased $1,265,000 (29.4%). This decrease was caused primarily by controlling costs and reducing staffing levels. Alliance expects that there may be further increases in selling, general and administrative expenses related to the addition of new management and development personnel and other costs associated with supporting Alliance's business strategy. Included in last year's other income and expenses is a charge of $404,000 representing Alliance's equity in the net loss of the Rainbow Casino in its first six months of operations prior to Alliance's acquisition of the general partnership interest in RCVP on March 29, 1995. Interest expense for the period increased $373,000 over the same period last year due principally to the increased interest expense related to the debt of Rainbow Casino. FISCAL 1995 COMPARED TO FISCAL 1994 REVENUES Total revenues for the fiscal year ended June 30, 1995 were approximately $131,988,000, an increase of $8,934,000 (7.3%) over those for fiscal 1994. Revenues from all gaming machine management operations increased $3,997,000 (3.9%) to approximately $106,827,000 in fiscal 1995. Revenues from gaming machine management operations in the State of Louisiana declined $1,796,000 (10.3%) primarily as a result of increased competition from riverboat operations. Revenue from Nevada gaming machine management operations for fiscal 1995 increased approximately $5,739,000 (6.7%) over those for fiscal 1994. The increase in the Nevada gaming machine management revenues was attributable to a $2.15 increase in the average net win per gaming device per day in fiscal 1995 compared to fiscal 1994 (accounting for approximately $4,042,000 of such increase) and an increase in the weighted average number of gaming devices on location during fiscal 1995 as compared to fiscal 1994 (accounting for an increase of approximately $1,751,000). Revenues from casino and tavern operations, including food and beverage sales, increased approximately $4,975,000 (24.6%) during fiscal 1995 over those for fiscal 1994 as revenues recognized from the Rainbow Casino, which were consolidated beginning March 29, 1995, exceeded the revenues lost as a result of the closing of Alliance's properties in downtown Las Vegas and the termination of Alliance's lease at the Royal Casino. COSTS AND EXPENSES COSTS OF REVENUES. Cost of gaming machine management revenues for the fiscal year ended June 30, 1995 increased $3,543,000 (4.6%) over that for fiscal 1994. Costs of revenues for gaming machine management operations in Louisiana decreased $1,199,000 (10.7%) from fiscal 1994 as revenues declined primarily as a result of increased competition in that market. As a percent of related revenues, Louisiana gaming machine management costs of revenues remained relatively constant. Cost of gaming revenues for Nevada gaming machine management revenues for fiscal 1995 increased $4,742,000 (7.3%) over that in fiscal 1994 and increased slightly as a percent of Nevada gaming machine management revenues due primarily to increased costs associated with additional and renewed space lease contracts. Cost of gaming machine management revenues includes rents under both space lease and revenue-sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenues, including the cost of food and beverage sales, for fiscal 1995 decreased $724,000 (4.8%) over that in fiscal 1994 primarily due to the closing of Alliance's properties in downtown Las Vegas and the termination of Alliance's lease at the Royal Casino. These decreases were partially offset by increases in Rainbow Casino costs of revenues which were consolidated beginning in March 1995. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor expenses, including taxes and benefits. Although the gross margin percentage for Nevada operations declined slightly during fiscal 1995, the decline was completely offset by the addition of the Rainbow Casino and a small improvement in the Louisiana gross margin percentage. As a result, the total cost of revenues as a percentage of total revenues declined by 2.9% over that in fiscal 1994. 65 EXPENSES. In fiscal 1995, Alliance incurred development costs associated with pursuing Alliance's long term growth strategy of approximately $7,843,000, an increase of approximately $6,651,000 (558.0%) over fiscal 1994. Included in the development costs for fiscal 1995 was $1,669,000 of costs related to the Merger. Included as an offset to development costs for fiscal 1994 was a non-recurring gain of $3,600,000 related to Alliance's effort to acquire Capital Gaming and the payment by Capital Gaming to extinguish its obligation to issue warrants to Alliance in connection therewith. Fiscal 1994 development costs also include certain significant expenses associated with Alliance's purchase of Native American Investments, Inc. ("NAI"). Development costs include salaries and wages, related taxes and benefits, professional fees, travel expenses, payments to third parties for business development options and other expenses associated with supporting Alliance's long-term growth strategy. With the exception of the significant costs expected to be incurred in conjunction with the Merger, Alliance expects to continue to incur a significant level of development costs although at a reduced level compared to fiscal 1995 due to the termination of two executives in this business unit in order to reduce costs and its relocation to lower cost office space. Alliance believes that such reduced costs will be adequate to pursue its business development strategies on a more limited basis in accordance with its business plan following consummation of the Merger. Corporate administrative expenses for fiscal 1995 were approximately $9,735,000, an increase of $1,853,000 over the same amounts for fiscal 1994. The primary cause for the increase was $1,331,000 in compensation expense recognized upon the issuance of 250,000 shares of Common Stock to Steve Greathouse, Alliance's President, Chief Executive Officer and Chairman of the Board, in connection with his employment agreement. Also contributing to the increase in corporate administrative expenses were $485,000 of expenses related to certain service contracts and termination costs. Corporate administrative expenses include salaries and wages, related taxes and benefits, professional fees and other expenses associated with maintaining the corporate office and providing centralized corporate services for Alliance. Exclusive of the development and corporate expenses noted above, selling, general and administrative expenses for fiscal 1995 increased $1,078,000 (7.9%) from fiscal 1994. Selling, general and administrative expenses related to gaming machine management operations in fiscal 1995 decreased $1,340,000 (13.8%) from fiscal 1994. Selling, general and administrative expenses for Louisiana gaming machine management operations declined approximately $660,000 (23.8%) as staff reductions and cost containment measures were implemented to counter increased competition in that market. The same costs for Nevada gaming machine management operations in fiscal 1995 decreased $680,000 (9.8%) as the benefit of staff reductions and cost controls taken in late fiscal 1994 was realized. Selling, general and administrative costs increased for casino and tavern operations by $1,595,000 (44.0%) over those in fiscal 1994. The acquisition of the Rainbow Casino, which contributed $1,984,000 to the increase, was partially offset by the closing of Alliance's downtown Las Vegas properties and the termination of the lease at the Royal Casino. Also contributing to the increase in selling, general and administrative expenses were $478,000 of expenses related to certain service contracts and termination costs. Selling, general and administrative expenses may be subject to further increases. In fiscal 1994, due to continuing losses from operations, negative cash flows and incompatibility with Alliance's long-term growth strategy, Alliance's Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and (ii) dispose of the currently operated small independent tavern operations. Based on these decisions, Alliance recognized total expenses of approximately $5,884,000 in fiscal 1994. As a result of the decision to exit the downtown Las Vegas gaming market, in September 1994, Alliance substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the fiscal 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write-down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. 66 On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming machines prior to the fire (of which 193 were destroyed by the fire) through its controlled subsidiary, VSI. Alliance was fully insured for all equipment, leasehold improvements, other assets and business income with the exception of approximately $46,000 in deductibles. During fiscal 1995, Alliance recorded approximately $247,000 of income from business interruption insurance proceeds compared to $241,000 of such proceeds in fiscal 1994. Alliance is discussing settlement of additional business interruption claims with the insurance carrier. Alliance has also received insurance proceeds based on the replacement value of the assets destroyed in the fire and, therefore, recognized a gain of approximately $156,000 which is included in other income in fiscal 1994. FISCAL 1994 COMPARED TO FISCAL 1993 REVENUES Total revenues for the fiscal year ended June 30, 1994 were approximately $123,054,000 for fiscal 1994, an increase of $9,963,000 (8.8%) over those for fiscal 1993. Revenues from all gaming machine management operations increased $6,548,000 (6.8%) to approximately $102,830,000 in fiscal 1994. Gaming machine management operations in the state of Louisiana contributed $5,222,000 (an increase of 42.9%) to the overall increase in gaming machine management revenues as Alliance continued to experience increasing demand in that relatively young market. Revenue from Nevada gaming machine management operations increased approximately $1,326,000 (1.6%) over those for fiscal 1993. The increase in the Nevada gaming machine management revenues was attributable to a $1.30 increase in the average net win per gaming machine per day in fiscal 1994 over that of fiscal 1993 (accounting for an increase of approximately $2,608,000) which was partially offset by a decrease in the weighted average number of gaming machines on location during fiscal 1994 as compared to fiscal 1993 (accounting for a decrease of approximately $1,282,000). Revenues from casino and taverns increased approximately $3,449,000 (20.6%) during fiscal 1994 as compared to those for fiscal 1993 due to the continued expansion of casino operations and operating additional troubled tavern locations. COSTS AND EXPENSES COSTS OF REVENUES. Cost of gaming machine management revenues for the fiscal year ended June 30, 1994 increased $3,718,000 (5.1%) over that for fiscal 1993. Gaming machine management operations in Louisiana contributed $2,854,000 (an increase of 40.6%) from fiscal 1993 to the overall increase. Cost of gaming revenues for Nevada gaming machine management revenues for fiscal 1994 increased $864,000 (1.3%) over that for fiscal 1993. The increase to cost of Nevada gaming machine management revenues was primarily due to an increase in location operators' share of gaming revenues caused by replacing a large space lease contract with revenue-sharing arrangements. Cost of gaming machine management revenues includes rents under both space lease and revenue-sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenues for fiscal 1994 increased $3,412,000 (29.6%) over that for fiscal 1993 primarily due to the first full year of operations of two small casinos and the first full year of operating the hotel and food and beverage operations at the Mizpah Hotel and Casino (the "Mizpah"). Previously, Alliance had operated only the casino at the Mizpah, but in January, 1993 began operating the entire facility including food and beverage operations to insure its availability for the casino. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor expenses, including taxes and benefits. Although the gross margin percentage from Nevada operations declined during fiscal 1994, the decline was offset by increases in the Louisiana operating margin percentage. As a result, the combined cost of gaming revenues as a percentage of gaming revenues remained relatively constant from fiscal 1993 to fiscal 1994. EXPENSES. In August 1994, due to continuing losses from operations, negative cash flows and incompatibility with Alliance's long-term growth strategy, Alliance's Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and (ii) dispose of the currently operated small independent tavern operations. Based on these decisions, Alliance recognized total expenses of approximately $5,883,500 in fiscal 1994. As a result of the decision to exit the downtown Las Vegas gaming market, in September 1994, Alliance substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the fiscal 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments 67 net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write-down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. Alliance's lease at the Mizpah has a remaining lease term of approximately 8.5 years with an option on Alliance's behalf to terminate the lease arrangement at any time after December 31, 1995 with 120 days notice. In September 1994, Alliance notified the landlord of the Mizpah of its intent to exercise the termination clause of its lease at the earliest possible date of January 1, 1996 and give 120 days notice at that time. As a result of this decision, Alliance recognized additional charges of $467,500 in fiscal 1994. Also included in selling, general and administrative expenses for fiscal 1994 are development costs associated with pursuing Alliance's long term growth strategy of approximately $1,192,000. These developmental costs include approximately $4,792,000 in legal fees, travel expenses and other expenses associated with supporting Alliance's long-term growth strategy, which expenses are partially offset by the $3,600,000 recovered under the Capital Gaming termination agreement. Fiscal 1994 was the first year in which significant funds were expended in pursuit of this strategy. Exclusive of the reserves, write-downs and development expenses noted above, selling, general and administrative expenses for fiscal 1994 increased $1,679,000 (8.5%) over those in fiscal 1993. The primary causes for the increase include a $400,000 fiscal 1994 bonus granted to Shannon L. Bybee as part of the restructuring of his employment with Alliance, $350,000 in fees incurred under the one year consulting contract with Carole A. Carter, the former President and Chief Operating Officer of Alliance, continued expansion of the Louisiana machine management operations which contributed approximately $546,000 to the overall increase and $274,000 of overall increases in Nevada machine management operations. The general and administrative costs for casinos and taverns were $3,622,000 (18.0%) of related revenues for fiscal 1994 as compared to $3,511,000 (21.0%) for fiscal 1993. The same costs for gaming machine management operations were $9,736,000 (9.5%) of revenues for fiscal 1994 and $8,916,000 or (9.3%) of revenues for fiscal 1993. Bad debt expense in fiscal 1994 increased 52.9% to approximately $705,000 over that for fiscal 1993 expense of $461,000 due primarily to the financial difficulties of a particular customer in Northern Nevada. On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming machines prior to the fire (of which 193 were destroyed by the fire) through its controlled subsidiary, VSI. Alliance is fully insured for all equipment, leasehold improvements, other assets and business income with the exception of approximately $46,000 in deductibles. Through June 30, 1994, Alliance had recorded approximately $241,000 of income from business interruption insurance proceeds. Alliance will continue to receive proceeds under this policy while the Fairgrounds Race Course is rebuilt. Alliance also received insurance proceeds based on the replacement value of the assets destroyed in the fire and, therefore, recognized a gain of approximately $156,000 which is included in other income in fiscal 1994. BGII RESULTS OF OPERATIONS GENERAL BGII was formed in August 1991 to consolidate BEC's gaming machine manufacturing and distribution operations which are conducted through Wulff, Gaming and Systems. The operations of Wulff were conducted through Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, two direct subsidiaries of BEC, until their transfer to BGII in contemplation of the initial public offering of common stock of BGII. The operations of Gaming and Systems were conducted as divisions or subsidiaries of BEC until substantially all of the assets and liabilities of these divisions and subsidiaries were transferred to BGII in contemplation of the initial public offering of common stock of BGII. For purposes of this discussion of results of operations of BGII, the operations of Wulff, Gaming and Systems are described separately as well as on a consolidated basis and GmbH results are included in Wulff's results. The results of operations for Wulff and Gaming include an allocation of BGII, the parent company, revenues and expenses, and intercompany transactions which are eliminated on a consolidated basis. 68 The following tables set forth, for the periods indicated, the percentage of revenues represented by items reflected in BGII's consolidated statements of operations.
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- CONSOLIDATED REVENUES: Sales....................................................................... 97.5% 97.9% 98.1% Other....................................................................... 2.5 2.1 1.9 ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales............................................................... 72.1% 66.5% 65.4% Selling, General and Administrative......................................... 34.0 25.4 26.2 Provision for Doubtful Receivables.......................................... 4.9 2.4 2.7 Unusual Charges............................................................. -- -- 2.3 ---------- ---------- ---------- 111.0 94.3 96.6 ---------- ---------- ---------- Operating Income (Loss)....................................................... (11.0) 5.7 3.4 Interest Expense.............................................................. 2.6 2.9 2.8 ---------- ---------- ---------- Income (Loss) before Income Taxes and Extraordinary Gain...................... (13.6) 2.8 0.6 Provision for Income Taxes.................................................... 2.5 1.2 2.0 ---------- ---------- ---------- Income (Loss) before Extraordinary Gain....................................... (16.1) 1.6 (1.4) Extraordinary Gain on Early Extinguishment of Debt............................ 2.2 -- -- ---------- ---------- ---------- Net Income (Loss)............................................................. (13.9)% 1.6% (1.4)% ---------- ---------- ---------- ---------- ---------- ---------- WULFF REVENUES: Sales....................................................................... 96.6% 96.3% 97.1% Other....................................................................... 3.4 3.7 2.9 ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales............................................................... 65.4% 64.9% 67.4% Selling, General and Administrative......................................... 25.5 25.1 24.1 Provision for Doubtful Receivables.......................................... 0.5 1.7 1.3 Unusual Charges............................................................. -- -- 2.9 ---------- ---------- ---------- 91.4 91.7 95.7 ---------- ---------- ---------- Operating Income.............................................................. 8.6 8.3 4.3 Interest Expense.............................................................. 1.3 1.3 1.0 ---------- ---------- ---------- Income before Income Taxes.................................................... 7.3 7.0 3.3 Provision for Income Taxes.................................................... 3.7 2.3 3.5 ---------- ---------- ---------- Net Income.................................................................... 3.6% 4.7% (0.2)% ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION (APPROXIMATE UNITS): New Wall Machines Sold by Wulff............................................. 12,552 13,100 12,000 ---------- ---------- ---------- ---------- ---------- ----------
69
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- GAMING REVENUES: Sales....................................................................... 98.3% 99.3% 98.9% Other....................................................................... 1.7 0.7 1.1 ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales............................................................... 100.0% 73.7% 71.9% Selling, General and Administrative......................................... 48.4 21.9 24.6 Provision for Doubtful Receivables.......................................... 16.9 3.0 3.6 Unusual Charges............................................................. -- -- 1.9 ---------- ---------- ---------- 165.3 98.6 102.0 ---------- ---------- ---------- Operating Income (Loss)....................................................... (65.3) 1.4 (2.0) Interest Expense.............................................................. 7.1 4.6 5.2 ---------- ---------- ---------- Loss before Income Taxes and Extraordinary Gain............................... (72.4) (3.2) (7.2) Provision for Income Taxes.................................................... -- 0.2 0.3 ---------- ---------- ---------- Loss before Extraordinary Gain................................................ (72.4) (3.4) (7.5) ---------- ---------- ---------- Extraordinary Gain on Early Extinguishment of Debt, Net of Income Taxes....... 7.7 -- -- ---------- ---------- ---------- Net Income (Loss)............................................................. (64.7)% (3.4)% (7.5)% ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION (UNITS): New Slot Machines Sold...................................................... 7,749 17,655 11,948 New Video Gaming Machines Sold.............................................. 2,205 3,807 6,080 Other....................................................................... 202 163 56 ---------- ---------- ---------- Total..................................................................... 10,156 21,625 18,084 ---------- ---------- ---------- ---------- ---------- ---------- SYSTEMS REVENUES: Sales....................................................................... 100.0% 100.0% 100.0% Other....................................................................... -- -- -- ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales............................................................... 28.2% 32.0% 35.3% Selling, General and Administrative......................................... 42.8 46.5 34.3 Provision for Doubtful Receivables.......................................... (4.4) 2.1 5.3 ---------- ---------- ---------- 66.6 80.6 74.9 ---------- ---------- ---------- Operating Income.............................................................. 33.4 19.4 25.1 Interest Expense.............................................................. -- 0.2 -- ---------- ---------- ---------- Income before Income Taxes.................................................... 33.4 19.2 25.1 Provision for Income Taxes.................................................... -- -- -- ---------- ---------- ---------- Net Income.................................................................... 33.4% 19.2% 25.1% ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION: New Installations Implemented............................................... 6 11 9 ---------- ---------- ---------- ---------- ---------- ----------
70 YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 WULFF Wulff's revenues for the year ended December 31, 1995 were $130.7 million compared to $111.1 million in 1994, an increase of $19.6 million (18%). This improvement resulted from the favorable effect of currency translation rates in the 1995 period, an increase in slot and video gaming machines sold by Vertriebs' wholly-owned subsidiary, GmbH, and an increase in used equipment and recreation and amusement machine sales offset in part by a decrease in new wall machine units sold by 8% and a decrease in the average selling price for new wall machines by 8.4%. Revenues from GmbH increased by 99% due to increased new casino openings and greater market penetration in Western and Central Europe and in Africa. The overall decline in the value of the U.S. dollar against the Deutsche Mark increased revenues by $15.0 million in 1995. New and used wall machine sales for the last six months of 1995 were impacted by regulations, which became effective January 1, 1996, limiting the number of wall machines per square meter in arcade locations, thereby reducing new sales opportunities. Industry-wide demand for new machines was adversely effected by this new regulation while demand for used machines increased dramatically. The decrease in demand for new wall machines resulted in increased competition based on sales price resulting in the reduction in average selling price for new units during the year. Management expects the demand for new wall machines to continue to be lower than prior year levels during the first half of 1996. See "Risk Factors -- Operating History -- Recent Losses." Revenues from the distribution of recreational and amusement machines increased by approximately 8.7% during 1995. Operating income was $5.6 million for 1995 compared to $9.2 million in 1994, a decrease of $3.6 million or 40%. This decrease resulted from lower gross margins, higher selling, general and administrative expenses, and unusual charges, offset in part by a lower provision for doubtful receivables. Gross margins for 1995 were 33% compared to 35% in the prior year. Gross margin was unfavorably impacted by higher unit costs associated with lower production levels, a change in product mix to lower priced used machines and a decrease in average selling price of new wall machines sold. Selling, general and administrative expenses increased by $3.5 million resulting from the effect of currency translation rates between years and costs associated with the increased revenues in GmbH. Wulff recorded unusual charges in 1995 of $0.8 million to writedown to net realizable value the carrying value of a building to be sold and $1.0 million to increase its tax reserves primarily for value added taxes. In addition, Wulff incurred $2.0 million of unusual charges representing an allocation of merger transaction costs and litigation expenses related to the proposed merger with WMS, which has since been terminated, and to a tender offer by Alliance which was subsequently terminated in connection with the execution of a definitive merger agreement between BGII and Alliance. The effective tax rate for the year ended December 31, 1995 was 50% compared to an effective rate of 26% in 1994. The 1994 rate was lower due to implementation of a tax planning strategy that reduced the effective tax rate by approximately 50%. GAMING Gaming's revenues for the year ended December 31, 1995 were $108.4 million compared to $117.8 million in 1994, a decrease of $9.4 million or 8%. New gaming machines sold decreased to 18,084 units in 1995 from 21,625 units in 1994, a decrease of 16%. This decline in new unit sales was caused principally by a reduced number of new casino openings, especially in the riverboat markets, partially offset by increased sales in the Nevada market. Management believes that the increase in sales into the Nevada market occurred principally due to the popularity of Gaming's new Game Maker-Registered Trademark- machine, a multi-game, touch screen video device which accounted for 26% of Gaming's unit sales in 1995. The average price of new gaming machines sold increased approximately 3% in 1995 principally due to proportionately greater sales of the higher priced Game Maker-Registered Trademark- machine. Revenues from new machines decreased to $90.9 million in 1995 from $106.6 million in 1994. Revenues from sales of used equipment increased by 121% to $9.2 million in 1995. In addition, revenues from sales of service parts and interest income from financing customer receivables increased by $2.2 million in 1995. 71 Gaming incurred an operating loss of $2.2 million for 1995 compared to operating income of $1.6 million in the 1994 period, a decline of $3.8 million. The decline in operating results was principally due to the impact of the aforementioned decrease in revenues, higher selling, general and administrative costs and higher bad debt provisions and unusual charges offset, in part, by an increase in gross margin. Gross margin as a percentage of total revenues was 28% for 1995 compared to 26% in 1994. Lower costs of materials in 1995 were offset, in part, by decreased absorption of manufacturing overhead expenses attributable to the decline in new sales units for 1995. Selling, general and administrative expenses increased to $26.7 million in 1995 compared to $25.8 million in 1994, an increase of 3%. The $0.9 million increase resulted principally from an increase in legal expenses primarily related to Louisiana. Despite the decrease in unit sales in 1995, the provision for doubtful accounts increased $0.3 million resulting from the closure of certain riverboat casinos. Gaming incurred $2.0 million of unusual charges in 1995 representing an allocation of merger transaction costs and litigation expenses related to the proposed merger with WMS, which has since been terminated, and to a tender offer by Alliance which was subsequently terminated in connection with the execution of the Merger Agreement. SYSTEMS Systems' revenues for the year ended December 31, 1995 were $20.7 million, a 55% increase compared to 1994. This increase is directly attributable to the increased number of game monitoring units ("GMUs") sold to both new casinos and to existing customers which expanded their casinos, upgraded their current systems due to new products, or replaced existing systems. In 1995 Systems sold approximately 22,000 GMUs compared to 13,000 in 1994. During 1995, Systems products were installed in 9 new locations and as of December 31, 1995, Systems had 50 installations on-line. The average price of a GMU sold during 1995 decreased by 1.5% from the 1994 average price. Systems' operating income was $5.2 million in 1995 compared to $2.6 million in 1994, a 100% increase. This increase resulted from increased GMUs sold, partially offset by lower gross margins, higher selling, general and administrative expenses and a higher provision for doubtful receivables. Gross margin was 65% in 1995 compared to 68% in 1994. This decrease results from the decrease in the average selling price of a GMU during 1995, higher product costs and a provision for product upgrades. Selling, general and administrative expenses increased by $0.9 million in 1995 principally as a result of higher compensation costs to support the business and higher facility costs for the 1995 year as 1994 was only impacted for six months by the higher costs resulting from Systems occupying its new facility in July 1994. The provision for doubtful accounts of $1.1 million in 1995 was primarily attributable to one riverboat customer. CONSOLIDATED Revenues for the year ended December 31, 1995 were $249.3 million, net of eliminations, compared to $236.2 million in 1994, an increase of 6%. This increase is due to the aforementioned increase at Wulff and Systems partially offset by the aforementioned decrease in Gaming's revenues. BGII had operating income of $8.4 million for 1995 compared to $13.4 million in the 1994 period. The decrease in operating results of $5.0 million was caused principally by the unusual charges recorded in 1995 along with the aforementioned decrease in Wulff and Gaming's operating results partially offset by the aforementioned increase in operating income at Systems. Interest expense was $6.9 million in 1995 compared to $6.8 million in 1994. The net loss for 1995 was $3.4 million or $0.31 per share compared to net income of $3.8 million or $0.35 per share in 1994. This decline in net income resulted from the after tax effect of $5.3 million in unusual charges and an increase in the effective income tax rate primarily due to the aforementioned higher effective tax rate in Germany in 1995. 72 YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 WULFF Wulff's revenues for the year ended December 31, 1994 were $111.1 million compared to $112.6 million in 1993, a decrease of $1.5 million (1%). New wall machine unit sales of Wulff's products increased approximately 4% in 1994. Additionally, the average selling price for new wall machine units sold increased approximately 10% due principally to popular models introduced by Wulff in the latter part of 1994. Revenues from the distribution of recreational and amusement machines, new wall machines manufactured by third parties, used wall machines and other revenues decreased approximately 17% in the 1994 period due in part to depressed economic conditions in Germany and increased competition in the lower margin recreational and amusement sales markets. Currency translation rate adjustments of Wulff's revenues into U.S. dollars increased revenues by $2.3 million in the 1994 period due to fluctuations in the German mark versus the U.S. dollar. Wulff's operating income was $9.2 million for 1994 compared to operating income of $9.7 million in the 1993 period. The $0.5 million decrease in 1994 as compared to 1993 was caused principally by the aforementioned decrease in revenues and a $1.4 million increase in the provision for bad debts, offset, in part, by a slight improvement in Wulff's gross margin as a percentage of total revenues and a decrease in selling, general and administrative expenses of approximately 3%. The increase in Wulff's provision for bad debts was caused by an increase in Wulff's accounts and notes receivable balances in the 1994 period as well as the general impact of depressed economic conditions on some of Wulff's customers. GAMING Gaming's revenues for the year ended December 31, 1994 were $117.8 million compared to $48.5 million in 1993, an increase of $69.3 million (143%). New gaming machines sold increased to 21,625 units in 1994 from 10,156 units in 1993, an increase of 112%. The introduction of Gaming's S5500 ProSeries-TM- line of slot machines and its new Game Maker-Registered Trademark-, a multi-game touch screen machine, in the second half of 1993 and 1994, respectively, as well as the proliferation of legalized gaming in riverboat markets, contributed to this increase of units sold. The average price of gaming machines sold increased 18% in 1994 due to additional features, such as the embedded bill acceptor, in the new machines and fewer sales through distributors in 1994. Aggregate revenues from new machines increased to $106.6 million in 1994 from $41.7 million in 1993. Revenues from other sources, including interest income, increased $4.4 million from $6.8 million in 1993 to $11.2 million in 1994, primarily due to increased sales of used units and machine accessories. Gaming's operating income was $1.6 million for 1994 compared to an operating loss of $31.7 million in the 1993 period, an improvement of $33.3 million. The 1993 operating loss includes $12.5 million of unusual charges principally relating to the writedown of inventories originally intended for the Louisiana VLT market and provisions for bad debts relating to Gaming's former distributor in Louisiana. The improvement in operating results was principally due to the aforementioned increase in revenues, higher gross margins realized from increased absorption of manufacturing overhead costs coupled with lower costs of materials, offset, in part, by higher selling, general and administrative costs as well as higher bad debt provisions and interest costs. Cost of sales as a percentage of Gaming's total revenues, was 73% in 1994 compared to 87% in 1993, excluding an inventory valuation adjustment in 1993 of $6.2 million (13% of 1993 total revenues). The lower cost of sales is due to increased absorption of overhead manufacturing expenses attributable to increased production in 1994 as compared to 1993 and lower costs of materials attributed to ongoing redesign of products and volume discounts from suppliers. Selling, general and administrative expenses increased to $25.9 million in 1994 compared to $23.4 million in 1993, an increase of 11%. The $2.5 million increase was caused principally by increased staffing levels in the sales departments and sales related costs associated with the aforementioned sales volume increase in 1994 compared to 1993. Bad debt expense provisions increased to $3.6 million in 1994 from $3.2 million in 1993, excluding a $5.1 million increase in the provision in 1993 primarily relating to Gaming's former distributor of VLT devices in Louisiana. This $0.4 million increase (13%) resulted from increased sales volume in the 1994 period. 73 SYSTEMS Systems' revenues for the year ended December 31, 1994 were $13.4 million compared to $12.0 million in the comparable 1993 period, an increase of $1.4 million (12%). Continued growth in casino emerging markets, particularly with casinos on Indian lands and on riverboats, contributed to an increase in the demand for gaming monitoring systems and the increase in Systems' revenues. Systems' operating income was $2.6 million for the year ended December 31, 1994 compared to $4.0 million during the twelve months ended December 31, 1993. This decrease in operating income of $1.4 million was caused primarily by slightly lower gross profit margins as a percentage of revenues, higher selling, general and administrative costs and a higher provision for bad debts offset, in part, by the aforementioned increase in revenues. Selling, general and administrative expenses increased $1.1 million due to higher sales levels, increased staffing levels and increased facility costs. The provision for bad debts increased $0.8 million due to the increase in revenues and higher accounts receivable balances outstanding during the period. CONSOLIDATED Revenues for the year ended December 31, 1994 were $236.2 million, net of eliminations, compared to $168.7 million in 1993, an increase of 40%. This increase is due to the aforementioned increase at Gaming and Systems partially offset by the aforementioned decrease in Wulff's revenues. BGII had operating income of $13.4 million for 1994 compared to an operating loss of $18.5 million in the 1993 period. The improvement in operating results of $31.9 million was caused principally by the aforementioned improvement in Gaming's operating results partially offset by the aforementioned decline in operating income at Systems and Wulff. Interest expenses was $6.8 million in 1994 compared to $4.4 million in 1993. This increase was caused by higher borrowings outstanding and higher interest rates in 1994. BGII's effective tax rate in 1994 and 1993 differs from the U.S. statutory rate of 34% principally due to the lack of tax benefits available for operating losses generated in the U.S. IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION Inflation has not had a significant effect on Alliance's operations for the three years ended December 31, 1995 or BGII's operations during the three years ended December 31, 1995. Substantially all of Wulff's transactions are denominated in Deutsche Marks. The Deutsche Mark is the functional currency used by BGII to translate Wulff's financial statements. Therefore, BGII is exposed to foreign exchange rate risk. BGII does not generally enter into foreign exchange contracts to hedge its exposure to foreign exchange rate fluctuations. 74 BUSINESS OVERVIEW Alliance is a diversified gaming company that currently operates approximately 6,000 electronic gaming machines (primarily video poker devices and slot machines) and also owns and operates a small casino in each of Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest gaming machine management operator in Nevada and is the exclusive operator of video poker devices at the only racetrack and ten associated OTBs in the greater New Orleans area. As part of its long-term growth strategy, Alliance entered into the Merger Agreement on October 18, 1995 with BGII pursuant to which BGII will become a wholly-owned subsidiary of Alliance. BGII, through subsidiaries in the United States and Germany, is a leading designer, manufacturer and distributor of electronic gaming machines. BGII also designs, assembles and sells computerized monitoring systems for slot and video gaming machines which provide casino operators with on-line real time player tracking, security and maintenance capabilities. BGII is currently the second largest manufacturer of casino-style electronic gaming machines in North America and since 1993 has made significant inroads in recapturing a portion of its once dominant market share of the late 1970s. Although BGII sells gaming devices to most of the major participants in the United States casino industry, the Company hopes to continue to increase its penetration in such casinos by capitalizing on Alliance's and BGII's management's relationships within the gaming industry to enable the Company to demonstrate the performance capabilities of its current products. Alliance believes that the Merger represents an opportunity to acquire an established company with a well-recognized presence in the gaming industry and a significant base of assets and experience. Management estimates that the installed base of casino-style electronic gaming machines (for these purposes, primarily slot and video machines) is approximately 650,000 units, of which approximately 50% are located in North America, and that annual sales in North America have grown from approximately 30,000 units in 1991 to approximately 89,000 units in 1995, reflecting a period of exceptional growth in the number and size of casinos in North America. Historically, growth in the gaming machine market has been principally fueled by sales to new casinos and to a lesser degree by replacement of machines (which have an average replacement cycle of three to seven years) and the application of new technology. In the future, management believes that annual sales growth resulting from replacement requirements and the application of new technology should outpace growth in demand generated by new casino openings, which growth rate is expected to decline. Management believes that the Merger provides Alliance with an avenue for entering a business historically characterized by effective barriers to entry in that the BGII assets being acquired are difficult to replicate and require significant time and investment to develop successfully. BUSINESS STRATEGY The Company's strategic objective is to build a pre-eminent gaming entertainment company to capitalize on what management believes to be gaming's continuing growth within the entertainment industry. In addition to continuing the development of the Company's existing business units, the Company's strategic focus will be on the Gaming and Systems business unit, key elements of which include: CAPITALIZE ON BGII'S CURRENT SALES MOMENTUM. Since 1993, BGII's management has initiated steps to increase its share of gaming machine sales in traditional markets and capture increased gaming machine market share in new and emerging jurisdictions. In the mid-1980s, BGII's management's slow response to rapidly evolving technology, new competitors and changing customer preferences contributed to a significant reduction in Gaming's market position. Hans Kloss, who became President of BGII in 1993, and other members of the current BGII senior management, have led BGII's efforts to rebuild its market position, and have effectively increased its presence in major casinos in the Las Vegas market, including Caesars Palace and the MGM Grand. As part of its long-term growth strategy, Gaming has increased its research and development efforts, focusing on upgrading its gaming machine product line, and has increased its sales and marketing efforts. For example, Gaming introduced its ProSeries-TM- reel-type slot machines during the third quarter of 1993 and its multi-game touch screen machine, the V7000 Game Maker-Registered Trademark- ("Game Maker-Registered Trademark-"), 75 during the third quarter of 1994, which have contributed significantly to an increase in unit sales which have approximately doubled the level of unit sales in 1993. See "Gaming Machine Manufacturing and Systems-- Gaming--Products." DEVELOP AND MARKET PREMIER GAMING ENTERTAINMENT PRODUCTS EMPLOYING NEW TECHNOLOGY. The Company intends to continue to develop, market and sell premier gaming entertainment products and systems that employ available information technology currently in common use in other segments of the entertainment industry, but not yet prevalent in the gaming industry. The Company believes that technological enhancements are the key to improving the appeal of its games and locations. To implement this strategy, the Company will draw upon the resources of Dr. Craig Fields, Vice Chairman of the Board, who has over 20 years of experience with advanced information technology from his work with several leading companies and government agencies. Alliance has developed and is currently marketing a next-generation computerized product called "Gambler's Bonus," a cardless slot players' club and player tracking system for use in its gaming machine management route operations which will allow multiple locations to be linked together into a distributed gaming environment. Management believes that "Gambler's Bonus" offers a wider variety of gaming choices to players than any other gaming device currently available for use in route locations. Additionally, BGII is in the process of developing an innovative form of cashless wagering that uses bar-coded coupons which can be read by bill validators in slot machines with the resulting information being transmitted to a computerized monitoring system, subject to testing and regulatory approval. In addition, both BGII and Alliance have developed electronic gaming machines with bill acceptor and ticket printer features, as well as touch screen and multi-game capabilities. ENHANCE OPERATING EFFICIENCIES AND IMPROVE THE QUALITY OF THE COMPANY'S PRODUCTS AND SERVICES. The Company is taking a number of steps in different business units to improve its operating efficiencies while at the same time improving the quality of its products and services, including (i) engineering improvements in its gaming machine manufacturing operations and reducing per unit costs by increasing production throughput and negotiating decreases in materials costs; (ii) continuing to improve Wulff's manufacturing efficiency and productivity through the use of computer-aided design systems, automated production equipment and devotion of substantial resources to product quality control in its wall machine operations; (iii) expanding the installed base of electronic gaming machines equipped with Gambler's Bonus, and updated bill-acceptor devices throughout its Nevada gaming machine management operations, which is expected to improve Alliance's revenues and operating efficiencies; and (iv) initiating improved customer service programs and increasing employee responsiveness to customers' needs for after-sale services. Management will continue to seek cost reductions and efficiencies. CAPITALIZE ON RELATIONSHIPS AND ENTER INTO ALLIANCES WITH TECHNOLOGY AND ENTERTAINMENT COMPANIES. Management's focus on technological developments in gaming entertainment has created the potential for alliances with other technology-oriented companies for the purpose of sharing information or professional services in developing product concepts. The Company intends to continue to develop or license technology which can be integrated into various aspects of the gaming entertainment industry in the future. In addition, the Company intends to make strategic acquisitions of rights to use proprietary technology when attractive opportunities arise. There can be no assurance, however, that any such alliances or acquisitions will be available to the Company or will result in sustained beneficial results to the Company. BUSINESS UNITS Following the Merger, the Company will operate through four business units: (i) casino-style electronic gaming machine manufacturing and systems, (ii) German operations (consisting of the manufacture and distribution of wall-mounted gaming machines and distribution of other recreational and amusement machines), (iii) gaming machine management operations and (iv) casino operations. 76 GAMING MACHINE MANUFACTURING AND SYSTEMS INDUSTRY OVERVIEW Gaming's primary markets for its gaming machine products are the United States and Europe and, to a lesser extent, Canada, the Far East, Latin America and the Caribbean. The following table sets forth the percentage of Gaming's new unit sales by market segment during the periods shown:
PERCENTAGE OF NEW UNITS SOLD ------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------- NEW UNIT SALES BY MARKET SEGMENT 1993 1994 1995 ----- ----- ----- Nevada and Atlantic City............................................... 27% 34% 42% International.......................................................... 27 21 30 Riverboats............................................................. 31 31 12 Indian Gaming.......................................................... 12 13 14 Other (principally VLTs)............................................... 3 1 2 --- --- --- 100% 100% 100% --- --- --- --- --- ---
UNITED STATES MARKETS. Within the United States, Nevada represents the largest installed base of gaming machines with an installed base of approximately 185,000 machines as of December 31, 1995. Atlantic City is the second largest market which management estimates had an installed base of approximately 30,000 machines as of December 31, 1995. Product sales in these markets are primarily to established casino customers to either replace existing machines or as part of an expansion or refurbishment of the casino. Also, because gaming machine revenues have increased at a higher rate than table game revenues over the past decade, casino operators have frequently increased floor space dedicated to gaming machines. In addition, major casino openings in Nevada, expansions of existing casinos and the proliferation of casinos in emerging markets have created additional floor space available for new machines and are anticipated to further increase competitive pressures on casino operators to replace existing equipment with new machines on an accelerated basis. Riverboat casinos began operating in 1991 and, as of December 31, 1995, riverboat casinos were operating in Indiana, Iowa, Illinois, Mississippi, Missouri and Louisiana. The estimated installed base of gaming machines on riverboats is approximately 61,000 machines as of December 31, 1995. Casino-style gaming continues to expand on North American Indian lands. Indian gaming is regulated under the Indian Gaming Regulatory Act of 1988 which permits specific types of gaming. Gaming's machines are placed only with Indian gaming operators who have negotiated a compact with the state and received approval by the U.S. Department of the Interior. Gaming has, either directly or through its distributors, sold machines for casinos on Indian lands in Arizona, Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North Dakota, South Dakota and Wisconsin. Compacts have also been approved in Oregon, Colorado and Louisiana, although Gaming made no deliveries in these jurisdictions during 1995. In addition to the approved states, compacts are under consideration in several states, including Alabama, California, Maine, Massachusetts, Rhode Island, Texas and Washington. The installed base of all Indian gaming machines as of December 31, 1995 was approximately 52,000 units. In addition, there are currently casinos in Colorado and South Dakota. The estimated installed base of machines in these markets as of December 31, 1995 was approximately 13,000 machines. The continued growth of domestic emerging markets for gaming machines is contingent upon the public's acceptance of these markets and an ongoing regulatory approval process by Federal, state and local governmental authorities. Management cannot predict which new jurisdictions or markets, if any, will approve the operation of gaming machines, the timing of any such approval or the level of Gaming's participation in any such new markets. INTERNATIONAL MARKETS. In addition to the domestic markets, the gaming industry is also expanding in international markets. Gaming's primary international market is Europe, and to a lesser extent, Canada, the 77 Far East, Latin America and the Caribbean. Gaming has begun, and plans to continue, expansion into the Australian market, and in 1995, BGII established an office in Sydney, Australia. No new machines have yet been sold into Australia. The percentage of Gaming's international revenues by geographic area for the periods indicated are set forth below:
PERCENTAGE OF REVENUE ------------------------------- YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Europe (including sales to GmbH)......................................... 69.2% 55.6% 51.4% Canada................................................................... 12.7 16.6 21.6 Latin America............................................................ 16.3 20.5 19.7 Far East................................................................. 1.8 4.4 4.0 Other.................................................................... -- 2.9 3.3 --------- --------- --------- 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- ---------
MARKETS FOR SYSTEMS. Systems' primary markets for its computerized monitoring systems are the United States and, to a lesser extent, Canada, New Zealand, Latin America, Europe, and the Caribbean. Markets for Systems within the United States include traditional land-based casinos predominately in Nevada and Atlantic City, New Jersey, Indian gaming and riverboats. Domestically, the market for monitoring systems is divided equally between selling to new installations and to existing customers who are either expanding their casino floors or are upgrading their hardware to a new product release. Unlike the United States, where most jurisdictions require the implementation of systems, there have been few international markets to do so. Management believes, however, that the international market for such systems is increasing, and that Systems' sales to such markets will increase accordingly. GAMING PRODUCTS. Gaming designs, manufactures and distributes a variety of electronic slot and video gaming machines. Machines are differentiated from one another by graphic design and theme, cabinet style and size, payout, reel-type design and minimum/maximum betting amount. Slot machines are normally produced to specific order, with design and configuration customized to a customer's particular requirements. Customers may also change from one gaming model to another gaming model by ordering a "conversion kit" which consists of artwork, reel strips and a computer chip. Gaming's video gaming machines are designed to simulate various live card games and keno through a video display. New games and themes are introduced periodically in order to satisfy customer demand and to compete with product designs introduced by competitors. Gaming introduced its "ProSeries-TM-" reel-type slot machines during the third quarter of 1993 and its multi-game touch screen machine, the Game Maker-Registered Trademark-, during the third quarter of 1994. The Game Maker-Registered Trademark- can offer up to 10 different video games within one gaming device. Various games can be selected from a game library that has over 200 games. The games simulate various card games, keno and popular reel-spinning games. The Game Maker-Registered Trademark- machines contain bill acceptors and many other features believed to be popular with casinos and their customers. The Game Maker-Registered Trademark- machines are available in upright, bar top and slant top cabinets. Based on Gaming's sales of this product to date, management believes that Gaming is currently more competitive than in the past in the video gaming device market. Revenues from sales of Game Maker-Registered Trademark- machines were approximately $0.1 million, $6.7 million and $27.4 million during 1993, 1994 and 1995, respectively. The ProSeries-TM- was the result of a comprehensive product development effort which began in 1991. The development process included extensive testing of the new products in-house and on casino floors for reliability and player appeal. Based on Gaming's sales of the ProSeries-TM- products to date, management believes that the ProSeries-TM- has been the catalyst to allow Gaming to increase market share in traditional and emerging markets for gaming machines as the product becomes accepted by casino customers. Revenues from sales of ProSeries-TM- machines were approximately $19.3 million, $86.2 million and $57.1 million during 1993, 1994 and 1995, respectively. 78 Gaming typically offers a 90-day labor and up to a one-year parts warranty for new gaming machines sold and is actively involved in customer service after the original installation. Gaming provides several after-sale, value-added services to its customers including customer education programs, a 24-hour customer service hot-line, and field service support programs and spare parts programs. In addition, Gaming sells and services used gaming machines and sells parts for existing machines. Sales of used gaming machines increased for 1995 as management implemented a policy to reduce inventory levels. Sales of used equipment were $2.7 million, $4.2 million and $9.2 million for the years ended December 31, 1993, 1994 and 1995, respectively. The following table sets forth the percentages of Gaming's revenues provided by each of its major product lines during the periods shown:
PERCENTAGE OF REVENUES ------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Slot machines..................................................... 67.0% 74.2% 52.8% Video gaming machines............................................. 18.9 16.3 31.0 Other (primarily used machines, parts and services)............... 14.1 9.5 16.2 ----- ----- ----- 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- -----
Gaming machines have a mechanical life that can exceed 10 years. However, in the established markets, Gaming's experience is that casino operators usually replace gaming machines after three to seven years. The factors which result in replacement of gaming machines sooner than their mechanical life include technological advances, development of new games, new sound and visual features and changing preferences of casino patrons. Casinos typically recoup the purchase cost of their electronic gaming machines in a few months, which allows casinos to replace machines with new models that are popular with casino patrons. Gaming often accepts used machines as trade-ins toward the purchase of new gaming equipment. While a small secondary market exists in the United States, used machines are typically resold into the international market. While some used equipment is reconditioned for direct sale, much is sold in container lots on an "as is" condition through independent brokers. In the past, Gaming had designed, manufactured and distributed video lottery terminals ("VLTs"), which are generally operated by, or under the regulation of, state or provincial lottery commissions. The VLT business was less than 2% of revenues during 1993, 1994 and 1995. Gaming will pursue this business only on a selected basis in the future. PRODUCT DEVELOPMENT. The Company believes that technological enhancements are the key to improving the appeal of its electronic gaming machines. Most gaming machines on casino floors today are driven by technology which was developed over 20 years ago. The Company believes that accelerating the use of existing computer technology will give its gaming machines and systems a competitive advantage in the gaming industry. Gaming develops its products for both the domestic and international market. Gaming's product development process is divided into two areas, hardware and software. Major areas of hardware development include cabinet style, electronic capability, machine handle, coin hopper and bill acceptor. Hardware development efforts are focused upon player appeal, product reliability and ease of maintenance. Development cycles for hardware can range from a few days for simple enhancements to more than a year for new electronics or new mechanical packages. The software development process for new games, which includes graphics development, involves a continuous effort requiring relatively significant human resource allocations. Creativity in software development is an important element in product differentiation as the major manufacturers sometimes use similar hardware technology. Ideas for new models are generated both internally and from customers. Gaming can design the software and artwork for a new model in as little as two weeks, excluding regulatory approval. All 79 new or modified hardware and software is designed to satisfy all applicable testing standards and must receive the approval of the appropriate gaming regulatory agency based substantially on satisfying such applicable testing standards before such gaming product can be offered for play to the public. Most gaming jurisdictions rely upon and accept the certification of selected independent laboratories that a gaming product meets the applicable testing standards. Regulatory approval for new or modified hardware and software changes takes from 30 days to three months or more. On an annual basis, Gaming expects to introduce approximately 25 new games to the market. However, no assurance can be made with respect to the rate of new model introductions. During 1993, 1994 and 1995, Gaming spent $3.0 million, $3.5 million, and $3.7 million, respectively, on product research and development. SALES AND MARKETING. Gaming uses a direct sales force, an independent distributor network and GmbH to sell its products. Gaming's sales staff of approximately 20, which operates offices in Nevada, New Jersey, Mississippi, Illinois and Florida, generated approximately 84% of new machine sales over the past three years. Gaming currently uses distributors for sales to certain specific markets in the United States as well as certain European jurisdictions. Gaming's agreements with distributors do not specify minimum purchases but generally provide that Gaming may terminate such agreements if certain performance standards are not met. Approximately 8% of new gaming machine unit sales over the past three years have been generated through independent distributors (including foreign distributors) and 8% have been generated through GmbH. In addition to offering an expansive product line, Gaming provides customized services in response to specific casino requests. These services include high quality silkscreen printing of gaming machine glass, customized game development and interior design services. Gaming also offers customized design services that utilize computer aided design and studio software programs. Gaming's design department can generate a casino floor layout and can create a proposed slot mix for its customers. In many of the emerging markets, Gaming provides assistance to customers including the selection of related equipment such as slot stands, chairs, etc. and a recommended layout of the casino floor as well as a mix of machine models. Sales to established casinos in Nevada normally require completion of a successful trial period for the machines in the casino. Approximately 75% of Gaming's slot and video gaming machine sales are on terms of 90 days or less. Approximately 25% of Gaming's sales, primarily in certain emerging markets such as riverboat and Indian gaming casinos, are financed over extended periods as long as 36 months and bear interest at rates ranging from 8% to 14%. International sales are generally consummated on a cash basis or financed over a period of one year or less. In addition, in certain situations, Gaming has participated in the financing of other gaming related equipment manufactured by third parties in the emerging markets. Management believes that financing of customer sales has become an increasingly important factor in certain emerging markets. See "--Competition." CUSTOMERS. The demand for slot machines and video gaming machines varies depending on new construction and renovation of casinos and other facilities with needs for new equipment. Since machines are not replaced each year, many current customers will need only product maintenance in the near future. Growth will depend on Gaming's ability to obtain new customers and take advantage of the newly emerging markets. For the year ended December 31, 1995, Gaming's largest customer accounted for approximately 5% of Gaming's sales while Gaming's ten largest customers, excluding GmbH, accounted for approximately 25% of Gaming's revenues. During that period, sales to GmbH accounted for approximately 9% of Gaming's revenues. ASSEMBLY OPERATIONS. Gaming's Las Vegas facility was built in 1990 specifically for the design, manufacture and distribution of gaming equipment. The 150,000-square foot facility was designed to meet fluctuating product design demands and volume requirements, and management believes the facility enables Gaming to increase production without significant capital expenditures. 80 Management believes that its assembly operations allow for rapid generation of different models to fill orders quickly and efficiently. Another major advantage of the existing plant operation is the system by which machines can be altered in many ways including the size, type and color of glass, sound and payoff patterns to produce a "customized" product for each customer. Gaming keeps an inventory of parts that allow machines to be altered quickly to conform with a particular customer's design/feature request. Gaming designs all of the major assemblies that are incorporated into the final machine configuration. COMPETITION. The market for gaming machines in North America is dominated by a single competitor, IGT. There are a number of other well established, well-financed and well-known companies producing machines that compete with each of Gaming's lines in each of Gaming's markets. The other major competitors are Universal Distributing of Nevada, Inc., Sigma Games, Inc., WMS and in the international marketplace, companies who market gaming machines under the brand names of Aristocrat, Atronic, Cirsa and Novomatic. In addition, certain technology-oriented companies, including CDS and Sega Enterprises Ltd., have recently announced their intention to enter the gaming machine business. Management believes that some of these competitors generally have greater capital resources than Gaming. Competition among gaming product manufacturers, particularly with respect to sales of gaming machines into new and emerging markets, is based on competitive customer pricing and financing terms, appeal to the player, quality of the product and having an extensive distribution and sales network. The future success of the Company, to a large extent, will be dependent upon the ability of Gaming to design, manufacture and market technologically sophisticated products that achieve high levels of player acceptance. The development of a successful new product or product design by a competitor could adversely affect sales of Gaming's products and force Gaming to respond quickly with its own competing products. In addition, management believes that customer financing terms have become an increasingly important competitive factor in certain emerging markets. Competitive conditions sometimes require Gaming to grant extended payment terms on gaming machines and other gaming equipment. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of a default may be less than the amount financed. Accordingly, Gaming will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. Also, because certain of Gaming's competitors generally have greater financial resources than Gaming, Gaming will need to rely on third party financing arrangements in order to compete in providing competitive financing to customers. See "--Sales and Marketing." SYSTEMS PRODUCTS. Systems designs, assembles, and sells a computerized monitoring system ("SDS 6000") for slot and video gaming machines which provide casino operators with on-line real time data relative to a machine's accounting, security, and maintenance functions. The SDS 6000 also provides data to, and receives data from, other third party player tracking computer and software applications allowing casinos to track their players to establish and compile individual player profitability and other demographic information. SDS 6000 is comprised primarily of (1) hardware consisting of microcontroller based printed circuit boards which are installed within the slot and video machines as well as card reader displays and keypads which provide casinos the ability to track player gaming activity and to monitor access to slot and video machines by the casino's employees, (2) application software developed by Systems which provides access to the slot machine's activity data gathered by the microcontroller hardware, and (3) third party mini-computers on which the application software resides. Systems also provides software and hardware support services, including maintenance, repair and training for purchasers of its monitoring systems. PRODUCT DEVELOPMENT. Systems' product development is divided into two areas, hardware and software. The major areas of hardware development include microcontroller circuit board design and programming as well as user interface devices such as card readers, keypads and displays. Hardware development efforts are focused upon the casino operator in terms of functionality, product reliability and ease of maintenance and customer appeal in terms of appearance and ease of use. Development cycles for hardware can vary between a few months for minor revisions to more than a year for major design changes or for changes made by various slot manufacturers with which Systems' product must communicate and be 81 physically integrated. Software development results in (1) periodic product releases that include new features which extend and enhance the SDS 6000 product, (2) periodic maintenance releases which enable casino operators to correct problems or improve the usability of the system and (3) documentation needed to install and use the system. In 1995, the hardware and software groups from Systems, as well as engineers from Gaming, coordinated efforts to develop a form of cashless wagering that uses bar-coded coupons which can be read by the bill validators in Gaming's slot machines which are connected to an SDS 6000 system. Testing and regulatory approval is being pursued by Systems in anticipation of a 1996 release to casino operators. In 1996, Systems and Gaming development groups will continue to direct development efforts towards other forms of cashless wagering for use on Gaming's slot machines and the SDS 6000 system. During 1993, 1994 and 1995, Systems spent $1.4 million, $1.7 million and $1.9 million, respectively on product research and development. SALES AND MARKETING. Systems has a direct sales force which produces the majority of its sales. Gaming's sales force and Gaming's independent distributor network produce the balance of Systems' sales, primarily in situations where customers are making slot machine and computerized slot monitoring system purchase decisions at the same time. Worldwide, Systems has approximately 60,000 GMUs installed, or in the process of being installed, of which approximately 53,000 are in the United States. Over the past three years, Systems' own sales force has generated approximately 78% of its sales. Systems offers its customers the option of signing separate hardware and software maintenance agreements at the time of sale. These agreements are for periods of one year and automatically renew unless otherwise canceled in writing by the customer or Systems. After an initial warranty period, typically 90 days, the customer is invoiced a monthly hardware and software maintenance fee which provides essentially for repair and/or replacement of malfunctioning hardware and software, software version upgrades, and on-call support for software. Systems offers limited financing terms, normally less than one year, for sales to new installations. Most sales, however, are invoiced on a net 30 days basis. CUSTOMERS. The demand for computerized slot monitoring systems is driven either by regulatory requirements in a given jurisdiction and/or by a casino operator's competitive need to properly track their players' activity and establish and compile individual player profitability and other demographic information, all of which is of particular importance to casinos in developing marketing strategies. Systems' revenues are derived equally from selling to new installations as well as to existing customers who are either expanding their casino floors or are upgrading their hardware to a new product release. For the year ended December 31, 1995, Systems' ten largest customers (which includes certain multi-site casino operators that have corporate agreements with Systems) accounted for approximately 92% of Systems' revenues. Due to the high initial costs of installing a computerized monitoring system, customers for such systems generally have tended not to change suppliers once they have installed such a system. Future growth will be based on further expansion in the established and emerging markets as well as continued development efforts by Systems to provide customers with new and innovative hardware and software product offerings. COMPETITION. Although there are numerous companies providing computerized slot monitoring systems to casino operators, the competition currently consists of IGT, CDS, and to a lesser extent, by Gaming Systems International and Acres Gaming. Competition is keen in this market due to the number of providers and the limited number of casinos and the jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all main factors in determining a provider's success in selling its system. Systems believes the future success of its operations will be determined by its ability to bring new and innovative products to the market place and at the same time maintain a base of loyal existing customers. 82 GERMAN OPERATIONS INDUSTRY OVERVIEW Management believes that the German amusement game industry, a historically stable market, consists of approximately 200,000 wall machine units and 50,000 token machine units. German regulations require the replacement of wall machines after a period of up to four years, ensuring replacement sales in Germany. As a result, the annual market sales are approximately 50,000 units with fluctuations resulting primarily from economic conditions and regulatory changes. In May 1993, the maximum initial coin drop in wall machines was increased from 30 pfennigs to 40 pfennigs. This regulatory change caused some customers to defer purchases prior to this regulatory proposal pending its outcome. During mid-1994, the German government effected a tax law revision based on a European Court ruling, whereby V.A.T. charged to the operators of wall machines was significantly reduced. Management believes this tax law revision, offset in part by increased leisure taxes, caused the aggregate new wall machine unit sales to increase to approximately 47,000 units in 1994. Effective January 1, 1996, a regulatory change took effect requiring all arcade operators to have at least 15 square meters of space for each wall machine and a maximum of 10 machines per arcade. Starting in mid-1995, arcade operators began removing wall machines from their arcades to meet the requirements of this new regulation. Despite this adverse impact, the demand for new wall machines remained at approximately 47,000 units in 1995. All wall machines manufactured since 1992 have meters that monitor the amount inserted by players and paid out by the machine; from the end of 1996 on, all wall machines in use are required to have such meters, which management believes should lead to an increase in demand for new, metered wall machines in the latter half of 1996. See "--Operations of Wulff--Products." See "Management's Discussion and Analysis of Financial Condition and Results of Operations--BGII Results of Operations" and "Gaming Regulation and Licensing--Germany." One of the most important markets for wall machines in Germany is the arcade market. A significant number of arcades are owned by competitors of Wulff who are able to introduce their own machines into the arcades and generally do not purchase wall machines from Wulff. Wulff's two largest competitors, NSM, AG and Gauselmann, AG, own arcades containing approximately 15% of the wall machines in Germany. Management believes Wulff's share of the installed base of German wall machines market was approximately one-quarter of the market for each of the last three years. On an ongoing basis, the German legislative authorities regulate and monitor the wall machine industry so as to ensure certain manufacturing standards and the fairness of each machine to users. The most significant legislation presently affecting the wall machine industry relates to prescribed licensing procedures, the use, installation and operation of wall machines and the taxation of wall machines. There have been no recent material changes in these ongoing legislative regulations. See "Risk Factors--Operating History--Recent Losses" and "Gaming Regulation and Licensing--Germany." Token machines, unlike wall machines, are not designed to pay off money. Instead, a player wins games or tokens. Therefore, the strict German licensing requirements governing wall machines are not currently applied to token machines, although it cannot be ruled out that this may change in the future due to legislative changes or changes in administrative practice. Furthermore, management believes that the token machine market has reached its potential and that sales will decline because token machines are not subject to the four-year operation limit set by German regulations. See "Gaming Regulation and Licensing-- Germany." OPERATIONS OF WULFF PRODUCTS. Wulff's manufacturing operations were founded in Berlin in 1950 and sold to BEC in 1972. Wulff produces and distributes a variety of models of wall machines, under the trade name "Bally Wulff", for operation in arcades, hotels, restaurants and taverns primarily in Germany. These wall machines are coin-operated, armless gaming devices similar to slot machines that award winnings for matching numbers or symbols on three to five wheels or drums and differ primarily in appearance, graphic design, theme, pay-table and customer appeal. Each game costs up to 40 pfennigs (approximately $0.28, assuming an exchange rate of $1=DM 0.6987 as of December 31, 1995 hereinafter) to play, although the player may deposit larger amounts to provide continuous play but not to increase payoffs. German regulations limit the maximum payout to ten times the player's stake (DM 4.00 or approximately $2.80 per game). Current models of wall 83 machines provide the player the opportunity to win 100 special games on one play, which increases the potential amount that can be won on the minimum coin drop. German regulations require a minimum payback of 60% for wall machines, although many machines are generally programmed to pay back at higher rates to encourage play. Effective January 1, 1997, all wall machines in use must have meters that monitor the amount inserted by players and paid out by the machine. See "Gaming Regulation and Licensing-- Germany." In addition to manufacturing wall machines, Wulff distributes wall machines and other recreational and amusement coin-operated machines manufactured by third parties to provide a more extensive line of products to its customers. These machines include pool tables, dart games, pinball machines, jukeboxes and arcade games and are distributed primarily for use in arcades, restaurants, hotels and taverns. One of BGII's indirect subsidiaries, GmbH distributes traditional slot machines, manufactured primarily by Gaming, principally to customers in Europe, Russia and, through its branch office in Johannesburg, South Africa, the African continent. The following table sets forth the percentage of Wulff's revenues by product line during the periods shown:
PERCENTAGE OF REVENUE ------------------------------- YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Wall machines manufactured by Wulff...................................... 42.8% 50.8% 37.5% Recreational and amusement machines and third party wall machines distributed............................................................. 36.4 20.0 22.3 Slot machines distributed................................................ 5.0 6.3 11.2 Other (primarily used machines, parts and services)...................... 15.8 22.9 29.0 --------- --------- --------- 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- ---------
Wulff also manufactures token machines for operation in arcades, hotels, restaurants and taverns in Germany. See "Gaming Regulation and Licensing--Germany." PRODUCT DEVELOPMENT. Management believes that Wulff's wall machines are viewed as premium products because of their quality, dependability, ease of service and proven ability to attract players and generate revenue. Wulff designs its machines to appeal to each of the three categories of participants in the distribution process-- Wulff's sales representatives and independent distributors, the owner/operators of the machines, and the players. The sales representatives and distributors require machines with broad appeal that are easy to demonstrate and sell. The owner/operators desire reasonably priced machines that are easy to collect from and service and that are proven revenue generators. The players prefer entertaining machines that are simple to play and have unique features. Wulff's management has formed design teams which are responsible for generating ideas for creative new machines. These teams are comprised of representatives of each department involved in the production and distribution of machines, such as art design, engineering, manufacturing, marketing and sales. The design teams meet for three days each calendar quarter at a site away from Wulff's headquarters. The teams analyze machines currently being marketed by Wulff and its competitors to assess their strengths and weaknesses and then suggest ideas for new machines. These ideas are reviewed to determine which machines should be produced on a trial basis. Wulff typically pursues 15 to 20 projects at any given time, and approximately 12 to 15 machines are submitted for licensing each year. These new machines are built in limited quantities and then test marketed for three to six months. Generally, less than one-half of the new machines tested are put into full scale production. Management believes this process of generating new ideas and then turning only a limited number of the ideas into machines which will reach the mass market is responsible for the high quality of Wulff's machines and their continued acceptance and success in the marketplace. Because the machines have a reputation for quality, Wulff is often able to produce and market a particular model for up to two years, which management believes, based upon its experience in the relevant marketplace and feedback from customers, exceeds the industry average. 84 During 1993, 1994 and 1995, Wulff spent approximately $3.3 million, $3.5 million, and $3.6 million, respectively, on product research and development. SALES AND MARKETING. Wulff sells approximately 94% of its products through its own sales force of 56 people located in its 23 regional sales offices. Independent German distributors account for approximately 6% of sales. Approximately 97% of Wulff's sales of new wall machines are in the German market. The sales offices are operated as independent profit centers and are assigned geographic areas for which they are responsible for sales, servicing the machines and assisting in collecting customers' accounts receivable balances. GmbH maintains a sales office in Hanover for the distribution of traditional slot machines, principally in Europe, and has an office in Johannesburg, South Africa for the sale and distribution of traditional slot machines into the African continent. Wulff devotes substantial time, money and effort marketing and promoting its products. Wulff takes an active part in the annual Amusement Game Fair which is held each January in Frankfurt, Germany, at which Wulff introduces new products. The wall machines manufactured and sold by Wulff generally sell for prices ranging from DM 5,000 to DM 8,000 (approximately $3,493 to $5,590). A majority of machines distributed by Wulff are paid for in full within 90 days after the sale. Remaining sales of machines are financed by Wulff generally over a 12-month period, with interest rates of up to 12%. For this reason, Wulff establishes an internal credit rating and credit limit for each customer. Under Wulff's conditions of sale, title to a machine is retained by Wulff until the machine has been paid for in full. In addition, Wulff demands collateral as security. Currently, Wulff provides customer financing for approximately 20% of its sales, and management expects this practice to increase during the latter half of 1996. In approximately 60% of its sales, Wulff accepts wall machines and/or other recreational and amusement equipment as trade-ins toward the purchase of new machines. To the extent possible, the used machines are then resold. CUSTOMERS. Each of Wulff's top ten customers in 1994 has maintained its relationship with Wulff for over three years. For the fiscal year ended December 31, 1995, no single customer accounted for more than 3% of Wulff's sales, while Wulff's top ten customers accounted for approximately 10% of Wulff's sales. Wulff's customer base for wall machines may be divided into two categories which differ based on the preferences of their clientele. Arcade operators are generally interested in purchasing the newest products in the hopes that a new innovation will result in a high level of public demand to play the new "hot" product. Hotels, restaurants and taverns, on the other hand, are generally more inclined to purchase lower-priced existing models with proven earnings records to provide as an amenity to customers. ASSEMBLY OPERATIONS. Wulff's manufacturing process is primarily an assembly operation. Its manufacturing facility consists of a four-story, 100,000-square foot building in Berlin, Germany. Wulff purchases its key raw materials, sub-assemblies and fabricated parts from a variety of suppliers, and most parts are purchased from multiple suppliers. While there exists no formal long-term contract commitments to any single supplier, Wulff has placed certain standing orders with suppliers through 1996 to help assure the availability of specific quantities on an as-needed basis. These orders are cancelable by Wulff at any time without penalty. Most of the component parts are standard on all models of all Wulff's wall machines, which promotes easy conversion from the production of one model to another in response to customer demand. Except in connection with certain promotions, Wulff generally maintains low inventory levels of assembly parts, and the amount of work-in-process is generally less than the number of machines sold in one week. Because of its manufacturing structure, Wulff is capable of substantially increasing its wall machine output without significant capital expenditures. Wulff continues to improve its manufacturing efficiency and productivity through the use of computer-aided design systems, automated production equipment and devotion of substantial resources to product quality control. COMPETITION. Germany's wall machine manufacturing industry is dominated by Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management believes these three entities collectively account for more than 90% of the entire market. Wulff competes with many companies in the distribution of coin- operated amusement games, some of which are larger and have greater resources than Wulff. Wulff's two 85 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. Management believes that the primary competitive factors in the wall machine coin-operated amusement game market are the quality and depth of the product line, price and customer service which includes the ability to fill orders quickly and efficiently. Management believes that the market for token machines has expanded rapidly, from sales of approximately 3,900 units in 1993 to approximately 16,700 units in 1995. Management believes that token machines have in recent years competed directly with wall machines due to the lower prices and the popularity of the token machines. Furthermore, management believes that the token machine market may have reached its potential and that sales may decline because token machines are not subject to the four-year operation limit set by German regulations. See "Gaming Regulation and Licensing--Germany." GAMING MACHINE MANAGEMENT OPERATIONS NEVADA OPERATIONS Alliance's Nevada gaming machine management operations involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other gaming machines in local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores operated by third parties ("local establishments"). Alliance's gaming machine management operations target local residents who generally frequent establishments close to their homes. The following table sets forth certain historical data concerning the Alliance's Nevada gaming machine management operations:
AT JUNE 30, ----------------------------------------------------- AT DECEMBER 31, 1991 1992 1993 1994 1995 1995 --------- --------- --------- --------- --------- --------------- Number of electronic gaming machines owned...................................... 5,240 5,505 5,121 5,148 5,208 5,288 Number of locations......................... 527 552 508 496 516 521
Alliance enters into gaming machine management agreements with local establishments through either revenue-sharing arrangements or space lease arrangements. In revenue-sharing arrangements, most common with taverns, restaurants and convenience stores, Alliance does not pay rent, but rather receives a percentage of the revenues from the electronic gaming machines. In such arrangements, both the owner of the local establishment and Alliance must have a gaming license. In space lease arrangements, most common with supermarkets and drug stores, Alliance pays a fixed rental to the owner of the local establishment and Alliance receives all of the revenues derived from the gaming machines. In such arrangements, only Alliance (and not the establishment owner) is required to hold a gaming license. Most of the local establishments serviced by Alliance are restricted by law to operating no more than 15 gaming machines. Revenue-sharing arrangements accounted for approximately 80%, 86%, 86% and 86% of the Nevada gaming machine management revenues and 77%, 80%, 78% and 78% of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the six-month period ended December 31, 1995, respectively. At December 31, 1995, the weighted average remaining term of Alliance's revenue-sharing arrangements was approximately 3.9 years. Space lease arrangements accounted for approximately 20%, 14%, 14% and 14% of the Nevada gaming machine management revenues and 23%, 20%, 22% and 22% of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the six-month period ended December 31, 1995. At December 31, 1995, the weighted average remaining term of Alliance's space leases was 2.9 years. Alliance has historically been able to renew or replace revenues from expiring agreements with revenues generated by renewal or replacement contracts. However, during the past few years, greater competitive pressures in the gaming machine management business have increased the portion of gaming machine management revenues payable to the local establishment, decreasing Alliance's gross margins from these operations. As a result, Alliance has refocused its Nevada gaming machine management operations to 86 emphasize return on investment rather than increasing market share and has undertaken a systematic review process to adjust its contract mix to emphasize higher margin contracts and, where permissible, canceling or not renewing unprofitable contracts. SALES AND MARKETING. As the largest Nevada gaming machine management operator, Alliance believes that it is able to differentiate itself from its competitors through a full-service operation providing its customers marketing assistance and promotional allowances and using its advanced design capabilities to provide electronic gaming machines with features customized to customers' needs, such as Gambler's Bonus. Alliance has developed and is currently testing a new system called "Gambler's Bonus". Gambler's Bonus is designed as a cardless slot players' club and player tracking system, which allows multiple route locations to be linked together into a distributed gaming environment. Through this technology, Alliance is able to provide its players and customers with many of the same gaming choices currently available only in a larger scale casino environment such as multi-location progressive jackpots, bigger jackpot payouts and traditional players' club enhancements. Additionally, Alliance will offer a series of new and unique games available only to members of the Gambler's Bonus players' club. Since launching Gamblers' Bonus, the gaming machines linked to Gambler's Bonus have experienced an increase in net win per day per machine. As of March 1, 1996, Alliance had 286 machines linked to the Gambler's Bonus system, and management expects to have Gambler's Bonus in approximately 50 locations, or a total of 430 machines, by the end of March 1996 and 88 locations, or a total of 980 machines, by June 1996. Alliance believes Gambler's Bonus will improve both the revenues and operating efficiencies of its Nevada gaming machine management operations and has the potential to create additional opportunities in the gaming machine management segment of the gaming industry. Additionally, in keeping with the trends in the Nevada market, Alliance is updating its gaming device base with bill-acceptor equipped electronic gaming machines which are also expected to improve revenues and operating efficiencies. CUSTOMERS. Alliance believes it has a diversified customer base with no one customer accounting for more than 10% of Alliance's revenues generated from Nevada gaming machine management operations during fiscal 1995, although approximately 14.1% of such revenues was generated through an affiliated group of such customers. The affiliated group consists of eight partnerships each having one individual partner who is common to all such partnerships. For the year ended December 31, 1995, Alliance's ten largest customers accounted for approximately 20.7% of Alliance's revenues. ASSEMBLY OPERATIONS. Alliance currently manufactures and distributes electronic gaming machines in Nevada for use in its gaming machine management operations. Alliance manufactured approximately 80% of the electronic gaming machines currently used in its Nevada gaming machine management operations. The manufacturing process generally involves the assembly of standard components which are readily available from various sources. Alliance is not dependent upon any one supplier for the material or components used in its manufacturing operations. COMPETITION. Alliance is subject to substantial direct competition for its revenue-sharing and space lease gaming machine management locations from several large gaming machine management operators and numerous small operators, located principally in Las Vegas, Reno and the surrounding areas. Alliance and Jackpot Enterprises, Inc. are the dominant gaming machine management operators in Nevada. The principal method of competition for gaming machine management operators includes the economic terms of the revenue-sharing or space lease arrangement, the services provided and the reputation of the gaming machine management operator. Price competition is intense and has reduced Alliance's gross margin on such operations over the past several years as the percentage of the gaming device revenues retained by local establishment owners has increased. LOUISIANA OPERATIONS In March 1992, Alliance obtained a contract to operate video poker gaming devices in the greater New Orleans, Louisiana area through its controlled subsidiary, VSI. Alliance entered into an operating agreement which runs through May 2002 with Fair Grounds for Alliance to be the exclusive operator of video poker devices at the only racetrack and ten associated OTB parlors in the greater New Orleans area. 87 Alliance selects, installs, manages and services video poker devices for each of the ten facilities owned by Fair Grounds for which it receives a percentage of the revenue generated by the devices. Alliance currently has installed 694 video poker devices in Louisiana. Under the Louisiana gaming laws and regulations, the majority stockholder of any entity operating video poker devices in Louisiana must be a domiciled resident of the State of Louisiana. As a result, Alliance owns 49% of the capital stock of VSI and three prominent members of the Louisiana business and legal community own the remaining 51%. Pursuant to the terms of the VSI Loan, VSI may not pay cash dividends or make any distribution of its property. The VSI Loan amortizes quarterly until due in full in September 1998 and may be prepaid at any time without penalty. Alliance, however, owns all the voting stock of VSI and the majority of its officers and directors are Alliance employees. Alliance has a 71% interest in dividends of VSI in the event dividends are declared. Alliance also formed two other Louisiana subsidiaries, Southern Video Services, Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI are structured in a manner similar to VSI except that Alliance is entitled to receive 60% of any SVS dividends. Under the terms of its contract with Fair Grounds, Alliance must conduct any additional video poker operations in Louisiana other than gaming at racetracks or OTB parlors through SVS. To date, SVS and VDSI have not engaged in business in Louisiana. In addition, Alliance and Fair Grounds may have certain mutual rights of first refusal to participate in certain Louisiana riverboat gaming opportunities of the other party on terms and conditions to be specified. Alliance is prohibited by the Louisiana Act from engaging in both the manufacture and operation of gaming machines in Louisiana and, therefore, Alliance does not manufacture its own gaming machines for use in Louisiana. See "Risk Factors--Regulation by Gaming Authorities" and "Gaming Regulation and Licensing-- Louisiana." On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race Course in New Orleans where Alliance operated 199 gaming machines prior to the fire, 193 of which were destroyed in the fire. Alliance was fully insured for all equipment, leasehold improvements, other assets and business income with the exception of immaterial deductibles. From December 17, 1993 through December 31, 1995, Alliance recorded approximately $815,000 of income from business interruption insurance proceeds. Alliance is discussing settlement of additional business interruption claims with the insurance carrier. SALES AND MARKETING. VSI has developed an extensive marketing program under the name "The Players Room" which is designed to attract primarily local residents to its facilities. Media placement has focused on newspaper and radio advertising with promotions including a player's club, direct mailings and offerings of a wide range of prizes. Alliance intends to selectively expand its operations in the greater New Orleans area by increasing the number of video poker devices in certain of its existing locations as demand warrants, as well as investigating the addition of new locations under its current contract with the Fair Grounds in areas where competitive factors are favorable. Under the Louisiana Act, racetracks and OTB parlors are permitted to install an unlimited number of video poker devices while truckstops and taverns may install only limited numbers of such devices. COMPETITION. Alliance is subject to extensive competition for contracts to operate video poker devices and Alliance's racetrack and OTB parlors compete with various truck stops and locations with liquor licenses throughout the New Orleans area. Each truck stop is permitted to operate up to 50 video poker devices and each tavern is permitted to operate up to three video poker devices. In addition, Louisiana has authorized riverboat gaming statewide and several riverboats are operating in Orleans Parish. Riverboats are permitted to have live table games and an unlimited number of gaming machines, including slot machines. Louisiana has also authorized one land-based casino, permitted to include live table games and an unlimited number of gaming machines in New Orleans, which opened in May 1995; however, its operator filed for bankruptcy reorganization and ceased operations in November 1995. The operator has stated its intention to reopen the land-based casino following reorganization. 88 CASINO OPERATIONS RAINBOW CASINO. On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. The entire project consists of the Rainbow Casino, which is a 24,000-square foot casino owned and operated by Alliance containing approximately 589 gaming machines and 28 table games, and also includes an 89-room Days Inn hotel and a 10-acre indoor and outdoor entertainment complex called Funtricity Entertainment Park, which was developed by a subsidiary of Six Flags Corporation. Both the hotel and entertainment park, which were substantially completed in late May 1995, are operated by third parties. The entire property, known as Vicksburg Landing, is the only destination of its kind in Mississippi containing a casino/family entertainment complex. Through a wholly-owned subsidiary, Alliance originally purchased a 45% limited partnership interest in RCVP, a Mississippi limited partnership which owns the casino, all assets (including the gaming equipment) associated with the casino and certain adjacent parcels of land. The 55% general partnership interest in RCVP was held by RCC, an unaffiliated Mississippi corporation. Pursuant to a management agreement dated October 29, 1993, which terminates on December 31, 2010, Alliance through a wholly-owned subsidiary also serves as manager of the casino. In connection with the completion of the casino and the acquisition of its original 45% limited partnership interest, Alliance funded a $3,250,000 advance to RCC on the same terms as RCC's financing from HFS (other than the fact that such advance is subordinate to payments due to HFS, and the HFS financing is secured). The HFS financing provided to RCC on August 3, 1993 consisted of a $7.5 million loan secured by a first priority lien on all of the assets of the project. The terms of the HFS financing provide that, in connection with the loan and certain marketing services provided by HFS to RCC, RCC will pay to HFS a perpetual royalty based upon the casino's annual gross gaming revenues of 12% on the first $40 million, 11% on the next $10 million, and 10% thereafter. On March 29, 1995, Alliance consummated certain transactions whereby Alliance acquired from RCC the controlling general partnership interest in RCVP and increased its partnership interest. In exchange for the commitments by NGM, a subsidiary of National Gaming Corporation, and Alliance to provide additional financing (up to a maximum of $2,000,000 each) to be used, among other things for the completion of certain incomplete elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy) and for a $500,000 payment paid to HFS as a waiver fee, a commitment by Alliance to fund any additional capital necessary for the completion, upgrading or working capital of the project, the following occurred: (i) a subsidiary of Alliance became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As of December 31, 1995, amounts outstanding under the HFS facility and the related financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of cash above $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. In addition, if during any continuous 12-month period until December 31, 1999 the casino achieves earnings from the project of at least $10.5 million before deducting depreciation, amortization, certain debt payments and substantially all taxes, then Alliance will be obligated to pay to certain principals of the original partnership an amount aggregating $1 million in cash or shares of Common Stock. Also, Alliance's 5.2% royalty on gross revenues was terminated on the date it became the general partner. PLANTATION STATION. In April 1990, Alliance purchased, for an aggregate purchase price of $9,700,000, substantially all of the assets of the Plantation Station casino ("Plantation Station") located near the border of Reno and Sparks in northern Nevada. Plantation Station is a 20,000 square-foot casino which currently contains approximately 453 gaming machines, keno and 10 table games, including blackjack, craps, roulette and poker. In addition, Plantation Station offers a race and sports book which is leased to an independent race and sports book operator and includes a 300-seat restaurant owned by Alliance. Plantation Station is convenient to both Reno and Sparks and caters to the local market. 89 SALES AND MARKETING. Alliance's casinos target the cost-conscious market. Alliance promotes its casinos primarily by providing quality food at reasonable prices and through special promotional events. Alliance believes its experience with operating small casinos targeted to local markets will enable it to effectively operate casinos in emerging gaming jurisdictions that have similar characteristics. COMPETITION. Gaming of all types is available throughout Nevada in numerous locations, including many locations similar to those at which Alliance operates gaming machines. All of these gaming opportunities may compete directly or indirectly with Alliance's casino operations. Many of Alliance's competitors possess substantially greater financial and other resources than Alliance. Many of such competitors include large casino-hotels which offer more variety and amenities and may be perceived to have more favorable locations than Alliance. The operation of casinos is a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and success of marketing programs. Plantation Station's primary casino operations focus on the local market rather than the tourist market. The Rainbow Casino generally appeals to both locals and visitors. Accordingly, Alliance believes that the principal competition for Plantation Station's operations comes from larger "locals" casinos. The Rainbow Casino appeals to both locals and visitors to historic Vicksburg, Mississippi. The Rainbow Casino is the fourth gaming facility to open in Vicksburg, Mississippi and as such, faces substantial direct competition for gaming customers in the region. BUSINESS DEVELOPMENT ACTIVITY Through a wholly-owned subsidiary, Native American Investment, Inc., Alliance has a contract to develop Class II and III gaming opportunities with an Indian tribe in California. Class II gaming includes bingo, pulltabs and non-banking card games that are already permitted in a state, and is subject to the concurrent jurisdiction of the National Indian Gaming Commission ("NIGC") and the applicable Indian tribe. Class III gaming is a residual category composed of all forms of gaming that are not Class I gaming (which consists of non-commercial social games played solely for prizes of minimal value or traditional forms of Indian gaming) or Class II gaming, including casino-style gaming. The contract is subject to negotiations resulting in satisfactory compacts with the state and approval of the contract by the National Indian Gaming Commission. The Governor of California has to date refused to negotiate a compact covering Class III electronic gaming machines and house-banked games in California and is currently engaged in related litigation over the scope of gaming issues with certain Indian tribes. There can be no assurance as to ultimate outcome of these litigation activities or the successful completion or operation of any part of this project. On March 27, 1996, the United States Supreme Court ruled that a portion of the Indian Gaming Regulatory Act was unconstitutional. As a result, Federal courts cannot oversee negotiations between Indian tribes and state officials about the scope of on-reservation gaming and Indian tribes cannot file suits against states or state officials. Management of Alliance believes that this ruling will have a materially adverse effect upon its Native American casino development activities in California. Accordingly, management is considering whether the current net book value of its investment in Native American Investment, Inc., of $1,800,000 may not be fully recoverable under current circumstances, necessitating a write-off of part or all of that balance during the current quarter. Alliance and Casino Magic Corporation, through wholly-owned subsidiaries, are members in KGP and KFP, both Kansas limited liability companies. Under the Option Agreement granted to KGP by Camptown and TRAK Southeast, KGP has been granted the exclusive right, which right expires on September 13, 2013, to operate gaming machines and/or casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000 loan from Boatmens' Bank which was guaranteed by KFP. Alliance and Casino Magic Corporation each invested $1,580,000 in KFP which was used to purchase a certificate of deposit to collateralize its guarantee. Construction of Camptown's racing facility was completed and the facility opened for business in May 1995. The racing facility was temporarily closed on November 5, 1995 due to poor financial results. Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an intention to reopen for business following bankruptcy reorganization. Boatmen's Bank demanded payment 90 of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which is secured by a second mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the Option Agreement. KFP intends to vigorously pursue all of its rights and remedies which may include, among other things, seeking authority from the bankruptcy court to commence a foreclosure action. In the case of a foreclosure action, KFP would be required to assume or pay the existing first mortgage of approximately $2,000,000 if KFP becomes the purchaser at any such sale. The Kansas legislature has considered gaming bills during the 1996 session although none have passed. There can be no assurance that gaming of any type will ever be legalized in Kansas and management intends to continue to evaluate the recoverability of its investment. As described in "Unaudited Pro Forma Condensed Combined Financial Information," the Company intends to reduce Alliance development expenses, which related to mergers, acquisitions and joint ventures, following the Transaction. The reduction reflects the elimination of costs that were being incurred prior to Alliance's accomplishment of its strategic plan to acquire a major electronic gaming machine manufacturing company. To accomplish this reduction the Company intends to reduce payroll costs and fees paid to consultants and legal costs related to non-BGII transactions Alliance had been pursuing. PATENTS, COPYRIGHTS AND TRADE SECRETS Alliance has copyrighted both the source code and the video presentation of its games and registered many of these copyrights with the U.S. Copyright Office under the Copyright Act of 1976. Game version upgrades and new games are currently in the process of United States patent and copyright registration. Such copyrights expire at various dates from September 2056 to October 2065. In addition, some of the games have Federal and/or state trademarks registered with the U.S. Patent and Trademark Office. Some of the games (either currently used or reserved for future development) also are covered by patents filed with the U.S. Patent and Trademark Office. Such patents expire at various dates from May 2008 to March 2012. BGII is obligated under several patent agreements to pay royalties ranging from approximately $50 to $200 per game depending on the components in the gaming machines. Additionally, based on an amendment to the trademark licensing agreement between BGII and BEC dated March 31, 1995, BGII is obligated to pay a royalty on new machines sold of $25 to $30 per machine beginning on March 31, 1995 with a minimum annual royalty payment of $500,000 for the initial five-year term of the amended agreement, which is subject to annual renewals thereafter. Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0 million, respectively. Pursuant to a Trademark and License Agreement, as amended, between BEC and BGII (the "License Agreement"), BGII licenses the name "Bally" from BEC for use in the businesses of BGII. In 1992, BGII paid $3.5 million to BEC in the form of an offset against a tax receivable which was owed by BEC to BGII for the licensing rights. See "Notes to BGII's Consolidated Financial Statements--Summary of Significant Accounting Policies--Intangible Assets." On March 27, 1995, BEC filed an action in the United States District Court, District of New Jersey seeking to revoke BGII's right to the use of the Bally trade name under the terms of the License Agreement. On March 31, 1995, BGII and BEC entered into a Trademark License and Settlement Agreement pursuant to which the above-described action was settled. BGII agreed to pay BEC a per machine royalty of $25 on the first 20,000 new machines sold annually on or after March 31, 1995 and $30 per machine for new machine unit sales in excess of 20,000 gaming machines, with a minimum annual royalty of $500,000 per year for the initial five year term of the amended agreement and subject to annual renewal thereafter. In addition, BGII agreed to rebate to BEC an amount for every new gaming machine sold to BEC or its affiliates for two years. As part of the settlement, BGII retained its right to the use of the Bally trade name for an initial period of five years with annual extensions thereafter at the option of BGII. The settlement has not had a significant impact on BGII's financial position, results of operations or cash flows. BEC has asserted that its permission is required for the surviving company in the Merger to continue to utilize the Bally trade name, an assertion which BGII has denied. On February 16, 1996, BGII received notice from BEC alleging that BGII had violated the License Agreement by, among other things, granting to Marine Midland a security interest in general intangibles. In such notice, BEC also stated that as 91 a result of the foregoing, it was immediately terminating the License Agreement. BGII does not believe that it has violated the terms of the License Agreement and BGII will defend its position against BEC's claims. See the description of related litigation under "Risk Factors--Bally Trade Name" and "--Litigation Relating to the Merger." In July 1992, BGII reached an agreement for an exclusive license until December 31, 2005, subject to extension, of a patent relating to the use of credit cards in gaming machines and acquired 1% of the stock of Scotch Twist, Inc., the private company which granted this license in exchange for the issuance of 100,001 shares of BGII's common stock. The licensing agreement requires BGII to commit $1.2 million in research and development costs related to the patent, plus any costs related to obtaining required regulatory approvals and licenses. As of December 31, 1995, approximately $1.0 million had been spent relating to this commitment. In connection with a settlement agreement entered between BEC, Gaming, BGI Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest in the Casino Interlink Multiple Location Progressive System (the "Progressive System") to IGT. BGII reserved certain rights in the sale, including the rights to continue to sell the Progressive System (i) within Europe, (ii) for use in single locations, and (iii) worldwide in lottery applications. BGII agreed to discontinue general sales of the Progressive System or any similar system outside of Europe for a period of five years. This agreement is binding on all successors and assigns of BGII, including the Company. The Company has registered the trademark "CEI" and its design and the logos of United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and Trademark Office. EMPLOYEES AND LABOR RELATIONS As of December 31, 1995, Alliance employed approximately 683 persons in the State of Nevada and approximately 8 persons in various states related to its business development activities, VSI employed approximately 73 persons in the State of Louisiana, RCVP employed 374 persons in the State of Mississippi, and BGII and its subsidiaries employed approximately 500 persons in various states and 440 persons in Germany. None of such employees is covered by a collective bargaining agreement. Wulff's employees, however, are covered by German regulations which apply industry-wide and are developed, to some extent, through negotiations between representatives of the metal working industry employers and the trade union representing the employees. These regulations are in the nature of collective bargaining agreements and cover the general terms and conditions of such items as wages, vacations and work hours. The regulations codify what are considered the common standards of employment in the German metal working industry. The Company believes its relationships with its employees are satisfactory. LITIGATION RELATING TO THE MERGER On or about June 19, 1995, three purported class actions were filed in the Chancery Court of Delaware by BGII stockholders against BGII and its directors (the "Fiorella, Cignetti and Neuman Actions") in connection with the then-proposed merger of BGII with WMS (the "WMS Merger"). Also on or about June 19, 1995, a purported class action was filed in the Delaware Court of Chancery by a BGII stockholder against BGII and its directors and Alliance (the "Strougo Action") in connection with the tender offer and consent solicitation made by Alliance (subsequently superseded by the execution of the Merger Agreement). On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman and Strougo Actions (collectively, the "Stockholder Plaintiffs") filed with the Court a motion to consolidate the four actions. On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an amended complaint that adopted certain allegations concerning self-dealing by BGII directors in connection with the merger agreement entered into with WMS (the "WMS Agreement"); added a claim relating to BGII's alleged failure to hold an annual meeting as required; and added WMS as defendant. The amended complaint also alleged that BGII intended, in violation of Delaware law, to sell Wulff without first seeking stockholder approval of the sale. The action sought an order enjoining defendants from proceeding with, consummating or closing the WMS Merger, or rescinding it if it closed; preventing the sale of Wulff without prior stockholder approval; declaring invalid BGII's agreement to pay WMS a fee if the WMS Agreement is terminated by BGII in 92 certain circumstances; compelling an auction of BGII and the provision of due diligence to Alliance; scheduling an immediate meeting of BGII stockholders; and awarding compensatory damages. Management believes these claims to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against BGII for BGII's failure to pay $4.8 million upon termination of the WMS Agreement. Management intends to vigorously defend this action. On November 22, 1995, BGII answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Agreement by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising BGII that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary judgement. BGII's response to that motion is presently due on March 29, 1996. Pursuant to the Merger Agreement, Alliance has agreed to indemnify BGII against such a claim under certain circumstances. On September 14, 1995, a stockholders' class and derivative action was commenced by Richard Iannone, an Alliance stockholder, against Alliance, the members of its current Board of Directors and certain of its former directors in Federal District Court in Nevada asserting, among other matters, that Alliance has wasted corporate assets in its efforts to acquire BGII by, among other things, agreeing to onerous and burdensome financing arrangements that threaten Alliance's ability to continue as a going concern and that Alliance had made false and misleading statements and omissions in connection with that effort by failing to disclose the need to refinance an additional $53 million of existing BGII indebtedness, by failing to disclose how Alliance would recapitalize the indebtedness of a combined Alliance/BGII and by failing to disclose the leading role played by Richard Rainwater in Alliance's efforts to acquire control of BGII which, given assurances made by Alliance to gaming regulators in Nevada that the unlicensed Mr. Rainwater would not play an active role in the management of Alliance, could expose Alliance to suspension or revocation of its Nevada gaming license. In addition, the stockholder action against Alliance alleges that (i) Alliance substantially inflated its results of operations by selling gaming machines at inflated prices in exchange for promissory notes (without any down payment) which Alliance knew could not be paid in full but which Alliance nevertheless recorded at full value, (ii) Alliance doctored reports sent to its route customers and (iii) the directors of Alliance had caused Alliance to engage in self-dealing transactions with certain directors which resulted in the exchange of Alliance assets for assets and services of vastly lesser value. On September 21, 1995, a United States magistrate denied the plaintiffs' request for expedited discovery, stating that Mr. Iannone was not an adequate representative and was not likely to succeed on the merits. On October 4, 1995, the defendants filed a motion to dismiss the action. On December 18, 1995, the plaintiff filed an amended shareholder derivative complaint. The plaintiff is no longer asserting any class claims. On March 5, 1996 the defendants filed a motion to dismiss the amended complaint. In June 1995, BEC asserted that a certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits the use by BGII of the trade name "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1999. BGII believes such claim is entirely without merit since the restriction referred to expired on January 8, 1996 and in any event does not relate to the use of the "Bally" trade name, which is covered by the License Agreement. The restriction in the Noncompete Agreement will not have any impact on the Company since the Effective Time of the Merger contemplates a closing of the Merger after the restriction in the Noncompete Agreement lapses. BEC has not reasserted this position since it was informed by BGII in July 1995 that the restriction lapsed on January 8, 1996. Consequently, management believes BEC has determined not to contest BGII's position. BEC has also asserted that a merger between BGII and the Merger Subsidiary would violate the terms of the License Agreement. BGII has denied these claims and management believes that the surviving company in the Merger will be permitted to use the "Bally" trade name in accordance with the terms of such License Agreement. Management believes that no breach of such License Agreement is caused by the Merger and the use of the "Bally" trade name by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995, Alliance, the Merger Subsidiary and BGII commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, 93 among other things, that the surviving company in the Merger will be permitted to use the "Bally" trade name in accordance with the terms of the License Agreement, and seeking injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced an action against BGII, Gaming, Alliance and the Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" trade name (the "BEC Action"). On November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC Action. The BEC Action alleges that BGII's continued use of the trade name after the Merger will (1) constitute a prohibited assignment of BGII's rights to use the trade name and (2) exceed the scope of the license granted to BGII because BGII will be under the control of Alliance. On December 15, 1995, BEC filed a motion for a preliminary injunction in the BEC Action. At a hearing on January 17, 1996, the court declined to issue a preliminary injunction, but held BEC's motion in abeyance pending the defendants' motion to dismiss and for summary judgment, which the defendants had filed on December 26, 1995. Thereafter, the parties advised the court that they are negotiating a settlement of the BEC Action. On March 29, 1996, at the court's request, the parties entered into a consent order providing for the administrative dismissal of the BEC Action, subject to its reopening should the settlement not be consummated. If the parties do not agree on a settlement, BGII, Gaming, Alliance and the Merger Subsidiary intend to vigorously defend their position in these actions. However, there can be no assurance that BEC will not be successful in its action to prohibit the surviving corporation in the Merger from using the "Bally" trade name. The loss of the "Bally" trade name may have a material adverse effect on the gaming machine operations of the Company. On February 16, 1996, BGII received notice from BEC alleging that BGII had violated the License Agreement by, among other things, granting to Marine Midland a security interest in general intangibles. In such notice, BEC also stated that as a result of the foregoing, it was immediately terminating the License Agreement. Management does not believe that BGII has violated the terms of the License Agreement and the Company will defend its position against BEC's claims. OTHER LITIGATION In 1994, after an intensive Federal investigation of Gaming's former Louisiana distributor, eighteen individuals were indicted on charges of racketeering and fraud against Gaming and the Louisiana regulatory system. Among those indicted were the former distributor's stockholders, directors, employees and others alleged to be associated with organized crime. Fifteen entered pleas of guilty before trial and the remaining three were convicted in October 1995. In addition, Alan Maiss, a former director and president of BGII, pled guilty to misprision of a felony in connection with such investigation. BGII, its subsidiaries and its current employees were not subject to such investigation. Prior to the conclusion of the Federal criminal case, BGII's activities with regard to its former VLT distributor in Louisiana were the subject of inquiries by gaming regulators and a report by the New Jersey Division of Gaming Enforcement dated August 24, 1995. The New Jersey Commission has indicated that it will hold a hearing on the matter, but no date has been set at this time. The New Jersey report made no specific recommendations for action by the New Jersey Commission. The Gaming Authorities in Ontario, Canada, who have investigated the matter, issued a gaming registration to Gaming on February 8, 1996. On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated (the "plaintiffs"). The plaintiffs filed suit against the Company and approximately 45 other defendants (each a "defendant," and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people into playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are 94 seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. ENVIRONMENTAL MATTERS The Company is subject to Federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, past spills, disposals or other releases of hazardous substances (together, "Environmental Laws"). The Company uses certain substances and generates certain wastes that are regulated or may be deemed hazardous under applicable Environmental Laws. From time to time, the Company's operations may result in certain noncompliance with applicable requirements under Environmental Laws. Any past noncompliance with applicable requirements under Environmental Laws has not had a material adverse effect on the Company's results of operations or financial condition. Further, the Company believes that any noncompliance or cleanup liability under current Environmental Laws would not have a material adverse effect on the Company's results of operations or financial condition. 95 GAMING REGULATION AND LICENSING The manufacture and distribution of gaming machines and the operation of gaming facilities are subject to extensive Federal, state, local and foreign regulation. Although the laws and regulations of the various jurisdictions in which the Company operates and into which the Company may expand its gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of these jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines and the operation of gaming facilities, as well as for the officers, directors, major stockholders and key personnel of such companies. Any person which acquires a controlling interest in the Company would have to meet the requirements of all governmental bodies which regulate the Company's gaming business. A change in the make-up of the Company's Board of Directors and management would require the various Gaming Authorities to examine the qualifications of the new board and management. The past conduct of management, which may be re-examined in conjunction with hearings in Nevada, New Jersey and Louisiana, would normally not be a controlling factor in passing upon the suitability of a successor group when that prior management group would no longer be in control of the Company. Absent actual approval of the successor interests controlling the Company after a merger or other acquisition, there can be no assurances that governmental authorities would give required approvals to any particular persons or groups. NEVADA The ownership and operation of casino gaming facilities in Nevada, and the manufacture, distribution and operation of gaming machines and cashless wagering systems for use or play in Nevada, or for distribution outside of Nevada, are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the "Nevada Act") and (ii) various local ordinances and regulations. The Company's gaming, manufacturing, distributing and slot machine route operations (herein referred to as "gaming machine management operations") are subject to the licensing and regulatory control of the Nevada State Gaming Control Board (the "Nevada Board"), the Nevada Gaming Commission (the "Nevada Commission"), the County Liquor and Gaming Licensing Board (the "Clark County Board") and various other county and city regulatory agencies, all of which are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things, (i) the prevention of unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time in any capacity; (ii) the strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments and the manufacture and distribution of gaming machines, cashless wagering systems and associated equipment; (iii) the establishment and maintenance of responsible accounting practices and procedures; (iv) the maintenance of effective control over the financial practices of licensees, including establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent practices; and (vi) providing a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the gaming related operations conducted by the Company. Alliance and BGII are each registered with the Nevada Commission as publicly-traded corporations ("Registered Corporations"). The Company's direct and indirect subsidiaries conduct gaming operations at various locations, conduct gaming machine management operations and manufacture and distribute electronic gaming machines (collectively, the "Alliance Nevada Subsidiaries"). Gaming, the operating subsidiary for BGII's domestic gaming operations, which manufactures and distributes electronic gaming machines, is also required to be licensed by the Nevada Gaming Authorities. The licenses held by the Alliance Nevada Subsidiaries and Gaming require the periodic payments of fees, or fees and taxes, and are not transferable. Alliance and BGII have been found suitable to own the stock of the Nevada Subsidiaries and Gaming, respectively, each of which is a corporate licensee (individually, a "Corporate Licensee" and collectively, 96 "Corporate Licensees") under the terms of the Nevada Act. As Registered Corporations, Alliance and BGII are required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of the profits from, the Corporate Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. Alliance, BGII and the Corporate Licensees have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities, gaming machine management operations, and in the manufacture and distribution of gaming machines for use or play in Nevada or for distribution outside of Nevada, as the case may be. The Merger must be approved in advance by the Nevada Board and the Nevada Commission. Hearings are currently scheduled before the Nevada Board on April 3, 1996 and before the Nevada Commission on April 25, 1996 to obtain the necessary approvals. All gaming machines and cashless wagering systems that are manufactured, sold or distributed for use or play in Nevada, or for distribution outside of Nevada, must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming machines manufactured for use or play in Nevada must be approved by the Nevada Commission before distribution or exposure for play. The approval process for gaming machines and cashless wagering systems includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming machines or cashless wagering system meets strict technical standards that are set forth in the regulations of the Nevada Commission. Associated equipment must be administratively approved by the Chairman of the Nevada Board before it is distributed for use in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or the Corporate Licensees in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and key employees of the Company who are actively and directly involved in the licensed activities of the Corporate Licensees may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities who, in addition to their authority to deny an application for a finding of suitability or licensure, have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or the Corporate Licensees, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or the Corporate Licensees to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and the Corporate Licensees that hold nonrestricted licenses are required to submit detailed financial and operating reports to the Nevada Commission. A nonrestricted license is a license for an operation consisting of 16 or more slot machines, or a license for any number of slot machines together with any other game, gaming device, race book or sports pool at one establishment. Substantially all material loans, leases, sales of securities and similar financing transactions by the Corporate Licensees that hold a nonrestricted license must be reported to or approved by the Nevada Commission. If it were determined that the Nevada Act was violated by a Corporate Licensee, the licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company and the Corporate Licensees and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate any nonrestricted gaming establishment operated by a Corporate Licensee and, under certain circumstances, 97 earnings generated during the supervisor's appointment (except for reasonable rental of the casino) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of the gaming licenses of the Corporate Licensees or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the gaming related operations of the Company. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his or her suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor" as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or the Corporate Licensees, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. The Nevada Commission may, in its discretion, require the holder of any debt securities of a Registered Corporation, such as the Notes, to file applications, be investigated and be found suitable to own the debt security if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if, without the prior approval of the Nevada Commission, it 98 (i) pays the unsuitable person any dividend, interest or any distribution whatsoever, (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain current stock ledgers in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to impose a requirement that a Registered Corporation's stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Nevada Commission has imposed this requirement on the Company. The Company may not make a public offering of its securities such as the Common Stock, Preferred Stock and Notes, without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. The Company has filed an application for approval of the Offerings and related transactions, including stock pledges, negative pledges, security interests and guarantees in connection with the Note Offering. However, there can be no assurance that the Offerings will be approved or that if approved, they will be approved on a timely basis. Any such approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. The Nevada Commission has also imposed a requirement on Alliance and BGII that it must receive the prior administrative approval of the Nevada Board Chairman for any offer for the sale of an equity security in a private transaction such as the Private Placement. The Company has filed a request for administrative approval of the Private Placement. However, there can be no assurance that the Nevada Board Chairman will approve the Private Placement or that he will approve it on a timely basis. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he or she obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as a part of the approval process relating to the transaction. The Merger and certain related transactions require the prior approval of the Nevada Commission. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices on Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada, and to the counties and cities in which the Licensees' respective 99 operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either (i) a percentage of the gross revenues received, (ii) the number of gaming machines operated, or (iii) the number of games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. The Corporate Licensees that hold a license as an operator of a gaming device route or a manufacturer's or distributor's license also pay certain fees to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of its participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees or employ a person in the foreign operations who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at establishments operated by a Corporate Licensee are subject to licensing, control and regulation by applicable local regulatory agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse affect upon the operations of the Corporate Licensees. LOUISIANA The manufacture, distribution, servicing and operation of video draw poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw Poker Devices Control Law and the Rules and Regulations promulgated thereunder (the "Louisiana Act"). Licensing and regulatory control is provided by the Video Gaming Division of the Gaming Enforcement Section of the Office of State Police within the Department of Public Safety and Corrections (the "Division"). The laws and regulations of the Division are based upon a primary consideration of maintaining the health, welfare and safety of the general public and upon a policy which is concerned with protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of Devices. The newly elected Governor of Louisiana has called for a referendum to determine the future of land-based casinos, riverboats, and video poker machines taken as a group. In response to this issue, a number of legislators have expressed the view that the voters should have a choice as to whether to continue to allow any or all of the above types of gaming. To date no action has been taken. See "Risk Factors -- Strict Regulation by Gaming Authorities." Each of the indirect operating subsidiaries for the Company's gaming operations in Louisiana, VSI and SVS, has been granted a license as a Device owner by the Division. Another indirect subsidiary of the Company, VDSI, has been granted a license as a distributor by the Division. Gaming has been granted a license as a manufacturer by the Division. These gaming subsidiaries are "Louisiana Licensees" under the terms of the Louisiana Act. The licenses held by such Louisiana Licensees expire at midnight on June 30 of each year and must be renewed annually through payment of fees. All license fees must be paid on or before May 15 in each year licenses are renewable. The Division may deny, impose a condition on or suspend or revoke a license, renewal or application for a license for violations of any rules and regulations of the Division or any violations of the Louisiana Act. In addition, fines for violations of gaming laws or regulations may be levied against the Louisiana Licensees and the persons involved for each violation of the gaming laws. The issuance, condition, denial, suspension or 100 revocation is a pure and absolute privilege and is at the discretion of the Division in accordance with the provisions of the Louisiana Act. A license is not property or a protected interest under the constitution of either the United States or the State of Louisiana. The Division has the authority to conduct overt and covert investigations of any person involved directly or indirectly in the video gaming industry in Louisiana. This investigation may extend to information regarding a person's immediate family and relatives and their affiliations with certain organizations or other business entities. The investigation may also extend to any person who has or controls more than a 5% ownership, income or profits interest in an applicant for or holder of a license or who is a key employee, or who has the ability to exercise significant influence over the licensee. All persons or entities investigated must meet all suitability requirements and qualifications for a licensee. The Division may deny an application for licensing for any cause which it may deem reasonable. The applicant for licensing must pay a filing fee which also covers the cost of the investigation. In order for a corporation to be licensed as a distributor by the Division, a majority of the stock of the corporation must be owned by persons who have been domiciled in Louisiana for a period of at least two years prior to the date of the application. In addition to licensure as a manufacturer of Devices under the Louisiana Act, Gaming has been licensed by the Division as a manufacturer under the Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana Riverboat Act"). Gaming's application for a permanent manufacturer's license as it relates to the land-based casino was pending before LEDGC at the time the operator of the land-based casino filed for bankruptcy reorganization and ceased operations, resulting in the termination of funding for the LEDGC regulatory operations and the effective closure of the LEDGC's operations. See "Risk Factors--Ongoing BGII Regulatory Investigations" and "Business--Other Litigation." The Division notified Alliance that it would be necessary to obtain approval from them prior to the Effective Time. To that effect, the Company has made all requests necessary to obtain any such licenses, permits or approvals required to be obtained prior to the Effective Time. MISSISSIPPI The manufacture, distribution, ownership and operation of gaming machines in Mississippi is subject to extensive state and local laws and regulations, including the Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the "Mississippi Regulations") promulgated thereunder. The Mississippi Gaming Commission (the "Mississippi Commission") oversees licensing and regulatory compliance. Gaming in Mississippi can be legally conducted only on vessels of a certain minimum size in navigable waters of the Mississippi River or in waters of the State of Mississippi which lie adjacent and to the south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison and Jackson, and only in counties in Mississippi in which the registered voters have not voted to prohibit such activities. The voters in Jackson County, the southeastern-most county of Mississippi, have voted to prohibit gaming in that county. However, gaming could be authorized in Jackson County should the voters fail to disapprove of gaming in that county in any referendum, which could be held annually. The underlying policy of the Mississippi Act is to ensure that gaming operations in Mississippi are conducted (i) honestly and competitively, (ii) free of criminal and corruptive influences and (iii) in a manner which protects the rights of the creditors of gaming operations. Gaming in the future may also be legally conducted on American Indian lands in Mississippi as regulated in part by the 1988 Indian Gaming Regulatory Act, which activity will not be subject to the Mississippi Act. The Mississippi Act requires that a person (including any corporation or other entity) must be licensed to conduct gaming activities in Mississippi. A license to own and operate gaming machines will be issued only for a specified location which has been approved as a gaming site by the Mississippi Commission. The Company through its interest in RCVP must apply for renewal of such licenses, which renewal cannot be assured. Gaming holds a license to manufacture and distribute gaming machines. The Mississippi Act also requires that each officer or director of a gaming licensee, or other person who exercises a significant influence over the licensee, either directly or indirectly, must be found suitable by the Mississippi Commission. In addition, any employee of the licensee who is directly involved in gaming must obtain a work permit from the Mississippi Commission. The 101 Mississippi Commission will not issue a license or make a finding of suitability unless it is satisfied, only after an extensive investigation paid for by the applicant, that the persons associated with the gaming licensee or applicant for a license are of good character, honesty and integrity, with no relevant or material criminal record. In addition, the Mississippi Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources, and that persons associated with the applicant have sufficient business probity, competence and experience to engage in the proposed gaming enterprise. The Mississippi Commission may refuse to issue a work permit to a gaming employee (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or knowingly violated the Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable cause. If an employee is denied a license, the Company must terminate his or her employment. The Merger must be approved in advance by the Mississippi Commission. A hearing is scheduled before the Mississippi Commission on April 18, 1996 to obtain the necessary approval. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or fine any person, as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or person who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but filing of such petition does not necessarily stay any action by the Mississippi Commission pending a decision by the Circuit Court. Each gaming licensee must pay a license fee to the State of Mississippi based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings). The license fee equals 4% of gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000 and up to $134,000 per month and 8% of gaming receipts over $134,000 per month. The foregoing license fees are allowed as a credit against any Mississippi State income tax liability for the year paid. An additional license fee, equal to $100 for each table game conducted or planned to be conducted on the gaming premises, is payable to the State of Mississippi annually in advance. Municipal and county fees may also be assessed and vary from jurisdiction to jurisdiction. All taxes and fees must be paid timely in order to retain a gaming license. The Mississippi Act also imposes certain audit and record keeping laws and regulations, primarily to ensure compliance with the Mississippi Act, including compliance with the provisions relating to the payment of license fees. Under the Mississippi Regulations, a gaming licensee cannot be publicly held, although an affiliated corporation, such as the Company, may be publicly held so long as the Company registers with and gets the approval of the Mississippi Commission. In addition, approval of any subsequent public offerings of the securities of the Company must be obtained from the Mississippi Commission if any part of the proceeds from that offering are intended to be used to pay for or reduce debt used to pay for the construction, acquisition or operation of any gaming facility in Mississippi. Under the Mississippi Regulations, a person is prohibited from acquiring control of a licensee without the prior approval of the Mississippi Commission. Any person who, directly or indirectly, or in association with others, acquires beneficial ownership of more than five percent of a licensee must notify the Mississippi Commission of this acquisition. The Mississippi Commission may require that a person be found suitable if that person holds between a five percent and ten percent ownership position and must require that a person be found suitable if that person owns more than ten percent of a licensee. Furthermore, regardless of the amount of ownership, any person who acquires beneficial ownership may be required to be found suitable if the Mississippi Commission has reason to believe that the acquisition of such ownership would be inconsistent with the declared policy of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit with the State Tax Commission a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission will not be permitted to have any direct or indirect ownership in the licensee. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in the licensee if found unsuitable, is guilty of a 102 misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied a revoked by the Mississippi Commission, the licensee is not permitted to pay such person of services rendered, or to employ or enter into any contract with such person. Dockside casinos may be required to be moved to a "safe harbor" in the event of a threatened hurricane. The appropriate county civil defense director will determine when such movement is required. In general, it is anticipated that casino vessels will have to be moved in the event of a Class III or more severe hurricane warning, where there is the possibility of 125 miles per hour wind speeds. The movement of a casino barge will not necessarily insure protection against damage or destruction by a hurricane. Furthermore, the removal of a casino barge will generally require several days, and as a consequence, the casino barge will be out of business during that movement, even if no hurricane strikes the casino site. Any permanently moored vessel used for casino operations must meet the fire safety standard of the Mississippi Fire Prevention Code, the Life Safety Code and the Standards for the Construction and Fire Protection of Marine Terminals, Piers and Wharfs of the National Fire Protection Association. Additionally, any establishment to be constructed for dockside gaming must meet the Southern Standard Building Code or the local building code, if such a local building code has been implemented at the casino's site. While unpowered and permanently moored vessels do not require certification by the United States Coast Guard, the Mississippi Commission has engaged the American Bureau of Shipping, an independent consulting agency, which will inspect and certify all casino barges with respect to stability and single compartment flooding integrity, in accordance with the Mississippi Regulations. The law and regulations permitting and governing Mississippi casino gaming were adopted during 1990 and 1991, and the first casinos opened in August 1992. Consequently, the interpretation and application of Mississippi law and regulations may evolve over time, and any such changes may have an adverse effect on Mississippi licensees. NEW JERSEY BGII's subsidiary, Gaming, is licensed by the New Jersey Commission as a gaming-related casino service industry ("CSI") in accordance with the New Jersey Casino Control Act (the "Casino Control Act"). Prior to expiration of the initial license period, Gaming filed an application for renewal of its license, which application has been deemed complete by the New Jersey Commission. Consequently, pending formal renewal of the license, Gaming is permitted to continue doing business with New Jersey casino licenses. Due to the change of control of BGII as a result of the Merger, BGII's license as a CSI will be terminated. The Company will apply for a new CSI license following the Merger; however, the Company's operations in New Jersey are expected to continue uninterrupted pursuant to transactional waivers granted by the New Jersey Commission on a sale-by-sale basis, as the New Jersey Commission has indicated its willingness to provide such waivers to the Company. In considering the qualifications of an applicant for a CSI license, the New Jersey Commission may require that the officers, directors, key personnel, financial sources and stockholders (in particular those with holdings in excess of 5%) of the applicant and its holding and intermediary companies demonstrate their qualifications. In this regard, such persons and entities may be investigated and may be required to make certain regulatory filings and to disclose and/or to provide consents to disclose personal and financial data. The costs associated with such investigation are typically borne by the applicant. ADDITIONAL DOMESTIC JURISDICTIONS The Company, in the ordinary course of its business, routinely considers business opportunities to expand its gaming operations into additional jurisdictions. Although the laws and regulations of the various jurisdictions in which the Company operates or into which the Company may expand its gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of those jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines as well as for the officers, directors, major stockholders and key personnel of such companies. 103 Alliance and BGII and their key personnel have obtained, or applied for, all government licenses, registrations, findings of suitability, permits and approvals necessary for the manufacture and distribution, and operation where permitted, of their gaming machines in the jurisdictions in which Alliance and BGII currently do business. The Company and the holders of its securities may be subject to the provisions of the gaming laws of each jurisdiction where BGII or its subsidiaries are licensed and/or conduct business, including, without limitation, the States of Arizona, Colorado, Connecticut, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory authority within each such state as well as Australian, Canadian and other foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or conduct business. Following the consummation of the Merger, the Company and its officers and directors will be required to apply for any government licenses, permits and approvals necessary or required by each of these jurisdictions. Holders of common stock of an entity licensed to manufacture and sell gaming machines, and in particular those with holdings in excess of 5%, should note that local laws and regulations may affect their rights regarding the purchase of such common stock and may require such persons or entities to make certain regulatory filings, or seek licensure, findings of qualification or other approvals. In some cases this process may require the holder or prospective holder to disclose and/or provide consents to disclose personal and financial data in connection with necessary investigations, the costs of which are typically borne by the applicant. The investigatory and approval process can take three to six months to complete under normal circumstances. See "Risk Factors--Strict Regulation by Gaming Authorities." FEDERAL REGISTRATION. The operating subsidiaries of the Company that are involved in gaming activities are required to file annually with the Attorney General of the United States in connection with the sale, distribution or operation of gaming machines. All currently required filings have been made. GERMANY German legislative authorities regulate and monitor the wall machine industry so as to ensure certain manufacturing standards and the fairness of each machine to users. The most significant legislation presently affecting the wall machine industry relates to prescribed licensing procedures, the use, installation and operation of machines and the taxation of same. No approval of the Merger is required to be obtained from German legislative or regulatory authorities. Wall machine manufacturers are dependent upon the successful introduction of new products each year and currently are required to receive prior government approval for each new product introduction. Manufacturers are required to apply for licenses through an agency of the German federal Ministry of Economics. Such agency maintains a policy of accepting only two licensing applications from an individual applicant at any given time. Wulff, through affiliates and subsidiaries, is in a position to file up to six concurrent applications. After receiving a prototype of a machine for which the applicant seeks government licensing approval, the federal agency deliberates for periods that range from approximately 6 to 24 months. If that product is approved, the wall machine manufacturer is permitted to reproduce the sample machine initially submitted for government approval. Every wall machine carries with it a small license card that permits the machine to be operated for up to four years from the initial date of sale, after which it may not be used in Germany. In Germany, wall machines sold via the secondary market may be operated by a new owner but only for the residual time remaining on each machine's four-year life. In addition to licensing requirements for manufacturers, any person or entity which intends to operate a licensed wall machine must apply to local regulatory authorities for a license, which will not be granted by the authorities if facts justify the assumption that the applicant does not possess the requisite reliability. In this proceeding, the applicant must furnish a police certificate of conduct. German legislation prohibits the public play of wall machines by individuals under age 18. Voluntary agreements among manufacturers and certain amusement game trade associations, among other things, restrict wall machine advertising and the ability of a player to play more than two machines at once, require all machines to carry visible warning notices and provide that every wall machine is automatically switched off for three minutes after one hour of continuous play. 104 In April 1993, the German government increased the maximum coin drop per game effective May 7, 1993 from 30 pfennig (approximately $0.21) to 40 pfennigs (approximately $0.28) although 30-pfennig machines are still permitted to be manufactured and sold. The Spielverordnung (gaming ordinance) specifically governs wall machines. These regulations limit game payouts to DM 4.00 (approximately $2.80 per game), require a minimum payout percentage, detail where the machines may be installed, how many may be installed and by whom, which games are prohibited, the technical requirements of the machines and technical review and approval. Operators must comply with regulations which stipulate how many machines may operate within defined square foot areas (15 square meters per machine, with a maximum of ten machines per location). The Spielverordnung was modified in 1985 to achieve a significant reduction of gaming machines. Gaming halls which through December 19, 1985 had more gaming machines than permitted under the revised regulations, have a transition period through December 31, 1995 to comply with the revised regulations. Such facilities were allowed to keep the 1985 number of wall machines until December 31, 1990. During the period January 1, 1991 to December 31, 1995 they are entitled to two-thirds of such total number, but they must be in compliance with the new limits by January 1, 1996. In taverns, restaurants, hotels and certain other establishments, no more than two gaming machines are permitted. See "Risk Factors--Operating History--Recent Losses." The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs the zoning classification of land and the type and density of development within the various zoning classifications. Effective January 27, 1990, the Baunutzungsverordnung was amended essentially to restrict the development of larger gaming halls to core commercial areas, limit the permissibility of smaller gaming halls in various types of mixed use zones and to ban gaming halls in most types of residential and all types of industrial use areas. Prior to such amendment, gaming halls, regardless of size, were generally allowed in core, business, mixed and industrial zones. In addition, on a case by case basis, each local zoning agency is authorized to exclude certain types of otherwise permissible uses, including gaming halls. Subject to certain exceptions, V.A.T. of 15% is generally assessed on the sale or supply of any goods and services in Germany. Since the total amount paid for particular goods or services is considered to be the gross price in calculating such tax, the actual rate is 13.04%. With respect to operators of gaming machines, prior to January 1, 1994, V.A.T. was to have been assessed at a rate of 0.1304 times a multiplier of, with respect to the period from January 1, 1991 through December 31, 1992, 2.0 times the amount remaining in the cash box after payoffs to players and, with respect to the period from January 1, 1993 through December 31, 1993, 2.5 times the amount remaining in the cash box after payouts to players. Commencing January 1, 1994 the tax rate was changed to 0.1304 times the cash handled by a machine. During mid-1994, the German government effected a tax law revision based on a European Court ruling whereby V.A.T. charged to the operators of wall machines was significantly reduced. See "Business--German Operations--Industry." In accordance with the ruling, for all cases arising on or after, or that were pending on, July 5, 1994, the basis for taxation has been the cash remaining in the machines. The rule requiring a minimum payout percentage is applied to the amount remaining in the cash box net of such V.A.T. Depending on the municipality in which a machine is located, operators may also have to pay a monthly leisure tax on each machine of up to DM 600 (approximately $419). The business conducted by Wulff had benefitted from the Berlin Promotion Act, a special tax statute which was intended to support the economy of West Berlin in various ways. With the reunification of Germany, the need for benefits provided by the law is perceived to have decreased. Consequently, the German government has enacted amendments to the Berlin Promotion Act which are designed to phase out, over a number of years, most of the tax benefits and incentives provided by the law. These tax benefits and incentives have been changed in five ways: (i) the V.A.T. rebates of up to 10% to enterprises located in West Berlin for sales to German customers outside West Berlin were eliminated by January 1, 1994, which began with an initial 30% decrease on January 1, 1992, and continued with further decreases of 20% on July 1, 1992, 25% on January 1, 1993 and 25% on January 1, 1994; (ii) the V.A.T. rebates of 4.2% for German (other than West Berlin) enterprises which purchase goods from West Berlin taxpayers' enterprises were abolished effective July 1, 1991; (iii) special accelerated depreciation allowances which permitted West Berlin taxpayers to pay to write off 75% of the cost of qualifying fixed assets at any time during the first three years after acquisition have been modified to limit the write off to 50%; (iv) certain special investment subsidies have 105 been restricted and were completely eliminated by the end of 1994; and (v) tax credits on German federal income taxes were reduced from 22.5% in 1990 to 20% in 1991, 13.5% in 1992, 9.0% in 1993 and 4.5% in 1994, and were phased out completely by December 31, 1994. During 1995, Wulff increased the amount of VAT reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. MANAGEMENT The name, age, present principal occupation or employment and five-year employment history of each of the directors and executive officers of the Company as of April 1, 1996 is set forth below. No director or executive officer is related by blood, marriage or adoption to any other director or executive officer. ALLIANCE
NAME AGE POSITION WITH THE COMPANY Steve Greathouse 45 Chairman of the Board, President and Chief Executive Officer Anthony DiCesare 33 Director and Executive Vice President--Development Craig Fields 49 Vice Chairman of the Board Joel Kirschbaum 44 Director and Consultant David Robbins 36 Director Alfred H. Wilms 51 Director Christopher Baj 36 Director Shannon L. Bybee 56 Executive Vice President--Government Affairs and Special Advisor to the Board of Directors John W. Alderfer 51 Senior Vice President--Finance and Administration; Chief Financial Officer and Treasurer David D. Johnson 44 Senior Vice President, General Counsel and Secretary Robert L. Miodunski 45 Senior Vice President--Nevada Route Group Robert M. Hester 40 Vice President--Human Resources and Administration Johnann F. McIlwain 49 Vice President--Marketing Robert L. Saxton 42 Vice President--Casino Group Robert A. Woodson 46 Vice President--Regulatory Compliance
Steve Greathouse joined the Company as President and Chief Executive Officer in August 1994, was appointed a director in October 1994, and became Chairman of the Board in March 1995. Mr. Greathouse, who has held various positions in the gaming industry since 1974, most recently served as the President of the Harrah's Casino Hotels Division of The Promus Companies Incorporated from September 1993 to July 1994. In this position, Mr. Greathouse had responsibility for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City. From July 1991 to September 1993, Mr. Greathouse served as President and (from 1990) Chief Operating Officer of Harrah's Southern Nevada, overseeing the operations of Harrah's Las Vegas and Harrah's Laughlin. From 1990 to July 1991, Mr. Greathouse served as Executive Vice President of Harrah's Southern Nevada. Mr. Greathouse is an active member and has served as the Chairman of the Board of the Nevada Resort Association and is on the Executive Committee of United Way of Southern Nevada. He has also served as a member of the Board of Directors of the Las Vegas Convention and Visitors Authority and on the Executive Committee of the Nevada Development Authority. Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and joined the Company as Executive Vice President--Development and as a director in July 1994. Prior to that time and following his graduation from business school in 1989 he was employed as an associate at Wasserstein, Perella & Co., Inc. from September 1989 to April 1991, where he worked in the Mergers and Acquisitions group. 106 Dr. Craig Fields was appointed a director in October 1994 and became Vice Chairman of the Board in March 1995. Dr. Fields was employed by the U.S. Department of Defense Advanced Research Projects Agency ("ARPA") from 1974 to 1990. He joined the Microelectronics and Computer Technology Corporation ("MCC") in 1990 as President and later became Chairman and CEO. He left MCC in 1994, and serves as director of two publicly-traded corporations in addition to the Company, Ensco, Inc. and Projectavision, Inc. Joel Kirschbaum was appointed a director in July 1994 and served as Chairman of the Board from July 1994 to March 1995. Mr. Kirschbaum is the sole stockholder, director and officer of KIC, which is the sole general partner in Kirkland, and of GSA, Inc. ("GSI"), the sole general partner in GSA. He has been engaged in operating the businesses of KIC and Kirkland since January 1991 when KIC and Kirkland were established, and GSI and GSA since June 1993. Prior to that time, he worked at Goldman, Sachs & Co. for 13 years, during the last six of which he was a General Partner. When he established KIC and Kirkland, Mr. Kirschbaum resigned his general partnership interest in Goldman, Sachs & Co. and became a limited partner. Mr. Kirschbaum resigned his limited partnership interest in Goldman, Sachs & Co. in November 1993. David Robbins was appointed a director in July 1994. Mr. Robbins has been an attorney with O'Sullivan, Graev & Karabell from September 1995 to the present. From May 1993 to September 1995, Mr. Robbins was an attorney with Kramer, Levin, Naftalis, Kamin & Frankel. From September 1984 to May 1993, Mr. Robbins was an attorney with Cahill Gordon & Reindel. Alfred H. Wilms has served as a director of the Company since November 1983. He served as Chief Executive Officer of the Company from December 1984 to July 1994 and as Chairman of the Board of the Company from August 1986 to July 1994. From 1976 through 1989, Mr. Wilms served as President of Wilms Distributing Company, Inc. and Wilms Export Company, N.V., a Belgian company engaged in the distribution of amusement and gaming equipment. From 1971 through 1976, Mr. Wilms held various positions with Bally Continental, including positions in research and development, marketing, sales, gaming operation and management, and, from 1974 through 1979, he served as a director of Bally Manufacturing Corp. Mr. Wilms is currently President and a director of Aqualandia, the largest waterpark in Europe; President and a director of Gibsa, a real estate company located in Spain; and a director of Jardin Parks, a real estate company located in Spain. Mr. Wilms is a citizen and resident of Belgium. Shannon L. Bybee joined the Company in July 1993 and served as President and Chief Operating Officer until July 1994. In July 1994, Mr. Bybee assumed the roles of Executive Vice President--Government Affairs and Special Advisor to the Board of Directors and also took a position as Associate Professor with the William F. Harrah College of Hotel Administration and the UNLV International Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee currently serves as a member of the board of directors of The Claridge Hotel and Casino Corporation, a position he has held since August 1988. Prior to his association with the Company, Mr. Bybee had served as Chief Executive Officer of The Claridge Hotel and Casino Corporation from August 1989 to July 1993. From 1983 to 1987 Mr. Bybee served as Senior Vice President and from 1978 to 1981 as Vice President of Golden Nugget, Inc. (now Mirage Resorts, Inc.). John W. Alderfer joined the Company in September 1990 as Vice President, Chief Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to Senior Vice President--Finance and Administration, in December 1993. Prior to joining the Company, Mr. Alderfer was the Chief Financial Officer of The Bicycle Club, a Los Angeles--based card casino, from February 1989 to September 1990. David D. Johnson joined the Company as Senior Vice President, General Counsel and Secretary in March 1995. Previously, Mr. Johnson developed extensive gaming industry experience representing a diverse group of casino clients as a Senior Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, a Nevada law firm where he was employed from January 1987 to April 1995. Prior to joining Schreck, Jones, Bernhard, Woloson & Godfrey, Mr. Johnson served as Chief Deputy Attorney General for the gaming division of the Nevada Attorney General's Office. Mr. Johnson serves as Vice Chairman of the Executive Committee of the Nevada State Bar's Gaming Law Section and is an officer and founding member of the Nevada Gaming Attorneys Association. 107 Robert L. Miodunski joined the Company as Senior Vice President--Nevada Route Group in March 1994. From January 1991 to March 1994, Mr. Miondunski was President of Mulholland-Harper Company, a sign manufacturing and service company. From 1984 through 1990, Mr. Miodunski held various positions with Federal Signal Company, the most recent being Vice President and General Manager of the Midwest Region of the Sign Group. Robert M. Hester joined the Company in October 1993 as Director of Human Resources and was promoted to Vice President--Human Resources and Administration in December 1993. From 1989 to 1993, Mr. Hester was Director of Human Resources for Sam's Town Hotel and Casino in Las Vegas. Johnann F. McIlwain joined the Company in June 1994 as Vice President--Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of Marketing of Greenwood, Inc. a Philadelphia-based gaming and entertainment company. From 1989 to 1991, she was Director of Marketing Services for Hospitality Franchise Systems, Inc. in Parsippany, New Jersey. Prior to joining Hospitality Franchise Systems, Inc. Ms. McIlwain served as Director of Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal Casino Hotel. Robert L. Saxton joined the Company in 1982 as Corporate Controller and was elected Vice President--Casino Group in December 1993. Since joining the Company, Mr. Saxton has held various management positions with the Nevada Route Group and is currently responsible for casino operations. He also serves as President of the Company's Louisiana subsidiaries. Robert A. Woodson joined the Company in 1988 as Director of Gaming Compliance and was promoted to Vice President--Regulatory Compliance in September 1993. Prior to joining the Company, Mr. Woodson was with the Investigation Division of the State of Nevada Gaming Control Board for 10 years. Christopher Baj has provided financial and operational consulting services to various clients since April 1987 to the present. From January 1993 to December 1995, Mr. Baj was also employed as the senior manager of Stanley L. Levin, CPA. From April 1987 to December 1992, Mr. Baj was employed as the senior consultant at Levin, Callaghan & Nawrocki, CPA's. Mr. Baj is a Certified Public Accountant. Following consummation of the Merger, the Company intends to evaluate the composition of its Board of Directors to insure that the Board includes individuals having appropriate skills and experience in light of the expanded scope of the Company's operations following the Merger. With the exception of Hans Kloss, who will continue as President of BGII and Managing Director of Wulff, and Robert Conover, who will continue as President of Systems, and Richard Gillman and Neil Jenkins, who will not continue with the Company, the current executive officers of BGII, if any, who will be employed by the Company after the Merger have not yet been determined. The Company expects that a substantial number of BGII officers will remain employed by the Company following consummation of the Merger. Hans Kloss has been a Director of BGII since August 1991 and President and Chief Operating Officer of BGII since May 1993. Mr. Kloss has been the Managing Director of BGII's German subsidiaries, Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, since 1981 and has been employed by those companies since 1970. Robert Conover is the President of Systems and has held that position since November 1990. Mr. Conover also serves as Vice-President and Chief Information Officer of BEC and has served as such since December 1992. Mr. Conover is also Senior Vice-President in charge of Management Information Systems Operations at the BEC subsidiaries that operate casino hotels, and has held that position since 1983. 108 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT The following table sets forth certain information as of April 1, 1996 with respect to the beneficial ownership of the Common Stock, which constitutes the Company's only outstanding class of voting securities, by (i) each person who, to the knowledge of the Company, beneficially owned more than 5% of the Common Stock, (ii) each director of the Company, (iii) the named executive officers of the Company (as defined in the Exchange Act) and (iv) all executive officers and directors of the Company as a group:
POST-TRANSACTION AMOUNT OF PRE-TRANSACTION PERCENT OF SHARES PERCENT OF CLASS(1) CLASS(1)(2)(3) --------------- --------------------- ----------------------- Alfred H. Wilms.............................. 7,034,082(4) 46.9% 23.6% Donaldson, Lufkin & Jenrette Securities 1,695,500(5) 11.6% 5.8% Corporation ................................ 277 Park Avenue New York, New York 10172 Joel Kirschbaum ............................. 1,333,333(6) 10.3% 4.8% Kirkland Investment Corporation Kirkland-Ft. Worth Corporation Investment Partners, L.P. 535 Madison Avenue New York, New York 10022 Gaming Systems Advisors, L.P. ............... --(7) -- -- 535 Madison Avenue New York, New York 10022 Steve Greathouse............................. 333,333(8) 1.9% 1.2% Anthony L. DiCesare.......................... --(9) -- -- Craig Fields................................. 125,000(10) * * David Robbins................................ 20,000(11) * * Christopher Baj.............................. -- -- -- Shannon L. Bybee............................. 210,000(12) 1.6% * John W. Alderfer............................. 162,000(13) 1.2% * David D. Johnson............................. 66,667(14) -- -- Robert L. Miodunski.......................... 56,667(15) * * All executive officers and directors as a group....................................... 9,321,082(16) 46.5% 26.7%
- ------------------------ * Less than 1%. (1) Excludes the effect of (a) the issuance of (i) 2,750,000 shares subject to warrants to KIC in connection with the Kirkland Investment, (ii) 1,250,000 shares subject to warrants to GSA pursuant to the GSA Advisory Agreement on September 21, 1993 and 2,500,000 shares subject to additional warrants issuable to GSA upon consummation of the Merger, both of which become exercisable in equal amounts only when the stock price reaches $11, $13 and $15, and (iii) 750,000, 250,000 and 30,000 shares subject to warrants issued to Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer & Co. Inc. ("Oppenheimer") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"), respectively, in connection with the issuance of the Convertible Debentures, and (iv) 250,000 shares subject to warrants issued to Canyon Partners, Inc., in September 1995, and (b) shares covered by employee stock options other than those deemed beneficially owned by executive officers and directors. 109 (2) Assumes the issuance of approximately 603,000 shares to BGII stockholders in the Merger, approximately 12,308,000 shares in the Common Stock Offering, approximately 1,096,000 shares in the Private Placement, and approximately 813,000 shares in partial satisfaction of BGII employee contract termination costs and performance unit awards. (3) Excludes the effect of BGII obligations assumed by Alliance with respect to each outstanding stock option and warrant to purchase shares of BGII common stock, which options and warrants represented an aggregate of 752,500 and 1,498,000 shares of BGII common stock, respectively. (4) Includes 2,000,000 shares represented by the warrants issued to Mr. Wilms. Mr. Wilms' mailing address is 4380 Boulder Highway, Las Vegas, Nevada 89121. See "Certain Relationships and Related Transactions." (5) Donaldson, Lufkin & Jenrette Securities Corporation and certain affiliated entities filed on February 14, 1995, as amended on February 14, 1996, a Schedule 13G indicating ownership as of December 31, 1995, of (i) 1,193,500 shares issuable upon conversion of Convertible Debentures held by it, (ii) 500,000 shares which may be acquired upon exercise of certain warrants issued to Donaldson, Lufkin & Jenrette Securities Corporation and (iii) 2,000 shares. Excludes warrants exercisable for 250,000 shares issued to Donaldson, Lufkin & Jenrette Securities Corporation which will vest when the price of the Common Stock reaches $13 per share following consummation of the Merger or any similar transaction. (6) Based upon information contained in a Schedule 13D filed on June 23, 1994, as amended on September 28, 1995 and November 6, 1995, and provided to Alliance by such persons (except as to percent of class) which indicated that each of them held sole voting and disposition over all such shares. Of such shares, certain amounts have been or may be sold or distributed to Friend, Mr. DiCesare and, possibly, certain other persons, as set forth in the Schedule 13D provided to Alliance by Mr. Kirschbaum, KIC, Kirkland and GSA. (7) Based upon information contained in a Schedule 13D filed on June 23, 1994, as amended on September 28, 1995 and November 6, 1995 and provided to Alliance by such person jointly with Mr. Kirschbaum, KIC and Kirkland. (8) Includes options to purchase shares of Common Stock pursuant to the Alliance 1991 Plan, a portion of which vested in 1995 and excludes warrants exercisable for 250,000 shares portions of which became exercisable in equal amounts only when the stock price reaches $11, $13 and $15. (9) Based upon information contained in a Schedule 13D filed on June 23, 1994, as amended on September 28, 1995 and November 6, 1995 and provided to Alliance by Mr. Kirschbaum, KIC, Kirkland and GSA. As set forth in such Schedule 13D, as amended, Mr. DiCesare has certain rights to receive a portion of the securities that KIC would be entitled to receive upon dissolution of Kirkland and that GSI would be entitled to receive upon dissolution of GSA. (10) Includes 125,000 shares subject to options that are currently exercisable or will become exercisable within 60 days. Excludes warrants exercisable for 250,000 shares portions of which became exercisable only when the stock price reaches $11, $13 and $15 and options exercisable in equal amounts for 150,000 shares which will be issued within 30 days of the consummation of the Merger. See "Certain Relationships and Related Transactions." (11) Pursuant to options granted to Mr. Robbins by Kirkland. Based on information contained in the Schedule 13D referred to in Note 5 above. (12) Includes 210,000 shares subject to options that are currently exercisable or will become exercisable within 60 days. (13) Includes 162,000 shares subject to options that are currently exercisable or will become exercisable within 60 days. 110 (14) Includes 66,667 shares subject to options that are currently exercisable or will become exercisable within 60 days. (15) Includes 17,000 shares subject to options that are currently exercisable or will become exercisable within 60 days. (16) Includes 2,676,000 shares subject to options and warrants that are currently exercisable or will become exercisable within 60 days. STOCKHOLDERS AGREEMENT On July 14, 1994, as contemplated by the Stockholders Agreement dated as of September 21, 1993 by and among the Company, KIC, GSA, Kirkland and Mr. Wilms (as amended, the "Stockholders Agreement"), the Alliance Board of Directors was reconfigured to consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, David Robbins and Jay R. Gottlieb) and three persons designated by Mr. Wilms (Messrs. Wilms, David A. Scheinman and Sidney Sosin). The Stockholders Agreement and related transactions are more fully described in the Alliance Forms 8-K dated June 25, 1993, September 21, 1993 and July 14, 1994 and in its Information Statement dated June 29, 1994. On October 20, 1994, the Stockholders Agreement was amended to reconfigure the Board of Directors of Alliance to consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, Robbins and Gottlieb), one person designated by Mr. Wilms (Mr. Wilms) and two new directors designated by a majority of the Board of Directors of Alliance. The Stockholders Agreement obligates Mr. Wilms to vote his shares for such persons nominated by KIC. On October 20, 1994 Mr. Greathouse and Dr. Fields were appointed to the Board to fill vacancies created upon the resignation of Messrs. Scheinman and Sosin. As amended, the Stockholders Agreement also provides that Mr. Wilms may designate two persons (currently Messrs. Scheinman and Sosin) (the "Advisors") who will be observers of, and advisors to, the Board of Directors and who will be entitled to attend all of the Alliance Board of Directors' meetings and receive all information furnished to members of the Board. Mr. Wilms and/or at least one Advisor will be entitled to attend all meetings of the committees of Alliance's and its subsidiaries' Boards of Directors. In addition, Mr. Wilms is contractually obligated until September 21, 1997 to vote his shares of Common Stock in favor of four nominees of KIC to the Alliance Board of Directors. See "Certain Relationships and Related Transactions." OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES Immediately following the Transaction, the Company will have outstanding options, warrants and convertible securities which will be exercisable in the aggregate for approximately 21,800,000 shares of Common Stock, as described below. ALLIANCE OPTIONS. Alliance has two stock option plans currently in effect: the United Gaming, Inc. 1991 Long-Term Incentive Plan (previously defined as the Alliance 1991 Stock Option Plan) and the Gaming and Technology, Inc. 1984 Employee Stock Option Plan (previously defined as the Alliance 1984 Stock Option Plan). Pursuant to these two plans, an aggregate of 5,000,000 shares of Common Stock are issuable, as to which options covering 2,168,834 shares were outstanding and options covering 987,310 shares were exercisable as of December 31, 1995. In addition, Alliance has agreed to issue to Dr. Fields options exercisable for 150,000 shares within 30 days of the consummation of the Merger. WARRANTS. Alliance has issued warrants to purchase shares of Common Stock to the following persons in the amounts set forth below: (1) Mr. Wilms: warrants to purchase 2,000,000 shares at a purchase price of $2.50 per share (and in certain circumstances in a "cashless" transaction), and which expire on September 1, 1998, issued in connection with the VSI Loan; (2) Kirkland: warrants to purchase 2,750,000 shares at a purchase price of $1.50 per share, divided equally among warrants which become exercisable when the price of the Common Stock reaches $11, $13 and $15 per share and which expire on September 21, 1999, issued in connection with the Kirkland Investment; 111 (3) GSA: warrants to purchase 1,250,000 shares at a purchase price of $1.50 per share, divided equally among warrants which become exercisable when the price of the Common Stock reaches $11, $13 and $15 per share and which expire on September 21, 1999 issued in connection with Alliance's retention of GSA for financial advisory services, and additional warrants to purchase 2,500,000 shares issuable on the same terms upon consummation of the Merger; (4) Donaldson, Lufkin & Jenrette Securities Corporation: warrants to purchase 500,000 shares of Common Stock at a purchase price of $8.25 per share, issued in connection with the issuance of the Convertible Debentures, and additional warrants to purchase 250,000 shares at a purchase price of $8.25 per share which will vest when the price of the Common Stock reaches $13 per share following consummation of the Merger or any similar transaction, all of which expire on September 21, 1999; (5) Oppenheimer & Co. Inc.: warrants to purchase 250,000 shares of Common Stock at a purchase price of $8.25 per share and which expire on September 21, 1999, issued in connection with the issuance of the Convertible Debentures; (6) Canyon Partners, Inc.: warrants to purchase 250,000 shares of Common Stock at a purchase price of $3.75 per share, issued in connection with a firm commitment by Cerberus Partners, L.P. and affiliates of Canyon Partners, Inc. to Alliance in September 1995 relating to financing for Alliance's tender offer and consent solicitation; (7) Mr. Greathouse: warrants to purchase 250,000 shares on terms substantially the same as the warrants issued to GSA described in clause (3) above and which expire on August 15, 2000, issued in connection with his employment; (8) Dr. Fields: warrants to purchase 250,000 shares on terms substantially the same as the warrants issued to GSA described in clause (3) above and which expire on September 21, 2000, issued in connection with an agreement between Dr. Fields and Alliance upon his becoming a director; and (9) Friend: warrants to purchase 30,000 shares of Common Stock at a purchase price of $8.25 per share and which expire on September 21, 1999, issued in connection with the issuance of the Convertible Debentures. BGII OPTIONS. BGII has three stock option plans currently in effect: the 1991 Incentive Plan (previously defined as the BGII 1991 Incentive Plan), the 1991 Non-employee Directors' Option Plan (previously defined as the BGII 1991 Directors' Plan) and the 1994 Stock Option Plan for Non-Employee Directors (previously defined as the BGII 1994 Plan). Under the BGII 1991 Incentive Plan, 852,500 options were issued to employees of BGII, including 365,000 options held by executive officers. Under the BGII 1991 Directors' Plan, 100,000 options were issued to non-employee directors of BGII. Under the BGII 1994 Plan, 100,000 options were issued to non-employee directors of BGII. Pursuant to the Merger Agreement, Alliance will assume BGII's obligations with respect to each outstanding option, and such options will be exercisable for the Merger consideration per share of BGII common stock subject to such options, except that at the election of any employee of BGII (other than Messrs. Gillman, Jenkins and Kloss) immediately prior to the effective time, any such options held (not more than 552,500 in the aggregate) will be instead exercisable for a number of shares of Common Stock equal to the number of shares of BGII common stock subject thereto at an exercise price equal to the Alliance Average Trading Price. See "The Merger and Related Financings." WARRANTS. BGII issued warrants to purchase 1.2 million shares of BGII common stock at a purchase price of $12.50 per share, exercisable after the BGII common stock has traded at or above a price of $20 per share for 20 consecutive trading days and under certain other circumstances, expiring on July 29, 1998, which were issued in connection with the private placement of its 10 3/8% Senior Secured Notes due July 1998. In addition, BGII issued warrants to purchase 300,000 shares of BGII common stock at a purchase price of $15 per share, exercisable during a four-year period ending November 11, 1996, issued to the underwriters of the initial public offering of BGII's common stock, of which 2,000 warrants have been exercised. 112 Pursuant to the Merger Agreement, Alliance will assume BGII's obligation with respect to each outstanding warrant, and such warrants will be exercisable for the Merger consideration per share of BGII common stock subject to such warrants. See "The Merger and Related Financings." PERFORMANCE UNITS. Under the BGII 1992 Restricted Stock Performance Plan, BGII granted awards of performance units comprised of stock and cash to certain members of its senior management based upon specific performance objectives. Such performance units vest under certain circumstances following a change in control, including as a result of the Merger. Alliance has agreed to make payments to certain executive officers in connection with their employment agreements and performance unit awards. See "The Merger and Related Financings." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In March 1992, Mr. Wilms committed to provide the VSI Loan to Alliance's majority controlled subsidiary, VSI. As consideration for Mr. Wilms commitment, Alliance issued to Mr. Wilms a warrant to purchase 200,000 shares of Alliance Common Stock at a purchase price of $2.50 per share and agreed to issue an additional warrant to purchase 1.8 million shares of Common Stock at a purchase price of $2.50 per share upon funding of the full amount of such loan. Mr. Wilms is entitled to one demand and unlimited piggyback registration rights covering resale for the Common Stock underlying the warrants (previously defined as the Wilms Warrants). The exercise price of the warrants was determined based on an analysis of, and a fairness opinion with respect to, the transaction and on the price range of the Common Stock during a period prior to announcement of Alliance's expansion into Louisiana. The VSI Loan, as amended, requires quarterly interest and principal payments with an interest rate equal to 2% above the London InterBank Offered Rate, adjusted quarterly. The VSI Loan is currently held by CTC, a Belgian corporation owned by Mr. Wilms and members of his family. At June 30, 1993, Mr. Wilms had funded $6.0 million of the VSI Loan. On August 2, 1993, the Board unanimously approved (except that Mr. Wilms abstained from voting) the execution of a new Loan and Security Agreement (the "Amended VSI Loan") and amendment of the Wilms Warrants. CTC assumed Mr. Wilms' rights and obligations under the Amended VSI Loan. The Amended VSI Loan grants CTC a security interest in substantially all of VSI's present and future personal property; provided, however, that CTC's security interest will be subordinated to certain purchase money indebtedness incurred by VSI in the purchase from unaffiliated persons of inventory or equipment, and working capital loans to VSI from unaffiliated persons. Pursuant to the terms of the VSI Loan, VSI may not pay cash dividends or make any distributions of its property. The Amended VSI Loan matures on September 21, 1998 and provides for quarterly principal payments beginning September 1, 1993, rising from approximately $280,000 to $360,000 over its term. CTC has funded the full $6.5 million original principal amount of the Amended VSI Loan and Alliance has issued to Mr. Wilms the warrant to purchase 1.8 million shares of Common Stock. Pursuant to the Amended VSI Loan, the maturity date of the VSI loan was extended one year and the terms of the Wilms Warrants were also amended to extend their exercise period to September 1, 1998 and to provide for a "cashless" exercise of the Wilms Warrants under certain circumstances. No change was made in the interest rate applicable to the VSI Loan or in the number of shares or the exercise price of the Wilms Warrants. Alliance agreed to pay Mr. Wilms out-of-pocket expenses incurred in connection with the transactions with Kirkland, the restructuring of the VSI Loan and the related documentation in an aggregate amount of $201,750. As of December 31, 1995 the aggregate amount of the Amended VSI Loan outstanding was approximately $3.4 million. Under the terms of the Letter Agreement, dated as of June 25, 1993, between Kirkland, KIC, Alliance and, as to certain provisions, Mr. Wilms, and the related Securities Purchase Agreement, dated as of September 21, 1994, Alliance agreed to make payments to Kirkland at the rate of $350,000 per year in reimbursement to Kirkland for its aggregate costs and expenses in conducting its business as related to Alliance. Such payments aggregated approximately $272,000, $346,000 and $597,000 in fiscal years 1993 through 1995, respectively. 113 In connection with the closing of the Kirkland Investment and the related Nevada licensing process (completed June 23,1994), Alliance is obligated to reimburse Kirkland for an aggregate of approximately $312,000 in out-of-pocket expenses. Pursuant to a letter agreement dated June 25, 1993 among GSA, Alliance and Mr. Wilms, Alliance engaged GSA to assist it in among other things, identifying opportunities for strategic transactions and in structuring and negotiating such transactions. In connection with its retention of GSA for financial advisory services, Alliance has issued to it warrants to purchase 1,250,000 shares of Common Stock with an exercise price of $1.50 per share. Upon consummation of the Merger, GSA will be entitled to receive additional warrants to purchase 2,500,000 shares of Common Stock on the same terms. Joel Kirschbaum, a director of and consultant to Alliance, is the president, sole director and sole stockholder of GSI, the sole general partner of GSA. Mr. DiCesare, a director and Executive Vice President-Development of Alliance, has the right to receive 20% of the warrants (which percentage may increase in certain circumstances) to be distributed to GSI by GSA in connection with the consummation of the Merger. The Stockholders Agreement contains certain registration rights running in favor of Kirkland, KIC, GSA, Mr. Wilms and their respective transferees, including up to four demand registration rights each (and additional demand rights for Mr. Wilms under certain circumstances), at the expense of the Company, and provisions granting Mr. Wilms the right to participate in certain offerings of securities by the Company and by KIC and its transferees. Pursuant to an agreement with Alliance, Dr. Fields, Vice Chairman of the Alliance Board, will within 30 days of the consummation of the Merger receive options to purchase 150,000 shares of Common Stock. David Robbins, a director of Alliance appointed to the Board of Directors in July 1994, was employed until July 1995 by the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel which has represented Alliance in various matters. The firm received fees from Alliance of $1,046,000 and $493,000 in fiscal 1994 and 1995, respectively. DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS CONVERTIBLE DEBENTURES GENERAL. Alliance has outstanding $85 million aggregate principal amount of 7 1/2% Convertible Subordinated Debentures due 2003. The Convertible Debentures pay 7 1/2% interest per annum payable on a semi-annual basis. The Convertible Debentures are convertible into shares of Common Stock at any time prior to maturity (unless previously redeemed) at a conversion price of $10.00 (the "Conversion Price") with each $1,000 principal amount being convertible into 100 shares of Common Stock. The Company may, at its option, redeem the Convertible Debentures at a redemption price equal to the principal amount of such Convertible Debentures, together with accrued interest, plus a specified redemption premium. The Convertible Debentures also contain certain required redemption obligations at the option of the holders of the Convertible Debentures. The following description of the Convertible Debentures does not purport to be complete and is subject to and qualified in its entirety by reference to the agreements related to such Convertible Debentures which have been filed as exhibits to Alliance's Form S-2 Registration Statement No. 33-72990 and subsequent amendments thereto. CHANGE IN CONTROL. Upon the occurrence of a Change in Control (as defined in the Convertible Debentures), each holder of Convertible Debentures will have the right to require the Company to purchase all or any of such holder's Convertible Debentures at 101% of the principal amount thereof, plus accrued interest to the date of such purchase. The Merger will not constitute a Change of Control under the Convertible Debentures. SUBORDINATION. The Convertible Debentures are subordinated in right of payment to all indebtedness of Alliance, including the principal of and premium, if any, and interest on such indebtedness, whether 114 outstanding or created in the future, for borrowed money, for indebtedness incurred in connection with acquisitions, and for money owned or reimbursement obligations under letters of credit or under any lease of real or personal property, which obligations are capitalized on Alliance's books. SUBSIDIARY INDEBTEDNESS Set forth below is a brief summary of certain indebtedness of the subsidiaries of the Company, which will remain outstanding after the Merger. The following description does not purport to be complete and is subject to and qualified in its entirety by reference to the agreements related to such indebtedness which have been filed as exhibits to, or incorporated by reference in, the Registration Statement of which this Prospectus forms a part. VSI LOAN In March 1992, Alfred H. Wilms committed to provide to VSI, a subordinated loan of up to $6.5 million. The VSI Loan, as amended, bears interest at a rate equal to the London Interbank Offered Rate for a period of ninety days plus 2%, payable quarterly, and is due on September 21, 1998. The Amended VSI Loan is secured by liens in favor of CTC, an affiliate of Mr. Wilms, on substantially all of VSI's assets. Pursuant to the terms of the VSI Loan, VSI may not pay cash dividends or make any distribution of its property. As of December 31, 1995, there was an outstanding balance of $3.4 million on this loan. See "Certain Relationships and Related Transactions." RAINBOW CASINO In connection with the completion of the Rainbow Casino, HFS provided financing to RCC on August 3, 1993, consisting of a $7.5 million loan secured by a first priority lien on all of the assets of the project. Such assets are also pledged to secure a royalty payment required to be made by RCVP to an affiliate of HFS. The terms of the HFS financing provide that, in connection with the loan and certain marketing services provided by HFS to RCC, RCC will pay to HFS a royalty based upon the casino's annual gross gaming revenues of 12% on the first $40 million, 11% on the next $10 million, and 10% thereafter. See "Business--Casino Operations." On March 29, 1995, in exchange for commitments by Alliance and NGM, to provide additional financing (up to a maximum of $2.0 million each) to be used, among other things, for the completion of certain elements of the project. RCVP issued promissory notes to each of Alliance and NGM equal to the amount of such commitments. As of December 31, 1995, amounts outstanding under the HFS facility and the related financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10% of the net available cash flows (which amount shall increase to 20% of cash flow from gaming revenues above $35.0 million (I.E., only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. In addition, if during any continuous 12-month period until December 31, 1999 the casino achieves earnings from the project of at least $10.5 million before deducting depreciation, amortization, certain debt payments and substantially all taxes, then Alliance will be obligated to pay to certain principals of the original partnership an amount aggregating $1 million in cash or shares of Common Stock. 115 DESCRIPTION OF THE NOTES Set forth below is a summary of certain provisions of the Notes. The Notes will be issued pursuant to an indenture (the "Indenture") to be dated as of ,1996 by and among Alliance Gaming Corporation, the Guarantors and , as trustee (the "Trustee"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Notes are also governed by certain provisions contained in the Trust Indenture Act. The following summary of certain provisions of the Indenture and the Collateral Agreements does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the Indenture and the Collateral Agreements, including the definitions therein of certain terms used below. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Indenture. Wherever particular provisions of the Indenture are referred to in this summary, such provisions are incorporated by reference as a part of the statements made and such statements are qualified in their entirety by such reference. For purposes of this summary, the term "the Company" refers to Alliance Gaming Corporation ("Alliance") exclusive of its subsidiaries, and shall refer to the person who assumes Alliance's obligations in respect of the Notes, and no longer to Alliance, upon the Assumption of Obligations described under "-- General" below. GENERAL The Notes will be senior, secured, general obligations of the Company, limited in aggregate principal amount to $75.0 million and secured as set forth under "-- Security for the Notes" below. The Notes will be jointly and severally irrevocably and unconditionally guaranteed on a senior secured basis by each of the Company's present and future Subsidiaries, except RCVP, VSI and specified entities through which its German operations are owned (the "Guarantors"). The term "Subsidiaries" as used herein, however, does not include Unrestricted Subsidiaries. The Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. The Notes will mature on , 2003. The Notes will bear interest at the rate per annum stated on the cover page hereof from the date of issuance or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semi-annually on and of each year, commencing , 1996, to the persons in whose names such Notes are registered at the close of business on the or immediately preceding such Interest Payment Date. The Company has agreed to use commercially reasonable good faith efforts to cause all of its obligations in respect of the Notes to be assumed by a Subsidiary of the Company, which Subsidiary would own all assets currently owned by the Company (other than the Company's Equity Interests in such Subsidiary), but which would not have any obligations in respect of the Company's $85 million principal amount of Convertible Debentures. In the event the Company is unable, including because of gaming regulatory restrictions, to cause such Subsidiary to assume its obligations in respect of the Notes by , 1997, then until the end of the first semi-annual interest payment period during which such an assumption of obligations (the "Assumption of Obligations") has occurred, the Notes will bear interest at the increased rate of % per annum. Interest will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Principal of, premium, if any, and interest on the Notes will be payable, and the Notes may be presented for registration of transfer or exchange, at the office or agency of the Company maintained for such purpose, which office or agency shall be maintained in the Borough of Manhattan, The City of New York. At the option of the Company, payment of interest may be made by check mailed to the Holders of the Notes at the addresses set forth upon the registry books of the Company. No service charge will be made for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Until otherwise designated by the Company, the Company's office or agency will be the corporate trust office of the Trustee at , New York, New York. SECURITY FOR THE NOTES Subject to certain limited exceptions, the obligations of the Company with respect to the Notes and of the Guarantors with respect to their guarantees will be secured by the following: (i) an exclusive pledge of all 116 Equity Interests directly or indirectly owned by the Company, other than 1/3 of its Equity Interests in specified entities through which the Company's German operations are directly or indirectly held; (ii) an exclusive assignment of all intercompany notes of the Company and its Subsidiaries; (iii) except as set forth below, an exclusive Lien on substantially all of the Company's and its Subsidiaries' unencumbered assets, whether currently owned or acquired in the future; and (iv) a PARI PASSU or junior Lien on other property of the Company and its Subsidiaries, whether currenly owned or acquired in the future, to the extent permitted by the other security arrangements in respect thereof (collectively, the "Collateral"). The Company and the Guarantors will enter into security agreements, mortgages, deeds of trust and certain other collateral assignment agreements (collectively, the "Collateral Agreements") that will provide for the grant of a security interest in or pledge of the Collateral to the Trustee, as collateral agent, for the benefit of the holders of the Notes. Such pledges and security interests will secure the payment and performance when due of all of the obligations of the Company and the Guarantors under the Indenture, the Notes, such Guarantors' guarantees and the Collateral Agreements. In accordance with the foregoing description, the Collateral will not include certain assets of the Company and its Subsidiaries, including without limitation the following: (i) the assets of RCVP and VSI (which entities are partially owned and also will not be Guarantors); (ii) the assets of Wulff (which also will not be a Guarantor); (iii) accounts receivable and inventory of Gaming (which are anticipated to secure a working capital facility as described below); (iv) assets which are not assignable by their terms or pursuant to restrictions imposed by Gaming Authorities (E.G., gaming licenses, cash used in the operation of casinos and certain intangible assets); and (v) encumbered assets of the Company and its Subsidiaries, the terms of which do not permit PARI PASSU or junior Liens (E.G., certain furniture, fixtures and equipment). The Indenture will contain certain covenants limiting the ability of the Company and its Subsidiaries to incur Indebtedness. Subject to certain limitations, the Indenture permits the inventory and accounts receivable of Gaming, Wulff and their Subsidiaries to be used to secure up to $ million principal amount permitted to be outstanding under one or more working capital facilities. See the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK" below. In addition, substantially all of the assets of RCVP and VSI, and certain of the assets of Wulff, will continue to be pledged to secure Indebtedness and other obligations of such persons. See "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Certain Other Indebtedness." As a result, such encumbered assets will be available to satisfy obligations in respect of the Notes, if at all, only after such secured obligations are satisfied in full. Following an Event of Default, the Trustee, on behalf of the Holders of the Notes, in addition to any rights or remedies available to it under the Indenture, may take such action as it deems advisable to protect and enforce its rights in the Collateral, including the institution of foreclosure proceedings. The ability of the Holders of the Notes to operate certain businesses of the Company or any Subsidiary after any foreclosure on the Collateral is subject to (x) restrictions under certain gaming regulations, including the approval of certain Gaming Authorities and (y) such other restrictions as may be applicable under the laws of other jurisdictions. See "Gaming Regulation and Licensing." If the Trustee takes possession of or otherwise acquires any of such facilities, the Trustee would be required to obtain a license from the Gaming Authorities of the relevant jurisdiction or jurisdictions to operate such facilities. Because potential bidders must satisfy licensing requirements, the number of potential bidders in a foreclosure sale will be less than in foreclosure of other types of facilities and such requirements may delay the sale of, and may adversely affect the sales price for, such businesses and other Collateral. In addition, the ability of the holders of Notes to realize upon the Collateral may be subject to certain other bankruptcy law or fraudulent transfer limitations in the event of a bankruptcy. Enforcement of each of the terms of the Indenture, the Collateral Agreements and the other documents and instruments executed in connection therewith is also subject to general principles of equity. CERTAIN BANKRUPTCY LIMITATIONS The right of the Trustee to foreclose on the Collateral upon the occurrence of an Event of Default will likely be significantly impaired if a bankruptcy case under Title 11 of the Bankruptcy Code is commenced by or against the Company or any Guarantor prior to such foreclosure. Once such a case is commenced, the 117 Bankruptcy Code prohibits a secured creditor, such as the Trustee, from commencing or pursuing a foreclosure on its collateral without bankruptcy court approval. Moreover, the bankruptcy court may decline to grant such approval, even if the debtor is in default under the applicable debt instruments, if it concludes that there exists or that the debtor can provide "adequate protection" for the interest of such secured creditor. The meaning of the term "adequate protection" may vary according to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral, as of the commencement of the case, and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of foreclosure during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term "adequate protection" and the broad discretionary powers of a bankruptcy court, it is impossible to predict, in the event of the bankruptcy of the Company or a Guarantor, whether and for how long payments under the Notes would be delayed, whether or when the Trustee would be permitted to foreclose on the Collateral or whether or to what extent holders of the Notes would be compensated for any delay in payment or loss of value of the Collateral through the requirement of "adequate protection." See "Risk Factors - -- Fraudulent Transfer Considerations." The Company is a holding company, conducting all of its business through Subsidiaries, including the Guarantors. Holders of the Notes will be direct creditors of each Guarantor by virtue of its guarantee. Nonetheless, in the event of the bankruptcy or financial difficulty of a Guarantor, such Guarantor's obligations under its guarantee and any security interest granted to secure such guarantee may be subject to review and avoidance under state and federal fraudulent transfer laws. Among other things, such obligations may be avoided if a court concludes that such obligations were incurred and such security interests granted for less than reasonably equivalent value or fair consideration at a time when the Guarantor was insolvent, was rendered insolvent, or was left with inadequate capital to conduct its business. A court would likely conclude that a Guarantor did not receive reasonably equivalent value or fair consideration to the extent that the aggregate amount of its liability on its guarantee exceeds the economic benefits it receives in the Transaction. See "Risk Factors -- Fraudulent Transfer Considerations." If the obligations of a Guarantor under its guarantee and the security interests granted to secure such guarantee were avoided, Holders of Notes would have to look to the assets of any remaining Guarantors for payment. There can be no assurance in that event that such assets would be sufficient to pay the outstanding principal and interest on the Notes. REDEMPTION The Company will not have the right to redeem any Notes prior to , 200 (other than pursuant to a Required Regulatory Redemption, as described in the next following paragraph). The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after , 200 , upon not less than 30 days nor more than 60 days notice to each holder of Notes, at the following redemption prices (expressed as percentages of the principal amount) if redeemed during the 12-month period commencing of the years indicated below, in each case (subject to the right of Holders of record on a Record Date to receive interest due on an Interest Payment Date that is on or prior to such Redemption Date) together with accrued and unpaid interest thereon to the Redemption Date:
YEAR PERCENTAGE - --------------------------------------------------------------------------------- ----------- ............................................................................. % ............................................................................. % ............................................................................. % and thereafter............................................................... 100.000%
The Notes will also be redeemable in whole or in part, at any time upon not less than 30 nor more than 60 days prior notice (or such earlier date as may be required by any Gaming Authority) at 100% of the principal amount thereof, together with accrued and unpaid interest through the date on which the holder receives notice of disqualification (or such lesser price as such Gaming Authority may require), pursuant to a Required Regulatory Redemption. In certain circumstances, holders of the Notes may be required to qualify under regulations adopted by certain Gaming Authorities as a financial source to and as holders of securities 118 of the Company. See "Gaming Regulation and Licensing." The Indenture will provide that if any Gaming Authority requires that a holder (whether the record or beneficial owner) so qualify and if such holder does not so qualify, then such holder must dispose of his interest in the Notes within 30 days after receipt of notice of such finding, or within such earlier time as such Gaming Authority may require. In the case of a partial redemption, the Trustee shall select the Notes or portions thereof for redemption in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or in such other manner it deems appropriate and fair. The Notes may be redeemed in part in multiples of $1,000 only. The Notes will not have the benefit of any mandatory redemption or sinking fund. Notice of any redemption will be sent, by first class mail, at least 30 days and not more than 60 days prior to the date fixed for redemption to the Holder of each Note to be redeemed to such Holder's last address as then shown upon the registry books of the Registrar. Any notice which relates to a Note to be partially redeemed must state the portion of the principal amount equal to the unredeemed portion thereof and must state that on and after the date of redemption, upon surrender of such Note, a new Note or Notes in a principal amount equal to the unredeemed portion thereof will be issued. On and after the date of redemption, interest will cease to accrue on the Notes or portions thereof called for redemption, unless the Company defaults in the payment thereof. CERTAIN COVENANTS REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL The Indenture will provide that in the event that a Change of Control has occurred, each holder of Notes will have the right, at such holder's option, pursuant to an irrevocable and unconditional offer by the Company (the "Change of Control Offer"), to require the Company to repurchase all or any part of such holder's Notes (PROVIDED, that the principal amount of such Notes must be $1,000 or an integral multiple thereof) on a date (the "Change of Control Purchase Date") that is no later than 60 days after the occurrence of such Change of Control, at a cash price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, (subject to the right of Holders of record on a Record Date to receive interest due on an Interest Payment Date that is on or prior to such Change in Control Purchase Date) together with accrued interest to the Change of Control Purchase Date. The Change of Control Offer shall be made within 15 days following a Change of Control and shall remain open for 20 Business Days following its commencement (the "Change of Control Offer Period"). Upon expiration of the Change of Control Offer Period, the Company shall purchase all Notes properly tendered in response to the Change of Control Offer. As used herein, a "Change of Control" means (i) any merger or consolidation of the Company with or into any person or any sale, transfer or other conveyance, whether direct or indirect, of all or substantially all of the assets of the Company, on a Consolidated basis, in one transaction or a series of related transactions, if, immediately after giving effect to such transaction, any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) other than an Exempt Person is or becomes the "beneficial owner," directly or indirectly, of more than % of the total voting power in the aggregate normally entitled to vote in the election of directors, managers, or trustees, as applicable, of the transferee or surviving entity, (ii) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) other than an Exempt Person is or becomes the "beneficial owner," directly or indirectly, of more than % of the total voting power in the aggregate of all classes of Capital Stock of the Company then outstanding normally entitled to vote in elections of directors, (iii) during any period of 12 consecutive months after the Issue Date, individuals who at the beginning of any such 12-month period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was 119 previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, or (iv) from and after the Assumption of Obligations, Alliance ceases to be the "beneficial owner," directly or indirectly, of 100% of the Equity Interests of the Company. An "Exempt Person" is defined as (A) the Company, any Subsidiary of the Company or any employee benefit plan or stock ownership plan of either the Company or any Subsidiary of the Company or (B) any of Kirkland, KIC, GSA or Mr. Wilms, or any of their respective Affiliates, or any successor to any of Kirkland, KIC or GSA or any of their respective Affiliates by merger, sale or transfer of assets or similar transaction or by a transfer from Mr. Wilms to any estate planning vehicle controlled by Mr. Wilms or established for the benefit of Mr. Wilms' family or his estate. On or before the Change of Control Purchase Date, the Company will (i) accept for payment Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to pay the Change of Control Purchase Price (together with accrued and unpaid interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted together with an Officers' Certificate listing the Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to the Holders of Notes so accepted payment in an amount equal to the Change of Control Purchase Price (together with accrued and unpaid interest), and the Trustee will promptly authenticate and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted will be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Purchase Date. The Change of Control purchase feature of the Notes may make more difficult or discourage a takeover of the Company, and, thus, the removal of incumbent management. The Change of Control purchase feature resulted from negotiations between the Company and the Underwriters. No assurance can be given that the Company will have sufficient funds available to purchase all of the Notes were they to be tendered in response to an offer made as a result of a Change of Control. See "Risk Factors -- Change of Control." The phrase "all or substantially all" of the assets of the Company will likely be interpreted under applicable state law and will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or transfer of "all or substantially all" of the assets of the Company has occurred. In addition, no assurances can be given that the Company will be able to acquire Notes tendered upon the occurrence of a Change of Control. Any Change of Control Offer will be made in compliance with all applicable laws, rules and regulations, including, if applicable, Regulation 14E under the Exchange Act and the rules thereunder and all other applicable Federal and state securities laws. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK The Indenture will provide that, except as set forth below in this covenant, the Company and the Guarantors will not, and will not permit any of their Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur, become directly or indirectly liable with respect to (including as a result of an Acquisition), or otherwise become responsible for, contingently or otherwise (individually and collectively, to "incur" or, as appropriate, an "incurrence"), any Indebtedness or any Disqualified Capital Stock (including Acquired Indebtedness). Notwithstanding the foregoing: (a) if (i) no Default or Event of Default shall have occurred and be continuing at the time of, or would occur after giving effect on a PRO FORMA basis to, such incurrence of Indebtedness or Disqualified Capital Stock and (ii) on the date of such incurrence (the "Incurrence Date"), the Consolidated Coverage Ratio of the Company for the Reference Period immediately preceding the Incurrence Date, after giving effect on a PRO FORMA basis to such incurrence of such Indebtedness or Disqualified Capital Stock and, to the extent set forth in the definition of Consolidated Coverage Ratio, the use of proceeds thereof, would be at least to 1 (the "Debt Incurrence Ratio"), then the Company may incur such Indebtedness or Disqualified Capital Stock, PROVIDED, that except in the case of Permitted Indebtedness and Acquired Indebtedness, such Indebtedness incurred pursuant to this clause (a) has an Average Life to Stated Maturity that exceeds the 120 remaining Average Life to Stated Maturity of the Notes and has a Stated Maturity for its final scheduled principal or (in the case of Disqualified Capital Stock) redemption payment, as applicable, later than the Stated Maturity for the final scheduled principal payment of the Notes; (b) the Company and the Guarantors may incur Indebtedness evidenced by the Notes and represented by the Indenture up to the amounts specified therein as of the date thereof; (c) the Company and the Guarantors may incur Purchase Money Indebtedness (including any Indebtedness issued to refinance, replace or refund such Indebtedness) on or after the Issue Date, PROVIDED, that (i) the aggregate amount of such Indebtedness incurred on or after the Issue Date and outstanding at any time pursuant to this paragraph (c) shall not exceed $ million, and (ii) in each case, such Indebtedness shall not constitute less than 75% nor more than 100% of the cost (determined in accordance with GAAP) to the Company or such Guarantor, as applicable, of the property so purchased or leased; (d) the Company and the Guarantors, as applicable, may incur Refinancing Indebtedness with respect to any Indebtedness or Disqualified Capital Stock, as applicable, described in clauses (a) and (b) of this covenant or with respect to Indebtedness which is outstanding on the Issue Date so long as such Refinancing Indebtedness is secured only by the assets (if any) that secured the Indebtedness so refinanced; (e) Gaming, Wulff and their Subsidiaries may incur Indebtedness under one or more working capital facilities in an aggregate amount outstanding at any time (including any Indebtedness which refinances, replaces or refunds such Indebtedness) of $ million; (f) the Company and the Guarantors may incur Permitted Indebtedness; and (g) the Company and the Guarantors may incur Indebtedness in an aggregate amount outstanding at any time (including any Indebtedness issued to refinance, replace, or refund such Indebtedness) of up to $ million, minus the amount of any such Indebtedness retired with Net Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset Sale. Indebtedness or Disqualified Capital Stock of any Person which is outstanding at the time such Person becomes a Subsidiary of the Company (including upon designation of any subsidiary or other person as a Subsidiary) or is merged with or into or consolidated with the Company or a Subsidiary of the Company shall be deemed to have been incurred at the time such Person becomes such a Subsidiary of the Company or is merged with or into or consolidated with the Company or a Subsidiary of the Company, as applicable. LIMITATION ON RESTRICTED PAYMENTS The Indenture will provide that the Company and the Guarantors will not, and will not permit any of their Subsidiaries to, directly or indirectly, make any Restricted Payment if, after giving effect to such Restricted Payment on a pro forma basis, (1) a Default or an Event of Default shall have occurred and be continuing, (2) the Company is not permitted to incur at least $1.00 of additional Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the covenant "LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK," or (3) the aggregate amount of all Restricted Payments made by the Company and its Subsidiaries, including after giving effect to such proposed Restricted Payment, from and after the Issue Date, would exceed the sum of (a) 50% of the aggregate Adjusted Consolidated Net Income of the Company and its Consolidated Subsidiaries for the period (taken as one accounting period) commencing on the first day of the first full fiscal quarter commencing after the Issue Date, to and including the last day of the fiscal quarter ended immediately prior to the date of each such calculation (or, in the event Adjusted Consolidated Net Income for such period is a deficit, then minus 100% of such deficit), plus (b) the aggregate Net Cash Proceeds received by the Company from the sale of its Qualified Capital Stock (other than (i) to a Subsidiary of the Company and (ii) to the extent applied in connection with a Qualified Exchange), after the Issue Date. The foregoing clauses (2) and (3) of the immediately preceding paragraph, however, will not prohibit (u) from and after the occurrence of the Assumption of Obligations, distributions by the Company to the extent promptly applied by Alliance (i) to pay reasonable general and administrative expenses of Alliance not to exceed $ million in any consecutive four-quarter period or (ii) to effect the redemption of an 121 Equity Interest permitted under clause (v) below, (v) the redemption by the Company of any Equity Interest if (i) counsel to the Company delivers an opinion that failure to so redeem would subject the Company to a materially adverse action by a Gaming Authority (or, if applicable, a failure so to act with a materially adverse consequence to the Company) and (ii) the Company determines (as evidenced by a Board of Directors resolution delivered to the Trustee) that such adverse action or failure so to act would be likely to have a material adverse effect on the Company, (w) Restricted Investments for , PROVIDED, that, after giving PRO FORMA effect to such Investment, the aggregate amount of all such Investments made on or after the Issue Date that are outstanding (after giving effect to any such Investments that are returned or repaid to the Company or to the Wholly-owned Subsidiary Guarantor that made such prior Investment, without restriction, in cash on or prior to the date of any such calculation) at any time does not exceed $ million, (x) the payment of scheduled dividends (or, after the Assumption of Obligations, the distribution of such amounts to Alliance to the extent promptly applied to pay such dividends) on the Preferred Stock issued concurrently with the Notes to the extent such dividends are not permitted to be paid in-kind pursuant to the terms thereof, (y) a Qualified Exchange, or (z) the payment of any dividend on Qualified Capital Stock within 60 days after the date of its declaration if such dividend could have been made on the date of such declaration in compliance with the foregoing provisions. The full amount of any Restricted Payment made pursuant to the foregoing clauses (u), (v), (w), (x) and (z) (but not pursuant to clause (y)) of the immediately preceding sentence, however, will be deducted in the calculation of the aggregate amount of Restricted Payments available to be made referred to in clause (3) of the immediately preceding paragraph. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Indenture will provide that the Company and the Guarantors will not, and will not permit any of their Subsidiaries to, directly or indirectly, create, assume or suffer to exist any consensual restriction on the ability of any Subsidiary of the Company to pay dividends or make other distributions to or on behalf of, or to pay any obligation to or on behalf of, or otherwise to transfer assets or property to or on behalf of, or make or pay loans or advances to or on behalf of, the Company or any Subsidiary of the Company, except (a) restrictions imposed by the Notes or the Indenture, (b) restrictions imposed by applicable law or by Gaming Authorities on entities possessing a Gaming License, (c) existing restrictions under Indebtedness outstanding on the Issue Date, (d) restrictions under any Acquired Indebtedness not incurred in violation of the Indenture or any agreement relating to any property, asset, or business acquired by the Company or any of its Subsidiaries, which restrictions in each case existed at the time of acquisition, were not put in place in connection with or in anticipation of such acquisition and are not applicable to any person, other than the person acquired, or to any property, asset or business, other than the property, assets and business so acquired, (e) restrictions with respect solely to a Subsidiary of the Company imposed pursuant to a binding agreement which has been entered into for the sale or disposition of all or substantially all of the Equity Interests or assets of such Subsidiary, PROVIDED, that such restrictions apply solely to the Equity Interests or assets of such Subsidiary which are being sold and (f) restrictions on transfer contained in Permitted Liens, PROVIDED, that such restrictions relate only to the transfer of the property subject thereto. Notwithstanding the foregoing, customary provisions restricting subletting or assignment of any lease entered into in the ordinary course of business, consistent with industry practice shall not in and of themselves be considered a restriction on the ability of the applicable Subsidiary to transfer such agreement. LIMITATION ON LEASES The Indenture will provide that the Company will not, nor will any of its Subsidiaries be permitted to, lease as tenant or subtenant real or personal property (except Permitted Leases), unless the Company's Consolidated Coverage Ratio for the four full fiscal quarters immediately preceding such event, taken as one period (and also after giving pro forma effect to any lease as if such lease was entered into at the beginning of such four-quarter period), would have been at least equal to the ratios set forth below for the applicable period during which such determination is made:
PERIOD RATIO - --------------------------------------------------------------------------------- ----------- First 24 months from and including the Issuance Date............................. to 1 Thereafter....................................................................... to 1
122 In giving effect to the lease as of such four full fiscal quarters, it will be assumed that the rent for such prior four fiscal quarters was the greater of the (i) average annualized rent over the term of such lease and (ii) rent payable for the first four fiscal quarters of such lease. EXCESS CASH FLOW OFFER The Indenture will provide that within 90 days after each fiscal year, commencing with the fiscal year ending June 30, 1997, the Company shall make an offer to all holders (an "Excess Cash Flow Offer") to purchase the maximum principal amount of the Notes that may be purchased with 50% of the Company's Excess Available Cash Flow (the "Excess Cash Flow Offer Amount") in respect of the fiscal year then ended, at a purchase price in cash equal to 101% of the principal amount of the Notes to be purchased, together with accrued and unpaid interest thereon to the date of purchase (the "Excess Cash Flow Purchase Price"), in accordance with the procedures set forth in the Indenture. The Excess Cash Flow Offer will be required to remain open for 20 Business Days following its commencement. Upon the expiration of such period, the Company will apply the Excess Cash Flow Offer Amount to the purchase of all Notes properly tendered (on a pro rata basis if the Excess Cash Flow Offer Amount is insufficient to purchase all Notes so tendered) at the Excess Cash Flow Purchase Price. To the extent that the aggregate principal amount of Notes tendered pursuant to any Excess Cash Flow Offer is less than the Excess Cash Flow Offer Amount with respect thereto, the Company may, subject to the other provisions of the Indenture, use any remaining Excess Cash Flow for general corporate purposes. MANDATORY RCVP PAYMENTS The Indenture will provide that for so long as RCVP is not a Wholly-owned Subsidiary Guarantor, the general partner of RCVP shall cause RCVP to apply on each and , commencing , 1997, 100% of the RCVP Net Cash Flow for the six months ending on the or immediately prior to such payment to the payment of interest owing on the RCVP Intercompany Notes. LIMITATION ON LIENS The Indenture will provide that the Company will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien of any kind, other than Permitted Liens, upon any of their respective assets now owned or acquired on or after the date of the Indenture or upon any income or profits therefrom. LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK The Indenture will provide that the Company and the Guarantors will not, and will not permit any of their Subsidiaries to, in one or a series of related transactions, convey, sell, transfer, assign or otherwise dispose of, directly or indirectly, any of their respective property, business or assets, including by merger or consolidation (in the case of a Guarantor or a Subsidiary of the Company), and including any sale or other transfer or issuance of any Equity Interests of any Subsidiary of the Company, whether by the Company or a Subsidiary of either or through the issuance, sale or transfer of Equity Interests by a Subsidiary of the Company (an "Asset Sale"), unless (l)(a) within 240 days after the date of such Asset Sale, the Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the optional redemption of the Notes in accordance with the terms of the Indenture or to the repurchase of the Notes pursuant to an irrevocable, unconditional cash offer (the "Asset Sale Offer") to repurchase Notes at a purchase price (the "Asset Sale Offer Price") of 100% of principal amount, together with accrued and unpaid interest to the date of payment, made within 210 days of such Asset Sale or (b) within 210 days following such Asset Sale, the Asset Sale Offer Amount is invested in assets and property (other than notes, bonds, obligation and securities) which in the good faith reasonable judgment of the Board of Directors of the Company will immediately constitute or be a part of a Related Business of the Company or such Subsidiary (if it continues to be a Subsidiary) immediately following such transaction, (2) with respect to any Asset Sale or related series of Asset Sales involving securities, property or assets with an aggregate fair market value in excess of $ , at least % of the consideration for such Asset Sale or series of related Asset Sales consists of Cash or Cash Equivalents, (3) no Default or Event of Default shall have occurred and be continuing at the time of, or 123 would occur after giving effect, on a PRO FORMA basis, to, such Asset Sale, and (4) the Board of Directors of the Company determines in good faith that the Company or such Subsidiary, as applicable, receives fair market value for such Asset Sale. The Indenture will provide that an Asset Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset Sales not applied to the uses set forth in (l)(b) above (the "Excess Proceeds") exceeds $ million and that each Asset Sale Offer shall remain open for 20 Business Days following its commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset Sale Offer Period, the Company shall apply the Asset Sale Offer Amount plus an amount equal to accrued interest to the purchase of all Notes properly tendered (on a pro rata basis if the Asset Sale Offer Amount is insufficient to purchase all Notes so tendered) at the Asset Sale Offer Price (together with accrued interest). To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Asset Sale Offer Amount, the Company may use any remaining Net Cash Proceeds for general corporate purposes as otherwise permitted by the Indenture, and following each Asset Sale Offer the Excess Proceeds amount shall be reset to zero. For purposes of (2) above, total consideration received means the total consideration received for such Asset Sales minus the amount of (a) Indebtedness secured by the assets sold and assumed or repaid by a transferee as required thereunder and (b) property that within 30 days of such Asset Sale is converted into Cash or Cash Equivalents). Notwithstanding the foregoing provisions of the prior paragraph: (i) the Company and its Subsidiaries may, in the ordinary course of business, convey, sell, lease, transfer, assign or otherwise dispose of inventory acquired and held for resale in the ordinary course of business; (ii) the Company and its Subsidiaries may convey, sell, lease, transfer, assign or otherwise dispose of assets pursuant to and in accordance with the limitation on mergers, sales or consolidations provisions in the Indenture; (iii) the Company and its Subsidiaries may sell or dispose of damaged, worn out or other obsolete property in the ordinary course of business so long as such property is no longer necessary for the proper conduct of the business of the Company or such Subsidiary, as applicable; (iv) the Subsidiaries may convey, sell, lease, transfer, assign or otherwise dispose of assets to the Company or any of its Wholly-owned Subsidiaries; and (v) the Company may effect the Assumption of Obligations. All Net Cash Proceeds from an Event of Loss shall be invested or used to repurchase Notes, all within the period and as otherwise provided above in clause (1) of the first paragraph of this covenant. In addition to the foregoing, the ability of the Company and its Subsidiaries to, directly or indirectly, make any Asset Sale of any of the Equity Interests of any Subsidiary is restricted pursuant to the covenant "RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK" BELOW. Any Asset Sale Offer shall be made in compliance with all applicable laws, rules, and regulations, including, if applicable, Regulation 14E of the Exchange Act and the rules and regulations thereunder and all other applicable Federal and state securities laws. LIMITATION ON TRANSACTIONS WITH AFFILIATES The Indenture will provide that neither the Company nor any of its Subsidiaries will be permitted on or after the Issue Date to enter into any contract, agreement, arrangement or transaction with any Affiliate (an "Affiliate Transaction"), or any series of related Affiliate Transactions, (i) unless it is determined that the terms of such Affiliate Transaction(s) are fair and reasonable to the Company, and no less favorable to the Company than could have been obtained in an arm's length transaction with a non-Affiliate and (ii) if involving consideration to either party in excess of $ , unless in addition the Company delivers an officers' certificate to the Trustee certifying that a majority of the members of the Company's Board of Directors who are disinterested with respect to such transaction have determined that such transaction or 124 transactions comply with clause (i) above, and (iii) except for Exempted Affiliate Transactions, if involving consideration to either party in excess of $ million, unless in addition the Company, prior to the consummation thereof, obtains a written favorable opinion as to the fairness of such transaction to the Company from a financial point of view from an independent investment banking firm of national reputation. In addition, the Company will not, and will not permit any of its Subsidiaries to, pay any management, consulting or related fees to Kirkland, KIC or their respective Affiliates pursuant to any agreement between any of such entities and the Company or any of its Affiliates if a Default or Event of Default has occurred and is continuing. LIMITATION ON MERGER, SALE OR CONSOLIDATION The Indenture will provide that other than as may be necessary to effect the Assumption of Obligations, the Company will not, directly or indirectly, consolidate with or merge with or into another person or sell, lease, convey or transfer all or substantially all of its assets (computed on a Consolidated basis), whether in a single transaction or a series of related transactions, to another person or group of affiliated persons or adopt a plan of liquidation, unless (i) either (a) the Company is the continuing entity or (b) the resulting, surviving or transferee entity or, in the case of a plan of liquidation, the entity which receives the greatest value from such plan of liquidation is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by supplemental indenture all of the obligations of the Company in connection with the Notes and the Indenture; (ii) no Default or Event of Default shall exist or shall occur immediately after giving effect on a PRO FORMA basis to such transaction; (iii) immediately after giving effect to such transaction on a PRO FORMA basis, the Consolidated Net Worth of the Consolidated surviving or transferee entity or, in the case of a plan of liquidation, the entity which receives the greatest value from such plan of liquidation is at least equal to 100% of the Consolidated Net Worth of the Company immediately prior to such transaction; and (iv) immediately after giving effect to such transaction on a PRO FORMA basis, the Consolidated resulting, surviving or transferee entity or, in the case of a plan of liquidation, the entity which receives the greatest value from such plan of liquidation would immediately thereafter be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in paragraph (a) of the covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified Capital Stock." Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company or consummation of a plan of liquidation in accordance with the foregoing, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made or, in the case of a plan of liquidation, the entity which receives the greatest value from such plan of liquidation shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor corporation had been named therein as the Company, and the Company shall be released from the obligations under the Notes and the Indenture except with respect to any obligations that arise from, or are related to, such transaction. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise) of all or substantially all of the properties and assets of one or more Subsidiaries, the Company's interest in which constitutes all or substantially all of the properties and assets of the Company shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. LIMITATION ON LINES OF BUSINESS The Indenture will provide that neither the Company nor any of its Subsidiaries or Unrestricted Subsidiaries shall directly or indirectly engage to any substantial extent in any line or lines of business activity other than that which, in the reasonable good faith judgment of the Board of Directors of the Company is a Related Business. MAINTENANCE OF INSURANCE The Indenture will provide that, from and at all times after the Issue Date until the Notes have been paid in full, the Company will, and will cause its Subsidiaries to, have and maintain in effect insurance with 125 responsible carriers against such risks and in such amounts as is customarily carried by similar businesses with such deductibles, retentions, self insured amounts and coinsurance provisions as are customarily carried by similar businesses of similar size, including, without limitation, property and casualty, and, with respect to insurance on the Collateral, shall have provided insurance certificates evidencing such insurance to the Trustee prior to the Issue Date and shall thereafter provide such certificates prior to the anniversary or renewal date of each such policy, which certificate shall expressly state the expiration date for each policy listed. All insurance with respect to the Collateral required under the Indenture (except worker's compensation) shall name the Company and the Trustee as additional insureds or loss payees, as the case may be, with losses in excess of $ million payable jointly to the Company and the Trustee (unless a Default or Event of Default has occurred and is then continuing, in which case all losses are payable solely to the Trustee), with no recourse against the Trustee for the payment of premiums, deductibles, commissions or club calls, and for at least 30 days notice of cancellation. All such insurance policies will be issued by carriers having an A.M. Best & Company, Inc. rating of A- or higher and a financial size category of not less than X, or if such carrier is not rated by A.M. Best & Company, Inc., having the financial stability and size deemed appropriate by an opinion from a reputable insurance broker. RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK The Indenture will provide that the Company and the Guarantors will not sell, and will not permit any of their Subsidiaries to issue or sell, any Equity Interests of any Subsidiary of the Company to any person other than the Company or a wholly owned Subsidiary of the Company, except for (i) directors' qualifying shares or shares owned by foreign nationals, in each case to the extent required by applicable law, and (ii) Equity Interests of RCVP and VSI outstanding on the Issue Date and not owned by Wholly-owned Subsidiaries. FUTURE SUBSIDIARY GUARANTORS The Indenture will provide that all present and future Subsidiaries of the Company (other than RCVP, VSI and specified entities through which the Company's German operations are directly or indirectly held) jointly and severally will guaranty irrevocably and unconditionally all principal, premium, if any, and interest on the Notes on a senior basis. The term Subsidiary does not include Unrestricted Subsidiaries. RELEASE OF GUARANTORS The Indenture will provide that no Guarantor shall consolidate or merge with or into (whether or not such Guarantor is the surviving person) another person unless (i) subject to the provisions of the following paragraph and certain other provisions of the Indenture, the person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor pursuant to a supplemental indenture and (if required) additional Collateral Agreements in form reasonably satisfactory to the Trustee, pursuant to which such person shall unconditionally guarantee, on a senior secured basis, all of such Guarantor's obligations under such Guarantor's guarantee, the Indenture and the Collateral Agreements on the terms set forth in the Indenture; (ii) immediately before and immediately after giving effect to such transaction on a PRO FORMA basis, no Default or Event of Default shall have occurred or be continuing; and (iii) immediately after such transaction, the surviving person holds all permits required for operation of the business of, and such entity is controlled by a person or entity (or has retained a person or entity which is) experienced in, or otherwise holds all permits (including those required from Gaming Authorities) to operate its business. Upon the sale or disposition (whether by merger, stock purchase, asset sale or otherwise) of a Subsidiary Guarantor or all of its assets to an entity which is not a Subsidiary Guarantor or the designation of a Subsidiary to become an Unrestricted Subsidiary, which transaction is otherwise in compliance with the Indenture (including, without limitation, the provisions of the covenant "LIMITATIONS ON SALE OF ASSETS AND SUBSIDIARY STOCK"), such Subsidiary Guarantor will be deemed released from its obligations under its Guarantee of the Notes; PROVIDED, HOWEVER, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure, any Indebtedness of the Company or any other Subsidiary shall also terminate upon such release, sale or transfer. 126 The guarantee of the entity which becomes the obligor under the Indenture pursuant to the Assumption of Obligations shall be released from its guarantee in connection therewith. LIMITATION ON STATUS AS INVESTMENT COMPANY The Indenture will prohibit the Company and its Subsidiaries from being required to register as an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended), or from otherwise becoming subject to regulation under the Investment Company Act. REPORTS The Indenture will provide that whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the Trustee and to each Holder, within 15 days after it is or would have been required to file such with the Commission, annual and quarterly financial statements substantially equivalent to financial statements that would have been included in reports filed with the Commission, if the Company were subject to the requirements of Section 13 or 15(d) of the Exchange Act, including, with respect to annual information only, a report thereon by the Company's certified independent public accountants as such would be required in such reports to the Commission, and, in each case, together with a management's discussion and analysis of financial condition and results of operations which would be so required. EVENTS OF DEFAULT AND REMEDIES The Indenture will define an Event of Default as (i) the failure by the Company to pay any installment of interest on the Notes as and when the same becomes due and payable and the continuance of any such failure for 30 days, (ii) the failure by the Company to pay all or any part of the principal, or premium, if any, on the Notes when and as the same becomes due and payable at maturity, redemption, by acceleration or otherwise, including, without limitation, payment of the Change of Control Purchase Price or the Asset Sale Offer Price, or otherwise, (iii) the failure by the Company or any Subsidiary to observe or perform any other covenant or agreement contained in the Notes or the Indenture and, subject to certain exceptions, the continuance of such failure for a period of 30 days after written notice is given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, (iv) certain events of bankruptcy, insolvency or reorganization in respect of the Company or any of its Significant Subsidiaries, (v) a default in Indebtedness of the Company or any of its Subsidiaries with an aggregate principal amount in excess of $ million, (vi) final unsatisfied judgments not covered by insurance aggregating in excess of $ million, at any one time rendered against the Company or any of its Subsidiaries and not stayed, bonded or discharged within 60 days, and (vii) an event of default under any Collateral Agreement. The Indenture provides that if a Default occurs and is continuing, the Trustee must, within 90 days after the occurrence of such default, give to the Holders notice of such default. If an Event of Default occurs and is continuing (other than an Event of Default specified in clause (iv), above, relating to the Company or any Significant Subsidiary,) then in every such case, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by notice in writing to the Company (and to the Trustee if given by Holders) (an "Acceleration Notice"), may declare all principal, determined as set forth below, and accrued interest thereon to be due and payable immediately. If an Event of Default specified in clause (iv), above, relating to the Company or any Significant Subsidiary occurs, all principal and accrued interest thereon will be immediately due and payable on all outstanding Notes without any declaration or other act on the part of Trustee or the Holders. The Holders of a majority in aggregate principal amount of Notes generally are authorized to rescind such acceleration if all existing Events of Default, other than the non-payment of the principal of, premium, if any, and interest on the Notes which have become due solely by such acceleration and except a default with respect to any provision requiring a supermajority approval to amend, which default may only be waived by such a supermajority, have been cured or waived. Prior to the declaration of acceleration of the maturity of the Notes, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may waive on behalf of all the Holders any default, except a default with respect to any provision requiring a supermajority approval to amend, which default may only be waived by such a supermajority, and except a default in the payment of principal of or interest on any 127 Note not yet cured or a default with respect to any covenant or provision which cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable security or indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Indenture will provide that the Company may, at its option and at any time within one year of the Stated Maturity of the Notes, elect to have its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented, the Collateral shall be released from the Liens in favor of the Notes and the Indenture shall cease to be of further effect as to all outstanding Notes and guarantees thereof, except as to (i) rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due from the trust funds; (ii) the Company's obligations with respect to such Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or agency for payment and money for security payments held in trust; (iii) the rights, powers, trust, duties, and immunities of the Trustee, and the Company's obligations in connection therewith; and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and the Guarantors released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, the Collateral shall be released from the Liens in favor of the Notes and certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the Notes, U.S. legal tender, non-callable government securities or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on such Notes on the stated date for payment thereof or on the redemption date of such principal or installment of principal of, premium, if any, or interest on such Notes, and the holders of Notes must have a valid, perfected, exclusive security interest in such trust; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to such Trustee confirming that (A) the Company has received from, or there has been published by the Internal Revenue Service, a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of such Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to such Trustee confirming that the holders of such Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of 128 its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the holders of such Notes over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; and (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that the conditions precedent provided for in, in the case of the officers' certificate, clauses (i) through (vi) of this paragraph and, in the case of the opinion of counsel, clauses (i) (with respect to the validity and perfection of the security interest), (ii), (iii) and (v) of this paragraph have been complied with. If the funds deposited with the Trustee to effect Legal Defeasance or Covenant Defeasance are insufficient to pay the principal of, premium, if any, and interest on the Notes when due, then the obligations of the Company and the Guarantors under the Indenture and the Collateral Agreements will be revived, and no such defeasance will be deemed to have occurred. AMENDMENTS AND SUPPLEMENTS The Indenture will contain provisions permitting the Company, the Guarantors and the Trustee to enter into a supplemental indenture for certain limited purposes without the consent of the Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, the Company, the Guarantors and the Trustee are permitted to amend or supplement the Indenture or any supplemental indenture or modify the rights of the Holders; PROVIDED, that no such modification may without the consent of holders of at least 66-2/3% in aggregate principal amount of the Notes at the time outstanding modify the provisions (including the defined terms used therein) of the covenant "REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE IN CONTROL" in a manner adverse to the Holders; and PROVIDED, FURTHER, that no such modification may, without the consent of each Holder affected thereby: (i) change the Stated Maturity on any Note, or reduce the principal amount thereof or the rate (or extend the time for payment) of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or reduce the Change of Control Purchase Price or the Asset Sale Offer Price, or alter the provisions (including the defined terms used therein) regarding the right of the Company to redeem the Notes in a manner adverse to the Holders, or (ii) reduce the percentage in principal amount of the outstanding Notes, the consent of whose Holders is required for any such amendment, supplemental indenture or waiver provided for in the Indenture, or (iii) modify any of the waiver provisions, except to increase any required percentage or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. NO PERSONAL LIABILITY OF STOCKHOLDERS, EMPLOYEES, OFFICERS, DIRECTORS The Indenture will provide that no direct or indirect stockholder, employee, officer or director, as such, past, present or future of the Company, the Guarantors or any successor entity shall have any personal liability in respect of the obligations of the Company or the Guarantors under the Indenture or the Notes by reason of his or its status as such stockholder, employee, officer or director, except to the extent such is an issuer or a Guarantor of any Note. CERTAIN DEFINITIONS "ACQUIRED INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock of any person existing at the time such person becomes a Subsidiary of the Company, including by designation, or is merged or consolidated into or with the Company or one of its Subsidiaries. "ACQUISITION" means the purchase or other acquisition of any person or substantially all the assets of any person by any other person, whether by purchase, merger, consolidation, or other transfer, and whether or not for consideration. "ADJUSTED CONSOLIDATED NET INCOME" means, with respect to any person for any period, the Consolidated Net Income of such person for such period minus 100% of the amount of any writedowns, writeoffs, or negative extraordinary charges not otherwise reflected in Consolidated Net Income during such period. 129 "AFFILIATE" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For purposes of this definition, the term "control" means the power to direct the management and policies of a person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise, PROVIDED, that a Beneficial Owner of 5% or more of the total voting power normally entitled to vote in the election of directors, managers or trustees, as applicable, shall for such purposes be deemed to constitute control. "AVERAGE LIFE TO STATED MATURITY" means, as of the date of determination, with respect to any security or instrument, the quotient obtained by dividing (i) the sum of (a) the product of the number of years from the date of determination to the date or dates of each successive scheduled principal (or redemption) payment of such security or instrument and (b) the amount of each such respective principal (or redemption) payment by (ii) the sum of all such principal (or redemption) payments. "BENEFICIAL OWNER" or "beneficial owner" for purposes of the definition of Change of Control has the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or not applicable, except that a "person" shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time. "BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "CAPITAL STOCK" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "CAPITALIZED LEASE OBLIGATION" of any person means any obligation of such person or its Subsidiaries on a Consolidated basis under any capital lease of real or personal property which, in accordance with GAAP, has been recorded as a capitalized lease obligation. "CASH EQUIVALENT" means (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (PROVIDED, that the full faith and credit of the United States of America is pledged in support thereof) or (ii) time deposits, certificates of deposit, commercial paper and bankers' acceptances issued by the parent corporation of any domestic commercial bank of recognized standing having capital and surplus in excess of $500 million and commercial paper issued by others rated at least A-2 or the equivalent thereof by Standard & Poor's Ratings Services or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing within one year after the date of acquisition. "CONSOLIDATED COVERAGE RATIO" of any person on any date of determination (the "Transaction Date") means the ratio, on a PRO FORMA basis, of (a) the aggregate amount of Consolidated EBITDA of such person attributable to continuing operations and businesses (exclusive of amounts attributable to operations and businesses permanently discontinued or disposed of) for the Reference Period to (b) the aggregate Consolidated Fixed Charges of such person (exclusive of amounts attributable to operations and businesses permanently discontinued or disposed of, but only to the extent that the obligations giving rise to such Consolidated Fixed Charges would no longer be obligations contributing to such person's Consolidated Fixed Charges subsequent to the Transaction Date) during the Reference Period; PROVIDED, that for purposes of such calculation, (i) Acquisitions which occurred during the Reference Period or subsequent to the Reference Period and on or prior to the Transaction Date shall be assumed to have occurred on the first day of the Reference Period, (ii) transactions giving rise to the need to calculate the Consolidated Coverage Ratio shall be assumed to have occurred on the first day of the Reference Period, (iii) the incurrence of any Indebtedness or issuance of any Disqualified Capital Stock during the Reference Period or subsequent to the Reference Period and on or prior to the Transaction Date (and the application of the proceeds therefrom to the extent used to refinance or retire other Indebtedness) shall be assumed to have occurred on the first day of such Reference Period, (iv) the Consolidated Fixed Charges of such person attributable to interest on any 130 Indebtedness or dividends on any Disqualified Capital Stock bearing a floating interest (or dividend) rate shall be computed on a PRO FORMA basis as if the average rate in effect from the beginning of the Reference Period to the Transaction Date had been the applicable rate for the entire period, unless such person or any of its Subsidiaries is a party to an Interest Swap or Hedging Obligation (which shall remain in effect for the 12-month period immediately following the Transaction Date) that has the effect of fixing the interest rate on the date of computation, in which case such rate (whether higher or lower) shall be used and (v) there shall be excluded from Consolidated Fixed Charges any portion of such Consolidated Fixed Charges related to any amount of Indebtedness that was outstanding during the Reference Period but is not outstanding on the Transaction Date, except for Consolidated Fixed Charges actually incurred with respect to Indebtedness borrowed (as adjusted pursuant to clause (iv)) under a revolving credit or similar arrangement to the extent the commitment thereunder remains in effect on the Transaction Date. "CONSOLIDATED EBITDA" means, with respect to any person, for any period, the Consolidated Net Income of such person for such period adjusted to add thereto (to the extent deducted from net revenues in determining Consolidated Net Income), without duplication, the sum of (i) Consolidated income tax expense, (ii) Consolidated depreciation and amortization expense and (iii) Consolidated Fixed Charges. "CONSOLIDATED FIXED CHARGES" of any person means, for any period, the aggregate amount (without duplication and determined in each case in accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled to be paid or accrued (including, in accordance with the following sentence, interest attributable to Capitalized Lease Obligations) of such person and its Consolidated Subsidiaries during such period, including (i) original issue discount and non-cash interest payments or accruals on any Indebtedness, (ii) the interest portion of all deferred payment obligations, and (iii) all commissions, discounts and other fees and charges owed with respect to bankers' acceptances and letter of credit financings and Interest Swap and Hedging Obligations, in each case to the extent attributable to such period, (b) one- third of Consolidated Rental Expense for such period attributable to operating leases of such person and its Consolidated Subsidiaries, and (c) the amount of dividends accrued or payable by such person or any of its Consolidated Subsidiaries in respect of Disqualified Capital Stock (other than by Subsidiaries of such person to such person or such person's Wholly-owned Subsidiaries). For purposes of this definition, (x) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP and (y) interest expense attributable to any Indebtedness represented by the guaranty by such person or a Subsidiary of such person of an obligation of another person shall be deemed to be the interest expense attributable to the Indebtedness guaranteed. "CONSOLIDATED NET INCOME" means, with respect to any person for any period, the net income (or loss) of such person and its Consolidated Subsidiaries (determined on a Consolidated basis in accordance with GAAP) for such period, adjusted to exclude (only to the extent included in computing such net income (or loss) and without duplication): (a) all gains (but not losses) which are either extraordinary (as determined in accordance with GAAP) or are either unusual or nonrecurring (including any gain from the sale or other disposition of assets outside the ordinary course of business or from the issuance or sale of any capital stock), (b) the net income, if positive, of any person, other than a Wholly-owned Subsidiary, in which such person or any of its Consolidated Subsidiaries has an interest, except to the extent of the amount of any dividends or distributions actually paid in cash to such person or a wholly owned Consolidated Subsidiary of such person during such period, but in any case not in excess of such person's PRO RATA share of such person's net income for such period, (c) the net income or loss of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition, and (d) the net income, if positive, of any of such person's Consolidated Subsidiaries to the extent that the declaration or payment of dividends or similar distributions is not at the time permitted by operation of the terms of its charter or bylaws or any other agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Consolidated Subsidiary. "CONSOLIDATED NET WORTH" of any person at any date means, in the case of a partnership, the partners' capital, and in the case of any other person, the aggregate Consolidated stockholders' equity of such person (plus amounts of equity attributable to preferred stock) and its Consolidated Subsidiaries, as would be 131 shown on the Consolidated balance sheet of such person prepared in accordance with GAAP, adjusted to exclude (to the extent included in calculating such equity), (a) the amount of any such stockholders' equity attributable to Disqualified Capital Stock or treasury stock of such person and its Consolidated Subsidiaries, (b) all upward revaluations and other write-ups in the book value of any asset of such person or a Consolidated Subsidiary of such person subsequent to the Issue Date, and (c) all investments in Subsidiaries that are not Consolidated Subsidiaries and in persons that are not Subsidiaries. "CONSOLIDATED RENTAL EXPENSE" of any Person, for any period and determined without duplication, means the aggregate rental obligations of such Person and its Consolidated Subsidiaries (not including taxes, insurance, maintenance and similar expenses that the lessee is obligated to pay under the terms of the relevant leases), determined on a Consolidated basis in conformity with GAAP, payable in respect of such period under leases of real or personal property (net of income from subleases thereof, not including taxes, insurance, maintenance and similar expenses that the sublessee is obligated to pay under the terms of such sublease), whether or not such obligations are reflected as liabilities or commitments on a Consolidated balance sheet of such Person and its Subsidiaries or in the notes thereto, excluding, however, in any event, that portion of Consolidated Fixed Charges of such Person representing payments by such Person or any of its Consolidated Subsidiaries in respect of Capitalized Lease Obligations. "CONSOLIDATED SUBSIDIARY" means, for any person, each Subsidiary of such person (whether now existing or hereafter created or acquired) the financial statements of which are Consolidated for financial statement reporting purposes with the financial statements of such person in accordance with GAAP. "CONSOLIDATION" means, with respect to any Person, the consolidation of the accounts of such Person and each of its Subsidiaries if and to the extent the accounts of such Person and each of its Subsidiaries would normally be consolidated with those of such Person, all in accordance with GAAP consistently applied. The term "Consolidated" shall have a similar meaning. "DISQUALIFIED CAPITAL STOCK" means (a) except as set forth in (b), with respect to any person, Equity Interests of such person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such person or any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity of the Notes and (b) with respect to any Subsidiary of such person (including with respect to any Subsidiary of the Company), any Equity Interests other than any common equity with no preference, privileges, or redemption or repayment provisions. "EQUITY INTEREST" of any Person means any shares, interests, participations or other equivalents (however designated) in such Person's equity, and shall in any event include any Capital Stock issued by, or partnership interests in, such Person. "EVENT OF LOSS" means, with respect to any property or asset, any (i) loss, destruction or damage of such property or asset or (ii) any condemnation, seizure or taking, by exercise of the power of eminent domain or otherwise, of such property or asset, or confiscation or requisition of the use of such property or asset. "EXCESS AVAILABLE CASH FLOW" means, for any period, the Company's Consolidated EBITDA for such period less the sum of (i) Consolidated Fixed Charges actually paid by the Company and its Subsidiaries during such period, (ii) up to $ million in capital expenditures actually made by the Company and its Subsidiaries during such period, (iii) principal payments on Indebtedness of the Company and its Subsidiaries actually made by the Company and its Subsidiaries during such period and (iv) $ million. "EXEMPTED AFFILIATE TRANSACTIONS" means (i) transactions between or among the Company and/or its Wholly-owned Subsidiary Guarantors or among Wholly-owned Subsidiary Guarantors, (ii) any agreement between the Company (which, for purposes of the definition, shall not include the successor issuer of the Notes pursuant to the Assumption of Obligations), KIC, Kirkland or GSA providing for compensation not to exceed $ million per annum in the aggregate (plus reimbursement of related reasonable expenses), (iii) transactions between the Company or any of its Subsidiaries and any employee of the Company or any of its Subsidiaries that are entered into in the ordinary course of business and (iv) the payment of reasonable and customary regular fees and expenses to directors of the Company, 132 "FAIR MARKET VALUE" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy and, with respect to any redemption of Notes pursuant to the applicable gaming laws, means (a) the last sales price regular way on the last trading day prior to the date of determination of such value on the largest national securities exchange (or, if said security is not listed on a national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ")) on which such Notes shall have traded on such trading day, or (b) if no such sales of such Notes occurred on such trading day, the mean between the "bid" and "asked" prices on such national securities exchange or as quoted on the National Market System of NASDAQ, as the case may be, on such last trading day, or (c) if the Notes are not listed or quoted on any national securities exchange or the National Market System of NASDAQ, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked price for the Notes have not been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any New York Stock Exchange member firm regularly making a market in the Notes, selected for such purpose by the Company or (d) if none of the clauses (a) through (c) are applicable, the fair market value of such Notes as of the date of determination as determined in such manner as shall be satisfactory to the Company, which shall be entitled to rely for such purpose on the advice of any firm of investment bankers or securities dealers having familiarity with the Notes. "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession as in effect on the Issue Date. "GAMING AUTHORITY" means any governmental agency which regulates gaming in a jurisdiction in which the Company or any of its Subsidiaries conducts gaming activities or activities related to the design, manufacture or distribution of gaming machines, equipment or systems. "GAMING LICENSES" means every material license, material franchise, or other material authorization required to own, lease, operate or otherwise conduct or manage riverboat, dockside or land-based gaming (including any applicable liquor licenses) or to design, manufacture or distribute gaming machines, equipment or systems in any state or jurisdiction where the Company or any of its Subsidiaries conducts such business. "GSA" means Gaming Systems Advisors, L.P. "GUARANTEED DEBT" of any person means, without duplication, all indebtedness of any other person referred to in the definition of Indebtedness contained in this section guaranteed directly or indirectly in any manner by such person, or in effect guaranteed directly or indirectly by such person through an agreement (a) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (b) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (c) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (d) to maintain working capital or equity capital of the debtor, or otherwise maintain the net worth, solvency or other financial condition of the debtor or (e) otherwise to assure a creditor against loss; PROVIDED, that the term "guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "INDEBTEDNESS" of any person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of such any person, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except those incurred in the ordinary course of its business that would and 133 continue to constitute ordinarily a trade payable to trade creditors, (iv) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (v) for the payment of money relating to any Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement obligation of such person with respect to any letter of credit; (b) all net obligations of such person under Interest Swap and Hedging Obligations; (c) all liabilities and obligations of others of the kind described in the preceding clause (a) or (b) that such person has guaranteed or that is otherwise its legal liability or which are secured by any assets or property of such person and all obligations to purchase, redeem or acquire any Equity Interests; (d) any and all deferrals, renewals, extensions, refinancings and refundings (whether direct or indirect) of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (a), (b) or (c), or this clause (d), whether or not between or among the same parties; and (e) all Disqualified Capital Stock of such Person (valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends). For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Disqualified Capital Stock, such Fair Market Value to be determined in good faith by the board of directors of the issuer (or managing general partner of the issuer) of such Disqualified Capital Stock. "INTEREST SWAP AND HEDGING OBLIGATION" means any obligation of any person pursuant to any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate exchange agreement, currency exchange agreement or any other agreement or arrangement designed to protect against fluctuations in interest rates or currency values, including, without limitation, any arrangement whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such person calculated by applying a fixed or floating rate of interest on the same notional amount. "INVESTMENT" by any person in any other person means (without duplication) (a) the acquisition (whether by purchase, merger, consolidation or otherwise) by such person (whether for cash, property, services, securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities, including any options or warrants, of such other person; (b) the making by such person of any deposit with, or advance, loan or other extension of credit to, such other person (including the purchase of property from another person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other person) or any commitment to make any such advance, loan or extension (but excluding accounts receivable or deposits arising in the ordinary course of business); (c) other than guarantees of Indebtedness of the Company or any Guarantor to the extent permitted by the covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified Capital Stock," the entering into by such person of any guarantee of, or other credit support or contingent obligation with respect to, Indebtedness or other liability of such other person; (d) the making of any capital contribution by such person to such other person; and (e) the designation by the Board of Directors of the Company of any person to be an Unrestricted Subsidiary. Any such designation constitutes an Investment in an amount equal to the sum of (x) the net assets of such Subsidiary at the time of the designation, unless in the case of this clause (x) the designation is made at the time of an Acquisition of such Subsidiary by the Company or any of its Subsidiaries, in which case the amount of consideration paid by the Company and its Subsidiaries to effect such Acquisition (excluding Qualified Capital Stock of the Company or (after the Assumption of Obligations) Alliance issued in connection therewith) shall be included in lieu thereof and (y) the maximum amount of Guaranteed Debt of the Company and its Subsidiaries in respect of the designated Subsidiary which is to be outstanding immediately after such designation. "ISSUE DATE" means the date of first issuance of the Notes under the Indenture. "KIC" means Kirkland Investment Corporation. "KIRKLAND" means Kirkland-Ft. Worth Investment Partners, L.P. 134 "LEGAL REQUIREMENTS" shall mean all applicable laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments, departments, commissions, boards, courts, authorities, agencies, officials and officers of governments, federal, state and municipal. "LIEN" means any mortgage, charge, pledge, lien (statutory or otherwise), security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents received by the Company in the case of a sale of Qualified Capital Stock and by the Company and its Subsidiaries in respect of an Asset Sale plus, in the case of an issuance of Qualified Capital Stock upon any exercise, exchange or conversion of securities (including options, warrants, rights and convertible or exchangeable debt) of the Company that were issued for cash on or after the Issue Date, the amount of cash originally received by the Company upon the issuance of such securities (including options, warrants, rights and convertible or exchangeable debt) less, in each case, the sum of all payments, fees, commissions and (in the case of Asset Sales, reasonable and customary), expenses (including, without limitation, the fees and expenses of legal counsel and investment banking fees and expenses) incurred in connection with such Asset Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only, less the amount (estimated reasonably and in good faith by the Company) of income, franchise, sales and other applicable taxes required to be paid by the Company or any of its respective Subsidiaries in connection with such Asset Sale. "PERMITTED INDEBTEDNESS" means (a) Indebtedness incurred by the Company to any Wholly-owned Subsidiary Guarantor, and any Indebtedness incurred by any Subsidiary of the Company to any Wholly-owned Subsidiary Guarantor or to the Company; PROVIDED, that, in the case of Indebtedness of the Company, such obligations shall be unsecured and subordinated in all respects to the Company's obligations pursuant to the Notes and the date of any event that causes such Subsidiary Guarantor to no longer be a Wholly-owned Subsidiary Guarantor shall be an Incurrence Date; and (b) Interest Swap and Hedging Obligation relating to Indebtedness of the Company or any Subsidiary, as the case may be; PROVIDED the notional principal amount of such Interest Swap and Hedging Obligation does not exceed the principal amount of the Indebtness to which such Interest Swap and Hedging Obligation relates. "PERMITTED INVESTMENT" means (a) Investments in any of the Notes; (b) Cash Equivalents; (c) intercompany notes to the extent permitted under the definition of "Permitted Indebtedness"; (d) loans, advances or investments in existence on the Issue Date; (e) any Investment consisting of the extension of gaming credit to casino customers consistent with industry practice in the ordinary course of business; (f) accounts and notes receivable if credited or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (g) Investments in Wholly-owned Subsidiary Guarantors (including Investments as a direct result of which a person becomes a Wholly-owned Subsidiary Guarantor); and (h) loans to RCVP, VSI or Wulff, provided that . "PERMITTED LEASES" means the following: (a) any Capitalized Lease Obligation of the Company or any Subsidiary incurred in accordance with the covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified Capital Stock"; and (b) any lease of the Company or any of its Subsidiaries, as tenant or subtenant, existing on the date of the Indenture and listed on a schedule thereto, including any modifications, amendments, renewals or supplements thereof, PROVIDED, that the aggregate annual rent and other costs thereunder are not increased thereby, except as such rent or costs may be increased during any renewed lease term pursuant to the terms of such leases as they exist on the date of the Indenture. "PERMITTED LIEN" means (a) Liens existing on the Issue Date; (b) Liens imposed by governmental authorities for taxes, assessments or other charges not yet subject to penalty or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the company in accordance with GAAP; (c) statutory liens of carriers, warehousemen, mechanics, 135 materialmen, landlords, repairmen or other like Liens arising by operation of law in the ordinary course of business, PROVIDED, that (i) the underlying obligations are not overdue for a period of more than 60 days, or (ii) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (d) Liens securing the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, zoning, similar restrictions and other similar encumbrances or title defects which, singly or in the aggregate, do not in any case materially detract from the value of the property, subject thereto (as such property is used by the Company or any of its Subsidiaries) or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (f) Liens arising by operation of law in connection with judgments, only to the extent, for an amount and for a period not resulting in an Event of Default with respect thereto; (g) pledges or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security legislation; (h) Liens securing the Notes; (i) Liens securing Indebtedness of a person existing at the time such person becomes a Wholly-owned Subsidiary Guarantor or is merged with or into the Company or a Wholly-owned Subsidiary Guarantor or Liens securing Indebtedness incurred in connection with an Acquisition, PROVIDED, that such Liens were in existence prior to the date of such acquisition, merger or consolidation, were not incurred in anticipation thereof, and do not extend to any other assets; (j) Liens arising from Indebtedness permitted to be incurred under clause (c) or (e) of the covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified Capital Stock," PROVIDED, that such Liens relate to the property which is subject to such Indebtedness; (k) leases or subleases granted to other persons in the ordinary course of business not materially interfering with the conduct of the business of the Company or any of its Subsidiaries or materially detracting from the value of the relative assets of the Company or any Subsidiary; and (l) Liens securing Refinancing Indebtedness incurred to refinance any Indebtedness that was previously so secured in a manner no more adverse to the Holders of the Notes than the terms of the Liens securing such refinanced Indebtedness, PROVIDED, that the Indebtedness secured is not increased and the lien is not extended to any additional assets of property. "PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of such person to any seller or other person incurred to finance the acquisition (including in the case of a Capitalized Lease Obligation, the lease) of any after acquired real or personal tangible property which, in the reasonable good faith judgment of the Board of Directors of the Company, is directly related to a Related Business of the Company and which is incurred concurrently with such acquisition and is secured only by the assets so financed. "QUALIFIED CAPITAL STOCK" means any Capital Stock of the Company that is not Disqualified Capital Stock. "QUALIFIED EXCHANGE" means any legal defeasance, redemption, retirement, repurchase or other acquisition of Equity Interests or Indebtedness of the Company issued on or after the Issue Date with the Net Cash Proceeds received by the Company from the substantially concurrent sale of Qualified Capital Stock or any exchange of Qualified Capital Stock for any Equity Interests or Indebtedness issued on or after the Issue Date. "RCVP NET CASH FLOW" means for any period . "RCVP INTERCOMPANY NOTES" means . "REFERENCE PERIOD" with regard to any person means the four full fiscal quarters (or such lesser period during which such person has been in existence) ended immediately preceding any date upon which any determination is to be made pursuant to the terms of the Notes or the Indenture. "REFINANCING INDEBTEDNESS" means Indebtedness or Disqualified Capital Stock (a) issued in exchange for, or the proceeds from the issuance and sale of which are used substantially concurrently to repay, redeem, defease, refund, refinance, discharge or otherwise retire for value, in whole or in part, or (b) constituting an amendment, modification or supplement to, or a deferral or renewal of ((a) and (b) above are, collectively, a "Refinancing"), any Indebtedness or Disqualified Capital Stock in a principal amount or, in the case of 136 Disqualified Capital Stock, liquidation preference, not to exceed (after deduction of reasonable and customary fees and expenses incurred in connection with the Refinancing) the lesser of (i) the principal amount or, in the case of Disqualified Capital Stock, liquidation preference, of the Indebtedness or Disqualified Capital Stock so refinanced and (ii) if such Indebtedness being refinanced was issued with an original issue discount, the accreted value thereof (as determined in accordance with GAAP) at the time of such Refinancing; PROVIDED, that (A) such Refinancing Indebtedness of any Subsidiary of the Company shall only be used to refinance outstanding Indebtedness or Disqualified Capital Stock of such Subsidiary, (B) such Refinancing Indebtedness shall (x) not have an Average Life to Stated Maturity shorter than the Indebtedness or Disqualified Capital Stock to be so refinanced at the time of such Refinancing and (y) in all respects, be no less subordinated or junior, if applicable, to the rights of Holders of the Notes than was the Indebtedness or Disqualified Capital Stock to be refinanced and (C) such Refinancing Indebtedness shall have no installment of principal (or redemption payment) scheduled to come due earlier than the Stated Maturity of any installment of principal of the Indebtedness or Disqualified Capital Stock to be so refinanced which was scheduled to come due prior to the Stated Maturity of the Notes or a final Stated Maturity or redemption date, as applicable, no earlier than the final Stated Maturity or redemption date, as applicable, of the Indebtedness or Disqualified Capital Stock to be so refinanced. "RELATED BUSINESS" means the business conducted (or proposed to be conducted) by the Company and its Subsidiaries as of the Issue Date (including after giving effect to the Merger) and any and all businesses that in the good faith judgment of the Board of Directors of the Company are materially related businesses. "REQUIRED REGULATORY REDEMPTION" means a redemption by the Company of any of a holder's Notes pursuant to, and in accordance with, any order of any Gaming Authority with appropriate jurisdiction and authority relating to a Gaming License, or to the extent necessary in the reasonable, good faith judgment of the Company to prevent the loss, failure to obtain or material impairment to or to secure the reinstatement of, any material Gaming License, where such redemption or acquisition is required because the holder or beneficial owner of such Note is required to be found suitable or to otherwise qualify under any gaming laws and is found unsuitable, or not found suitable or so qualified within a reasonable period of time. "RESTRICTED INVESTMENT" means, in one or a series of related transactions, any Investment, other than Permitted Investments. "RESTRICTED PAYMENT" means, with respect to any person, (a) the declaration or payment of any dividend or other distribution in respect of Equity Interests of such person or any parent or Subsidiary of such person, (b) any payment on account of the purchase, redemption or other acquisition or retirement for value of Equity Interests of such person or any Subsidiary or parent of such person, (c) other than with the proceeds from the substantially concurrent sale of, or in exchange for, Refinancing Indebtedness, any purchase, redemption, or other acquisition or retirement for value of, any payment in respect of any amendment of the terms of or any defeasance of, any Subordinated Indebtedness, directly or indirectly, by such person or a parent or Subsidiary of such person prior to the scheduled maturity, any scheduled repayment of principal, or scheduled sinking fund payment, as the case may be, of such Indebtedness and (d) any Restricted Investment by such person; PROVIDED, HOWEVER, that the term "Restricted Payment" does not include (i) any dividend, distribution or other payment on or with respect to Capital Stock of an issuer to the extent payable solely in shares of Qualified Capital Stock of such issuer; or (ii) any dividend, distribution or other payment, directly or indirectly, to the Company, or to any of its Wholly-owned Subsidiary Guarantors, by any of its Subsidiaries. "SIGNIFICANT SUBSIDIARY" shall have the meaning provided under Regulation S-X of the Securities Act, as in effect on the Issue Date. "STATED MATURITY," when used with respect to any Note, means , 2003 and, when used with respect to any other Indebtedness or Disqualified Capital Stock, means the dates specified in such other instrument as the fixed date on which the principal thereof or such installment of principal is due and payable. 137 "SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company or a Guarantor that is subordinated in right of payment to the Notes or such Guarantee, as applicable, in any respect or has a Stated Maturity on or after the Stated Maturity of the Notes. "SUBSIDIARY," with respect to any person, means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such person, by such person and one or more Subsidiaries of such person or by one or more Subsidiaries of such person, (ii) any other person (other than a corporation) in which such person, one or more Subsidiaries of such person, or such person and one or more Subsidiaries of such person, directly or indirectly, at the date of determination thereof has at least majority ownership interest, or (iii) a partnership in which such person or a Subsidiary of such person is, at the time, a general partner and in which such person, directly or indirectly, at the date of determination thereof has at least a majority ownership interest. Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the Company or of any Subsidiary of the Company. Unless the context otherwise requires, Subsidiary means each direct and indirect subsidiary of the Company. "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939, as amended. "UNRESTRICTED SUBSIDIARY" means any direct or indirect subsidiary of the Company that does not own any Capital Stock of, or own or hold any Lien on any property of, the Company or any other Subsidiary of the Company and that, at the time of determination, shall be an Unrestricted Subsidiary (as designated by the Board of Directors of the Company); PROVIDED, that (i) such subsidiary shall not engage, to any substantial extent, in any line or lines of business activity other than a Related Business, (ii) neither immediately prior thereto nor after giving PRO FORMA effect to such designation would there exist a Default or Event of Default and (iii) immediately after giving pro forma effect thereto, the Company could incur at least $1.00 of Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified Capital Stock." The Board of Directors of the Company may designate any Unrestricted Subsidiary to be a Subsidiary, PROVIDED, that (i) no Default or Event of Default is existing or will occur as a consequence thereof and (ii) immediately after giving effect to such designation, on a PRO FORMA basis, the Company could incur at least $1.00 of Indebtedness pursuant to the Debt Incurrence Ratio in paragraph (a) of the covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified Capital Stock." Each such designation shall be evidenced by filing with the Trustee a certified copy of the resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. "WHOLLY-OWNED SUBSIDIARY" means a Subsidiary all the Equity Interests of which are owned by the Company or one or more Wholly-owned Subsidiaries of the Company, except for directors' qualifying shares or shares owned by foreign nationals, in each case to the extent required by applicable law. UNDERWRITING Subject to certain conditions contained in the Underwriting Agreement, Donaldson, Lufkin & Jenrette Securities Corporation, Jefferies & Company, Inc. and Ladenburg, Thalmann & Co. Inc. (the "Underwriters") have severally agreed to purchase from the Company $75,000,000 aggregate principal amount of the Notes. The principal amount of Notes each Underwriter has agreed to purchase is set forth opposite its name below.
PRINCIPAL AMOUNT UNDERWRITER OF NOTES Donaldson, Lufkin & Jenrette Securities Corporation......................... Jefferies & Company, Inc.................................................... Ladenburg, Thalmann & Co. Inc............................................... ---------------- Total................................................................... $ 75,000,000 ---------------- ----------------
138 The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Notes offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all the Notes if any are taken. The Underwriters have advised the Company and the Guarantors that the Underwriters propose to offer the Notes directly to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of % of the principal amount. Any Underwriter may allow, and such dealers may reallow, a discount not in excess of % of the principal amount to any other Underwriter and to certain other dealers. After the initial public offering of the Notes, the public offering price and other selling terms may be changed by the Underwriters. Prior to this Note Offering, there has been no public market for the Notes. The Company does not intend to list any of the Notes on a national securities exchange or to seek the admission thereof for trading in the NASDAQ NMS. The Underwriters have advised the Company that they currently intend to make a market in the Notes, but are not obligated to do so and may discontinue any such market-making at any time without notice. Accordingly, there can be no assurance as to the liquidity of, or that an active trading market will develop for, the Notes. Alliance and its subsidiaries have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments the Underwriters may be required to make in respect thereof. The Note Offering is being made pursuant to the provisions of Schedule E ("Schedule E") to the Bylaws of the National Association of Securities Dealers, Inc. ("NASD") because Donaldson, Lufkin & Jenrette Securities Corporation beneficially owns more than 10% of the Common Stock. See "Security Ownership of Certain Beneficial Holders and Management." Accordingly, Donaldson, Lufkin & Jenrette Securities Corporation must comply with the requirements set forth in Section 3(c) of Schedule E to the NASD By-laws, which provides generally that, if an underwriter owns more than 10% of the common stock of an issuer the price at which such securities are to be distributed to the public must be established by a "qualified independent underwriter," as defined in Section 2(o) of Schedule E, who must participate in the preparation of the registration statement and the prospectus and who must exercise the usual standards of due diligence with respect thereto. In accordance with such requirements, Ladenburg, Thalmann & Co. Inc. has agreed to act as the qualified independent underwriter in connection with the Note Offering, for which it will receive customary fees. Ladenburg, Thalmann & Co. Inc. has participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part and has exercised the usual standard of due diligence with respect thereto. Pursuant to the terms of the Underwriting Agreement, Alliance and its subsidiaries have agreed to indemnify Ladenburg, Thalmann & Co. Inc. against certain liabilities in connection with its role as qualified independent underwriter, including liabilities under the Securities Act. From time to time, each of Donaldson, Lufkin & Jenrette Securities Corporation and Ladenburg, Thalmann & Co. Inc. has acted, and may in the future act, as financial advisor to Alliance and its affiliates and BGII and its affiliates, including with respect to the Merger, for which they have received, and may in the future receive, customary fees. The Underwriters are also acting as underwriters for the Preferred Stock Offering and Ladenburg, Thalmann & Co. Inc. and Jefferies & Company, Inc. are acting as underwriters for the Common Stock Offering. Alliance has agreed to pay Donaldson, Lufkin & Jenrette Securities Corporation customary fees (plus reimbursement of reasonable out-of-pocket expenses) for advisory services rendered in connection with the Merger and the negotiation of certain documents. In addition, BGII has agreed to pay Ladenburg, Thalmann & Co. Inc. customary fees (plus reimbursement of reasonable out-of-pocket expenses) for advisory services rendered in connection with the Merger and related transactions. LEGAL MATTERS Certain legal matters in connection with the securities offered hereby are being passed upon for the Company by Schreck, Jones, Bernhard, Woloson & Godfrey, Chartered, Las Vegas, Nevada, and Milbank, Tweed, Hadley & McCloy, New York, New York, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. 139 The statements as to matters of law and legal conclusions concerning Nevada gaming laws included under the caption "Gaming Regulation and Licensing--Nevada" have been prepared by Schreck, Jones, Bernhard, Woloson & Godfrey, Chartered, Las Vegas, Nevada, gaming counsel for the Company. The statements as to matters of law and legal conclusions concerning Louisiana gaming laws included under the captions "Risk Factors--Strict Regulation of Gaming Authorities" and "Gaming Regulation and Licensing--Louisiana" have been prepared by Hoffman, Sutterfield, Ensenat, a Professional Corporation, New Orleans, Louisiana, gaming counsel for the Company. The statements as to matters of law and legal conclusions concerning Mississippi gaming laws included under the caption "Gaming Regulation and Licensing--Mississippi" have been prepared by Paul H. Johnson, Esq., Jackson, Mississippi, gaming counsel for the Company. The statements as to matters of law and legal conclusions concerning New Jersey gaming laws included under the captions "Risk Factors--Strict Regulation of Gaming Authorities" and "Gaming Regulation and Licensing--New Jersey" have been prepared by Kozlov, Seaton, Romanini & Brooks, Cherry Hill, New Jersey, gaming counsel for the Company. The statements as to matters of law and legal conclusions concerning German gaming laws included under the caption "Gaming Regulation and Licensing--Germany" have been prepared by Bruckhaus, Westrick, Stegeman, Berlin, Germany, German counsel for the Company. 140 EXPERTS The consolidated financial statements of Alliance Gaming Corporation and subsidiaries as of June 30, 1994 and 1995, and for each of the years in the three-year period ended June 30, 1995 included herein have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to a change in the method of accounting for income taxes, effective July 1, 1993. As noted under "Forecast of Operating Income and Adjusted Operating Cash Flow," KPMG Peat Marwick LLP has not examined the Forecast presented under "Forecast of Operating Income and Adjusted Operating Cash Flow" and, accordingly, does not express an opinion or any other form of assurance with respect thereto. The consolidated balance sheets of BGII as of December 31, 1994 and 1995, and the consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 included herein have been included herein in reliance upon the report of Coopers & Lybrand L.L.P., independent accountants, appearing elsewhere herein, given on the authority of that firm as experts in accounting and auditing. As noted under "Forecast of Operating Income and Adjusted Operating Cash Flow," Coopers & Lybrand L.L.P. neither examined nor compiled nor had any other involvement with the preparation of the Forecast presented under "Forecast of Operating Income and Adjusted Operating Cash Flow" and accordingly does not express an opinion or any other form of assurance with respect thereto, nor do they assume any responsibility for the Forecast. AVAILABLE INFORMATION Each of Alliance and BGII is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. The reports, proxy statements and other information filed by Alliance and BGII may be inspected and copied at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at the Commission's regional offices located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or part of such materials also may be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Alliance's Common Stock is and the Preferred Stock, when issued, will be, listed on the NASDAQ National Market System under the symbol "ALLY" and "ALLYP", respectively. Reports, proxy statements and other information filed by Alliance and BGII may also be inspected at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Alliance has filed with the Commission a Registration Statement on Form S-2 (together with any amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus, which is a part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Such additional information may be inspected, without charge, at the Commission's principal office in Washington, D.C. and copies may be obtained from the Commission upon payment of the prescribed fee. Statements contained in this Prospectus or in any document incorporated in this Prospectus by reference as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. 141 INDEX TO FINANCIAL STATEMENTS ALLIANCE GAMING CORPORATION
PAGE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report........................................................................ F-2 Consolidated Balance Sheets as of June 30, 1994 and 1995............................................ F-3 Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-5 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1993, 1994 and 1995............................................................................................... F-7 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-6 Notes to Consolidated Financial Statements.......................................................... F-8-F-21 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and December 31, 1995 (unaudited)........................................................................................ F-22 Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 1994 and 1995........................................................................................... F-23 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1994 and 1995........................................................................................... F-24 Notes to Unaudited Condensed Consolidated Financial Statements...................................... F-25-F-29 BALLY GAMING INTERNATIONAL, INC. Report of Independent Accountants................................................................... F-31 Consolidated Balance Sheets, December 31, 1994 and 1995............................................. F-32 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995.......... F-33 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995............................................................................................... F-34 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995.......... F-35 Notes to Consolidated Financial Statements.......................................................... F-36-F-64
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Alliance Gaming Corporation We have audited the consolidated balance sheets of Alliance Gaming Corporation and subsidiaries as of June 30, 1995 and 1994 and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the three-year period ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alliance Gaming Corporation and subsidiaries as of June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial statements, effective July 1, 1993 Alliance Gaming Corporation adopted the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES. KPMG Peat Marwick LLP Las Vegas, Nevada September 1, 1995 F-2 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1994 AND 1995 (DOLLARS IN THOUSANDS)
1994 1995 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................... $ 37,085 $ 13,734 Securities available for sale........................................................... 12,489 23,680 Receivables, net........................................................................ 5,924 3,316 Inventories............................................................................. 661 714 Prepaid expenses........................................................................ 4,420 4,148 Refundable income taxes................................................................. 361 361 Other................................................................................... 30 156 ---------- ---------- Total current assets.................................................................. 60,970 46,109 ---------- ---------- PROPERTY AND EQUIPMENT: Land and improvements................................................................... 3,229 17,296 Building and improvements............................................................... 4,286 8,822 Gaming equipment........................................................................ 30,395 36,396 Furniture, fixtures and equipment....................................................... 9,632 11,582 Leasehold improvements.................................................................. 5,222 5,372 Construction in progress................................................................ 212 30 ---------- ---------- 52,976 79,498 Less accumulated depreciation and amortization.......................................... 24,293 29,146 ---------- ---------- Property and equipment, net........................................................... 28,683 50,352 ---------- ---------- OTHER ASSETS: Receivables, net........................................................................ 4,609 5,309 Excess of costs over net assets of an acquired business, net of accumulated amortization of $295 (1994) and $585 (1995)......................................................... 3,789 3,842 Intangible assets, net of accumulated amortization of $4,145 (1994) and $5,516 (1995)... 13,527 12,405 Deferred tax assets..................................................................... 1,081 1,399 Investment in minority owned subsidiary................................................. 2,000 1,585 Other................................................................................... 4,757 5,347 ---------- ---------- Total other assets.................................................................... 29,763 29,887 ---------- ---------- $ 119,416 $ 126,348 ---------- ---------- ---------- ----------
(Continued) See accompanying notes to consolidated financial statements. F-3 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(CONTINUED) JUNE 30, 1994 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1995 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long term debt.................................................... $ 1,504 $ 3,995 Accounts payable........................................................................ 1,661 1,758 Accrued expenses, including related parties of $312 (1994) and $931 (1995).............. 6,879 8,610 ---------- ---------- Total current liabilities............................................................. 10,044 14,363 ---------- ---------- Long term debt, less current maturities................................................... 89,222 97,402 Deferred tax liabilities.................................................................. 1,218 1,205 Other liabilities......................................................................... 3,587 2,750 ---------- ---------- Total liabilities..................................................................... 104,071 115,720 ---------- ---------- Commitments and contingencies Minority interest....................................................................... 246 643 STOCKHOLDERS' EQUITY: Common stock, $.10 par value; authorized 175,000,000 shares; issued 10,505,928 shares (1994) and 11,654,150 shares (1995).................................................... 1,051 1,165 Special stock, $0.10 par value; authorized 10,000,000 shares; issued 1,333,333 (1994 and 1995).................................................................................. 133 133 Paid-in capital......................................................................... 26,716 32,134 Unrealized loss on securities available for sale........................................ (421) (316) Accumulated deficit..................................................................... (12,380) (23,131) ---------- ---------- Total stockholders' equity............................................................ 15,099 9,985 ---------- ---------- $ 119,416 $ 126,348 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. F-4 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1993 1994 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: Gaming: Routes................................................................... $ 96,282 $ 102,830 $ 106,827 Casino and gaming arcades................................................ 12,526 15,679 21,287 Food and beverage sales.................................................... 4,184 4,480 3,847 Net equipment sales........................................................ 99 65 27 ---------- ---------- ---------- 113,091 123,054 131,988 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of gaming: Routes................................................................... 72,614 76,332 79,875 Casino and taverns....................................................... 8,667 11,871 11,436 Cost of food and beverage.................................................. 2,876 3,084 2,795 Cost of equipment sales.................................................... 49 20 12 Selling, general & administrative.......................................... 12,667 13,555 14,633 Business development expenses.............................................. 900 1,192 7,843 Corporate expenses......................................................... 6,191 7,882 9,735 Bad debt expense........................................................... 461 705 400 Loss on abandoned small casinos............................................ -- 3,713 -- Loss on abandoned taverns.................................................. -- 2,638 -- Depreciation and amortization.............................................. 8,718 9,530 9,520 ---------- ---------- ---------- 113,143 130,522 136,249 ---------- ---------- ---------- Operating loss............................................................... (52) (7,468) (4,261) Other income (expense): Interest income............................................................ 998 2,084 2,798 Interest expense........................................................... (5,046) (6,830) (8,133) Minority share of income................................................... -- (506) (397) Equity in income of affiliate.............................................. -- -- 31 Other, net................................................................. 450 (167) (524) ---------- ---------- ---------- Loss before income taxes..................................................... (3,650) (12,887) (10,486) Income tax expense........................................................... -- (241) (265) ---------- ---------- ---------- Net loss..................................................................... $ (3,650) $ (13,128) $ (10,751) ---------- ---------- ---------- ---------- ---------- ---------- Net loss per common share.................................................... $(0.38) $(1.28) $(0.95) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding................................... 9,696 10,251 11,300 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. F-5 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1993 1994 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.......................................................................... $ (3,650) $ (13,128) $ (10,751) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................................... 8,718 9,530 9,520 Loss on abandoned casinos....................................................... -- 3,713 -- Loss on abandoned taverns....................................................... -- 2,638 -- Write-off of other assets....................................................... 149 1,817 2,796 Provision for losses on receivables............................................. 461 705 400 Amortization of debt discounts.................................................. 265 292 297 Undistributed earnings of affiliate............................................. -- -- (31) Non-cash stock compensation expense............................................. -- -- 1,313 Net change in operating assets and liabilities: (Increase) decrease in: Inventories..................................................................... (233) 78 (40) Prepaid expenses................................................................ 1,475 (519) 381 Refundable income taxes......................................................... 766 (361) -- Other........................................................................... 305 254 (126) Increase (decrease) in: Accounts and slot contracts payable............................................. (2,378) 269 (447) Accrued and deferred income taxes............................................... -- 137 (137) Other liabilities, including minority interest.................................. (153) 511 397 Accrued expenses................................................................ 184 3,126 (2,615) --------- --------- --------- Net cash provided by operating activities..................................... 5,909 9,062 957 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment............................................... (5,092) (5,385) (8,887) Proceeds from sale of property and equipment...................................... 257 1,466 351 Additions to receivables.......................................................... (8,715) (18,801) (8,970) Cash collections on receivables................................................... 7,925 17,541 10,315 Net cash provided by acquisition of business...................................... -- -- 2,481 Acquisition of securities available for sale...................................... -- (12,910) (11,086) Acquisition of partnership interests.............................................. -- (2,000) (1,585) Additions to intangible assets.................................................... (77) (5,179) (390) Additions to other long-term assets............................................... (3,296) (2,031) (3,877) --------- --------- --------- Net cash used in investing activities......................................... (8,998) (27,299) (21,648) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt, net of expenses..................................... 1,941 81,984 -- Issuance of common stock warrants................................................. 559 116 -- Reduction of long-term debt....................................................... (2,167) (41,776) (3,125) Issuance of special stock, net of costs........................................... -- 4,799 -- Issuance of common stock.......................................................... 2,097 619 465 --------- --------- --------- Net cash provided by (used in) financing activities........................... 2,430 45,742 (2,660) --------- --------- --------- CASH AND CASH EQUIVALENTS: Increase (decrease) for year...................................................... (659) 27,505 (23,351) Balance, beginning of year........................................................ 10,239 9,580 37,085 --------- --------- --------- Balance, end of year.......................................................... $ 9,580 $ 37,085 $ 13,734 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. F-6 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1993, 1994 AND 1995 (DOLLARS IN THOUSANDS)
RETAINED TOTAL COMMON STOCK SPECIAL STOCK EARNINGS UNREAL. STOCKHOLDERS --------------- ---------------- PAID-IN (ACCUM. LOSS ON EQUITY SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT) SECURITIES ------------ ------ ------- ------ ------- ------- -------- ---------- Balances, June 30, 1992............ $23,661 9,409 $ 942 -- $ -- $18,321 $ 4,398 $-- Net loss......................... (3,650) -- -- -- -- -- (3,650 ) -- Common stock warrants issued..... 559 -- -- -- -- 559 -- -- Shares issued upon exercise of options......................... 2,096 591 59 -- -- 2,037 -- -- ------------ ------ ------- ------ ------- ------- -------- ----- Balances, June 30, 1993............ 22,666 10,000 1,001 -- -- 20,917 748 -- Net loss......................... (13,128) -- -- -- -- -- (13,128 ) -- Shares issued for acquisitions... 249 112 11 -- -- 238 -- -- Common stock warrants issued..... 116 -- -- -- -- 116 -- -- Cost of private placement........ (201) -- -- -- -- (201) -- -- Net change in unrealized loss on securities available for sale... (421) -- -- -- -- -- -- (421) Shares issued for capital infusion........................ 4,999 -- -- 1,333 133 4,866 -- -- Shares issued upon exercise of options......................... 819 394 39 -- -- 780 -- -- ------------ ------ ------- ------ ------- ------- -------- ----- Balances, June 30, 1994............ 15,099 10,506 1,051 1,333 133 26,716 (12,380 ) (421) Net loss......................... (10,751) -- -- -- -- -- (10,751 ) -- Shares issued for acquisitions... 3,754 712 71 -- -- 3,683 -- -- Compensatory stock issued........ 1,313 250 25 -- -- 1,288 -- -- Net change in unrealized loss on securities available for sale... 105 -- -- -- -- -- -- 105 Shares issued upon exercise of options......................... 465 186 18 -- -- 447 -- -- ------------ ------ ------- ------ ------- ------- -------- ----- Balances, June 30, 1995............ $ 9,985 11,654 $1,165 1,333 $133 $32,134 $(23,131) $(316) ------------ ------ ------- ------ ------- ------- -------- ----- ------------ ------ ------- ------ ------- ------- -------- -----
See accompanying notes to consolidated financial statements. F-7 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1993, 1994 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS DESCRIPTION OF BUSINESS Alliance Gaming Corporation and its subsidiaries (collectively, the "Company") are presently engaged in gaming device route operations in Nevada and in the greater New Orleans, Louisiana area; casino operations in Nevada and Mississippi; and the design, manufacture and refurbishment of gaming devices. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Alliance Gaming Corporation, its wholly-owned subsidiaries and indirect subsidiaries and its partially owned, controlled subsidiaries. In the case of Video Services, Inc. ("VSI"), the Company owns 490 shares of Class B voting stock, which constitutes 100% of the voting stock, of VSI. The Company is entitled to receive 71% of dividends declared by VSI, if any, at such time that such dividends are declared. In July 1994, the Company acquired a 45% limited partnership interest in the Rainbow Casino-Vicksburg Partnership. Accordingly, the Company accounted for its investment in this partnership under the equity method until March 29, 1995 at which time the Company increased its partnership interest and assumed the general partnership position (see Note 11). Effective March 29, 1995, the results of operations of the Rainbow Casino have been included in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION In accordance with industry practice, the Company recognizes gaming revenues as the net win from route, casino and tavern operations, which is, for gaming devices, the difference between coins and currency deposited into the devices and payments to customers and, for other games, the difference between gaming wins and losses. The Company recognizes total net win from gaming devices as revenues for gaming routes which operate under revenue-sharing arrangements and revenue-sharing payments as a cost of gaming routes. The Company recognizes revenue from parts and equipment sales to outside purchasers when the products are shipped. LOCATION RENT EXPENSE For financial statement purposes, the Company recognizes expenses for fixed periodic rental payments (including scheduled increases) made in connection with route operation space lease arrangements or sublease agreements on a straight line basis over the term of the agreement including any extension periods which are expected to be exercised. Contingent periodic rental payments are expensed in the period incurred. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Such investments of $29,799,000 (1994) and $5,238,000 (1995) are included in cash and cash equivalents and are carried at cost, which approximates market value. SECURITIES AVAILABLE FOR SALE Effective January 1, 1994, the Company adopted Financial Accounting Standard No. 115. For fiscal years beginning after December 15, 1993, Statement 115 requires that, except for debt securities classified as "held-to-maturity" securities, investments in debt and equity securities should be reported at fair market value. The Company has designated certain securities as being available for sale. Securities are designated as available for sale at the time of their purchase. The Company determines which securities are available for sale by evaluating whether such securities would be sold in response to liquidity needs, asset/liability management and other factors. Securities available for sale are recorded at market value with the resulting unrealized gains and losses being recorded, net of tax, as a component of stockholders' equity. Gains or losses on these securities are determined using the specific identification method. F-8 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS (CONTINUED) INVENTORIES Inventories are stated at the lower of cost or market and are determined by the first-in, first out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated and amortized over their estimated useful lives or lease terms, if less, using the straight line method as follows: 31-39 Building and improvements....................................... years Gaming equipment................................................ 5-7 years Furniture, fixtures and equipment............................... 3-10 years Leasehold improvements.......................................... 5-20 years
EXCESS OF COSTS OVER NET ASSETS OF AN ACQUIRED BUSINESS Excess of costs over net assets of an acquired business is the excess of the cost over the value of net tangible assets of an acquired business and is generally amortized on the straight-line method over a period of 40 years. In the case of the Company's majority-owned subsidiary, Native American Investments, Inc., where the assets acquired are largely intangible, the Company has elected a 10-year amortization period representing the estimated life of the rights acquired, consisting principally of contracts to conduct gaming operations on Indian lands. At each balance sheet date, management evaluates the realizability of goodwill based on expectations of non-discounted cash flows and operating income for each subsidiary having a material goodwill balance. Based upon its most recent analysis, management believes that no material impairment of goodwill exists at June 30, 1995. INTANGIBLE ASSETS Intangible assets consist primarily of costs associated with the acquisition of location leases which are capitalized and amortized using the straight-line method over the terms of the leases, ranging from one to 40 years, with an average life of approximately 11 years. Intangible assets for fiscal 1995 includes approximately $4,547,000 of commissions, discounts and other capitalized costs related to the issuance of the Company's 7.5% Convertible Subordinated Debentures due 2003, net of approximately $957,000 of accumulated amortization. At June 30, 1994, intangible assets includes $4,993,000 of such costs, net of $405,000 of accumulated amortization. Such amounts are being amortized over the term of the debentures. The carrying value of intangible assets is periodically reviewed by management and impairment losses are recognized when the expected non-discounted future operating cash flows derived from such intangible assets are less than their carrying value. OTHER ASSETS Other assets includes assets held for sale, long-term deposits and other non-current assets. In fiscal 1993, the Company paid to certain property owners a $2,500,000 refundable deposit to operate gaming devices at their location. Additionally, other assets are presented net of valuation allowances of $1,763,000 and $631,000 at June 30, 1994 and 1995, respectively. LOSS PER SHARE OF COMMON STOCK Loss per share of common stock has been computed based on the weighted average number of shares of common stock outstanding. Fully diluted earnings per share is not presented because the effect would be anti-dilutive. F-9 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS (CONTINUED) INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Financial Accounting Standard No. 109 ACCOUNTING FOR INCOME TAXES. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective July 1, 1993, the Company adopted Statement 109. The Company previously used the asset and liability method under Statement 96. RECLASSIFICATIONS Certain reclassifications have been made to prior year financial statements to conform with the current year presentation. 2. RECEIVABLES The Company's gaming route operations from time to time involve making loans to location operators in order to participate in revenues over extended periods of time. The loans, made for build-outs, tenant improvements and initial operating expenses are generally secured by the personal guarantees of the operators and the locations' assets. The majority of the loans are interest bearing and are expected to be repaid over a period of time not to exceed the life of the revenue sharing arrangement. The loans have varying payment terms, with weekly payment amounts ranging from $200 to $1,440 and monthly payment amounts ranging from $200 to $18,780. Interest rates on the loans range from prime plus 1.50% to stated rates of 12% with various due dates ranging from July 1995 to April 2007. The loans are expected to be repaid from the locations' cash flows or proceeds from the sale of the leaseholds. Receivables at June 30 consist of the following:
1994 1995 --------- --------- (IN THOUSANDS) Notes receivable-location operators...................................... $ 8,319 $ 7,760 Other receivables........................................................ 2,214 865 --------- --------- 10,533 8,625 Less current amounts..................................................... (5,924) (3,316) --------- --------- Long-term receivables, excluding current amounts......................... $ 4,609 $ 5,309 --------- --------- --------- ---------
Receivables are presented net of an allowance for doubtful accounts of $1,389,000 and $1,659,000 as of June 30, 1994 and 1995, respectively. The allowance is allocated between current and long-term receivables on a pro rata basis related to notes receivable from location operators. During fiscal 1994, the Company cancelled certain sublease agreements as a result of defaults by payors in making payments and acquired title to the assets and operating rights to the tavern locations in exchange for releases of the customers' debt owed to the Company. During fiscal 1994, interest income of approximately $48,000 was recognized on these receivables. Total interest income of $130,000 would have been recognized if the receivables had been current in accordance with their original terms. The total initial investment in these tavern locations of approximately $2,011,000 includes the net receivables of approximately $1,362,000 and other assets of $649,000. No such transactions were completed in fiscal 1995. Management of the Company has determined the fair value of the locations' assets from knowledge of sales F-10 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 2. RECEIVABLES (CONTINUED) of comparable establishments and expertise acquired from operating its gaming devices at similar locations. Due to the Company's decision to dispose of the currently operated small independent tavern operations, certain reserves and write downs were recognized in fiscal 1994 results of operations. Management believes properly managing the disposal of these operations will protect the Company's existing contractual arrangements from the tavern locations as well as assure their continued operation while preserving the Company's investment. Management canNo. estimate when or how many of these locations will be obtained and subsequently disposed. 3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS In fiscal 1994, due to continuing losses from operations, negative cash flows and incompatibility with the Company's long-term growth strategy, the Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming market and 2) dispose of the currently operated small independent taverns on commercially reasonable terms as market conditions warrant. As a result of the decision to exit the downtown Las Vegas gaming market, the Company substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. The Company has entered into an agreement to sell all of its tavern locations to an unaffiliated third party. The sale is contingent upon, among other conditions, approval by Nevada gaming authorities. In addition to the items noted above, the Company's lease on the Mizpah Hotel and Casino has a remaining term of approximately 7.5 years with an option on the Company's behalf to terminate the lease arrangement with 120 days written notice at any time after December 31, 1995. The Company has notified the landlord of the Mizpah of its intention to exercise the termination clause of the lease at that time. As a result of this decision, the Company recognized an expense of $467,500 in fiscal 1994. 4. DEBT Long-term debt at June 30 consists of the following:
1994 1995 --------- ---------- (IN THOUSANDS) 7.5% Convertible subordinated debentures due 2003, unsecured..................... $ 85,000 $ 85,000 Due to stockholder, net of discount of $983,709 (1994) and $747,619 (1995), secured by the assets of VSI.................................................... 4,390 3,309 Hospitality Franchise Systems, secured by the assets of Rainbow Vicksburg........ -- 9,065 Other, secured by related equipment.............................................. 1,336 4,023 --------- ---------- 90,726 101,397 Less current maturities.......................................................... 1,504 3,995 --------- ---------- Long-term debt, less current maturities.......................................... $ 89,222 $ 97,402 --------- ---------- --------- ----------
F-11 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 4. DEBT (CONTINUED) Accrued interest of approximately $1,893,000 (1994) and $1,991,000 (1995) is included in accrued expenses in the Consolidated Balance Sheets. Included in these amounts are $30,343 (1994) and $27,813 (1995) due to affiliates of Alfred H. Wilms, principal stockholder and member of the Board of Directors of the Company, related to funding of VSI's gaming device route operations. In September 1993, the Company completed the private placement of $85,000,000 aggregate principal amount of its 7.5% Convertible Subordinated Debentures due 2003. The debentures pay interest semi-annually on March 15 and September 15. These debentures are convertible at any time into shares of the Company's common stock at a conversion price of $10 per share (equivalent to a conversion rate of 100 shares per $1,000 principal amount of debentures), subject to adjustment. Upon certain defined events, including a change of control, holders of the debentures have the right to require the Company to redeem the debentures for cash at the rate of 101% of principal amount plus accrued interest. The debentures are redeemable at predetermined redemption prices, in whole or in part, at the option of the Company for cash at any time on and after September 15, 1995 if the market price of the common stock exceeds 250% of the conversion price for 20 out of any 30 consecutive trading days or at any time on and after September 15, 1996. In March 1992, Alfred H. Wilms, director and principal stockholder (and then Chairman of the Board of Directors and Chief Executive Officer) of the Company, committed to provide or cause others to provide a $6,500,000 five year subordinated loan to VSI, the Company's controlled subsidiary which loan has been funded in full and is secured by a subordinated interest in all of VSI's present and future personal property. Until August 1993, the loan required quarterly payments of interest. In August 1993, the loan agreement was amended to extend the maturity of the loan to September 1, 1998 and to require quarterly payments of principal and interest. Interest on the loan accrues at the rate of 200 basis points above the 90-day London Inter Bank Offered Rate, adjusted quarterly. At June 30, 1995 the interest rate for the note was 8.2275%. During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan $7,750,000 to the Company's majority controlled subsidiary RCVP in connection with the construction of the Rainbow Casino. The loan amount was subsequently increased to $10,000,000. The note bears interest at 7.5% per annum and requires monthly payments of principal and interest over an 24 month period. In exchange for funding this loan, HFS is also entitled to receive a monthly royalty fee equal to 12% of the casino's gaming revenues. Included in the consolidated results of operations for fiscal 1995 are approximately $810,000 of such royalties. Maturities of long-term debt for each of the five years ending subsequent to June 30, 1995 are as follows: 1996........................................................... $3,995,000 1997........................................................... 3,927,000 1998........................................................... 2,825,000 1999........................................................... 1,670,000 2000........................................................... 1,723,000 Thereafter..................................................... 87,257,000
5. STOCKHOLDERS' EQUITY The Company's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of special stock, par value $.10 per share ("Special Stock"). Special Stock consists of non-voting stock where no holder of the Special Stock shall be entitled to vote at any meeting of stockholders or otherwise, except as otherwise may be specifically provided by law or as approved by the Board of Directors in certain limited circumstances at the time of the stock issuance. The Special Stock may be issued from time to time in one or more series, each series having such designations, preferences and relative, participating, optional or other special rights, F-12 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 5. STOCKHOLDERS' EQUITY (CONTINUED) qualifications, limitations or restrictions as shall be stated and expressed in the resolution providing for the issuance of Special Stock or any series thereof adopted by the Board of Directors. The Board has designated an initial series of Special Stock as "Non-voting Junior Convertible Special Stock" which consists of 1,333,333 shares (the "Initial Series"). The Company's Articles of Incorporation provide that the Initial Series is intended to have the same rights as the Common Stock except that the Initial Series has no voting rights and a $.01 per share liquidation preference. At June 30, 1995, only the Initial Series of Special Stock was outstanding. The Initial Series is convertible on a share for share basis into shares of Common Stock of the Company. In 1984, the Company created an Employee Stock Option Plan (the "1984 Plan") that provides for the issuance of up to 2,000,000 shares of common stock to Company employees and directors. At June 30, 1995, there were incentive stock options covering 207,000 shares and non-qualified stock options covering 10,000 shares outstanding under the 1984 Plan. At June 30, 1994 there were incentive stock options covering 376,000 shares and non-qualified stock options covering 15,000 shares outstanding under the 1984 Plan. Generally, options are granted at the fair market value of the Company's Common Stock at the date of the grant and become exercisable over five years. In 1992, the Company created the 1991 Long Term Incentive Plan (the "Incentive Plan") that, as amended, provides for the issuance of up to 3,000,000 shares of common stock to Company employees and directors. At June 30, 1995 there were incentive stock options covering 2,400,834 shares outstanding under the Incentive Plan. At June 30, 1994 there were incentive stock options covering 1,099,500 shares outstanding under the Incentive Plan. Generally, options are granted at the fair market value of the Company's Common Stock at the date of the grant and become exercisable over five years. Transactions involving stock options are summarized as follows:
OPTIONS OUTSTANDING -------------------------- SHARES EXERCISE PRICE Balance, June 30, 1992..................................................... 1,546,150 1.375- 8.750 Granted.................................................................. 300,000 5.875- 8.750 Exercised................................................................ (590,700) 1.375- 4.875 Cancelled................................................................ (3,600) 3.875 ---------- Balance, June 30, 1993..................................................... 1,251,850 1.375- 8.750 Granted.................................................................. 690,500 6.500-10.125 Exercised................................................................ (393,850) 1.625- 4.000 Cancelled................................................................ (58,000) 2.125- 4.000 ---------- Balance, June 30, 1994..................................................... 1,490,500 1.375-10.125 Granted.................................................................. 1,598,334 5.750- 8.000 Exercised................................................................ (186,000) 1.375- 4.000 Cancelled................................................................ (285,000) 3.500-10.000 ---------- Balance, June 30, 1995..................................................... 2,617,834 1.625- 9.250 ---------- ---------- Exercisable at June 30, 1995............................................... 825,600 1.625- 9.250 ---------- ----------
Also at June 30, 1995, Mr. Wilms held warrants to purchase 2,000,000 shares of Common Stock at $2.50 per share, subject to adjustment. These warrants were issued in connection with the funding of the $6,500,000 five year subordinated loan for VSI. F-13 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 5. STOCKHOLDERS' EQUITY (CONTINUED) Upon closing of the private placement of the Company's 7.5% Convertible Subordinated Debentures and the $5 million equity investment by Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") on September 21, 1993, the Company issued warrants to purchase up to 2,750,000 shares of Common Stock at $1.50 per share to Kirkland. These warrants are exercisable one year after the grant date and only after the market price of the Common Stock reaches certain predetermined levels. Under the same terms, the Company issued warrants to purchase 1,250,000 and 30,000 shares of Common Stock to Gaming Systems Advisors, L.P. ("GSA") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"), respectively. The Company also issued warrants to purchase 500,000 and 250,000 shares of Common Stock at $8.25 per share to the initial purchasers of the Debentures, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Oppenheimer & Co., Inc. ("Oppenheimer"), respectively. Under the same general terms and conditions, DLJ may earn warrants to purchase an additional 250,000 shares of the Company's Common Stock. In fiscal 1995, in connection with the commencement of their employment with the Company, Steve Greathouse, the Company's Chairman of the Board, President and Chief Executive Officer and Dr. Craig Fields, Vice Chairman of the Board were each granted warrants to purchase 250,000 shares of common stock on the same terms as the Kirkland warrants described above. As of June 30, 1995, none of the warrants granted to Kirkland, GSA, Friend, Greathouse or Fields are exercisable. F-14 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 6. INCOME TAXES The Company generally accounts for income taxes and files its income tax returns on a consolidated basis. However, VSI, in which the Company holds 100% of the voting interests, has previously filed its income tax returns on a separate basis and was not consolidated for tax purposes. During the quarter ended December 31, 1994, the Company determined that VSI can be consolidated for tax purposes. As a result, the Company filed for and has received a refund of estimated income taxes paid for fiscal year 1994. Effective July 1, 1993, the Company adopted Financial Accounting Standard No. 109 ACCOUNTING FOR INCOME TAXES, prospectively. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The federal and state income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 1995 and 1994 are presented below.
1994 1995 ---------- ---------- (IN THOUSANDS) DEFERRED TAX ASSETS: Net Operating Loss Carryforwards.............................................. $ 8,495 $ 12,470 Inventory Obsolescence Reserve................................................ 578 179 Receivables, Bad Debt Allowance............................................... 472 564 Organization and Start-up Costs............................................... 267 172 Reserves for abandoned projects............................................... 1,577 1,356 Other......................................................................... 307 566 ---------- ---------- Total gross deferred tax assets................................................. 11,696 15,307 Less: Valuation allowance....................................................... (10,615) (13,908) ---------- ---------- Net deferred tax assets......................................................... $ 1,081 $ 1,399 ---------- ---------- DEFERRED TAX LIABILITIES: Property and equipment, principally due to depreciation differences........... 1,218 1,399 ---------- ---------- Total gross deferred tax liabilities (in 1995, $194 is included in accrued expenses)...................................................................... 1,218 1,399 ---------- ---------- Net deferred tax assets (liabilities)........................................... $ (137) $ -- ---------- ---------- ---------- ----------
The valuation allowance for deferred tax assets as of June 30, 1994 was $10,615,000. The net change in the total valuation allowance for the twelve months ended June 30, 1995 was an increase of $3,293,000. At June 30, 1995, the Company has estimated net operating loss carryforwards for federal income tax purposes of approximately $36,678,000 which are available to offset future federal taxable income, if any, expiring in the years 2007 through 2010. F-15 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 6. INCOME TAXES (CONTINUED) A reconciliation of the Company's provision for income tax expense as compared to the tax benefit calculated by applying the statutory federal tax rate to the loss before income taxes follows.
1994 1995 --------- --------- (IN THOUSANDS) Statutory Rate..................................................................... $ (4,202) $ (3,565) Meals, entertainment............................................................... 3 27 State Income Taxes................................................................. 33 67 Tax losses for which no current benefit is recognized.............................. 4,385 3,736 Alternative Minimum Tax............................................................ 22 -- --------- --------- $ 241 $ 265 --------- --------- --------- ---------
The components of the Company's income tax expense for the year ended June 30, 1995 are:
1994 1995 --------- --------- (IN THOUSANDS) Federal--current................................................................... $ 73 $ -- State--current..................................................................... 31 102 Federal--deferred.................................................................. 118 163 State--deferred.................................................................... 19 -- --------- --------- Total.......................................................................... $ 241 $ 265 --------- --------- --------- ---------
7. STATEMENTS OF CASH FLOWS The following supplemental information is related to the Consolidated Statements of Cash Flows. In fiscal 1995, the Company reclassified approximately $212,000 from receivables to intangible assets and reclassified other assets of approximately $1,099,000 to property and equipment ($1,074,000) and receivables ($25,000). Additionally, numerous non-cash items related to the Company's acquisition of the general partnership interest in RCVP impacted the statement of cash flows. The most significant of these non-cash items included non-cash additions to property, plant and equipment of approximately $23,400,000 and additions to total debt of approximately $13,839,000. See also Note 11. In fiscal 1994, the Company reclassified approximately $1,445,000 of accounts receivable to intangible assets ($1,393,000) and property and equipment ($52,000) on a net basis. Payments for interest expense in 1993, 1994 and 1995 were approximately $4,408,000, $4,690,000 and $7,102,000 respectively. F-16 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 8. INTERIM FINANCIAL INFORMATION (UNAUDITED) Following is the unaudited quarterly results of the Company for the years ended June 30, 1994 and 1995. This information is not covered by the Independent Auditors' Report.
PRIMARY INCOME TOTAL NET (LOSS) (LOSS) PER REVENUES INCOME SHARE(1) --------- ---------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 First Quarter........................................................ $ 28,419 $ (1,376) $ (.14) Second Quarter....................................................... 30,566 (1,221) (.12) Third Quarter........................................................ 31,807 847 .08 Fourth Quarter....................................................... 32,262 (11,378) (1.09) 1995 First Quarter........................................................ $ 30,824 $ (1,926) $ (.18) Second Quarter....................................................... 31,514 (3,090) (.28) Third Quarter........................................................ 31,439 (1,775) (.16) Fourth Quarter....................................................... 38,211 (3,960) (.34)
- ------------------------ (1) The sum of the income (loss) per share for the four quarters, which are based on average shares outstanding during each quarter, does not equal income (loss) per share for the year, which is based on average shares outstanding during the year. 9. RELATED PARTY TRANSACTIONS The Company sold products to Seeben N.V., a company in which Alfred H. Wilms is the brother of a member of the company's board of directors. Sales to this company were approximately $2,000 (1993), $6,000 (1994) and $0 (1995). No accounts receivable were due from this company at June 30, 1994 or June 30, 1995. Sales prices and terms were similar to those of non-affiliated persons. In March 1992, Alfred H. Wilms, a director and principal stockholder (and then Chairman and Chief Executive Officer of the Company), committed to provide or cause others to provide a $6,500,000 five year, unsecured, subordinated loan to VSI, a majority-controlled subsidiary of the Company engaged in the Company's Louisiana gaming device route operations. As consideration for this commitment, the Company issued to Mr. Wilms five year warrants to purchase 200,000 shares of Common Stock at $2.50 per share subject to certain adjustments, and agreed to issue an additional warrant to purchase 1,800,000 shares of Common Stock at $2.50 per share subject to certain adjustments upon complete funding of the loan. At June 30, 1993 approximately $6,000,000 of the loan had been funded. The remaining $500,000 was funded in October 1993 at which time the Company issued to Mr. Wilms the additional warrant for 1,800,000 shares of common stock. David Robbins, a director appointed to the Board in July 1994, as a designee of Kirkland Investment Corporation ("KIC"), is employed by the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel which has represented the Company in various matters related to the Company's growth strategy and its transactions with Kirkland and KIC. The Company paid fees of approximately $1,046,000 and $493,000 to such firm in fiscal 1994 and fiscal 1995, respectively. In connection with the agreements with KIC (100% owned by Joel Kirschbaum) and its affiliates and related transactions, the Company has paid to or on behalf of Kirkland and its affiliates a total of approximately $346,000 in fiscal 1994 and $597,000 in fiscal 1995 primarily for reimbursement of expenses incurred on behalf of the Company. F-17 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 9. RELATED PARTY TRANSACTIONS (CONTINUED) In 1993 and 1994 the Company entered into employment agreements with certain key employees. These agreements range from one to three years in length and cover certain other terms of employment including compensation. As a condition of his employment, in April 1995 the Company issued 250,000 shares of common stock to Steve Greathouse, the Company's Chairman, President and Chief Executive Officer and recognized a non-cash charge of $1,313,000 related to this transaction. 10. COMMITMENTS AND CONTINGENCIES The Company leases office space, equipment, warehouse and repair facilities, gaming route locations, casino and other locations under non-cancelable operating leases. Future minimum rentals under non-cancelable operating leases at June 30, 1995 are:
TOTAL MINIMUM SUBLEASE NET MINIMUM YEAR ENDED JUNE 30 RENTALS INCOME RENTALS ----------- ----------- ----------- (IN THOUSANDS) 1996................................................................... $ 8,828 $ 921 $ 7,907 1997................................................................... 6,462 842 5,620 1998................................................................... 6,173 809 5,364 1999................................................................... 5,623 758 4,865 2000................................................................... 3,737 598 3,139 Thereafter............................................................. 34,349 2,757 31,592 ----------- ----------- ----------- $ 65,172 $ 6,685 $ 58,487 ----------- ----------- ----------- ----------- ----------- -----------
Certain gaming route location leases provide only for contingent rentals based upon a percentage of gaming revenue and are cancelable at any time by either party. Operating lease rental expense, including contingent lease rentals, for years ended June 30 was as follows:
1993 1994 1995 --------- --------- --------- (IN THOUSANDS) Minimum rentals........................................................ $ 11,727 $ 13,743 $ 9,704 Contingent rentals..................................................... 49,621 55,910 58,113 --------- --------- --------- 61,348 69,653 67,817 Sublease rental income................................................. (850) (1,004) (1,192) --------- --------- --------- $ 60,498 $ 68,649 $ 66,625 --------- --------- --------- --------- --------- ---------
These amounts are included in the cost of gaming revenues on the accompanying Consolidated Statements of Operations. In April, 1990, the Company entered into a ten year lease to operate a non-restricted gaming location in Las Vegas, Nevada. The lease commencement date was scheduled to begin no later than 90 days after the construction had been finalized. In January, 1991, the Company received notice that the construction was complete; however, upon review of the property, the Company did not believe that construction had been completed. In August, 1992, the lessor filed a suit against the Company seeking compensatory and exemplary damages totalling $18,700,000. In fiscal 1992, the Company had accrued a $480,000 liability representing back rent owed to the lessor. In February, 1993 the lawsuit was settled and the Company paid the lessor $425,000 in return for resolution of all prior and current disputes regarding the lease terms. The lease calls for monthly rentals of approximately $31,000 and provides for annual increases based on certain indices. At F-18 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) June 30, 1992, the Company sublet the property to a location operator in exchange for the right to operate gaming devices at the property under a space lease arrangement for a period of 10 years beginning December, 1992. The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial Partners, LLC ("KFP"), both Kansas limited liability companies. Under an option agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP has been granted the exclusive right to operate gaming devices and/or casino-type gaming at Camptown's facility if and when such gaming is permitted in Kansas. In September 1994, the Kansas Racing Commission approved a revised financing proposal submitted by Camptown that would facilitate completion of construction of a greyhound racing facility on the 320 acre site in Frontenac, Kansas. Camptown has received a $3,205,000 loan commitment which has been guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for its portion of the loan guarantee which was made in the form of a certificate of deposit. The Company owns 50% of the equity of KFP which is accounted for under the equity method. The Company has not guaranteed the obligations of KFP. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. Camptown's obligation to begin to repay the loan guaranteed by KFP commenced in June 1995 with interest only payments. Principal repayment is scheduled to commence in June 1996. There can be no assurance as to the successful completion or operation of any part of this project. The Company is also involved in various claims and legal actions arising in the ordinary course of business. Management of the Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. 11. ACQUISITIONS On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. Through a wholly-owned subsidiary, the Company originally purchased a 45% limited partnership interest in RCVP, a Mississippi limited partnership which owns the casino, all assets (including the gaming equipment) associated with the casino and certain adjacent parcels of land. As consideration for its 45% limited partnership interest, the Company paid $2,000,000 in cash and issued 600,000 shares of its common stock to RCC and its two sole shareholders. The 55% general partnership interest in RCVP was held by RCC. In connection with the completion of the casino, the Company funded a $3,250,000 advance to RCC on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to payments due to HFS). On March 29, 1995, the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in RCVP and increased its partnership interest. In exchange for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a financing fee payable to HFS) related to the completion of certain incomplete elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy), a related $652,000 cash payment by the Company to NGM and commitments by the Company and NGM to fund additional financing required to complete the project (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As a result of these transactions, RCVP assumed $1,304,000 of new debt of which 50% was payable to the Company. Under the adjusted partnership interests, RCC is entitled to receive 10% of the net available cash flows after debt service and other items, as defined, (which amount shall increase to 20% of cash above $35,000,000 (i.e., only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. This transaction was accounted for as an acquisition using the purchase method. Accordingly, the purchase price F-19 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 11. ACQUISITIONS (CONTINUED) was allocated to assets acquired based on their estimated fair values. This treatment resulted in no cost in excess of net assets acquired (goodwill) being recognized. The Rainbow Casino's results of operations have been included in the consolidated results of operations since the date of acquisition. The following summarized, unaudited pro forma results of operations for the fiscal year ended June 30, 1995, assume the complete acquisition of RCVP occurred on the date the casino permanently opened for business.
1995 ---------- Revenues.................................................................................... $ 142,051 Net loss.................................................................................... (10,862) Net loss per common share................................................................... $ (0.96)
12. RECENT DEVELOPMENTS (UNAUDITED) On June 19, 1995, the Company publicly proposed a negotiated acquisition of Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common stock. Prior to making this offer, the Company had acquired 500,000 shares of BGII stock on the open market and at June 30, 1995 held 1,000,000 shares (approximately 9.3% of BGII's total outstanding shares, based on BGII's most recent public filings) which it acquired at an average cost of approximately $10.41 per share. Under the proposed terms of the offer, approximately 60% of BGII shares not held by the Company would be acquired for cash with the remainder exchanged for shares of the Company's common stock. The offer was contingent upon satisfactory due diligence, regulatory and stockholder approval and reasonable financing. At the time the offer was made public, the Company requested expedited due diligence, subject to a confidentiality agreement. BGII had previously announced a planned merger with WMS Industries, Inc. ("WMS") which included an exclusive period for WMS to negotiate the terms of that proposed merger. WMS's exclusive negotiating period had expired several weeks before the Company's proposal was made without announcement or action on the part of BGII or WMS. On July 25, 1995, after being refused due diligence access and the announcement by BGII that a definitive agreement had been reached to merge with WMS, the Company announced its intent to make a tender offer for BGII. The tender offer was on largely the same terms as the originally proposed acquisition. On the same date, the Company announced it had filed litigation in Delaware Chancery Court requesting that the court require BGII to grant the Company due diligence access, enjoin BGII from proceeding with the WMS merger (including a provision therein requiring the sale of BGII's German operations) and declare the breakup fee provided for in the WMS merger to be invalid. The Company indicated that it would increase the price per share of BGII stock to $13.00 per share if the breakup fee was declared invalid. The tender offer was conditioned upon the Company being validly tendered a number of shares of BGII stock, which combined with its own holdings of such stock, would give the Company a majority of BGII's outstanding shares. The tender offer commenced on July 28, 1995. Subsequently, the Company announced its intention to proceed with a consent solicitation to elect a majority of independent directors to the BGII Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly announced an agreement whereby the parties would hold in abeyance all activities related to pending litigation until September 1, 1995, refrain from commencing new litigation until that same date, BGII would schedule its annual shareholder meeting for consideration of the proposed WMS merger and the election of directors on October 30, 1995, and the Company would extend the expiration date of the tender offer until September 12, 1995 and refrain from soliciting proxies until September 1, 1995. On September 1, 1995, the Company disclosed that it had obtained firm financing commitments to fund the tender offer and that such commitments were not conditioned on due diligence of BGII. Accordingly, the Company extended the expiration date of its tender offer to September 29, 1995. BGII and WMS filed lawsuits against the Company alleging numerous public misrepresentations had been made by the Company with regards to the WMS-BGII agreement, the Company's tender offer and the level of cooperation of BGII's board of directors. F-20 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED JUNE 30, 1993, 1994 AND 1995 12. RECENT DEVELOPMENTS (UNAUDITED) (CONTINUED) Subsequent to filing its lawsuit against the Company, BGII adopted a poison pill provision designed to discourage the Company's acquisition efforts. In response to the poison pill adoption, the Company announced it had increased its tender offer to $13.00 per share of BGII common stock and increased to 5,400,000 the number of BGII common shares being sought in the tender offer. F-21 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30 DEC. 31 1995 1995 ---------- ---------- ASSETS CURRENT ASSETS: Cash, cash equivalents and securities available for sale................................ $ 37,414 $ 29,468 Receivables, net........................................................................ 3,316 3,110 Inventories............................................................................. 714 672 Prepaid expenses........................................................................ 4,148 2,984 Other................................................................................... 517 411 ---------- ---------- Total current assets.................................................................. 46,109 36,645 ---------- ---------- Property and equipment, net............................................................... 50,352 50,870 Receivables, net.......................................................................... 5,309 4,809 Excess of costs over net assets of an acquired business, net of accumulated amortization of $585 and $694......................................................................... 3,842 3,733 Intangible assets, net of accumulated amortization of $5,516 and $5,798................... 12,405 11,638 Investment in minority owned subsidiary................................................... 1,585 1,585 Other..................................................................................... 6,746 7,592 ---------- ---------- Total assets........................................................................ $ 126,348 $ 116,872 ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt.................................. $ 3,995 $ 4,054 Accounts payable...................................................... 1,758 2,295 Accrued expenses, including due to related parties of $931 and $23.... 8,610 10,187 --------- --------- Total current liabilities........................................... 14,363 16,536 Long-term debt, less current maturities................................. 97,402 96,052 --------- --------- Other liabilities....................................................... 3,955 4,082 --------- --------- Total liabilities................................................... 115,720 116,670 --------- --------- Minority interest....................................................... 643 919 STOCKHOLDERS' EQUITY (DEFICIENCY): Common stock, $0.10 par value; authorized 175,000,000 shares; issued and outstanding 11,654,150 and 12,987,483.......................... 1,165 1,298 Special stock, $0.10 par value; authorized 10,000,000 shares; issued and outstanding 1,333,333 and 0.................................... 133 -- Paid-in capital..................................................... 32,134 32,134 Unrealized loss on securities available for sale, net............... (316) (1,587) Accumulated deficit................................................. (23,131) (32,562) --------- --------- Total stockholders' equity (deficiency)............................. 9,985 (717) --------- --------- Total liabilities and stockholders' equity (deficiency)........... $ 126,348 $ 116,872 --------- --------- --------- ---------
See notes to unaudited condensed consolidated financial statements. F-22 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1995 --------- --------- REVENUES: Gaming: Routes.................................................................................. $ 52,511 $ 52,621 Casino and taverns...................................................................... 7,861 21,679 Food and beverage sales................................................................... 1,950 1,923 Net equipment sales....................................................................... 16 6 --------- --------- 62,338 76,229 --------- --------- COSTS AND EXPENSES: Cost of gaming: Routes.................................................................................. 39,214 40,361 Casinos and taverns..................................................................... 4,653 9,887 Cost of food and beverage................................................................. 1,414 1,426 Cost of equipment sales................................................................... 9 1 Selling, general and administrative....................................................... 6,486 9,398 Business development expenses............................................................. 3,508 10,737 Corporate expenses........................................................................ 4,302 3,037 Depreciation and amortization............................................................. 4,613 4,906 --------- --------- 64,199 79,753 --------- --------- Operating loss............................................................................ (1,861) (3,524) OTHER INCOME (EXPENSE): Interest income........................................................................... 1,504 818 Interest expense.......................................................................... (3,915) (4,288) Minority share of income.................................................................. (169) (276) Other, net................................................................................ (286) (1,373) --------- --------- Loss before income taxes.................................................................. (4,727) (8,643) Income tax expense........................................................................ (290) (788) --------- --------- Net loss.................................................................................. $ (5,017) $ (9,431) --------- --------- --------- --------- Loss per share of common stock............................................................ $ (.45) $ (.79) --------- --------- --------- --------- Weighted average common shares outstanding................................................ 11,101 11,879 --------- --------- --------- ---------
See notes to unaudited condensed consolidated financial statements. F-23 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 (DOLLARS IN THOUSANDS)
1994 1995 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................................................ $ (5,017) $ (9,431) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization......................................................... 4,613 4,906 Loss on sale of property and equipment................................................ 560 240 Write off of other assets............................................................. 361 201 Provision for losses on receivables................................................... 261 20 Amortization of debt discounts........................................................ 179 118 Equity in losses of affiliate......................................................... 405 -- Deferred income tax provision......................................................... -- 655 Net change in operating assets and liabilities: Decrease in: Inventories........................................................................... 28 12 Prepaid expenses...................................................................... 1,577 1,163 Refundable income taxes............................................................... -- 312 Other assets.......................................................................... 615 143 Increase (decrease) in: Accounts and slot contracts payable................................................... 101 537 Accrued expenses...................................................................... (1,333) 1,577 Minority interests.................................................................... 168 276 Other liabilities..................................................................... (424) (223) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES:.......................................... $ 2,094 $ 506 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment..................................................... (2,905) (5,004) Proceeds from sale of property and equipment............................................ 265 2,218 Additions to receivables................................................................ (12,303) (6,296) Cash collections on receivables......................................................... 9,272 6,564 Investment in subsidiary................................................................ (1,580) -- Proceeds from sale (purchase of) of securities available for sale....................... (133) 8,015 Additions to intangible assets.......................................................... (162) (420) Additions to other long-term assets..................................................... (1,959) (2,179) ---------- ---------- Net cash provided by (used in) investing activities................................... (9,505) 2,898 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt............................................................. (1,594) (2,091) Proceeds from long-term debt............................................................ -- 682 Issuance of stock....................................................................... 109 -- ---------- ---------- Net cash used in financing activities................................................. (1,485) (1,409) ---------- ---------- CASH AND CASH EQUIVALENTS: Increase (decrease) for period.......................................................... (8,896) 1,995 Balance, beginning of period............................................................ 37,085 13,734 ---------- ---------- Balance, end of period................................................................ $ 28,189 $ 15,729 ---------- ---------- ---------- ----------
See notes to unaudited condensed consolidated financial statements. F-24 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 1. ADJUSTMENTS FOR FAIR PRESENTATION In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results to be expected for a full year. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the financial statements and notes in the Company's annual report on Form 10-K. All intercompany accounts and transactions have been eliminated in consolidation. 2. RECLASSIFICATIONS Certain reclassifications have been made to prior period financial statements to conform with current period presentations. 3. RECEIVABLES The Company's gaming route operations from time to time involve making loans to location operators in order to participate in revenues over extended periods of time. These loans, generally made for buildouts, tenant improvements and initial operating expenses, are generally guaranteed on a full recourse basis by the location owner and are secured by the assets of the location. The majority of the loans are interest bearing and are expected to be repaid over a period of time not to exceed the life of the related revenue sharing agreement. The loans have varying payment terms requiring either weekly or monthly payments. Annual interest rates on the loans range from prime plus 1.5% to stated rates of 12% with various maturity dates ranging through 2007. The loans are expected to be repaid from the locations' cash flows or proceeds from the sale of the leaseholds. Receivables consist of the following:
JUNE 30 DEC. 31 1995 1995 --------- --------- (IN THOUSANDS) Notes receivable-location operators...................................... $ 7,760 $ 7,764 Other receivables........................................................ 865 155 --------- --------- 8,625 7,919 Less current amounts..................................................... (3,316) (3,110) --------- --------- Long-term receivables, excluding current amounts......................... $ 5,309 $ 4,809 --------- --------- --------- ---------
Receivables are presented net of an allowance for doubtful accounts of approximately $1,659,000 and $1,435,000 as of June 30, 1995 and December 31, 1995, respectively. The allowance is allocated between current and long-term receivables on a pro rata basis related to notes receivable from location operators. F-25 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 4. DEBT Long-term debt at June 30, 1995 and December 31, 1995 consists of the following:
JUNE 30 DEC 31 1995 1995 ---------- ---------- (IN THOUSANDS) Convertible subordinated debentures due 2003, 7.5%.............................. 85,000 85,000 Due to stockholder due 1998, 200 basis points over the London Inter Bank offer rate (current rate 7.97%), net of discount of $747,619 and $629,573............ 3,309 2,797 Hospitality Franchise Systems due 2001, 7.5%.................................... 9,065 8,476 National Gaming Mississippi due 2002, 10.0%..................................... 631 1,224 Other debt...................................................................... 3,392 2,609 ---------- ---------- 101,397 100,106 Less current maturities......................................................... 3,995 4,054 ---------- ---------- Long-term debt, less current maturities......................................... $ 97,402 $ 96,052 ---------- ---------- ---------- ----------
Accrued interest of approximately $1,991,000 (June 30) and $1,973,000 (December 31) is included in accrued expenses in the unaudited condensed consolidated balance sheets. Amounts due to stockholder include amounts owed to affiliates of Alfred H. Wilms, the Company's largest stockholder and a member of the Board of Directors of the Company, relating to funding of the Company's majority-controlled subsidiary, Video Services, Inc.'s ("VSI") gaming device route operations. 5. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to losses and the lack of available carrybacks, the Company recognized no federal income tax expense or benefit for the six month period ended December 31, 1994 and 1995 other than the tax effects of changes in the unrealized gains (losses) on securities available for sale. At December 31, 1995, the Company had estimated net operating loss carryforwards for federal income tax purposes of approximately $35,000,000 which are available to offset future federal taxable income, if any, expiring 2007 through 2009. The deferred tax asset related to the net operating losses has been fully reserved. 6. INTANGIBLE ASSETS Intangible Assets includes $4,272,000, net of $1,232,000 of accumulated amortization, for costs related to the commissions, discounts and other issuance costs of the Company's private placement of $85,000,000 aggregate principal amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are being amortized on a straight line basis over the term of the debentures. 6. INVESTMENT IN MINORITY OWNED SUBSIDIARY The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an option agreement (the "option agreement") granted to KGP by F-26 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 6. INVESTMENT IN MINORITY OWNED SUBSIDIARY (CONTINUED) Camptown Greyhound Racing, Inc. ("Camptown") and The Racing Association of Kansas-Southeast ("TRAK Southeast"), KGP has been granted the exclusive right, which right expires on September 13, 2013, to operate gaming devices and/or casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. The Company and Casino Magic Corporation each invested $1,580,000 in KFP which was used to purchase a certificate of deposit to collateralize its guaranty. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. The racing facility was temporarily closed on November 5, 1995 due to poor financial results. Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an intention to reopen for business following bankruptcy reorganization. Boatmen's Bank demanded payment of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which is secured by a second mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the Option Agreement. KFP intends to vigorously pursue all of its rights and remedies which may include, among other things, seeking authority from the bankruptcy court to commence a foreclosure action. In the case of a foreclosure action, KFP would be required to assume or pay the existing first mortgage of approximately $2,000,000 if KFP becomes the purchaser at any such sale. The Company intends to continue to monitor its investment in KFP. While the Company is encouraged by the positive movement in Kansas towards considering legislation that would legalize the operation of gaming devices at pari-mutuel track locations, there can be no assurance as to Camptown's ability to maintain its license at the location, or any successful completion or operation of any part of this project. 7. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE For balance sheet presentation the following account balances have been combined at December 31, 1995:
(IN THOUSANDS) Cash and cash equivalents........ $ 15,729 Securities available for sale.... 13,739 ------- Total............................ $ 29,468 ------- -------
As of December 31, 1995, unrealized losses for securities available for sale was $1,587,000 net of the tax effect of $817,000 and is included as a component of stockholder's equity. 8. INTANGIBLE ASSETS Intangible Assets includes $4,272,000 net of $1,232,000 of accumulated amortization, for costs related to the commissions, discounts and other issuance costs of the Company's private placement of $85,000,000 aggregate principal amount of 7.5% Convertible Subordinated Debentures due 2003. Such costs are being amortized on a straight line basis over the term of the debentures. 9. PROPOSED BGII MERGER TRANSACTION On October 18, 1995, the Company and Bally Gaming International, Inc. ("BGII") entered into a definitive merger agreement ("Merger") under which the outstanding shares of BGII common stock would each be exchanged for $13 in cash and shares of the Company's common stock. On January 22, 1996, the parties reached an agreement to amend the terms of the Merger. Under the amended agreement, each share of BGII common stock outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares already owned by the Company) will receive $7.83 per share in cash, $3.57 per share in the Company's Series B Special Stock which is a Pay-in-Kind (PIK) preferred stock, and $0.30 per share of F-27 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 9. PROPOSED BGII MERGER TRANSACTION (CONTINUED) the Company's common stock totaling $11.70 per share of BGII common stock. The PIK preferred stock has an eight-year maturity and has a dividend rate of 15% as follows: PIK at 15% for the first five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the eighth year of the term. All shares of Series B Special Stock are mandatorily redeemable by the eighth anniversary of the date of initial issuance. If the Company fails to redeem such shares by that date, then the number of directors constituting the Company's Board will be increased by two and the holders of the shares of Series B Special Stock will have the right to elect no more than two directors total to the Company's Board. The holders of Series B Special Stock will have no other remedies upon such failure to redeem the outstanding shares of Series B Special Stock by such date. Other than as described herein, the holders of shares of Series B Special Stock have no other voting rights except as stated by law. The Company intends to seek to have the Series B Special Stock quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous agreement. The transaction is subject to approval by shareholders, obtaining customary regulatory approvals, the securing of $150,000,000 in permanent financing by the Company including $15,000,000 through a registered public offering of the Series B Special Stock, and certain other conditions. The Merger is expected to occur in late April 1996. 10. LEGAL PROCEEDINGS In June 1995, Bally Entertainment Corporation ("BEC") asserted that a certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits the use of the trade name "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1996. BGII believes such claim is entirely without merit since the restriction referred to expires on January 8, 1996 and in any event does not relate to the use of the "Bally" trade name, which is covered by the License Agreement. The restriction in the Noncompete Agreement will not have any impact on the combined company after the Merger since the effective time of the Merger contemplates a closing of the Merger after the restriction in the Noncompete Agreement lapses. BEC has not reasserted this position since it was informed by BGII in July 1995 that the restriction lapses on January 8, 1996. Consequently, BGII believes BEC has determined not to contest with BGII's position. BEC has also asserted that its permission is required for use of the "Bally" trade name by any entity other than BGII and that a merger between BGII and another company would violate the terms of the License Agreement. BGII has denied these claims and believes that the surviving company in a merger will be permitted to use the "Bally" trade name in accordance with the terms of such License Agreement. BGII believes that no breach of such License Agreement is caused by the Merger and the use of the "Bally" trade name by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995 the Company, the Company's Merger Subsidiary, and BGII commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, among other things, that the surviving company in the Merger will be permitted to use the "Bally" trade name in accordance with the terms of the License Agreement, and seeking injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced an action against BGII, Bally Gaming (a BGII subsidiary), the Company, and the Company's Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" trade name (the "BEC Action"). The BEC Action alleges that BGII's continued use of the trade name after the Merger will (1) constitute a prohibited assignment of BGII's rights to use the trade name and (2) exceed the scope of the license granted to BGII because BGII will be under control of the Company. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC Action. BGII, Bally Gaming, the Company, and the Company's Merger Subsidiary intend to vigorously defend their position in these actions. However, there can be no F-28 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 10. LEGAL PROCEEDINGS (CONTINUED) assurance that BEC will not be successful in its action to prohibit the surviving corporation in the Merger from using the "Bally" trade name. The loss of the "Bally" trade name may have a material adverse effect on the gaming machine operations of the surviving corporation in the Merger. 11. INITIAL SERIES SPECIAL STOCK In September 1993, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") invested $5,000,000 in the Company in exchange for 1,333,333 shares of the Company's Non-Voting Junior Convertible Special Stock, which are convertible on a share for share basis into shares of the Company's Common Stock, and warrants to purchase up to 2,750,000 shares of common stock subject to certain conditions. In December 1995, Kirkland elected to convert the entire 1,333,333 shares of Special Stock into shares of the Company's Common Stock. F-29 [THIS PAGE INTENTIONALLY LEFT BLANK] F-30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Bally Gaming International, Inc. We have audited the accompanying consolidated balance sheets of Bally Gaming International, Inc. as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bally Gaming International, Inc. as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada February 13, 1996 F-31 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 9,204 $ 5,526 Accounts and notes receivable, net of allowance for doubtful accounts of $12,282 and $16,281................................................................................ 84,632 87,176 Inventories, net: Raw materials and work-in-process..................................................... 21,082 16,066 Finished goods........................................................................ 28,377 35,525 ---------- ---------- 49,459 51,591 Other current assets.................................................................... 5,074 3,983 ---------- ---------- Total current assets................................................................ 148,369 148,276 Long-term notes receivable, net of allowance for doubtful accounts of $8,198 and $7,869.................................................................... 5,558 9,981 Property, plant and equipment, at cost: Land.................................................................................... 1,357 1,357 Buildings and leasehold improvements.................................................... 19,262 19,871 Machinery and equipment................................................................. 26,636 30,328 Furniture, fixtures and equipment....................................................... 6,075 6,162 Less accumulated depreciation........................................................... (28,972) (34,474) ---------- ---------- Property, plant and equipment, net.................................................... 24,358 23,244 Intangible assets, less accumulated amortization of $12,609 and $13,720................... 11,410 10,814 Other assets.............................................................................. 2,547 2,001 ---------- ---------- $ 192,242 $ 194,316 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 19,272 $ 18,556 Accrued liabilities and other payables: Compensation and benefit related liabilities............................................ 5,962 5,608 Other................................................................................... 11,363 11,798 ---------- ---------- 17,325 17,406 Current maturities of long-term debt.................................................... 16,000 14,957 ---------- ---------- Total current liabilities........................................................... 52,597 50,919 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $458 and $344........................................................................ 39,542 39,656 Other long-term debt, less current maturities............................................. 14,220 15,331 Commitments and contingencies Stockholders' equity: Preferred stock; $.01 par value; 5,000,000 shares authorized, none issued............... -- -- Common stock; $.01 par value; 30,000,000 shares authorized, 10,749,501 and 10,799,501 issued and outstanding.................................................. 107 108 Additional paid-in-capital.............................................................. 67,758 68,345 Retained earnings....................................................................... 5,235 1,842 Cumulative translation adjustments...................................................... 13,560 18,662 Unearned compensation................................................................... (777) (547) ---------- ---------- Total stockholders' equity.......................................................... 85,883 88,410 ---------- ---------- $ 192,242 $ 194,316 ---------- ---------- ---------- ----------
See accompanying notes. F-32 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS,)EXCEPT PER SHARE DATA Revenues: Sales...................................................................... $ 164,571 $ 231,318 $ 244,471 Other...................................................................... 4,136 4,874 4,841 ---------- ---------- ---------- 168,707 236,192 249,312 ---------- ---------- ---------- Costs and expenses: Cost of sales.............................................................. 121,710 157,059 163,131 Selling, general and administrative........................................ 57,357 59,989 65,289 Provision for doubtful receivables......................................... 8,176 5,763 6,712 Unusual charges............................................................ -- -- 5,816 ---------- ---------- ---------- 187,243 222,811 240,948 ---------- ---------- ---------- Operating income (loss)...................................................... (18,536) 13,381 8,364 Interest expense............................................................. 4,424 6,768 6,853 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary gain..................... (22,960) 6,613 1,511 Provision for income taxes................................................... 4,242 2,820 4,904 ---------- ---------- ---------- Income (loss) before extraordinary gain...................................... (27,202) 3,793 (3,393) Extraordinary gain on early extinguishment of debt........................... 3,759 -- -- ---------- ---------- ---------- Net income (loss)............................................................ $ (23,443) $ 3,793 $ (3,393) ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per common share: Income (loss) before extraordinary gain.................................... $ (2.54) $ 0.35 $ (0.31) Extraordinary gain on early extinguishment of debt......................... 0.35 -- -- ---------- ---------- ---------- Net income (loss).......................................................... $ (2.19) $ 0.35 $ (0.31) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common shares and common stock equivalents outstanding................................................................. 10,685 10,727 10,776 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. F-33 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS)
ADDITIONAL CUMULATIVE TOTAL COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS' STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY ----------- ----------- ----------- ------------- --------------- ------------- Balance at December 31, 1992.................. $ 106 $ 65,757 $ 24,885 $ 11,662 $ (1,133) $ 101,277 Net loss.................................... -- -- (23,443) -- -- (23,443) Issuance of restricted Company common stock award..................................... 1 1,149 -- -- (1,150) -- Exercise of warrants........................ -- 30 -- -- -- 30 Amortization of unearned compensation....... -- -- -- -- 951 951 Foreign currency translation adjustment..... -- -- -- (4,536) -- (4,536) Issuance of stock warrants.................. -- 600 -- -- -- 600 ----- ----------- ----------- ------------- ------- ------------- Balance at December 31, 1993.................. 107 67,536 1,442 7,126 (1,332) 74,879 Net income.................................. -- -- 3,793 -- -- 3,793 Amortization of unearned compensation....... -- -- -- -- 555 555 Foreign currency translation adjustment..... -- -- -- 6,434 -- 6,434 Issuance of Company common stock under compensation agreement.................... -- 222 -- -- -- 222 ----- ----------- ----------- ------------- ------- ------------- Balance at December 31, 1994.................. 107 67,758 5,235 13,560 (777) 85,883 ----- ----------- ----------- ------------- ------- ------------- Net loss.................................... -- -- (3,393) -- -- (3,393) Exercise of stock options................... 1 587 -- -- -- 588 Amortization of unearned compensation....... -- -- -- -- 230 230 Foreign currency translation adjustment..... -- -- -- 5,102 -- 5,102 ----- ----------- ----------- ------------- ------- ------------- Balance at December 31, 1995.................. $ 108 $ 68,345 $ 1,842 $ 18,662 $ (547) $ 88,410 ----- ----------- ----------- ------------- ------- ------------- ----- ----------- ----------- ------------- ------- ------------- COMMON STOCK SHARE AMOUNTS (IN THOUSANDS) ISSUED - ---------------------------------------------- ------------- Balance at December 31, 1992.................. 10,623 Issuance of restricted Company common stock award..................................... 100 Exercise of warrants........................ 2 ------------- Balance at December 31, 1993.................. 10,725 Issuance of Company common stock under compensation agreement.................... 25 ------------- Balance at December 31, 1994.................. 10,750 Exercise of stock options................... 50 ------------- Balance at December 31, 1995.................. 10,800 ------------- -------------
See accompanying notes. F-34 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss)............................................................. $ (23,443) $ 3,793 $ (3,393) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Extraordinary gain on early extinguishment of debt.......................... (3,759) -- -- Depreciation and amortization............................................... 8,103 8,271 8,953 Deferred income taxes....................................................... 163 (296) (778) Provision for doubtful receivables.......................................... 8,176 5,763 6,712 Provision for writedown of building to be sold.............................. -- -- 812 Provision for inventory valuation........................................... 6,156 2,230 1,955 (Gain) loss on disposals of property, plant and equipment................... 64 (83) 48 Changes in operating assets and liabilities: Accounts and notes receivable............................................. (17,648) (15,823) (10,304) Inventories............................................................... (15,077) (3,889) (2,167) Other current assets...................................................... (1,534) (713) 1,279 Accounts payable and accrued liabilities.................................. 9,717 2,730 578 Other, net.................................................................. (466) (759) 100 ---------- ---------- ---------- Cash provided by (used in) operating activities........................... (29,548) 1,224 3,795 ---------- ---------- ---------- Cash flows from investing activities: Net assets of distribution business acquired.................................. (8,382) -- -- Purchases of property, plant and equipment.................................... (6,467) (9,537) (8,240) Proceeds from disposals of property, plant and equipment...................... 1,091 1,749 1,757 Other......................................................................... 351 1,397 250 ---------- ---------- ---------- Cash used in investing activities......................................... (13,407) (6,391) (6,233) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of Senior Secured Notes and Common Stock Warrants...... 40,000 -- -- Net change in lines of credit................................................. 28,711 21,423 359 Repayments of long-term debt.................................................. (29,761) (13,192) (2,908) Exercise of stock warrants and stock options.................................. 30 -- 588 ---------- ---------- ---------- Cash provided by financing activities....................................... 38,980 8,231 (1,961) Effect of exchange rate changes on cash....................................... (389) 704 721 ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents.............................. (4,364) 3,768 (3,678) Cash and cash equivalents, beginning of year.................................. 9,800 5,436 9,204 ---------- ---------- ---------- Cash and cash equivalents, end of year........................................ $ 5,436 $ 9,204 $ 5,526 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental cash flows information: Operating activities include cash payments for interest and income taxes as follows: Interest paid............................................................... $ 2,910 $ 5,972 $ 6,888 Income taxes paid, net of refunds........................................... 6,454 4,020 1,801 Investing activities exclude the following non-cash activities: Exchange of income tax receivable for intangible assets and equipment....... 1,969 -- -- Long-term note received from sale of assets................................. -- 517 -- Financing activities exclude the following non-cash activities: Issuance of restricted stock awards......................................... 1,150 -- -- Issuance of Company common stock under compensation agreement............... -- 222 -- Issuance of note payable for license agreement.............................. -- 1,465 --
See accompanying notes. F-35 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Bally Gaming International, Inc. (the "Company") was formed in August 1991 by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine manufacturing and distribution operations of BEC. These operations are conducted in Germany under the name Bally Wulff ("Wulff") and in the United States under the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs, manufactures (through the Company's wholly-owned subsidiary "Automaten") and distributes (through the Company's wholly-owned subsidiary "Vertriebs") wall-mounted, coin-operated, armless gaming devices similar to slot machines known as wall machines and also distributes recreational and amusement machines manufactured by third parties. Gaming designs, manufactures and distributes electronic slot machines and video gaming machines. Systems designs, assembles and sells computerized monitoring systems for slot and video gaming machines. In three transactions dated November 1991, July 1992 and September 1993, BEC divested substantially all its interests in the Company. Certain reclassifications have been made to prior years' financial statements to conform with the 1995 presentation. Hereafter, references to the Company are to the consolidated operations of Wulff, Gaming and Systems including the predecessor operations. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with original maturities of three months or less which are readily convertible into cash. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead. PROPERTY, PLANT AND EQUIPMENT Depreciation is provided by using the straight-line method over the estimated economic lives of the related assets and the terms of the applicable leases for leasehold improvements, which range from 3 to 30 years. Significant replacements and improvements are capitalized; other maintenance and repairs are expensed. The cost and accumulated depreciation of assets retired or otherwise disposed of are eliminated from the accounts and any resulting gain or loss is credited or charged to income as appropriate. INTANGIBLE AND OTHER ASSETS Intangible assets include the cost in excess of net assets of acquired businesses, which are being amortized using the straight-line method over periods ranging up to 40 years from dates of acquisition. In July 1992, the Company reached an agreement for an exclusive license until December 31, 2005, subject to extension, of a patent relating to the use of credit cards in gaming machines, and acquired 1% of the stock of Scotch Twist, Inc., a private company which granted this license, in exchange for the issuance of 100,001 shares of the Company's Common Stock. The licensing agreement requires the Company to commit F-36 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) $1.2 million in research and development costs related to the patent, plus any costs related to obtaining required regulatory approvals and licenses. As of December 31, 1995 approximately $1 million has been spent relative to this commitment. In July 1992 and again in March 1995, the Company and BEC amended a trademark license agreement ("License Agreement") pursuant to which the Company licensed the use of the name "Bally" for its use in the gaming machine business worldwide. Prior to 1995, the trademark licensing rights were being amortized using the straight-line method over a 20 year period. Pursuant to the terms of the March 1995 amendment, the Company reduced the remaining amortization period to five years effective March 31, 1995, resulting in an increase in amortization expense of approximately $315,000 for the year ended December 31, 1995. In January 1993, as part of an amendment to an intercorporate agreement between the Company and BEC, a long-term income tax receivable from BEC of $1,971,000 was exchanged for certain assets owned by BEC but managed by the Company, a reduction in the period from six years to three years of certain non- competition restrictions previously imposed on the Company by BEC and the settlement of certain other intercompany service arrangements with BEC. This transaction resulted in an increase to intangible assets of approximately $1,515,000 which is being amortized over a 6 year period. In June 1994, the Company acquired a paid up license for use of a patent on slot machines manufactured or sold during the life of the patent. The owner of the patent had recently filed an infringement action against various casinos in Atlantic City alleging infringement of a certain patent by these casino companies. As a result of the agreement, the casino operator defendants will be released from any claims relating to the past and future use of certain gaming machines manufactured by the Company. The Company agreed to pay $2 million over a 5 year period, without interest, for the paid up license. The asset is fully amortized as of December 31, 1995. The carrying value of intangible assets is periodically reviewed by management and impairment losses, if any, are recognized when the expected non-discounted future operating cash flows derived from such intangible assets is less than their carrying value. In 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") was issued which will be effective for the Company's year ended December 31, 1996. This statement requires that long-lived assets and certain identifiable intangible assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Management believes that if SFAS No. 121 had been early adopted at December 31, 1995, it would not have had a material effect on the financial position, results of operations or cash flows of the Company. INCOME TAXES Taxes on income of Wulff are provided at the tax rates applicable to the tax jurisdictions in Germany, as Wulff files separate foreign income tax returns. German withholding taxes and related United States federal income taxes are provided on Wulff earnings. REVENUE RECOGNITION The Company sells products on normal credit terms (90 days or less), over longer term installments of up to 36 months or more or through payments from the net winnings of the machines until the purchase price is paid. Revenue from sales of gaming machines and recreational and amusement equipment is normally recognized at the time products are shipped and title has passed to the customer. Revenue from sales of software included in computerized management systems is recognized at the time the systems are accepted by the customer, which normally coincides with installation of the equipment. Revenue from sales of hardware included in computerized management systems is recognized at the time the product is shipped. F-37 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency of Wulff is the Deutsche Mark. Assets and liabilities of Wulff are translated at the rate of exchange at the end of the period, and the statements of operations are translated at the average rate of exchange for the period. Translation adjustments are reflected as a separate component of stockholder's equity. Gains and losses on foreign currency transactions are included in net income. RESEARCH AND DEVELOPMENT The Company expenses product research and development costs as incurred. Research and development costs for the years ended December 31, 1993, 1994 and 1995 were $7.8 million, $8.7 million and $9.2 million, respectively. STOCK-BASED EMPLOYEE COMPENSATION AWARDS The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options and stock performance rights equals the market price on date of grant, no compensation expense is recognized. In 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") was issued which will be effective for the Company's year ended December 31, 1996. SFAS No. 123 provides alternative accounting treatment to APB No. 25 with respect to stock-based compensation and requires certain additional disclosures, including disclosures if the Company elects not to adopt the accounting requirements of SFAS No. 123. At this point, the Company does not anticipate adopting the accounting requirements of SFAS No. 123 and therefore in future years would expect to provide the required additional disclosures in the footnotes to the consolidated financial statements. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding totaling 10,685,054, 10,726,556 and 10,775,699 for the years ended December 31, 1993, 1994 and 1995. Common stock equivalents were not included in the computation of earnings (loss) per common share as their effect would have been antidilutive or immaterial. MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION On October 17, 1995, the Board of Directors of the Company approved an Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant to the Merger Agreement, the Company will merge with a subsidiary of Alliance ("Alliance Merger Subsidiary") with the Company being the surviving corporation and becoming a wholly-owned subsidiary of Alliance ("Alliance Merger"). The Merger Agreement provides that the Company's stockholders will have the right to receive, in exchange for each of their issued and outstanding shares of the Company's common stock (i) an amount of cash determined by dividing $76,700,000 by the number of shares of the Company's common stock outstanding immediately prior to the effective time of the Merger (other than shares which are held by the Company, Alliance or their respective subsidiaries) ("Converted Shares"), (ii) a fraction of a share of common stock, $.10 par value, of Alliance ("Alliance F-38 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) Common Stock") having a value determined in accordance with the Merger Agreement of $.30 (the "Common Stock Consideration") and (iii) that number of shares (or fractions thereof) of 15% Non-Voting Junior Special Stock, Series B, $.10 par value, of Alliance (the "Series B Special Stock") having a value determined in accordance with the Merger Agreement equal to $11.40 less the cash consideration described in clause (i) above. The obligations of Alliance and the Company to consummate the Alliance Merger are subject to various conditions, including obtaining requisite stockholder and regulatory approvals and Alliance's obtaining $150 million in financing on commercially reasonable terms, at least two-thirds of which must be in the form of bank debt, other debt having a term of at least four years or equity. In conjunction with the Merger Agreement, Alliance terminated its unsolicited tender offer and consent solicitation and withdrew its litigation against the Company and the Company withdrew its litigation against Alliance. BUSINESS SEGMENT The business of the Company is conducted in one industry segment: the design, manufacture and distribution of gaming machines, computerized monitoring systems and recreational and amusement equipment. All of Wulff's sales are to customers outside the United States while Gaming and Systems sell to domestic and foreign customers. See "Commitments and Contingencies." The Company has operations based in Germany and the United States. The table below presents information as to the Company's operations by geographic region.
YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- REVENUES: Germany................................................ $ 112,601 $ 111,068 $ 130,655 United States.......................................... 60,533 131,228 129,140 Eliminations........................................... (4,427) (6,104) (10,483) ---------- ---------- ---------- Consolidated........................................... $ 168,707 $ 236,192 $ 249,312 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS): Germany................................................ $ 9,702 $ 9,232 $ 5,581 United States.......................................... (27,658) 4,184 2,982 Eliminations........................................... (580) (35) (199) ---------- ---------- ---------- Consolidated........................................... $ (18,536) $ 13,381 $ 8,364 ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS: Germany................................................ $ 81,899 $ 97,537 $ 100,207 United States.......................................... 90,613 99,478 100,643 Eliminations........................................... (1,682) (4,773) (6,534) ---------- ---------- ---------- Consolidated........................................... $ 170,830 $ 192,242 $ 194,316 ---------- ---------- ---------- ---------- ---------- ----------
Wulff's customers are a diverse group of operators of arcades, hotels, restaurants and taverns, primarily in Germany. Gaming's and Systems' customers are primarily casinos and gaming machine distributors in the United States and abroad. Receivables of Wulff, Gaming and Systems are generally collateralized by the related equipment. See "Concentration of Credit Risk." F-39 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) Export sales (including sales to Wulff) from Gaming's and Systems' operations for the years ended December 31, 1993, 1994 and 1995 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Europe....................................................... $ 8,651 $ 10,889 $ 12,890 Far East..................................................... 223 860 998 Latin America................................................ 2,030 4,015 5,392 Canada....................................................... 1,589 3,254 6,185 Other........................................................ -- 556 1,824 --------- --------- --------- $ 12,493 $ 19,574 $ 27,289 --------- --------- --------- --------- --------- ---------
ACCOUNTS AND NOTES RECEIVABLE The Company grants certain customers extended payment terms under contracts of sale. These contracts are generally for terms of one to three years, with interest at prevailing rates, and are generally collateralized by the related equipment sold although the value of such equipment, if repossessed, may be less than the receivable balance outstanding. See "Concentration of Credit Risk." The following table represents, at December 31, 1995, scheduled collections of accounts and notes receivable (net of allowances for doubtful accounts) by year: 1996............................................................... $ 87,176 1997............................................................... 8,250 1998............................................................... 1,731 --------- $ 97,157 --------- ---------
LONG-TERM DEBT AND LINES OF CREDIT Long-term debt and lines of credit consist of the following at December 31, 1994 and 1995:
1994 1995 ---------- ---------- 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $458 and $344........................................................ $ 39,542 $ 39,656 OTHER LONG-TERM DEBT: Wulff revolving lines of credit....................................... 15,853 15,905 Bally Gaming, Inc. revolving line of credit........................... 7,768 9,400 Notes payable, 5% to 12%.............................................. 6,599 4,983 Less current maturities............................................... (16,000) (14,957) ---------- ---------- $ 14,220 $ 15,331 ---------- ---------- ---------- ----------
In July 1993, the Company completed a private placement of $40 million principal amount of 10 3/8% Senior Secured Notes due July 1998 and Common Stock Purchase Warrants to purchase 1.2 million shares of Common Stock exercisable at $12.50 per share after the Common Stock has traded at an average of $20 per share for a twenty consecutive trading day period and under certain other circumstances. The warrants became exercisable during November 1993. The Company allocated $600,000 of the $40 million gross proceeds to the warrants and accordingly recorded the Senior Secured Notes at $39.4 million with unamortized discount of $600,000 (the effective yield of the Senior Secured Notes is 10.77%). The Company used $21.6 million of the gross proceeds of $40 million from the sale of the notes and warrants to redeem all of its outstanding 6% Senior Convertible Debentures due 2002. The Company realized an extraordinary gain of approximately $3.8 million from the redemption of the Convertible Debentures in 1993. The gain represents the difference between the carrying amount of the debt retired and related deferred financing costs ($25.4 F-40 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) million) and the redemption price of $21.6 million. The Senior Secured Notes are collateralized by a pledge of the outstanding capital stock of Automaten and Vertriebs and a guarantee by Bally Gaming, Inc. The Notes are subject to redemption, at the option of the Company, at a redemption price equal to 103% and 101.5% of the principal amount of the Notes if redeemed during the twelve month period beginning on the anniversary of the issue date in the years 1996 and 1997, respectively. During March 1993, Vertriebs obtained two bank lines of credit for the purpose of financing the acquisition of assets acquired from an independent distributor. The agreements provide for borrowings of DM2,250,000 and DM16,000,000 (approximately $1,600,000 and $11,200,000) at December 31, 1995, respectively. Availability of the DM2,250,000 line of credit is reduced by DM250,000 per quarter and expires on March 31, 1998. Borrowings under this line of credit bear interest at 6.95%. The working capital revolving credit line of DM16,000,000 bears interest at a rate tied to an international borrowing rate plus 1% (5.3% at December 31, 1995) and is due on demand. These lines are collateralized by a pledge of the assets acquired. Approximately $12,751,000 was outstanding under these lines at December 31, 1995. In May 1993, Vertriebs obtained a DM16,300,000 (approximately $11,400,000 at December 31, 1995) revolving line of credit for general working capital purposes. This agreement bears interest at a rate tied to an international borrowing rate plus 1% (4.8% at December 31, 1995) and is due on demand. This line is collateralized by the receivables of Vertriebs. Approximately $3,144,000 was outstanding under this line at December 31, 1995. Vertriebs and Automaten are jointly and severally liable under these lines of credit. In March 1993, Bally Gaming, Inc. obtained a bank revolving line of credit which, as amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the credit agreement) inventory and accounts receivable with a maximum borrowing capacity of $15,000,000. Borrowings under this agreement, which expires March 31, 1997, bear interest at one and one-half percent above the bank's prime rate (10% at December 31, 1995). The Company must pay an annual facility fee of one-half of one percent of the maximum borrowing capacity and a monthly unused line fee of one-quarter of one percent of the difference between the maximum borrowing capacity and the average daily outstanding balance during any month. This line of credit is collateralized by property, plant and equipment and the eligible inventory and accounts receivable. The agreement and subsequent amendments also contain certain financial and other restrictive covenants, including the maintenance by Bally Gaming, Inc. of specified levels of minimum net working capital, working capital ratio, tangible net worth, net worth ratio, and minimum net income after taxes, all as defined in the credit agreement. Eligible borrowing capacity under this agreement at December 31, 1995 was approximately $15,000,000. Approximately $9,400,000 was outstanding at December 31, 1995. Aggregate annual maturities of long-term debt for the five years after December 31, 1995 are $14.9 million, $11.5 million, $43.6 million, $.3 million and none. STOCK PLANS, AWARDS AND RIGHTS 1991 INCENTIVE PLAN On November 6, 1991, the Company adopted the 1991 Incentive Plan of Bally Gaming International, Inc. (the "Plan") for directors (employee directors that are not members of the Compensation and Stock Option Committee of the Board of Directors), officers, key employees and consultants (collectively "Participants"). The Plan provides for the grant of stock options, stock appreciation rights ("SARs") and restricted stock (collectively "Awards"). The aggregate number of shares of common stock which may be delivered under the Plan and the 1991 Non-Employee Directors' Option Plan described below may not exceed 1,250,000 shares. No awards may be granted after November 6, 2001. The Plan provides for granting incentive as well as nonqualified stock options. Unless the Compensation and Stock Option Committee of the Board of Directors, in its discretion, determines otherwise, F-41 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) nonqualified stock options will be granted with an option price equal to the fair market value of the shares of common stock at the date of grant. Incentive stock options must be granted at not less than the fair market value of the shares of common stock at the date of grant. SARs are rights granted to Participants to receive shares of common stock and/or cash in an amount equal to the excess of (i) the fair market value of the shares of common stock on the date the SARs are exercised over (ii) the fair market value of the shares of common stock on the date the SARs were granted or, at the discretion of the Compensation and Stock Option Committee of the Board of Directors, the date the option was granted, if granted in tandem with an option granted on a different date. Restricted stock awards are rights granted to an employee to receive shares of common stock without payment but subject to forfeiture and other restrictions as set forth in the Plan. Generally, the restricted stock awarded, and the right to vote such stock or to receive dividends thereon, may not be sold, exchanged or otherwise disposed of during the restricted period. The Compensation and Stock Option Committee of the Board of Directors, in its discretion, will determine the restrictions and the forfeiture provisions applicable to restricted stock awards. The Plan provides that, at the discretion of the Compensation and Stock Option Committee of the Board of Directors, the Company may pay cash to Participants to insure that the Participant will receive the common stock net of all taxes imposed on such Participant related to the receipt of common stock and cash payments under the Plan. During 1991, restricted stock awards for 72,500 shares of common stock were granted under the Plan to key employees effective January 1, 1992. These awards are fully vested at December 31, 1995. In 1993, 100,000 shares of restricted common stock were granted to an officer of the Company. This award vests ratably over a five-year period. As of December 31, 1995, 40,000 shares of this award were vested. The Plan is administered by the Compensation and Stock Option Committee which will determine the participants to whom awards will be granted, the provisions applicable to each award and the time periods during which the awards may be exercised. Each option and SAR granted under the Plan may be exercisable for a term of not more than ten years after the date of grant. Incentive stock options and SARs granted in tandem with incentive stock options may only be exercised when the fair market value of common stock is greater than the option price. Certain other restrictions apply in connection with the timing of exercise. In the event of a change of control (as defined in the Plan), the date on which all SARs and options outstanding under the Plan may first be exercised is accelerated, and restrictions on restricted stock awards lapse. Generally, all SARs and options terminate 90 days after a change of control. 1991 NON-EMPLOYEE DIRECTORS' OPTION PLAN The 1991 Non-Employee Directors' Option Plan of the Company (the "Directors' Plan") was also adopted in November 1991. The Directors' Plan provides for the granting of stock options at the Company's initial public offering price to persons who, on the consummation of the Company's initial public offering, were members of the Board of Directors and who are not employees of the Company or its subsidiaries ("Non-Employee Directors"), and thereafter, options are granted at fair market value to persons who become members of the Board of Directors after the Company's initial public offering and who are not employees of the Company or its subsidiaries at the time they become members of the Board of Directors. Each of the Non-Employee Directors received, or will receive, an option, for ten years, to purchase 25,000 shares of common stock that vests over three years. Administration, the term of the Directors' Plan and change of control features for the Directors' Plan are consistent with the above described Plan. F-42 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) At December 31, 1995, 35,000 shares were reserved for future grant under the Plan and the Directors' Plan. A summary of shares granted, canceled and exercisable (excluding restricted stock grants of 172,500) are as follows:
NUMBER OF OPTION PRICE SHARES PER SHARE ---------- ----------------- Outstanding at December 31, 1992.............................. 845,000 $11.75 - $14.50 Granted..................................................... 188,000 $12.38 - $12.75 Canceled.................................................... (9,000) $14.50 ---------- Outstanding at December 31, 1993.............................. 1,024,000 $11.75 - $14.50 Granted..................................................... 58,000 $ 8.06 - $12.88 Canceled.................................................... (53,000) $12.00 - $14.50 ---------- Outstanding at December 31, 1994.............................. 1,029,000 $ 8.06 - $14.50 Granted..................................................... 30,000 $7.88 Canceled.................................................... (16,500) $12.00 - $14.50 Exercised................................................... (50,000) $11.75 ---------- Outstanding at December 31, 1995.............................. 992,500 $ 7.88 - $14.50 ---------- ----------------- ---------- ----------------- Exercisable at December 31, 1995.............................. 871,320 $ 8.06 - $14.50 ---------- ----------------- ---------- -----------------
1992 RESTRICTED STOCK PERFORMANCE PLAN On November 3, 1992, the Company's Board of Directors adopted the Bally Gaming International, Inc. 1992 Restricted Stock Performance Plan (the "Performance Plan"). The purpose of the Performance Plan is to benefit the Company through increased incentive on the part of key employees, officers, directors and consultants of the Company and its subsidiaries by permitting the Company to make awards of Restricted Stock and/or Performance Units comprised of stock and cash to such persons based upon specific performance objectives. Up to 600,000 shares of the Company's common stock have been reserved under this plan. In February 1993, 200,000 Performance Units were granted in connection with an employment agreement entered into by the Company with its Chairman of the Board and Chief Executive Officer. In May 1993, 200,000 Performance Units were granted in connection with an employment agreement entered into by the Company and Bally Gaming, Inc. with its new President. In December 1993, an additional 120,000 Performance Units were granted to other members of senior management of the Company, of which 40,000 units were canceled during the year ended December 31, 1994. Under the terms of the award agreements as amended June 8, 1994, the Performance Units will vest if either (i) the cumulative annual growth rate for any three consecutive years during the Performance Period (as defined in the Performance Plan) is at least 35% (the "EPS Growth Target") or (ii) the fair market value of the Common Stock (as determined based on the market price of the Common Stock) equals or exceeds $40 per share for at least twenty of thirty consecutive trading days (the "Market Price Target") or (iii) under certain circumstances following a change in control or (iv) the Company enters into a business combination or (v) the Company obtains a capital infusion of at least $30,000,000 provided however if (i) the Company's earnings per share growth in any consecutive three years during the Performance Period (as defined in the Performance Plan) is at least 85% of the EPS Growth Target, at least 70% of the Performance Units will vest, or (ii) the Company's stock price at any time in the Performance Period (as defined in the Performance Plan) is at least 85% of the Market Price Target, at least 70% of the Performance Units will vest. Each Performance Unit is equal in value to one share of the Company's Common Stock, plus an additional amount in cash equal to fifty percent (50%) of the value of one share of Common Stock, based on the fair market value of the Common Stock at the date the award vests. Payments are to be made in common stock and/or cash as determined by the Compensation Committee. No accruals have been recorded in the Company's financial statements as of December 31, 1995 as such performance objectives have not yet begun to be met. F-43 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) 1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS The 1994 Stock Option Plan for Non-Employee Directors (the "1994 Directors' Plan") was adopted in April 1994 and provides for the granting of stock options of the Company's Common Stock exercisable at fair market value to Non-Employee Directors. Each of the Non-Employee Directors received an option, for ten years, to purchase 25,000 shares of Common Stock that vests over three years. The option price was $12.875. The 1994 Directors' Plan has change in control features similar to those contained in the 1991 Directors' Plan. 250,000 shares of the Company's Common Stock were reserved for future issuance under the 1994 Directors' Plan. At December 31, 1995, 125,000 shares had been granted of which 33,333 shares were exercisable, 25,000 had been canceled and none had previously been exercised. STOCK PERFORMANCE RIGHTS ("SPRS") Stock Performance Rights ("SPRs") are rights granted to individuals to receive cash in an amount equal to the excess of (i) the fair market value of the shares of common stock on the date the SPRs are exercised over (ii) the fair market value of the shares of common stock on the date the SPRs were granted. In 1993, 100,000 SPRs were granted to an officer of the Company at a fair market value on date of grant of $11.625 in connection with the signing of a five-year employment agreement. These SPRs vest ratably over the term of the employment agreement and become exercisable at the end of each vesting period. As of December 31, 1995, 40,000 of the SPRs were exercisable, and none had been previously exercised. WARRANTS The Company issued warrants to the underwriters of the initial public offering of the Company's common stock to purchase an aggregate of 300,000 shares of its common stock. The warrants are exercisable during a four-year period ending November 11, 1996 at an exercise price of $15 per share. For the year ended December 31, 1993, 2,000 warrants were exercised and no other warrants have since been exercised. In 1993, the Company issued warrants to purchase 1.2 million shares of its common stock at $12.50 per share in connection with the private placement of the Senior Secured Notes. These warrants are currently exercisable and expire on July 29, 1998. At December 31, 1995 none of these warrants were exercised. See "Long-term Debt and Lines of Credit." COMMON STOCK RESERVED FOR FUTURE ISSUANCE At December 31, 1995 shares of the Company's Common Stock were reserved for future issuance as follows: Warrants related to the 10 3/8% Senior Secured Notes............. 1,200,000 1991 Incentive Plan and Directors' Plan.......................... 1,200,000 1992 Restricted Stock Performance Plan........................... 600,000 1994 Stock Option Plan for Non-Employee Directors................ 250,000 Warrants to underwriters......................................... 298,000 --------- 3,548,000 --------- ---------
OTHER REVENUES Other revenues for the years ended December 31, 1993, 1994 and 1995 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Interest......................................................... $ 3,795 $ 3,538 $ 3,615 Currency transaction gain (loss)................................. (245) (30) (53) Other............................................................ 586 1,366 1,279 --------- --------- --------- $ 4,136 $ 4,874 $ 4,841 --------- --------- --------- --------- --------- ---------
F-44 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) UNUSUAL CHARGES During the year ended December 31, 1995, the Company incurred approximately $4.0 million in legal, accounting, investment banking, public and investor relations and printing costs in connection with a merger agreement with WMS Industries, Inc., which has been terminated, Alliance's tender offer and consent solicitation and the pending Alliance Merger. All of these costs have been expensed as incurred. Such costs will continue to be incurred in 1996. During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge of $.8 million to writedown to net realizable value a building to be sold. The provision was based on a strategic decision to sell the building as Wulff's other distribution offices adequately covered the geographic region that would have been served by this facility. During 1995, Wulff increased the amount of value added tax reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. The Company has accrued the liability as, based on current developments, the Company's estimate of the ultimate outcome and its experience in contesting these matters, it is probable that a liability has been incurred and a range of costs can be reasonably estimated. As the scope of the liability is better determined, there could be changes in the estimate of the ultimate liability. Management believes that the preliminary proposed adjustments are without merit and the ultimate results of the audit will not have a material adverse effect on the Company's financial position, results of operations or cash flows. INCOME TAXES Effective January 1, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes" which requires recognition of deferred tax assets and liabilities for temporary differences and net operating loss ("NOL") and tax credit carryforwards. Under SFAS No. 109, deferred income taxes are established based on enacted tax rates expected to be in effect when temporary differences are scheduled to reverse and NOL and tax credit carryforwards are expected to be utilized. The cumulative effect of the adoption of SFAS No. 109 had an immaterial effect on net income for the year ended December 31, 1993. The provision (credit) for foreign and domestic income taxes for the years ended December 31, 1993, 1994 and 1995 was as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- FEDERAL: Current........................................................ $ 476 $ 220 $ 260 Deferred....................................................... -- -- -- --------- --------- --------- 476 220 260 --------- --------- --------- --------- --------- --------- FOREIGN: Current........................................................ 3,603 2,896 4,586 Deferred....................................................... 163 (296) 58 --------- --------- --------- 3,766 2,600 4,644 --------- --------- --------- Total provisions for income taxes................................ $ 4,242 $ 2,820 $ 4,904 --------- --------- --------- --------- --------- ---------
F-45 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) The major components of the net deferred tax asset as of December 31, 1994, and 1995 were as follows:
AS OF DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- Property, plant and equipment......................................... $ 1,075 $ 1,193 Other................................................................. 131 -- ---------- ---------- Total deferred tax liabilities.................................... 1,206 1,193 ---------- ---------- Bad debt reserves..................................................... 4,933 5,876 Inventory reserves.................................................... 5,527 4,736 Wulff corporate reorganization........................................ 235 366 Net operating loss carryforwards...................................... -- 391 Foreign tax credit carryforwards...................................... 8,382 12,955 AMT tax credit carryforwards.......................................... 384 570 Intangibles........................................................... 2,432 909 Accrued liabilities................................................... 1,201 562 Deferred compensation................................................. 696 476 Other................................................................. 31 500 ---------- ---------- Total deferred tax assets......................................... 23,821 27,341 ---------- ---------- Valuation allowance................................................... (21,460) (24,667) ---------- ---------- Net deferred tax assets........................................... $ 1,155 $ 1,481 ---------- ---------- ---------- ----------
At December 31, 1994 and 1995, net deferred tax assets resulted from German net operating loss carryforwards and, inventory and intangible assets book/tax basis differences. At December 31, 1995 the Company has foreign tax credit carryforwards of approximately $13.0 million and alternative minimum tax ("AMT") credit carryforwards of approximately $.6 million. Foreign tax credits are available to offset future taxes due in the U.S. on future foreign taxable income and expire between 1997 and 2001 unless utilized prior to such time. AMT credits are available to be carried forward indefinitely and may be utilized against regular U.S. corporate income tax to the extent it does not exceed tax computed under AMT calculations. The provision for income taxes at the Company's effective tax rate differed from the provision for income taxes at the statutory rate as follows:
YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Taxes at federal statutory rate................................. $ (7,806) $ 2,248 $ 529 Losses with no current tax benefit.............................. 11,528 -- -- Federal alternative minimum tax................................. 143 200 200 Foreign earnings at other than U.S. statutory rate.............. 238 (2) 3,529 Foreign withholding on dividends................................ 333 353 450 Other........................................................... 34 21 196 Impact of SFAS 109 adoption..................................... (228) -- -- --------- --------- --------- $ 4,242 $ 2,820 $ 4,904 --------- --------- --------- --------- --------- ---------
RELATED PARTY TRANSACTIONS In connection with the Company's initial public offering, BEC granted restricted stock awards for shares of the Company's common stock owned by BEC to certain senior executives of the Company. These restricted stock awards represent compensation from the Company equal to the fair market value of the F-46 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) shares on the date of the awards and are recorded as unearned compensation and a capital contribution in the accompanying financial statements. Unearned compensation is charged to operations over the vesting periods of the awards. In connection with the Company's initial public offering, the Company and BEC entered into an intercorporate agreement which was amended in July 1992, and again in January 1993, which provided, among other things, that BEC would perform certain accounting, tax, treasury, legal, data processing, employee benefits and other services which the Company reasonably requests, and that the Company would reimburse BEC for the reasonable cost of all services rendered, including salaries and expenses of BEC's employees while they are rendering such services. Charges by BEC to the Company under the intercorporate agreement for the years ended December 31, 1993, 1994 and 1995 were $295,000, $90,000 and none, respectively. The Company participated in BEC's insurance program for general liability and directors' and officers' liability coverage through June 1993. Under these programs, insurance expenses were charged to the Company based on claims experience and for reimbursements of premium payments made by BEC. Insurance expense charged to the Company was $281,000, none, and none for the years ended December 31, 1993, 1994 and 1995, respectively. The Company had a long-term income tax receivable from BEC totaling $1,971,000 at December 31, 1992. As part of an amendment to the intercorporate agreement between the Company and BEC, which was entered into in January 1993, the income tax receivable of $1,971,000 was exchanged for certain assets previously owned by BEC but managed by the Company, a reduction in the period from six years to three years of certain non-competition restrictions previously imposed on the Company by BEC and settlement of certain other intercompany service arrangements with BEC. This transaction resulted in an increase to intangible assets of approximately $1,515,000 which is being amortized over a six-year period. Waters, McPherson, McNeill, P.C., a law firm of which Mr. McPherson, a director of the Company, is Senior Lawyer and Chairman, provides legal services to the Company, primarily relating to litigation involving the Company's former distributor in Louisiana. As of December 31, 1994 and 1995, the Company was indebted to the firm for approximately $200,000 and $480,000, respectively, for legal services rendered. During the years ended December 31, 1993, 1994 and 1995, Waters, McPherson, McNeill, P.C. billed the Company approximately $1.0 million, $1.3 million and $1.5 million, respectively, for legal services provided to the Company. EMPLOYEE BENEFIT PLANS Until February 28, 1994 the Company participated in BEC's defined contribution plans which covered certain full-time employees and which were considered part of the Company's overall retirement program. Effective March 1, 1994, the Company ceased its participation in BEC's defined contribution plans and formed its own plan. This program consists of a savings plan to which employees may contribute a percentage of their compensation. Employee contributions to the savings plan, up to certain limits, may be matched by the Company. The Company's contribution accrued for the savings plan for the years ended December 31, 1993, 1994 and 1995 was approximately $91,000, $120,000 and $140,000, respectively. COMMITMENTS AND CONTINGENCIES The Company is obligated under several patent agreements to pay royalties ranging from approximately $50 to $200 per game depending on the components in the gaming machines. Additionally, based on an amendment to the trademark licensing agreement between the Company and BEC dated March 31, 1995, the Company is obligated to pay a royalty on new machines sold of $25 to $30 per machine beginning on March 31, 1995 with a minimum annual royalty payment of $500,000 for the initial five-year term of the amended agreement, which is subject to annual renewals thereafter. Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0 million, respectively. F-47 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) The Company leases certain facilities and equipment for production, selling and administrative purposes under operating leases. Future minimum lease payments at December 31, 1995 under operating leases that have initial or remaining lease terms in excess of one year are as follows: 1996............................................................... $ 3,136 1997............................................................... 2,753 1998............................................................... 1,754 1999............................................................... 1,361 2000............................................................... 1,121 Thereafter......................................................... 1,844 --------- $ 11,969 --------- ---------
Rent expense for the years ended December 31, 1993, 1994 and 1995 was $2.6 million, $2.7 million and $3.6 million, respectively. The Company has entered into employment contracts with several of its executives. These contracts are for periods ranging from one to five years and require certain minimum annual payments. Future minimum annual payments under these contracts are as follows: 1996................................................................ $ 3,573 1997................................................................ 2,299 1998................................................................ 1,700 --------- $ 7,572 --------- ---------
In conjunction with sales by Gaming, with recourse to Gaming and/or the Company, of certain trade receivables to third parties, Gaming and/or the Company have guaranteed amounts due from various customers of approximately $18.2 million at December 31, 1995. A charge was recognized as a result of these sales of receivables which aggregated approximately $.5 million, $1.0 million and $.1 million during 1993, 1994 and 1995, respectively. It is possible that one or more of Gaming's customers whose obligation has been guaranteed by Gaming may be unable to make payments as such become due. In this case Gaming may become responsible for repayment of at least a portion of such amounts over the term of the receivables. At December 31, 1995, amounts due from one customer under three contracts totaling $3.5 million were past due and these amounts and subsequent installments have not been paid. In general, under the terms of these contracts, the Company may be responsible for monthly payments of the outstanding obligations. The third party holder of these contracts has not yet asserted demands under these contracts although such demands may be imminent. The Company intends to pursue a restructuring of the contracts although no assurance can be given that such a restructuring would be successfully negotiated. The outcome of this issue is not anticipated to have a material effect on the financial position, results of operations or cash flows of the Company. A provision for doubtful accounts of approximately $3.5 million and $6.3 million on all receivables with recourse is included in the Company's allowance for doubtful accounts at December 31, 1994 and 1995, respectively. On or about June 19, 1995, three purported class actions were filed in the Chancery Court of Delaware by Company's stockholders against the Company and its directors (the "Fiorella, Cignetti and Neuman Actions"). The Fiorella and Neuman Actions, in identical complaints alleged that the Company's directors had breached their fiduciary duties of good faith, fair dealing, loyalty and candor by approving the Merger Agreement with WMS ("WMS Merger") instead of the unsolicited tender offer transaction proposed by Alliance ("Alliance Proposal"), by not properly exposing the Company for sale, and by failing to take all reasonable steps to maximize stockholder value. These actions sought injunctions to prevent the Company from proceeding with, consummating or closing the WMS Merger, and to rescind it should it be consummated, as well as compensatory damages. The Cignetti Action made similar allegations, and also alleged that F-48 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) the Company had in place a shareholders' right plan, commonly know as a "poison pill." The Cignetti Action sought an injunction requiring the Company to negotiate with all bona fide parties or other potential acquirees or to conduct an unencumbered market check in a manner designed to maximize shareholder value, and preventing the Company from implementing any unlawful barriers to the acquisition of the Company by any third party or taking other actions that would lessen its attractiveness as an acquisition candidate. The Cignetti Action also specifically requested an injunction barring triggering of the Company's alleged "poison pill" until full consideration was given to the Alliance Proposal (subsequently superseded by the execution of the Merger Agreement with Alliance), and sought compensatory damages. Also on or about June 19, 1995, a purported class action was filed in the Delaware Court of Chancery by a Company stockholder against the Company and its directors and Alliance (the "Strougo Action"). The Strougo Action alleged that the Alliance Proposal (subsequently superseded by the execution of the Alliance Merger Agreement) to acquire the Company stock was at a grossly unfair and inadequate price; that the Company's directors had breached their fiduciary duties by failing seriously to consider potential purchasers for the Company other than Alliance; and that the transaction proposed by Alliance was wrongful, unfair and harmful to the Company's public stockholders. The Strougo Action sought a declaration that defendants had breached their fiduciary duties; an injunction preventing the consummation of the Alliance transaction or requiring its rescission; an order requiring defendants to permit a stockholders' committee to participate in any process undertaken in connection with the sale of the Company; and compensatory damages. On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs") filed with the Court a motion to consolidate the four actions. On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an amended complaint (the "Amended Fiorella Action") that adopted certain allegations concerning self-dealing by the Company's directors in connection with the WMS Merger; added a claim relating to the Company's alleged failure to hold an annual meeting as required and added WMS as defendant. The Amended Fiorella Action also alleged that the Company intended, in violation of Delaware law, to sell Wulff without first seeking stockholder approval of the sale. The action sought an order enjoining defendants from proceeding with, consummating or closing the WMS Merger, or rescinding it if it closed; preventing the sale of Wulff without prior stockholder approval; declaring invalid the Company's agreement to pay WMS a fee if the WMS Merger is terminated by the Company in certain circumstances; compelling an auction of the Company and the provision of due diligence to Alliance; scheduling an immediate meeting of the Company stockholders; and awarding compensatory damages. The Company believes these lawsuits to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against the Company for the Company's failure to pay $4.8 million upon termination of the WMS Merger. The Company believes this lawsuit to be without merit and intends to vigorously defend this action. On November 22, 1995, the Company answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Merger by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising the Company that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of the Company to perform the WMS Merger. On February 8, 1996 WMS moved for summary judgement. The Company's response to that action is presently due on March 15, 1996. Pursuant to the Merger Agreement, Alliance has agreed to indemnify the directors and officers of the Company in certain circumstances. In June 1995, BEC asserted that a certain agreement between BEC and the Company (the "Non-compete Agreement") prohibits the use by the Company of the tradename "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1999. The Company believes such a claim is entirely without merit since the restriction referred F-49 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) to expired on January 8, 1996 and in any event does not relate to the use of the "Bally" tradename, which is covered by the License Agreement. The restriction in the Non-compete Agreement will not have any impact on the combined company after the Merger since the effective time of the Alliance Merger contemplates a closing of the Alliance Merger after the restriction in the Non-compete Agreement lapses. BEC has not reasserted this position since it was informed by the Company in July 1995 that the restriction lapses on January 8, 1996. Consequently, the Company believes BEC has determined not to contest the Company's position. On February 16, 1996, the Company received notice from BEC alleging that the Company has violated the License Agreement by, among other things, granting to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which provides Bally Gaming, Inc.'s revolving line of credit, a security interest in general intangibles. In such notice, BEC also stated that as a result of the foregoing, it was immediately terminating the License Agreement. The Company does not believe that it has violated the terms of the License Agreement and the Company will defend its position against BEC's claims. BEC has also asserted that its permission is required for use of the "Bally" tradename by any entity other than the Company and that a merger between the Company and another company would violate the terms of the License Agreement. The Company has denied these claims and believes that the surviving company in the Alliance Merger will be permitted to use the "Bally" tradename in accordance with the terms of such License Agreement. The Company believes that no breach of such License Agreement is caused by the Alliance Merger and use of the "Bally" tradename by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995, Alliance, the Alliance Merger Subsidiary and the Company commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, among other things, that the surviving company in the Alliance Merger will be permitted to use the "Bally" tradename in accordance with the terms of the License Agreement, and seeking injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced an action against the Company, Bally Gaming, Inc., Alliance and the Alliance Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" tradename (the "BEC Action"). The BEC Action alleges that the Company's continued use of the tradename after the Alliance Merger will (1) constitute a prohibited assignment of the Company's rights to use the tradename and (2) exceed the scope of the license granted to the Company because the Company will be under the control of Alliance. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC Action. On December 15, 1995 BEC filed a motion to dismiss, transfer to New Jersey or stay the Alliance Action pending resolution of the BEC Action. On December 15, 1995, BEC filed a motion for a preliminary injunction in the BEC Action. At a hearing on January 17, 1996, the court declined to issue a preliminary injunction, but held BEC's motion in abeyance pending the defendant's motion to dismiss and for summary judgment, which defendants had filed on December 26, 1995. After a second hearing on February 20, 1996 the court stated it would attempt to rule on both motions in fourteen days. The Company, Bally Gaming Inc., Alliance and the Alliance Merger Subsidiary intend to vigorously defend their position in these actions. In 1994, after an intensive federal investigation of Gaming's former distributor, eighteen individuals were indicted on charges of racketeering and fraud against Gaming and the Louisiana regulatory system. Among those indicted were the former distributor's stockholders, directors, employees and others alleged to be associated with organized crime. Fifteen entered pleas of guilty before trial and the remaining three were convicted in October 1995. Gaming was never a subject or target of the federal investigation. Prior to the conclusion of the federal case, the Company's activities with regard to its former VLT distributor in Louisiana were the subject of inquiries by gaming regulators and a report by the New Jersey Division of Gaming Enforcement ("DGE") dated August 24, 1995. The New Jersey Casino Control Commission ("CCC") has indicated that it may hold a hearing on the matter, but no date has been set at this time. F-50 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) The New Jersey report makes no specific recommendations for action by the CCC. The gaming authorities in Ontario, Canada, who have investigated the matters, have issued a gaming registration to the Company's subsidiary Bally Gaming, Inc. on February 8, 1996. The DGE's report is similar in many respects to one prepared by the President of the Louisiana Economic Development and Gaming Corporation ("LEDGC") in January 1995. Hearings on that report were held in January 1995 and on February 7, 1995 the Board of Directors of the LEDGC found all of the allegations in its President's report to be without merit and granted a license to the Company and has announced that it will continue to monitor the Company's conduct in light of any further information disclosed as a result of the trial of the eighteen defendants (all of whom have now plead, or been found, guilty) and other regulatory proceedings. In November 1995, the operator of the land based casino in New Orleans filed for bankruptcy reorganization and ceased operations. That action resulted in the termination of funding for the LEDGC regulatory operations and, shortly thereafter, the Attorney General of Louisiana took control of the agency and effectively closed its operations. LEDGC's President and employees were dismissed. The foregoing occurred prior to the completion of review of the Company's pending application. The Company believes that the information contained in the DGE's report does not differ in any material respect from the prior report to the LEDGC the conclusions of which were found to be without merit in February 1995. An adverse determination by a gaming regulator in any jurisdiction could result in the loss of the Company's ability to do business in that jurisdiction. Further regulatory scrutiny in other jurisdictions would be likely to follow. The Company would appeal any adverse finding, as was the case when the Company successfully appealed the LEDGC President's decision in January 1995. On September 25, 1995, the Company was named as defendant in a class action lawsuit filed in the United States District Court, District of Nevada, by Larry Schreier on behalf of himself and all others similarly situated (the "plaintiffs"). The plaintiffs filed suit against the Company and approximately 45 other defendants (each a "defendant," and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people in playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable federal law. The Company believes the plaintiffs' lawsuit to be without merit and intends to vigorously defend these actions. While the ultimate results of the matters described above are not presently known, management does not expect that the results will have a material adverse effect on the Company's results of operations, financial position or cash flows. The Company and its subsidiaries are from time to time also subject to litigation incidental to the conduct of their business. The Company believes that the results of such litigation and other pending legal proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows. CONCENTRATION OF CREDIT RISK The financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts and notes receivable and customer obligations guaranteed by the Company. F-51 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) Product sales and the resulting receivables are concentrated in specific legalized gaming regions. The Company also distributes its products through third party distributors resulting in distributor receivables. At December 31, 1995 net accounts and notes receivable, including obligations of various customers which are guaranteed by the Company, by region as a percentage to total net receivables are as follows:
AS OF DECEMBER 31, 1995 ----------------------------------------------------- WULFF GAMING SYSTEMS TOTAL ----------- ------------ ------------- ----------- Germany............................................... 47.0% --% --% 47.0% Mississippi Riverboats................................ -- 9.5 -- 9.5 Other Riverboat Casinos............................... -- 1.3 -- 1.3 Nevada................................................ -- 15.0 1.8 16.8 Atlantic City......................................... -- 2.0 2.0 4.0 International......................................... -- 8.0 1.6 9.6 Louisiana............................................. -- 1.6 .1 1.7 New Mexico Indian Casinos............................. -- 5.6 .2 5.8 Other Indian Casinos.................................. -- 1.8 .3 2.1 Others individually less than 5%...................... -- 2.2 -- 2.2 -- --- --- ----- 47.0% 47.0% 6.0% 100.0% -- -- --- --- ----- --- --- -----
Gaming's receivables and customer obligations guaranteed by Gaming and/or the Company, from riverboat casinos and casinos on Indian land generally represent sales to recently opened casinos and, in many cases, new customers to Gaming. Approximately 43% of the accounts and notes receivable and customer obligations guaranteed by the Company at December 31, 1995 relate to these emerging markets including approximately 25% to three customers operating in Mississippi. Receivables and customer obligations guaranteed by the Company from emerging market customers contain increased risk factors compared to receivables at Wulff or other traditional markets for Gaming. In early 1995, the Governor of the State of New Mexico signed compacts with certain Indian tribes to permit casino gaming on tribal lands in New Mexico. These compacts went through appropriate federal approval processes and a number of casinos began operating. In July 1995 the Supreme Court of New Mexico found that the Governor did not have proper authority to sign the compacts. The Indian tribes have filed a lawsuit in federal court to seek resolution to this issue. Gaming and Systems had sold product to the Indian tribes prior to this ruling. At December 31, 1995, the Company has $5.5 million in accounts and notes receivable from an operator of two casinos for two different Indian tribes including $2.1 million of trade receivables sold to a third party with recourse to Gaming. This operator is currently four months ahead on payments. No provision for doubtful accounts for this customer has been included in the accompanying financial statements at December 31, 1995. Management believes the receivable is properly valued at December 31, 1995. As events change during 1996 management will reevaluate its estimate of the realizability of the receivable. CONSOLIDATING FINANCIAL STATEMENTS The following consolidating financial statements are presented to provide information regarding Bally Gaming, Inc., as guarantor of the Senior Secured Notes, and Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, because substantially all of the common stock of these entities is pledged as collateral for the Senior Secured Notes. The results herein are presented by each legal entity rather than by business segment as presented elsewhere in these financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Such business segment information of Bally Gaming, Inc., Automaten and Vertriebs includes an allocation of parent company revenues and expenses whereas the following consolidating financial statements do not reflect these allocations to the subsidiaries. The notes to consolidating financial statements should be read in conjunction with the consolidated financial statements and notes thereto. F-52 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1994 (IN THOUSANDS)
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. --------- --------- -------- -------- ------------- -------------- ASSETS Current assets: Cash and cash equivalents............. $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204 Accounts and notes receivable, net of allowance for doubtful accounts of $19, $5,659 and $6,604 for Automaten, Vertriebs and Gaming................. 2,813 46,342 38,773 2,903 (6,199) 84,632 Inventories, net: Raw materials and work-in-process... 5,063 -- 16,019 -- -- 21,082 Finished goods...................... 2,442 9,413 17,599 -- (1,077) 28,377 --------- --------- -------- -------- ------------- -------------- 7,505 9,413 33,618 -- (1,077) 49,459 Other current assets.................. 1,446 2,957 650 196 (175) 5,074 --------- --------- -------- -------- ------------- -------------- Total current assets.............. 13,126 66,199 73,396 3,099 (7,451) 148,369 Long-term notes receivables, net of allowance for doubtful accounts of $35 and $8,163 for Vertriebs and Gaming.... -- 1,186 4,372 -- -- 5,558 Long-term receivables from affiliate.... 23,314 -- -- 29,014 (52,328) -- Property, plant and equipment, at cost: Land.................................. -- 332 1,025 -- -- 1,357 Buildings and leasehold improvements......................... 1,648 7,705 9,909 -- -- 19,262 Machinery and equipment............... 11,174 7,072 8,390 -- -- 26,636 Furniture, fixtures and equipment..... 828 2,181 5,335 -- (2,269) 6,075 Less accumulated depreciation......... (11,615) (5,978) (11,844 ) -- 465 (28,972) --------- --------- -------- -------- ------------- -------------- Property, plant and equipment, net.............................. 2,035 11,312 12,815 -- (1,804) 24,358 Intangible assets, less accumulated amortization of $197, $11,131, $69 and $1,212 for Automaten, Vertriebs, Gaming and Parent............................. -- 5,773 181 5,456 -- 11,410 Investment in subsidiaries.............. -- -- -- 90,766 (90,766) -- Other assets............................ 337 586 113 1,511 -- 2,547 --------- --------- -------- -------- ------------- -------------- $38,812 $85,056 $90,877 $129,846 $(152,349) $192,242 --------- --------- -------- -------- ------------- -------------- --------- --------- -------- -------- ------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................... $ 411 $ 4,064 $18,880 $ 891 $ (4,974) $ 19,272 Accrued liabilities and other payables: Compensation and benefit related liabilities........................ 2,287 612 2,433 630 -- 5,962 Interest............................ -- -- -- 1,890 -- 1,890 Other............................... 1,461 4,065 4,495 186 (734) 9,473 --------- --------- -------- -------- ------------- -------------- 3,748 4,677 6,928 2,706 (734) 17,325 Current maturities of long-term debt................................. -- 13,756 1,350 894 -- 16,000 --------- --------- -------- -------- ------------- -------------- Total current liabilities......... 4,159 22,497 27,158 4,491 (5,708) 52,597 Long-term payables to affiliate......... -- 26,741 29,014 -- (55,755) -- 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $458.... -- -- -- 39,542 -- 39,542 Other long-term debt, less current maturities............................. -- 5,006 7,927 1,287 -- 14,220 Commitments and contingencies Stockholders' equity: Preferred stock....................... -- -- -- -- -- -- Common stock.......................... 2,638 15,142 -- 107 (17,780) 107 Additional paid-in-capital............ 19,191 6,455 34,596 73,852 (66,336) 67,758 Retained earnings (accumulated deficit)............................. 6,199 1,433 (7,818 ) 11,550 (6,129) 5,235 Cumulative translation adjustments.... 6,625 7,782 -- (206) (641) 13,560 Unearned compensation................. -- -- -- (777) -- (777) --------- --------- -------- -------- ------------- -------------- Total stockholders' equity.......... 34,653 30,812 26,778 84,526 (90,886) 85,883 --------- --------- -------- -------- ------------- -------------- $38,812 $85,056 $90,877 $129,846 $(152,349) $192,242 --------- --------- -------- -------- ------------- -------------- --------- --------- -------- -------- ------------- --------------
See accompanying notes. F-53 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING BALANCE SHEET DECEMBER 31, 1995 (IN THOUSANDS)
BALLY BALLY BALLY BALLY CONSOLIDATING GAMING WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ----------- --------- --------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents................... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526 Accounts and notes receivable, net of allowance for doubtful accounts of $19, $7,201, and $9,061 for Automaten, Vertriebs and Gaming................................. 1,804 51,110 38,948 4,772 (9,458) 87,176 Inventories, net: Raw materials and work-in-process........... 4,974 -- 11,092 -- -- 16,066 Finished goods.............................. 3,548 12,340 21,020 -- (1,383) 35,525 ----------- ----------- --------- --------- ------------- ------------- 8,522 12,340 32,112 -- (1,383) 51,591 Other current assets........................ 1,236 1,443 651 560 93 3,983 ----------- ----------- --------- --------- ------------- ------------- Total current assets...................... 12,915 68,133 72,644 5,332 (10,748) 148,276 Long-term notes receivables, net of allowance for doubtful accounts of $48 and $7,821 for Vertriebs and Gaming......................... -- 1,654 8,327 -- -- 9,981 Long-term receivables from affiliate.......... 23,208 -- -- 28,380 (51,588) -- Property, plant and equipment, at cost: Land........................................ -- 332 1,025 -- -- 1,357 Buildings and leasehold improvements........ 1,571 8,375 9,925 -- -- 19,871 Machinery and equipment..................... 11,913 9,617 8,798 -- -- 30,328 Furniture, fixtures and equipment........... 812 2,520 5,909 -- (3,079) 6,162 Less accumulated depreciation............... (12,964) (8,787) (13,587) -- 864 (34,474) ----------- ----------- --------- --------- ------------- ------------- Property, plant and equipment, net.......... 1,332 12,057 12,070 -- (2,215) 23,244 Intangible assets, less accumulated amortization of $11,527, $94 and $2,099 for Vertriebs, Gaming and Parent................. -- 6,089 156 4,569 -- 10,814 Investment in subsidiaries.................... -- -- -- 90,766 (90,766) -- Other assets.................................. 332 561 113 497 498 2,001 ----------- ----------- --------- --------- ------------- ------------- $ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316 ----------- ----------- --------- --------- ------------- ------------- ----------- ----------- --------- --------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................ $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556 Accrued liabilities and other payables: Compensation and benefit related liabilities.............................. 2,335 955 2,318 -- -- 5,608 Interest.................................. -- -- -- 1,890 -- 1,890 Other..................................... 1,472 3,546 4,293 617 (20) 9,908 ----------- ----------- --------- --------- ------------- ------------- 3,807 4,501 6,611 2,507 (20) 17,406 Current maturities of long-term debt........ -- 14,333 212 412 -- 14,957 ----------- ----------- --------- --------- ------------- ------------- Total current liabilities................. 4,364 25,220 26,165 2,950 (7,780) 50,919 Long-term payables to affiliate............... -- 26,421 28,380 -- (54,801) -- 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $344................. -- -- -- 39,656 -- 39,656 Other long-term debt, less current maturities................................... -- 4,721 9,435 1,175 -- 15,331 Commitments and contingencies Stockholders' equity: Preferred stock............................. -- -- -- -- -- -- Common stock................................ 2,638 15,142 -- 108 (17,780) 108 Additional paid-in-capital.................. 19,191 6,455 34,596 74,439 (66,336) 68,345 Retained earnings(accumulated deficit)...... 2,155 286 (5,273) 11,969 (7,295) 1,842 Cumulative translation adjustments.......... 9,439 10,249 7 (206) (827) 18,662 Unearned compensation....................... -- -- -- (547) -- (547) ----------- ----------- --------- --------- ------------- ------------- Total stockholders' equity................ 33,423 32,132 29,330 85,763 (92,238) 88,410 ----------- ----------- --------- --------- ------------- ------------- $ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316 ----------- ----------- --------- --------- ------------- ------------- ----------- ----------- --------- --------- ------------- -------------
See accompanying notes. F-54 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)
BALLY BALLY CONSOLIDATING BALLY GAMING BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ---------- ---------- --------- ------------- ------------- Revenues: Sales.............................. $ 42,437 $ 100,287 $ 59,709 $ -- $ (37,862) $ 164,571 Other.............................. 1,497 3,083 807 1,479 (2,730) 4,136 ----------- ---------- ---------- --------- ------------- ------------- 43,934 103,370 60,516 1,479 (40,592) 168,707 ----------- ---------- ---------- --------- ------------- ------------- Costs and expenses: Cost of sales...................... 26,937 81,611 51,888 -- (38,726) 121,710 Selling, general and administrative.................... 6,737 19,608 24,498 6,531 (17) 57,357 Provision (credit) for doubtful receivables....................... (13) 326 7,363 500 -- 8,176 ----------- ---------- ---------- --------- ------------- ------------- 33,661 101,545 83,749 7,031 (38,743) 187,243 ----------- ---------- ---------- --------- ------------- ------------- Operating income (loss).............. 10,273 1,825 (23,233) (5,552) (1,849) (18,536) Interest expense..................... 21 1,873 2,849 2,180 (2,499) 4,424 ----------- ---------- ---------- --------- ------------- ------------- Income (loss) before income taxes and extraordinary gain.................. 10,252 (48) (26,082) (7,732) 650 (22,960) Provision (benefit) for income taxes............................... 3,705 (557) 10 -- 1,084 4,242 ----------- ---------- ---------- --------- ------------- ------------- Income (loss) before extraordinary gain................................ 6,547 509 (26,092) (7,732) (434) (27,202) Extraordinary gain on early extinguishment of debt.............. -- -- 3,759 -- -- 3,759 ----------- ---------- ---------- --------- ------------- ------------- Net income (loss).................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443) ----------- ---------- ---------- --------- ------------- ------------- ----------- ---------- ---------- --------- ------------- -------------
See accompanying notes. F-55 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
BALLY BALLY CONSOLIDATING BALLY GAMING BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ---------- ---------- --------- ------------- ------------- Revenues: Sales............................. $ 47,419 $ 99,218 $ 130,452 $ -- $ (45,771) $ 231,318 Other............................. 1,189 3,578 776 2,856 (3,525) 4,874 ----------- ---------- ---------- --------- ------------- ------------- 48,608 102,796 131,228 2,856 (49,296) 236,192 ----------- ---------- ---------- --------- ------------- ------------- Costs and expenses: Cost of sales..................... 30,988 79,589 91,107 -- (44,625) 157,059 Selling, general and administrative................... 6,656 19,408 28,135 5,862 (72) 59,989 Provision for doubtful receivables...................... 11 1,894 3,858 -- -- 5,763 ----------- ---------- ---------- --------- ------------- ------------- 37,655 100,891 123,100 5,862 (44,697) 222,811 ----------- ---------- ---------- --------- ------------- ------------- Operating income (loss)............. 10,953 1,905 8,128 (3,006) (4,599) 13,381 Interest expense.................. 2 1,648 3,871 4,486 (3,239) 6,768 ----------- ---------- ---------- --------- ------------- ------------- Income (loss) before income taxes... 10,951 257 4,257 (7,492) (1,360) 6,613 Provision (benefit) for income taxes.............................. 3,885 (1,019) 1,685 (1,465) (266) 2,820 ----------- ---------- ---------- --------- ------------- ------------- Net income (loss)................... $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793 ----------- ---------- ---------- --------- ------------- ------------- ----------- ---------- ---------- --------- ------------- -------------
See accompanying notes. F-56 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
BALLY BALLY BALLY CONSOLIDATING GAMING BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ---------- ---------- ---------- ------------- ------------- Revenues: Sales............................ $ 52,263 $ 117,618 $ 127,985 $ -- $ (53,395) $ 244,471 Other............................ 889 3,477 1,155 2,911 (3,591) 4,841 ----------- ---------- ---------- ---------- ------------- ------------- 53,152 121,095 129,140 2,911 (56,986) 249,312 ----------- ---------- ---------- ---------- ------------- ------------- Costs and expenses: Cost of sales.................... 35,337 95,483 85,270 -- (52,959) 163,131 Selling, general and administrative.................. 7,433 22,492 30,365 5,044 (45) 65,289 Provision for doubtful receivables..................... -- 1,697 5,015 -- -- 6,712 Unusual charges.................. 799 1,038 125 3,854 -- 5,816 ----------- ---------- ---------- ---------- ------------- ------------- 43,569 120,710 120,775 8,898 (53,004) 240,948 ----------- ---------- ---------- ---------- ------------- ------------- Operating income................... 9,583 385 8,365 (5,987) (3,982) 8,364 Interest expense................... 1 1,398 4,155 4,613 (3,314) 6,853 ----------- ---------- ---------- ---------- ------------- ------------- Income (loss) before income taxes............................. 9,582 (1,013) 4,210 (10,600) (668) 1,511 Provision (benefit) for income taxes............................. 3,987 134 1,665 (1,380) 498 4,904 ----------- ---------- ---------- ---------- ------------- ------------- Net income (loss).................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393) ----------- ---------- ---------- ---------- ------------- ------------- ----------- ---------- ---------- ---------- ------------- -------------
See accompanying notes. F-57 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)
BALLY CONSOLIDATING BALLY GAMING BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ----------- ----------- --------- ------------- ------------- Cash flows from operating activities: Net income (loss)............................... $ 6,547 $ 509 $ (22,333) $ (7,732) $ (434) $ (23,443) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Extraordinary gain on early extinguishment of debt...................................... -- -- (3,759) -- -- (3,759) Depreciation and amortization................. 1,609 2,466 2,221 1,557 250 8,103 Deferred income taxes......................... -- 163 -- -- -- 163 Provision for doubtful receivables............ (13) 326 7,363 500 -- 8,176 Provision for inventory valuation reserves.... -- -- 6,156 -- -- 6,156 (Gain) loss on disposals of property, plant and equipment................................ (40) 15 89 -- -- 64 Changes in operating assets and liabilities: Accounts and notes receivable............... 6,842 (3,384) (15,213) (957) (4,936) (17,648) Inventories................................. (2,987) 3,411 (15,290) -- (211) (15,077) Other current assets........................ (824) 481 126 (423) (894) (1,534) Accounts payable and accrued liabilities.... (2,759) (5,814) 12,060 423 5,807 9,717 Other........................................... -- -- -- -- (466) (466) ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) operating activities................................. 8,375 (1,827) (28,580) (6,632) (884) (29,548) ----------- ----------- ----------- --------- ------------- ------------- Cash flows from investing activities: Net assets of distribution business acquired.... -- (8,382) -- -- -- (8,382) Purchases of property, plant and equipment...... (1,541) (3,298) (1,628) -- -- (6,467) Proceeds from disposals of property, plant and equipment...................................... 57 585 449 -- -- 1,091 Other........................................... -- -- 110 -- 241 351 ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) investing activities................................. (1,484) (11,095) (1,069) -- 241 (13,407) ----------- ----------- ----------- --------- ------------- ------------- Cash flows from financing activities: Proceeds from issuance of Senior Secured Notes.... -- -- -- 40,000 -- 40,000 Net change in lines of credit..................... -- 20,825 5,667 2,219 -- 28,711 Repayments of long-term debt...................... -- (7,376) (415) (21,970) -- (29,761) Change in payables to/receivables from affiliates....................................... -- -- 21,170 (21,813) 643 -- Exercise of stock warrants........................ -- -- -- 30 -- 30 Intercompany dividends............................ (8,167) -- -- 8,167 -- -- ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) financing activities................................. (8,167) 13,449 26,422 6,633 643 38,980 Effect of exchange rate changes on cash........... (69) (320) -- -- -- (389) ----------- ----------- ----------- --------- ------------- ------------- Increase (decrease) in cash and cash equivalents...................................... (1,345) 207 (3,227) 1 -- (4,364) Cash and cash equivalents, beginning of period.... 1,844 4,400 3,556 -- -- 9,800 ----------- ----------- ----------- --------- ------------- ------------- Cash and cash equivalents, end of period.......... $ 499 $ 4,607 $ 329 $ 1 $ -- $ 5,436 ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- ----------- --------- ------------- ------------- Supplemental cash flows information: Operating activities include cash payments (receipts) for interest and income taxes as follows: Interest paid................................. $ 22 $ 942 $ 327 $ 1,619 $ -- $ 2,910 Income taxes paid (received).................. 5,732 1,077 -- (355) -- 6,454 Investing activities exclude the following non-cash activities: Exchange of income tax receivable for intangible assets and equipment.............. -- -- 454 1,515 -- 1,969 Financing activities exclude the following non-cash activities: Issuance of restricted stock awards........... -- -- -- 1,150 -- 1,150
SEE ACCOMPANYING NOTES. F-58 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS)
BALLY CONSOLIDATING BALLY GAMING BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ----------- ----------- --------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................. $ 7,066 $ 1,276 $ 2,572 $ (6,027) $ (1,094) $ 3,793 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization............... 2,556 2,491 1,974 1,342 (92) 8,271 Deferred income taxes....................... (415) (56) -- -- 175 (296) Provision for doubtful receivables.......... 11 1,894 3,858 -- -- 5,763 Provision for inventory valuation........... -- -- 2,230 -- -- 2,230 (Gain) loss on disposals of property, plant and equipment.............................. -- 6 (89) -- -- (83) CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts and notes receivable............. (2,237) (3,099) (9,783) (644) (60) (15,823) Inventories............................... 1,096 476 (5,573) -- 112 (3,889) Other current assets...................... 286 (1,711) 139 572 1 (713) Accounts payable and accrued liabilities.............................. 1,708 (342) 2,396 (912) (120) 2,730 Other....................................... 450 (759) -- 183 (633) (759) ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) operating activities............................. 10,521 176 (2,276) (5,486) (1,711) 1,224 ----------- ----------- ----------- --------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment.... (3,086) (4,363) (2,088) -- -- (9,537) Proceeds from disposals of property, plant and equipment.................................... -- 1,414 335 -- -- 1,749 Other......................................... -- -- 268 -- 1,129 1,397 ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) investing activities............................. (3,086) (2,949) (1,485) -- 1,129 (6,391) ----------- ----------- ----------- --------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in lines of credit................. -- 16,192 4,419 812 -- 21,423 Repayments of long-term debt.................. -- (11,675) (704) (813) -- (13,192) Change in payables to/receivables from affiliates................................... -- -- 72 (654) 582 -- Dividends to/from affiliate................... (6,654) 514 -- 6,140 -- -- ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) financing activities............................. (6,654) 5,031 3,787 5,485 582 8,231 Effect of exchange rate changes on cash....... 82 622 -- -- -- 704 ----------- ----------- ----------- --------- ------------- ------------- Increase (decrease) in cash and cash equivalents.................................. 863 2,880 26 (1) -- 3,768 Cash and cash equivalents, beginning of year......................................... 499 4,607 329 1 -- 5,436 ----------- ----------- ----------- --------- ------------- ------------- Cash and cash equivalents, end of year........ $ 1,362 $ 7,487 $ 355 $ -- $ -- $ 9,204 ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- ----------- --------- ------------- ------------- SUPPLEMENTAL CASH FLOWS INFORMATION: Operating activities include cash payments (receipts) for interest and income taxes as follows: Interest paid............................... $ 3 $ 981 $ 789 $ 4,199 $ -- $ 5,972 Income taxes paid (received)................ 4,038 (105) 12 75 -- 4,020 INVESTING ACTIVITIES EXCLUDE THE FOLLOWING NON-CASH ACTIVITIES: Capital contribution to affiliate........... -- -- -- (5,492) -- (5,492) Long-term note received from sale of assets..................................... -- -- 517 -- -- 517 FINANCING ACTIVITIES EXCLUDE THE FOLLOWING NON-CASH ACTIVITIES: Capital contribution from affiliate......... 899 4,593 -- -- -- 5,492 Issuance of Company common stock under compensation agreement..................... -- -- -- 222 -- 222 Issuance of note payable for license agreement.................................. -- -- -- 1,465 -- 1,465
See accompanying notes. F-59 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
BALLY CONSOLIDATING BALLY GAMING BALLY WULFF BALLY WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ----------- ----------- --------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................. $ 5,595 $ (1,147) $ 2,545 $ (9,220) $ (1,166) $ (3,393) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization............... 2,602 3,120 2,029 1,312 (110) 8,953 Deferred income taxes....................... -- 63 -- -- (841) (778) Provision for doubtful receivables.......... -- 1,697 5,015 -- -- 6,712 Provision for inventory valuation........... -- -- 1,955 -- -- 1,955 Provision for writedown of building to be sold....................................... -- 812 -- -- -- 812 (Gain) loss on disposals of property, plant and equipment.............................. (17) 67 (2) -- -- 48 CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts and notes receivable............... 1,223 (2,855) (8,672) -- -- (10,304) Inventories................................. (393) (2,140) 142 -- 224 (2,167) Other current assets........................ (119) 1,763 (1) (364) -- 1,279 Accounts payable and accrued liabilities.... 239 1,240 (1,235) (1,139) 1,473 578 Other, net.................................... (1) (402) 7 819 (323) 100 ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) operating activities............................... 9,129 2,218 1,783 (8,592) (743) 3,795 ----------- ----------- ----------- --------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment.................................... (1,694) (5,468) (1,078) -- -- (8,240) Proceeds from disposals of property, plant and equipment.................................... 24 1,728 5 -- -- 1,757 Other......................................... -- -- (10) -- 260 250 ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) investing activities............................... (1,670) (3,740) (1,083) -- 260 (6,233) ----------- ----------- ----------- --------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in lines of credit................. -- (1,273) 1,632 -- -- 359 Repayments of long-term debt.................. -- (2) (2,287) (620) 1 (2,908) Change in payables to/receivables from affiliates................................... 2,058 (2,058) 533 (1,015) 482 -- Exercise of stock options..................... -- -- -- 588 -- 588 Dividends to/from affiliates.................. (9,639) -- -- 9,639 -- -- ----------- ----------- ----------- --------- ------------- ------------- Cash provided by (used in) financing activities............................... (7,581) (3,333) (122) 8,592 483 (1,961) Effect of exchange rate changes on cash....... 113 608 -- -- -- 721 ----------- ----------- ----------- --------- ------------- ------------- Increase (decrease) in cash and cash equivalents.................................. (9) (4,247) 578 -- -- (3,678) Cash and cash equivalents, beginning of period....................................... 1,362 7,487 355 -- -- 9,204 ----------- ----------- ----------- --------- ------------- ------------- Cash and cash equivalents, end of period...... $ 1,353 $ 3,240 $ 933 $ -- $ -- $ 5,526 ----------- ----------- ----------- --------- ------------- ------------- ----------- ----------- ----------- --------- ------------- ------------- SUPPLEMENTAL CASH FLOWS INFORMATION: OPERATING ACTIVITIES INCLUDE CASH PAYMENTS (RECEIPTS) FOR INTEREST AND INCOME TAXES AS FOLLOWS: Interest paid............................... $ 1 $ 1,335 $ 1,178 $ 4,374 $ -- $ 6,888 Income taxes paid (refunded), net........... 3,104 (1,694) 85 306 -- 1,801
See accompanying notes. F-60 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATING FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS These notes to consolidating financial statements should be read in conjunction with the consolidated financial statements and notes thereto. Certain reclassifications have been made to prior years' financial statements to conform with the 1995 presentation. Hereafter, references to the Company are to the subsidiaries of Bally Gaming International, Inc. RESEARCH AND DEVELOPMENT The Company expenses product research and development costs as incurred. Research and development costs for the years ended December 31, 1993, 1994 and 1995 were:
BALLY GAMING BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL, AUTOMATEN VERTRIEBS INC. INC. ----------- ------------- ------------- ------------- 1993................................... $ 3,350 $ -- $ 4,440 $ 7,790 ----------- ----- ------ ------ ----------- ----- ------ ------ 1994................................... $ 3,546 $ -- $ 5,199 $ 8,745 ----------- ----- ------ ------ ----------- ----- ------ ------ 1995................................... $ 3,561 $ -- $ 5,639 $ 9,200 ----------- ----- ------ ------ ----------- ----- ------ ------
ACCOUNTS AND NOTES RECEIVABLE The following table represents, at December 31, 1995, scheduled collections of accounts and notes receivable (net of allowances for doubtful accounts) by year:
CONSOLIDATING BALLY GAMING BALLY WULFF BALLY WULFF BALLY AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS GAMING, INC. PARENT ADJUSTMENTS INC. ----------- ----------- ------------ --------- ------------- ------------- 1996.................... $ 1,804 $ 51,110 $ 38,948 $ 4,772 $ (9,458) $ 87,176 1997.................... -- 1,464 6,786 -- -- 8,250 1998.................... -- 190 1,541 -- -- 1,731 ----------- ----------- ------------ --------- ------------- ------------- $ 1,804 $ 52,764 $ 47,275 $ 4,772 $ (9,458) $ 97,157 ----------- ----------- ------------ --------- ------------- ------------- ----------- ----------- ------------ --------- ------------- -------------
LONG-TERM DEBT Aggregate annual maturities of long-term debt for the five years after December 31, 1995 are:
BALLY GAMING BALLY WULFF BALLY GAMING, INTERNATIONAL, VERTRIEBS INC. PARENT INC. ----------- ------------- --------- ------------- 1996..................................... $ 14,333 $ 212 $ 412 $ 14,957 1997..................................... 1,572 9,435 456 11,463 1998..................................... 3,149 -- 40,468 43,617 1999..................................... -- -- 251 251 2000..................................... -- -- -- -- ----------- ------ --------- ------------- Total.................................... $ 19,054 $ 9,647 $ 41,587 $ 70,288 ----------- ------ --------- ------------- ----------- ------ --------- -------------
F-61 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) OTHER REVENUES Other revenues for the year ended December 31, 1994 were as follows:
CONSOLIDATING BALLY GAMING BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ----------- --------------- --------- ------------- ------------- Interest............................. $ 294 $ 2,932 $ 608 $ 2,943 $ (3,239) $ 3,538 Currency transaction gain (loss)..... 3 52 2 (87) -- (30) Other................................ 892 594 166 -- (286) 1,366 ----------- ----------- ----- --------- ------------- ------ $ 1,189 $ 3,578 $ 776 $ 2,856 $ (3,525) $ 4,874 ----------- ----------- ----- --------- ------------- ------ ----------- ----------- ----- --------- ------------- ------
Other revenues for the year ended December 31, 1995 were as follows:
CONSOLIDATING BALLY GAMING BALLY WULFF BALLY WULFF BALLY GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ------------- ----------- ------------- --------- ------------- ------------- Interest............................. $ 362 $ 2,626 $ 962 $ 2,979 $ (3,314) $ 3,615 Currency transaction gain (loss)..... -- 62 (29) (68) (18) (53) Other................................ 527 789 222 -- (259) 1,279 ----- ----------- ------ --------- ------------- ------ $ 889 $ 3,477 $ 1,155 $ 2,911 $ (3,591) $ 4,841 ----- ----------- ------ --------- ------------- ------ ----- ----------- ------ --------- ------------- ------
UNUSUAL CHARGES During the year ended December 31, 1995, Parent and Bally Gaming, Inc. incurred approximately $3.9 million and $.1 million, respectively, in legal, accounting, investment banking, public and investor relations and printing costs in connection with the merger agreement with WMS Industries, Inc., which has since been terminated, Alliance's tender offer and consent solicitation and the pending Alliance Merger. All of these costs have been expensed as incurred. Such costs will continue to be incurred in 1996. During the fourth quarter of 1995, Vertriebs recorded a non-recurring charge of $.8 million to writedown to net realizable value a building to be sold. The provision was based on a strategic decision to sell the building as Wulff's other distribution offices adequately covered the geographic region that would have been served by this facility. During 1995, Wulff increased the amount of value added tax reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. The Company has accrued the liability as, based on current developments, the Company's estimate of the ultimate outcome and its experience in contesting these matters, it is probable that a liability has been incurred and a range of costs can be reasonably estimated. As the scope of the liability is better determined, there could be changes in the estimate of the ultimate liability. Management believes that the preliminary proposed adjustments are without merit and the ultimate results of the audit will not have a material adverse effect on the Company's financial position, results of operations or cash flows. F-62 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATING FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and equipment for production, selling and administrative purposes under operating leases. Future minimum lease payments at December 31, 1995 under operating leases that have initial or remaining lease terms in excess of one year are as follows:
BALLY GAMING BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL, AUTOMATEN VERTRIEBS INC. INC. ----------- ----------- ------------- ------------- 1996............................................. $ 608 $ 1,610 $ 918 $ 3,136 1997............................................. 608 1,505 640 2,753 1998............................................. -- 1,157 597 1,754 1999............................................. -- 878 483 1,361 2000............................................. -- 680 441 1,121 Thereafter....................................... -- 767 1,077 1,844 ----------- ----------- ------ ------------- $ 1,216 $ 6,597 $ 4,156 $ 11,969 ----------- ----------- ------ ------------- ----------- ----------- ------ -------------
Rent expense for the years ended December 31, 1993, 1994 and 1995 was:
BALLY GAMING BALLY WULFF BALLY WULFF BALLY GAMING, INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT INC. ------------- ----------- ------------- ----------- ------------- 1993..................................... $ 680 $ 1,519 $ 405 $ -- $ 2,604 ----- ----------- ------ ----- ------ ----- ----------- ------ ----- ------ 1994..................................... $ 621 $ 1,604 $ 487 $ -- $ 2,712 ----- ----------- ------ ----- ------ ----- ----------- ------ ----- ------ 1995..................................... $ 615 $ 1,731 $ 1,221 $ 2 $ 3,569 ----- ----------- ------ ----- ------ ----- ----------- ------ ----- ------
F-63 BALLY GAMING INTERNATIONAL, INC. SUPPLEMENTARY DATA QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED -------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, -------------------- -------------------- -------------------- -------------------- 1994 1995 1994 1995 1994 1995 1994 1995 --------- --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) CONSOLIDATED Revenues................................. $ 61.7 $ 68.3 $ 58.9 $ 69.2 $ 49.3 $ 51.5 $ 66.3 $ 60.3 Gross profit............................. 19.4 24.8 17.6 23.9 16.3 17.7 25.8 19.8 Operating income (loss).................. 4.0 6.7 2.7 4.6 1.2 (1.3) 5.5 (1.6) Net income (loss)........................ 1.3 2.8 1.6 1.1 (1.4) (3.8) 2.2 (3.5) Net income (loss) per share of common stock................................... $ 0.12 $ 0.27 $ 0.15 $ 0.10 $ (0.13) $ (0.35) $ 0.21 $ (0.33) WULFF Revenues................................. $ 29.1 $ 36.0 $ 21.4 $ 35.5 $ 26.4 $ 27.0 $ 34.2 $ 32.2 Gross profit............................. 10.0 12.4 5.6 11.9 8.9 9.3 14.5 8.9 Operating income (loss).................. 2.5 3.8 (0.4) 3.0 2.5 0.8 4.6 (2.0) Net income (loss)........................ 1.1 1.4 (0.1) 1.0 1.3 (0.3) 3.0 (2.4) GAMING Revenues................................. $ 30.2 $ 28.0 $ 35.0 $ 33.0 $ 21.4 $ 24.0 $ 31.3 $ 23.4 Gross profit............................. 7.4 8.6 9.2 9.0 5.2 7.0 9.2 5.9 Operating income (loss).................. 1.0 1.0 1.8 0.6 (1.8) (1.6) 0.6 (2.2) Net income (loss)........................ (0.3) (0.6) 0.4 (0.9) (3.2) (3.0) (1.1) (3.7) SYSTEMS Revenues................................. $ 3.0 $ 6.1 $ 4.3 $ 4.2 $ 2.8 $ 2.4 $ 3.3 $ 8.0 Gross profit............................. 2.0 3.9 2.8 3.0 2.2 1.5 2.1 5.0 Operating income......................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6 Net income............................... 0.5 2.1 1.3 1.0 0.5 (0.5) 0.3 2.6
F-64 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE Incorporation by Reference..................... 2 Prospectus Summary............................. 3 Risk Factors................................... 18 The Merger and Related Financings.............. 26 Use of Proceeds................................ 28 Capitalization................................. 29 Unaudited Pro Forma Condensed Combined Financial Information......................... 30 Supplemental Analysis of Adjusted Operating Cash Flow..................................... 41 Forecast of Operating Income and Adjusted Operating Cash Flow........................... 45 Selected Historical Financial Information of Alliance...................................... 57 Selected Historical Financial Information of BGII.......................................... 59 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 60 Business....................................... 75 Gaming Regulation and Licensing................ 96 Management..................................... 106 Security Ownership of Certain Beneficial Holders and Management........................ 109 Certain Relationships and Related Transactions.................................. 113 Description of Certain Other Indebtedness...... 114 Description of the Notes....................... 116 Underwriting................................... 139 Legal Matters.................................. 140 Experts........................................ 141 Available Information.......................... 141 Index to Financial Statements.................. F-1
$75,000,000 ALLIANCE GAMING CORPORATION % SENIOR SECURED NOTES DUE 2003 ----------------- PROSPECTUS ----------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION JEFFERIES & COMPANY, INC. LADENBURG, THALMANN & CO. INC. , 1996 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. An itemized statement of the estimated amount of all expenses in connection with the distribution of the securities registered hereby is as follows: Securities and Exchange Commission registration fee................ $ 25,862 Blue Sky fees and expenses......................................... * NASD fee........................................................... 8,000 Legal fees and expenses............................................ * Accounting fees and expenses....................................... * Printing and engraving expenses.................................... * Trustee and Registrar fees......................................... * Miscellaneous...................................................... * --------- Total.......................................................... $ *
- ------------------------ * To be provided by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article VI of the Company's Articles of Incorporation limits the liability of the Company's directors and officers. It provides that a director or officer of the Company will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director or officer, except for liability (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) for the payment of dividends in violation of Section 78.300 of the Nevada General Corporation Law. It also provides that any repeal or modification of the foregoing provision of the stockholders of the Company will be prospective only, and will not adversely affect any limitation on the personal liability of a director or officer of the Company existing at the time of such repeal or modification. Section 78.300 of the Nevada General Corporation Law provides: 1. The directors of a corporation shall not make dividends or other distributions to stockholders except as provided by such section. 2. In case of any willful or grossly negligent violation of the provisions of such section, the directors under whose administration the violation occurred, except those who caused their dissent to be entered upon the minutes of the meeting of the directors at the time, or who not then being present caused their dissent to be entered on learning of such action, are jointly and severally liable, at any time within 3 years after each violation, to the corporation, and, in the event of its dissolution or insolvency, to its creditors at the time of the violation, or any of them, to the lesser of the full amount of the dividend made or of any loss sustained by the corporation by reason of the dividend or other distribution to stockholders. However, Section 78.751 of the Nevada General Corporation Law permits the Registrant to indemnify its directors and officers as follows: 1. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except any action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, II-1 has no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. 2. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines, upon application, that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. 3. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter herein, he must be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. 4. Any indemnification under subsections 1 and 2, unless offered by a court or advanced pursuant to subsection 5, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or (d) If a quorum of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion. 5. The articles of incorporation, the bylaws or an agreement made by the corporation may provide that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- .1*1 -- Form of Common Stock Underwriting Agreement. *1.2 -- Form of Preferred Stock Underwriting Agreement. *1.3 -- Form of Note Underwriting Agreement. 2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October 18, 1995, as amended and restated. 2.2 -- Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 2.3 -- Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc., Capital Gaming International, Inc., I.G. Davis, Jr. and John E. Dell, with exhibits thereto (incorporated herein by reference to Alliance's Form 8-K dated November 5, 1993). 2.4 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 2.5 -- Offer to Purchase Common Shares of Bally Gaming International, Inc., dated July 28, 1995 (incorporated herein by reference to Alliance's Schedule 14D-1 and Schedule 13D dated July 28, 1995). 3.1 -- Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments thereto). 3.2 -- Revised By-Laws of the Registrant (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). *4.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 15% Non-Voting Junior Special Stock, Series B. *4.2 -- Form of Certificate evidencing 15% Non-Voting Junior Special Stock, Series B. 4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment with Video Services, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 31, 1992). 4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of Texas, N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003 (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments thereto). 4.5 -- Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.5, above). 4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments thereto). *4.6 -- Form of Note Indenture (including form of Note) *4.7 -- Form of Senior Secured Indenture (including form of Note and Guarantee). *4.8 -- Form of Collateral Documents. *5 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the securities being registered. 10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services, Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated March 31, 1992).
II-3
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- 10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to Alliance for Alliance's corporate headquarters building at 4380 Boulder Highway, Las Vegas, Nevada (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1989). 10.3 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein by reference to Alliance's Form 10-Q for the quarter ended March 31, 1993). 10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). 10.5 -- Letter Agreement dated June 25, 1993 among United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation and, as to certain provisions, Alfred H. Wilms, including Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of Stockholders Agreement), Exhibit C (Form of Certificate of Designations of Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.6 -- Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A (Form of Warrant Agreement) and Exhibit B (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.7 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308). 10.8 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 2-98777). 10.9 -- Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.10 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P. relating to warrants to purchase 2.75 million shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.11 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Gaming Systems Advisors, L.P. relating to warrants to purchase 1.25 million shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.12 -- Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.13 -- Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308). 10.14 -- Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by reference to Alliance's Form S-3 Registration Number 33-58233). 10.15 -- Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993).
II-4
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- 10.16 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated herein by reference to Alliance's Form 10-Q dated September 30, 1993). 10.17 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). 10.18 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.19 -- Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.20 -- Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc. (as secured party) and The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (as pledgors) (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.21 -- Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.22 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming International, Inc. and I.G.Davis, Jr. (incorporated herein by reference to Alliance's Form 8-K dated December 10, 1993). 10.23 -- Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred H. Wilms and Video Services, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.24 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.25 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.26 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Oppenheimer & Co. Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.27 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.29 -- Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United Gaming, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
II-5
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- 10.30 -- Letter Agreement, dated as of March 3, 1994, by and among United Native American Gaming, Inc., USA Gaming of Native America, Inc., USA Gaming, Inc. and others (incorporated herein by reference to Alliance's Form 8-K dated March 7, 1994). 10.31 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (incorporated herein by reference to Alliance's Form 8-K dated March 15, 1994). 10.32 -- Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.33 -- Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.34 -- Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.35 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994 (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.36 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29, 1995, between United Gaming Rainbow and RCC (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.37 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.38 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.39 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.40 -- Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada, together with Agreement dated February 7, 1994, as amended July 11, 1994 between Rainbow Casino-Vicksburg Partnership, L.P. and the City of Vicksburg, Mississippi (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.41 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). 10.42 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United Gaming of Iowa, Inc., GDREC and Joseph and Paula Zwack (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.43 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve Greathouse (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233).
II-6
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- 10.44 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steven Greathouse (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.45 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.46 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.47 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.48 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.49 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.50 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.51 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.52 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and their affiliates of RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP) (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.53 -- Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP) of United Gaming Rainbow and Alliance and their affiliates (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.54 -- 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). 10.55 -- 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). 10.56 -- Agreement, dated January 8, 1993 by and between Bally Gaming International, Inc. and Bally Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(p) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1992). 10.57 -- Second Amendement to Trademark License Agreement and Settlement Agreement, dated March 31, 1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc. (incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K dated April 3, 1995). 10.58 -- 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).
II-7
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- 10.59 -- Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International, Inc. effective February 6, 1992 (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's Registration Statement No. 33-42227 on Form S-1 effective November 1, 1991). 10.60 -- Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International Inc. (incorporated herein by reference to exhibit 99(e) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993). 10.61 -- 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(f) included in BGII's Annual Report on Form 10-K for the fiscal y ear ended December 31, 1991). 10.62 -- 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). 10.63 -- Bally Gaming International, Inc. 1992 Restricted Stock Performance Plan (incorporated herein by reference to exhibit 99(d) included in BGII's Registration Statement on Form S-3 filed on November 1, 1993). 10.64 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.65 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(h) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.66 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Neil Jenkins and Bally Gaming International, Inc.(incorporated herein by reference to exhibit 10(iii)(i) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.67 -- 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). 10.68 -- Employment Agreement, effective January 1, 1993, between Bally Gaming International, Inc. and Richard Gillman (incorporated herein by reference to exhibit 10(iii)(j) included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). 10.69 -- Amendment, dated June 8, 1994, to the Employment Agreement, effective as of January 1, 1993, between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(m) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.70 -- Employment Agreements, as amended, between Hans Kloss and each of Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's Registration Statement No. 33-42227 on Form S-1, effective November 8, 1991). 10.71 -- Third Amendments, dated June 2, 1993, to Employment Agreements between Hans Kloss and each of Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit 99(c) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993). 10.72 -- Employment Agreement, effective as of May 15, 1993, between Bally Gaming International, Inc., Bally Gaming, Inc. and Hans Kloss (incorporated herein by reference to exhibit 99(b) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993).
II-8
EXHIBIT NO. DESCRIPTION - ---------------------- ------------------------------------------------------------------------------------------------- 10.73 -- Amendment, dated June 8, 1994, to the Employment Agreement effective as of May 15, 1993, between Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(q) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.74 -- Employment Agreement, dated June 30, 1994, between Neil Jenkins and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(r) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.75 -- Employment Agreement, dated as of March 24, 1995, between Scott D. Schweinfurth and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(z) included in BGII's Annual Report on Form 10-K/A for the period ended December 31, 1994). *10.76 -- Collateral Documents. 12 -- Statement re computation of ratios. 23.1 -- Consent of KPMG Peat Marwick LLP. 23.2 -- Consent of Coopers & Lybrand L.L.P. *23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as Exhibit 5). 24 -- Power of Attorney (included on signature page). *25 -- Statement of Eligibility of Trustee.
- ------------------------ * To be filed by amendment. II-9 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be part of this Registration Statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions set forth in response to Item 15, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-10 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Alliance Gaming Corporation certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. ALLIANCE GAMING CORPORATION By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Senior Vice President--Finance and Administration, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE Chairman of the Board of Directors, ------------------------------------------- President and Chief Executive Officer April 1, 1996 Steve Greathouse (Principal Executive Officer) Senior Vice President-Finance and /s/ JOHN W. ALDERFER Administration, Chief Financial ------------------------------------------- Officer and Treasurer (Principal April 1, 1996 John W. Alderfer Financial and Accounting Officer) /s/ ANTHONY DICESARE ------------------------------------------- Director and Executive Vice April 1, 1996 Anthony DiCesare President-Development ------------------------------------------- Director (Vice Chairman of the Board) April 1, 1996 Dr. Craig Fields
II-11 /s/ JOEL KIRSCHBAUM ------------------------------------------- Director April 1, 1996 Joel Kirschbaum /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms /s/ DAVID ROBBINS ------------------------------------------- Director April 1, 1996 David Robbins /s/ CHRISTOPHER BAJ ------------------------------------------- Director April 1, 1996 Christopher Baj
II-12 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, BGII Acquisition Corp. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. BGII ACQUISITION CORP. By: /s/ STEVE GREATHOUSE -------------------------------------- Name: Steve Greathouse Title: President/Treasurer/Director Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE Director, President and Treasurer ------------------------------------------- (Principal Executive Officer, April 1, 1996 Steve Greathouse Financial and Accounting Officer)
II-13 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, APT Games, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. APT GAMES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- Director and President April 1, 1996 Steve Greathouse (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-14 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Casino Electronics, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. CASINO ELECTRONICS, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President April 1, 1996 Steve Greathouse (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-15 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Foreign Gaming Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. FOREIGN GAMING VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President April 1, 1996 Steve Greathouse (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-16 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, United Coin Machine Co. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. UNITED COIN MACHINE CO. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. MIODUNSKI ------------------------------------------- President April 1, 1996 Robert L. Miodunski (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ STEVE GREATHOUSE ------------------------------------------- Director April 1, 1996 Steve Greathouse /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-17 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, APT Coin Machines, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. APT COIN MACHINES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President April 1, 1996 Robert L. Saxton (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-18 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Trolley Stop, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. TROLLEY STOP, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President April 1, 1996 Robert L. Saxton (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-19 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Plantation Investments, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. PLANTATION INVESTMENTS, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President April 1, 1996 Robert L. Saxton (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-20 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Mizpah Investments, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. MIZPAH INVESTMENTS, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President April 1, 1996 Robert L. Saxton (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-21 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, United Games, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. UNITED GAMES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President April 1, 1996 Steve Greathouse (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-22 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Slot Palace, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. SLOT PALACE, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President April 1, 1996 Robert L. Saxton (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-23 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, WCAL, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. WCAL, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President April 1, 1996 Robert L. Saxton (Principal Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-24 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Double Eagle Hotel & Casino, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. DOUBLE EAGLE HOTEL & CASINO, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-25 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, FCJI, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. FCJI, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: President and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ JOHN W. ALDERFER President and Treasurer (Principal ------------------------------------------- Executive, Financial and Accounting April 1, 1996 John W. Alderfer Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-26 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, United Native American, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. UNITED NATIVE AMERICAN, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Financial and April 1, 1996 Steve Greathouse Accounting Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-27 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Native American Investments, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. NATIVE AMERICAN INVESTMENTS, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Director and Treasurer (Principal April 1, 1996 John W. Alderfer Financial and Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-28 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Oregon Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. OREGON VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-29 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Indiana Gaming Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. INDIANA GAMING VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-30 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Mississippi Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. MISSISSIPPI VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-31 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, United Gaming of Iowa, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. UNITED GAMING OF IOWA, INC. By: /s/ STEVE GREATHOUSE -------------------------------------- Name: Steve Greathouse Title: President and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE President and Treasurer (Principal ------------------------------------------- Executive, Financial and Accounting April 1, 1996 Steve Greathouse Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-32 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, United Gaming Rainbow certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. UNITED GAMING RAINBOW By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-33 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Mississippi Ventures II, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. MISSISSIPPI VENTURES II, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-34 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Vermont Financial Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. VERMONT FINANCIAL VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-35 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Missouri Ventures II, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. MISSOURI VENTURES II, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Director and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- Director and President (Principal April 1, 1996 Steve Greathouse Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Director and Treasurer (Principal April 1, 1996 John W. Alderfer Financial and Accounting Officer)
II-36 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Louisiana Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. LOUISIANA VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-37 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Video Distributing Services, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. VIDEO DISTRIBUTING SERVICES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Director and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Robert L. Saxton /s/ JOHN W. ALDERFER ------------------------------------------- Director and Treasurer (Principal April 1, 1996 John W. Alderfer Financial and Accounting Officer) /s/ STEVE GREATHOUSE ------------------------------------------- Director April 1, 1996 Steve Greathouse /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-38 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Southern Video Services, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. SOUTHERN VIDEO SERVICES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Director and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ ROBERT L. SAXTON ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Robert L. Saxton /s/ JOHN W. ALDERFER ------------------------------------------- Director and Treasurer (Principal April 1, 1996 John W. Alderfer Financial and Accounting Officer) ------------------------------------------- Director April 1, 1996 Marie G. Krantz /s/ STEVE GREATHOUSE ------------------------------------------- Director April 1, 1996 Steve Greathouse /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-39 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Alpine Willow Investments, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. ALPINE WILLOW INVESTMENTS, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Chief Executive Officer/Secretary/Chief Financial Officer/Director Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- Chief Executive Officer/Secretary/ /s/ JOHN W. ALDERFER Chief Financial Officer/Director ------------------------------------------- (Principal Executive, Financial and April 1, 1996 John W. Alderfer Accounting Officer)
II-40 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Kansas Gaming Ventures, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. KANSAS GAMING VENTURES, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- President (Principal Executive Officer) April 1, 1996 Steve Greathouse /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-41 The Registrant and each person whose signature appears below hereby authorizes John W. Alderfer, David D. Johnson, Steve Greathouse and Anthony DiCesare (the "Agents") to file one or more amendments (including post-effective amendments) to this registration statement, which amendments may make such changes in this registration statement as such Agent deems appropriate, and to file any new registration statement (and any post-effective amendment thereto) which registers additional securities of the same classes and for the same offering as this registration statement in accordance with Rule 462(b) under the Securities Act (each, a "462(b) Registration Statement"), and the Registrant and each such person hereby appoints each such Agent as attorney-in-fact to execute in the name and on behalf of the Registrant and each such person, individually and in each capacity stated below, any such amendments to this registration statement and any such 462(b) Registration Statements. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Pennsylvania Gaming Ventures I, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement or amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on April 1, 1996. PENNSYLVANIA GAMING VENTURES I, INC. By: /s/ JOHN W. ALDERFER -------------------------------------- Name: John W. Alderfer Title: Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement or amendment has been signed by the following persons in the capacities and the dates indicated. SIGNATURE TITLE DATE - ------------------------------------------------------ --------------------------------------- ---------------- /s/ STEVE GREATHOUSE ------------------------------------------- Director and President (Principal April 1, 1996 Steve Greathouse Executive Officer) /s/ JOHN W. ALDERFER ------------------------------------------- Treasurer (Principal Financial and April 1, 1996 John W. Alderfer Accounting Officer) /s/ ALFRED H. WILMS ------------------------------------------- Director April 1, 1996 Alfred H. Wilms
II-42 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- .1*1 -- Form of Common Stock Underwriting Agreement. *1.2 -- Form of Preferred Stock Underwriting Agreement. *1.3 -- Form of Note Underwriting Agreement. 2.1 -- Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October 18, 1995, as amended and restated. 2.2 -- Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 2.3 -- Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc., Capital Gaming International, Inc., I.G. Davis, Jr. and John E. Dell, with exhibits thereto (incorporated herein by reference to Alliance's Form 8-K dated November 5, 1993). 2.4 -- Consolidation Agreement, dated March 29, 1995 among Alliance, United Gaming Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 2.5 -- Offer to Purchase Common Shares of Bally Gaming International, Inc., dated July 28, 1995 (incorporated herein by reference to Alliance's Schedule 14D-1 and Schedule 13D dated July 28, 1995). 3.1 -- Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments thereto). 3.2 -- Revised By-Laws of the Registrant (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). *4.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof of 15% Non-Voting Junior Special Stock, Series B. *4.2 -- Form of Certificate evidencing 15% Non-Voting Junior Special Stock, Series B. 4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment with Video Services, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 31, 1992). 4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of Texas, N.A., as Trustee in respect of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003 (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments thereto). 4.5 -- Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.5, above). 4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990, and subsequent amendments thereto). *4.6 -- Form of Note Indenture (including form of Note) *4.7 -- Form of Senior Secured Indenture (including form of Note and Guarantee). *4.8 -- Form of Collateral Documents. *5 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey as to legality of the securities being registered.
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- 10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services, Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated March 31, 1992). 10.2 -- Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to Alliance for Alliance's corporate headquarters building at 4380 Boulder Highway, Las Vegas, Nevada (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1989). 10.3 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein by reference to Alliance's Form 10-Q for the quarter ended March 31, 1993). 10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and John W. Alderfer (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). 10.5 -- Letter Agreement dated June 25, 1993 among United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation and, as to certain provisions, Alfred H. Wilms, including Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of Stockholders Agreement), Exhibit C (Form of Certificate of Designations of Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.6 -- Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A (Form of Warrant Agreement) and Exhibit B (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.7 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308). 10.8 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 2-98777). 10.9 -- Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.10 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P. relating to warrants to purchase 2.75 million shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.11 -- Warrant Agreement, dated as of September 21, 1993, by and between United Gaming, Inc. and Gaming Systems Advisors, L.P. relating to warrants to purchase 1.25 million shares of Common Stock (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.12 -- Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.13 -- Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308). 10.14 -- Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by reference to Alliance's Form S-3 Registration Number 33-58233).
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- 10.15 -- Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.16 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated herein by reference to Alliance's Form 10-Q dated September 30, 1993). 10.17 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993 (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994). 10.18 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.19 -- Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.20 -- Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc. (as secured party) and The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (as pledgors) (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.21 -- Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.22 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming International, Inc. and I.G.Davis, Jr. (incorporated herein by reference to Alliance's Form 8-K dated December 10, 1993). 10.23 -- Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred H. Wilms and Video Services, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.24 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.25 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.26 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Oppenheimer & Co. Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.27 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and L.H. Friend, Weinress & Frankson, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto).
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- 10.29 -- Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United Gaming, Inc. (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.30 -- Letter Agreement, dated as of March 3, 1994, by and among United Native American Gaming, Inc., USA Gaming of Native America, Inc., USA Gaming, Inc. and others (incorporated herein by reference to Alliance's Form 8-K dated March 7, 1994). 10.31 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (incorporated herein by reference to Alliance's Form 8-K dated March 15, 1994). 10.32 -- Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.33 -- Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.34 -- Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.35 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994 (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.36 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29, 1995, between United Gaming Rainbow and RCC (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.37 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.38 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.39 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc. (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.40 -- Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada, together with Agreement dated February 7, 1994, as amended July 11, 1994 between Rainbow Casino-Vicksburg Partnership, L.P. and the City of Vicksburg, Mississippi (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.41 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain (incorporated herein by reference to Alliance's Form 10-K for the year ended June 30, 1994).
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- 10.42 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United Gaming of Iowa, Inc., GDREC and Joseph and Paula Zwack (incorporated herein by reference to Alliance's Form S-2, Registration Number 33-72990 and subsequent amendments thereto). 10.43 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve Greathouse (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.44 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steven Greathouse (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.45 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.46 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig Fields (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.47 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum (incorporated herein by reference to Alliance's Form S-3, Registration Number 33-58233). 10.48 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.49 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.50 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.51 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.52 -- Release, dated March 29, 1995, by United Gaming Rainbow and Alliance and their affiliates of RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP) (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.53 -- Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP) of United Gaming Rainbow and Alliance and their affiliates (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.54 -- 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). 10.55 -- 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). 10.56 -- Agreement, dated January 8, 1993 by and between Bally Gaming International, Inc. and Bally Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(p) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1992).
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- 10.57 -- Second Amendement to Trademark License Agreement and Settlement Agreement, dated March 31, 1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc. (incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K dated April 3, 1995). 10.58 -- 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). 10.59 -- Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International, Inc. effective February 6, 1992 (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's Registration Statement No. 33-42227 on Form S-1 effective November 1, 1991). 10.60 -- Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International Inc. (incorporated herein by reference to exhibit 99(e) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993). 10.61 -- 1991 Non-Employee Directors' Option Plan of Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(f) included in BGII's Annual Report on Form 10-K for the fiscal y ear ended December 31, 1991). 10.62 -- 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). 10.63 -- Bally Gaming International, Inc. 1992 Restricted Stock Performance Plan (incorporated herein by reference to exhibit 99(d) included in BGII's Registration Statement on Form S-3 filed on November 1, 1993). 10.64 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(g) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.65 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(h) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.66 -- Award Agreement (Performance Units), dated June 8, 1994, by and between Neil Jenkins and Bally Gaming International, Inc.(incorporated herein by reference to exhibit 10(iii)(i) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.67 -- 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). 10.68 -- Employment Agreement, effective January 1, 1993, between Bally Gaming International, Inc. and Richard Gillman (incorporated herein by reference to exhibit 10(iii)(j) included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). 10.69 -- Amendment, dated June 8, 1994, to the Employment Agreement, effective as of January 1, 1993, between Richard Gillman and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(m) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994).
EXHIBIT NO. DESCRIPTION PAGE - ---------------------- ------------------------------------------------------------------------------------------ ----- 10.70 -- Employment Agreements, as amended, between Hans Kloss and each of Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit 10(iii)(b) included in BGII's Registration Statement No. 33-42227 on Form S-1, effective November 8, 1991). 10.71 -- Third Amendments, dated June 2, 1993, to Employment Agreements between Hans Kloss and each of Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated herein by reference to exhibit 99(c) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993). 10.72 -- Employment Agreement, effective as of May 15, 1993, between Bally Gaming International, Inc., Bally Gaming, Inc. and Hans Kloss (incorporated herein by reference to exhibit 99(b) included in BGII's Registration Statement No. 33-71154 on Form S-3 filed on November 1, 1993). 10.73 -- Amendment, dated June 8, 1994, to the Employment Agreement effective as of May 15, 1993, between Hans Kloss and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(q) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.74 -- Employment Agreement, dated June 30, 1994, between Neil Jenkins and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(r) included in BGII's Annual Report on Form 10-K for the period ended December 31, 1994). 10.75 -- Employment Agreement, dated as of March 24, 1995, between Scott D. Schweinfurth and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(iii)(z) included in BGII's Annual Report on Form 10-K/A for the period ended December 31, 1994). *10.76 -- Collateral Documents. 12 -- Statement re computation of ratios. 23.1 -- Consent of KPMG Peat Marwick LLP. 23.2 -- Consent of Coopers & Lybrand L.L.P. *23.3 -- Consent of Schreck, Jones, Bernhard, Woloson and Godfrey (included in its opinion filed as Exhibit 5). 24 -- Power of Attorney (included on signature page). *25 -- Statement of Eligibility of Trustee.
- ------------------------ * To be filed by amendment. EX-12 2 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 ALLIANCE GAMING CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
PRO FORMA COMBINED FINANCIAL INFORMATION ----------- SIX MONTH PERIODS ENDED YEAR ENDED FISCAL YEARS ENDED JUNE 30, DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- ----------- 1991 1992 1993 1941 1995 1994 1995 1995 --------- --------- --------- --------- --------- --------- --------- ----------- Earnings: Net income (loss)............... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,752) $ (5,016) $ (9,431) $ 11 Income taxes.................... (5,958) 241 265 290 787 2,555 Imputed interest on rents....... 16,485 16,647 19,966 21,700 21,848 10,945 10,721 22,734 Interest and debt discount amortization................... 4,663 4,505 5,046 6,830 8,133 3,915 4,288 18,121 --------- --------- --------- --------- --------- --------- --------- ----------- Earnings (loss) as defined for ratio........................ $ (626) $ 16,472 $ 21,362 $ 15,643 $ 19,489 $ 10,134 $ 6,365 $ 43,421 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Fixed Charges: Imputed interest on rents....... $ 16,485 $ 16,647 $ 19,966 $ 21,700 $ 21,843 $ 10,945 $ 10,721 $ 22,734 Interest and debt discount amortization................... 4,663 4,505 5,046 6,830 8,133 3,915 4,288 18,121 --------- --------- --------- --------- --------- --------- --------- ----------- Fixed charges as defined for ratio........................ $ 21,148 $ 21,152 $ 25,012 $ 28,530 $ 29,976 $ 14,860 $ 15,009 $ 40,855 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Ratio of earnings to fixed charges.......................... (0.03) 0.78 0.85 0.55 0.65 0.68 0.42 1.06 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Amounts by which earnings were adequate (inadequate) to cover fixed charges.................... $ (21,774) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (4,726) $ (8,644) $ 2,566 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- TWELVE- SIX MONTHS MONTH PERIODS ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, -------------------- 1995 1994 1995 ------------- --------- --------- Earnings: Net income (loss)............... $ (3,338) $ (2,448) $ (5,797) Income taxes.................... 2,642 1,202 1,289 Imputed interest on rents....... 22,515 11,105 10,886 Interest and debt discount amortization................... 17,746 9,163 8,788 ------------- --------- --------- Earnings (loss) as defined for ratio........................ $ 39,565 $ 19,022 $ 15,166 ------------- --------- --------- ------------- --------- --------- Fixed Charges: Imputed interest on rents....... $ 22,515 $ 11,105 $ 10,886 Interest and debt discount amortization................... 17,746 9,163 8,788 ------------- --------- --------- Fixed charges as defined for ratio........................ $ 40,261 $ 20,268 $ 19,674 ------------- --------- --------- ------------- --------- --------- Ratio of earnings to fixed charges.......................... .98 .94 .77 ------------- --------- --------- ------------- --------- --------- Amounts by which earnings were adequate (inadequate) to cover fixed charges.................... $ (696) $ (1,246) $ (4,508) ------------- --------- --------- ------------- --------- ---------
EX-23.1 3 CONSENT OF KPMG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Alliance Gaming Corp.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the registration statement. As noted under the captions "Forecast of Operating Income and Adjusted Operating Cash Flow" and "Experts", KPMG Peat Marwick LLP has not examined the Forecast presented under "Forecast of Operating Income and Adjusted Operating Cash Flow" and, accordingly we do not express an opinion or any other form of assurance with respect thereto. KPMG PEAT MARWICK LLP Las Vegas, Nevada March 27, 1996 EX-23.2 4 CONSENT OF COOPERS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-2 of our report, dated February 13, 1996, on our audits of the consolidated financial statements of Bally Gaming International, Inc. We also consent to the reference to our firm under the caption "Experts." As noted under the captions "Forecast of Operating Income and Adjusted Operating Cash Flow" and "Experts," Coopers & Lybrand L.L.P. neither examined nor compiled nor had any other involvement with the preparation of the accompanying prospective financial information included in this registration statement and, accordingly, we do not express an opinion or any other form of assurance with respect thereto, nor do we assume any responsibility for such prospective financial information. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada April 1, 1996 -----END PRIVACY-ENHANCED MESSAGE-----