-----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, MxzdcaZBAZbQzwxDRpHgcsjY9hJtEANrfgAYCfe0rLZTVzEB8JExw3yJ7eU9Om5C o/dNVFCKpzx4/qkNj11Mvg== 0000912057-96-008677.txt : 19960510 0000912057-96-008677.hdr.sgml : 19960510 ACCESSION NUMBER: 0000912057-96-008677 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960509 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-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-02799 FILM NUMBER: 96558391 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-4/A 1 S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996 REGISTRATION NO. 333-2799 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 10549 ------------------------ AMENDMENT NO. 3 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 7993 88-0104066 (State or Other Jurisdiction (Primary Standard (I.R.S. Employer of Industrial Identification Incorporation or Classification Code Number) Organization) Number)
4380 BOULDER HIGHWAY LAS VEGAS, NEVADA (702) 435-4200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) JOHN W. ALDERFER CHIEF FINANCIAL OFFICER 4380 BOULDER HIGHWAY LAS VEGAS, NEVADA 89121 (702) 435-4200 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) -------------------------- COPIES TO: LAWRENCE LEDERMAN, ESQ. MILBANK, TWEED, HADLEY & MCCLOY 1 CHASE MANHATTAN PLAZA NEW YORK, NEW YORK 10005 (212) 530-5000 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective and all other conditions to the Exchange Offer described in the enclosed prospectus have been satisfied or waived If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF SECURITIES BEING REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE 7 1/2% Convertible Senior Subordinated Debentures due 2003........................ $85,000,000 60% $51,000,000 $17,587.00(4) 15,287,770 Common Stock, par value $.10 per share...... shares (2) -- -- (3) 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, par 3,739,822 shares value $.10 per share....................... (2) -- -- (3)
(1) Calculated pursuant to Rule 457(f)(1), based on the average of the bid and asked price of the Registrant's 7 1/2% Convertible Subordinated Debentures due 2003, which will be cancelled in the Exchange Offer, on April 23, 1996. (2) There are being registered hereunder 15,287,770 shares of Common Stock (the maximum number of shares of Common Stock that may be issued upon conversion of the Debentures being registered hereunder) and 3,739,822 shares of Special Stock (including 850,000 shares of Special Stock representing the maximum number of shares of Special Stock that may be issued upon conversion of the Debentures being registered hereunder and 2,889,822 shares of Special Stock representing the maximum number of shares of Special Stock that may be issued as dividends on outstanding shares of Special Stock pursuant to the pay-in-kind feature of the Special Stock). (3) Pursuant to Rule 457(i), no registration fee is payable with respect to the Common Stock or Special Stock since the Common Stock or Special Stock will be issued for no separate consideration. Common Stock or Special Stock will be issued only upon the conversion of the Debentures, at an initial conversion rate of approximately 180 shares of Common Stock per $1,000 principal amount or 10 shares of Special Stock per $1,000 principal amount (as the case may be) assuming that the Automatic Conversion occurs. (4) Paid with original filing. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALLIANCE GAMING CORPORATION CROSS REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM S-4 AND PROSPECTUS FORM S-4 - ITEM NUMBER AND CAPTION - ------------------------------------------------------------------------- LOCATION IN PROSPECTUS --------------------------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus.................... FACING PAGE OF THE REGISTRATION STATEMENT; CROSS-REFERENCE SHEET; OUTSIDE FRONT COVER PAGE OF PROSPECTUS 2. Inside Front and Outside Back Cover Pages of Prospectus........................................ AVAILABLE INFORMATION; INCORPORATION BY REFERENCE; TABLE OF CONTENTS 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information............................. OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS SUMMARY; RISK FACTORS; THE EXCHANGE OFFER; CERTAIN FEDERAL INCOME TAX CONSIDERATIONS; THE MERGER AND RELATED FINANCINGS; UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION; NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION; SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE; SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII; BUSINESS; GAMING REGULATION AND LICENSING 4. Terms of the Transaction........................... PROSPECTUS SUMMARY; THE EXCHANGE OFFER; DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES; COMPARISON OF NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE DEBENTURES; CERTAIN FEDERAL INCOME TAX CONSIDERATIONS; THE MERGER AND RELATED FINANCINGS; DESCRIPTION OF CAPITAL STOCK
FORM S-4 - ITEM NUMBER AND CAPTION - ------------------------------------------------------------------------- LOCATION IN PROSPECTUS --------------------------------------------------- 5. Pro Forma Financial Information.................... PROSPECTUS SUMMARY; UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION; NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION; FORECAST OF OPERATIONS; SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE; SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII; MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6. Material Contracts With the Company Being Acquired.......................................... PROSPECTUS SUMMARY; THE EXCHANGE OFFER; THE MERGER AND RELATED FINANCINGS; BUSINESS; MANAGEMENT 7. Additional Information Required For Reoffering by Persons and Parties Deemed to be Underwriters..... Not Applicable 8. Interests of Named Experts and Counsel............. LEGAL MATTERS; EXPERTS 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.... Not Applicable B. INFORMATION ABOUT THE REGISTRANT 10. Information With Respect to S-3 Registrants........ Not Applicable 11. Incorporation of Certain Information by Reference......................................... Not Applicable 12. Information With Respect to S-2 or S-3 Registrants....................................... INCORPORATION BY REFERENCE; PROSPECTUS SUMMARY; THE EXCHANGE OFFER; UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION; NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION; SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE; THE COMPANY; THE MERGER AND RELATED FINANCINGS; BUSINESS; GAMING REGULATION AND LICENSING 13. Incorporation of Certain Information by Reference......................................... INCORPORATION BY REFERENCE 14. Information With Respect to Registrants Other Than S-2 or S-3 Registrants............................ Not Applicable
FORM S-4 - ITEM NUMBER AND CAPTION - ------------------------------------------------------------------------- LOCATION IN PROSPECTUS --------------------------------------------------- C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information With Respect to S-3 Companies.......... Not Applicable 16. Information With Respect to S-2 or S-3 Companies... Not Applicable 17. Information With Respect to Companies Other Than S-2 or S-3 Companies.............................. Not Applicable D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Authorizations Are to be Solicited............................... Not Applicable 19. Information if Proxies, Consents or Authorizations Are Not to be Solicited or in an Exchange Offer... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED MAY 9, 1996 PROSPECTUS OFFER FOR ALL OUTSTANDING 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 IN EXCHANGE FOR 7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003 OF ALLIANCE GAMING CORPORATION ALLIANCE GAMING CORPORATION ("ALLIANCE") HEREBY OFFERS, UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH IN THIS PROSPECTUS (THE "PROSPECTUS") AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL", WHICH, TOGETHER WITH THE PROSPECTUS, CONSTITUTE THE "EXCHANGE OFFER"), TO EXCHANGE UP TO $85,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS 7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003 (THE "NEW CONVERTIBLE DEBENTURES") FOR A LIKE PRINCIPAL AMOUNT OF ITS ISSUED AND OUTSTANDING 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 (THE "OLD CONVERTIBLE DEBENTURES"). THE TERMS OF THE NEW CONVERTIBLE DEBENTURES ARE SUBSTANTIALLY IDENTICAL TO THE TERMS OF THE OLD CONVERTIBLE DEBENTURES, EXCEPT THAT THE NEW CONVERTIBLE DEBENTURES WILL HAVE A LOWER CONVERSION PRICE AND WILL BE SENIOR IN RIGHT OF PAYMENT TO THE OLD CONVERTIBLE DEBENTURES. UPON CONSUMMATION OF THE MERGER (SHOULD IT OCCUR) 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 (THE "MERGER"), WITHIN 60 DAYS AFTER CONSUMMATION OF THE EXCHANGE OFFER, THE NEW CONVERTIBLE DEBENTURES WILL AUTOMATICALLY BE CONVERTED AS DESCRIBED BELOW. SEE "DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES" AND "THE MERGER AND RELATED FINANCINGS". THE NEW CONVERTIBLE DEBENTURES WILL BEAR INTEREST FROM THE DATE OF ISSUANCE, PAYABLE ON MARCH 15 AND SEPTEMBER 15 (EACH, AN "INTEREST PAYMENT DATE"), COMMENCING SEPTEMBER 15, 1996. HOLDERS WHOSE OLD CONVERTIBLE DEBENTURES ARE ACCEPTED FOR EXCHANGE WILL ALSO RECEIVE ON THE NEXT INTEREST PAYMENT DATE FOR THE OLD CONVERTIBLE DEBENTURES PAYMENT IN RESPECT OF INTEREST (PROVIDED SUCH HOLDERS' NEW CONVERTIBLE DEBENTURES HAVE NOT THERETOFORE BEEN CONVERTED) AND (TO THE EXTENT SUCH HOLDER WAS ENTITLED THERETO) LIQUIDATED DAMAGES ON THE OLD CONVERTIBLE DEBENTURES, IN EACH CASE ACCRUED TO THE DATE OF ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES. SEE "DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES" AND "COMPARISON OF NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE DEBENTURES". AT THE OPTION OF THE HOLDER, THE NEW CONVERTIBLE DEBENTURES WILL BE CONVERTIBLE INTO COMMON STOCK OF ALLIANCE, PAR VALUE $.10 PER SHARE (THE "COMMON STOCK"), PRIOR TO MATURITY, UNLESS PREVIOUSLY REDEEMED OR CONVERTED, AT A CONVERSION PRICE OF $8.33 PER SHARE (EQUIVALENT TO A CONVERSION RATE OF APPROXIMATELY 120 SHARES PER $1,000 PRINCIPAL AMOUNT OF NEW CONVERTIBLE DEBENTURES), SUBJECT TO ADJUSTMENT UNDER CERTAIN CIRCUMSTANCES. NEITHER THE OLD CONVERTIBLE DEBENTURES NOR THE NEW CONVERTIBLE DEBENTURES ARE LISTED OR QUOTED ON ANY SECURITIES EXCHANGE OR AUTOMATED QUOTATION SYSTEM. ON MAY 7, 1996, THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM (WHERE IT IS QUOTED UNDER THE SYMBOL "ALLY") WAS $4.00 PER SHARE. SEE "DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES". (CONTINUED ON NEXT PAGE) ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE 27 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS WHO ARE DETERMINING WHETHER TO EXCHANGE OLD CONVERTIBLE DEBENTURES FOR NEW CONVERTIBLE DEBENTURES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL COMMISSION NOR THE REGULATORY AUTHORITY OF ANY OTHER STATE HAS PASSED UPON OR CONFIRMED THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE , 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD CONVERTIBLE DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. The date of this Prospectus is May 8, 1996. (CONTINUED FROM PRECEDING PAGE) THE EXCHANGE OFFER WILL BE CONSUMMATED BEFORE AND IS NOT CONDITIONED ON CONSUMMATION OF THE MERGER. IF THE MERGER IS CONSUMMATED WITHIN 60 DAYS AFTER THE ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES, THEN AT THE EFFECTIVE TIME OF THE MERGER THE NEW CONVERTIBLE DEBENTURES WILL AUTOMATICALLY BE CONVERTED (THE "AUTOMATIC CONVERSION") INTO COMMON STOCK AT A CONVERSION PRICE OF $5.56 PER SHARE (EQUIVALENT TO A CONVERSION RATE OF APPROXIMATELY 180 SHARES PER $1,000 PRINCIPAL AMOUNT OF NEW CONVERTIBLE DEBENTURES), SUBJECT TO ADJUSTMENT UNDER CERTAIN CIRCUMSTANCES. A HOLDER TENDERING OLD CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER MAY ELECT, AT THE TIME SUCH OLD CONVERTIBLE DEBENTURES ARE TENDERED, TO FOREGO RECEIPT OF ALL OR ANY PORTION OF THE COMMON STOCK THAT SUCH HOLDER WOULD OTHERWISE BE ENTITLED TO RECEIVE UPON THE OCCURRENCE OF THE AUTOMATIC CONVERSION WITH RESPECT TO THE NEW CONVERTIBLE DEBENTURES ISSUED IN EXCHANGE FOR SUCH OLD CONVERTIBLE DEBENTURES AND TO RECEIVE IN LIEU THEREOF TEN SHARES OF THE 10% NON-VOTING JUNIOR CONVERTIBLE PAY-IN-KIND SPECIAL STOCK, SERIES E, OF ALLIANCE, PAR VALUE $.10 PER SHARE (THE "SERIES E PREFERRED STOCK"), FOR EACH $1,000 PRINCIPAL AMOUNT OF NEW CONVERTIBLE DEBENTURES. EACH SHARE OF SERIES E PREFERRED STOCK WILL ACCRUE DIVIDENDS AT AN ANNUAL RATE OF 10% ($10.00 PER SHARE), PAYABLE QUARTERLY IN CASH OR, AT ALLIANCE'S OPTION THROUGH THE FIRST DIVIDEND PAYMENT DATE FOLLOWING THE FIFTEENTH ANNIVERSARY OF ISSUANCE, IN ADDITIONAL SHARES OF SERIES E PREFERRED STOCK, WILL BE CONVERTIBLE INTO COMMON STOCK AT AN INITIAL CONVERSION PRICE OF $6.56 PER SHARE (EQUIVALENT TO A CONVERSION RATE OF APPROXIMATELY 15.244 SHARES OF COMMON STOCK PER SHARE OF SERIES E PREFERRED STOCK), SUBJECT TO ADJUSTMENT UNDER CERTAIN CIRCUMSTANCES, AND WILL HAVE A $100 LIQUIDATION PREFERENCE PER SHARE. SEE "DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES", "DESCRIPTION OF CAPITAL STOCK -- SPECIAL STOCK -- 10% NON-VOTING JUNIOR CONVERTIBLE PAY-IN-KIND SPECIAL STOCK, SERIES E". THE MERGER REMAINS SUBJECT TO CERTAIN CONDITIONS, INCLUDING REGULATORY APPROVALS AND THE OBTAINING OF FINANCING. ALTHOUGH THERE CAN BE NO ASSURANCE, ALLIANCE CURRENTLY EXPECTS THAT THE MERGER WILL BE CONSUMMATED WITHIN 60 DAYS AFTER THE ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES AND THUS THAT THE AUTOMATIC CONVERSION WILL OCCUR. THE NEW CONVERTIBLE DEBENTURES WILL BE REDEEMABLE IN WHOLE OR IN PART, AT THE OPTION OF ALLIANCE, FOR CASH AT ANY TIME PRIOR TO SEPTEMBER 15, 1996 IF THE PRICE OF THE COMMON STOCK EXCEEDS 250% OF THE CONVERSION PRICE (AS DEFINED IN THE INDENTURE PURSUANT TO WHICH THE NEW CONVERTIBLE DEBENTURES WILL BE ISSUED (THE "NEW CONVERTIBLE INDENTURE")) FOR 20 OUT OF ANY 30 CONSECUTIVE TRADING DAYS AND AT ANY TIME ON OR AFTER SEPTEMBER 15, 1996, IN EACH CASE AT THE REDEMPTION PRICES SET FORTH HEREIN, PLUS ACCRUED INTEREST TO THE DATE OF REDEMPTION. THE NEW CONVERTIBLE DEBENTURES ARE REDEEMABLE AT THE OPTION OF THE HOLDER UNDER CERTAIN CIRCUMSTANCES, INCLUDING A CHANGE OF CONTROL (AS DEFINED IN THE NEW CONVERTIBLE INDENTURE), AT 101% OF THE PRINCIPAL AMOUNT THEREOF, PLUS ACCRUED INTEREST TO THE DATE OF REDEMPTION. THE MERGER WILL NOT BE A CHANGE OF CONTROL FOR PURPOSES OF THIS REDEMPTION FEATURE. THE NEW CONVERTIBLE DEBENTURES ARE UNSECURED OBLIGATIONS OF ALLIANCE AND ARE SUBORDINATED IN RIGHT OF PAYMENT TO ALL EXISTING AND FUTURE SENIOR INDEBTEDNESS (AS DEFINED IN THE NEW CONVERTIBLE INDENTURE) OF ALLIANCE, WHICH EXCLUDES ALL INDEBTEDNESS (AS DEFINED IN THE NEW CONVERTIBLE INDENTURE) OF ALLIANCE'S SUBSIDIARIES, BUT WILL BE SENIOR IN RIGHT OF PAYMENT TO THE OLD CONVERTIBLE DEBENTURES, AND ALSO MAY BE MADE STRUCTURALLY SENIOR TO THE OLD CONVERTIBLE DEBENTURES. AT MARCH 31, 1996, THERE WAS NO OUTSTANDING SENIOR INDEBTEDNESS OF ALLIANCE AND $14.1 MILLION OF INDEBTEDNESS OF ALLIANCE'S SUBSIDIARIES ($140.0 MILLION AND $33.5 MILLION, RESPECTIVELY, ON A PRO FORMA BASIS AT MARCH 31, 1996 ASSUMING THE MERGER HAD OCCURRED ON THAT DATE). NEITHER THE INDENTURE GOVERNING THE OLD CONVERTIBLE DEBENTURES NOR THE NEW CONVERTIBLE INDENTURE, IMPOSES ANY LIMITATION ON ALLIANCE'S ABILITY TO INCUR ADDITIONAL SENIOR INDEBTEDNESS OR INDEBTEDNESS OF SUBSIDIARIES. THE CONSUMMATION OF THE EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF OLD CONVERTIBLE DEBENTURES BEING TENDERED OR ON CONSUMMATION OF THE MERGER. THE OBLIGATION OF ALLIANCE TO CONSUMMATE THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS, INCLUDING, AMONG OTHERS, THE REQUIREMENTS THAT (I) THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK SHALL HAVE APPROVED THE ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES AND OF THE SECURITIES ISSUABLE UPON CONVERSION THEREOF (THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK HAVE INDICATED THEIR INTENTION TO APPROVE SUCH ISSUANCE), AND (II) THE NEVADA GAMING COMMISSION AND THE MISSISSIPPI GAMING COMMISSION SHALL EACH HAVE APPROVED THE ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES AND OF THE SECURITIES ISSUABLE UPON CONVERSION THEREOF. SEE "THE EXCHANGE OFFER -- CONDITIONS TO THE EXCHANGE OFFER". ALLIANCE BELIEVES THAT ITS ABILITY TO OBTAIN FINANCING FOR, AND HENCE TO CONSUMMATE, THE MERGER WILL DEPEND ON, AMONG OTHER FACTORS, THE EXCHANGE OF A SUBSTANTIAL AMOUNT OF THE OLD CONVERTIBLE DEBENTURES. ALLIANCE WILL NOT RECEIVE ANY PROCEEDS FROM THE EXCHANGE OFFER. ALLIANCE WILL PAY ALL EXPENSES INCIDENT TO THE EXCHANGE OFFER. TENDERS OF OLD CONVERTIBLE DEBENTURES MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. IN THE EVENT ALLIANCE TERMINATES THE EXCHANGE OFFER AND DOES NOT ACCEPT FOR EXCHANGE ANY OLD CONVERTIBLE DEBENTURES, ALLIANCE WILL PROMPTLY RETURN THE OLD CONVERTIBLE DEBENTURES TO THE HOLDERS THEREOF. SEE "THE EXCHANGE OFFER -- TERMS OF THE EXCHANGE OFFER". IMPORTANT Any holder of Old Convertible Debentures desiring to tender all or any portion of his Old Convertible Debentures should either (1) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal and mail or deliver it, together with the certificates representing tendered Old Convertible Debentures and any other required documents, to The Bank of New York (the "Exchange Agent") or tender such Old Convertible Debentures pursuant to the procedure for book-entry transfer set forth in "The Exchange Offer -- Procedures for Tendering" or (2) request his broker, dealer, commercial bank, trust company or nominee to effect the transaction for him. Holders whose Old Convertible Debentures are registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such person if they desire to tender their Old Convertible Debentures. Holders who wish to tender Old Convertible Debentures and whose Old Convertible Debentures are not immediately available or who cannot comply with the procedures for book entry transfer on a timely basis may tender such Old Convertible Debentures by following the procedures for guaranteed delivery set forth in "The Exchange Offer -- Procedures for Tendering". ------------------------ NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION AS TO WHETHER ANY HOLDER OF OLD CONVERTIBLE DEBENTURES SHOULD TENDER OLD CONVERTIBLE DEBENTURES PURSUANT TO THE EXCHANGE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATIONS, INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ALLIANCE OR THE DEALER MANAGERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF ALLIANCE OR BGII SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SUCH SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER ALLIANCE NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY HOLDER OF OLD CONVERTIBLE DEBENTURES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING OLD CONVERTIBLE DEBENTURES PURSUANT TO THE EXCHANGE OFFER OR WHETHER A HOLDER OF NEW CONVERTIBLE DEBENTURES SHOULD ELECT TO RECEIVE COMMON STOCK OR SERIES E PREFERRED STOCK IF THE AUTOMATIC CONVERSION OCCURS. EACH HOLDER OF OLD CONVERTIBLE DEBENTURES MUST MAKE HIS OR HER OWN DECISION WITH RESPECT TO THE FOREGOING. AVAILABLE INFORMATION Alliance has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act, with respect to the registration of the New Convertible Debentures and will file with the Commission a Schedule 13E-4 (together with all amendments, exhibits, schedules and supplements thereto, the "Schedule 13E-4") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to the Exchange Offer. This Prospectus does not contain all the information set forth in the Registration Statement, to which reference is hereby made for further information about Alliance and the Exchange Offer. Alliance is subject to the informational requirements of the Exchange Act and in accordance therewith files periodic reports, proxy and information statements and other information with the Commission. The Registration Statement and all reports, proxy and information statements and other information filed by Alliance with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock is quoted on The Nasdaq Stock Market, Inc. ("NASDAQ"), and all reports, proxy and information statements, and other information filed with the Commission also may be inspected at the offices of NASDAQ, 1735 K Street, N.W., Washington, D.C. 20006. INCORPORATION BY REFERENCE The following documents filed with the Commission by Alliance pursuant to 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; and (2) Alliance's Quarterly Reports on Form 10-Q for the quarters ended September 30, 1995, December 31, 1995 and March 31, 1996, respectively. THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, TO ALLIANCE GAMING CORPORATION, 4380 BOULDER HIGHWAY, LAS VEGAS, NEVADA 89121 (TELEPHONE NUMBER (702) 435-4200), ATTENTION: JOHN W. ALDERFER, SENIOR VICE PRESIDENT -- FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER AND TREASURER. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NOT LATER THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE. 3 TABLE OF CONTENTS
PAGE ----- AVAILABLE INFORMATION...................................................................................... 4 INCORPORATION BY REFERENCE................................................................................. 4 PROSPECTUS SUMMARY......................................................................................... 7 The Company.............................................................................................. 7 Description of the New Convertible Debentures............................................................ 10 Description of the Series E Preferred Stock.............................................................. 13 Description of the Exchange Offer........................................................................ 14 Risk Factors............................................................................................. 16 The Merger and Related Financings........................................................................ 17 Sources and Uses of Funds................................................................................ 18 Pro Forma Business Structure of the Company.............................................................. 19 Certain Advantages and Disadvantages of the Exchange Offer............................................... 19 Summary Financial Information............................................................................ 20 RISK FACTORS............................................................................................... 27 Subordination............................................................................................ 27 High Leverage and Fixed Charges; Holding Company Structure; Working Capital.............................. 27 Risks of Equity Ownership................................................................................ Restrictions on Certain Activities....................................................................... 28 Operating History -- Recent Losses....................................................................... 29 Implementation of the Merger............................................................................. 29 Financial Forecast....................................................................................... 30 Change of Control........................................................................................ 30 Competition.............................................................................................. 31 Product Development...................................................................................... 32 Customer Financing....................................................................................... 32 Sales to Non-traditional Gaming Markets.................................................................. 32 Foreign Operations....................................................................................... 33 Key Personnel............................................................................................ 33 Strict Regulation by Gaming Authorities.................................................................. 33 Ownership Limitations on Securities of the Company....................................................... 34 Ongoing BGII Regulatory Investigations................................................................... 34 Certain Litigation; Bally Trade Name..................................................................... 34 Gaming Taxes and Value Added Taxes....................................................................... 35 Absence of Public Market; Volatility of Market Prices.................................................... 35 Dilution; Outstanding Options and Convertible Securities................................................. 36 Transfer Restrictions on Non-Tendering Holders........................................................... 36 Effect of Exchange Offer on Liquidity.................................................................... 37 Election to Receive Series E Preferred Stock upon Automatic Conversion................................... Limitations on Net Operating Losses; Discharge of Debt Income............................................ 37 Hart-Scott-Rodino Filing................................................................................. 37 THE EXCHANGE OFFER......................................................................................... 38 General.................................................................................................. 38 Terms of the Exchange Offer.............................................................................. 38 Conditions to the Exchange Offer......................................................................... 38 Expiration; Extension; Termination; Amendment............................................................ 40 Procedures for Tendering................................................................................. 41 Election to Receive Series E Preferred Stock upon Automatic Conversion................................... Withdrawal of Tenders.................................................................................... 43 Acceptance of Old Convertible Debentures; Delivery of New Convertible Debentures......................... 44 Exchange Agent and Information Agent..................................................................... 44 Dealer Managers.......................................................................................... 44
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PAGE ----- DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES.............................................................. 46 General.................................................................................................. 46 Conversion at Election of Holder......................................................................... 46 Automatic Conversion Upon Consummation of Merger......................................................... 47 Interest on New Convertible Debentures................................................................... 47 Subordination............................................................................................ 48 Redemption at Alliance's Option.......................................................................... 49 Redemption at Holder's Option............................................................................ 49 Certain Covenants........................................................................................ 50 Events of Default........................................................................................ 51 Merger and Consolidation................................................................................. 52 Assumption of Obligations................................................................................ 52 Modification and Waiver.................................................................................. 52 Satisfaction and Discharge of the New Convertible Indenture.............................................. 53 Control by Debentureholders.............................................................................. 53 Mandatory Disposition Pursuant to Gaming Laws............................................................ 53 COMPARISON OF NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE DEBENTURES.................................... 53 Reduction in Conversion Price............................................................................ 53 Automatic Conversion upon Consummation of Merger......................................................... 54 Subordination............................................................................................ 54 Registration Rights; Liquidated Damages.................................................................. 54 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................................................. 56 Consideration Allocable to Interest...................................................................... 56 The Transaction.......................................................................................... 57 Drop-Down Transaction.................................................................................... 57 Market Discount.......................................................................................... 57 New Convertible Debentures............................................................................... 58 Common Stock and Series E Preferred Stock................................................................ 58 Proposed Legislation..................................................................................... 59 Backup Withholding....................................................................................... 60 Holders of Old Convertible Debentures Who Do Not Participate in the Exchange Offer....................... 60 THE MERGER AND RELATED FINANCINGS.......................................................................... 62 MARKET PRICE DATA AND DIVIDEND POLICY...................................................................... 65 DILUTION................................................................................................... 66 CAPITALIZATION............................................................................................. 67 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............................................... 69 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION...................................... 73 SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW...................................................... 78 FORECAST OF OPERATIONS..................................................................................... 80 SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST................................ 83 SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE...................................................... 93 SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII.......................................................... 95 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 97 Introduction............................................................................................. 97 Liquidity and Capital Resources of Alliance.............................................................. 97 Liquidity and Capital Resources of the Company (Pro Forma)............................................... 100 Alliance Results of Operations........................................................................... 101 BGII Results of Operations............................................................................... 106
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PAGE ----- BUSINESS................................................................................................... 114 Overview................................................................................................. 114 Business Strategy........................................................................................ 114 Business Units........................................................................................... 115 Gaming Machine Manufacturing and Systems................................................................. 116 German Operations........................................................................................ 122 Gaming Machine Management Operations..................................................................... 125 Casino Operations........................................................................................ 128 Business Development Activity............................................................................ 129 Patents, Copyrights and Trade Secrets.................................................................... 129 Employees and Labor Relations............................................................................ 130 Litigation Relating to the Merger........................................................................ 130 Other Litigation......................................................................................... 132 Environmental Matters.................................................................................... 133 GAMING REGULATION AND LICENSING............................................................................ 133 Nevada................................................................................................... 134 Louisiana................................................................................................ 138 Mississippi.............................................................................................. 139 New Jersey............................................................................................... 141 Additional Domestic Jurisdictions........................................................................ 141 Germany.................................................................................................. 142 MANAGEMENT................................................................................................. 144 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT............................................ 147 Stockholders Agreement................................................................................... 149 Outstanding Options and Convertible Securities........................................................... 149 DESCRIPTION OF CAPITAL STOCK............................................................................... 151 Common Stock............................................................................................. 151 Special Stock............................................................................................ 151 Provisions Applicable to Certain Holders................................................................. 154 INTEREST IN OLD CONVERTIBLE DEBENTURES..................................................................... 154 CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE OLD CONVERTIBLE DEBENTURES.... 154 LEGAL MATTERS.............................................................................................. 155 EXPERTS.................................................................................................... 155 INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
6 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) THE TERM "ALLIANCE" MEANS ALLIANCE GAMING CORPORATION AND ITS SUBSIDIARIES TAKEN AS A WHOLE PRIOR TO THE MERGER, (II) THE TERM THE "COMPANY" 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 EXCHANGE OFFER, THE OFFERINGS (AS DEFINED BELOW) AND THE PRIVATE PLACEMENT (AS DEFINED BELOW), (III) THE TERM "BGII" MEANS BALLY GAMING INTERNATIONAL, INC. AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, PRIOR TO THE MERGER AND (IV) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION IN THE 15% PREFERRED STOCK OFFERING (AS DEFINED BELOW). HOLDERS OF OLD CONVERTIBLE DEBENTURES 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. UNLESS THE CONTEXT OTHERWISE REQUIRES, THIS PROSPECTUS, INCLUDING THE PRO FORMA FINANCIAL INFORMATION, THE SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW AND THE FORECAST OF OPERATIONS INCLUDED HEREIN, ASSUMES THE EXCHANGE OF $50.0 MILLION PRINCIPAL AMOUNT OF OLD CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER AND CONSUMMATION OF THE MERGER AND CONVERSION INTO COMMON STOCK OF ALL NEW CONVERTIBLE DEBENTURES. SEE "THE MERGER AND RELATED FINANCINGS". OVERVIEW The Exchange Offer is being made to enhance Alliance's capital structure and to facilitate financing of the pending Merger. If the Merger occurs within 60 days after the issuance of the New Convertible Debentures, the New Convertible Debentures will automatically convert into Common Stock at a conversion price of $5.56 per share or, if a holder tendering Old Convertible Debentures in the Exchange Offer so elects at the time such Old Convertible Debentures are tendered, the New Convertible Debentures received in exchange therefor will automatically convert into shares of Series E Preferred Stock that are in turn each convertible into Common Stock at a conversion price of $6.56 per share. If the Merger does not occur within such 60-day period, the New Convertible Debentures will remain outstanding with a conversion price of $8.33 per share. The conversion price of the Old Convertible Debentures is $10.00 per share. The New Convertible Debentures will be senior in right of payment to the Old Convertible Debentures. See "-- Description of the New Convertible Debentures". THE COMPANY BACKGROUND Alliance is a diversified gaming company that currently operates through its subsidiaries approximately 6,000 electronic gaming machines (primarily video poker machines and slot machines) and also owns and operates a small casino in each of Vicksburg, Mississippi and Sparks/Reno, Nevada. Alliance is the largest gaming machine management operator in Nevada and is the exclusive operator of video poker devices at the only racetrack and ten associated off-track betting parlors ("OTBs") in the greater New Orleans area. As part of its long-term growth strategy, Alliance entered into an Agreement and Plan of Merger in October 1995, as amended in January 1996 (the "Merger Agreement"), with BGII pursuant to which BGII will become a wholly-owned subsidiary of Alliance. BGII, through subsidiaries in the United States and Germany, is a leading designer, manufacturer and distributor of electronic gaming machines. BGII also designs, assembles and sells computerized monitoring systems for slot and video gaming machines which provide casino operators with on-line real time player tracking, security and maintenance capabilities. BGII is currently the second largest manufacturer of casino-style electronic gaming machines in North America and since 1993 has made significant inroads in recapturing a portion of its once dominant market share of the late 1970s. Unit sales of electronic gaming machines by BGII's domestic subsidiary have approximately doubled from the level of unit sales in 1993. Although BGII sells electronic gaming machines 7 to most of the major participants in the United States casino industry, the Company hopes to continue to increase its penetration in such casinos by capitalizing on Alliance's and BGII's managements' relationships within the gaming industry together with the performance capabilities of its current products. Alliance believes that the Merger represents an opportunity to acquire an established electronic gaming machine manufacturer with a well-recognized presence in the gaming industry and a significant base of assets and experience. Management estimates that the installed base of casino-style electronic gaming machines (for these purposes, primarily slot and video machines) is approximately 650,000 units, of which approximately 50% are located in North America, and that annual sales in North America have grown from approximately 30,000 units in 1991 to approximately 89,000 units in 1995, reflecting a period of accelerated growth in the number and size of casinos in North America. Historically, growth in the gaming machine market has been fueled principally by sales to new casinos and to a lesser degree by replacement of machines (which have an average replacement cycle of three to seven years) and the application of new technology. In the future, management believes that annual sales growth resulting from replacement requirements and the application of new technology should outpace growth in demand generated by new casino openings, which growth rate is expected to decline. Management believes that the Merger provides Alliance with an avenue for entering a business historically characterized by effective barriers to entry in that the BGII assets being acquired are difficult to replicate and would require significant time and investment to develop successfully. For the twelve-month period ended December 31, 1995, on a pro forma basis after giving effect to the Merger and the related transactions described herein, the Company would have had revenues and Adjusted Operating Cash Flow (as defined; see the introduction to "Summary Financial Information") of approximately $401.0 million and $47.3 million, respectively, and for the three months ended March 31, 1996 would have been $99.1 million and $11.3 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 if the Merger occurs will be on BGII's domestic subsidiary, key elements of which include: - to capitalize on BGII's strong product line and current sales momentum as represented by unit sales of electronic gaming machines by BGII's domestic subsidiary which have approximately doubled from the level of unit sales in 1993; - to develop and market premier gaming entertainment products employing available information technology currently in common use in other segments of the entertainment industry, but not yet prevalent in the gaming industry; - to reduce costs through enhanced operating efficiencies while improving the quality of products and services; and - to capitalize on relationships and enter into alliances with technology and entertainment companies, with a particular focus on the application of technology in the gaming entertainment business. The Company believes it has assembled a strong and experienced management team to implement its strategy and capitalize on the opportunities in the gaming industry. Steve Greathouse, Chairman of the Board of Directors, President and Chief Executive Officer of Alliance, has over 20 years of experience in the gaming industry and has strong relationships with many casino operators. Prior to joining Alliance in 1994, Mr. Greathouse was President of the Harrah's Casino Hotels Division of The Promus Companies Incorporated. Craig Fields, Vice Chairman of the Board of Directors of Alliance, who is expected to assume a senior management position if the Merger is consummated, 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, if the Merger occurs, join the senior management team. Since 8 becoming President of BGII in 1993, Mr. Kloss has been instrumental in implementing changes in BGII's United States-based operations which have contributed to improvements in the results of such operations. See "Management". BUSINESS UNITS Following the Merger, the Company will operate through four business units: (i) casino-style electronic gaming machine manufacturing and systems, (ii) German operations (consisting of the manufacture and distribution of wall-mounted gaming machines and the distribution of other recreational and amusement machines), (iii) gaming machine management operations and (iv) casino operations. The business units described in clauses (i) and (ii) are currently operated by BGII and will not become part of the Company unless the Merger occurs, and the business units described in clauses (iii) and (iv) are currently operated by Alliance. GAMING MACHINE MANUFACTURING AND SYSTEMS. BGII's United States subsidiary, Bally Gaming, Inc., currently has two components: a domestic-based electronic gaming machine manufacturing unit ("Gaming") and a data systems and software and hardware support service unit ("Systems"). Gaming designs, manufactures and distributes a variety of slot machines and video gaming machines. Gaming is the second largest electronic gaming machine manufacturer in North America, and has significantly increased its penetration in the gaming machine market with the successful introduction of its ProSeries-TM- and Game Maker-Registered Trademark- lines in 1993 and 1994, respectively. In the United States, Gaming historically has marketed electronic gaming machines, primarily to casinos in Atlantic City and Nevada, and more recently has marketed such machines in other jurisdictions. Gaming also distributes electronic gaming machines outside the United States, principally in Europe through Bally Gaming International GmbH ("GmbH") and, to a lesser extent, in Canada, the Far East, Latin America and the Caribbean. Systems designs, assembles and sells, primarily to casino operators in the United States, computerized player tracking, cash monitoring, accounting and security data systems for electronic gaming machines. Since the introduction of its SDS 6000 system in the first quarter of 1993 and subsequent upgrades, Systems has rapidly expanded its presence in casino properties. By the end of 1993, Systems had 40,000 of its game monitoring units ("GMUs") installed in 33 casino properties. This has since increased to 59,000 GMUs installed in 56 casino properties as of April 1, 1996. For the twelve-month period ended December 31, 1995, EBITDA (as defined; see footnote (1) to "Summary Financial Information -- Summary Historical Financial Information -- Alliance Gaming Corporation") for the gaming machine manufacturing and systems unit was approximately $11.7 million. GERMAN OPERATIONS. BGII's German subsidiaries, which operate under the name Bally Wulff (collectively, "Wulff"), design, manufacture and distribute coin-operated, wall-mounted, electronic gaming machines known as wall machines. Management estimates that Wulff has approximately 25% of the installed base of the wall machine market which exists almost exclusively in Germany and that Wulff and the two other major competitors have a greater than 90% market share. Wulff markets its own wall machines as well as wall machines and other recreational and amusement machines manufactured by third parties, including pool tables, air-hockey and pinball machines, jukeboxes and arcade games, to operators of arcades, taverns, hotels and restaurants primarily in Germany. For the twelve-month period ended December 31, 1995, EBITDA for the German operations unit was approximately $15.2 million. GAMING MACHINE MANAGEMENT OPERATIONS. Alliance's Nevada gaming machine management operations, which are the largest in Nevada, involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other electronic gaming machines in local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores operated by third parties. Alliance enters into contracts with these parties whereby Alliance either receives a portion of the revenue generated by the machines or pays rent and receives all of the revenues generated by the machines. In Nevada, Alliance operated approximately 5,357 units installed in 528 locations as of April 1, 1996. As of March 31, 1996, the weighted average remaining term of Alliance's revenue-sharing arrangements was approximately 3.6 years. Alliance's customer and machine base has remained relatively stable 9 over the last five years. These operations target local residents who generally frequent establishments close to their homes. In December 1995, Alliance launched Gambler's Bonus, a proprietary product which brings large casino gaming amenities to local establishments, such as multi-location progressive jackpots, bigger jackpot payouts and traditional players' club enhancements. Since launching Gambler's Bonus, the gaming machines linked to Gambler's Bonus have experienced an increase in average net win per day per machine. As of April 1, 1996, Alliance had the Gambler's Bonus system installed in 23 locations representing approximately 360 machines, and management expects to have Gambler's Bonus installed in approximately 88 locations or a total of 980 machines by June 1996. In 1992, Alliance expanded its machine management operations to Louisiana, where it has an exclusive 10-year contract (seven years remaining, plus a five-year right of first refusal thereafter) to operate approximately 700 video poker devices at the only racetrack and 10 associated OTBs in the greater New Orleans area. For the twelve-month period ended December 31, 1995, EBITDA for the gaming machine management operations unit was $18.3 million. CASINO OPERATIONS. Alliance owns and operates two small full-service casinos. In Mississippi, the Company's Rainbow Casino is part of the Vicksburg Landing facility which opened in July 1994 and is the only casino/family entertainment complex of its kind in Mississippi. The Rainbow Casino currently has approximately 589 electronic gaming machines and 28 table games. In addition to the approximately 24,000-square foot Rainbow Casino, Vicksburg Landing opened an 89-room hotel and a 10-acre indoor/ outdoor amusement park in May 1995. Although the hotel and amusement park are not owned or operated by Alliance, management believes that such facilities have contributed significantly to the recent strong financial results of the Rainbow Casino. Alliance's Plantation Station Casino located in Reno/Sparks, Nevada is a 20,000-square foot casino which currently contains approximately 453 electronic gaming machines, keno and 10 table games in addition to a 300-seat restaurant owned by Alliance. For the twelve-month period ended December 31, 1995, EBITDA for the casino operations unit was $10.5 million. Alliance is a Nevada corporation organized in 1968. Alliance's principal executive offices are located at 4380 Boulder Highway, Las Vegas, Nevada 89121, and its telephone number is (702) 435-4200. DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES Securities Offered................ Up to $85,000,000 aggregate principal amount of New Convertible Debentures. The terms of the New Convertible Debentures and the Old Convertible Debentures are substantially identical in all material respects, except that the New Convertible Debentures will have a lower conversion price, will be senior in right of payment to the Old Convertible Debentures and will automatically convert as described below upon consummation of the Merger (should it occur within 60 days of issuance). See "Description of the New Convertible Debentures". Interest Rate..................... 7 1/2% per annum. Interest Payment Dates............ March 15 and September 15, commencing September 15, 1996. Maturity.......................... September 15, 2003. Ranking........................... The New Convertible Debentures are unsecured obligations of Alliance and are subordinated to all existing and future Senior Indebtedness of Alliance, and effectively subordinated to all Indebtedness of Alliance's subsidiaries, but will be senior to the Old Convertible Debentures. At March 31, 1996, there was no outstanding Senior Indebtedness of Alliance, the total amount of outstanding Indebtedness of Alliance's subsidiaries was $14.1 million ($140.0 million and $33.5 million, respectively, on a pro forma basis at March 31, 1996 assuming the Merger had occurred
10 on that date). At March 31, 1996, there was no outstanding Indebtedness of Alliance ranking on a parity with the New Convertible Debentures. In addition, the New Convertible Debentures may become structurally senior to the Old Convertible Debentures. See "Risk Factors -- Subordination" and "-- High Leverage and Fixed Charges; Holding Company Structure; Working Capital" and "Description of the New Convertible Debentures -- Subordination". Conversion Rights................. At the option of the holder, the New Convertible Debentures are convertible into shares of Common Stock at any time prior to maturity, unless previously redeemed or converted, at a conversion price of $8.33 per share, subject to adjustment under certain circumstances. Accordingly, each $1,000 principal amount of New Convertible Debentures is convertible initially into approximately 120 shares of Common Stock subject to adjustment. Automatic Conversion upon Occurrence of Merger............. If the Merger is consummated within 60 days after the issuance of the New Convertible Debentures, then at the effective time of the Merger, the New Convertible Debentures will be automatically converted into Common Stock at the conversion price of $5.56 per share (equivalent to a conversion rate of approximately 180 shares of Common Stock per $1,000 principal amount of New Convertible Debentures), subject to adjustment in certain circumstances. A holder tendering Old Convertible Debentures in the Exchange Offer may elect in the Letter of Transmittal, at the time such Old Convertible Debentures are tendered, to forego receipt of all or any portion of the Common Stock that such holder would otherwise receive upon the occurrence of the Automatic Conversion with respect to the New Convertible Debentures issued in exchange for such Old Convertible Debentures and to receive in lieu thereof ten shares of Series E Preferred Stock for each $1,000 principal amount of New Convertible Debentures. See "The Exchange Offer -- Election to Receive Series E Preferred Stock upon Automatic Conversion", "Description of the New Convertible Debentures -- Automatic Conversion upon Consummation of Merger" and "Description of Capital Stock -- Special Stock -- 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E". The shares of Common Stock to be issued upon the Automatic Conversion will be issued at a price significantly above book value per share, so the holders of New Convertible Debentures will, upon the Automatic Conversion, suffer immediate and substantial dilution. See "Risk Factors -- Dilution; Outstanding Options and Convertible Securities" and "Dilution". The Merger remains subject to certain conditions, including regulatory approvals and the obtaining of financing. ALTHOUGH THERE CAN BE NO ASSURANCE, ALLIANCE CURRENTLY EXPECTS THAT THE MERGER WILL BE CONSUMMATED WITHIN 60 DAYS AFTER THE NEW CONVERTIBLE DEBENTURES ARE ISSUED AND THUS THAT THE AUTOMATIC CONVERSION WILL OCCUR. Mandatory Redemption.............. None. Optional Redemption............... The New Convertible Debentures are redeemable in whole or in part at the option of Alliance for cash (i) at any time prior to
11 September 15, 1996 at 105.63% of the principal amount thereof, plus accrued interest to the date of redemption, in the event that the trading price of the Common Stock exceeds 250% of the Conversion Price (as defined in the New Convertible Indenture) for 20 trading days during any period of 30 consecutive trading days after September 15, 1996, and (ii) at any time thereafter, at the redemption prices set forth herein, plus accrued interest to the date of redemption. Redemption at Holder's Option..... If a Change in Control (as defined in the New Convertible Indenture) or other Redemption Event (as defined in the New Convertible Indenture) occurs, subject to certain conditions, each holder of New Convertible Debentures will have the right to require Alliance to purchase all or any part of such holder's New Convertible Debentures at 101% of the principal amount thereof, plus accrued interest to the date of purchase. The right to require Alliance to redeem the New Convertible Debentures as a result of the occurrence of a Redemption Event could create an event of default under Senior Indebtedness as a result of which any re- demption could, absent a waiver, be blocked by the subordination provisions of the Senior Indebtedness. Moreover, there can be no assurance that, in the event a Redemption Event were to occur, Alliance would have or be able to obtain sufficient funds to satisfy its obligation to purchase New Convertible Debentures. See "Risk Factors -- Change of Control" and "Description of New Convertible Debentures -- Redemption at Holder's Option". Interest and Liquidated Damages... The New Convertible Debentures will bear interest from the date of issuance, payable on each of the Interest Payment Dates, commencing September 15, 1996. In addition, holders whose Old Convertible Debentures are accepted for exchange will also receive on the next interest payment date for the Old Convertible Debentures payment in respect of interest (provided such holders' New Convertible Debentures have not theretofore been converted) and (to the extent such holder was entitled thereto) liquidated damages on the Old Convertible Debentures, in each case accrued to the date of issuance of the New Convertible Debentures. The amount of liquidated damages accrued and unpaid to the date hereof is $.71 per $1,000 principal amount of Old Convertible Debentures, and additional liquidated damages are cur- rently accruing at the rate of $.10 per $1,000 principal amount per week. See "Description of the New Convertible Debentures" and "Comparison of New Convertible Debentures and Old Convertible Debentures -- Redemption Rights; Liquidated Damages". Absence of Public Market.......... Alliance does not currently intend to list the New Convertible Debentures on any securities exchange or to seek approval for quotation through any automated quotation system. See "Risk Factors -- Absence of Public Market; Volatility of Market Prices". Moreover, until the earlier of (i) the 60th day after issuance of the New Convertible Debentures and (ii) the effective time of the Merger (if it occurs), the liquidity of the New Convertible Debentures may be adversely affected by the fact that upon an Automatic Conversion some New Convertible Debentures
12 would be converted into Common Stock while other New Convertible Debentures would be converted into Series E Preferred Stock, and different New Convertible Debentures may trade at different prices depending on the class of capital stock into which such New Convertible Debentures would be converted in the event of the Automatic Conversion.
13 DESCRIPTION OF SERIES E PREFERRED STOCK Dividends......................... Each share of the Series E Preferred Stock will accrue dividends at an annual rate of 10% ($10.00 per share), payable quarterly in cash or, at Alliance's option through the first dividend payment date following the fifteenth anniversary of issuance, in additional shares of Series E Preferred Stock. Alliance currently expects that so long as the Series E Preferred Stock remains outstanding, Alliance will, subject to the terms thereof, pay dividends thereon accruing through the first dividend payment date occurring after the fifteenth anniversary of the Effective Time in additional shares of such stock, rather than in cash. Voting Rights..................... Upon default in the payment of dividends for six consecutive dividend payment dates, the number of directors constituting the Board of Directors of Alliance (the "Alliance Board") will be increased by two, and the holders of shares of Series E Preferred Stock will have the right, voting separately as a class with the holders of any parity stock, to elect two directors to the Alliance Board. Such right will exist until all dividends accumulated on such shares have been paid or set apart for payment in full. Other than as described above, the holders of shares of Series E Pre- ferred Stock have no other voting rights except as required by law. Conversion........................ The Series E Preferred Stock will be convertible, in whole or in part, into shares of Common Stock at any time at the option of the holder at a conversion price of $6.56 per share (equivalent to a conversion rate of approximately 15.244 shares of Common Stock per share of Series E Preferred Stock), subject to adjustment in certain circumstances. Ranking........................... Upon liquidation, the holders of shares of Series E Preferred Stock are entitled (subject to prior preferences and other rights of any senior equity securities and in proportion to any parity stock) to be paid in cash out of the assets of Alliance an amount equal to $100 per share (the "Liquidation Value"), plus an amount equal to all accrued and unpaid dividends and distributions. The Series E Preferred Stock will rank junior in right of payment to the 15% Non-Voting Pay-in-Kind Special Stock, Series B, par value $.10 per share (the "15% Preferred Stock"), which is to be issued as part of the Merger consideration and in a public offering. There is no limitation on Alliance's ability to issue additional equity securities ranking senior to the Series E Preferred Stock. Redemption........................ The Series E Preferred Stock can be redeemed at any time in whole or in part at the option of Alliance for cash at a price equal to the Liquidation Value plus any accrued and unpaid dividends or distributions to the date of redemption. Absence of Public Market.......... Alliance does not currently intend to list the Series E Preferred Stock on any securities exchange or to seek approval for quotation through any automated quotation system. See "Risk Factors -- Absence of Public Market; Volatility of Market Prices".
14 DESCRIPTION OF THE EXCHANGE OFFER The Exchange Offer................ The New Convertible Debentures are being offered in exchange for a like principal amount of Old Convertible Debentures. See "The Exchange Offer -- Terms of the Exchange Offer". Purpose........................... The Exchange Offer is being made to enhance Alliance's capital structure and to facilitate financing of the Merger. Tenders; Expiration Date.......... The Exchange Offer will expire at 12:00 midnight, New York City time, on June , 1996, unless extended by Alliance. See "The Exchange Offer -- Expiration; Extension; Termination; Amendment". Withdrawal of Tenders............. Tenders of Old Convertible Debentures may be withdrawn at any time prior to the expiration of the Exchange Offer. Thereafter, such tenders are irrevocable, except that they may be withdrawn at any time after the expiration of 40 business days from the commencement of the Exchange Offer, unless accepted for exchange prior to that date. See "The Exchange Offer -- Withdrawal of Tenders". Acceptance of Old Convertible Debentures and Delivery of New Convertible Debentures........... Alliance will accept for exchange any and all Old Convertible Debentures that are properly tendered and not withdrawn prior to the Expiration Date, subject to the terms and conditions of the Exchange Offer. The New Convertible Debentures to be issued pursuant to the Exchange Offer will be delivered as promptly as practicable following the Expiration Date. See "The Exchange Offer -- Acceptance of Old Convertible Debentures; Delivery of New Convertible Debentures". Alliance reserves the right, subject to applicable laws, to delay acceptance for exchange, to delay the exchange or to terminate the Exchange Offer. Election to Receive Series E Pre- ferred Stock upon Automatic Con- version.......................... If a holder tendering Old Convertible Debentures in the Exchange Offer desires to receive Series E Preferred Stock upon the Automatic Conversion with respect to all or any part of the New Convertible Debentures received in exchange for such Old Convertible Debentures, such holder must so elect at the time of such tender by following the procedures described in "The Exchange Offer -- Election to Receive Series E Preferred Stock upon the Automatic Conversion". Unless these election procedures are followed, all of the New Convertible Debentures issued in exchange for such Old Convertible Debentures will be automatically converted into Common Stock upon the Automatic Conversion. Procedures for Tendering Old Convertible Debentures; Guaranteed Delivery.............. Each holder of Old Convertible Debentures wishing to accept the Exchange Offer must either (i) complete and sign the Letter of Transmittal (or a facsimile thereof), in accordance with the instructions contained herein and therein, and deliver such Letter of Transmittal, together with any signature guarantees and any other documents required by the Letter of Transmittal, to the
15 Exchange Agent at one of its addresses set forth on the back cover page of this Prospectus and either (a) the tendered Old Convertible Debentures must be physically delivered to the Exchange Agent or (b) the Old Convertible Debentures must be transferred pursuant to the procedures for book-entry transfer described herein and a confirmation of such book-entry transfer must be received by the Exchange Agent, in each case on or prior to the Expiration Date, or (ii) comply with the guaranteed delivery procedures set forth herein. Any beneficial owner of Old Convertible Debentures whose securities are registered in the name of a broker, dealer, commercial bank, trust company or other nominee is urged to contact the registered holder(s) of such securities promptly to instruct the registered holder(s) whether to tender such beneficial owner's securities. See "The Exchange Offer -- Procedures for Tendering". Conditions........................ The obligation of Alliance to consummate the Exchange Offer is subject to certain conditions, including, among others, the requirements that (i) the holders of a majority of the outstanding shares of Common Stock shall have approved the issuance of the New Convertible Debentures and of the securities issuable upon conversion thereof (the holders of a majority of the outstanding shares of Common Stock have indicated their intention to approve such issuance) and (ii) the Nevada Gaming Commission and the Mississippi Gaming Commission shall each have approved the issuance of the New Convertible Debentures and of the Common Stock and Series E Preferred Stock upon conversion thereof. See "The Exchange Offer -- Conditions to the Exchange Offer". Certain Federal Income Tax Considerations................... For a discussion of certain federal income tax consequences of the matters discussed herein to holders of Old Convertible Debentures, see "Certain Federal Income Tax Considerations". Exchange Agent.................... The Bank of New York. See "The Exchange Offer -- Exchange Agent and Information Agent". Information Agent................. Georgeson & Company Inc. See "The Exchange Offer -- Ex- change Agent and Information Agent".
16 RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered in connection with deciding whether to tender Old Convertible Debentures in the Exchange Offer. CERTAIN ADVANTAGES AND DISADVANTAGES OF THE EXCHANGE OFFER Set forth below is a summary of certain potential benefits and risks to be taken into account in considering whether to participate in the Exchange Offer. This is not intended to be tax or legal advice and holders should seek their own advice and counsel regarding the possible effects of the Exchange Offer. ADVANTAGES TO TENDERING DEBENTUREHOLDERS IF MERGER OCCURS - Conversion price will decrease from $10.00 to $5.56, resulting in issuance of more Common Stock and/or Series E Preferred Stock on conversion IF MERGER DOES NOT OCCUR - Conversion price will decrease from $10.00 to $8.33 - New Convertible Debentures will be senior in right of payment to the Old Convertible Debentures DISADVANTAGES TO TENDERING DEBENTUREHOLDERS IF MERGER OCCURS (RESULTING IN AUTOMATIC CONVERSION) - Holders of Common Stock and Series E Preferred Stock have the lowest two priorities in the capital structure of the Company - Series E Special Stock may have less liquidity than the Old Convertible Debentures IF MERGER DOES NOT OCCUR - Liquidity of New Convertible Debentures may be less than that of the Old Convertible Debentures currently ADVANTAGES TO NON-TENDERING DEBENTUREHOLDERS IF MERGER OCCURS - Holders of Old Convertible Debentures will remain debtholders of the combined company and will therefore have priority in right of payment over holders of equity securities, including the Common Stock and the Series E Preferred Stock - Holders of Old Convertible Debentures will continue to be entitled to receive fixed interest payments DISADVANTAGES TO NON-TENDERING DEBENTUREHOLDERS IF MERGER OCCURS - Will be subordinated to all other indebtedness, including substantial amounts of senior debt - Fewer Old Convertible Debentures outstanding could reduce liquidity IF MERGER DOES NOT OCCUR - Old Convertible Debentures will be subordinated to New Convertible Debentures - Fewer Old Convertible Debentures outstanding could reduce liquidity 17 THE MERGER AND RELATED FINANCINGS Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Alliance has agreed to acquire all of the stock of BGII for a price of approximately $77.2 million in cash, $35.7 million in the 15% Preferred Stock and $2.9 million of Common Stock as set forth below. In addition, the Company would generally assume BGII's obligations with respect to each outstanding BGII stock option and warrant, subject to certain modifications approved by BGII stockholders, and will retire approximately $53.3 million of outstanding debt of BGII (including prepayment premium, original issue discount and accrued and unpaid interest through the effective date of the Merger). At meetings held on April 2, 1996, the shareholders of Alliance and BGII approved the Merger Agreement and the Merger. Alliance intends to seek shareholder approval by written consent of (i) the issuance of the New Convertible Debentures pursuant to the Exchange Offer and (ii) the issuance of securities issuable directly or indirectly on conversion thereof (the "Issuance Proposal"), and approval of the Issuance Proposal is a condition to Alliance's obligation to consummate the Exchange Offer. Holders of a majority of the outstanding shares of Common Stock have indicated their intention to vote in favor of the Issuance Proposal, which would insure adoption of the Issuance Proposal. See "The Exchange Offer -- Conditions to the Exchange Offer" and "The Merger and Related Financings". As currently contemplated, the Merger and related transactions will be financed through (i) a private placement of an aggregate of $5.0 million of equity of Alliance (the "Private Placement"), (ii) the issuance of an aggregate of $15.0 million gross proceeds of 15% Preferred Stock, plus pay-in-kind dividends accrued from May 3, 1996, through a public offering (excluding any over-allotment option in connection therewith, the "15% Preferred Stock Offering") and (iii) the issuance of $140.0 million aggregate principal amount of Senior Secured Notes due 2003 (the "Senior Notes") through a public offering (the "Note Offering" and, together with the 15% Preferred Stock Offering, the "Offerings"). The Offerings are contingent upon and will close simultaneously with the Merger. The actual amounts and securities issued will depend upon a number of factors, including market conditions and other factors beyond the control of Alliance and, therefore, assuming the Merger occurs, could change significantly. The Merger, the Exchange Offer, the Private Placement, the 15% Preferred Stock Offering and the Note Offering are sometimes referred to herein collectively as the "Transaction". See "The Merger and Related Financings". The 15% Preferred Stock Offering and the Note Offering are each to be made by Alliance exclusively pursuant to separate prospectuses. In the Private Placement, 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 per share and the average of the last sales price of the Common Stock for the five trading days immediately preceeding the Merger. The 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 Automatic Conversion, with the remainder to be in the form of non-voting special stock convertible into Common Stock. Alliance anticipates, and it is assumed for all purposes herein, that all of the $5.0 million will be issued in the form of Common Stock. The Private Placement will close simultaneously with the Merger. The consummation of the Merger is contingent on completion of the Offerings and obtaining requisite regulatory approval. The Merger Agreement terminates on June 18, 1996. If the Merger is not consummated by that date, Alliance may seek an extension, but has made no determination in that regard. Alliance believes that its ability to obtain financing for, and hence to consummate, the Merger will depend on, among other factors, the exchange of a substantial amount of the Old Convertible Debentures. 18 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 the other elements of the Transaction, based on the Company's cash and debt balances as of March 31, 1996. The actual balances and number of shares outstanding will vary based on the date of consummation of the Transaction and the securities issued in connection with the Merger and the financing thereof. (IN MILLIONS) ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS CASH SOURCES: CASH USES:
Senior Notes............................ $ 140.0 15% Preferred Stock..................... 15.0 Common Stock (Private Placement)........ 5.0 --------- Total Cash Sources.................. 160.0 Cash to BGII Stockholders(a)............ $ 77.2 Retire BGII Debt(b)..................... 53.3 Employee Contract Termination Costs and Performance Unit Awards(c)......... 7.6 Fees and Expenses(d).................... 21.9 --------- Total Cash Uses..................... 160.0
NON-CASH SOURCES: NON-CASH USES:
New Convertible Debentures issued and automatically converted into Common Stock.................................. $ 50.0 15% Preferred Stock to BGII Stockholders(e)........................ 35.7 Common Stock to BGII Stockholders(f).... 2.9 Common Stock(c)......................... 3.7 --------- Total Non-Cash Sources................ 92.3 --------- Total Sources....................... $ 252.3 --------- --------- Retire Old Convertible Debentures....... $ 50.0 15% Preferred Stock to BGII Stockholders(e)........................ 35.7 Common Stock to BGII Stockholders(f).... 2.9 Common Stock(c)......................... 3.7 --------- Total Non-Cash Uses................... 92.3 --------- Total Uses.......................... $ 252.3 --------- ---------
- -------------------------- (a) Represents the cash consideration to be paid to BGII stockholders in the Merger consisting of $7.83 per share of BGII common stock plus interest accruing at a rate of 5.5% per annum from May 3, 1996 to the effective time of the Merger (but not later than June 18, 1996, unless extended), calculated in accordance with the terms of the Merger Agreement. (b) Represents retirement of the following debt of BGII outstanding at March 31, 1996 together with accrued and unpaid interest thereon: (i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a prepayment price of 101% plus original issue discount of $0.3 million; (ii) $9.3 million under a bank revolving line of credit of Bally Gaming Inc., a wholly owned subsidiary of BGII; (iii) other notes payable of BGII, aggregating $1.6 million; and (iv) accrued and unpaid interest on the foregoing debt instruments, through the effective time of the Merger, totaling approximately $2.0 million. (c) Includes $5.0 million payable in cash to Richard Gillman, Chairman of the Board and Chief Executive Officer of BGII, and $1.3 million payable to Neil Jenkins, Executive Vice President and Secretary of BGII, consisting of $0.9 million in cash and $0.4 million in Common Stock, all pursuant to agreements with Alliance in connection with the termination of their respective employment agreements and performance unit awards. Additionally, Hans Kloss, President and Chief Operating Officer of BGII and Managing Director of Wulff, who will remain with the Company, will receive a total of $4.3 million consisting of $1.5 million in cash and $2.8 million in Common Stock, and Robert Conover, President of Systems, who will remain with the Company, will receive a total of $0.7 million consisting of $0.2 million in cash and $0.5 million in Common Stock, in connection with their employment agreements and (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 19 performance unit awards. The Common Stock portion of each of such payments will be valued at the average daily closing price per share of Alliance Common Stock as reported through NASDAQ for the ten consecutive trading days ending on (and including) the fifth trading day prior to the Merger (the "Alliance Average Trading Price") but in no event more than $6.00 nor less than $4.25 per share. See "The Merger and Related Financings". (d) Total estimated Alliance and BGII Transaction-related fees and expenses are $37.0 million, of which $15.1 million has been paid through March 31, 1996. Excludes the value of Common Stock to be issued to a Dealer Manager as a financial advisory fee. See "The Exchange Offer -- Dealer Managers". (e) Represents the 15% Preferred Stock consideration to be paid to BGII stockholders in the Merger consisting of $3.57 liquidation value of 15% Preferred Stock per share of BGII common stock plus dividends accruing at a rate of 15% per annum from May 3, 1996. (f) Represents the Common Stock consideration to be paid to BGII stockholders in the Merger consisting of $0.30 per share of BGII common stock valued at the Alliance Average Trading Price. 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. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Alliance Gaming Corporation Gaming Machine German Machine Casino Manufacturing Operations Management Operations and Systems Operations Bally Bally Gaming Wulff Nevada: Louisiana: Nevada: Mississippi: Gaming, Inc. International United Coin Video Plantation Rainbow Services, (including GmbH Machine Co. Inc. Station Casino Casino Systems Division)
- ------------------------ (1) BGII entities to be acquired only on consummation of the Merger. (2) Not wholly-owned. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 20 SUMMARY FINANCIAL INFORMATION The following Summary Forecast of Operations (the "Summary Forecast") sets forth, to the best of management's knowledge and belief and giving consideration to actual results for Alliance and BGII for the three months ended March 31, 1996, management's expectations of the results of operations for the Company (assuming consummation of the Merger and giving effect to the other elements of the Transaction) for the twelve-month period ending December 31, 1996. The Summary Forecast, which consists of forward-looking statements, is qualified by, and subject to, the assumptions set forth below and the other information contained in this Prospectus, and should be read in conjunction with the "Forecast of Operations", including the "Summary of Significant Assumptions and Accounting Policies for the Forecast". The following Summary Historical Financial Information tables set forth summary consolidated financial information of Alliance, which has been derived from the audited consolidated financial statements of Alliance, including the notes thereto, as of June 30, 1995 and for the fiscal years ended June 30, 1993, 1994 and 1995, and the unaudited interim condensed consolidated financial statements of Alliance, including the notes thereto, as of March 31, 1996 and for the nine-month periods ended March 31, 1995 and 1996, which are included elsewhere in this Prospectus. The following Summary Historical Financial Information tables also set forth summary consolidated financial information of BGII, which has been derived from the audited consolidated financial statements of BGII, including the notes thereto, as of December 31, 1995 and for the fiscal years ended December 31, 1993, 1994 and 1995, and the unaudited interim condensed consolidated financial statements of BGII, including the notes thereto, as of March 31, 1996, and for the three-month periods ended March 31, 1995 and 1996, which are included elsewhere in this Prospectus. The Summary Historical Financial Information for Alliance and BGII reflects all adjustments which management believes necessary to present fairly the financial position, results of operations and cash flows of Alliance and BGII. All such adjustments are of a normal recurring nature. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the fiscal year as a whole. The following tables also set forth Summary Unaudited Pro Forma Condensed Combined Financial Information. The Pro Forma Statements of Operations Data 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 the nine months ended March 31, 1996, and further assuming that the Rainbow Casino operations were consolidated. The detailed presentation of revenues is derived from internally prepared supporting schedules not otherwised presented or incorporated herein. The Pro Forma Balance Sheet Data present the financial position of the Company assuming the Transaction occurred on March 31, 1996. The Summary Unaudited Pro Forma Condensed Combined Financial Information does not purport to present the financial position or results of operations of the Company had the Transaction and events assumed therein occurred on the dates specified, nor is it necessarily indicative of the results of operations of the Company as they may be in the future or as they may have been had the Transaction and the consolidation of the Rainbow Casino operating results been consummated on the dates described above. The Summary Unaudited Pro Forma Condensed Combined Financial Information is based on certain assumptions and adjustments described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information and should be read in conjunction therewith. The tables should be read in conjunction with "Unaudited Pro Forma Condensed Combined Financial Information", "Notes to Unaudited Pro Forma Condensed Combined Financial Information", "Supplemental Analysis of Adjusted Operating Cash Flow", "Forecast of Operations", "Summary of Significant Assumptions and Accounting Policies for the Forecast", "Selected Historical Financial Information of Alliance", "Selected Historical Financial Information of BGII", "Management's Discussion and Analysis of Financial Condition and Results of Operations", the audited consolidated financial statements of Alliance, including the notes thereto, the unaudited interim condensed consolidated financial statements of Alliance, including the notes thereto, the audited consolidated financial statements of BGII, including the notes thereto, the unaudited interim condensed consolidated financial statements of BGII, including the notes thereto, and other financial and operating information included elsewhere in this Prospectus. 21 SUMMARY FORECAST OF OPERATIONS (1)
COMPARATIVE ANALYSIS OF OPERATIONS (2) ------------------------------------------------------------- FORECASTED OPERATIONS FOR TWELVE MONTHS THREE MONTHS THE TWELVE MONTHS ENDED DECEMBER 31, ENDED MARCH 31, ENDING ------------------------------ ----------------------------- DECEMBER 31, 1994 1995 1995 1996 1996 -------------- -------------- -------------- ------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS INFORMATION: Total Revenues....................... $ 373,031 $ 400,964 $ 105,778 $ 99,112 $ 425,957 Total Operating Costs................ 361,753(3) 381,720(3) 96,337(3) 95,185(3) 406,239(3) -------------- -------------- -------------- ------------- -------- Operating Income..................... 11,278 19,244 9,441 3,927 19,718 Net Income (Loss).................... $ (12,181)(4) $ (7,153)(4) $ 2,906(4) $ (3,076)(4) $ (27,939)(4) -------------- -------------- -------------- ------------- -------- -------------- -------------- -------------- ------------- -------- Income (Loss) per Common Share....... $ (0.89) $ (0.64) $ 0.04 $ (0.20) $ (1.42)(5) -------------- -------------- -------------- ------------- -------- -------------- -------------- -------------- ------------- -------- SUPPLEMENTAL INFORMATION: Operating Income..................... $ 11,278 $ 19,244 $ 9,441 $ 3,927 $ 19,718 Depreciation and Amortization........ 22,483 22,584 4,740 5,311 23,192 Casino Royalty....................... (1,670) (3,674) (983) (1,024) (4,368) Minority Interest.................... (675) (504) (83) (432) (920) -------------- -------------- -------------- ------------- -------- Subtotal........................... 31,416 37,650 13,115 7,782 37,622 Adjustments: Rainbow Operations................. -- 1,912(6) 1,189(6) -- -- Unusual or Non-recurring Charges........................... 2,856(7) 7,783(7) 600(7) 3,487(7) 4,479(8) Direct Merger Costs................ -- -- -- -- 12,815(9) -------------- -------------- -------------- ------------- -------- Adjusted Operating Cash Flow......... $ 34,272(10) $ 47,345(10) $ 14,904(10) $ 11,269(10) $ 54,916(10) -------------- -------------- -------------- ------------- -------- -------------- -------------- -------------- ------------- -------- OTHER DATA: Net Interest Expense............... $ 19,561 $ 20,743 $ 4,964 $ 5,191 $ 20,491 -------------- -------------- -------------- ------------- -------- -------------- -------------- -------------- ------------- --------
- ------------------------------ (1) The Summary Forecast, which consists of forward-looking statements, gives consideration to actual results for the three months ended March 31, 1996 as well as a number of estimates and assumptions that, while presented with numerical specificity and considered reasonable by management of the Company, are inherently subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of the Company. The Summary Forecast is necessarily speculative in nature, and it is usually the case that one or more of the assumptions do not materialize. The Summary Forecast and actual results will vary, and those variations may be material. Accordingly, the inclusion of the Summary Forecast herein should not be regarded as a representation by the Company or any other person (including the Dealer Managers) 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. Holders of Old Convertible Debentures are cautioned not to place undue reliance on the Summary Forecast. (2) See Note (2) -- Presentation of Supplemental Comparative Information of the "Summary of Significant Assumptions and Accounting Policies for the Forecast" elsewhere in the Prospectus. (3) Selling, general and administrative costs are net of the following: direct Merger costs; the business development costs over (under) the $3.0 million annual budgeted amount totaling $4.7 million, $1.0 million, $1.4 million and $(52,000) for the twelve months ended December 31, 1994 and 1995 and three months ended March 31, 1995 and 1996, respectively; and synergy cost savings totaling $5.0 million for the twelve months ended December 31, 1994, 1995 and ending 1996, and $1.3 million for the three months ended March 31, 1995 and 1996. See Note (8) below for one-time $1.0 million costs to implement synergy cost savings in 1996. See Note (9) below for the 1996 presentation which includes direct Merger costs. (4) Excludes 15% Preferred Stock dividends. Dividends on the 15% Preferred Stock are compounded quarterly at a rate of 15% per annum; however, such dividends are permitted to be paid-in-kind for the first five years after issuance and partially in kind for the next two years. (5) The Loss per Common Share in the forecasted twelve-month period ending December 31, 1996 is computed based on 25,400,000 common shares outstanding, and includes depreciation and amortization of $23.2 million (or $0.91 per share), direct Merger costs of $12.8 million (or $0.50 per share), loss on assumed conversion of New Convertible Debentures of $18.5 million (or $0.73 per share) and 15% Preferred Stock dividends of $8.0 million (or $0.32 per share). (6) Represents adjustment to reflect management's derivation of Rainbow Casino's annualized results for the period, net of incremental royalty. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 22 (7) Reflects items determined by management to be unusual or non-recurring (which are also included in Total Operating Costs). The concepts of non-recurring or unusual charges as used throughout the Prospectus are not defined in generally accepted accounting principles ("GAAP"). See Note 10(e),(f),(g) and (h) below. (8) For the twelve months ending December 31, 1996, reflects items determined by management to be non-recurring charges, consisting of a provision for impaired assets of two development projects totaling $3.2 million; the $1.0 million of one-time charges (which are included in Total Operating Costs) to implement the expected annual synergy cost savings (which are reflected in Total Operating Costs as well); and certain charges of $0.3 million relating to a regulatory investigation and legal proceedings in Louisiana. (9) Direct Merger costs for the twelve months ending December 31, 1996 of $12.8 million have been included in Total Operating Costs and presented as an adjustment in computing the Adjusted Operating Cash Flow. See Note (3) above for the presentation of direct Merger costs in earlier periods. (10) The following is a reconciliation of the historical EBITDA (as defined in Note (1) -- Summary Historical Financial Information -- Alliance Gaming Corporation) by business unit to the combined Adjusted Operating Cash Flow:
FORECASTED TWELVE TWELVE MONTHS ENDED THREE MONTHS ENDED MONTHS DECEMBER 31, MARCH 31, ENDING -------------------- -------------------- DECEMBER 31, 1994 1995 1995 1996 1996 --------- --------- --------- --------- ------------ (IN THOUSANDS) EBITDA by Business Unit: Gaming............................... $ 7,304 $ 7,305 $ 2,659(a) $ 1,046(a) $ 10,750 Systems.............................. 3,593 5,788 1,997(a) 1,620(a) 6,303 Wulff................................ 15,575 15,172 5,106(a) 3,406(a) 16,836 Gaming Machine Management............ 17,159 18,260 4,758 4,469 19,957 Casinos.............................. 2,927 10,546 731 3,889 14,958 Alliance Corporate Administrative Expense............................. (10,609) (8,912) (1,654) (4,723) (8,979) Alliance Development Expense......... (7,694) (15,072) (2,139) (3,497) (13,815) BGII Corporate Administrative Expense............................. (4,520) (3,732) (1,285) (604) (4,800) Discontinued Operations/Other........ (1,378) (933) (58) (64) -- Casino Royalty....................... -- (2,718) (27) (1,024) (4,368) Minority Interest.................... (675) (504) (83) (432) (920) BGII Unusual Charges and Other....... (300) (7,216) (400) (1,296) (2,300) --------- --------- --------- --------- ------------ Combined EBITDA........................ 21,382 17,984 9,605 2,790 33,622 Adjustments: Direct Merger Costs.................. -- 13,106(b) -- 3,794(b) 12,815(b) Alliance Development Expense Adjustment.......................... 4,694(c) 966(c) 1,389(c) (52 (c) -- Rainbow Operations................... 340(d) 2,506(d) 2,060(d) -- -- Unusual or Nonrecurring Charges...... 2,856(e) 7,783(f) 600(g) 3,487(h) 4,479(i) Synergy Cost Savings................. 5,000(j) 5,000(j) 1,250(j) 1,250(j) 4,000(j) --------- --------- --------- --------- ------------ Adjusted Operating Cash Flow........... $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916 --------- --------- --------- --------- ------------ --------- --------- --------- --------- ------------
-------------------------------- (a)Differences in interim results for the three-month periods for Gaming and Systems were affected by the timing and number of new casino openings, and management believes that the interim results for Wulff in the 1996 quarter were affected by regulations, which became effective January 1, 1996, limiting the number of wall machines per square meter in arcade locations, thereby reducing new sales opportunities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (b)For the twelve months ended December 31, 1995, $11.1 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges and Other. No such costs were incurred by either company in the three months ended March 31, 1995. For the three months ended March 31, 1996, $2.8 million of direct Merger costs are included in Alliance Development Expense and $1.0 million in BGII Unusual Charges and Other. For the forecasted twelve months ending December 31, 1996, $10.8 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges and Other. (c)Reflects Alliance Development Expense, which relates to mergers, acquisitions and joint ventures, adjusted to $3.0 million annually. The adjustment to $3.0 million reflects the anticipated elimination of expenses that were being incurred pending Alliance's accomplishment of its strategic plan to acquire a major gaming machine manufacturing company. To accomplish this reduction, Alliance reduced payroll costs and fees paid to consultants and legal costs related to non-BGII transactions it had been pursuing. The adjustment to eliminate direct costs related to the Merger is shown in Note (b) above. For the three months ended March 31, 1996, Alliance Development Expense was below the $3.0 million annual rate by $52,000. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 23 (d)To adjust to reflect the operating results of the Rainbow Casino as if owned during all of 1994 and 1995 and, for the twelve months ended December 31, 1995 and three months ended March 31, 1995, to reflect the recent operating results of the Rainbow Casino, as if such results had occurred for all of 1995 (including an adjustment for additional casino royalty expense of approximately $1.7 million, $1.0 million and $1.0 million for the twelve months ended December 31, 1994 and 1995 and the three months ended March 31, 1995, respectively). (e)Includes legal costs included as BGII Corporate Administrative Expense related to a former executive totaling $0.5 million and $0.3 million recorded as BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana and a reserve for discontinued operations of $2.0 million for Alliance included in Alliance Corporate Administrative Expense. (f)Includes one-time charges included in Alliance Corporate Administrative Expense consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain officers and directors, which were incurred during the quarter ended June 30, 1995. Also includes $1.4 million relating to a regulatory investigation and legal proceedings in Louisiana included in BGII Unusual Charges and Other, and $0.2 million included in BGII Corporate Administrative Expense for legal costs related to the "Bally" trade name litigation. BGII Unusual Charges and Other also includes $2.0 million in costs related to the merger agreement between BGII and WMS Industries Inc. ("WMS"), a provision of $0.8 million at Wulff to write down to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for German value added taxes ("V.A.T."). (g)Includes certain charges of $0.4 million included in BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana and $0.2 million included in BGII Corporate Administrative Expense for legal costs related to the "Bally" trade name litigation. (h)Includes a provision for impaired assets of two development projects totaling $3.2 million included in Alliance Corporate Administrative Expense. Also includes certain charges of $0.3 million included in BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana. (i)Includes a provision for impaired assets of two development projects totaling $3.2 million in Alliance Corporate Administrative Expense, $1.0 million of one-time charges to implement the expected annual synergy cost savings, and certain charges of $0.3 million included in BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana. (j)To adjust for estimated synergy cost savings identified by management to date including elimination of certain duplicative costs, such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. For the forecasted twelve months ending December 31, 1996, the synergy cost savings is presented net of the $1.0 million of one-time charges to implement the cost savings (which is added back in (i) above). 24 SUMMARY HISTORICAL FINANCIAL INFORMATION ALLIANCE GAMING CORPORATION
FISCAL YEARS NINE MONTHS ENDED JUNE 30, ENDED MARCH 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) STATEMENTS OF OPERATIONS DATA: Net Revenues................................................... $ 113,091 $ 123,054 $ 131,988 $ 93,776 $ 116,796 Operating Loss................................................. (52) (7,468) (4,261) (2,544) (5,872) Net Interest Expense........................................... (4,048) (4,746) (5,335) (3,609) (5,135) Net Loss....................................................... $ (3,650) $ (13,128) $ (10,751) $ (6,793) $ (14,829) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net Loss per Common Share...................................... $ (0.38) $ (1.28) $ (0.95) $ (0.61) $ (1.21) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Deficit of Earnings to Fixed Charges.................... $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248) Pro Forma Deficit of Earnings to Fixed Charges.......... $ (1,164) $ (9,821) $ (200) --------- --------- --------- --------- --------- --------- Pro Forma Deficit of Earnings to Fixed Charges and 15% Preferred Stock Dividend............................... $ (9,202) $ (15,737) $ (6,116) --------- --------- --------- --------- --------- --------- Cash Flow Information: Historical Cash Flows From: Operating Activities.................................. $ 6,206 $ 9,062 $ 957 $ 167 $ (533) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Inveseting Activities................................. $ (9,295) $ (27,299) $ (21,648) $ (9,791) $ 5,255 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Financing Activities.................................. $ 2,430 $ 45,742 $ (2,660) $ (1,509) $ (2,495) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro Forma Cash Flows From: Operating Activities.................................. $ 7,225 $ 4,890 $ 20,564 --------- --------- --------- --------- --------- --------- Investing Activities.................................. $ (26,936) $ (15,356) $ (1,086) --------- --------- --------- --------- --------- --------- Financing Activities.................................. $ (757) $ 1,528 $ (3,059) --------- --------- --------- --------- --------- --------- OTHER DATA: Gaming Machine Management: Units................................................. 5,868 5,889 5,902 5,955 5,989 Locations............................................. 518 506 526 527 539 Casinos: Tables................................................ 9 9 37 9 35 Slots Operated........................................ 428 434 1,005 486 1,038 Revenues: Gaming Machine Management............................. $ 96,282 $ 102,830 $ 106,827 $ 79,389 $ 81,111 Casinos............................................... 11,286 12,046 19,668 9,874 34,361 Discontinued Operations............................... 5,523 8,178 5,493 4,513 1,324 --------- --------- --------- --------- --------- Net Revenues........................................ $ 113,091 $ 123,054 $ 131,988 $ 93,776 $ 116,796 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- EBITDA (1): Gaming Machine Management............................. $ 14,564 $ 16,820 $ 18,562 $ 13,558 $ 12,967 Casinos (2)........................................... 1,963 2,190 5,359 2,444 10,789 Corporate Development Expenses (3).................... (900) (1,192) (7,843) (5,647) (14,234) Corporate Administrative Expenses (4)................. (6,191) (7,882) (10,177) (5,906) (7,710) Discontinued Operations (5)........................... (770) (7,874) (642) (59) (357) Casino Royalty........................................ -- -- (810) (27) (2,931) Minority Interest..................................... -- (506) (397) (252) (708) --------- --------- --------- --------- --------- Total EBITDA (1).................................... $ 8,666 $ 1,556 $ 4,052 $ 4,111 $ (2,184) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Depreciation and Amortization........................... $ 8,718 $ 9,530 $ 9,520 $ 6,934 $ 7,328 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Capital Expenditures.................................... $ 5,092 $ 7,022 $ 7,880 $ 7,816 $ 6,624 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
AT MARCH 31, 1996 ------------ BALANCE SHEET DATA: Cash and Cash Equivalents and Securities Available for Sale ........................................ $ 25,562 Working Capital..................................................................................... 15,583 Total Assets........................................................................................ 111,288 Long-term Debt, Including Current Maturities........................................................ 99,089 Stockholders' Deficiency............................................................................ (5,595)
25 - -------------------------- (1) EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization ("EBITDA"). Corporate expenses, casino royalty, minority interest and unusual charges are shown as separate components of EBITDA and are not allocated back to business units. EBITDA should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of Alliance's performance or to cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Management believes that EBITDA is a useful adjunct to net income and other measurements under GAAP and is a conventionally used financial indicator. (2) Since March 29, 1995, the Rainbow Casino operations have been consolidated with Alliance. (3) Includes direct Merger costs of $1.7 million and $12.2 million for the fiscal year ended June 30, 1995 and the nine months ended March 31, 1996, respectively. (4) Includes one-time charges incurred by Alliance consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain officers and directors, which were incurred during the quarter ended June 30, 1995, and a provision for impaired assets of two development projects totaling $3.2 million incurred in the quarter ended March 31, 1996. (5) Includes businesses now or previously considered as discontinued operations. 26 BALLY GAMING INTERNATIONAL, INC.
THREE MONTHS FISCAL YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------ ----------------------------- 1993 1994 1995 1995 1996 -------- -------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) STATEMENTS OF OPERATIONS DATA: Revenues................. $168,707 $236,192 $249,312(1) $ 68,289 $ 58,544 Operating Income (Loss).................. (18,536)(2) 13,381 (3)(4) 8,364(1)(3)(4)(5)(6) 6,637(3)(4) 2,274(3)(7) Interest Expense......... 4,424 6,768 6,853 1,733 1,665 Net Income (Loss)........ $(23,443) $ 3,793 $ (3,393) $ 2,862 $ (513) -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Net Income (Loss) per Share................... $ (2.19) $ 0.35 $ (0.31) $ 0.27 $ (0.05) -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Ratio of Earnings to Fixed Charges........... 1.93 1.21 3.76 1.37 -------- ---------- ---------- ---------- -------- ---------- ---------- ---------- Deficit of Earnings to Fixed Charges........... $ 22,960 -------- -------- Cash Flows From: Operating Activities... $(24,548) $ 1,224 $ 3,795 $ (5,605) $ (1,757) -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Investing Activities... $(13,407) $(6,391 ) $ (6,233) $ (2,108) $ (2,218) -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Financing Activities... $ 38,900 $ 8,231 $ (1,961) $ 1,688 $ 590 -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- OTHER DATA: Unit Sales: Gaming................. 10,156 21,625 18,084 4,862 4,041 Wulff.................. 12,552 13,100 12,000 2,900 2,400 Revenues: Gaming (8)............. $ 49,298 $118,659 $111,849(1) $ 27,979 $ 24,784 Systems................ 12,748 13,386 20,681 6,088 5,004 -------- -------- ---------- ---------- ---------- Gaming Machine Manufacturing and Systems............. 62,046 132,045 132,530 34,067 29,788 Wulff.................. 106,661 104,147 116,782 34,222 28,756 -------- -------- ---------- ---------- ---------- Total Revenues....... $168,707 $236,192 $249,312 $ 68,289(9) $ 58,544(9) -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- EBITDA (10): Gaming (8)............. $(24,747)(2) $ 7,304 $ 7,305(1)(5) $ 2,659 $ 1,046 Systems................ 3,829 3,593 5,788 1,997 1,620 -------- -------- ---------- ---------- ---------- Gaming Machine Manufacturing and Systems............. (20,918)(2) 10,897 13,093(1)(5) 4,656 2,666 Wulff.................. 15,959 15,575 15,172 5,106 3,406 BGII Corporate Administrative Expense (8)................... (5,473) (4,520 )(4) (3,732)(4) (1,285)(4) (604) Unusual Charges and Other................. -- (300 )(3) (7,216)(3)(6) (400)(3) (1,296)(3)(7) -------- -------- ---------- ---------- ---------- Total EBITDA (10).... $(10,432) $21,652 $ 17,317 $ 8,077(9) $ 4,172(9) -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Depreciation and Amortization............ $ 8,103 $ 8,271 $ 8,953 $ 1,440 $ 1,898 -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- Capital Expenditures..... $ 6,467 $ 9,537 $ 8,240 $ 2,232 $ 2,733 -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ----------
AT MARCH 31, 1996 --------------- BALANCE SHEET DATA: Cash and Cash Equivalents........................................................................ $ 2,009 Working Capital.................................................................................. 85,649 Total Assets..................................................................................... 186,936 Long-term Debt, Including Current Maturities..................................................... 69,971 Stockholders' Equity............................................................................. 86,000
- ------------------------------ (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 included in Unusual Charges and Other 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, and $0.4 million and $0.3 million for the three months ended March 31, 1995 and 1996, respectively. (4) Includes legal costs related to a former executive totaling $0.5 million during the year ended December 31, 1994. Also includes legal costs related to the "Bally" trade name litigation totaling $0.2 million during both the year ended December 31, 1995 and the three months ended March 31, 1995. (5) Includes a provision for doubtful receivables of $0.9 million related to the bankruptcy described in Note (1) above. (6) Includes $2.0 million in Merger transaction costs and related litigation expenses, $2.0 million in costs related to the merger agreement with WMS, a provision of $0.8 million at Wulff to write-down to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for V.A.T. (7) Includes $1.0 million in Merger transaction costs. 27 (8) Includes results of GmbH and BGI Australia Pty Limited in Gaming's results, along with certain reclassifications from historical presentation. (9) Differences in interim results for the three-month periods for Gaming and Systems were affected by the timing and number of new casino openings, and management believes that the interim results for Wulff in the 1996 quarter were affected by regulations, which became effective January 1, 1996, limiting the number of wall machines per square meter in arcade locations, thereby reducing new sales opportunities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (10)See Note (1) to "Summary Historical Financial Information -- Alliance Gaming Corporation" in this Prospectus Summary. 28 SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
FISCAL YEAR NINE MONTHS ENDED ENDED JUNE 30, MARCH 31, 1995 1996 ----------- ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS DATA: Revenues............................................................................... $ 400,821 $ 287,117 Operating Income....................................................................... 22,677 9,136 Net Interest Expense................................................................... (20,431) (15,716) Casino Royalty......................................................................... (3,431) (2,931) Minority Interest...................................................................... (397) (708) Other, net............................................................................. 418 398 ----------- ------------ Loss Before Taxes...................................................................... (1,164) (9,821) Provisions for Income Taxes............................................................ (2,555) (1,508) ----------- ------------ Net Loss............................................................................... $ (3,719) $ (11,329) ----------- ------------ ----------- ------------ 15% Preferred Stock Dividend........................................................... $ (8,039) $ (5,916) ----------- ------------ ----------- ------------ Net Loss per Common Share.............................................................. $ (0.50) $ (0.70) ----------- ------------ ----------- ------------ OTHER DATA: Depreciation and Amortization.......................................................... $ 22,642 $ 17,114 Capital Expenditures................................................................... 16,484 13,166
AT MARCH 31, 1996 ------------ BALANCE SHEET DATA: Cash and Cash Equivalents and Securities Available for Sale......................................... $ 19,817 Working Capital..................................................................................... 107,330 Total Assets........................................................................................ 345,564 Long-term Debt, Including Current Maturities........................................................ 208,432 Stockholders' Equity................................................................................ 42,350
29 RISK FACTORS PRIOR TO DECIDING WHETHER TO TENDER OLD CONVERTIBLE DEBENTURES IN THE EXCHANGE OFFER, HOLDERS OF THE OLD CONVERTIBLE DEBENTURES SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, ESPECIALLY THE CONSIDERATIONS DESCRIBED OR REFERRED TO IN THE FOLLOWING PARAGRAPHS. SUBORDINATION The Senior Notes expected to be issued in the Note Offering or, if the Merger does not occur, the New Convertible Debentures, will be considered Senior Indebtedness as defined in the Old Convertible Indenture (as defined below). Therefore, the payment of the principal of (and premium, if any), interest on, liquidated damages with respect to, and redemptions at the option of the holders of Old Convertible Debentures will be subordinated in right of payment to prior payment in full of all holders of the Senior Notes or, if the Merger does not occur, the New Convertible Debentures. In addition, upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, receivership, reorganization, assignment for the benefit of creditors, marshalling of assets and liabilities or any bankruptcy, insolvency or similar proceedings of Alliance, the holders of all Senior Notes or, if the Merger does not occur, the New Convertible Debentures, will first be entitled to receive payment in full in cash of all amounts due or to become due thereon before the holders of the Old Convertible Debentures will be entitled to receive any applicable payments. The Senior Notes will also be Senior Indebtedness as defined in the New Convertible Indenture; however, the Senior Notes are expected to be issued only upon the consummation of the Merger (in which event the New Convertible Debentures would be automatically converted into Common Stock or Series E Preferred Stock). For further information with respect to the subordination of Old Convertible Debentures and New Convertible Debentures to Senior Indebtedness, see "Description of the New Convertible Debentures -- Subordination". In addition, whether or not the Merger occurs, Alliance may transfer to an existing subsidiary all or substantially all of Alliance's assets (including the stock of BGII if the Merger occurs but excluding the stock of such subsidiary), subject to obtaining needed regulatory approvals and satisfaction of other conditions (the "Drop-Down Transaction"). In connection with this transfer, the subsidiary would become jointly and severally liable with Alliance for all of Alliance's obligations with respect to the New Convertible Debentures or the Senior Notes, as applicable. As a result of this transfer and assumption, the holders of the New Convertible Debentures or the Senior Notes, as applicable, but not of the Old Convertible Debentures, would in effect have a claim prior to that of the holders of the Old Convertible Debentures on the assets of Alliance (in addition to the claim the holders of the Senior Notes are expected to have as a result of guarantees from Alliance's subsidiaries), and the Old Convertible Debentures would accordingly be structurally subordinated to the New Convertible Debentures or the Senior Notes, as applicable. HIGH LEVERAGE AND FIXED CHARGES; HOLDING COMPANY STRUCTURE; WORKING CAPITAL Alliance currently has, and after the Transaction the Company will have, a substantial amount of indebtedness. As of March 31, 1996, Alliance had outstanding debt (including the $85.0 million principal amount of Old Convertible Debentures) of $99.1 million and a deficiency in stockholders' equity of $5.6 million, and on a pro forma basis after giving effect to the Transaction, the Company would have had outstanding debt of approximately $208.4 million and a long-term debt to equity ratio of 4.9 to 1. If the 15% Preferred Stock were included in debt the pro forma long-term debt to equity ratio would be 6.1 to 1. See "The Merger and Related Financings", "Capitalization" and "Unaudited Pro Forma Condensed Combined Financial Information". In addition, if the maximum amount of dividends on the 15% Preferred Stock were paid in kind, as is anticipated, the liquidation value of the 15% Preferred Stock would accrete to approximately $124.0 million after seven years. The high level of indebtedness and the amount of 15% 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 15% 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 30 vulnerability to adverse general economic and industry conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of the Company (Pro Forma)". On a pro forma basis after giving effect to the Transaction and the use of proceeds thereof, the Company's earnings would have been inadequate to cover fixed charges (including the imputed fixed charges for contingent rental expense related to revenue-sharing agreements in its Nevada gaming machine management operations of approximately $18.0 million annually) by approximately $1.2 million for the year ended June 30, 1995 and $9.8 million for the nine-month period ended March 31, 1996. On a pro forma basis after giving effect to the Transaction, the Company would have annual fixed charges (including the imputed charges referred to in the immediately preceding sentence) of approximately $44.4 million plus dividends on the 15% Preferred Stock (aggregating $8.0 million in the first year permitted to be paid in kind for the first five years after issuance and partially in kind for the next two years) and possibly further amounts (payable in kind for the first 15 years following issuance ) on the Series E Preferred Stock. Future operating results are subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond the control of the Company. There can be no assurance that the Company will be able to generate the cash flow necessary to permit the Company to meet its fixed charges and repayment obligations. If the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to the Company. Any inability of the Company to service its fixed charges and repayment obligations would have a significant adverse effect on the Company and the market value and marketability of the Common Stock, the Series E Preferred Stock, the 15% Preferred Stock, the Senior Notes, the Old Convertible Debentures and the New Convertible Debentures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of the Company (Pro Forma)". Alliance is a holding company, the only material assets of which are equity interests in its subsidiaries (including, if the Merger occurs, BGII and its subsidiaries). The ability of Alliance to make interest and principal payments on its obligations, including the Senior Notes, Old Convertible Debentures and New Convertible Debentures, or to pay cash dividends, will depend on the subsidiaries' ability to generate sufficient cash flow from operations and distribute such amounts to Alliance. Such entities' ability to make these distributions is restricted by, among other things, the indebtedness of Alliance's Video Services, Inc. ("VSI") subsidiary and may be restricted by other obligations which may be incurred in the future and by restrictions imposed by gaming authorities on licensed enterprises. The Company believes that if the Merger occurs its consolidated cash flow needs for the next 12 months will increase as a result of an increase in accounts receivable relating to the introduction of new machines and the expected increases in production and sales levels from recent historical levels. The Company expects that cash flow generated by operations and other available cash will be sufficient to satisfy the Company's normal working capital needs, although there can be no assurance the Company will generate such available cash. See "-- Implementation of the Merger". In order to be competitive in meeting the growing customer demand for financing of gaming equipment in emerging gaming markets, the Company also plans to continue to involve third-party finance companies to secure additional financing; however, there can be no assurances that such additional financing will be obtained. Failure to obtain such financing on terms acceptable to the Company could impair the Company's operations and ability to pursue its business strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". RISKS OF EQUITY OWNERSHIP If the Automatic Conversion occurs, the New Convertible Debentures will be automatically converted into Common Stock or, if a tendering holder of Old Convertible Debentures so elects at the time such Old Convertible Debentures are tendered, into Series E Preferred Stock. See "Description of New Convertible Debentures -- Automatic Conversion upon Consummation of Merger" and "Description of Capital 31 Stock -- Special Stock". The holders of Common Stock and Series E Preferred Stock issued upon conversion of the New Convertible Debentures will no longer be debtholders of the Company and thus will no longer be entitled to receive fixed interest payments and will be subordinated to the holders of Senior Notes and Old Convertible Debentures, as well as to all other creditors of the Company and holders of the 15% Preferred Stock, upon any liquidation, dissolution or winding up of the Company. The terms of the Senior Notes will impose restrictions on the Company's ability to make cash distributions on its capital stock, including the Common Stock and the Series E Preferred Stock. The terms of the Series E Preferred Stock permit the Company to pay dividends on the Series E Preferred Stock until the fifteenth anniversary of the issuance thereof in additional shares of Series E Preferred Stock. Alliance currently expects that any dividends declared on the Series E Preferred Stock during such 15-year period will be paid in such additional shares. Moreover, Alliance has never paid cash dividends on the Common Stock and does not currently expect to pay any cash dividends on the Common Stock in the foreseeable future. There can be no assurance that the Company will pay cash dividends at any time in the future on any shares of its capital stock. RESTRICTIONS ON CERTAIN ACTIVITIES The indenture pursuant to which the Senior Notes will be issued (the "Senior Indenture") is expected to provide that the Senior Notes will be guaranteed by certain subsidiaries of the Company and secured by the stock thereof and will impose restrictions on Alliance and its subsidiaries, in addition to restrictions imposed by existing instruments, including the indenture for the Old Convertible Debentures (the "Old Convertible Indenture"), and the restrictions imposed by New Convertible Indenture. Generally, the restrictions contained in these indentures relate to the incurrence of additional indebtedness, the distribution of cash and/or property to shareholders, the repayment or repurchase of pari passu or junior securities, investments, mergers and sales of assets and the creation of liens. These restrictions and requirements could limit the ability of the Company to respond to changing business and economic conditions. A failure to comply with any of these obligations could also result in an event of default under the Senior Indenture, which could permit acceleration of the Senior Notes and acceleration of certain other indebtedness of the Company under other instruments which may contain cross-acceleration or cross-default provisions. See "The Merger and Related Financings". 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 $14.8 million during the nine months ended March 31, 1996, whereas BGII had net income of $5.3 million, a net loss of $23.4 million, net income of $3.8 million and a net loss of $3.4 million for its fiscal years ended December 31, 1992, 1993, 1994 and 1995, respectively and a net loss of $0.5 million for the three months ended March 31, 1996. There can be no assurance that the Company will be profitable in the future, that there will not be similar or other unusual or non-recurring charges in the future, or that future results will improve as a result of the Merger if it occurs. See "Unaudited Pro Forma Condensed Combined Financial Information", "Selected Historical Financial Information of Alliance" and "Selected Historical Financial Information of BGII". The new wall machine unit sales of Wulff decreased by approximately 8% in the year ended December 31, 1995 as compared to the year ended December 31, 1994 and by 17% in the three months ended March 31, 1996, as compared to the three months ended March 31, 1995. Management believes new wall machine revenues for the last six months of 1995 and the first three months of 1996 were adversely affected by an industry downturn caused by regulations imposed in Germany limiting the number of wall machines per square meter in arcade locations effective January 1, 1996, thereby reducing sales opportunities, and by increased competition from the sale of foreign-manufactured token machines in Germany. Management expects the adverse impact of such regulations to continue during the second quarter of 1996; however, there can be no assurance that this impact will only be temporary. Foreign competition may also continue to have an adverse impact on wall machine revenues. IMPLEMENTATION OF THE MERGER The Company's future operations and earnings if the Merger occurs will be largely dependent upon the Company's ability to integrate the businesses separately conducted by Alliance and BGII prior to the 32 Merger. Alliance and BGII currently operate in different areas of the gaming entertainment industry, with only modest overlap in their activities. There can be no assurance that the Company will successfully integrate the businesses of Alliance and BGII, and a failure to do so would have a material adverse effect on the Company's financial position, results of operations and cash flows. Additionally, although the Company does not currently have any specific acquisition plans other than the Merger, the need to focus management's attention on integration of the separate businesses may limit the Company's ability to successfully pursue acquisitions or other opportunities related to its business for the foreseeable future. Although the Company plans to introduce more sophisticated technology into BGII's electronic gaming machines, there is no assurance that it will succeed in doing so or that it will be able to enter into alliances with technology and entertainment companies. In addition, although management cannot precisely quantify future cost savings, the Company expects to realize cost savings of approximately $5.0 million on an annual basis (primarily through the reduction of duplicative costs, such as facility, legal, accounting and compensation costs) as a result of the Merger. In order to achieve these cost savings, the Company believes it will incur one-time costs of approximately $1.0 million. The achievement of these savings is dependent on, among other things, the successful integration of the businesses of Alliance and BGII. There can be no assurance, however, that such savings will be achieved or sustained. See "Unaudited Pro Forma Condensed Combined Financial Information". BGII currently supplies electronic gaming machines to certain customers which are in competition with Alliance. It is possible that, because of such competition, certain of these customers may cease purchasing electronic gaming machines from BGII if the Merger occurs. Alliance and BGII do not believe that such discontinuations, if any, will be material. BGII sales to machine management operators have historically been, and are likely to remain, insignificant. Nevertheless, discontinuance of purchases by customers could adversely affect the Company's sales. FINANCIAL FORECAST The Company was the sole preparer of the forecast (the "Forecast") set forth under "Forecast of Operations". While such Forecast is presented with numerical specificity, it is based on the Company's current best estimates of expected results given the forecasted assumptions described in "Summary of Significant Assumptions and Accounting Policies for the Forecast" for the period presented, including consummation of the Merger and the other elements of the Transaction. The Forecast, which consists of forward-looking statements, is qualified by and subject to the assumptions set forth therein and the other information contained in this Prospectus. The Company does not intend to update or otherwise revise the Forecast to reflect events or circumstances existing or arising after the date of this Prospectus or to reflect the occurrence of unanticipated events. The Forecast necessarily is based upon a number of estimates and assumptions, that, while presented with numerical specificity and considered reasonable by the Company, are inherently subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of the Company. Financial forecasts are necessarily speculative in nature, and it is usually the case that one or more of the assumptions underlying such projections do not materialize. The Forecast and actual results will vary, and those variations may be material. The inclusion of the Forecast herein should not be regarded as a representation by the Company or any other person that the Forecast will be achieved. Prospective investors are cautioned not to place undue reliance on the Forecast or the other forward-looking information contained herein. If the Merger and the Offerings do not occur, the principal difference in Alliance's financial condition, relative to the Alliance historical financial information otherwise presented herein, would be that Alliance's additional cash and cash equivalents and securities available for sale would decrease by approximately $7.0 million, which management believes will not have a material adverse effect on the financial condition of Alliance or impair its ability to meet its ongoing obligations. 33 CHANGE OF CONTROL Following consummation of the Transaction, Alliance's two largest shareholders, Alfred Wilms and Kirkland Investment Corporation ("KIC"), who currently own approximately 38.8% and 10.3%, respectively, of the outstanding shares of Common Stock, will own approximately 19.9% and 5.3%, respectively, of the outstanding shares of Common Stock assuming exchange of $50.0 million of Old Convertible Debentures and conversion into Common Stock only. Accordingly, following the Transaction, no one person or group will hold a majority interest in the Company, and it is possible that the Company could be subject to a change in control, either pursuant to a takeover attempt or otherwise, to a greater degree than has been the case. Mr. Wilms is contractually obligated until September 21, 1997 to vote his shares of Common Stock in favor of four nominees of KIC to Alliance's seven-member Board of Directors. See "Security Ownership of Certain Beneficial Holders and Management". If a Redemption Event (including a Change of Control) should occur, the Company will be required, subject to certain conditions, to offer to purchase all outstanding Senior Notes, Old Convertible Debentures and New Convertible Debentures, as applicable, at a price equal to 101% of the then outstanding principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The Transaction will not constitute a Change of Control under the Old Convertible Indenture. Alliance does not currently have sufficient funds available to purchase all of the outstanding Old Convertible Debentures and/or the New Convertible Debentures to be issued in the Exchange Offer (and on a pro forma basis after giving effect to the Transaction, the Company will not have sufficient funds available to purchase all of the outstanding Senior Notes and/or Old Convertible Debentures) were they to be tendered in response to an offer made as a result of a Redemption Event. There can be no assurance that Alliance would have or be able to obtain such funds through a refinancing of the Senior Notes, Old Convertible Debentures and New Convertible Debentures to be repurchased or otherwise. In addition, the right to require Alliance to redeem the New Convertible Debentures and/or the Old Convertible Debentures could create an event of default under Senior Indebtedness as a result of which any redemption could, absent a waiver, be blocked by the subordination provisions of the New Convertible Indenture and the Old Convertible Indenture. Also, the requirement that Alliance offer to repurchase the Senior Notes, Old Convertible Debentures and New Convertible Debentures in the event of a Change of Control may have the effect of deterring a third party from effecting a transaction that would constitute a Change of Control. COMPETITION The respective business units of Alliance (gaming machine management operations and casino operations) and of BGII (gaming machine manufacturing and systems and German operations) are subject to vigorous 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 BGII's product lines in each of the markets for BGII's gaming machine manufacturing operations. The domestic market for gaming machines is dominated by a single competitor, International Game Technology ("IGT"), with a number of smaller competitors in the field. In addition, certain technology-oriented companies have recently announced plans to enter the gaming machine market. Management believes that some of these competitors have greater capital resources than BGII. 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, 34 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 BGII and own and operate a significant number of arcades, which may give them a competitive advantage arising from a built-in market for their games and the ability to test market new games in their own arcades. In addition, wall machines compete for floor space in arcades with token machines, the sales of which have expanded rapidly in the last several years, in part as a result of low price competitors from outside Germany and the popularity of these machines. Token machines are not subject to the strict German licensing requirements governing wall machines. GAMING MACHINE MANAGEMENT OPERATIONS. The competition for obtaining and renewing gaming machine routes in Nevada is high and continues to intensify. Such competition has, over time, reduced Alliance's gross profit margins for such operations. In addition, such competition has required Alliance to provide substantial financial incentives and incur financial risks to retain or obtain certain gaming machine route locations. Such incentives include long-term lease commitments, guarantees of leases in favor of owners of local establishments, substantial advance deposits, payments of lease rentals in advance and loans for buildings and tenant-improvement costs. Although Alliance believes that it now has adequate procedures for evaluating and managing such risks, historically substantial losses have been incurred in connection with such transactions reflecting, in part, former management's willingness to accept higher levels of risk to further its policy of emphasizing market share. Notwithstanding the change in Alliance's business strategy to one emphasizing profitability rather than market share, the future success of Alliance'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 Alliance 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 Alliance. In Louisiana, Alliance is subject to extensive competition for contracts to operate video poker machines, and Alliance'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 Alliance's operations comes from larger casinos focusing on the local market. Alliance'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 (if the Merger occurs) is expected to depend 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. 35 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 for electronic gaming machines is contingent upon the public's acceptance of these markets and an ongoing regulatory approval process by Federal, state and local governmental authorities. The Company cannot predict which new jurisdictions or markets, if any, will approve the operation of electronic gaming machines, the timing of any such approval or the level of the Company's participation in any such markets or that jurisdictions currently permitting gaming will continue to do so in the future. FOREIGN OPERATIONS The Company's business in foreign markets is subject to the risks customarily associated with such activities. These risks include fluctuations in foreign currency exchange rates and controls, expropriation, nationalization and other economic, tax and regulatory policies of local governments as well as the laws and policies of the United States affecting foreign trade and investment. BGII does not generally enter into foreign exchange contracts to hedge its exposure to foreign exchange rate fluctuations. KEY PERSONNEL The success of the Company will be dependent, to a significant extent, upon the continued services of a relatively small group of executive personnel. The loss or unavailability of one or more of such executive officers or the inability to attract or retain key employees in the future could have an adverse effect upon the Company's operations. See "Management". STRICT REGULATION BY GAMING AUTHORITIES The manufacture and distribution of gaming machines and the conduct of gaming operations is subject to extensive Federal, state, local and foreign regulation by various gaming authorities (each, a "Gaming Authority"). Although the laws and regulations of the various jurisdictions in which the Company operates vary in their technical requirements and are subject to amendment from time to time, virtually all of these jurisdictions require licenses, permits, documentation of the qualification, including evidence of integrity and financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines and gaming operations as well as for the officers, directors, major stockholders and key personnel of such companies. Alliance and BGII and their key personnel have obtained, or applied for, all government licenses, registrations, findings of suitability, permits and approvals necessary for the manufacture and distribution, and operation where permitted, of their gaming machines in the jurisdictions in which Alliance and BGII currently do business. However, there can be no assurance that such licenses, registrations, findings of suitability, permits or approvals will be given or renewed in the future or that the Company will obtain the licenses necessary to operate in emerging markets. 36 BGII was pursuing a permanent manufacturer's license for Gaming as it relates to the land-based casino in New Orleans. However, in November 1995, the operator of the land-based casino in New Orleans filed for bankruptcy reorganization and ceased operations. That action resulted in the termination of funding for the regulatory operations of the Louisiana Economic Development Gaming Corporation ("LEDGC") and, shortly thereafter, the Attorney General of Louisiana took control of the agency and effectively closed its operations and dismissed its President and employees. The foregoing occurred prior to completion of review of Gaming's pending application. In addition, BGII's application for renewal of Gaming's license as a gaming-related casino service industry in New Jersey is pending before the New Jersey Casino Control Commission (the "New Jersey Commission"). See "-- Ongoing BGII Regulatory Investigations" and "Gaming Regulation and Licensing". Alliance currently has an agreement with Fair Grounds Corporation, Jefferson Downs Corporation and Finish Line Management Corporation (collectively, "Fair Grounds") to be the exclusive operator of video poker machines at the only racetrack and ten associated OTBs in the greater New Orleans area. The Louisiana legislature has recently passed a bill which would allow each parish to decide whether to disallow video poker devices, riverboat casinos and, in Orleans Parish, land-based casinos. If any parish in which Alliance operates elects to disallow video poker devices, the Company would have to cease its video poker operations there by June 30, 1999. Alliance cannot predict which parishes will so elect; however, if Orleans Parish or certain other parishes in which Alliance operates so elect, the cessation of the Company's video poker operations would have a material adverse effect on the operations of Alliance. Alliance's operations also depend on the financial viability of the racetrack, which is beyond the control of Alliance. OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY The Gaming Authorities may, in their discretion, require the holder of any security of the Company, such as the Common Stock, Old Convertible Debentures, New Convertible Debentures or Series E Preferred Stock, to file applications, be investigated and be found suitable to own such security of the Company. If a record or beneficial owner of Common Stock, Old Convertible Debentures, New Convertible Debentures or Series E Preferred Stock is required by a Gaming Authority to be found suitable, such owner will be required to apply for a finding of suitability generally within 30 days after request by such Gaming Authority, or within such earlier time as required by such Gaming Authority. As a general matter, assuming a passive investment intent, only owners of specified percentages of the Company's securities are required to be found suitable, absent unusual circumstances, which percentage is typically between 10% to 15%. 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 Common Stock, Old Convertible Debentures, New Convertible Debentures or Series E Preferred Stock or to have any other relationship with the Company, then the Company can be sanctioned, including the loss of its approvals, if without the prior approval of the Gaming Authorities, the Company: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction; or (v) fails to pursue all lawful efforts to require such person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securites for cash at fair market value. 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 Common Stock, Old Convertible Debentures, New Convertible Debentures or Series E Preferred Stock found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Common Stock, Old Convertible Debentures, New Convertible Debentures or Series E Preferred Stock beyond such period of time prescribed by a Gaming Authority may be guilty of a criminal offense. See "Gaming Regulation and Licensing". 37 ONGOING BGII REGULATORY INVESTIGATIONS In May 1994, an investigation of BGII's former VLT Louisiana distributor resulted in the indictment by a United States grand jury and subsequent conviction in New Orleans of 18 individuals including certain of the former distributor's officers, directors, employees and others. In addition, Alan Maiss, a former director and president of BGII, pled guilty to misprision of a felony in connection with such investigation. BGII, its subsidiaries and its current employees were not subject to such investigation. BGII's activities with regard to its former VLT distributor in Louisiana have been the subject of current inquiries by gaming regulators. The gaming authorities in Ontario, Canada, who have investigated the matter, issued a gaming registration to Bally Gaming, Inc. on February 8, 1996. The New Jersey Commission is currently reviewing such proceedings in connection with Gaming's application for a license renewal. An adverse determination by a Gaming Authority 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 the Merger 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 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 and Alliance in Federal District Court in New Jersey seeking to enjoin such parties from using the "Bally" trade name. On February 16, 1996 BGII received notice from BEC alleging that BGII had violated the license agreement relating to such trade name by, among other things, granting to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which provides Bally Gaming, Inc.'s revolving line of credit, a security interest in general intangibles. In such notice, BEC also stated that as a result of the foregoing, it was immediately terminating the License Agreement. Loss of the "Bally" trade name, should such loss occur, may have a material adverse effect on the business, results of operations and financial condition of the Company, taken as a whole. WMS has instituted a lawsuit in New York State Court against BGII alleging, among other things, that $4.8 million is due and payable from BGII to WMS as a result of the termination of BGII's merger agreement with WMS. Pursuant to the Merger Agreement, Alliance has agreed to indemnify BGII against such a claim under certain circumstances. Prospective purchasers should read the description of these and other litigation proceedings currently pending against Alliance and BGII, as well as certain purported class actions, under the captions "Business -- Litigation Relating to the Merger" and "-- Other Litigation". GAMING TAXES AND VALUE ADDED TAXES Gaming operators are typically subject to significant taxes and fees in addition to corporate income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees, which could occur prospectively or retroactively, would adversely affect the Company. Sales of Wulff's products in Germany are generally subject to V.A.T. The operations of Wulff had benefitted from a special tax rebate that was phased out from January 1, 1992 to January 1, 1994. See "Gaming Regulation and Licensing -- Germany". In addition, during 1995, Wulff increased the amount of V.A.T. reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. The Company pays and expects to continue to pay substantial taxes and fees in Nevada, Louisiana and Mississippi and expects to pay substantial taxes and fees in any other jurisdiction in which it conducts gaming operations. 38 ABSENCE OF PUBLIC MARKET; VOLATILITY OF MARKET PRICES The New Convertible Debentures are being offered to the holders of Old Convertible Debentures. The Old Convertible Debentures were issued in September 1993 and are eligible for trading in the Private Offerings, Resale and Trading through Automatic Linkages ("PORTAL") market. The New Convertible Debentures and the Series E Preferred Stock are newly issued securities for which there will at the time of issuance be no market. Alliance does not currently intend to list the New Convertible Debentures or the Series E Preferred Stock on any securities exchange or to seek approval for quotation through any automated quotation system, nor is there any assurance that the New Convertible Debentures or the Series E Preferred Stock will be eligible for listing on any market. Accordingly, there can be no assurance as to the development or liquidity of any trading market for the New Convertible Debentures or the Series E Preferred Stock. Moreover, until the earlier of (i) the 60th day after issuance of the New Convertible Debentures and (ii) the effective time of the Merger (if it occurs), the liquidity and market price of the New Convertible Debentures may be adversely affected by the fact that upon an Automatic Conversion some New Convertible Debentures would be converted into Common Stock while other New Convertible Debentures would be converted into Series E Preferred Stock, and different New Convertible Debentures may trade at different prices depending on the class of capital stock into which such New Convertible Debentures would be converted in the event of the Automatic Conversion. There can be no assurance with respect to the prices at which the Common Stock will trade after the date hereof. On May 7, 1996, the closing price of the Common Stock as reported on NASDAQ was $4.00 per share. The trading price of the Common Stock could be subject to wide fluctuations in response to quarter- to-quarter variations in operating results and other events or factors, including the success of the Company's development activities, legislation approving or defeating gaming, other governmental actions, developments in the gaming industry generally and announcements by the Company or by competitors. Historical trading volumes for the Common Stock have been relatively low and research coverage for the Common Stock is limited. See "Market Price Data and Dividend Policy". In addition, the securities markets in general, and the gaming industry in particular, experience extreme price and volume fluctuations in a manner which is often unrelated to the operating performance of the companies within the gaming industry. These broad market fluctuations may adversely affect the market price of the Old Convertible Debentures, New Convertible Debentures, Common Stock and Series E Preferred Stock. A shift away from investor interest in gaming in general could adversely affect the trading price of the Old Convertible Debentures, New Convertible Debentures, Common Stock and Series E Preferred Stock. DILUTION; OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES The shares of Common Stock to be issued upon Automatic Conversion of the New Convertible Debentures will be issued at a price significantly above book value per share, so the holders of New Convertible Debentures will, upon the Automatic Conversion, suffer immediate substantial dilution. See "Dilution". Moreover, Alliance has outstanding options, warrants and convertible securities, many of which are held by management and principal stockholders, which can be exercised for or converted into in the aggregate approximately 12,400,000 shares of Common Stock, excluding shares underlying the New Convertible Debentures and the Old Convertible Debentures, and within 30 days of the consummation of the Merger, Alliance will issue additional options exercisable for 150,000 shares of Common Stock. Also, the New Convertible Debentures and the Series E Preferred Stock will be convertible into more shares of Common Stock than the Old Convertible Debentures, and the Series E Preferred Stock has a pay-in-kind feature that will result in issuance of additional shares of such stock also carrying conversion rights. 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, which options and warrants will represent an aggregate of 552,500 shares (based on the assumption that all eligible employees other than Messrs. Gillman, Jenkins and Kloss 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) and 112,350 shares of Common Stock, respectively (assuming each BGII warrant will be exercisable for the Merger consideration per share of BGII common stock subject to such warrant at the exercise price per share of such BGII warrant in effect immediately prior to the Effective Time and further assuming a price of $4.00 per share of Common Stock). 39 Further, warrants exercisable for an additional 2,500,000 shares of Common Stock will be issued to Alliance affiliates in connection with the Merger, and warrants exercisable for an additional 250,000 shares of Common Stock have been issued and will vest when the price of the Common Stock reaches $13.00 per share following consummation of the Merger or any similar transaction. Additionally, approximately 1,018,000 shares of Common Stock remain available for issuance under the Alliance 1984 Stock Option Plan and the Alliance 1991 Stock Option Plan. To the extent such outstanding options, warrants and other rights to purchase Common Stock are exercised, there will be further significant dilution to the shareholders of the Company. Additionally, if the Company consummates further acquisitions or other transactions utilizing the Company's securities, significant dilution to the Company's shareholders may result. See "Dilution" and "Security Ownership of Certain Beneficial Holders and Management". TRANSFER RESTRICTIONS ON NON-TENDERING HOLDERS Holders of Old Convertible Debentures who purchased such securities from Alliance and do not exchange their Old Convertible Debentures pursuant to the Exchange Offer will continue to be subject to certain restrictions on transfer of such Old Convertible Debentures which, in effect, prohibit transfers except pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws unless a registration statement is in effect with respect thereto. Pursuant to a registration rights agreement between Alliance and the holders of the Old Convertible Debentures, Alliance is required to maintain an effective shelf registration statement with respect to the Old Convertible Debentures at all times prior to September 21, 1996, and in the event that Alliance fails in this obligation for a period exceeding 90 days in the aggregate per year, liquidated damages ("Liquidated Damages") accrue daily and become payable on each Interest Payment Date to the holders of Old Convertible Debentures whose Old Convertible Debentures are subject to transfer restrictions as a result of this failure. The amount of Liquidated Damages accrued and unpaid to the date hereof is $.71 per $1,000 principal amount of Old Convertible Debentures, and additional Liquidated Damages are currently accruing at the rate of $.10 per $1,000 principal amount per week. See "Comparison of New Convertible Debentures and Old Convertible Debentures -- Registration Rights; Liquidated Damages". Holders whose transfer-restricted Old Convertible Debentures are accepted for exchange will be paid on September 1996 all Liquidated Damages to which they are entitled that are accrued and unpaid at the date of issuance of the New Convertible Debentures. New Convertible Debentures issued pursuant to the Exchange Offer in exchange for Old Convertible Debentures may be offered for resale, resold or otherwise transferred by holders thereof (other than any such holder which is an "affiliate" of Alliance within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act. EFFECT OF EXCHANGE OFFER ON LIQUIDITY The Old Convertible Debentures are not traded in an established market. After the consummation of the Exchange Offer, it is anticipated that the outstanding principal amount of Old Convertible Debentures may be significantly reduced. To the extent that any such Old Convertible Debentures are tendered in the Exchange Offer, any trading market for such Old Convertible Debentures may be substantially more limited. A security with a smaller outstanding principal amount available for trading may command a lower price than would a comparable security with a larger outstanding principal amount. Therefore, to the extent that Old Convertible Debentures are tendered and accepted pursuant to the Exchange Offer, the reduced outstanding principal amount may adversely affect the liquidity and market price of the unpurchased Old Convertible Debentures. Similarly, if the Exchange Offer is consummated but substantial amounts of Old Convertible Debentures are not exchanged therein, the amount of New Convertible Debentures will be reduced, adversely affecting the liquidity of the market therefor. For the first ten business days following completion of the Exchange Offer, none of the Dealer Managers will be able to effect purchases of New Convertible Debentures, Old Convertible Debentures or Common Stock, including for market making and trading purposes. ELECTION TO RECEIVE SERIES E PREFERRED STOCK UPON AUTOMATIC CONVERSION After the acceptance for exchange of any Old Convertible Debentures in accordance with the terms of the Exchange Offer, the election of the tendering holder to receive Common Stock or Series E Preferred 40 Stock, as the case may be, upon exchange thereof will be irrevocable and will be binding upon such holder and all transferees of the New Convertible Debentures issued in exchange thereof. As a consequence, if the Automatic Conversion occurs, holders of New Convertible Debentures will receive upon conversion thereof either Common Stock or Series E Preferred Stock, as the case may be, in accordance with such election, even if at the time of the Automatic Conversion they might prefer to receive the other security upon conversion thereof. Moreover, until the earlier of (i) the 60th day after issuance of the New Convertible Debentures and (ii) the effective time of the Merger (if it occurs), the liquidity and market price of the New Convertible Debentures may be adversely affected by the fact that upon an Automatic Conversion some New Convertible Debentures would be converted into Common Stock while other New Convertible Debentures would be converted into Series E Preferred Stock, and different New Convertible Debentures may trade at different prices depending on the class of capital stock into which such New Convertible Debentures would be converted in the event of the Automatic Conversion. LIMITATIONS ON NET OPERATING LOSSES; DISCHARGE OF DEBT INCOME Alliance had net operating loss carryovers ("NOLs") into 1996 of approximately $46 million, which Alliance believes are not currently subject to an annual limitation on their utilization under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). There is a material risk that the Merger, the Exchange Offer and the related financings will result in an "ownership change" under Section 382 of the Code, in which event the use of these NOLs will likely be subject to an annual limitation of approximately $5 million on their utilization. For tax purposes the Automatic Conversion results in an extinguishment of debt gain. However, this tax gain would be entirely offset against the Company's net operating loss carry-forwards, based on current Common Stock prices. HART-SCOTT-RODINO FILING Any person acquiring New Convertible Debentures pursuant to the Exchange Offer may be required to file a Premerger Notification and Report Form (an "HSR Form") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") with respect to the Automatic Conversion or any optional conversion of the New Convertible Debentures or Series E Preferred Stock into Common Stock. In general, if (i) a person would hold, upon consummation of the Automatic Conversion or any optional conversion, Common Stock exceeding $15 million in value, (ii) certain jurisdictional requirements are met and (iii) no exemption applies, then the HSR Act would require that such person file an HSR Form and observe the applicable waiting period under the HSR Act prior to acquiring such Common Stock. If such waiting period has not expired or been terminated at the date of the Automatic Conversion or any optional conversion, Alliance may be required to deliver such recipient's Common Stock into an escrow facility pending the expiration or termination of such waiting period. 41 THE EXCHANGE OFFER GENERAL Alliance hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal, to exchange an aggregate principal amount of up to $85,000,000 of New Convertible Debentures for a like principal amount of the issued and outstanding Old Convertible Debentures. It is Alliance's intention to exchange all Old Convertible Debentures tendered to and accepted by Alliance pursuant to the Exchange Offer for New Convertible Debentures and to cancel all such Old Convertible Debentures. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal, Alliance will accept for exchange Old Convertible Debentures which are properly tendered on or prior to the Expiration Date and not withdrawn as permitted below. As of the date of this Prospectus, $85,000,000 aggregate principal amount of Old Convertible Debentures was outstanding. This Prospectus, together with the Letter of Transmittal, are first being sent on or about May , 1996, to all holders of Old Convertible Debentures known to Alliance. Alliance's obligation to accept Old Convertible Debentures for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth in "-- Conditions to the Exchange Offer." Although Alliance has no present intention to do so, it reserves the right, subject to applicable law and any restrictions imposed by applicable debt instruments, to purchase or make offers for any Old Convertible Debentures that remain outstanding subsequent to the Expiration Date. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. Tendering holders of Old Convertible Debentures will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the conversion of Old Convertible Debentures pursuant to the Exchange Offer. Alliance will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Offer. CONDITIONS TO THE EXCHANGE OFFER The obligation of Alliance to consummate the Exchange Offer is subject to certain conditions, including, among others, the requirements that (i) holders of a majority of the outstanding shares of Common Stock of Alliance shall have approved the issuance of the New Convertible Debentures and of the securities issuable directly or indirectly upon conversion thereof (the holders of a majority of shares of the Common Stock have indicated their intention to approve such issuance), and (ii) the Nevada Gaming Commission and the Mississippi Gaming Commission shall each have approved the issuance of the New Convertible Debentures and of the Common Stock and Series E Preferred Stock issuable upon conversion thereof. Furthermore, notwithstanding any other provision of the Exchange Offer, Alliance shall not be required to accept for exchange, or to issue New Convertible Debentures in exchange for, any Old Convertible Debentures, subject to any applicable rules or regulations of the Commission, and may terminate or amend the Exchange Offer, if at any time before the acceptance of such Old Convertible Debentures for exchange, any of the following events shall have occurred: (1) there shall have been instituted or threatened or be pending any action or proceeding before or by any court or governmental, regulatory or administrative agency or instrumentality, or by any other person, in connection with the Exchange Offer or any other aspect of the Transaction that is, or is reasonably likely to be, in the reasonable judgment of Alliance, materially adverse to the business, operations, properties, condition (financial or otherwise), assets, liabilities or prospects of the Company; (2) there shall have occurred any material adverse development, in the reasonable judgment of Alliance, with respect to any action or proceeding concerning the Company; (3) any order, statute, rule, regulation, executive order, notice, ruling, stay, decree, judgment or injunction shall have been proposed, enacted, entered, issued, promulgated, enforced or deemed 42 applicable by an court or governmental, regulatory or administrative agency or instrumentality that, in the reasonable judgment of Alliance, would or might prohibit, prevent, restrict or delay consummation of the Transaction or that is, or is reasonably likely to be, materially adverse to the business, operations, properties, condition (financial or otherwise), assets, liabilities or prospects of the Company; (4) there shall have occurred or be likely to occur any event affecting the business or financial affairs of the Company or which, in the reasonable judgment of Alliance, would or might prohibit, prevent, restrict or delay consummation of the Exchange Offer or any other part of the Transaction, or that will, or is reasonably likely to, materially impair the contemplated benefits to Alliance or the Company of the Transaction, including the Exchange Offer, or otherwise result in the consummation of the Transaction, including the Exchange Offer, not being or being not reasonably likely to be in the best interests of Alliance or the Company; (5) the trustee under the New Convertible Indenture (the "Trustee") shall have objected in any respect to, or taken any action that could, in the reasonable judgment of Alliance, adversely affect the consummation of, the Exchange Offer or any other part of the Transaction, or shall have taken any action that challenges the validity or effectiveness of the procedures used by Alliance in the making of the Exchange Offer or the acceptance of, or payment for, any of the Old Convertible Debentures or any other part of the Transaction; (6) Alliance shall not have received from any federal, state or local governmental, regulatory or administrative agency or instrumentality any approval, authorization or consent that, in the reasonable judgment of Alliance, is necessary to effect the Exchange Offer or any other part of the Transaction, including without limitation the approval of the Nevada Gaming Commission and the Mississippi Gaming Commission for the issuance of the New Convertible Debentures (or the issuance of shares issuable directly or indirectly on conversion thereof); (7) there shall have occurred (a) any general suspension of, or limitation on prices for, trading in securities in the United States securities or financial markets, (b) any significant adverse change in the price of the Old Convertible Debentures or Common Stock in the United States securities or financial markets, (c) a material impairment in the trading market for debt or equity securities, (d) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (e) any limitation (whether or not mandatory) by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, on, or other event that, in the reasonable judgment of Alliance, might affect, the extension of credit by banks or other lending institutions, (f) a commencement of a war or armed hostilities or other national or international calamity directly or indirectly involving the United States, (g) any imposition of a general suspension of trading or limitation of prices on the New York Stock Exchange or NASDAQ, or (h) in the case of any of the foregoing existing on May , 1996, a material acceleration or worsening thereof; or (8) any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus is a part. All the foregoing conditions are for the sole benefit of Alliance and may be asserted by Alliance regardless of the circumstances giving rise to such conditions and may be waived by Alliance (except for any required approvals of the Nevada Gaming Commission and the Mississippi Gaming Commission), in whole or in part, at any time and from time to time, in the reasonable discretion of Alliance. The failure by Alliance at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. If any of the conditions set forth in this section shall not be satisfied, Alliance may, subject to applicable law, (i) terminate the Exchange Offer and return all Old Convertible Debentures tendered pursuant to the Exchange Offer to tendering holders; (ii) extend the Exchange Offer and retain all tendered Old Convertible Debentures, subject to the right of a tendering holder to withdraw his or her Old Convertible Debentures, until the Expiration Date for the extended Exchange Offer; (iii) amend the terms of the Exchange Offer or modify the consideration to be paid by Alliance pursuant to the Exchange Offer; or (iv) waive the unsatisfied 43 conditions (except for any required approvals of the Nevada Gaming Commission and the Mississippi Gaming Commission) with respect to the Exchange Offer and accept all Old Convertible Debentures tendered pursuant to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Convertible Debentures being tendered. EXPIRATION; EXTENSION; TERMINATION; AMENDMENT The Exchange Offer will expire at 12:00 midnight, New York City time, on June , 1996. Alliance expressly reserves the right, in its discretion, at any time or from time to time, to extend the period of time during which the Exchange Offer is open by giving oral (confirmed in writing) or written notice of such extension to the Exchange Agent and making a public announcement thereof prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. There can be no assurance that Alliance will exercise its right to extend the Exchange Offer or that the Exchange Offer will be otherwise extended. During any extension of the Exchange Offer, all Old Convertible Debentures previously tendered pursuant thereto and not exchanged or withdrawn will remain subject to the Exchange Offer and may be accepted for exchange by Alliance at the expiration of the Exchange Offer subject to the right of a tendering holder to withdraw his Old Convertible Debentures. See "-- Withdrawal of Tenders". Under no circumstances will interest be paid by Alliance by reason of any extension of the Exchange Offer. Alliance also expressly reserves the right, subject to applicable law, to delay acceptance for exchange of any Old Convertible Debentures or, regardless of whether such Old Convertible Debentures were theretofore accepted for exchange, to delay the exchange of any Old Convertible Debentures pursuant to the Exchange Offer or to terminate the Exchange Offer and not accept for exchange any Old Convertible Debentures, by giving oral (confirmed in writing) or written notice of such delay or termination to the Exchange Agent, if any of the conditions to the Exchange Offer specified herein fail to be satisfied . The reservation by Alliance of the right to delay exchange or acceptance for exchange of Old Convertible Debentures is subject to the provisions of Rule 13e-4(f)(5) under the Exchange Act, which requires that Alliance pay the consideration offered or return the Old Convertible Debentures deposited by or on behalf of holders thereof promptly after the termination or withdrawal of the Exchange Offer. Any extension, delay, termination or amendment of the Exchange Offer will be followed as promptly as practicable by a public announcement thereof. Without limiting the manner in which Alliance may choose to make a public announcement of any extension, delay, termination or amendment of the Exchange Offer, Alliance shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by issuing a release to the Dow Jones News Service, except in the case of an announcement of an extension of the Exchange Offer, in which case Alliance shall have no obligation to publish, advertise or otherwise communicate such announcement, other than by issuing a notice of such extension by press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. If Alliance increases or decreases or otherwise materially changes the amount of consideration currently offered, the Exchange Offer will remain open at least ten business days from the date that Alliance first publishes, sends or gives notice, by public announcement or otherwise, of such increase or decrease. Alliance has no current intention to increase or decrease or otherwise materially change the amount of consideration currently offered. If Alliance materially changes the terms of the Exchange Offer or the information concerning the Exchange Offer, Alliance will extend the Exchange Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated under the Exchange Act. These rules provide that the minimum period during which an offer must remain open following a material change in the terms of the offer or information concerning the offer (other than a change in consideration offered or a change in percentage of securities sought) will depend on the facts and circumstances, including the relative materiality of such terms or 44 information. The Commission has stated that, as a general rule, it is of the view than an offer should remain open for a minimum of five business days from the date that notice of such a material change is first published, sent or given. PROCEDURES FOR TENDERING TENDERS OF OLD CONVERTIBLE DEBENTURES. For a holder validly to tender Old Convertible Debentures pursuant to the Exchange Offer, either (i) a properly completed and validly executed Letter of Transmittal (or a facsimile thereof), together with any signature guarantees and any other documents required by the instructions to the Letter of Transmittal, or (ii) an Agent's Message (as defined below), must be received by the Exchange Agent on or prior to the Expiration Date at the address set forth on the back cover page of this Prospectus. In addition, either (i) the Exchange Agent must receive tendered Old Convertible Debentures at such address or (ii) such Old Convertible Debentures must be transferred pursuant to the procedures for book-entry transfer described below and a confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. A holder who desires to tender Old Convertible Debentures and who cannot comply with the procedures set forth herein for tender on a timely basis or whose Old Convertible Debentures are not immediately available must comply with the procedures for guaranteed delivery set forth below. LETTERS OF TRANSMITTAL, OLD CONVERTIBLE DEBENTURES AND CONFIRMATIONS OF BOOK-ENTRY TRANSFER SHOULD BE SENT ONLY TO THE EXCHANGE AGENT, AND NOT TO ALLIANCE, THE TRUSTEE OR THE INFORMATION AGENT. DELIVERY OF LETTERS OF TRANSMITTAL. If the Old Convertible Debentures are registered in the name of a person other than the signer of the Letter of Transmittal relating thereto, then in order to tender such Old Convertible Debentures pursuant to the Exchange Offer, such Old Convertible Debentures must be endorsed or accompanied by appropriate bond powers signed exactly as the name or names of the registered owner or owners appear on the certificates, with the signatures on the certificates or bond powers guaranteed as provided below. Any beneficial owner whose Old Convertible Debentures are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Convertible Debentures should contact such registered holder promptly and instruct such registered holder to tender the Old Convertible Debentures on such beneficial owner's behalf. If any beneficial owner wishes to tender Old Convertible Debentures himself or herself, that beneficial owner must, prior to completing and executing the Letter of Transmittal and, where applicable, delivering his or her Old Convertible Debentures, either make appropriate arrangements to register ownership of the Old Convertible Debentures in such beneficial owner's name or follow the procedures described in the immediately preceding paragraph. The transfer of record ownership may take a considerable amount of time. THE METHOD OF DELIVERY OF OLD CONVERTIBLE DEBENTURES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER TENDERING THE OLD CONVERTIBLE DEBENTURES. IF DELIVERY IS TO BE MADE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE. BOOK-ENTRY TRANSFER. Promptly after the commencement of the Exchange Offer, the Exchange Agent will seek to establish a new account or utilize an existing account with respect to the Old Convertible Debentures at The Depository Trust Company (the "DTC"). Any financial institution that is a participant in DTC's system and whose name appears on a security position listing on DTC's system as the owner of Old Convertible Debentures may make book-entry delivery of such Old Convertible Debentures by causing DTC to transfer such Old Convertible Debentures into the Exchange Agent's account with respect to the Old Convertible Debentures in accordance with DTC's Automated Tender Offer Program procedures for such book-entry transfers. However, the exchange for the Old Convertible Debentures so tendered will be made only after book-entry confirmation of such book-entry transfer of Old Convertible Debentures into the Exchange Agent's account, and timely receipt by the Exchange Agent of an Agent's Message (as such term is defined in the next sentence). The term "Agent's Message" means a message, transmitted by DTC and received by the Exchange Agent and forming a part of a book-entry confirmation, which states that DTC has 45 received an express acknowledgment from a participant tendering the Old Convertible Debentures that is the subject of such book-entry confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal, and that Alliance may enforce such agreement against such participant. Delivery of the Letter of Transmittal and any other required documents to DTC does not constitute delivery to the Exchange Agent. SIGNATURE GUARANTEES. Signatures on the Letter of Transmittal must be guaranteed by a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or by a commercial bank or trust company having an office or correspondent in the United States or by any other "eligible guarantor institution" as defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing being an "Eligible Institution") unless (a) the Letter of Transmittal is signed by the registered holder of the Old Convertible Debentures tendered therewith (or by a participant in DTC whose name appears on a security position listing as the owner of such Old Convertible Debentures) and neither the "Special Payment Instructions" box nor the "Special Delivery Instructions" box of the Letter of Transmittal is completed or (b) the Old Convertible Debentures tendered therewith are tendered for the account of an Eligible Institution. Signatures must also be guaranteed by an Eligible Institution on any notice of withdrawal with respect to Old Convertible Debentures tendered pursuant to a Letter of Transmittal with signature guarantees. GUARANTEED DELIVERY. If a holder desires to tender Old Convertible Debentures pursuant to the Exchange Offer and (a) such Old Convertible Debentures are not immediately available, (b) time will not permit such holder's Letter of Transmittal, such Old Convertible Debentures or other required documents to reach the Exchange Agent on or prior to the Expiration Date or (c) such holder cannot complete the procedures for book-entry transfer on or prior to the Expiration Date, a tender may be effected if all the following are complied with: (a) such tender is made by or through an Eligible Institution; (b) on or prior to the Expiration Date, the Exchange Agent has received from such Eligible Institution, at the address of the Exchange Agent set forth on the back cover page of this Prospectus, a properly completed and validly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) in substantially the form accompanying this Prospectus, setting forth the name and address of the registered holder and the principal amount of Old Convertible Debentures being tendered and stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the date of the Notice of Guaranteed Delivery, the Letter of Transmittal (or a facsimile thereof), properly completed and validly executed, together with the Old Convertible Debentures in proper form for transfer (or confirmation of book-entry transfer of such Old Convertible Debentures into the Exchange Agent's account with DTC), and any other documents required by the Letter of Transmittal and the instructions thereto, will be deposited by such Eligible Institution with the Exchange Agent; and (c) the Letter of Transmittal (or a facsimile thereof), properly completed and validly executed, together with the Old Convertible Debentures in proper form for transfer (or confirmation of book-entry transfer of such Old Convertible Debentures into the Exchange Agent's account with DTC) and any other documents required by the Letter of Transmittal and the instructions thereto, are received by the Exchange Agent within three New York Stock Exchange trading days after the date of such Notice of Guaranteed Delivery. MUTILATED, LOST OR MISSING CERTIFICATES. If a holder desires to tender Old Convertible Debentures pursuant to the Exchange Offer but such Old Convertible Debentures have been mutilated, lost, stolen or destroyed, such holder should write to or telephone the trustee under the Old Convertible Indenture, at the 46 address or telephone number listed below, about procedures for obtaining replacements for such Old Convertible Debentures or arranging for indemnification or any other matter that requires handling by such trustee: The Bank of New York 101 Barclay Street New York, New York 10286 (212) 495-1784 OTHER MATTERS. Notwithstanding any other provision of the Exchange Offer, delivery of the New Convertible Debentures for Old Convertible Debentures tendered and accepted pursuant to the Exchange Offer will occur only after timely receipt by the Exchange Agent of such Old Convertible Debentures in proper form for transfer (or confirmation of book-entry transfer of such Old Convertible Debentures into the Exchange Agent's account with DTC), together with properly completed and validly executed Letters of Transmittal (or a facsimile thereof) and any other required documents. Tenders of Old Convertible Debentures pursuant to any of the procedures described above and acceptance thereof by Alliance will constitute a binding agreement between Alliance and the tendering holder upon the terms and subject to the conditions of the Exchange Offer. All questions as to the form of all documents and the validity (including time of receipt) and acceptance of tenders of the Old Convertible Debentures will be determined by Alliance, in its reasonable discretion, and Alliance's determination shall be final and binding. Alternative, conditional or contingent tenders of Old Convertible Debentures will not be valid. Alliance reserves the absolute right to reject any or all tenders of Old Convertible Debentures that are not in proper form or the acceptance of which, in Alliance's opinion, would be unlawful. Alliance also reserves the absolute right to waive any defects, irregularities or conditions of tender as to particular Old Convertible Debentures. If Alliance waives its right to reject a defective, irregular or conditional tender of Old Convertible Debentures, the holder will be entitled to New Convertible Debentures in exchange for such Old Convertible Debentures. Alliance's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding. Any defect or irregularity in connection with tenders of Old Convertible Debentures must be cured within such time as Alliance determines, unless waived by Alliance. Tenders of Old Convertible Debentures shall not be deemed to have been made until all defects and irregularities have been waived by Alliance or cured. None of Alliance, the Dealer Managers, the Exchange Agent, the Information Agent, the Trustee or any other person will be under any duty to give notice of any defects or irregularities in tenders of Old Convertible Debentures, or will incur any liability to holders for failure to give any such notice. ELECTION TO RECEIVE SERIES E PREFERRED STOCK UPON AUTOMATIC CONVERSION If a holder tendering Old Convertible Debentures pursuant to the Exchange Offer desires to receive Series E Preferred Stock upon the Automatic Conversion with respect to all or any part of the New Convertible Debentures to be issued in exchange for such Old Convertible Debentures, (i) either (a) a properly completed and validly executed Letter of Transmittal (or a facsimile thereof), together with any signature guarantees and any other documents required by the instructions to the Letter of Transmittal or (b) a properly completed and validly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery in substantially the form accompanying this Prospectus) must be received by the Exchange Agent at the address set forth on the back cover page of this Prospectus on or prior to the Expiration Date, (ii) the principal amount of New Convertible Debentures to be converted into Series E Preferred Stock in the event of the Automatic Conversion must be indicated in the appropriate space on the Letter of Transmittal or the Notice of Guaranteed Delivery, as the case may be, and (iii) the other procedures described in "The Exchange Offer -- Procedures for Tendering" must be complied with. UNLESS THE FOREGOING REQUIREMENTS ARE SATISFIED, ALL OF THE NEW CONVERTIBLE DEBENTURES RECEIVED IN EXCHANGE FOR SUCH OLD CONVERTIBLE DEBENTURES WILL BE AUTOMATICALLY CONVERTED INTO COMMON STOCK, RATHER THAN SERIES E PREFERRED STOCK, UPON THE AUTOMATIC CONVERSION. Elections to receive shares of Series E Preferred Stock upon the Automatic Conversion will be accepted only in integral multiples of $1,000 principal amount. In order to change the election made pursuant to the foregoing, a tendering holder must, on or prior to the 47 Expiration Date, (i) withdraw his tender of Old Convertible Debentures in accordance with the procedures set forth in "The Exchange Offer -- Withdrawal of Tenders" and (ii) tender such Old Convertible Debentures again in accordance with the foregoing provisions of this paragraph. After the acceptance for exchange of any Old Convertible Debentures in accordance with the terms of the Exchange Offer, the election of the tendering holder to receive Common Stock or Series E Preferred Stock, as the case may be, upon exchange thereof will be irrevocable and will be binding upon such holder and all future holders of the New Convertible Debentures issued in exchange therefor. WITHDRAWAL OF TENDERS Tenders of Old Convertible Debentures may be withdrawn at any time until the Expiration Date. Thereafter, such tenders are irrevocable, except that they may be withdrawn at any time after , 1996 unless accepted for exchange prior to that date. Holders who wish to exercise their right of withdrawal with respect to the Exchange Offer must give written notice of withdrawal, delivered by mail or hand delivery or facsimile transmission, to the Exchange Agent at one of its addresses set forth on the back cover page of this Prospectus on or prior to the Expiration Date or at such other time as otherwise provided for herein. In order to be effective, a notice of withdrawal must specify the name of the person who deposited the Old Convertible Debentures to be withdrawn (the "Depositor"), the name in which the Old Convertible Debentures are registered if different from that of the Depositor and the principal amount of the Old Convertible Debentures to be withdrawn. If tendered Old Convertible Debentures to be withdrawn have been delivered or identified through confirmation of book-entry transfer to the Exchange Agent, the notice of withdrawal also must specify the name and number of the account at DTC to be credited with the withdrawn Old Convertible Debentures. The notice of withdrawal must be signed by the registered holder of such Old Convertible Debentures in the same manner as the applicable Letter of Transmittal (including any required signature guarantees), or be accompanied by evidence satisfactory to Alliance that the person withdrawing the tender has succeeded to the beneficial ownership of such Old Convertible Debentures. Withdrawals of tenders of Old Convertible Debentures may not be rescinded, and any Old Convertible Debentures withdrawn will be deemed not validly tendered thereafter for purposes of the Exchange Offer. However, properly withdrawn Old Convertible Debentures may be tendered again at any time prior to the Expiration Date by again following the procedures for tendering Old Convertible Debentures described herein. All questions as to the form and validity (including time of receipt) of any withdrawal of tendered Old Convertible Debentures will be determined by Alliance, in its sole discretion, and Alliance's determination shall be final and binding. None of Alliance, the Dealer Managers, the Exchange Agent, the Trustee, the Information Agent or any other person will be under any duty to give notification of any defect or irregularity in any withdrawal of tendered Old Convertible Debentures, or will incur any liability for failure to give any such notification. If Alliance is delayed in its acceptance for exchange of any Old Convertible Debentures or is unable to accept for exchange or exchange any Old Convertible Debentures pursuant to the Exchange Offer for any reason, then, without prejudice to Alliance's rights hereunder, tendered Old Convertible Debentures may be retained by the Exchange Agent on behalf of Alliance and may not be withdrawn (subject to Rule 13e-4(f)(5) under the Exchange Act, which requires that an issuer making a tender offer pay the consideration offered, or return the tendered securities, promptly after the termination or withdrawal of a tender offer), except as otherwise permitted hereby. ACCEPTANCE OF OLD CONVERTIBLE DEBENTURES; DELIVERY OF NEW CONVERTIBLE DEBENTURES The acceptance of Old Convertible Debentures validly tendered and not withdrawn will be made as promptly as practicable after the Expiration Date. For purposes of the Exchange Offer, Alliance will be deemed to have accepted for exchange validly tendered Old Convertible Debentures if, as and when Alliance gives oral (confirmed in writing) or written notice thereof to the Exchange Agent. Such notice of acceptance shall constitute a binding contract between Alliance and the tendering holder pursuant to which Alliance will be obligated to exchange the Old Convertible Debentures into a like principal amount of New Convertible Debentures, and upon such notice of acceptance the tendered Old Convertible Debentures will 48 cease to be treated as outstanding indebtedness of Alliance. Subject to the terms and conditions of the Exchange Offer, the New Convertible Debentures issued in respect of Old Convertible Debentures accepted and exchanged pursuant to the Exchange Offer will be made by the Exchange Agent as soon as practicable after receipt of such notice. The Exchange Agent will act as agent for the tendering holders of Old Convertible Debentures for the purposes of receiving the New Convertible Debentures from Alliance and transmitting the New Convertible Debentures to the tendering holders. Tendered Old Convertible Debentures not accepted for exchange by Alliance, if any, will be returned without expense to the tendering holder of such Old Convertible Debentures (or, in the case of Old Convertible Debentures tendered by book-entry transfer into the Exchange Agent's account at DTC, such Old Convertible Debentures will be credited to an account maintained at DTC) as promptly as practicable following the Expiration Date. EXCHANGE AGENT AND INFORMATION AGENT The Bank of New York has been appointed Exchange Agent for the Exchange Offer. All deliveries and correspondence sent to the Exchange Agent should be directed to its address set forth on the back cover page of this Prospectus. Requests for assistance or additional copies of this Prospectus and the Letter of Transmittal should be directed to Georgeson & Company Inc., as Information Agent, at its address set forth on the back cover page of this Prospectus. Alliance has agreed to pay the Exchange Agent and the Information Agent customary fees for their services and to reimburse the Exchange Agent and the Information Agent for their reasonable out-of-pocket expenses in connection therewith. Alliance also has agreed to indemnify the Exchange Agent and the Information Agent for certain liabilities, including certain liabilities under the federal securities laws. DEALER MANAGERS Deutsche Morgan Grenfell/C.J. Lawrence, Inc. ("Deutsche Morgan Grenfell"), Jefferies & Company, Inc. ("Jefferies") and Ladenburg, Thalmann & Co. Inc. ("Ladenburg" and, together with Deutsche Morgan Grenfell and Jefferies, the "Dealer Managers") have agreed to solicit exchanges of the New Convertible Debentures for the Old Convertible Debentures, for which Alliance will pay the Dealer Managers on consummation of the Merger a fee of 2.5% of the principal amount of Old Convertible Debentures accepted pursuant thereto. The maximum fee payable to the Dealer Managers is $2.1 million plus the amount that the Dealer Managers are entitled to pursuant to the next paragraph. Alliance will also reimburse the Dealer Managers for certain reasonable out-of-pocket expenses in connection with the Exchange Offer and will indemnify the Dealer Managers against certain liabilities, including liabilities under the Securities Act. Jefferies and Ladenburg are also expected to serve as underwriters for the Offerings, and Deutsche Morgan Grenfell and Jefferies, on the one hand, and Ladenburg, on the other, are serving as financial advisors to Alliance and BGII, respectively, for which they receive customary fees and reimbursement of expenses, including in the case of Jefferies, 450,000 shares of Common Stock and an advisory fee based on the principal amount of Old Convertible Debentures accepted pursuant to the Exchange Offer. 49 DESCRIPTION OF THE NEW CONVERTIBLE DEBENTURES The New Convertible Debentures are a new issue of securities and will be issued under the New Convertible Indenture. The terms of the New Convertible Debentures include those stated in the New Convertible Indenture and those made part of the New Convertible Indenture by the Trust Indenture Act of 1939, as amended (the "TIA"). The New Convertible Debentures are subject to all such terms and the holders of the New Convertible Debentures are referred to the New Convertible Indenture filed as an exhibit to the Registration Statement of which this Prospectus is a part and to the TIA for a statement of those terms. Certain capitalized terms used and not defined in the following summary are defined in the New Convertible Debentures and the New Convertible Indenture. This summary does not purport to be complete, and is subject to, and is qualified in its entirety by reference to, all the provisions of the New Convertible Indenture. The terms of the New Convertible Debentures are substantially identical in all material respects to the terms of the Old Convertible Debentures, except that the New Convertible Debentures will have a lower conversion price, will be senior in right of payment to the Old Convertible Debentures and will automatically convert upon consummation of the Merger (should it occur within 60 days after issuance of the New Convertible Debentures). See "Comparison of New Convertible Debentures and Old Convertible Debentures". GENERAL The New Convertible Debentures are unsecured senior subordinated obligations of Alliance, are limited to $85,000,000 aggregate principal amount and will mature on September 15, 2003. The New Convertible Debentures bear interest at the rate of 7 1/2% per annum from the issue date or, thereafter, the most recent interest payment date to which interest in respect of the New Convertible Debentures has been paid or provided for. Interest on the New Convertible Debentures is payable semi-annually on March 15 and September 15 of each year, commencing September 15, 1996, to the holders of record of the New Convertible Debentures at the close of business on the preceding March 1 or September 1, as the case may be. Principal of (and premium, if any) and interest on the New Convertible Debentures are payable, the transfer of the New Convertible Debentures is registerable, and the New Convertible Debentures are convertible, at the office of The Bank of New York, 101 Barclay Street, New York, New York 10286. Interest is computed on the basis of a 360-day year of twelve 30-day months. CONVERSION AT ELECTION OF HOLDER The New Convertible Indenture provides that the New Convertible Debentures or portions thereof (which are $1,000 or integral multiples thereof) are convertible into shares of Common Stock at any time prior to the close of business on the second Business Day prior to maturity, at the Conversion Price, which will be $8.33 per share, subject to adjustment as provided below. The right to convert New Convertible Debentures called for redemption will expire at the close of business on the fifth Business Day prior to the redemption date, except that in the case of redemption at the option of the holder as a result of a Redemption Event (as defined below), such right will terminate upon receipt by Alliance of written notice of the exercise of such option unless Alliance subsequently fails to pay the Redemption Price (as defined below). The holders of New Convertible Debentures who convert their New Convertible Debentures after a record date but prior to the date which is five business days prior to an Interest Payment Date are entitled to receive the interest payment made on such interest payment date if the conversion is made following the issuance by Alliance of a notice of redemption. Otherwise, holders of New Convertible Debentures converted after a record date but prior to an interest payment date will not be entitled to receive such interest payment. For information as to notices of redemption, see "-- Redemption at Alliance's Option". The Conversion Price is subject to adjustment in certain events, including (i) dividends (and other distributions) payable in shares of Common Stock on any class of capital stock of Alliance, (ii) the issuance to all holders of shares of Common Stock or rights or warrants entitling them to subscribe for or purchase shares of Common Stock at less than the current market price (as defined in the New Convertible Indenture), (iii) subdivisions, combinations and reclassifications of shares of Common Stock, (iv) certain tender offers by Alliance or any subsidiary of Alliance for shares of Common Stock and (v) distributions by Alliance to all holders of shares of Common Stock of evidences of indebtedness, securities other than shares of 50 Common Stock or other assets (including securities but excluding those dividends, rights, warrants and distributions referred to above and excluding dividends and distributions paid in cash or other property out of the retained earnings of Alliance), provided that, in the event that the fair market value of the assets, evidences of indebtedness or other securities so distributed applicable to one share of Common Stock equals or exceeds such current market price per share of Common Stock or such current market price exceeds such fair market value by less than $0.10 per share, the Conversion Price will not be adjusted until such time as the cumulative amount of all such distributions exceed $0.10 per share. In addition to the foregoing adjustments, Alliance is permitted to make such reductions in the Conversion Price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of the shares of Common Stock. In case of certain reclassifications, consolidations or mergers to which Alliance is a party or the transfer of all or substantially all of the assets of Alliance, each New Convertible Debenture then outstanding would, without the consent of any holders of New Convertible Debentures, become convertible only into the kind and amount of securities, cash and other property receivable upon the reclassification, consolidation, merger or transfer by a holder of the number of shares of Common Stock into which such New Convertible Debentures might have been converted immediately prior to such reclassification, consolidation, merger or transfer (assuming such holder of shares of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares). Fractional shares of Common Stock will not be issued upon conversion, but, in lieu thereof, Alliance will pay a cash adjustment based upon market price (as determined in accordance with the New Convertible Indenture). New Convertible Debentures surrendered for conversion between the record date for an interest payment and the interest payment date (except New Convertible Debentures called for redemption on a redemption date within such period) must be accompanied by payment of an amount equal to the interest thereon which the registered holder is to receive on such interest payment date. A New Convertible Debenture converted on an Interest Payment Date need not be accompanied by any payment and the interest on the principal amount of the New Convertible Debentures being converted will be paid on such interest payment date to the registered holder of such New Convertible Debenture on the immediately preceding record date. Except where New Convertible Debentures surrendered for conversion must be accompanied by payment as described above, no interest on converted New Convertible Debentures will be payable by Alliance on any interest payment date subsequent to the date of conversion. No other payment or adjustment for interest or dividends is to be made upon conversion. AUTOMATIC CONVERSION UPON CONSUMMATION OF MERGER The New Convertible Indenture provides that if the Merger is consummated within 60 days after the issuance of the New Convertible Debentures, then at the effective time of the Merger, the New Convertible Debentures will be automatically converted into Common Stock at the Special Conversion Price of $5.56 per share (equivalent to a conversion rate of approximately 180 shares per $1,000 principal amount of New Convertible Debentures). The Special Conversion Price will be adjusted under the circumstances which would give rise to an adjustment in the Conversion Price, as described in "-- Conversion at Election of Holder". A holder tendering Old Convertible Debentures in the Exchange Offer may elect, at the time such Old Convertible Debentures are tendered, to forego receipt of all or any portion of Common Stock that such holder would otherwise be entitled to receive upon the occurrence of the Automatic Conversion with respect to the New Convertible Debentures issued in exchange for such Old Convertible Debentures and to receive in lieu thereof ten shares of Series E Preferred Stock for each $1,000 principal amount of New Convertible Debentures held. See "The Exchange Offer -- Election to Receive Series E Preferred Stock upon Automatic Conversion". Each share of Series E Preferred Stock will have the terms described under "Description of Capital Stock -- Special Stock -- 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E". Fractional shares of Common Stock will not be issued upon the Automatic Conversion, but, in lieu thereof, Alliance will pay a cash adjustment based upon market price (as determined in accordance with the New Convertible Indenture). Fractional shares of Series E Preferred Stock will be issued, if necessary, upon the Automatic Conversion, and no cash adjustment will be paid in lieu of fractional shares of Series E 51 Preferred Stock. The Merger remains subject to certain conditions, including regulatory approvals and the obtaining of financing. ALTHOUGH THERE CAN BE NO ASSURANCE, ALLIANCE CURRENTLY EXPECTS THAT THE MERGER WILL BE CONSUMMATED WITHIN 60 DAYS AFTER THE ISSUANCE OF THE NEW CONVERTIBLE DEBENTURES AND THUS THAT THE AUTOMATIC CONVERSION WILL OCCUR. INTEREST ON NEW CONVERTIBLE DEBENTURES The New Convertible Debentures will bear interest from the date of issuance, payable on each Interest Payment Date, commencing September 15, 1996. Holders whose Old Convertible Debentures are accepted for exchange will also receive on September 15, 1996 (the next interest payment date for the Old Convertible Debentures) payment in respect of interest (provided such holders' New Convertible Debentures are not theretofore converted) and (to the extent such holder was entitled thereto) Liquidated Damages on the Old Convertible Debentures, in each case accrued to the date of issuance of the New Convertible Debentures. SUBORDINATION The payment of the principal of (and premium, if any), interest on and redemptions at the option of holders of the New Convertible Debentures will, to the extent set forth in the New Convertible Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, receivership, reorganization, assignment for the benefit of creditors, marshalling of assets and liabilities or any bankruptcy, insolvency or similar proceedings of Alliance, the holders of all Senior Indebtedness will first be entitled to receive payment in full in cash of all amounts due or to become due thereon before the holders of the New Convertible Debentures will be entitled to receive any payment in respect of the principal of (and premium, if any), interest on, or redemptions at the option of holders of the New Convertible Debentures. In the event of the acceleration of the principal amount due on the New Convertible Debentures, the holders of all Senior Indebtedness will first be entitled to receive payment in full in cash of all amounts due or to become due thereon before the holders of the New Convertible Debentures will be entitled to receive any payment of the principal of (and premium, if any), interest on, or redemptions at the option of holders of the New Convertible Debentures. No payments on account of principal of (and premium, if any), interest on or redemptions at the option of holders of the New Convertible Debentures may be made if there shall have occurred and be continuing a default in any payment with respect to Senior Indebtedness permitting the holders thereof to accelerate the maturity thereof, or if any judicial or other proceeding shall be pending with respect to any such default. In addition, upon the occurrence of any other default with respect to Senior Indebtedness permitting the holders thereof to accelerate the maturity thereof and receipt by Alliance of written notice of such occurrence (a "Blockage Notice"), no payment or distribution to the Trustee or any holder of the New Convertible Debentures (other than in the form of securities that are subordinated to a greater extent than the New Convertible Debentures are to Senior Indebtedness) will be permitted to be made by Alliance for a period commencing on the date of receipt of such Blockage Notice by Alliance and ending 179 days thereafter (unless such default is cured or waived). During any consecutive 360-day period, only one 179-day period may commence during which payment of principal of or interest on the New Convertible Debentures may not be made and the duration of such period may not exceed 179 days. Only a holder of in excess of $5,000,000 of Senior Indebtedness or an agent for any syndicate of lenders which syndicate in the aggregate holds in excess of $5,000,000 of Senior Indebtedness may initiate such a payment blockage. Because Alliance operates largely through subsidiaries, the New Convertible Debentures are structurally subordinated to the Indebtedness of such subsidiaries, including the trade payables and other indebtedness of such subsidiaries. "Senior Indebtedness" is defined in the New Convertible Indenture to mean (i) all indebtedness of Alliance, including the principal of and premium, if any, and interest on such indebtedness, whether outstanding currently or hereafter created, for borrowed money, including certain guarantees, for indebtedness incurred in connection with acquisitions, and for money owed or reimbursement obligations under letters of credit or under any lease of any real or personal property, which obligations are capitalized on Alliance's books, (ii) all currency hedging obligations of Alliance, (iii) all interest on any of the foregoing that would accrue but for the filing of a bankruptcy or similar proceeding at the rate specified in the 52 instrument governing such indebtedness, whether or not such interest is an allowable claim in such proceeding and (iv) any modifications, refundings, deferrals, renewals or extensions of any such indebtedness or securities, notes or other evidences of indebtedness issued in exchange for such indebtedness (collectively, "Indebtedness"), unless, by the terms of the instrument creating or evidencing such Indebtedness, it is provided that such Indebtedness is not superior in right of payment to the New Convertible Debentures or to other Indebtedness which is pari passu with or subordinated to the New Convertible Debentures, and except for the Old Convertible Debentures. The New Convertible Debentures will be senior in right of payment to the Old Convertible Debentures and to any other Indebtedness other than Senior Indebtedness. At March 31, 1996, there was no Senior Indebtedness of Alliance and $14.1 million of indebtedness of Alliance's subsidiaries ($140.0 million and $33.5 million, respectively, on a pro forma basis at March 31, 1996 assuming the Merger had occurred on that date). The New Convertible Indenture does not impose any limitation on Alliance's ability to incur additional Senior Indebtedness or Indebtedness of subsidiaries. The Senior Notes will constitute Senior Indebtedness as defined in the New Convertible Indenture. See "Risk Factors -- Subordination". REDEMPTION AT ALLIANCE'S OPTION The New Convertible Debentures are subject to redemption and will be redeemable at the option of Alliance, in whole or in part (in any integral multiple of $1,000), upon not less than 20 nor more than 60 days prior notice by mail, provided that until September 15, 1996 the New Convertible Debentures cannot be redeemed at the option of Alliance unless the closing price of the Common Stock has equalled or exceeded 250% of the then existing Conversion Price per share for at least 20 out of any 30 consecutive trading days ending within 60 days before the notice of redemption is first mailed. Thereafter, the New Convertible Debentures may be redeemed at the following redemption prices (expressed as percentages of the principal amount set forth below), if redeemed during the 12-month period beginning September 15 of the years indicated:
YEAR REDEMPTION PRICE - ------------------------------------------------------------------ ----------------- 1995.............................................................. 105.63% 1996.............................................................. 104.69% 1997.............................................................. 103.75% 1998.............................................................. 102.81% 1999.............................................................. 101.88% 2000.............................................................. 100.94% 2001 and thereafter............................................... 100.00%
in each case together with accrued interest to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an Interest Payment Date). If less than all of the New Convertible Debentures are to be redeemed, the Trustee will select the New Convertible Debentures to be redeemed by lot, pro rata or by such other method as the Trustee shall deem fair and equitable. On or after the redemption date, interest will cease to accrue on the New Convertible Debentures, or portion thereof, called for redemption. No sinking fund is provided for the New Convertible Debentures. REDEMPTION AT HOLDER'S OPTION The New Convertible Indenture provides that if a Redemption Event occurs, each holder of the New Convertible Debentures shall have the right, subject to certain conditions, at the holder's option, to require Alliance to redeem all of such holder's New Convertible Debentures, or any portion thereof that is an integral multiple of $1,000, on the date (the "Redemption Date") that is 45 days after the date of an Alliance Notice (as defined below), for cash at a price equal to 101% of the principal amount of such New Convertible Debentures to be redeemed (the "Redemption Price"), together with accrued interest to the Redemption Date. Within 15 days after the occurrence of a Redemption Event, Alliance, or at Alliance's request, the Trustee, is obligated to mail to all holders of record of the New Convertible Debentures a notice ("Alliance Notice") of the occurrence of such Redemption Event and of the redemption right arising as a result thereof. 53 Alliance must deliver a copy of the Alliance Notice to the Trustee. To exercise the redemption right a holder of such New Convertible Debentures must deliver on or before the 15th business day after the date of the Alliance Notice written notice to the Trustee of the holder's exercise of such right, together with the New Convertible Debentures with respect to which the right is being exercised, duly endorsed for transfer to Alliance. A Redemption Event will be deemed to have occurred at such time as: (i) there is a Change of Control of Alliance; or (ii) Alliance's Common Stock (or other common stock into which the New Convertible Debentures are then convertible) is not listed for trading on a United States national securities exchange or the NASDAQ NMS or the NASDAQ listing of Small Capitalization Stocks. Under the New Convertible Indenture, a "Change of Control" is deemed to have occurred at such time as (i) any person or group (as the term "person" or "group" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) other than an Exempt Person (as defined below) files a Schedule 13D or 14D-1 (or any successor schedule, form or report under the Exchange Act) disclosing that such person or group (excluding any Exempt Person) has become the beneficial owner of 50% or more of Alliance's capital stock having the power to vote in the election of directors under ordinary circumstances ("Voting Stock"), (ii) there shall be consummated any consolidation or merger of Alliance that is not approved by at least a majority of the Continuing Directors (A) in which Alliance is not the continuing or surviving corporation or (B) pursuant to which any Voting Stock of Alliance would be converted into cash, securities or other property, in each case other than a consolidation or merger in which the holders of such Voting Stock immediately prior thereto have at least a majority of the Voting Stock, directly or indirectly, of the resulting or surviving corporation immediately after the consolidation or merger or (iii) any person acquires all or substantially all of the assets of Alliance; provided, however, that a Change of Control shall not be deemed to have occurred if either (x) the closing price per share of the Common Stock for any five trading days within the period of ten consecutive trading days ending immediately before the Change of Control shall equal or exceed 105% of the conversion price of the New Convertible Debentures in effect on such trading day, or (y) with respect to a Change of Control described in clause (ii) or clause (iii) above, at least 90% of the consideration to be paid for the Voting Stock of Alliance in the transaction or transactions constituting the Change of Control consists of common stock traded on a national securities exchange or quoted on the NASDAQ NMS and, as a result of the transaction or transactions referred to in clause (ii) or clause (iii) above, the New Convertible Debentures become convertible solely into such common stock. Under the New Convertible Indenture, an "Exempt Person" is defined as (A) Alliance, any subsidiary of Alliance or any employee benefit plan or stock ownership plan of either Alliance or any subsidiary of Alliance or (B) any of Kirkland Ft. Worth Investment Partners, L.P. ("Kirkland"), KIC, Gaming Systems Advisors, L.P. ("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. The phase "substantially all" does not have a readily established meaning under applicable law; accordingly, there may be uncertainty as to whether any specific transaction may properly be characterized as a Change of Control or a sale, lease or conveyance of substantially all the assets of Alliance. The Merger will not result in a Change of Control of Alliance under the New Convertible Indenture. The right to require Alliance to redeem the New Convertible Debentures as a result of the occurrence of a Redemption Event could create an event of default under Senior Indebtedness as a result of which any redemption could, absent a waiver, be blocked by the subordination provisions of the New Convertible Debentures. At March 31, 1996, Alliance did not have any Senior Indebtedness with respect to which such waivers would be required. See "-- Subordination". Failure of Alliance to redeem the New Convertible Debentures when required would result in an Event of Default with respect to the New Convertible Debentures whether or not such redemption is permitted by the subordination provisions. Alliance does not 54 currently have sufficient funds available to purchase all the New Convertible Debentures were they to be tendered in response to an offer upon a Redemption Event, and there can be no assurance that Alliance would have or be able to obtain such funds. See "Risk Factors -- Change of Control". CERTAIN COVENANTS The New Convertible Indenture provides that Alliance will not, and will not permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to Alliance or the relevant Subsidiary than those that would have been obtained in a comparable transaction by Alliance or such Subsidiary with an unrelated person and (b) Alliance delivers to the Trustee with respect to any Affiliate Transaction involving aggregate payments in excess of $500,000 a resolution of the Alliance Board set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and such Affiliate Transaction is approved by a majority of the independent members of the Alliance Board; provided, however, that (i) any employment agreement entered into by Alliance or any of its subsidiaries in the ordinary course of business or (ii) the continuation, extension, or renewal of any transaction entered into between Alliance or any Subsidiary and any Affiliate on or prior to October 31, 1993 or (iii) transactions among Alliance and any of Kirkland, KIC, GSA, Mr. Wilms, or their respective Affiliates pursuant to or contemplated by agreements existing on October 31, 1993 as in effect on such date or (iv) any agreement between Alliance, KIC, Kirkland, GSA or their respective affiliates providing for the payment by Alliance of management or related fees in connection with providing services to Alliance in an aggregate amount not exceeding $1,400,000 per annum, plus reimbursement of reasonable related expenses or (v) any agreement between Alliance and Mr. Wilms or any of his affiliates providing for the payment by Alliance of consulting or similar fees in an aggregate amount not to exceed $500,000 per annum or (vi) any agreement with Mr. Wilms pursuant to which Alliance loaned funds to Mr. Wilms to be used to exercise stock purchase warrants if such exercise occurred so that Mr. Wilms could comply with his commitment to Alliance to obtain sufficient shares to approve the Kirkland Investment and the increase in the authorized number of shares of Alliance's Common Stock to 100,000,000 or (vii) transactions between or among Alliance and/or its Subsidiaries, in each case, shall not be deemed Affiliate Transactions. EVENTS OF DEFAULT The following are Events of Default under the New Convertible Indenture: (a) failure to pay principal of (and premium, if any, on) any New Convertible Debentures when due, whether or not such payment is prohibited by the subordination provisions of the New Convertible Indenture; (b) failure to pay any interest on any New Convertible Debentures when due, continued for 30 days, whether or not such payment is prohibited by the subordination provisions of the New Convertible Indenture; (c) failure to perform certain covenants of Alliance in the New Convertible Indenture, continued for 60 days after written notice as provided in the New Convertible Indenture; (d) certain events of bankruptcy, insolvency or reorganization; (e) default under any mortgage indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by Alliance or any of its Subsidiaries, and as a result of such default the maturity of such Indebtedness has been accelerated prior to its express maturity and the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been accelerated, aggregates $5,000,000 or more, provided, that if such default under such indenture or instrument shall be remedied or cured by Alliance or waived by the holders of such Indebtedness within 90 days of the date of acceleration of such Indebtedness, then the Event of Default under the New Convertible Indenture by reason thereof shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of either the Trustee or any of the holders; and (f) a final judgment or judgments or order or orders for the payment of money which aggregates $5,000,000 or more is entered against Alliance or one or more of its Subsidiaries, which judgment or judgments or order or orders shall not have been discharged or stayed pending appeal within 75 days after the entry thereof or discharged within 75 days after the expiration of any such stay. The New Convertible Indenture provides that, if an Event of Default shall have occurred and be continuing either the Trustee or the holders of at least 25% of the principal amount of the New Convertible 55 Debentures then outstanding may declare the principal amount of all New Convertible Debentures and interest accrued thereon to be due and payable immediately, but upon certain conditions such declarations may be annulled and past defaults may be waived (except a continuing default in payment of principal of (and premium, if any) or interest on the New Convertible Debentures or a default in respect of certain provisions which cannot be amended without the consent of the holder of each New Convertible Debenture affected) by the holders of a majority in principal amount of the New Convertible Debentures then outstanding. In the case of an Event of Default resulting from bankruptcy, insolvency or certain reorganizations, such amounts will be due and payable without any declaration or any other act on the part of the holders or the Trustee. The New Convertible Indenture provides that the Trustee, subject to the duty of the Trustee during a default to act with the required standard of care, will have no obligation to exercise any right or power granted it under the New Convertible Indenture at the request of the holders of the New Convertible Debentures unless the Trustee shall have been indemnified by such holders. Subject to such provisions in the New Convertible Indenture for the indemnification of the Trustee and certain other limitations, the holders of a majority in principal amount of the New Convertible Debentures then 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. The New Convertible Indenture provides that no holder of New Convertible Debentures will have any right to institute any action against Alliance under the New Convertible Indenture (except actions for payment of overdue principal (and premium, if any) or interest or to enforce conversion rights) unless such holder previously shall have given to the Trustee written notice of default and continuance thereof and the holders of not less than 25% in principal amount of the New Convertible Debentures then outstanding shall have requested the Trustee to institute such action and shall have offered the Trustee reasonable indemnity, the Trustee shall not have instituted such action within 60 days of such request and the Trustee shall not have received direction inconsistent with such written request by the holders of a majority in principal amount of the New Convertible Debentures then outstanding. MERGER AND CONSOLIDATION The New Convertible Indenture provides that Alliance will not merge or consolidate with any corporation, partnership or other entity and will not sell, lease or convey all or substantially all its assets to any entity, unless Alliance shall be the surviving entity, or the successor entity that acquires all or substantially all of the assets of Alliance shall be a corporation, partnership or limited liability company or trust organized under the laws of the United States or a State therein or the District of Columbia and shall expressly assume by supplemental indenture all obligations of Alliance under the New Convertible Indenture and the New Convertible Debentures, and immediately after giving effect to such merger, consolidation, sale, lease or conveyance, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing. ASSUMPTION OF OBLIGATIONS The New Convertible Indenture provides that if the Drop-Down Transaction occurs, the existing subsidiary which becomes the owner of substantially all of Alliance's assets (other than the stock of such subsidiary) would become jointly and severally liable with Alliance with respect to all of Alliance's obligations under the New Convertible Debentures and the New Convertible Indenture. The Drop-Down Transaction will be conditioned upon the receipt of an opinion of nationally recognized counsel confirming that the holders of the New Convertible Debentures will not recognize income, gain or loss for United States Federal income tax purposes as a result of such Drop-Down Transaction, and will be subject to United States Federal income tax in the same amount, in the same manner and at the same time as would have been the case if such Drop-Down Transaction had not occurred. The Drop-Down Transaction would require approval of the Nevada Gaming Authorities and perhaps other gaming authorities as well. MODIFICATION AND WAIVER Modifications and amendments of the New Convertible Indenture may be made by Alliance and the Trustee, with the consent of the holders of not less than a majority in principal amount of the New 56 Convertible Debentures then outstanding and affected, to add any provisions to, or change in any manner or eliminate any of the provisions of, such New Convertible Indenture or modify in any manner the rights of the holders of the New Convertible Debentures; provided that Alliance and the Trustee may not without the consent of the holder of each outstanding New Convertible Debenture affected thereby (a) extend the stated maturity of the principal amount of any New Convertible Debenture, or reduce the principal amount thereof or any premium thereon or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or otherwise change the redemption provisions, or impair the right to institute suit for the enforcement of any conversion or any payment on any New Convertible Debenture when due or adversely affect any conversion rights or redemption rights upon a Redemption Event or (b) reduce the aforesaid percentage in principal amount of the New Convertible Debentures, the consent of the holders of which is required for any such modification. The New Convertible Indenture may not be amended to alter the subordination of any outstanding New Convertible Debentures without consent of each holder of Senior Indebtedness then outstanding that would be adversely affected thereby. The holders of a majority in aggregate principal amount of outstanding New Convertible Debentures may waive any past default under the New Convertible Indenture, except a default in the payment of principal (and premium, if any) or interest or default with respect to certain covenants under the New Convertible Indenture. The New Convertible Indenture can be supplemented by Alliance without consent of the holders under certain circumstances, including (i) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the New Convertible Debentures any property or assets; (ii) to evidence the succession of another corporation to Alliance, and the assumption by the successor corporation of certain covenants, agreements, and obligations of Alliance; (iii) to add additional covenants of Alliance to the New Convertible Indenture for the protection of holders of New Convertible Debentures; (iv) to cure any ambiguity or to correct or supplement any provision of the New Convertible Indenture (or any supplement thereto); (v) to make any changes required by amendments to the TIA; (vi) to unilaterally reduce the conversion price of the New Convertible Debentures; and (vii) subject to certain conditions, to appoint a successor Trustee. SATISFACTION AND DISCHARGE OF THE NEW CONVERTIBLE INDENTURE The New Convertible Indenture provides that Alliance may terminate its obligations under the New Convertible Indenture at any time by delivering all outstanding New Convertible Debentures to the Trustee for cancellation and paying all sums required to be paid pursuant to the terms of the New Convertible Indenture. In addition, Alliance is permitted to terminate all of its obligations under the New Convertible Indenture by irrevocably depositing with the Trustee money or U.S. government obligations sufficient to pay principal and interest on the New Convertible Debentures to maturity or redemption and all other sums payable pursuant to the terms of the New Convertible Indenture, after complying with certain other procedures set forth in the New Convertible Indenture. CONTROL BY DEBENTUREHOLDERS The holders of a majority in aggregate principal amount of outstanding New Convertible Debentures 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 by the New Convertible Indenture; provided that such direction shall not be otherwise than in accordance with law and the provisions of the New Convertible Indenture. The Trustee has the right to decline to follow any such direction if (i) the Trustee determines that the action or proceeding may not lawfully be taken, (ii) the Trustee determines that the actions or proceedings so directed would involve it in personal liability or (iii) the Trustee determines that the actions or forbearances specified in or pursuant to such direction would be unduly prejudicial to the interests of holders of the New Convertible Debentures not joining in the giving of said direction. MANDATORY DISPOSITION PURSUANT TO GAMING LAWS If a holder or a beneficial owner of a New Convertible Debenture or any underlying Common Stock or Series E Preferred Stock is required by the Nevada Gaming Commission or Mississippi Gaming Commission 57 to be found suitable, such holder or beneficial owner must apply for a finding of suitability within 30 days after the Nevada Gaming Commission or Mississippi Gaming Commission request. The applicant for a finding of suitability must pay all costs of the investigation for such finding of suitability. If a holder or beneficial owner is required to be found suitable and is not found suitable by the Nevada Gaming Commission or Mississippi Gaming Commission, (i) the holder or beneficial owner must upon request of Alliance dispose of his or her New Convertible Debentures and underlying Common Stock and Series E Preferred Stock within 30 days or within that time prescribed by the Nevada Gaming Commission or Mississippi Gaming Commission, whichever is earlier, or (ii) Alliance may, at its option, redeem the holder's or beneficial owner's New Convertible Debentures in cash at the lesser of (w) the principal amount thereof or (x) the price at which the New Convertible Debentures were acquired by the holder or beneficial owner, together with, in either case, accrued interest to the date of the finding of unsuitability by the Nevada Gaming Commission or Mississippi Gaming Commission and repurchase the holder's or beneficial owner's underlying Common Stock and Series E Preferred Stock at the lesser of (y) the market price thereof on the date of the finding of unsuitability or (z) the price at which such Common Stock or Series E Preferred Stock was acquired by the holder or beneficial owner. Such mandatory disposition could be required at a time when market conditions are not favorable to the affected holder or beneficial owner or at a time or at costs which are otherwise unfavorable to such holder or beneficial owner. See "Gaming Regulation and Licensing". COMPARISON OF NEW CONVERTIBLE DEBENTURES AND OLD CONVERTIBLE DEBENTURES The terms of the New Convertible Debentures and the Old Convertible Debentures are identical in all material respects, except as follows: CONVERSION PRICE The conversion price of the Old Convertible Debentures is currently $10.00 per share of Common Stock. The initial conversion price of the New Convertible Debentures will be $8.33 per share of Common Stock. AUTOMATIC CONVERSION UPON CONSUMMATION OF MERGER If the Merger is consummated within 60 days after the issuance of the New Convertible Debentures, then at the effective time of the Merger the New Convertible Debentures will be automatically converted into Common Stock at the price of $5.56 per share (equivalent to a conversion rate of approximately 180 shares per $1,000 principal amount of New Convertible Debentures), subject to adjustment under certain circumstances (the "Special Conversion Price"). A holder of New Convertible Debentures may elect in such holder's Letter of Transmittal to forego receipt of all or any portion of the Common Stock that such holder would otherwise receive, and to receive in lieu thereof ten shares of Series E Preferred Stock for each $1,000 principal amount of New Convertible Debentures. The terms of the Old Convertible Debentures do not provide for a mandatory conversion of the Old Convertible Debentures into Common Stock (or Series E Preferred Stock) at the Special Conversion Price at the effective time of the Merger. SUBORDINATION The Old Convertible Debentures will be subordinated in right of payment to the New Convertible Debentures and the Old Convertible Debentures may be made structurally subordinated to the New Convertible Debentures pursuant to the Drop-Down Transaction. See "Risk Factors -- Subordination". REGISTRATION RIGHTS; LIQUIDATED DAMAGES On September 21, 1993, Alliance and the initial purchasers of Old Convertible Debentures entered into a registration rights agreement (the "Registration Rights Agreement"), pursuant to which Alliance agreed to file with the Commission promptly after September 21, 1993 a shelf registration statement under the Securities Act (the "Shelf Registration Statement") and to cause the Shelf Registration Statement to remain 58 effective until September 26, 1996 to cover resales of the Old Convertible Debentures by the holders thereof. Alliance filed and had declared effective a registration statement on Form S-2 in compliance with its obligations under the Registration Rights Agreement. The Registration Rights Agreement provides that if the Shelf Registration Statement ceases to be effective (without being succeeded immediately by an additional Shelf Registration Statement filed and declared effective) for a period of time exceeding 90 days in the aggregate per year (a "Registration Default"), Alliance is obligated to pay Liquidated Damages to each holder of Old Convertible Debentures whose Old Convertible Debentures or Common Stock are subjected to restrictions on transfer as a result of such Registration Defualt, during the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $0.05 per week per $1,000 principal amount of Old Convertible Debentures and, if applicable, $0.01 per week per share (subject to adjustment in the event of stock splits, stock recombinations, stock dividends and the like) of Common Stock issued upon conversion of such Old Convertible Debentures. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount or $0.01 per week per share (subject to adjustment as set forth above) of Common Stock issued upon conversion of such Old Convertible Debentures for each subsequent 90-day period until the applicable registration statement is filed and declared effective or the Shelf Registration Statement again becomes effective, as the case may be, up to a maximum amount of Liquidated Damages with respect to any Registration Default of $0.25 per week per $1,000 principal amount of Old Convertible Debentures or $0.05 per week per share (subject to adjustment as set forth above) of Common Stock constituting Transfer Restricted Securities (as defined in the Registration Rights Agreement). Following the cure of a Registration Default, Liquidated Damages will cease to accrue with respect to such Registration Default. In addition, for so long as the Old Convertible Debentures and Common Stock are outstanding, Alliance will continue to provide to holders of the Old Convertible Debentures and Common Stock and to prospective purchasers of the Old Convertible Debentures and Common Stock the information required by Rule 144A(d)(4), if applicable. A Registration Default occurred on December 27, 1995 and accordingly, Liquidated Damages have accrued to holders of transfer-restricted Old Convertible Debentures as described above. Liquidated Damages that accrue prior to March 15, 1996 have been fully paid by Alliance. The amount of Liquidated Damages accrued and unpaid from that date to the date of the Prospectus is $.71 per $1,000 principal amount of transfer-restricted Old Convertible Debentures, and additional Liquidated Damages are currently accruing at the rate of $0.10 per $1,000 principal amount per week. Holders whose transfer-restricted Old Convertible Debentures are accepted for exchange will be paid on September 15, 1996 all Liquidated Damages to which they are entitled that have accrued from March 15, 1996 through the date of issuance of the New Convertible Debentures. There is no registration rights agreement with respect to the New Convertible Debentures, and Alliance is not under any obligation to file any registration statement with respect thereto, other than the Registration Statement of which this Prospectus is a part. New Convertible Debentures issued pursuant to the Exchange Offer in exchange for Old Convertible Debentures may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of Alliance within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Convertible Debentures are acquired in the ordinary course of such holders' businesses and such holders have no arrangement with any person to participate in the distribution of the New Convertible Debentures. 59 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS THE FOLLOWING IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL INCOME TAX ASPECTS OF THE EXCHANGE OFFER AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF OLD CONVERTIBLE DEBENTURES. In the opinion of Milbank, Tweed, Hadley & McCloy, based on the assumptions and subject to the qualifications set forth herein, the succeeding discussion accurately describes the material United States Federal income tax consequences of the Exchange Offer to holders of the Old Convertible Debentures who hold the Old Convertible Debentures and the New Convertible Debentures, the Common Stock and the Series E Preferred Stock to be issued pursuant to the Exchange Offer or Automatic Conversions as the case may be as capital assets within the meaning of Section 1221 of the Code. Milbank, Tweed, Hadley & McCloy is rendering no other opinion concerning the tax consequences of the Transaction. This discussion does not address the United States Federal income tax consequences to holders of Old Convertible Debentures subject to special treatment under the United States Federal income tax laws, such as dealers in securities or foreign currency, tax-exempt entities, banks, thrifts, insurance companies, and investors in pass-through entities. The discussion does not describe any tax consequences arising out of the tax laws of any state, local or foreign jurisdiction. This summary is based upon the Code, existing and proposed regulations thereunder, and current administrative rulings and court decisions. All of the foregoing are subject to change, and any such change, which may be retroactive, could affect the continuing validity of this discussion. The following discussion is limited to the United States Federal income tax consequences relevant to a holder of Old Convertible Debentures that is (i) a citizen or resident of the United States, (ii) a corporation organized under the laws of the United States or any political subdivision thereof or therein, or (iii) an estate or trust, the income of which is subject to United States Federal income tax regardless of the source. CONSIDERATION ALLOCABLE TO INTEREST A portion of the New Convertible Debentures received in exchange for the Old Convertible Debentures and the Common Stock or Series E Preferred Stock received in exchange for New Convertible Debentures may be allocated to unpaid interest, and the remainder of the consideration will be allocated to the principal amount of the Old Convertible Debentures or New Convertible Debentures, as the case may be. However, the manner in which such allocation must be done for United States Federal income tax purposes is not clear. The tax consequences of the receipt of New Convertible Debentures in the Exchange Offer or shares of Common Stock or Series E Preferred Stock allocable to unpaid interest on the Old Convertible Debentures or New Convertible Debentures, as the case may be, differ from the tax consequences of the receipt of New Convertible Debentures in the Exchange Offer or shares of Common Stock or Series E Preferred Stock allocable to the principal amount of the New Convertible Debentures. Holders of Old Convertible Debentures upon receipt of New Convertible Debentures pursuant to the Exchange Offer will recognize ordinary interest income to the extent that any New Convertible Debentures received pursuant to the Exchange Offer are allocable to interest that has not previously been included in the holder's taxable income. Moreover, a holder of New Convertible Debentures upon receipt of Common Stock or Series E Preferred Stock received pursuant to the Automatic Conversion will recognize ordinary interest income to the extent that any Common Stock or Series E Preferred Stock received pursuant to the Automatic Conversion is allocable to interest which has not already been included in the holder's taxable income. In the event amounts allocable to interest are less than amounts previously included in the holder's taxable income, the difference should result in an ordinary loss. Any New Convertible Debentures or shares of Common Stock or Series E Preferred Stock not allocable to interest will be allocated to the principal amount of the Old Convertible Debentures or New Convertible Debentures, as the case may be, and will be treated as discussed below. Alliance intends to take the position that none of the principal of the New Convertible Debentures issued in the Exchange Offer is allocable to accrued and unpaid interest on the Old Convertible Debentures, that payment with respect to the Old Convertible Debentures on the first Interest Payment Date following the issuance of the New Convertible Debentures represents a payment of accrued interest in the Old Convertible Debentures and that the Common Stock or Series E Preferred Stock issued 60 in the Automatic Conversion is allocable first to principal and is allocable to interest only to the extent that the fair market value of the shares of Common Stock or Series E Preferred Stock issued in exchange for New Convertible Debentures exceeds the principal amount of the New Convertible Debentures. The Internal Revenue Service (the "IRS") may take a contrary position. Holders of New Convertible Debentures should consult their own tax advisors as to the amount of the Common Stock or Series E Preferred Stock received that will be allocated to accrued and unpaid interest. The discussion set forth below pertains only to New Convertible Debentures received in exchange for the stated principal amount of the Old Convertible Debentures or the Common Stock or Series E Preferred Stock received in exchange for the stated principal amount of the New Convertible Debentures and does not address consideration properly allocable to accrued and unpaid interest. THE TRANSACTION The exchange of Old Convertible Debentures for New Convertible Debentures pursuant to the Exchange Offer and the exchange of New Convertible Debentures for Common Stock or Series E Preferred Stock pursuant to the Automatic Conversion each will be a tax-free "recapitalization" within the meaning of Section 368(a)(1)(E) of the Code. However, holders of New Convertible Debentures that receive cash in lieu of fractional shares of Common Stock or Series E Preferred Stock will be treated as having received such fractional shares pursuant to the Automatic Conversion and then as having exchanged such fractional shares for cash in a redemption by Alliance. Accordingly, a holder exchanging Old Convertible Debentures for New Convertible Debentures pursuant to the Exchange Offer and New Convertible Debentures for Common Stock or Series E Preferred Stock pursuant to the Automatic Conversion will not recognize gain or loss in respect of such exchange for United States Federal income tax purposes, except that gain will be recognized upon the Automatic Conversion to the extent cash received in lieu of fractional shares exceeds the adjusted tax basis allocated to such fractional shares. A holder's adjusted tax basis in the New Convertible Debentures received will be equal to the holder's adjusted tax basis in the Old Convertible Debentures exchanged therefor, increased by any gain recognized. A holder's adjusted tax basis in the Common Stock or Series E Preferred Stock received will be equal to the holder's adjusted tax basis in the New Convertible Debentures exchanged therefor (other than the portion of the adjusted tax basis in the New Convertible Debentures allocated to fractional shares). A holder's holding period in the New Convertible Debentures received will include the holder's holding period in the Old Convertible Debentures exchanged therefor. A holder's holding period in the Common Stock or Series E Preferred Stock received will include the holder's holding period in the New Convertible Debentures exchanged therefor. MARKET DISCOUNT An Old Convertible Debenture has "market discount" in the hands of a holder if the principal amount of the Old Convertible Debenture when acquired exceeded the basis of the Old Convertible Debenture by an amount equal to or greater than 0.25% of the principal amount of the Old Convertible Debenture multiplied by the number of complete years after the acquisition date to the maturity date of the Old Convertible Debenture. Generally, gain on the disposition of any bond having market discount (a "Market Discount Bond") must be recognized and is treated as ordinary income to the extent it does not exceed the accrued market discount on that bond. Market discount generally accrues under a ratable method determined by the product of total market discount and the ratio of days held to the total days after the date of acquisition up to (and including) the date of maturity of the Old Convertible Debentures. In lieu of the ratable method of accrual, a holder of Old Convertible Debentures may elect to compute accrued market discount on the basis of a constant interest rate, I.E., taking into account the compounding of interest. It is anticipated that Treasury Regulations will be issued to provide guidance with respect to the treatment of accrued market discount on bonds transferred in connection with certain tax-free reorganizations. Although such regulations have not yet been issued, the legislative history of Section 1276 of the Code indicates that a holder who acquires stock or new debt obligations in exchange for Market Discount Bonds pursuant to a tax-free recapitalization or conversion of a convertible debt obligation should not be required to recognize accrued market discount with respect to the Market Discount Bonds as a result of the recapitalization or conversion. Instead, the holder should treat accrued market discount on the Market 61 Discount Bond as accrued market discount on the new obligation and as ordinary income to the extent of gain recognized on the subsequent disposition of the stock or new debt obligation received in exchange for the Market Discount Bond. No such regulations have been issued, however, and it is impossible to predict exactly what any such regulations would provide or whether they would apply to the Exchange Offer or Automatic Conversion. NEW CONVERTIBLE DEBENTURES Assuming that neither the Old Convertible Debentures nor the New Convertible Debentures will be "traded on an established market" (within the meaning of Treasury Regulation section 1.1273-2(f)) within the sixty day period ending thirty days after consummation of the Exchange Offer, the New Convertible Debentures will not be issued with original issue discount ("OID") for United States Federal income tax purposes. If, however, either the Old Convertible Debentures or the New Convertible Debentures are so traded during that period, the New Convertible Debentures may be issued with OID, the result of which may be to require the holder of the New Convertible Debentures to recognize income in advance of the receipt of cash attributable to that income. Stated interest on the New Convertible Debenture will be taxable as ordinary income when received or accrued by the holder in accordance with his method of accounting. Upon the sale, exchange or redemption of a New Convertible Debenture, the holder will recognize gain or loss equal to the difference between the amount realized on such sale, exchange or redemption and his adjusted tax basis in the New Convertible Debenture. Subject to the application of the market discount rules discussed above, such gain or loss will be long-term capital gain or loss if the New Convertible Debenture was held for more than one year. Conversion of a New Convertible Debenture (other than with respect to any accrued but unpaid interest) into Common Stock pursuant to its terms is not taxable. The holder's basis and holding period for the Common Stock will include his basis and holding period in the New Convertible Debenture. COMMON STOCK AND SERIES E PREFERRED STOCK Under Section 301(c) of the Code, distributions made with respect to shares of Common Stock or Series E Preferred Stock generally will be treated as ordinary income to the extent of Alliance's current and/ or accumulated earnings and profits for the taxable year of the distribution. Amounts distributed in excess of such earnings and profits are treated as a tax-free return of capital to the extent of the holder's adjusted tax basis in his shares of Common Stock or Series E Preferred Stock, with any amount distributed in excess of such adjusted tax basis being treated as an amount received on a sale or exchange of the stock. A 70% dividends received deduction (80% for corporate holders owning 20% or more in voting power and fair market value of Alliance's stock) may be available for certain corporate holders, subject to numerous conditions and exceptions. The precise treatment of distributions of Series E Preferred Stock as a dividend on such stock is subject to uncertainty. It is possible that the distribution of Series E Preferred Stock would not be subject to tax at the time of distribution but, in such case, a subsequent disposition of such stock would be subject to the special rules of section 306 of the Code which could result in dividend treatment at the time of disposition. Alternatively, the distribution of such stock could be subject to tax as a dividend at the time of distribution in accordance with the rules set forth above. The amount of the distribution would be equal to the fair market value of the Series E Preferred Stock at such time. Holders of New Convertible Debentures are urged to consult their tax advisors regarding the choice of receiving Common Stock or Series E Preferred Stock upon Automatic Conversion of their New Convertible Debentures. Generally, gain or loss is recognized on a sale or other disposition of Common Stock or Series E Preferred Stock to the extent of the difference between the amount of cash (and the fair market value of other property) received in the disposition and the holder's adjusted tax basis in his Common Stock or Series E Preferred Stock. Subject to the market discount rules discussed above, such gain or loss will be long-term capital gain or loss if the Common Stock or Series E Preferred Stock has been held for more than one year (which holding period includes the period during which the holder of the Common Stock or Series E Preferred Stock held the Old Convertible Debentures and New Convertible Debentures). Currently, net 62 capital gains and ordinary income of corporations are taxable at the same maximum rate (35%), whereas net long-term capital gains of individuals are taxable at a maximum rate (28%) that is lower than the maximum rate applicable to ordinary income (39.6%). In the case of both individuals and corporations, capital losses generally may be used to offset only capital gains, except to the extent of $3,000 per annum in the case of individuals. If Alliance redeems the holder's shares of Series E Preferred Stock or Common Stock for cash, the following would be applicable. Under the rules of section 302 of the Code, a redemption of shares of Series E Preferred Stock by Alliance for cash will be treated as a distribution taxable as a dividend to redeeming stockholders to the extent of Alliance's current or accumulated earnings and profits unless the redemption (i) results in a "complete termination" of the stockholder's interest in Alliance (within the meaning of section 302(b)(3) of the Code), (ii) is "substantially disproportionate" (within the meaning of section 302(b)(2) of the Code) with respect to the holder or (iii) is "not essentially equivalent to a dividend" (within the meaning of section 302(b)(1) of the Code). In determining whether any of the Code section 302(b) tests have been met, shares of Common Stock and of any other class of stock of Alliance will be taken into account along with shares of Series E Preferred Stock. Moreover, shares considered to be owned by the holder by reason of the constructive ownership rules set forth in section 318 of the Code, as well as shares actually owned, will be taken into account. If any of the foregoing tests is met, then, except with respect to declared and unpaid dividends, if any, the redemption of shares of Series E Preferred Stock for cash will result in taxable gain or loss equal to the difference between the amount of cash received and the holder's adjusted tax basis in the redeemed shares. Any such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the shareholder's holding period exceeds one year. Based on a published IRS ruling, the redemption of a shareholder's Series E Preferred Stock for cash will be treated as "not essentially equivalent to a dividend" if, taking into account the constructive ownership rules, (a) the shareholder's relative stock interest in Alliance is minimal, (b) the shareholder exercises no control over Alliance's affairs and (c) there is a reduction in the holder's proportionate interest in Alliance. No gain or loss generally will be recognized upon conversion of shares of Series E Preferred Stock into shares of Common Stock, except with respect to any cash paid in lieu of fractional shares of Common Stock. However, under certain circumstances, a holder of Series E Preferred Stock may recognize gain or dividend income to the extent there are dividends in arrears on such stock at the time of conversion into Common Stock. The tax basis of the Common Stock received upon conversion of shares of Series E Preferred Stock generally will be equal to the tax basis of the shares of Series E Preferred Stock so converted and the holding period of the Common Stock generally will include the holding period of the shares of Series E Preferred Stock converted. However, the tax basis of any Common Stock received on conversion and treated as a dividend will be equal to its fair market value on the date of the distribution and the holding period of such stock will commence on the day after its receipt. PROPOSED LEGISLATION President Clinton's Fiscal Year 1997 Budget Proposal, released March 19, 1996 (the "Administration's Proposal"), contains a provision reducing the dividends received deduction for corporations (other than those that own at least 20% (by vote and value) of the paying corporation) to 50% of the dividends received, effective for dividends paid after the 30th day after the date of enactment of the provision. The Administration's Proposal also contains a provision that would require the dividends received deduction holding period requirement to be met with respect to each dividend payment, effective for dividends paid after the 30th day after the date of enactment of the provision. Certain other pending legislative proposals would treat as a sale or exchange the entering into of one or more transactions that tend to "hedge" the economic risks of owning stock or debt. Holders of Old Convertible Debentures are urged to consult their tax advisors about these proposals. No assurance can be given as to whether or when legislation containing any or all of the above-mentioned or similar provisions will be enacted, and if enacted, when such provisions will be effective. BACKUP WITHHOLDING A holder of New Convertible Debentures, Common Stock or Series E Preferred Stock may be subject to backup withholding at the rate of 31% with respect to interest paid on the New Convertible Debentures and 63 dividends paid on the Common Stock or Series E Preferred Stock, unless the holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. Holders receiving New Convertible Debentures in exchange for Old Convertible Debentures or Common Stock or Series E Preferred Stock upon the Automatic Conversion should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Any amount paid as backup withholding will be creditable against the holder's United States Federal income tax liability. HOLDERS OF OLD CONVERTIBLE DEBENTURES WHO DO NOT PARTICIPATE IN THE EXCHANGE OFFER Holders of Old Convertible Debentures who elect not to participate in the Exchange Offer and who consequently do not exchange their Old Convertible Debentures for New Convertible Debentures will not recognize gain or loss as a consequence of the Exchange Offer. 64 THE MERGER AND RELATED FINANCINGS On October 18, 1995, Alliance entered into the Merger Agreement with BGII, a Delaware corporation, and BGII Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Alliance (the "Merger Subsidiary"). Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, the Merger Subsidiary would merge into BGII which will become a wholly-owned subsidiary of Alliance. The Merger consideration to BGII stockholders will be approximately $77.2 million in cash, $35.7 million in 15% Preferred Stock and $2.9 million in Common Stock, assuming that the effective time of the Merger occurs on or about June 18, 1996 and 10,799,501 shares of BGII common stock are outstanding, less 1,000,000 shares owned by Alliance which will be canceled upon consummation of the Merger. Alliance will also retire approximately $53.3 million of BGII's outstanding debt (including prepayment premium, original issue discount and accrued and unpaid interest through the effective time of the Merger) in connection with the Merger. At meetings held on April 2, 1996, the shareholders of Alliance and BGII approved the Merger Agreement and the Merger. The rules of the National Association of Securities Dealers, Inc. (the "NASD") require each NASDAQ NMS issuer, such as Alliance, to obtain stockholder approval in connection with the acquisition of the stock or assets of another company where the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, other than a public offering for cash, if the common stock has or will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding before the issuance of stock or securities convertible into or exercisable for common stock, or the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the stock or securities. In accordance with the NASD's rules, Allliance intends to seek shareholder approval by written consent of (i) the issuance of the New Convertible Debentures pursuant to the Exchange Offer and (ii) the issuance of securities issuable directly or indirectly on conversion thereof, and approval of the Issuance Proposal is a condition to Alliance's obligation to consummate the Exchange Offer. Certain executive officers and directors of Alliance have advised Alliance that they intend to vote the shares of Common Stock, representing a majority of the outstanding shares of Common Stock, as to which they have voting power, for the approval of the Issuance Proposal. This would insure adoption of the Issuance Proposal. See "The Exchange Offer -- Conditions to the Exchange Offer" and "Security Ownership of Certain Beneficial Holders and Management". At May 7, 1996, an aggregate of 1,052,500 shares of BGII common stock were subject to options granted to employees and directors under various stock option plans or as replacement options with respect thereto (of which options with respect to 552,500 shares are expected to remain outstanding after the Merger) and an aggregate of 1,498,000 shares of BGII common stock were subject to warrants issued by BGII in connection with certain financing transactions. The Transaction will be financed through the issuance of an aggregate of $5.0 million of Common Stock in the Private Placement, the issuance of an aggregate of $15.0 million of 15% Preferred Stock in the 15% Preferred Stock Offering and the issuance of $140.0 million aggregate principal amount of the Senior Notes in the Note Offering, all in conjunction with the Exchange Offer and the Automatic Conversion. A financial institution has agreed to purchase privately in the Private Placement, simultaneously with the consummation of the Merger, $5.0 million of the Common Stock of Alliance at a price equal to the lower of $4.56 per share (the average trading price of the Common Stock for the five trading day period immediately preceding the agreement) and the average of the last sales price of the Common Stock for the five trading days immediately preceding the Merger. This investment would be in the form of Common Stock to the extent of 4.9% of the total Common Stock outstanding at the time, taking into account Common Stock to be issued in the Merger and the Automatic Conversion, with the remainder to be in the form of non-voting special stock convertible into Common Stock. Alliance anticipates, and it is assumed for all purposes herein, that all $5.0 million will be issued in the form of Common Stock. Alliance currently expects to issue in the 15% Preferred Stock Offering approximately $15.0 million aggregate liquidation value of 15% Preferred Stock. The 15% Preferred Stock will accrue dividends at an 65 annual rate of 15% ($3.75 per share), payable quarterly in cash or, at Alliance's option, through the first dividend payment date following the seventh anniversary of issuance, in additional shares of 15% Preferred Stock, will have a $100 per share liquidation preference and will be senior in right of payment to the Series E Preferred Stock. See "Description of Capital Stock -- Special Stock -- 15% Non-Voting Pay-in-Kind Special Stock, Series B". Alliance currently intends to issue in the Note Offering approximately $140.0 million aggregate principal amount of Senior Notes with an expected maturity of seven years. The Senior Notes are expected to be guaranteed by subsidiaries of the Company and secured by their stock and are likely to include restrictive covenants prohibiting or limiting, among other things, the sale of assets, the making of acquisitions and other investments, capital expenditures, the incurrence of additional debt and liens and the payment of dividends and distributions. Non-compliance could result in the acceleration of such indebtedness. In addition, it is anticipated that the Senior Notes will contain a requirement that Alliance make periodic offers to repurchase the Senior Notes at 101% of the principal amount thereof together with accrued and unpaid interest to the date of repurchase upon a Change of Control. The Exchange Offer is not conditioned on consummation of the Merger. However, Alliance believes that its ability to obtain financing for, and hence to consummate, the Merger will depend on, among other factors, the exchange of a substantial amount of the Old Convertible Debentures. The consummation of the Merger is contingent on completion of the Offerings and obtaining requisite regulatory approval. The Merger Agreement terminates on June 18, 1996. If the Merger is not consummated by that date, Alliance may seek an extension, but has made no determination in that regard. Alliance believes that its ability to obtain financing for, and hence to consummate, the Merger will depend on, among other factors, the exchange of a substantial amount of the Old Convertible Debentures. Consummation of the Exchange Offer is subject to satisfaction of certain conditions, including, among others, the requirements that (i) the holders of a majority of the outstanding shares of Common Stock shall have approved the issuance of New Convertible Debentures and of the securities issuable upon conversion thereof (the holders of a majority of outstanding shares of Common Stock have indicated their intention to approved such issuance) and (ii) the Nevada Gaming Commission and the Mississippi Gaming Comission shall each have approved the issuance of New Convertible Debentures and of the Securities issuable upon conversion thereof. See "Gaming Regulation and Licensing". In the event that the Merger is consummated, all of the New Convertible Debentures will be automatically converted into Common Stock or, if so elected by a tendering holder of Old Convertible Debentures, Series E Preferred Stock. It is assumed for all purposes herein that (i) $50.0 million principal amount of New Convertible Debentures will be issued in the Exchange Offer, (ii) the Automatic Conversion will occur, and (iii) no holders of New Convertible Debentures will elect to receive Series E Preferred Stock upon conversion thereof. 66 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 the other elements of the Transaction based on the Company's cash and debt balances as of March 31, 1996. The actual balances and number of shares outstanding may vary based on the date of consummation of the Transaction and the securities issued in connection with the Merger and the financing thereof. (IN MILLIONS) ANTICIPATED SOURCES OF FUNDS ANTICIPATED USES OF FUNDS CASH SOURCES: CASH USES:
Senior Notes........................ $ 140.0 Cash to BGII Stockholders (a)....... $ 77.2 15% Preferred Stock................. 15.0 Retire BGII Debt (b)................ 53.3 Common Stock (Private Placement).... 5.0 Employee Contract Termination Costs --------- and Performance Unit Awards (c)..... 7.6 Fees and Expenses (d)............... 21.9 --------- Total Cash Sources.............. 160.0 Total Cash Uses..................... 160.0 --------- --------- NON-CASH SOURCES: NON-CASH USES: New Convertible Debentures issued and automatically converted into Common Stock....................... 50.0 Retire Old Convertible Debentures... 50.0 15% Preferred Stock to BGII 15% Preferred Stock to BGII Stockholders (e)................... 35.7 Stockholders (e).................... 35.7 Common Stock to BGII Stockholders Common Stock to BGII Stockholders (f)................................ 2.9 (f)................................. 2.9 Common Stock (c).................... 3.7 Common Stock (c).................... 3.7 --------- --------- Total Non-Cash Sources............ 92.3 Total Non-Cash Uses................. 92.3 --------- --------- Total Sources................... $ 252.3 Total Uses.......................... $ 252.3 --------- --------- --------- ---------
- ------------------------------ (a) Represents the cash consideration to be paid to BGII stockholders in the Merger consisting of $7.83 per share of BGII common stock plus interest accruing at a rate of 5.5% per annum from May 3, 1996 to the effective time of the Merger (as defined, but not later than June 18, 1996 unless extended), calculated in accordance with the terms of the Merger Agreement. (b) Represents retirement of the following debt of BGII outstanding at March 31, 1996 together with accrued and unpaid interest thereon: (i) $39.7 million of 10 3/8% Senior Secured Notes due July 1998, at a prepayment price of 101% plus original issue discount of $0.3 million; (ii) $9.3 million under a bank revolving line of credit of Bally Gaming, Inc., a wholly-owned subsidiary of BGII; (iii) other notes payable of BGII aggregating $1.6 million; and (iv) accrued and unpaid interest on the foregoing debt instruments, through the effective time of the Merger, totaling approximately $2.0 million. (c) Includes $5.0 million payable in cash to Richard Gillman and $1.3 million payable to Neil Jenkins consisting of $0.9 million in cash and $0.4 million in Common Stock, all pursuant to agreements with Alliance in connection with the termination of their respective employment agreements and performance unit awards. Additionally, Hans Kloss, who will remain with the Company, will receive a total of $4.3 million consisting of $1.5 million in cash and $2.8 million in Common Stock and Robert Conover, who will remain with the Company, will receive a total of $0.7 million consisting of $0.2 million in cash and $0.5 million in Common Stock, in connection with their employment agreements and performance unit awards. The Common Stock portion of each of such payments will be valued at the Alliance Average Trading Price (as defined in the Merger Agreement) but in no event more than $6.00 nor less than $4.25 per share. (d) Total estimated Alliance and BGII Transaction-related fees and expenses are $37.0 million, of which $15.1 million has been paid through March 31, 1996. Excludes the value of Common Stock to be issued to a Dealer Manager as a financial advisory fee. See "The Exchange Offer -- Dealer Managers". (e) Represents the 15% Preferred Stock consideration to be paid to BGII stockholders in the Merger consisting of $3.57 liquidation value of 15% Preferred Stock per share of BGII common stock, plus dividends accruing at a rate of 15% per annum from May 3, 1996. (f) Represents the Common Stock consideration to be paid to BGII stockholders in the Merger consisting of $0.30 per share of BGII common stock valued at the Alliance Average Trading Price. 67 MARKET PRICE DATA AND DIVIDEND POLICY The Old Convertible Debentures are not traded in an established market. The Common Stock is listed on NASDAQ under the symbol "ALLY". The following table sets forth, for the fiscal quarters indicated, the high and low sales price per share of the Common Stock as reported on NASDAQ.
FISCAL PERIOD HIGH LOW 1994 First Quarter.................................................................. $ 93/8 $ 67/8 Second Quarter................................................................. 111/2 77/8 Third Quarter.................................................................. 101/4 7 Fourth Quarter................................................................. 71/4 51/4 1995 First Quarter.................................................................. $ 81/2 $ 51/8 Second Quarter................................................................. 77/8 51/4 Third Quarter.................................................................. 8 51/2 Fourth Quarter................................................................. 61/8 43/8 1996 First Quarter.................................................................. $ 6 $ 45/8 Second Quarter................................................................. 55/8 23/4 Third Quarter.................................................................. 53/8 31/4 Fourth Quarter (through May 7, 1996)........................................... 47/8 31/2
On October 18, 1995 (the day the Merger Agreement was entered into), January 23, 1996 (the day the Merger Agreement was amended and restated), April 17 (the day the Extension Agreement was signed) and May 7, 1996, the closing price per share of the Common Stock as reported on NASDAQ was $4 1/2, $4 3/16, $4 and $4, respectively. The market price of shares of the Common Stock is subject to fluctuation. As a result, prospective purchasers are urged to obtain current market quotations. No cash dividends were declared or paid by Alliance during the fiscal years ended June 30, 1994 or June 30, 1995 or thereafter. The Alliance Board does not currently intend to pay cash dividends on the Common Stock. Future dividends on the Common Stock will be determined by the Alliance Board of Directors in light of the Company's alternative opportunities for investment and the earnings and financial condition of the Company, among other factors. The 15% Preferred Stock will accrue dividends at the rate of 15% per year, which may be paid for a period of time in the form of additional shares of 15% Preferred Stock. The Series E Preferred Stock will accrue dividends at the rate of 10% per year, which may be paid for ten years in the form of additional shares of Series E Preferred Stock. See "Description of Capital Stock -- Special Stock." On May 7 1996, there were approximately 1,612 holders of record of the Common Stock. 68 DILUTION The conversion price per share of Common Stock to be issued to the holders of the New Convertible Debentures pursuant to the Automatic Conversion exceeds the negative net tangible book value per share. Therefore, holders acquiring shares of Common Stock pursuant to the Automatic Conversion will realize an immediate dilution in the value of their shares. Net tangible book value per share is determined by subtracting total liabilities from total tangible assets and dividing the remainder by the applicable number of shares of Common Stock. Dilution assumes a conversion price of $5.56 per share in the Automatic Conversion. The following table illustrates the dilution to holders acquiring shares pursuant to the Automatic Conversion: Conversion price per share.......................................... $ 5.56 Negative net tangible book value per share prior to the Automatic Conversion and the Transaction as of March 31, 1996(a)............. $ (1.46) --------- --------- Increase in net tangible book value per share attributable solely to the Automatic Conversion excluding shares issuable pursuant to stock options and warrants (b)..................................... $ 2.84 --------- --------- Pro forma net tangible book value per share after the Automatic Conversion and the Transaction excluding shares issuable pursuant to stock options and warrants...................................... (1.20) --------- Dilution in pro forma net tangible book value per share to converting holders of Old Convertible Debentures (c)............... $ (6.76) --------- ---------
- ------------------------ (a) Negative net tangible book value per share is determined by dividing negative net tangible book value of the Company (tangible assets less liabilities and minority interest) by 12,987,483 shares of Common Stock outstanding at March 31, 1996. (b) Based on the conversion price of $5.56 per share pursuant to the Automatic Conversion. (c) Dilution is determined by subtracting pro forma net negative tangible book value (tangible assets less liabilities, minority interest and liquidation preference of Preferred Stock) per share after the Transaction from the conversion price of $5.56 pursuant to the Automatic Conversion. The dilution per share reflects the historical cost of the Alliance's assets at March 31, 1996. Alliance's management believes such dilution would be substantially reduced if it were calculated based upon the fair market value of Alliance's assets. 69 CAPITALIZATION The following table sets forth the consolidated capitalization as of March 31, 1996 of (i) Alliance on a historical basis, (ii) BGII on a historical basis, and (iii) 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) and the Automatic Conversion. See "The Merger and Related Financings" and "Unaudited Pro Forma Condensed Combined Financial Information".
AS OF MARCH 31, 1996 -------------------------------------- THE COMPANY ALLIANCE BGII PRO FORMA ACTUAL ACTUAL AS ADJUSTED ---------- ---------- -------------- (IN THOUSANDS) Long-Term Debt, excluding current maturities: Senior Notes (1)....................................................... $ -- $ -- $ 140,000 Old Convertible Debentures (2)......................................... 85,000 -- 35,000 Hospitality Franchise Systems.......................................... 6,902 -- 6,902 Due to Stockholder, Net of Unamortized Discount of $0.629 at March 31, 1996.................................................................. 1,442 -- 1,442 10 3/8% Senior Secured Notes due July 1998............................. -- 39,688 -- Other Notes Payable.................................................... 1,704 5,605 5,582 ---------- ---------- -------------- Total Long-Term Debt, excluding current maturities (3)................... 95,048 45,293 188,926 15% Preferred Stock (1).................................................. -- -- 50,662 Total Stockholders' Equity (Deficiency) (1)(2)(4)(5)(6).................. (5,595) 86,000 42,350 ---------- ---------- -------------- Total Capitalization..................................................... $ 89,453 $ 131,293 $ 281,938 ---------- ---------- -------------- ---------- ---------- --------------
- ------------------------ (1) Issuance costs relative to the Note Offering and the 15% Preferred Stock Offering are assumed to be capitalized and amortized over the relative terms of these instruments. Issuance costs relative to the Private Placement have been offset against proceeds. (2) Assumes $50.0 million of New Convertible Debentures are issued in exchange for a like amount of Old Convertible Debentures and are converted into Common Stock at a conversion price of $5.56 per share pursuant to the Exchange Offer and the Automatic Conversion. (3) Actual amounts exclude borrowings under lines of credit of $9.3 million at Gaming (which are being repaid in connection with the Merger) and $14.8 million at Wulff and current maturities of long-term debt of $4.7 million. Cash, cash equivalents and securities available for sale at March 31, 1996 on a pro forma basis were $19.8 million. The Wulff lines of credit have additional availability of $7.1 million and are expected to remain in place upon consummation of the Transaction. Alliance currently anticipates obtaining one or more working capital revolving facilities at Gaming (providing up to $ of borrowing availability in aggregate) which would be secured by inventory and accounts receivable. Alliance has not received any commitment for any such facility and no assurance can be given that it will be able to obtain any such facility on terms acceptable to Alliance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of the Company (Pro Forma)". (4) Excludes (i) 2,162,834 shares 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, Inc. 1984 Employee Stock Option Plan (the "Alliance 1984 Stock Option Plan"), of which options covering 1,088,644 shares were exercisable as of March 31, 1996; (ii) 2,000,000 shares issuable upon exercise of warrants issued to Mr. Wilms, all of which where exercisable at March 31, 1996; (iii) warrants issued at the time of the funding of the Old Convertible Debentures, which are exercisable only if the price of the Common Stock reaches $11, $13, and $15, consisting of: 2,750,000 shares issuable upon exercise of warrants issued to Kirkland, 1,250,000 shares issuable upon exercise of warrants issued to GSA and 30,000 shares issuable upon exercise of warrants issued to Friend; (iv) 500,000 shares issuable upon exercise to members of management, which are exercisable only if the 70 price of the Common Stock reaches $11, $13 and $15; and (v) warrants to acquire 1,000,000 shares, all of which are held by former underwriters or lenders and are exercisable as of March 31, 1996. Additionally excludes the shares underlying the $85.0 million of Old Convertible Debentures outstanding at March 31, 1995, convertible into 8,500,000 shares of Common Stock. Assuming $50.0 million of Old Convertible Debentures exchange into New Convertible Debentures and then are converted into Common Stock, there will remain $35.0 million of Old Convertible Debentures outstanding, which would be convertible into 3,500,000 shares of Common Stock. If the Merger were not to occur, leaving the $50.0 million of New Convertible Debentures outstanding, there would be an additional 602,401 shares of Common Stock underlying the New Convertible Debentures. Additionally, upon consummation of the Merger the following warrants for shares of Common Stock will be issued: (a) warrants to acquire 2,500,000 shares issuable to GSA, exercisable only if the price of the Common Stock reaches $11, $13 and $15; (b) warrants to acquire 250,000 shares of Common Stock issuable to a financial advisor, exercisable only if the Common Stock price reaches $13; and (c) 450,000 shares to be issued to a Dealer Manager. Also, the Company intends to satisfy a requirement to pay $1,000,000 to Rainbow Casino Corporation ("RCC"), the limited partner in Rainbow Casino Vicksburg Partnership L.P. ("RCVP"), by issuing $1,000,000 worth of Common Stock by September 30, 1996, which, based on the May 7, 1996 stock price, equates to 2,500,000 shares. See "Security Ownership of Certain Beneficial Holders and Management -- Outstanding Options and Convertible Securities", "The Exchange Offer -- Dealer Managers" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". (5) Excludes (i) approximately 15,000 shares of Common Stock issuable to the non-employee directors of BGII upon exercise of options granted under BGII's 1991 Non-employee Directors' Option Plan (the "BGII 1991 Directors' Plan") and BGII's 1994 Stock Option Plan for Non-Employee Directors (the "BGII 1994 Plan") (assuming a price of $4.00 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". (6) Includes approximately $3.7 million payable in shares of Common Stock, subject to a collar on the Common Stock price (932,533 shares, assuming a share price at the low end of the collar of $4.25) to Messrs. Jenkins, Kloss and Conover in connection with employment contract termination payments and performance unit awards. 71 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The Unaudited Pro Forma Condensed Combined Statements of Operations present results of operations of the Company assuming the Transaction occurred on July 1, 1994 for the statements for the twelve months ended June 30, 1995 and the nine months ended March 31, 1996, and further assuming that the Rainbow Casino operations were consolidated. Adjustments necessary to reflect these assumptions and to restate historical combined results of operations are presented in the Pro Forma Adjustments columns, which are further described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information. The Unaudited Pro Forma Condensed Combined Balance Sheet presents the financial position of the Company assuming the Transaction occurred on March 31, 1996. In preparing the following Pro Forma Financial Information, the Company has also assumed that $50.0 million of the $85.0 million principal amount of the Old Convertible Debentures are exchanged in the Exchange Offer and that all the resulting New Convertible Debentures are converted into Common Stock pursuant to the Automatic Conversion. Adjustments necessary to reflect this assumption and to restate historical combined balance sheets are presented in the Pro Forma Adjustments column, which are further described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information. If the Merger and the Offerings do not occur, the principal difference in Alliance's financial condition, relative to the historical Alliance financial information otherwise presented herein, would be that Alliance's cash, cash equivalents and securities available for sale would decrease by approximately $7.0 million, which management believes will not have a material adverse effect on the financial condition of Alliance or impair its ability to meet its ongoing obligations. The historical unaudited financial information for Alliance is derived from the audited financial statements of Alliance for the year ended June 30, 1995, and the unaudited financial statements of Alliance for the nine-month period ended March 31, 1996. The historical unaudited financial information for BGII is derived from the unaudited interim information generated as of and for the periods ended June 30, 1994 and 1995 and March 31, 1996. BGII operating results for the twelve-month period ended June 30, 1995 are calculated by subtracting the unaudited six-month period ended June 30, 1994 results from the audited year ended December 31, 1994 results and adding the unaudited six-month period ended June 30, 1995 results. BGII operating results for the nine-month period ended March 31, 1996 are calculated by subtracting the unaudited six-month period ended June 30, 1995 results from the audited year ended December 31, 1995 results and adding the unaudited three-month period ended March 31, 1996 results thereto. The Supplemental Unaudited Pro Forma Information presents pro forma cash flow and fixed charges information and includes related pro forma adjustments, consistent with those assumed elsewhere herein. The following information does not purport to present the financial position or results of operations of the Company had the Transaction and events assumed therein occurred on the dates specified, nor is it necessarily indicative of the results of operations of the Company as they may be in the future or as they may have been had the Transaction and the effect of consolidating the Rainbow Casino operating results been consummated on the dates shown. The Unaudited Pro Forma Condensed Combined Financial Information is based on certain assumptions and adjustments described in the Notes to Unaudited Pro Forma Condensed Combined Financial Information and should be read in conjunction therewith and with "The Merger and Related Financings", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited historical consolidated financial statements and related notes thereto of Alliance and BGII included elsewhere herein. 72 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 1996 (1)(2) (IN THOUSANDS)
HISTORICAL ---------------------- PRO FORMA PRO FORMA ALLIANCE BGII COMBINED ADJUSTMENTS COMBINED ---------- ---------- ---------- -------------- ----------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents and Securities $ 25,562 $ 2,009 $ 27,571 $ 152,900(a) $ 19,817 Available for Sale............................ (52,190)(b) (77,220)(c) (7,559)(c) (10,410)(c) 1,535(d) (14,810)(e) Receivables, Net............................... 2,060 82,872 84,932 84,932 Inventories.................................... 661 51,961 52,622 52,622 Other.......................................... 3,775 4,450 8,225 8,225 ---------- ---------- ---------- ----------- Total Current Assets......................... 32,058 141,292 173,350 165,596 Property and Equipment, Net...................... 52,065 23,615 75,680 75,680 Other Assets: Long Term Receivables, Net..................... 5,600 9,696 15,296 15,296 Excess of Costs over Net Assets of an Acquired 2,074 5,290 7,364 46,523(c) 53,887 Business, Net................................. Intangible Assets, Net......................... 11,273 5,127 16,400 4,998(c) 18,920 (2,478)(f) Other, Net..................................... 8,218 1,916 10,134 6,500(a) 16,185 (449)(b) ---------- ---------- ---------- ----------- Total Other Assets........................... 27,165 22,029 49,194 104,288 ---------- ---------- ---------- ----------- Total Assets................................. $ 111,288 $ 186,936 $ 298,224 $ 345,564 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable............................... $ 2,089 $ 14,707 $ 16,796 $ 16,796 Accrued Liabilities............................ 10,345 16,258 26,603 (3,789)(e) 21,964 (850)(b) Current Maturities of Long Term Debt........... 4,041 24,678 28,719 (9,213)(b) 19,506 ---------- ---------- ---------- ----------- Total Current Liabilities.................... 16,475 55,643 72,118 58,266 ---------- ---------- ---------- ----------- Long Term Debt, Less Current Maturities.......... 95,048 45,293 140,341 140,000(a) 188,926 (41,415)(b) (50,000)(f) Other Liabilities................................ 4,325 4,325 4,325 ---------- ---------- ---------- ----------- Total Liabilities............................ 115,848 100,936 216,784 251,517 Minority Interest................................ 1,035 1,035 1,035 Preferred Stock.................................. 15,000(a) 50,662 35,662(c) STOCKHOLDERS' EQUITY (DEFICIENCY): Common Stock, Par.............................. 1,298 108 1,406 125(a) 2,490 74(c) 93(c) (108)(c) 900(f) Paid-in Capital................................ 32,134 68,345 100,479 4,275(a) 108,012 (68,345)(c) 2,866(c) 3,637(c) 49,100(f) 16,000(f) Retained Earnings (Accumulated Deficit)........ (37,960) 1,329 (36,631) (712)(b) (68,098) (449)(b) (1,329)(c) 522(d) (11,021)(e) (18,478)(f) Cumulative Translation Adjustments............. 16,708 16,708 (16,708)(c) Other Stockholders' Equity..................... (1,067) (490) (1,557) 490(c) (54) 1,013(d) ---------- ---------- ---------- ----------- Total Stockholders' Equity (Deficiency)...... (5,595) 86,000 80,405 42,350 ---------- ---------- ---------- ----------- Total Liabilities and Stockholders' Equity (Deficiency)................................ $ 111,288 $ 186,936 $ 298,224 $ 345,564 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 73 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1995(1)(3) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIANCE ----------------------------------- AS BGII HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ---------- ----------- -------- ---------- REVENUES: Gaming.................................................... $128,114 $14,809(g) $142,923 $ Food and Beverage Sales................................... 3,847 891(g) 4,738 Net Equipment Sales....................................... 27 27 248,701 Other..................................................... 4,432 ---------- -------- ---------- Total Revenues.......................................... 131,988 147,688 253,133 ---------- -------- ---------- OPERATING COSTS: Gaming.................................................... 91,311 2,127(g) 93,438 Food and Beverage......................................... 2,795 334(g) 3,129 Equipment Sales........................................... 12 12 157,538 Selling, General and Administrative....................... 32,611 9,716(g) 39,153 67,651 (3,174)(h) Unusual Charges and Other................................. 1,500 Depreciation and Amortization............................. 9,520 893(g) 10,413 8,482 ---------- -------- ---------- Total Operating Costs................................... 136,249 146,145 235,171 ---------- -------- ---------- Operating Income (Loss)..................................... (4,261) 1,543 17,962 OTHER INCOME (EXPENSES): Interest Income........................................... 2,798 2,798 Interest Expense.......................................... (8,133) (988)(g) (9,121) (7,090) Casino Royalty............................................ (810) (2,621)(g) (3,431) Minority Interest......................................... (397) (397) Other, Net................................................ 317 101(g) 418 ---------- -------- ---------- Income (Loss) Before Taxes.................................. (10,486) (8,190) 10,872 Domestic Tax Expense........................................ (265) (265) (290) Foreign Tax Benefit (Expense)............................... (5,779) ---------- -------- ---------- Net Income (Loss)........................................... $(10,751) $ (8,455) $ 4,803 ---------- -------- ---------- ---------- -------- ---------- 15% Preferred Stock Dividend................................ Net Loss Applicable to Common Shares........................ Income (Loss) Per Common Share(5)........................... $ (0.95) $ 0.45 ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION:(6) 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.................................................... $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....................... 106,804 (5,000)(i) 100,135 (1,669)(j) Unusual Charges and Other................................. 1,500 (250)(j) 1,250 Depreciation and Amortization............................. 18,895 1,166(k) 22,642 2,404(l) (298)(m) 800(n) (325)(o) -------- -------- Total Operating Costs................................... 381,316 378,144 -------- -------- Operating Income (Loss)..................................... 19,505 22,677 OTHER INCOME (EXPENSES): Interest Income........................................... 2,798 2,798 Interest Expense.......................................... (16,211 ) (7,018)(n) (23,229 ) Casino Royalty............................................ (3,431 ) (3,431 ) Minority Interest......................................... (397 ) (397 ) Other, Net................................................ 418 418 -------- -------- Income (Loss) Before Taxes.................................. 2,682 (1,164 ) Domestic Tax Expense........................................ (555 ) (555 ) Foreign Tax Benefit (Expense)............................... (5,779 ) 3,779(p) (2,000 ) -------- -------- Net Income (Loss)........................................... $(3,652 ) $(3,719 ) -------- -------- -------- 15% Preferred Stock Dividend................................ $(8,039 ) -------- Net Loss Applicable to Common Shares........................ $(11,758) -------- -------- Income (Loss) Per Common Share(5)........................... $ (0.50 ) -------- -------- SUPPLEMENTAL INFORMATION:(6) PRO FORMA CASH FLOW INFORMATION: $ 7,225 Cash Flows from Operating Activities...................... -------- -------- $(26,936) Cash Flows from Investing Activities...................... -------- -------- Cash Flows from Financing Activities...................... $ (757 ) -------- -------- Pro Forma Deficit of Earnings to Fixed Charges.............. $(1,164 ) -------- -------- Pro Forma Deficit of Earnings to Fixed Charges and Preferred $(9,202 ) -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 74 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1996(1)(4) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIANCE ----------------------------------- AS BGII HISTORICAL ADJUSTMENTS ADJUSTED HISTORICAL ---------- ----------- -------- ---------- REVENUES: Gaming................................ $113,809 $ $113,809 $ Food and Beverage Sales............... 2,976 2,976 Net Equipment Sales................... 11 11 166,328 Other................................. 3,993 ---------- -------- ---------- Total Revenues...................... 116,796 116,796 170,321 ---------- -------- ---------- OPERATING COSTS: Gaming................................ 77,019 77,019 Food and Beverage..................... 1,992 1,992 Equipment Sales....................... 3 3 107,831 Selling, General and Administrative... 33,147 252(q) 33,399 48,842 Unusual Charges and Other............. 3,179 3,179 7,312 Depreciation and Amortization......... 7,328 7,328 6,977 ---------- -------- ---------- Total Operating Costs............... 122,668 122,920 170,962 ---------- -------- ---------- Operating Income (Loss)................. (5,872) (6,124) (641) OTHER INCOME (EXPENSES): Interest Income....................... 1,206 1,206 Interest Expense...................... (6,341) (6,341) (4,949) Casino Royalty........................ (2,931) (2,931) Minority Interest..................... (708) (708) Other, Net............................ 398 398 ---------- -------- ---------- Income (Loss) Before Taxes.............. (14,248) (14,500) (5,590) Domestic Tax Expense.................... (581) (581) (216) Foreign Tax (Expense) Benefit........... (2,032) ---------- -------- ---------- Net Loss................................ $(14,829) $(15,081) $ (7,838) ---------- -------- ---------- ---------- -------- ---------- 15% Preferred Stock Dividend............ Net Loss Applicable to Common Shares.... Loss Per Common Share(5)................ $ (1.21) $ (0.73) ---------- ---------- ---------- ---------- SUPPLEMENTAL INFORMATION:(6) 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................................ $113,809 $ $113,809 Food and Beverage Sales............... 2,976 2,976 Net Equipment Sales................... 166,339 166,339 Other................................. 3,993 3,993 -------- -------- Total Revenues...................... 287,117 287,117 -------- -------- OPERATING COSTS: Gaming................................ 77,019 77,019 Food and Beverage..................... 1,992 1,992 Equipment Sales....................... 107,834 107,834 Selling, General and Administrative... 82,241 (3,750)(r) 66,256 (12,235)(s) Unusual Charges and Other............. 10,491 (2,725)(s) 7,766 Depreciation and Amortization......... 14,305 874(t) 17,114 1,803(u) (224)(v) 600(w) (244)(x) -------- -------- Total Operating Costs............... 293,882 277,981 -------- -------- Operating Income (Loss)................. (6,765 ) 9,136 OTHER INCOME (EXPENSES): Interest Income....................... 1,206 1,206 Interest Expense...................... (11,290 ) (5,632)(w) (16,922 ) Casino Royalty........................ (2,931 ) (2,931 ) Minority Interest..................... (708 ) (708 ) Other, Net............................ 398 398 -------- -------- Income (Loss) Before Taxes.............. (20,090 ) (9,821 ) Domestic Tax Expense.................... (797 ) (797 ) Foreign Tax (Expense) Benefit........... (2,032 ) 1,321(y) (711 ) -------- -------- Net Loss................................ $(22,919) $(11,329) -------- -------- -------- 15% Preferred Stock Dividend............ $(5,916 ) -------- Net Loss Applicable to Common Shares.... $(17,245) -------- -------- Loss Per Common Share(5)................ $ (0.70 ) -------- -------- SUPPLEMENTAL INFORMATION:(6) PRO FORMA CASH FLOW INFORMATION: Cash Flows from Operating Activities.. $20,564 -------- -------- Cash Flows from Investing Activities.. $(1,088 ) -------- -------- Cash Flows from Financing Activities.. $(3,059 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(9,821 ) -------- -------- Pro Forma Deficit of Earnings to Fixed C $(15,737) -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Information 75 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION 1. The Unaudited Pro Forma Condensed Combined Financial Statements of Operations are presented as if the combination of Alliance and BGII occurred on July 1, 1994. The Unaudited Pro Forma Condensed Combined Balance Sheet is presented assuming the combination occurred on March 31, 1996. The combination is expected to be recorded as a purchase transaction in accordance with generally accepted accounting principles and, accordingly, BGII assets and liabilities are presented at their estimated fair values as of that date. The Merger Agreement provides that BGII stockholders will receive in the Merger, in exchange for each of their issued and outstanding shares of common stock, (i) an amount of cash (the "Cash Consideration") determined by dividing $76.7 million by the number of shares of BGII common stock issued and outstanding immediately prior to the Effective Time ($7.83 per share for purposes of presentation of the pro forma financial information) (plus interest accruing at a rate of 5.5% per annum from May 3, 1996 to the effective time of the Merger), (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 15% Preferred Stock having a value as determined in accordance with the Merger Agreement equal to $11.40 less the Cash Consideration of $7.83, or $3.57 per share for purposes of presentation of the pro forma financial information ($35.0 million in aggregate) (plus dividends accruing at a rate of 15% per annum from May 3, 1996). The price per share of Common Stock used for purposes of the Unaudited Pro Forma Condensed Combined Financial Information is $4.00, based on the closing price of the Common Stock as reported on NASDAQ on May 7, 1996. The assumed price per share of the $5.0 million Private Placement is computed as the lower of $4.56 (the average trading price of the Common Stock for the five trading day period immediately preceding the Private Placement agreement) or the average of the last sales price of the Common Stock for the five trading days immediately preceding the Merger (for these purposes, the closing price on May 7, 1996). See "The Merger and Related Financings". Foreign taxes result from the income generated by Wulff. Domestic taxes result from Federal consolidated alternative minimum taxes and state and local income taxes. The Rainbow Casino in Vicksburg began operations in July 1994. In March 1995, Alliance completed its acquisition of the general partnership interest in the limited partnership owning the casino and from that point forward, the Rainbow Casino's operations have been consolidated with those of Alliance. The Rainbow Casino's operating results have been included in the Unaudited Pro Forma Condensed Combined Statements of Operations as if it was owned for each period presented. Certain reclassifications of BGII balances have been made to conform to the Alliance reporting format. The following adjustments have been made to arrive at the Unaudited Pro Forma Condensed Combined Financial Information: 2. PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS AT MARCH 31, 1996 (a) To adjust for the net cash proceeds of the Offerings and the Private Placement, less estimated fees and expenses which have been capitalized in the case of the Offerings and netted against the gross proceeds in the case of the Private Placement. For every 1.0% increase in the effective dividend rate on the 15% Preferred Stock, which is assumed to be issued at liquidation value, the correlative change in the 15% Preferred Stock dividend would be $0.2 million, or a $0.01 decrease in earnings per common share. (b) To adjust for the repayment of $52.2 million of certain BGII debt as such instruments are intended to be repaid with the proceeds of the Offerings, including the remaining original issue discount and other costs associated with the prepayment of the BGII debt totaling $0.7 million and accrued and unpaid interest of $0.9 million. Additionally, certain deferred financing costs related to the BGII debt totaling $0.4 million will be written off. Based on the passage of time from March 31, 1996 to June 18, 76 1996, it is anticipated that at the effective time of the Merger the total repayment of debt including accrued and unpaid interest, original issue discount and other costs associated with the prepayment, will be $53.3 million. (c) The purchase of BGII is presented as follows:
(IN THOUSANDS) CONSIDERATION PAID: Cash paid for original 1 million shares of BGII common stock owned by Alliance..................................................................... $ 10,410 Cash consideration............................................................ 77,220 Value of Common Stock to be exchanged for BGII shares......................... 2,940 Value of 15% Preferred Stock to be exchanged for BGII shares.................. 35,662 Contract termination costs for certain BGII personnel (see below)............. 6,291 -------------- Total consideration........................................................... 132,523 Estimated value of BGII's underlying net assets............................... (86,000) -------------- Excess of costs over the net assets of BGII acquired.......................... $ 46,523 -------------- --------------
The compensation to be paid to BGII personnel consists of cash payable to Messrs. Gillman and Jenkins totaling $5.9 million and Common Stock valued at $0.4 million (determined using the Alliance Average Trading Price but in no event more than $6.00 nor less than $4.25 per share). As each of the above individuals will not be employed by the Company after the Merger, such costs have been included in the computation of goodwill. Consideration to be paid to Messrs. Kloss and Conover consists of $1.7 million in cash and $3.3 million of Common Stock (determined using the Alliance Average Trading Price but in no event more than $6.00 nor less than $4.25 per share). As Messrs. Kloss and Conover will remain with the Company, such amounts have been capitalized and will be amortized over the 2.5 and 1 year life of each of their employment agreements, respectively. These transactions have been effected in the Unaudited Pro Forma Condensed Combined Financial Information since they are conditions of the Merger Agreement. The allocation of purchase cost in the pro forma financial statements is based on available information. After consummation of the Merger, Alliance will arrange for independent appraisal of the significant assets and liabilities of BGII to determine the final allocation of purchase cost. Alliance management does not currently believe that any adjustments to the final allocation of purchase price will have a material effect on the Unaudited Pro Forma Condensed Combined Financial Information. (d) To add back the $1.0 million valuation adjustment, net of the tax effect of $0.5 million, for the Alliance-owned BGII common stock, representing the difference between the purchase cost of $10.4 million and the market value at March 31, 1996 of $8.9 million. (e) To record the payment of certain Merger and related expenses assumed to be incurred prior to and concurrent with the date of the Unaudited Pro Forma Condensed Combined Balance Sheet totaling $14.8 million, of which $3.8 million has been accrued for at March 31, 1996. (f) Represents the assumed conversion of all $50.0 million of the New Convertible Debentures assumed to be issued in the Exchange Offer into shares of Common Stock. The Exchange Offer is not subject to any minimum or maximum condition, and up to $85.0 million of New Convertible Debentures could be issued therein. Each $1,000 principal amount of Old Convertible Debentures is convertible into 100 shares of Common Stock. Each $1,000 principal amount of the New Convertible Debentures will be converted in the event of the Automatic Conversion into approximately 180 shares of Common Stock. The additional 80 shares of Common Stock per $1,000 of principal are treated as a "sweetener" to the original terms of the Old Convertible Debentures and recorded at the fair value of the stock consideration being offered as a non-cash charge for inducement for early conversion. 77 In accordance with the rules and regulations of the Commission, the net charge for inducement for early conversion resulting from the Exchange Offer was not considered in the Unaudited Pro Forma Condensed Combined Statements of Operations and has been reflected in the Unaudited Pro Forma Condensed Combined Balance Sheet as a charge against retained earnings. The assumed $50.0 million of New Convertible Debentures to be issued in the Exchange Offer and converted into Common Stock pursuant to the Automatic Conversion would result in a non-cash charge of $18.5 million, representing the value of the Common Stock inducement of $16.0 million and the write-off of the proportionate amount of the existing deferred financing costs. For every change of $10.0 million of New Convertible Debentures converted, the correlative increase or decrease in the non-cash charge would be $3.7 million. For tax purposes the Automatic Conversion results in an extinguishment of debt gain. However, this tax gain would be entirely offset against the Company's net operating loss carry-forwards, based on current Common Stock prices. 3. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE YEAR ENDED JUNE 30, 1995 (g) To recognize operations of the Rainbow Casino as if owned for the entire year. (h) Alliance development expenses, which relate to mergers, acquisitions and joint ventures, were reduced to $3.0 million annually resulting in an adjustment of $3.2 million. Such adjustment does not include any effect from the elimination of direct costs related to the Merger shown separately in (j) below. The reduction to $3.0 million reflects the elimination of costs that were being incurred prior to Alliance's accomplishment of its strategic plan to acquire a major gaming machine manufacturing company. To accomplish this reduction Alliance reduced payroll costs and fees paid to consultants and legal costs related to non-BGII transactions it had been pursuing. (i) To adjust for estimated synergy cost savings identified by management to date including elimination of certain duplicative costs, such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. (j) To eliminate costs associated with the Merger incurred by Alliance and BGII totaling $1.7 million and $0.3 million, respectively, consisting of legal, accounting and investment banking fees and related costs. (k) To record the amortization of the goodwill resulting from the Merger. The goodwill is being amortized over 40 years. (l) To amortize the costs associated with the termination of Messrs. Kloss and Conover's existing employment contracts with BGII over the life of their respective employment contracts. (m) To eliminate the amortization of goodwill on the historical financial statements of BGII. (n) To adjust for the $16.8 million increase in interest expense from the issuance of the $140.0 million of debt which Alliance currently intends to issue as part of the financing of the Merger, and to amortize the related debt issuance costs over 7 years, offset by the elimination of the $6.0 million interest on the BGII debt being refinanced. For every 0.50% change in the interest rate for the $140.0 million debt financing, the correlating change in interest expense for the year would be $0.7 million on a pre-tax basis. Also represents the reduction of interest expense of $3.8 million caused by the Exchange Offer and the Automatic Conversion into Common Stock of an assumed $50.0 million of principal of the New Convertible Debentures. Every $10.0 million of principal of the New Convertible Debentures exchanged and converted into Common Stock causes a decrease in interest expense of $0.8 million on a pre-tax basis. (o) Represents the reduction of the amortization of the deferred financing costs related to the assumed $50.0 million of New Convertible Debentures exchanged and converted into Common Stock. (p) To adjust for the estimated effect of foreign income tax savings resulting from acquisition restructuring which will enable Alliance to allocate items such as interest expense to Wulff. 78 4. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS FOR THE NINE-MONTH PERIOD ENDED MARCH 31, 1996 (q) Alliance development expenses, which relate to mergers, acquisitions and joint ventures, were reduced to $3.0 million annually. For the nine-month period ended March 31, 1996, Alliance was below this $3.0 million annualized amount by $0.3 million. The elimination of direct costs related to the Merger is shown separately in note (s) below. (r) To adjust for estimated synergy cost savings identified by management to date including elimination of certain duplicative costs, such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. (s) To eliminate costs associated with the Merger incurred by Alliance and BGII of $12.2 million and $2.7 million, respectively, consisting of legal, accounting and investment banking fees and related costs. (t) To record the amortization of the goodwill resulting from the Merger. The goodwill is being amortized over 40 years. (u) To amortize the costs associated with the termination of Messrs. Kloss and Conover's existing employment contracts with BGII over the life of their respective employment contracts. (v) To eliminate the amortization of goodwill on the historical financial statements of BGII. (w) To adjust for the $12.6 million increase in interest expense from the issuance of the $140.0 million of debt, at face value, which Alliance currently intends to issue as part of the financing of the Merger, and to amortize the related debt issuance costs over 7 years, net of the elimination of the $4.2 million interest on the BGII debt being refinanced. Also represents the reduction of interest expense of $2.8 million caused by the Exchange Offer and the Automatic Conversion into Common Stock of an assumed $50.0 million of principal of the New Convertible Debentures. (x) Represents the reduction of the amortization of the deferred financing costs related to the assumed $50.0 million of New Convertible Debentures exchanged and converted into Common Stock. (y) To adjust for the estimated effect of foreign income tax savings resulting from acquisition restructuring which will enable Alliance to allocate items such as interest expense to Wulff. 5. SHARE INFORMATION The following table reflects computations of the pro forma number of shares of Common Stock outstanding and the per share computations (shares in millions):
TWELVE MONTHS NINE MONTHS ENDED JUNE 30, ENDED MARCH 31, 1995 1996 ----------------- ------------------- Historical weighted average shares outstanding................................... 11.3(a) 12.2 Shares to be sold in the Private Placement....................................... 1.3 1.3 Shares to be issued to BGII stockholders......................................... 0.7 0.7 Common Stock to be issued to terminate contracts for certain BGII personnel...... 0.9 0.9 Common Stock to be issued in the Automatic Conversion............................ 9.5 9.5 --- --- Pro forma weighted average shares outstanding................................ 23.7 24.6 --- --- --- ---
- ------------------------ (a) Excludes 1.3 million shares of non-voting special stock held by KIC, which was converted into Common Stock in December 1995. 79 Effect of the Merger on the shareholders of Alliance, assuming a stock price of $4.00, exchange of $50.0 million of Old Convertible Debentures and conversion of New Convertible Debentures solely into Common Stock, is as follows (shares in millions): Shares of Common Stock outstanding at March 31, 1996.......................... 13.0 Shares of BGII common stock outstanding at March 31, 1996....................... 10.8 Less the shares of BGII common stock already owned by Alliance........... 1.0 --- BGII common stock to be converted......................... 9.8 --- --- Common Stock to be issued to BGII stockholders............................ 0.7 Common Stock to be issued to terminate contracts for certain BGII personnel.... 0.9 Common Stock to be sold in Private Placement............................... 1.3 Common Stock to be issued in the Automatic Conversion.................... 9.5 --- Pro forma total outstanding shares... 25.4 --- ---
If all $85.0 million outstanding Old Convertible Debentures were exchanged and the resulting New Convertible Debentures converted into Common Stock, the pro forma total of outstanding shares would increase by 6.3 million. 6. SUPPLEMENTAL PRO FORMA INFORMATION Additional supplemental information regarding cash flow and fixed charges has been presented with adjustments consistent with those shown in the pro forma operating results. The earnings required to cover the 15% 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. 80 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 holder of Old Convertible Debentures in determining whether to participate in the Exchange Offer. The Company believes that this information is a useful adjunct to net income, cash flows and other GAAP measurements. However, this supplemental information should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Alliance management has made certain adjustments to combined operating income and has made further adjustments thereto to arrive at a measure of adjusted operating cash flow ("Adjusted Operating Cash Flow"). As is more fully described below, such adjustments consist of the elimination of certain charges that management has determined to be non-recurring or unusual, as well as adjustments made to reflect the most recent operating results of the Rainbow Casino by annualizing the most recent nine-month operating results (seasonally adjusted), and presenting such results as if they had occurred for each period presented. The concepts of non-recurring or unusual charges are not defined in GAAP. In making these adjustments, management considered non-recurring revenue items as well as non-recurring expense items. There can be no assurance that other non-recurring or unusual charges will not occur in the future. SUPPLEMENTAL ANALYSIS OF ADJUSTED OPERATING CASH FLOW (DOLLARS IN THOUSANDS)
ESTIMATED 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.................. $ 20,431 ------- ------- NINE MONTH PERIOD ENDED MARCH 31, 1996 Operating Income (Loss)......................... $ (5,872) $ (6,124) $ (641) Depreciation and Amortization................... 7,328 7,328 6,977 Minority Interest............................... (708) (708) -- Casino Royalty.................................. (2,931) (2,931) -- ----------- ------------- ------------- $ (2,183) (2,435) 6,336 ----------- ------------- ------------- ----------- Reclassification of Certain Direct Merger Costs........................................ 12,235 2,725 ADJUSTMENTS: Rainbow Operations............................ (160) -- Other Unusual or Nonrecurring Charges......... 3,179 4,566 ------------- ------------- Adjusted Operating Cash Flow.................... $ 12,819 $ 13,627 $ 3,750 $ 30,196 ------------- ------------- ----------- ------- ------------- ------------- ----------- ------- Pro Forma Net Interest Expense.................. $ 15,716 ------- -------
The above supplemental analysis should be read in conjunction with the Unaudited Pro Forma Condensed Combined Financial Information and the notes thereto. In this regard, for the year ended June 30, 1995 the Company's pro forma deficit of earnings to fixed charges was $1.2 million, and the pro forma deficit 81 of earnings to fixed charges after the 15% Preferred Stock dividend was $9.2 million. The Company's pro forma deficit of earnings to fixed charges, both before and after the 15% Preferred Stock dividend, for the nine-month period ended March 31, 1996 was $9.8 million, and $15.7 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 totaled $1.7 million and $12.2 million for the year ended June 30, 1995 and the nine months ended March 31, 1996. BGII's direct costs incurred relating to the Merger totaled $0.3 million and $2.7 million for the year ended June 30, 1995 and the nine months ended March 31, 1996, respectively. The adjustments which were made in determining the supplemental analysis of Adjusted Operating Cash Flow which were not considered in the preceding Unaudited Pro Forma Condensed Combined Statements of Operations reflect the following: RAINBOW OPERATIONS. The final elements of the Rainbow Casino facility, consisting of an 89-room hotel and an amusement park and the completion of the casino exterior decor, parking, landscaping and signage, were not completed until July 1995, although the Rainbow Casino had been open without these amenities since July 1994. Although the hotel and amusement park are not owned or operated by Alliance, management believes that such facilities have contributed significantly to the recent strong financial results of the Rainbow Casino. Therefore, Alliance management believes that the results of operations for the nine months ended March 31, 1996 after considering seasonality (which management believes was immaterial) are more reflective of the property's ongoing results of operations. Accordingly, such results for the twelve months ended June 30, 1995 and the nine months ended March 31, 1996 have been annualized based on the actual financial results for the six months ended December 31, 1995, as Alliance management believes that such results better portray the Rainbow Casino's contribution to Adjusted Operating Cash Flow. This annualization involves forward-looking statements that involve risks and uncertainties, including the risks of competition, gaming regulation and the other risks detailed in this Prospectus, included under "Risk Factors". BGII ONE-TIME COSTS. Certain charges incurred by BGII consist of costs relating to a regulatory investigation and legal proceedings in Louisiana 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. Results for the nine months ended March 31, 1996 were adjusted for charges consisting of a reserve for V.A.T and the write-down of a building in Germany, which had been acquired in the purchase of a distributor and never used by Wulff, to its net realizable value in anticipation of its sale, totalling $1.8 million, as well as to adjust for legal costs relating to Louisiana of $1.0 million. In June 1995, BGII entered into a merger agreement with WMS, which was ultimately terminated to enter into the Merger Agreement with Alliance. Based on management's assessment and allocation of the total costs incurred for both the WMS and Alliance merger transactions, one-time costs related to the WMS transaction were $0.2 million and $1.8 million for the fiscal year ended June 30, 1995 and the nine months ended March 31, 1996, respectively. ALLIANCE ONE-TIME COSTS. One-time charges incurred by Alliance consist of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain directors. These charges were incurred during the quarter ended June 30, 1995 and are therefore included as adjustments only for the twelve months ended June 30, 1995. Also, for the nine months ended March 31, 1996 Alliance recorded a provision for impaired assets of two business development projects, totaling $3.2 million. SYNERGY COST SAVINGS. Although management cannot precisely quantify future savings, the Company has identified and expects to realize synergy cost savings of approximately $5.0 million on an annual basis (primarily through the reduction of duplicative costs, such as facility, legal, accounting and compensation costs) as a result of the Merger. The Company further expects to incur approximately $1.0 million in one-time implementation costs in realizing these savings, which expenditures have been added back in arriving at the above supplemental analysis. 82 FORECAST OF OPERATIONS The following Forecast of Operations (the "Forecast") sets forth, to the best of management's knowledge and belief and giving consideration to actual results for Alliance and BGII for the three months ended March 31, 1996, management's expectations of the results of operations for the Company (assuming consummation of the Merger and giving effect to the other elements of the Transaction) for the twelve-month period ending December 31, 1996. The Forecast is based on Alliance's current best estimates of expected results for the period presented given the forecasted assumptions described in "Summary of Significant Assumptions and Accounting Policies for the Forecast". The Forecast, which consists of forward-looking statements, is qualified by, and subject to, the assumptions set forth below and the other information contained in this Prospectus, and should be read in conjunction with "Summary of Significant Assumptions and Accounting Policies for the Forecast" as well as "Unaudited Pro Forma Condensed Combined Financial Information", "Supplemental Analysis of Pro Forma Adjusted Operating Cash Flows", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited historical consolidated financial statements and related notes thereto of Alliance and BGII included elsewhere herein. Alliance does not intend to update or otherwise revise the Forecast to reflect events or circumstances existing or arising after the date of this Prospectus or to reflect the occurrence of unanticipated events. BGII's independent accountants, Coopers & Lybrand L.L.P., have neither examined nor compiled nor had any other involvement with the preparation of the Forecast and accordingly do not express an opinion or any other form of assurance with respect thereto, nor do they assume any responsibility for the Forecast. Independent accountants for Alliance, KPMG Peat Marwick LLP, have not examined the Forecast presented herein and, accordingly, do not express an opinion or any other form of assurance with respect thereto, and no other independent expert has examined the Forecast. The Forecast is based upon a number of estimates and assumptions that while presented with numerical specificity and considered reasonable by management of Alliance are inherently subject to significant business, economic, competitive, regulatory and other uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of Alliance. However, the forecast does represent management's good faith estimate of the most likely 1996 results of operations including net income (loss), net income (loss) applicable to Common Shares, income (loss) per share, EBITDA and Adjusted Operating Cash Flow. The assumptions disclosed herein are those that Alliance believes are significant to the Forecast and reflect management's judgment as of the date hereof. The Forecast is necessarily speculative in nature, and it is usually the case that one or more of the assumptions do not materialize. Not all assumptions used in the preparation of the Forecast have been set forth herein. In addition, as disclosed elsewhere in this Prospectus under "Risk Factors", the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the Forecast. Many of the factors disclosed under "Risk Factors" in this Prospectus could cause actual results to differ materially from those expressed in the Forecast. The Forecast and actual results will vary, and those variations may be material. The inclusion of the Forecast herein should not be regarded as a representation by Alliance or any other person that the Forecast will be achieved. Holders are cautioned not to place undue reliance on the Forecast. If the Merger and the Offerings do not occur, the principal difference in Alliance's financial condition, relative to the historical Alliance financial information otherwise presented herein, would be that Alliance's cash, cash equivalents and securities available for sale would decrease by approximately $7.0 million, which management believes will not have a material adverse effect on the financial condition of Alliance or impair its ability to meet its ongoing obligations. Alliance was the sole preparer of the Forecast, which was prepared in accordance with guidelines established by the American Institute of Certified Public Accountants, except that it combines Alliance and BGII as if the Transaction had occurred and it omits the disclosure of certain non-operating items, income taxes, extraordinary items and significant changes in financial position. The Forecast reflects, among other things, the results of operations, EBITDA and Adjusted Operating Cash Flow, but it may not fully reflect the Company's ability to pay cash interest requirements because it does not reflect other cash obligations and requirements, such as mandatory payments on debt principal and preferred stock redemptions, and operating requirements relating to capital maintenance and expansion. Because the Forecast has been prepared on a consolidated basis, the Forecast does not account for the Company's holding company structure, which will result in cash flow earned at certain subsidiaries being unavailable for distribution to the Company, including to service indebtedness of the Company. 83 ALLIANCE GAMING CORPORATION FORECAST OF OPERATIONS
COMPARATIVE ANALYSIS OF OPERATIONS (1) ----------------------------------------------------- TWELVE MONTHS THREE MONTHS FORECAST OF OPERATIONS ENDED DECEMBER 31, ENDED MARCH 31, FOR THE TWELVE -------------------------- ------------------------- MONTHS ENDING 1994 1995 1995 1996 DECEMBER 31, 1996 ------------ ------------ ------------ ----------- ------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS INFORMATION: Revenues Gaming........................ $ 129,690 $ 147,590 $ 36,365 $ 39,707 $ 163,389 Food and Beverage Sales....... 7,096 4,045 1,118 856 4,189 Net Equipment Sales........... 231,371 244,488 67,664 57,440 254,467 Other......................... 4,874 4,841 631 1,109 3,912 ------------ ------------ ------------ ----------- ------------ Total Revenues.............. 373,031 400,964 105,778 99,112 425,957 ------------ ------------ ------------ ----------- ------------ Operating Costs Gaming........................ 90,125 98,377 22,972 26,771 103,331 Food and Beverage............. 4,755 2,884 701 566 3,150 Equipment Sales............... 152,582 157,800 42,889 36,740 158,804 Selling, General and Administrative............... 91,508(2) 94,859(2) 24,635(2) 22,318(2) 113,283(2) Unusual Charges and Other..... 300 5,216 400 3,479 4,479 Depreciation and Amortization................. 22,483 22,584 4,740 5,311 23,192 ------------ ------------ ------------ ----------- ------------ Total Operating Costs..... 361,753 381,720 96,337 95,185 406,239 ------------ ------------ ------------ ----------- ------------ Operating Income................ 11,278 19,244 9,441 3,927 19,718 ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ Net Income (Loss)............... $ (12,181) $ (7,153) $ 2,906 $ (3,076) $ (27,939) 15% Preferred Stock Dividends... (8,039) (8,039) (1,900) (1,900) (8,039) ------------ ------------ ------------ ----------- ------------ Net Income (Loss) Applicable to Common Shares.................. $ (20,220) $ (15,192) $ 1,006 $ (4,976) $ (35,978) ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ Income (Loss) per Common Share.......................... $ (0.89) $ (0.64) $ 0.04 $ (0.20) $ (1.42)(3) ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ Pro Forma (or Forecasted) Common Shares Outstanding............. 22,600 23,800 23,700 25,400 25,400 ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ SUPPLEMENTAL INFORMATION: Operating Income................ $ 11,278 $ 19,244 $ 9,441 $ 3,927 $ 19,718 Depreciation and Amortization... 22,483 22,584 4,740 5,311 23,192 Casino Royalty.................. (1,670) (3,674) (983) (1,024) (4,368) Minority Interest............... (675) (504) (83) (432) (920) ------------ ------------ ------------ ----------- ------------ Subtotal...................... 31,416 37,650 13,115 7,782 37,622 Adjustments: Rainbow Operations............ -- 1,912(4) 1,189(4) -- -- Other Unusual or Non-recurring Charges...................... 2,856(5) 7,783(5) 600(5) 3,487(5) 4,479(6) Direct Merger Costs........... -- -- -- -- 12,815(7) ------------ ------------ ------------ ----------- ------------ Adjusted Operating Cash Flow.... $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916 ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------ OTHER DATA: Net Interest Expense.......... $ 19,561 $ 20,743 $ 4,964 $ 5,191 $ 20,491 ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- ------------
- ------------------------------ (1) See Note (2) -- Presentation of Supplemental Comparative Information of the "Summary of Significant Assumptions and Accounting Policies for the Forecast". See accompanying Summary of Significant Assumptions and Accounting Policies for the Forecast 84 (2) Selling, general and administrative costs are net of the following: direct Merger costs; the business development costs over (under) the $3.0 million budgeted annual amount totaling $4.7 million, $1.0 million, $1.4 million and $(52,000) for the twelve months ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively; and synergy cost savings totaling $5.0 million for the twelve months ended December 31, 1994, 1995 and ending 1996 and $1.3 million for the three months ended March 31, 1995 and 1996. See Note (6) below for one-time $1.0 million costs to implement synergy cost savings in 1996. See Note (7) below for the 1996 presentation which includes direct Merger costs. (3) The Loss per Common Share in the forecasted twelve-month period ending December 31, 1996 is computed based on 25,400,000 common shares outstanding, and includes depreciation and amortization of $23.2 million (or $0.91 per share), direct Merger costs of $12.8 million (or $0.50 per share), loss on assumed conversion of convertible debentures of $18.5 million (or $0.73 per share) and 15% Preferred Stock Dividends of $8.0 million (or $0.32 per share). (4) Represents adjustment to reflect management's derivation of Rainbow Casino's annualized results for the period, net of incremental royalty. (5) Reflects items determined by management to be unusual or non-recurring (which are also included in Total Operating Costs). The concepts of non-recurring or unusual charges are not defined in GAAP. (6) For the twelve months ending December 31, 1996, reflects items determined by management to be non-recurring charges, consisting of a provision for impaired assets of two development projects totaling $3.2 million included in Alliance's Selling, General and Administrative costs; the $1.0 million of one-time charges (which are included in Selling, General and Administrative costs) to implement the expected annual synergy cost savings (which are reflected in Total Operating Costs as well); and certain charges of $0.3 million relating to a regulatory investigation and legal proceedings in Louisiana. (7) Direct Merger costs for the twelve months ending December 31, 1996 of $12.8 million have been included in Total Operating Costs and presented as an adjustment in computing the Adjusted Operating Cash Flow. See Note (2) above for the presentation of direct Merger costs in earlier periods. 85 SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES FOR THE FORECAST FOR THE TWELVE-MONTH PERIOD ENDING DECEMBER 31, 1996 NOTE 1. -- INTRODUCTION The Forecast of Operations for the twelve-month period ending December 31, 1996 and the accompanying related Summary of Significant Assumptions and Accounting Policies of Alliance Gaming Corporation and subsidiaries, after consummation of the Transaction, represent Alliance's best estimate as of the date of this Prospectus for the first twelve months of combined operations (after elimination of all significant intercompany accounts and transactions). The Forecast reflects management's judgment, based on present circumstances, of the expected set of conditions and their expected courses of action, to the extent such conditions or action are anticipated to affect the results described in the Forecast. The assumptions described herein are those that management believes are significant to the Forecast or are the key factors upon which the results shown in the Forecast depend. However, not all assumptions used in the preparation of the Forecast have been set forth herein. The estimates and assumptions, though considered reasonable by management, may not be achieved and are inherently subject to significant business, economic, regulatory and competitive uncertainties and contingencies, including possible competitive responses, many of which are not within the control of the Company and are not possible to assess accurately. Therefore, the actual results achieved during the forecast period will vary from those set forth in the Forecast, and the variations may be material. Holders of Old Convertible Debentures are cautioned not to place undue reliance on the Forecast. The Forecast assumes that, among other things: (i) the proceeds of the Offerings and the Private Placement are used as contemplated in "The Merger and Related Financings -- Sources and Uses of Funds"; (ii) there will be no change in GAAP that may have a direct material effect on the reporting of financial results of the Company; (iii) there will be no material changes made to gaming regulations that would affect the operations of the Company; and (iv) that management will realize the anticipated synergies. Management believes that these assumptions, when taken together with management's extensive experience in operating in such markets, provide a reasonably objective basis to forecast the Company's operations for the period presented. Alliance does not intend to update or otherwise revise the Forecast to reflect events or circumstances existing or arising after the date hereof or to reflect the occurrence of unanticipated events. The Forecast is provided solely for the 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, Alliance has presented a Comparative Analysis for the twelve-month periods ended December 31, 1994 and 1995 and the three-month periods ended March 31, 1995 and 1996 which have been derived using accounting principles and assumptions consistent with those used in deriving the Pro Forma Unaudited Condensed Combined Statements of Operations included elsewhere in this Prospectus. Each period in the Comparative Analysis includes adjustments for the planned reduction of the Company's ongoing development costs to $3.0 million per year, certain estimated annual synergy cost savings (net of one-time implementation costs) and items management believes to be one-time charges, and assumes that the Rainbow Casino was consolidated since its opening in July 1994. The Comparative Analysis has been prepared by management to provide potential participants in the Exchange Offer with additional information to analyze the Forecast and should not be construed as a presentation of actual historical results or expected future results. The "Unaudited Pro Forma Condensed Combined Financial Information", "Supplemental Analysis of Adjusted Operating Cash Flow" and the audited and unaudited historical consolidated financial statements and related notes thereto of Alliance and BGII included elsewhere herein should be read for additional information. 86 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). Alliance has agreements with local bars, taverns, restaurants and convenience stores for either space leases or revenue-sharing arrangements. Under the revenue-sharing arrangements, Alliance shares the revenues from the machines with the location operator, and with space leases Alliance pays a fixed rental to the owner of the establishment and then Alliance receives all of the revenues derived from the gaming devices. At December 31, 1995, the weighted average remaining term of Alliance's revenue-sharing arrangements was approximately 3.9 years, and for space 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) 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, as well as due to an increase in average net win per machine based primarily on the assumed implementation of Gambler's Bonus discussed below. The Forecast assumes that of the contracts expiring during the forecast period Alliance intends to retain 80%, which is consistent with historical renewal rates. For the year ended June 30, 1995, Alliance did not renew 17% of expiring agreements, including those Alliance had determined to allow to lapse. Additionally, in December 1995, Alliance implemented the Gambler's Bonus cardless slot player's club and player tracking system. Alliance assumes, for the purpose of this Forecast, that there will be 88 locations, or an aggregate of 980 machines, installed at June 1996, increasing to 130 locations, or 1,490 machines, at December 1996. Consistent with results of previously installed machines linked to Gambler's Bonus, the Forecast assumes that there will be an increase in the average net win per machine at these locations based on an anticipated increase in the play at these machines. Consistent with contracts signed to date, the Forecast assumes that the contracts with the additional locations will allow Alliance to receive a percentage of the increased gaming win generated by Gambler's Bonus in addition to its existing revenue participation. Forecasted results of the Nevada gaming operations are directly dependent upon the realization of these assumptions. Variations from the realization of these assumptions will have a material effect upon the forecasted results. 87 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) The Forecast assumes that costs and expenses (which include selling, general and administrative costs) related to Nevada gaming machine management operations are relatively stable as a percentage of revenues as compared to the 1995 levels. LOUISIANA VSI operates video poker devices in the greater New Orleans area under an exclusive agreement with the owner of the only full service thoroughbred horse racing facility and its 10 associated OTBs. The tenth OTB location opened in Metairie, Louisiana in October 1995, bringing the total number of machines in operation to approximately 700 (which is the assumed number of machines for the forecasted period). Only the operator of the full service horse racing facility may own OTBs. LOUISIANA GAMING MACHINE MANAGEMENT OPERATIONS
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 changed by referendum. See "Risk Factors -- Strict Regulation by Gaming Authorities". Forecasted results of the Louisiana gaming machine management 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. Alliance's operations also depend on the financial viability of the racetrack, which is beyond the control of Alliance. Pursuant to the terms of a subordinated loan of up to $6.5 million made in March 1992 by Mr. Wilms to VSI, a majority-controlled subsidiary of Alliance (the "VSI Loan"), VSI may not pay cash dividends or make any distribution of its property. The loan, which had an outstanding balance of $3.4 million at December 31, 1995, amortizes quarterly until due in full in September 1998 and may be prepaid at any time without penalty. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Forecast assumes that costs and expenses (which include selling, general and administrative costs) related to Louisiana gaming machine management operations will be approximately the same during the forecast period as a percentage of revenues as during 1995. 88 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. The Forecast also assumes that the Sparks, Nevada gaming market will increase by 3% in 1996, compared to 5% growth for calendar 1995 as reported by the Nevada Gaming Control Board. In addition, because the negative impact on Plantation Station of a major street, sidewalk, and landscaping redevelopment project by the City of Sparks ended in December 1995, the Forecast assumes that revenues will increase in 1996. Forecasted results of the Plantation Station operations are directly dependent upon the realization of these assumptions. Variations from these assumptions will have a material effect upon the forecasted results. The Forecast also assumes that costs and expenses (which includes selling, general and administrative costs) related to Plantation Station operations are approximately the same during the forecast period as a percentage of revenues as in 1995. 89 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) RAINBOW CASINO RAINBOW CASINO OPERATIONS (A)
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING -------------------- DECEMBER 31, 1994 1995 1996 --------- --------- ------------ (DOLLARS IN THOUSANDS, EXCEPT UNIT DATA) TOTAL VICKSBURG MARKET Average Number of Slot Machines........................................ 2,849 2,847 2,880 Average Number of Tables............................................... 152 154 155 Win/Slot/Day........................................................... $ 124 $ 142 $ 153 % CHANGE............................................................. -- 15.2% 7.4% Win/Table/Day.......................................................... $ 851 $ 789 $ 730 % CHANGE............................................................. -- -7.2% -7.5% Win/Position/Day....................................................... $ 128 $ 140 $ 145 % CHANGE............................................................. -- 9.2% 4.0% RAINBOW Average Number of Slot Machines........................................ 573 589 589 Average Number of Tables............................................... 28 28 25 Win/Position/Day....................................................... $ 72 $ 102 $ 132 % CHANGE............................................................. -- 42.7% 29.2% 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 the Company's location at Vicksburg Landing and the adjoining amenities will enable the Rainbow Casino to attract visitors from the existing tourism market of the historic city of Vicksburg as well as a significant share of the local market. The Rainbow Casino market share is assumed to 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. The Forecast assumes that there are no new entrants into the market and no relocation of existing facilities within the market. Forecasted results of Mississippi gaming operations are directly dependent upon the realization of these assumptions. Variations from these assumptions will have a material effect upon forecasted results. The Forecast assumes that costs and expenses (which include selling, general and administrative but do not include the casino royalty related to the Rainbow Casino operations) are relatively stable as a percentage of revenues as compared to the 1995 levels. NET EQUIPMENT SALES Forecasted equipment sales revenues includes the operating results from Gaming, Systems and Wulff. There are numerous factors which affect any forecast of gaming equipment sales, including gaming regulatory factors and casino or arcade machine demand and patron preferences. The impact of such factors on the Company will be material. GAMING Equipment sales reflect the sales of video and reel-type gaming machines to casinos in various jurisdictions, including casinos in Nevada and Atlantic City, riverboats, Native American casinos, and international 90 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) markets. Equipment sales is a function of the number of unit sales and the net sales price per unit. Gaming results include GmbH and BGI Australia Pty Limited along with certain reclassifications from historical presentation. GAMING OPERATIONS
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 15,000 International.............................................................. 4,499 5,498 5,500 ---------- ---------- ------------ Total.................................................................. 21,625 18,084 20,500 Net Revenues............................................................... $ 118,659 $ 111,849 $ 122,483 Cost and Expenses.......................................................... $ 111,355 $ 104,544 $ 111,733
Although worldwide electronic gaming machine sales (for these purposes, primarily slot and video machines) decreased in 1995 by approximately 18% primarily because of a reduced number of new casino openings and delays in previously expected riverboat activity, management assumes that 1996 worldwide gaming machine sales will increase as a result of (1) three major casino openings in Las Vegas, (2) the opening of Indiana riverboat casinos, (3) the expansion of certain other markets and (4) the expected increase in demand for replacement machines as a result of an increasing portion of the installed base reaching its natural replacement cycle. However, particularly in the case of non-traditional gaming markets, the timing and magnitude of electronic gaming machine sales is difficult to predict with accuracy. The Forecast assumes a relatively constant market share during the forecast period while Gaming's share during the past two years has grown significantly. The Forecast assumes gross margin increases during the forecast period due to a 1.5% increase in net unit price, continued reduction in the new material cost per unit (although at a lower rate than experienced during the past two years) and improved manufacturing efficiencies as a result of higher production levels during the forecast period than during the year ended December 31, 1995. Gaming's forecasted operating results are directly dependent upon the realization of these assumptions. The Forecast assumes selling, general and administrative expenses will increase by approximately 18% as a result of increased product development and sales efforts. Variations from these assumptions will have a material effect upon forecasted results. As Gaming's manufacturing overhead costs and selling, general and administrative expenses are relatively fixed, variances from the forecasted unit sales impact margins to a greater extent than if such costs were predominantly variable. 91 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) SYSTEMS Systems' revenues reflect the sales of computer hardware and computer software, as well as maintenance and upgrades of such hardware and software, to casinos in various jurisdictions, including Nevada and Atlantic City, riverboats, Native American casinos and, to a lesser extent, in international markets. Hardware and software sales are based on the contracts that Systems enters into with each of the individual casinos. Such contracts generally reflect pre-determined prices for goods and services provided by Systems. Maintenance revenues are generally a function of the total installed base of Systems' GMUs. SYSTEMS OPERATIONS
FORECASTED TWELVE TWELVE MONTHS ENDED MONTHS DECEMBER 31, ENDING ---------------------- DECEMBER 31, 1994 1995 1996 ---------- ---------- ----------------- (DOLLARS IN THOUSANDS) Net Revenues....................................................... $ 13,386 $ 20,681 $ 20,565 Cost and Expenses.................................................. $ 9,793 $ 14,893 $ 14,262
The Forecast assumes that revenues during the forecast period will be comparable to the prior year. The forecasted net revenues assumes that approximately 40% of Systems' sales result from product upgrades and expansions. The Forecast assumes gross margin will increase during the forecast period due to lower average discounts off list-price primarily due to a change in customer mix and the absence of a provision for product upgrades which was recorded during the year ended December 31, 1995. The Forecast assumes selling, general and administrative expenses will increase approximately 13%. Systems' forecasted operating results are directly dependent upon the realization of these assumptions. Variations from these assumptions will have a material effect upon forecasted results. In particular, because Systems' revenues are concentrated in a relatively small number of customers, a change in circumstantial delay or other change in a small number of orders will materially impact Systems' operating results. WULFF Wulff sales reflect the sales of new and used wall machine units, third-party wall machines, pinball machines and other related amusement devices and used equipment primarily in Germany to various arcades, taverns, hotels and amusement galleries. Wulff's revenues are a function of the number of unit sales and the sales price per unit. WULFF OPERATIONS
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 Cost 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 1996 than during the first half of 1995, but to increase, and to exceed the 1995 level of demand, in the second half of 1996 principally due to the expected impact of new regulations going into effect on January 1, 1997, 92 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) which will require all wall machines in use to have meters to monitor the amount inserted by players and paid out by the machine. There can be no assurance that the 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 in the second half of 1996 as forecasted. The Forecast assumes gross margin will increase during the forecast period due to lower raw material costs per unit partially offset by a lower average price per unit. Wulff's forecasted operating results will be directly dependent upon the realization of these assumptions. The Forecast assumes selling, general and administrative expenses will remain relatively constant. Variations from the realization of these assumptions will have a material effect upon forecasted results. As Wulff's manufacturing overhead costs and selling, general and administrative expenses are relatively fixed, variances from forecasted unit sales could impact margins to a greater extent than if such costs were predominantly variable. OTHER OPERATING COSTS AND EXPENSES (ALL BUSINESS UNITS) The Forecast gives effect to assumed cost savings as a result of Merger synergies and further assumes a reduction in corporate development costs, all on the basis reflected under "Supplemental Analysis of Adjusted Operating Cash Flow". In contrast to the actual results presented in the Comparative Analysis for 1995, the Forecast assumes that other than as presented, no charges will be incurred of the sort reflected in the "Supplemental Analysis of Adjusted Operating Cash Flow" as Other Unusual or Non-recurring Charges, although the concepts of non-recurring or unusual charges are not defined under GAAP. In developing the Forecast, management included anticipated Merger costs for the forecast period, and reviewed the Comparative Analysis period for non-recurring revenue items as well as non-recurring expense items. The forecast of other operating costs and expenses are particularly dependent upon the assumptions concerning synergy cost savings and reduction of corporate development costs. There is a possibility that a variation from the assumed savings may occur, and the effect may be material. Assumptions for forecasted overhead levels and certain other expenses as reflected above (E.G., for litigation costs) may be subject to factors substantially outside of the Company's control, to a greater degree than assumptions regarding its business units' revenues and cost of sales. DEPRECIATION AND AMORTIZATION Depreciation and amortization 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 --------- --------- ------------ (DOLLARS IN THOUSANDS) Gaming Machine Management................................................... $ 6,166 $ 7,773 $ 5,132 Casinos..................................................................... 644 3,803 1,580 Gaming...................................................................... 1,522 879 750 Systems..................................................................... 626 294 276 Wulff....................................................................... 7,389 7,067 5,682 Other....................................................................... 1,169 444 65 --------- --------- ------------ Total................................................................... $ 17,516 $ 20,260 $ 13,485 --------- --------- ------------ --------- --------- ------------
93 NOTE 3. -- OPERATING ASSUMPTIONS (CONTINUED) Management believes that it has substantial discretion to reduce forecasted levels of capital expenditures without materially reducing operating results for the forecasted period, principally in the case of the Gaming Machine Management and Casino expenditures. The significant capital expenditures in 1994 and 1995, including upgrading the Plantation Casino, completing the Rainbow Casino and upgrading the Gaming Machine Management installed base, are assumed to further enhance the Company's ability to reduce 1996 capital expenditures on a discretionary basis. Management estimates the minimum level of capital expenditures for maintenance purposes is approximately $8.0 million. NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT The following is a reconciliation of the historical EBITDA by business unit to the combined Adjusted Operating Cash Flow:
FORECASTED TWELVE TWELVE MONTHS ENDED THREE MONTHS ENDED MONTHS DECEMBER 31, MARCH 31, ENDING -------------------- -------------------- DECEMBER 31, 1994 1995 1995 1996 1996 --------- --------- --------- --------- ------------ (IN THOUSANDS) EBITDA by Business Unit: Gaming......................................... $ 7,304 $ 7,305 $ 2,659(a) $ 1,046(a) $ 10,750 Systems........................................ 3,593 5,788 1,997(a) 1,620(a) 6,303 Wulff.......................................... 15,575 15,172 5,106(a) 3,406(a) 16,836 Gaming Machine Management...................... 17,159 18,260 4,758 4,469 19,957 Casinos........................................ 2,927 10,546 731 3,889 14,958 Alliance Corporate Administrative Expense...... (10,609) (8,912) (1,654) (4,723) (8,979) Alliance Development Expense................... (7,694) (15,072) (2,139) (3,497) (13,815) BGII Corporate Administrative Expense.......... (4,520) (3,732) (1,285) (604) (4,800) Discontinued Operations/Other.................. (1,378) (933) (58) (64) -- Casino Royalty................................. -- (2,718) (27) (1,024) (4,368) Minority Interest.............................. (675) (504) (83) (432) (920) BGII Unusual Charges and Other................. (300) (7,216) (400) (1,296) (2,300) --------- --------- --------- --------- ------------ Combined EBITDA.................................. 21,382 17,984 9,605 2,790 33,622 Adjustments: Direct Merger Costs............................ -- 13,106(b) -- 3,794(b) 12,815(b) Alliance Development Expense Adjustment........ 4,694(c) 966(c) 1,389(c) (52 (c) -- Rainbow Operations............................. 340(d) 2,506(d) 2,060(d) -- -- Unusual or Nonrecurring Charges................ 2,856(e) 7,783(f) 600(g) 3,487(h) 4,479(i) Synergy Cost Savings........................... 5,000(j) 5,000(j) 1,250(j) 1,250(j) 4,000(j) --------- --------- --------- --------- ------------ Adjusted Operating Cash Flow..................... $ 34,272 $ 47,345 $ 14,904 $ 11,269 $ 54,916 --------- --------- --------- --------- ------------ --------- --------- --------- --------- ------------
- -------------------------- (a) Differences in interim results for the three months periods for Gaming and Systems were affected by the timing and number of new casino openings and management believes that the interim results for Wulff in the 1996 quarter were affected by regulations, which became effective January 1, 1996, limiting the number of wall machines per square meter in arcade locations, thereby reducing new sales opportunities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (b) For the twelve months ended December 31, 1995, $11.1 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges and Other. No such costs were incurred by either company in the three months ended March 31, 1995. For the three months ended March 31, 1996, $2.8 million of direct Merger costs are included in Alliance Development Expense and $1.0 million in BGII Unusual Charges and Other. For the forecasted twelve months ending December 31, 1996, $10.8 million of direct Merger costs are included in Alliance Development Expense and $2.0 million in BGII Unusual Charges and Other. (c) Reflects Alliance Development Expense, which relates to mergers, acquisitions and joint ventures, adjusted to $3.0 million annually. The adjustment to $3.0 million reflects the anticipated elimination of expenses that were being incurred pending Alliance's accomplishment of its strategic plan to acquire a major gaming manufacturing company. To accomplish this reduction, Alliance reduced payroll costs and fees paid to consultants and legal costs 94 NOTE 4. -- ADJUSTED OPERATING CASH FLOW BY BUSINESS UNIT (CONTINUED) related to non-BGII transactions it had been pursuing. The adjustment to eliminate direct costs related to the Merger is shown in Note (b) above. For the three months ended March 31, 1996, Alliance Development Expense was below the $3.0 million annual rate by $52,000. (d) To adjust to reflect the operating results of the Rainbow Casino as if owned during all of 1994 and 1995 and, for the twelve months ended December 31, 1995 and three months ended March 31, 1995, to reflect the recent operating results of the Rainbow Casino, as if such results had occurred for all of 1995 (including an adjustment for additional casino royalty expense of approximately $1.7 million, $1.0 million and $1.0 million, for the twelve months ended December 31, 1994 and 1995 and the three months ended March 31, 1995, respectively). (e) Includes legal costs included as BGII Corporate Administrative Expense related to a former executive totaling $0.5 million and $0.3 million recorded as BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana and a reserve for discontinued operations of $2.0 million for Alliance included in Alliance Corporate Administrative Expense. (f) Includes one-time charges included in Alliance Corporate Administrative Expense consisting of an executive signing bonus of $1.3 million paid in Common Stock and $1.1 million of termination costs for certain officers and directors, which were incurred during the quarter ended June 30, 1995. Also includes $1.4 million relating to a regulatory investigation and legal proceedings in Louisiana included in BGII Unusual Charges and Other, and $0.2 million included in BGII Corporate Administrative Expense for legal costs related to the "Bally" trade name litigation. BGII Unusual Charges and Other also includes $2.0 million in costs related to the merger agreement between BGII and WMS, a provision of $0.8 million at Wulff to write down to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for V.A.T. (g) Includes certain charges of $0.4 million included in BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana and $0.2 million included in BGII Corporate Administrative Expense for legal costs related to the "Bally" trade name litigation. (h) Includes a provision for impaired assets of two development projects totaling $3.2 million included in Alliance Corporate Administrative Expense. Also includes certain charges of $0.3 million included in BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana. (i) Includes a provision for impaired assets of two development projects totaling $3.2 million in Alliance Corporate Administrative Expense, $1.0 million of one-time charges to implement the expected annual synergy cost savings, and certain charges of $0.3 million included in BGII Unusual Charges and Other relating to a regulatory investigation and legal proceedings in Louisiana. (j) To adjust for estimated synergy cost savings indentified by management to date including elimination of certain duplicative costs such as facility, legal, accounting and compensation, which total approximately $5.0 million on an annual basis. For the forecasted twelve months ending December 31, 1996, the synergy cost savings is presented net of the $1.0 million of one-time charges to implement the cost savings (which is added back in (h) above). NOTE 5. -- MANDATORY PRINCIPAL PAYMENTS Because the Forecast has been prepared on a consolidated basis, the Forecast does not account for the Company's holding company structure, which will result in cash flows earned at certain subsidiaries being unavailable for distribution to the Company, including to service indebtedness of the Company during the forecast period. Mandatory principal payments for the twelve months ending December 31, 1996 (all of which relate to indebtedness of subsidiaries) consist of the following:
(IN THOUSANDS) VSI Loan.......................................................................................... $ 1,074 Rainbow Casino debt............................................................................... 2,810 Other............................................................................................. 773 ------ $ 4,657 ------ ------
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of the Company (Pro Forma)". 95 SELECTED HISTORICAL FINANCIAL INFORMATION OF ALLIANCE The following table sets forth selected consolidated financial information of Alliance as of and for the fiscal years ended June 30, 1991, 1992, 1993, 1994 and 1995, and as of and for the nine months ended March 31, 1995 and 1996. The historical financial information of Alliance as of June 30, 1991, 1992 and 1993 and for the years ended June 30, 1991 and 1992 as set forth below has been derived from the audited consolidated financial statements of Alliance not included in this Prospectus. The results for the period ended March 31, 1996 will not necessarily be indicative of the results for the fiscal year ended June 30, 1996, and in the opinion of Alliance include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information set forth herein. The table should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Unaudited Pro Forma Condensed Combined Financial Information", the audited consolidated financial statements of Alliance and the unaudited interim condensed consolidated financial statements of Alliance including the notes thereto and other financial and operating information included elsewhere in this Prospectus.
NINE MONTHS FISCAL YEARS ENDED JUNE 30, ENDED MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: REVENUES: Gaming: Routes................................. $ 77,150 $ 77,940 $ 96,282 $ 102,830 $ 106,827 $ 79,389 $ 81,111 Casinos and Taverns.................... 11,281 11,560 12,526 15,679 21,287 11,523 32,698 Food and Beverage Sales.................. 3,120 3,376 4,184 4,480 3,847 2,842 2,976 Net Equipment Sales (1).................. 214 379 99 65 27 22 11 --------- --------- --------- --------- --------- --------- --------- 91,765 93,255 113,091 123,054 131,988 93,776 116,796 COSTS AND EXPENSES: Cost of Gaming: Routes................................. 58,299 58,585 72,614 76,332 79,875 59,411 62,293 Casinos and Taverns.................... 8,528 8,459 8,667 11,871 11,436 6,743 14,726 Cost of Food and Beverage................ 2,249 2,367 2,876 3,084 2,795 2,038 1,992 Cost of Equipment Sales.................. 151 284 49 20 12 10 3 Selling, General and Administrative...... 8,059 8,950 12,667 13,555 14,633 9,279 14,308 Business Development Costs............... -- -- 900 1,192 7,843 5,647 14,233 Corporate Expenses....................... 7,567 5,290 6,191 7,882 9,735 6,258 4,606 Provision for Impaired Assets............ -- -- -- -- -- -- 3,179 Bad Debt Expense......................... 4,845 539 461 705 400 -- -- Write-off of Inventories, Intangibles and Other Assets............................ 4,982 -- -- -- -- -- -- Loss on Abandoned Casinos................ 7,847 2,307 -- 3,713 -- -- -- Loss on Abandoned Taverns................ -- -- -- 2,638 -- -- -- Depreciation and Amortization............ 7,092 7,355 8,718 9,530 9,520 6,934 7,328 --------- --------- --------- --------- --------- --------- --------- Total cost and expenses................ 109,619 94,136 113,143 130,522 136,249 96,320 122,668 --------- --------- --------- --------- --------- --------- --------- Operating Loss............................. (17,854) (881) (52) (7,468) (4,261) (2,544) (5,872) OTHER INCOME (EXPENSE): Interest Income.......................... 1,750 1,324 998 2,084 2,798 2,235 1,206 Interest Expense......................... (4,663) (4,505) (5,046) (6,830) (8,133) (5,844) (6,341) Minority Interest........................ -- -- -- -- (397) (252) (708) Royalty.................................. -- -- -- -- (810) (27) (2,931) Other Net................................ (1,007) (618) 450 (673) 317 33 398 --------- --------- --------- --------- --------- --------- --------- Loss Before Income Taxes................... (21,774) (4,680) (3,650) (12,887) (10,486) (6,399) (14,248) Income Tax (Expense) Benefit............... 5,958 -- -- (241) (265) (394) (581) --------- --------- --------- --------- --------- --------- --------- Net Loss............................... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,751) $ (6,793) $ (14,829) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net Loss Per Common Share.................. $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (0.61) $ (1.21) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted Average Common Shares Outstanding............................... 9,151 9,248 9,696 10,251 11,300 11,192 12,245 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Deficit of Earnings to Fixed Charges (2)... $ (21,744) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro Forma Deficit of Earnings to Fixed Charges................................... $ (1,164) $ (200) $ (9,821) --------- --------- --------- --------- --------- --------- Pro Forma Deficit of Earnings to Fixed Charges and 15% Preferred Stock Dividends................................. $ (9,202) $ (6,116) $ (15,737) --------- --------- --------- --------- --------- ---------
96
AT JUNE 30, AT MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) CASH FLOW INFORMATION: Historical Cash Flows From: Operating Activities................... $ 6,206 $ 9,062 $ 957 $ 167 $ (533) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Investing Activities................... $ (9,295) $ (27,299) $ (21,648) $ (9,791) $ 5,255 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Financing Activities................... $ 2,430 $ 45,742 $ (2,660) $ (1,509) $ (2,495) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro Forma Cash FLows From: Operating Activities................... $ 7,225 $ 4,890 $ 20,564 --------- --------- --------- --------- --------- --------- Investing Activities................... $ (26,936) $ (15,356) $ (1,088) --------- --------- --------- --------- --------- --------- Financing Activities................... $ (757) $ 1,528 $ (3,059) --------- --------- --------- --------- --------- --------- BALANCE SHEET DATA: Cash and Cash Equivalents.................. $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734 $ 25,952 $ 15,971 Securities Available for Sale.............. -- -- -- 12,489 23,680 13,240 9,591 Net Working Capital........................ 10,450 11,557 7,991 50,926 31,552 37,749 15,583 Total Assets............................... 79,024 75,594 73,768 119,416 126,348 128,103 111,288 Total Long-term Debt, including Current Maturities........................ 44,450 43,282 44,798 90,726 101,397 102,718 99,089 Total Stockholders' Equity (Deficiency) (2)....................................... 27,008 23,660 22,665 15,099 9,985 12,699 (5,595) Book Value per Share....................... 2.95 2.51 2.27 1.28 .77(3) 1.00(3) (.43)(3) Pro Forma Book Value per Share............. 1.67
- ------------------------------ (1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6 (1994), $0 (1995) and for the nine-month periods ended March 31, 1995 and 1996. (2) No dividends were paid by Alliance during any period presented. (3) Computed including Common Stock and Special Stock owned by KIC which was converted into Common Stock in December 1995. 97 SELECTED HISTORICAL FINANCIAL INFORMATION OF BGII The following table sets forth selected financial information of BGII (consolidated for the periods 1992 through 1995 and combined for 1991), as of and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 and as of and for the three months ended March 31, 1995 and 1996, of which certain periods are included elsewhere in this Prospectus. See "Basis of Presentation and Description of Business" in BGII's Notes to Consolidated Financial Statements. The historical financial information of BGII as of December 31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and 1992 as set forth below has been derived from the audited financial statements of BGII not included in this Prospectus. The unaudited results for the period ended March 31, 1996 will not necessarily be indicative of the results for the year ending December 31, 1996 and in the opinion of BGII include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the information set forth herein. The selected historical consolidated financial data for periods prior to November 18, 1991 (the date BGII completed its initial public offering of common stock), present, on a historical cost basis, the financial position results of operations and cash flows of the subsidiaries and divisions of BEC which formerly conducted operations as Gaming, Systems and Wulff. This table should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Unaudited Pro Forma Condensed Combined Financial Information", the audited consolidated financial statements of BGII including the notes thereto and the unaudited interim condensed consolidated financial statements of BGII including the notes thereto and other financial and operating information included elsewhere in this Prospectus.
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------- ---------------------- 1991 1992 1993(1) 1994(1) 1995(1) 1995(1) 1996(1) --------- --------- --------- --------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Revenues................................. $ 153,648 $ 163,781 $ 168,707 $ 236,192 $ 249,312(2) $ 68,289 58,544 Cost of Sales............................ 102,357 99,906 121,710(3) 157,059 163,131(2) 43,500 37,757 Selling, General and Administrative Expenses................................ 36,725 46,348 57,357(4) 59,989 65,289 16,998 16,526 Provision for Doubtful Receivables....... 2,176 3,597 8,176(5) 5,763 6,712(2) 1,154 991 Unusual Charges.......................... -- -- -- -- 5,816(6) -- 996(7) Interest Expense, Primarily Charged by BEC in 1991............................. 1,602 1,951 4,424 6,768 6,853 1,733 1,665 Provision for Income Taxes............... 5,784 6,725 4,242 2,820 4,904 2,042 1,122 --------- --------- --------- --------- --------- --------- ----------- Income (Loss) before Extraordinary Gain.................................... 5,004 5,254 (27,202) 3,793 (3,393) 2,862 (513) Extraordinary Gain on Early Extinguishment of Debt.................. -- -- 3,759 -- -- -- -- --------- --------- --------- --------- --------- --------- ----------- Net Income (Loss)........................ $ 5,004 $ 5,254 $ (23,443) $ 3,793 $ (3,393) $ 2,862 $ (513) --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Income (Loss) Per Share before Extraordinary Gain...................... $ 0.48 $ 0.50 $ (2.54) $ 0.35 $ (0.31) $ 0.27 $ (0.05) Extraordinary Gain on Early Extinguishment of Debt Per Share........ -- -- 0.35 -- -- -- -- --------- --------- --------- --------- --------- --------- ----------- Net Income (Loss) Per Share.............. $ 0.48 $ 0.50 $ (2.19) $ 0.35 $ (0.31) $ 0.27 $ (0.05) --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Pro Forma Net Income..................... $ 2,435(8) $ -- $ -- $ -- $ -- $ -- $ -- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Pro Forma Net Income Per Share........... $ 0.23(8) $ -- $ -- $ -- $ -- $ -- $ -- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Average Number of Common Shares Outstanding............................. 10,450 10,573 10,685 10,727 10,776 10,751 10,805 Ratio of Earnings to Fixed Charges....... 6.51 6.19 1.93 1.21 3.76 1.37 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Deficit of Earnings to Fixed Charges..... $ 22,960 --------- --------- CASH FLOWS FROM: Operating Activities................... $ (24,960) $ (17,604) $ (24,548) $ 1,224 $ 3,795 $ (5,605) $ (1,757) --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Investing Activities................... $ (2,818) $ (5,175) $ (13,407) $ (6,391) $ (6,233) $ (2,108) $ (2,218) --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Financing Activities................... $ 285 $ 18,506 $ 38,900 $ 8,231 $ (1,961) $ 1,688 $ 590 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- -----------
98
AT DECEMBER 31, AT MARCH 31, ----------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and Cash Equivalents................ $ 14,429 $ 9,800 $ 5,436 $ 9,204 $ 5,526 $ 3,959 $ 2,009 Working Capital.......................... 69,350 82,481 83,009 95,772 97,357 103,369 85,649 Property, Plant and Equipment, Net....... 19,650 18,695 24,042 24,358 23,244 26,412 23,615 Total Assets............................. 131,342 150,805 170,830 192,242 194,316 205,112 186,936 Long-term Debt, Including Current Maturities.............................. 7,186 25,950 62,458 69,762 69,944 73,936 69,971 Stockholders' Equity..................... 98,605 101,277 74,879 85,883 88,410 97,314 86,000
- ------------------------------ (1) Includes results from the acquisition of a distribution business by Wulff in January 1993. (2) Includes the impact of sales returns of $0.3 million and a provision for doubtful receivables of $0.9 million recorded in the second quarter of 1995 by Gaming related to two riverboats at the River City Complex in New Orleans which filed for bankruptcy. (3) Includes $6.2 million in charges to increase inventory valuation reserves in 1993 principally related to inventory originally intended for sale in the Louisiana video lottery terminal market. (4) Includes $1.2 million in charges related to a management reorganization at Gaming in 1993. (5) Includes a provision for doubtful receivables totaling $5.1 million recorded by Gaming in 1993 related to a former distributor who filed for bankruptcy during the second quarter of 1993. (6) Includes $4.0 million in merger transaction costs and related litigation expenses, a provision of $0.8 million at Wulff to write down to net realizable value the carrying value of a building to be sold and a provision of $1.0 million to increase Wulff's tax reserves primarily for V.A.T. (7) Includes $1.0 million in Merger transaction costs. (8) Includes pro forma income tax information for the year ended December 31, 1991 to reflect the provision for income taxes and net income as if Gaming and Systems had filed separate income tax returns. The pro forma information assumes that Gaming and Systems would have been unable to utilize operating losses on a carry back basis. 99 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion provides an assessment of the liquidity and capital resources of Alliance, the pro forma liquidity and capital resources of the Company, and the results of operations of each of Alliance and BGII. The discussion should be read in conjunction with the audited consolidated financial statements of Alliance and BGII, and the unaudited interim condensed consolidated financial statements of Alliance, in each case including the notes thereto, which are included elsewhere in this Prospectus. LIQUIDITY AND CAPITAL RESOURCES OF ALLIANCE At March 31, 1996, Alliance had working capital of approximately $15,583,000, a decrease of approximately $16,163,000 from June 30, 1995. The decrease in working capital is due in part to a decrease in cash and cash equivalents which were used to fund development activities in connection with Alliance's business strategy. As of March 31, 1996, Alliance had $25,562,000 in cash, cash equivalents and securities available for sale (including $8,875,000 representing the market value of the 1,000,000 shares of BGII common stock owned by Alliance), of which approximately $9,000,000 is necessary to fund ongoing gaming operations in the ordinary course of business. At June 30, 1995, Alliance had working capital of approximately $31,746,000 and $37,414,000 in cash, cash equivalents and securities available for sale. For the nine months ended March 31, 1996, Alliance incurred development costs associated with pursuing Alliance's business strategy relating to mergers and acquisition of approximately $14,233,000 consisting of $12,235,000 of direct costs incurred related to the Merger and the previous tender offer and consent solicitation by Alliance and $1,998,000 of salaries and administrative costs of the mergers and acquisitions unit. During fiscal 1995, Alliance incurred approximately $7,843,000 in expenses associated with pursuit of Alliance's business strategy, of which $1,669,000 related to the Merger. Alliance's business strategy is to use its strengthened management team, diversified gaming expertise and business and investment community relationships to develop new opportunities in the operation of land-based, dockside and riverboat casinos (including Native American casinos), gaming systems and technology and the supply and management of electronic gaming machines. On July 16, 1994 the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. In connection with the completion of the casino and the acquisition of its original 45% limited partnership interest in RCVP, the partnership which owns the casino, through a wholly-owned subsidiary, Alliance funded a $3,250,000 advance to the Rainbow Casino Corporation, an unaffiliated Mississippi corporation ("RCC"), on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to payments due to HFS and the HFS financing is secured). The HFS financing provided to RCC on August 3, 1993 consisted of a $7.5 million loan which is secured by a first priority lien on all of the assets of the project. The terms of the HFS financing provide that, in connection with the loan and certain marketing services provided by HFS to RCC, RCC will pay to HFS a royalty based upon the casino's annual gross gaming revenues of 12% on the first $40 million, 11% on the next $10 million, and 10% thereafter, which royalty is also secured by a lien on the assets of the project. See "Business -- Casino Operations". On March 29, 1995, Alliance consummated certain transactions whereby Alliance acquired from RCC the controlling general partnership interest in RCVP and increased its limited partnership interest. In exchange for commitments by Alliance and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, to provide additional financing (up to a maximum of $2,000,000 each) to be used, among other things, for the completion of certain elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy) and for a $500,000 payment paid to HFS as a waiver fee, a commitment by Alliance to fund any additional capital necessary for the completion, upgrading or working capital of the project, the following occurred: (i) a subsidiary of Alliance 100 became the general partner and RCC became the limited partner of RCVP and (ii) the respective partnership interests were adjusted. As of March 31, 1996, amounts outstanding under the HFS facility and the related financings aggregated $9.4 million. As adjusted, RCC is entitled to receive 10% of the net available cash flows (which amount shall increase to 20% of such amount if revenues exceed $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. In addition, if during any continuous 12-month period until December 31, 1999 the casino achieved earnings from the project of at least $10.5 million before deducting depreciation, amortization, royalty and income taxes, then Alliance would be obligated to pay to certain principals of the original partnership an amount aggregating $1 million in cash or shares of Common Stock 180 days after the occurrence. The casino has achieved the required earnings as adjusted, and Alliance is obligated to make the required payment or issue the Common Stock (with the issuance being its expected course of action) by September 30, 1996. Also, Alliance's 5.2% royalty on gross revenues was terminated on the date it became general partner. Alliance and Casino Magic Corporation, through wholly-owned subsidiaries, are members in 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. The Kansas legislature considered gaming bills during the 1996 session although none passed. There can be no assurance that gaming of any type will ever be legalized in Kansas. Management has evaluated this investment and determined it to be impaired because it does not appear to be recoverable. Alliance fully reserved the net book value of approximately $1,585,000 through a charge to operations which has been recorded in the quarter ended March 31, 1996. Native American Investments, Inc. ("NAI"), a wholly-owned subsidiary has a contract to develop Class II and III gaming opportunities with an Indian tribe in California. Class II gaming is subject to the concurrent jurisdiction of the National Indian Gaming Commission ("NIGC") and the applicable Indian tribe. Class III gaming is a residual category composed of all forms of gaming that are not Class I gaming or Class II gaming, including casino style gaming. The contract is subject to negotiations resulting in satisfactory compacts with the state and approval of the contract by the NIGC. The Governor of California has to date refused to negotiate a compact covering Class III electronic gaming machines and house-banked games in California and is currently engaged in related litigation over the scope of gaming issues with certain Indian tribes. There can be no assurance as to the ultimate outcome of these litigation activities or successful completion of any part of the Alliance project. On March 27, 1996, the United States Supreme Court ruled that a portion of the Indian Gaming Regulatory Act was unconstitutional. As a result, Federal courts cannot oversee negotiations between Indian tribes and state officials. Alliance believes that this ruling will have a materially adverse effect upon its Native American casino development activities in California. Accordingly, management has evaluated this investment and determined it to be impaired because it now appears to be 101 unrecoverable. Management has fully reserved the net book value of approximately $1,594,000 through a charge to operations which has been recorded in the quarter ended March 31, 1996. Management will continue to monitor the status of Class II and III gaming in California. In March 1992, Alfred H. Wilms committed to provide to VSI, a majority-controlled subsidiary of Alliance, a subordinated loan of up to $6.5 million dollars (the "VSI Loan"). The VSI Loan, as amended, bears interest at a rate equal to the London Interbank Offered Rate for a period of ninety days plus 2%, payable quarterly, and is due on September 21, 1998. The VSI Loan is secured by liens in favor of N.V. Continental Trust Company ("CTC"), an affiliate of Mr. Wilms, on substantially all of VSI's assets. Pursuant to the terms of the VSI Loan, VSI may not pay cash dividends or make any distribution of its property. Alliance also issued to Mr. Wilms warrants to purchase 2,000,000 shares of Common Stock at $2.50 per share in connection with such loan which expire on September 1, 1998 (the "Wilms Warrants"). As of March 31, 1996, there was an outstanding balance of $3.7 million on this loan. Cash provided by operations for the nine months ended March 31, 1996 decreased by approximately $700,000 from amounts reported for the same period in 1994. The change is primarily due to an increase in business development costs over the same period from the prior year of $8,586,000, primarily related to the Merger, partially offset by an increase in cash provided by the casino operations of approximately $7,795,000 attributable to the Rainbow Casino. Cash provided by operations for fiscal 1995 decreased approximately $8,105,000 from fiscal 1994. Included in fiscal 1994's cash provided by operations was a non-recurring gain of $3,600,000 associated with the termination of Alliance's letter agreement with Capital Gaming International, Inc. ("Capital Gaming"), which concerned the Alliance's proposed equity investment in Capital Gaming, and the payment by Capital Gaming of $4,000,000 (offset by transaction expenses) to Alliance in connection therewith, and $6,351,000 of charges related to Alliance's decision to exit the downtown Las Vegas gaming market and dispose of its tavern operations. Exclusive of these items, expenditures related to supporting Alliance's business strategy relating to mergers and acquisitions in fiscal 1995 increased approximately $3,051,000 from fiscal 1994. Long-term accrued expenses decreased by approximately $1,031,000 from fiscal 1994 as Alliance paid rent and other exit expenses against the amounts accrued in fiscal 1994 as noted above. The remaining increase in accrued expenses accounted for the use of cash in the amount of $4,710,000. These uses of cash were partially offset by an increase in cash flows from operations of approximately $2,666,000 from Alliance's ongoing business operations and an operating cash contribution of approximately $3,089,000 from the first year of operations by the Rainbow Casino. Significant non-cash items added back to cash flows from operations for fiscal 1995 include $1,313,000 in non-cash compensation expense and $1,075,000 related to certain service contracts and termination costs. Cash provided by investing activities for the nine months ended March 31, 1996 increased $15,046,000 over that in 1995 due primarily to the proceeds from the sale of approximately $12,950,000 of securities. Proceeds from the sale of property and equipment increased $1,805,000 compared to the same period last year. Cash flows used for investing activities in fiscal year 1995 decreased by $5,651,000 from the prior year. Net collections on receivables in fiscal 1995 improved by $2,605,000 over those in fiscal 1994. In fiscal 1994, Alliance funded approximately $7,250,000 in loans to Capital Gaming and the original general partner in RCVP, which additions were partially offset by increased collections of receivables related primarily to the collection of the Capital Gaming loan in fiscal 1994. Cash used in financing activities for the nine months ended March 31, 1996 increased $976,000 from the same period in 1995 due primarily to Alliance's principal reductions on its existing long-term debt by $1,192,000 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 the Old Convertible Debentures. Concurrent with the closing of the issuance of the Old Convertible Debentures, Kirkland invested $5,000,000 in Alliance (the "Kirkland Investment") in exchange for 1,333,333 shares of 102 Alliance's Non-Voting Junior Convertible Special Stock and warrants to purchase up to 2,750,000 shares of Common Stock, subject to certain conditions. A portion of the net proceeds from these transactions was used to repay previously existing debt and accrued interest of approximately $38,245,000. In December 1995, Kirkland elected to convert the entire 1,333,333 shares of Non-Voting Junior Convertible Special Stock into an equivalent number of shares of Common Stock. EBITDA as a percent of the related revenues changed for Nevada gaming machine management operations from 15.3% in fiscal 1994 to 16.7% in fiscal 1995 and to 14.5% in the first nine months of fiscal 1996 and for Louisiana gaming machine management operations from 17.5% to 19.1% and to 20.6% for the same periods. EBITDA as a percent of revenues for casino operations (excluding discontinued operations), excluding certain one-time charges, was 18.2% in fiscal 1994 and 23.3% in fiscal 1995 and 31.4% in the first nine months of fiscal 1996. The increase in the first nine months of fiscal 1996 was due primarily to the acquisition of the Rainbow Casino. EBITDA should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of Alliance's performance or to cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. Management believes that EBITDA is a useful adjunct to net income and other GAAP measurements and is a conventionally used financial indicator. On a pro forma basis, earnings would have been inadequate to cover fixed charges by approximately $1.1 million for the year ended June 30, 1995 and would have been inadequate to cover fixed charges by approximately $9.7 million for the nine-month period ended March 31, 1996. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY (PRO FORMA) On October 18, 1995 Alliance entered into the Merger Agreement with BGII. Pursuant to the Merger, BGII will become a wholly-owned subsidiary of Alliance. The aggregate Merger consideration to BGII stockholders will be approximately $77.2 million in cash (including interest accruing at a rate of 5.5% per annum from May 3, 1996 to the Effective Time), $35.7 million in 15% Preferred Stock (including dividends accruing at a rate of 15% per annum from May 3, 1996 to the Effective Time) and $2.9 million in Common Stock. Alliance will also retire approximately $53.3 million of long-term debt of BGII (including prepayment premium, original issue discount and unpaid interest accrued through the effective time of the Merger) in connection with the Merger, and will generally assume BGII's obligations with respect to outstanding options and warrants to purchase shares of BGII common stock. See "The Merger and Related Financings". Alliance currently anticipates obtaining one or more working capital revolving facilities at Gaming (providing up to $ of borrowing availability in aggregate) which would be secured by inventory and accounts receivable. Alliance has not received any commitment for any such facility and no assurance can be given that it will be able to obtain any such facility on terms acceptable to Alliance. Following the Transaction, Alliance 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, Alliance expects that it will have to refinance all or a portion of the Old Convertible Debentures and the Senior 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 15% Preferred Stock dividends by approximately $9.1 million and approximately $15.7 million for the 12-month period ended June 30, 1995 and the nine-month period ended March 31, 1996, respectively. Alliance believes that the Company's 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 103 attractive opportunities become available on terms satisfactory to management. However, the terms of the Senior Notes will significantly restrict the Company's ability to incur indebtedness. See "Risk Factors -- High Leverage and Fixed Charges; Holding Company Structure; Working Capital". Management believes that customer financing terms have become an increasingly important competitive factor in certain emerging markets. Competitive conditions sometimes require Gaming and Systems to grant extended payment terms on gaming machines and other gaming equipment. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of a default may be less than the amount financed. In conjunction with sales by Gaming, with recourse to Gaming and/or BGII , of certain trade receivables to third parties, Gaming and/or BGII have guaranteed amounts due from various customers of approximately $16.7 million at March 31, 1996. It is possible that one or more of Gaming's customers whose obligation has been guaranteed by Gaming may be unable to make payments as such become due. In this case Gaming may become responsible for repayment of at least a portion of such amounts over the term of the receivables. In general, under the terms of these contracts, the Company may be responsible for monthly payments of the outstanding obligations. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. Wulff provides customer financing for approximately 20% of its sales, and management expects this practice temporarily to increase during the latter half of 1996. In order to be competitive in meeting customer demand for financing of gaming equipment in emerging markets, the Company plans to continue to evaluate the need to involve third party finance companies or secure additional financing, although there is no assurance that such additional financing will be obtained. If the Merger and the Offerings do not occur, the principal difference in Alliance's financial condition, relative to the information otherwise presented herein, would be that Alliance would have expended cash of $7.0 million, which management believes will not have a material adverse effect on the financial condition of Alliance or impair its ability to meet its ongoing obligations. ALLIANCE RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995 REVENUES Total revenues for the nine months ended March 31, 1996 were $116,796,000, an increase of $23,020,000 (24.5%) over those for the same period in fiscal year 1995. Revenues from all gaming route operations increased $1,722,000 (2.2%) to approximately $81,111,000 in the first nine months of fiscal 1996. Revenues from the Louisiana route operations increased $467,000 (an increase of 3.9%) primarily as a result of an expansion of operations from the opening of a new OTB parlor in October 1995. Revenues from Nevada route operations increased approximately $1,255,000 (1.9%) over those for the same period last year. The increase in the Nevada gaming route revenues was attributable to a $0.66 increase in the average net win per gaming device per day for the nine months ended March 31, 1996 compared to the same period in fiscal year 1995 (accounting for an increase of approximately $942,000) and an increase in the weighted average number of gaming devices on location for the nine months ended March 31, 1996 as compared to the same period in fiscal year 1995 (accounting for an increase of approximately $313,000). Revenues from casino and tavern operations, including food and beverage sales, increased approximately $21,309,000 (148.3%) during the current nine months as compared to those for the prior year as revenues recognized from the Rainbow Casino, which were consolidated beginning March 29, 1995, exceeded the revenues lost with the termination of Alliance's lease at the Royal Casino and the reduction of operations at Alliance's tavern locations. COSTS AND EXPENSES COSTS OF REVENUES. Cost of gaming route revenues for the nine months ended March 31, 1996 increased $2,882,000 (4.8%) over the same period in fiscal year 1995. Costs of revenues from route operations in Louisiana increased $187,000 (an increase of 2.4% from last year) as a result of an expansion of operations from the opening of a new OTB parlor in October 1995. Costs of gaming revenues for Nevada gaming route revenues increased $2,695,000 (5.2%) as compared to the prior year as revenues increased and increased slightly as a percent of Nevada gaming route revenues primarily due to increased costs associated with 104 additional and renewed space lease contracts. Cost of route 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 $7,937,000 (90.4%) compared to the same period of fiscal year 1995 results primarily due to the Rainbow Casino cost of revenues which were consolidated beginning March 29, 1995. This increase was partially offset by the termination of Alliance's lease at the Royal Casino and the reduction of operations at Alliance's tavern locations. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor, including related taxes and benefits. EXPENSES. For the nine months ended March 31, 1996 Alliance incurred developmental costs associated with pursuing Alliance's business development strategy relating to mergers and acquisitions of approximately $14,233,000, consisting of $12,235,000 of direct costs incurred related to the Merger and the previous tender offer and consent solicitation by Alliance and $1,998,000 of salaries and administrative costs of the mergers and acquisitions unit, which represented an increase of $8,586,000 (152.0%). These business development expenses include salaries and wages, related taxes and benefits, professional fees, travel expense and other expenses associated with supporting Alliance's strategy. The level of business development activities, exclusive of Merger costs, has been reduced from prior periods due to the termination of two executives in this business unit in order to reduce costs and the relocation of this unit to lower cost office space. Alliance believes that such reduced level of costs will be adequate to pursue its business development strategies on a more limited basis in accordance with its business plan following consummation of the Merger. Selling, general and administrative expenses for the nine months ended March 31, 1996 increased approximately $5,029,000 (54.2%) over the same period in 1994. Expenses for casinos and taverns for the nine months ended March 31, 1996 increased $5,577,000 (209.5%) over the prior year primarily due to the Rainbow Casino expenses which were consolidated beginning March 29, 1995. This increase was partially offset by the termination of Alliance's lease at the Royal Casino and the reduction of operations at Alliance's tavern locations. Such expenses related to gaming machine management operations for the nine months ended March 31, 1996 decreased $548,000 (8.3%) over the same period in fiscal year 1995 reflecting steps taken to control costs, including reduced staffing levels. Corporate general and administrative expenses decreased $1,652,000 (26.4%). This decrease was caused primarily by controlling costs and reducing staffing levels. Alliance expects that there may be further increases in selling, general and administrative expenses related to the addition of new management and development personnel and other costs associated with supporting Alliance's business strategy. Included in last year's other income and expenses is a charge of $386,000 representing Alliance's equity in the net loss of the Rainbow Casino in its first nine months of operations prior to Alliance's acquisition of the general partnership interest in RCVP on March 29, 1995. Interest expense for the period increased $497,000 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 105 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. 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 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 106 operations declined approximately $660,000 (23.8%) as staff reductions and cost containment measures were implemented to counter increased competition in that market. The same costs for Nevada gaming machine management operations in fiscal 1995 decreased $680,000 (9.8%) as the benefit of staff reductions and cost controls taken in late fiscal 1994 was realized. Selling, general and administrative costs increased for casino and tavern operations by $1,595,000 (44.0%) over those in fiscal 1994. The acquisition of the Rainbow Casino, which contributed $1,984,000 to the increase, was partially offset by the closing of Alliance's downtown Las Vegas properties and the termination of the lease at the Royal Casino. Also contributing to the increase in selling, general and administrative expenses were $478,000 of expenses related to certain service contracts and termination costs. Selling, general and administrative expenses may be subject to further increases. In fiscal 1994, due to continuing losses from operations, negative cash flows and incompatibility with Alliance's long-term growth strategy, Alliance's Board of Directors resolved to (i) exit the downtown Las Vegas gaming market and (ii) dispose of the currently operated small independent tavern operations. Based on these decisions, Alliance recognized total expenses of approximately $5,884,000 in fiscal 1994. As a result of the decision to exit the downtown Las Vegas gaming market, in September 1994, Alliance substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the fiscal 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write-down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. On December 17, 1993, Alliance incurred a fire loss at the Fairgrounds Race Course in New Orleans, Louisiana where Alliance operated 199 electronic gaming machines prior to the fire (of which 193 were destroyed by the fire) through its controlled subsidiary, VSI. Alliance was fully insured for all equipment, leasehold improvements, other assets and business income with the exception of approximately $46,000 in deductibles. During fiscal 1995, Alliance recorded approximately $247,000 of income from business interruption insurance proceeds compared to $241,000 of such proceeds in fiscal 1994. Alliance is discussing settlement of additional business interruption claims with the insurance carrier. Alliance has also received insurance proceeds based on the replacement value of the assets destroyed in the fire and, therefore, recognized a gain of approximately $156,000 which is included in other income in fiscal 1994. FISCAL 1994 COMPARED TO FISCAL 1993 REVENUES Total revenues for the fiscal year ended June 30, 1994 were approximately $123,054,000 for fiscal 1994, an increase of $9,963,000 (8.8%) over those for fiscal 1993. Revenues from all gaming machine management operations increased $6,548,000 (6.8%) to approximately $102,830,000 in fiscal 1994. Gaming machine management operations in the State of Louisiana contributed $5,222,000 (an increase of 42.9%) to the overall increase in gaming machine management revenues as Alliance continued to experience increasing demand in that relatively young market. Revenue from Nevada gaming machine management operations increased approximately $1,326,000 (1.6%) over those for fiscal 1993. The increase in the Nevada gaming machine management revenues was attributable to a $1.30 increase in the average net win per gaming machine per day in fiscal 1994 over that of fiscal 1993 (accounting for an increase of approximately $2,608,000) which was partially offset by a decrease in the weighted average number of gaming machines on location during fiscal 1994 as compared to fiscal 1993 (accounting for a decrease of approximately $1,282,000). Revenues from casino and taverns increased approximately $3,449,000 (20.6%) during fiscal 1994 as compared to those for fiscal 1993 due to the continued expansion of casino operations and operating additional troubled tavern locations. 107 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 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 108 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. 109 The following tables set forth, for the periods indicated, the percentage of revenues represented by items reflected in BGII's consolidated statements of operations.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31 ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- CONSOLIDATED REVENUES: Sales.............................................. 97.5% 97.9% 98.1% 99.1% 98.1% Other.............................................. 2.5 2.1 1.9 0.9 1.9 ---------- ---------- ---------- ---------- ---------- Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales...................................... 72.1% 66.5% 65.4% 63.7% 64.5% Selling, General and Administrative................ 34.0 25.4 26.2 24.9 28.2 Provision for Doubtful Receivables................. 4.9 2.4 2.7 1.7 1.7 Unusual Charges.................................... -- -- 2.3 -- 1.7 ---------- ---------- ---------- ---------- ---------- Total Costs and Expenses......................... 111.0 94.3 96.6 90.3 96.1 ---------- ---------- ---------- ---------- ---------- Operating Income (Loss).............................. (11.0) 5.7 3.4 9.7 3.9 Interest Expense..................................... 2.6 2.9 2.8 2.5 2.9 ---------- ---------- ---------- ---------- ---------- Income (Loss) before Income Taxes and Extraordinary Gain................................................ (13.6) 2.8 0.6 7.2 1.0 Provision for Income Taxes........................... 2.5 1.2 2.0 3.0 1.9 ---------- ---------- ---------- ---------- ---------- Income (Loss) before Extraordinary Gain.............. (16.1) 1.6 (1.4) 4.2 (0.9) Extraordinary Gain on Early Extinguishment of Debt... 2.2 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net Income (Loss).................................... (13.9)% 1.6% (1.4)% 4.2% (0.9)% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- WULFF REVENUES: Sales.............................................. 96.6% 96.3% 97.1% 98.5% 97.5% Other.............................................. 3.4 3.7 2.9 1.5 2.5 ---------- ---------- ---------- ---------- ---------- Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales...................................... 65.4% 64.9% 67.4% 65.4% 66.3% Selling, General and Administrative................ 25.5 25.1 24.1 23.8 26.8 Provision for Doubtful Receivables................. 0.5 1.7 1.3 0.4 1.2 Unusual Charges.................................... -- -- 2.9 -- 1.6 ---------- ---------- ---------- ---------- ---------- Total Costs and Expenses......................... 91.4 91.7 95.7 89.6 95.9 ---------- ---------- ---------- ---------- ---------- Operating Income..................................... 8.6 8.3 4.3 10.4 4.1 Interest Expense..................................... 1.3 1.3 1.0 1.0 0.8 ---------- ---------- ---------- ---------- ---------- Income before Income Taxes........................... 7.3 7.0 3.3 9.4 3.3 Provision for Income Taxes........................... 3.7 2.3 3.5 5.5 3.4 ---------- ---------- ---------- ---------- ---------- Net Income (Loss).................................... 3.6% 4.7% (0.2)% 3.9% (0.1)% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION (APPROXIMATE UNITS): New Wall Machines Sold by Wulff.................... 12,552 13,100 12,000 2,900 2,400 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
110
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31 ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- GAMING REVENUES: Sales.............................................. 98.3% 99.3% 98.9% 99.5% 98.6% Other.............................................. 1.7 0.7 1.1 0.5 1.4 ---------- ---------- ---------- ---------- ---------- Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales...................................... 100.0% 73.7% 71.9% 69.6% 71.3% Selling, General and Administrative................ 48.4 21.9 24.6 24.7 26.4 Provision for Doubtful Receivables................. 16.9 3.0 3.6 2.4 2.6 Unusual Charges.................................... -- -- 1.9 -- 2.1 ---------- ---------- ---------- ---------- ---------- Total Costs and Expenses......................... 165.3 98.6 102.0 96.7 102.4 ---------- ---------- ---------- ---------- ---------- Operating Income (Loss).............................. (65.3) 1.4 (2.0) 3.3 (2.4) Interest Expense..................................... 7.1 4.6 5.2 5.0 6.0 ---------- ---------- ---------- ---------- ---------- Loss before Income Taxes and Extraordinary Gain...... (72.4) (3.2) (7.2) (1.7) (8.4) Provision for Income Taxes........................... -- 0.2 0.3 0.2 0.2 ---------- ---------- ---------- ---------- ---------- Loss before Extraordinary Gain....................... (72.4) (3.4) (7.5) (1.9) (8.6) ---------- ---------- ---------- ---------- ---------- Extraordinary Gain on Early Extinguishment of Debt, Net of Income Taxes................................. 7.7 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net Loss............................................. (64.7)% (3.4)% (7.5)% (1.9)% (8.6)% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION (UNITS): New Slot Machines Sold............................. 7,749 17,655 11,948 3,668 2,921 New Video Gaming Machines Sold..................... 2,205 3,807 6,080 1,194 1,120 Other.............................................. 202 163 56 -- -- ---------- ---------- ---------- ---------- ---------- Total............................................ 10,156 21,625 18,084 4,862 4,041 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- SYSTEMS REVENUES: Sales.............................................. 100.0% 100.0% 100.0% 100.0% 99.9% Other.............................................. -- -- -- -- 0.1 ---------- ---------- ---------- ---------- ---------- Total Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of Sales...................................... 28.2% 32.0% 35.3% 36.3% 31.8% Selling, General and Administrative................ 42.8 46.5 34.3 25.5 37.0 Provision for Doubtful Receivables................. (4.4) 2.1 5.3 5.5 -- ---------- ---------- ---------- ---------- ---------- Total Costs and Expenses......................... 66.6 80.6 74.9 67.3 68.8 ---------- ---------- ---------- ---------- ---------- Operating Income..................................... 33.4 19.4 25.1 32.7 31.2 Interest Expense..................................... -- 0.2 -- 0.1 0.1 ---------- ---------- ---------- ---------- ---------- Income before Income Taxes........................... 33.4 19.2 25.1 32.6 31.1 Provision for Income Taxes........................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net Income........................................... 33.4% 19.2% 25.1% 32.6% 31.1% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION: New Installations Implemented...................... 6 11 9 3 6 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
111 THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 WULFF Wulff's revenues for the three months ended March 31, 1996 were $31.4 million compared to $35.9 million in the comparable 1995 quarter, a decrease of 13%. Revenues from new wall machines decreased approximately 17% due to an approximate 14% decrease in units sold in the first quarter 1996 and an approximate 3% decrease in the average selling price of new wall machines. Revenues from the distribution of recreational and amusement machines, used wall machines and new wall machines manufactured by third parties decreased approximately 11% during the first quarter of 1996 compared to the 1995 period. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar increased revenues by $0.2 million during the 1996 period. Operating income for the three months ended March 31, 1996 was $1.3 million compared to $3.7 million for the three months ended March 31, 1995. The $2.4 million decrease was principally due to the aforementioned decrease in revenues, a $0.2 million increase in the provision for doubtful receivables, unusual charges of $0.5 million in 1996 representing an allocation of Merger costs, partially offset by slightly lower selling, general and administrative expenses. Gross margin as a percentage of revenues remained unchanged during the first quarter of 1996 and 1995. GAMING Gaming reported revenues of $23.6 million in the first quarter of 1996 compared to $28.0 million in the comparable 1995 period, a 16% decrease. Gaming reported unit sales of approximately 4,000 new gaming machines in the three months ended March 31, 1996, compared to approximately 4,900 in the comparable 1995 quarter. This decrease was primarily a result of the continuing trend of lower demand due to a reduced number of new casino openings. First quarter 1996 included sales of approximately 1,900 units to the Nevada and Atlantic City markets, 1,600 units to international markets and 500 units to riverboat, other domestic casinos and casinos on Native American lands. The average sale price for new gaming machines was unchanged during the first quarters of 1996 and 1995. In total, revenues from the sale of new gaming machines were $19.9 million in the 1996 quarter versus $23.8 million in the 1995 period. Revenues from other sources decreased approximately $0.5 million to $3.7 million in the 1996 period due principally to decreased accessory and used equipment sales offset in part by a 43% increase in part sales. Gaming reported an operating loss for the 1996 period of $0.6 million compared to operating income of $0.9 million in the first quarter of 1995. The $1.5 million decline in Gaming's operating results was primarily due to the aforementioned decline in Gaming's revenues, a 1% decline in gross profit margins as a percentage of total revenues and $0.5 million in unusual charges, offset, in part, by a decrease in selling, general, and administrative expenses. Gross profit margins as a percentage of revenues decreased due to the impact of decreased demand for new machines and a $0.4 million increase in the provision for inventory valuation, partially offset by the changing mix in products to higher margin products. Unusual charges of $0.5 million in 1996 represent an allocation of Merger costs. Selling, general, and administrative expenses decreased approximately $0.7 million principally due to lower legal expenses. SYSTEMS Systems' revenues for the three months ended March 31, 1995 and 1996 were $6.1 million and $5.0 million respectively. While this represents an 18% decrease from the prior year quarter, the 1995 quarter was a record quarter due to significant sales in the Louisiana market. Operating income for the three months ended March 31, 1996 was $1.6 million compared to operating income of $2.0 million for the three months ended March 31, 1995. The $0.4 million decrease in operating results was primarily a result of lower revenues and increased selling, general and administrative expenses offset, in part, by higher gross margin as a percentage of total revenues and a lower provision for doubtful receivables. Gross margins as a percentage of total revenues increased due primarily to product mix. Selling, general, and administrative expenses increased approximately $0.3 million due to increased staffing levels. The provision for doubtful receivables decreased approximately $0.3 million due principally to better collection experience during the 1996 quarter. 112 CONSOLIDATED Revenues for the first quarter of 1996 were $58.5 million compared to $68.3 million in the first quarter of 1995, a decrease of $9.8 million (14%) principally due to the aforementioned decreases in revenues at Wulff, Gaming and Systems. BGII had operating income of $2.3 million in the 1996 quarter compared to $6.6 million in the comparable 1995 quarter, a decrease of $4.3 million. The decline in operating results was attributable to the aforementioned decreases in Wulff's, Gaming's and Systems' operating results, and reflects $1.0 million of Merger transaction expenses in the first quarter of 1996. Interest expense was $1.7 million in both periods. BGII's effective tax rate in both periods differs from the United States statutory rate of 35% principally due to a higher tax rate on income earned in Germany and the lack of current tax benefits available for operating losses in the United States. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 WULFF Wulff's revenues for the year ended December 31, 1995 were $130.7 million compared to $111.1 million in 1994, an increase of $19.6 million (18%). This improvement resulted from the favorable effect of currency translation rates in the 1995 period, an increase in slot and video gaming machines sold by Vertriebs' wholly-owned subsidiary, GmbH, and an increase in used equipment and recreation and amusement machine sales offset in part by a decrease in new wall machine units sold by 8% and a decrease in the average selling price for new wall machines by 8.4%. Revenues from GmbH increased by 99% due to increased new casino openings and greater market penetration in Western and Central Europe and in Africa. The overall decline in the value of the U.S. dollar against the Deutsche Mark increased revenues by $15.0 million in 1995. New and used wall machine sales for the last six months of 1995 were impacted by regulations, which became effective January 1, 1996, limiting the number of wall machines per square meter in arcade locations, thereby reducing new sales opportunities. Industry-wide demand for new machines was adversely affected by this new regulation while demand for used machines increased dramatically. The decrease in demand for new wall machines resulted in increased competition based on sales price resulting in the reduction in average selling price for new units during the year. Management expects the demand for new wall machines to continue to be lower than prior year levels during the first half of 1996. See "Risk Factors -- Operating History -- Recent Losses." Revenues from the distribution of recreational and amusement machines increased by approximately 8.7% during 1995. Operating income was $5.6 million for 1995 compared to $9.2 million in 1994, a decrease of $3.6 million or 40%. This decrease resulted from lower gross margins, higher selling, general and administrative expenses, and unusual charges, offset in part by a lower provision for doubtful receivables. Gross margins for 1995 were 33% compared to 35% in the prior year. Gross margin was unfavorably impacted by higher unit costs associated with lower production levels, a change in product mix to lower priced used machines and a decrease in average selling price of new wall machines sold. Selling, general and administrative expenses increased by $3.5 million resulting from the effect of currency translation rates between years and costs associated with the increased revenues in GmbH. Wulff recorded unusual charges in 1995 of $0.8 million to writedown to net realizable value the carrying value of a building to be sold and $1.0 million to increase its tax reserves primarily for 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%. 113 GAMING Gaming's revenues for the year ended December 31, 1995 were $108.4 million compared to $117.8 million in 1994, a decrease of $9.4 million or 8%. New gaming machines sold decreased to 18,084 units in 1995 from 21,625 units in 1994, a decrease of 16%. This decline in new unit sales was caused principally by a reduced number of new casino openings, especially in the riverboat markets, partially offset by increased sales in the Nevada market. Management believes that the increase in sales into the Nevada market occurred principally due to the popularity of Gaming's new V7000 Game Maker-Registered Trademark- ("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. Gaming incurred an operating loss of $2.2 million for 1995 compared to operating income of $1.6 million in the 1994 period, a decline of $3.8 million. The decline in operating results was principally due to the impact of the aforementioned decrease in revenues, higher selling, general and administrative costs and higher bad debt provisions and unusual charges offset, in part, by an increase in gross margin. Gross margin as a percentage of total revenues was 28% for 1995 compared to 26% in 1994. Lower costs of materials in 1995 were offset, in part, by decreased absorption of manufacturing overhead expenses attributable to the decline in new sales units for 1995. Selling, general and administrative expenses increased to $26.7 million in 1995 compared to $25.8 million in 1994, an increase of 3%. The $0.9 million increase resulted principally from an increase in legal expenses primarily related to Louisiana. Despite the decrease in unit sales in 1995, the provision for doubtful accounts increased $0.3 million resulting from the closure of certain riverboat casinos. Gaming incurred $2.0 million of unusual charges in 1995 representing an allocation of merger transaction costs and litigation expenses related to the proposed merger with WMS, which has since been terminated, and to a tender offer by Alliance which was subsequently terminated in connection with the execution of the Merger Agreement. SYSTEMS Systems' revenues for the year ended December 31, 1995 were $20.7 million, a 55% increase compared to 1994. This increase is directly attributable to the increased number of GMUs sold to both new casinos and to existing customers which expanded their casinos, upgraded their current systems due to new products, or replaced existing systems. In 1995 Systems sold approximately 22,000 GMUs compared to 13,000 in 1994. During 1995, Systems products were installed in 9 new locations and as of December 31, 1995, Systems had 50 installations on-line. The average price of a GMU sold during 1995 decreased by 1.5% from the 1994 average price. Systems' operating income was $5.2 million in 1995 compared to $2.6 million in 1994, a 100% increase. This increase resulted from increased GMUs sold, partially offset by lower gross margins, higher selling, general and administrative expenses and a higher provision for doubtful receivables. Gross margin was 65% in 1995 compared to 68% in 1994. This decrease results from the decrease in the average selling price of a GMU during 1995, higher product costs and a provision for product upgrades. Selling, general and administrative expenses increased by $0.9 million in 1995 principally as a result of higher compensation costs to support the business and higher facility costs for the 1995 year as 1994 was only impacted for six months by the higher costs resulting from Systems occupying its new facility in July 1994. The provision for doubtful accounts of $1.1 million in 1995 was primarily attributable to one riverboat customer. CONSOLIDATED Revenues for the year ended December 31, 1995 were $249.3 million, net of eliminations, compared to $236.2 million in 1994, an increase of 6%. This increase is due to the aforementioned increase at Wulff and Systems partially offset by the aforementioned decrease in Gaming's revenues. 114 BGII had operating income of $8.4 million for 1995 compared to $13.4 million in the 1994 period. The decrease in operating results of $5.0 million was caused principally by the unusual charges recorded in 1995 along with the aforementioned decrease in Wulff and Gaming's operating results partially offset by the aforementioned increase in operating income at Systems. Interest expense was $6.9 million in 1995 compared to $6.8 million in 1994. The net loss for 1995 was $3.4 million or $0.31 per share compared to net income of $3.8 million or $0.35 per share in 1994. This decline in net income resulted from the after tax effect of $5.3 million in unusual charges and an increase in the effective income tax rate primarily due to the aforementioned higher effective tax rate in Germany in 1995. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 WULFF Wulff's revenues for the year ended December 31, 1994 were $111.1 million compared to $112.6 million in 1993, a decrease of $1.5 million (1%). New wall machine unit sales of Wulff's products increased approximately 4% in 1994. Additionally, the average selling price for new wall machine units sold increased approximately 10% due principally to popular models introduced by Wulff in the latter part of 1994. Revenues from the distribution of recreational and amusement machines, new wall machines manufactured by third parties, used wall machines and other revenues decreased approximately 17% in the 1994 period due in part to depressed economic conditions in Germany and increased competition in the lower margin recreational and amusement sales markets. Currency translation rate adjustments of Wulff's revenues into U.S. dollars increased revenues by $2.3 million in the 1994 period due to fluctuations in the German mark versus the U.S. dollar. Wulff's operating income was $9.2 million for 1994 compared to operating income of $9.7 million in the 1993 period. The $0.5 million decrease in 1994 as compared to 1993 was caused principally by the aforementioned decrease in revenues and a $1.4 million increase in the provision for bad debts, offset, in part, by a slight improvement in Wulff's gross margin as a percentage of total revenues and a decrease in selling, general and administrative expenses of approximately 3%. The increase in Wulff's provision for bad debts was caused by an increase in Wulff's accounts and notes receivable balances in the 1994 period as well as the general impact of depressed economic conditions on some of Wulff's customers. GAMING Gaming's revenues for the year ended December 31, 1994 were $117.8 million compared to $48.5 million in 1993, an increase of $69.3 million (143%). New gaming machines sold increased to 21,625 units in 1994 from 10,156 units in 1993, an increase of 112%. The introduction of Gaming's S5500 ProSeries-TM- line of slot machines and its new Game Maker-Registered Trademark-, a multi-game touch screen machine, in the second half of 1993 and 1994, respectively, as well as the proliferation of legalized gaming in riverboat markets, contributed to this increase of units sold. The average price of gaming machines sold increased 18% in 1994 due to additional features, such as the embedded bill acceptor, in the new machines and fewer sales through distributors in 1994. Aggregate revenues from new machines increased to $106.6 million in 1994 from $41.7 million in 1993. Revenues from other sources, including interest income, increased $4.4 million from $6.8 million in 1993 to $11.2 million in 1994, primarily due to increased sales of used units and machine accessories. Gaming's operating income was $1.6 million for 1994 compared to an operating loss of $31.7 million in the 1993 period, an improvement of $33.3 million. The 1993 operating loss includes $12.5 million of unusual charges principally relating to the writedown of inventories originally intended for the Louisiana VLT market and provisions for bad debts relating to Gaming's former distributor in Louisiana. The improvement in operating results was principally due to the aforementioned increase in revenues, higher gross margins realized from increased absorption of manufacturing overhead costs coupled with lower costs of materials, offset, in part, by higher selling, general and administrative costs as well as higher bad debt provisions and interest costs. Cost of sales as a percentage of Gaming's total revenues, was 73% in 1994 compared to 87% in 1993, excluding an inventory valuation adjustment in 1993 of $6.2 million (13% of 1993 total revenues). The lower 115 cost of sales is due to increased absorption of overhead manufacturing expenses attributable to increased production in 1994 as compared to 1993 and lower costs of materials attributed to ongoing redesign of products and volume discounts from suppliers. Selling, general and administrative expenses increased to $25.9 million in 1994 compared to $23.4 million in 1993, an increase of 11%. The $2.5 million increase was caused principally by increased staffing levels in the sales departments and sales related costs associated with the aforementioned sales volume increase in 1994 compared to 1993. Bad debt expense provisions increased to $3.6 million in 1994 from $3.2 million in 1993, excluding a $5.1 million increase in the provision in 1993 primarily relating to Gaming's former distributor of VLT devices in Louisiana. This $0.4 million increase (13%) resulted from increased sales volume in the 1994 period. SYSTEMS Systems' revenues for the year ended December 31, 1994 were $13.4 million compared to $12.0 million in the comparable 1993 period, an increase of $1.4 million (12%). Continued growth in casino emerging markets, particularly with casinos on Indian lands and on riverboats, contributed to an increase in the demand for gaming monitoring systems and the increase in Systems' revenues. Systems' operating income was $2.6 million for the year ended December 31, 1994 compared to $4.0 million during the twelve months ended December 31, 1993. This decrease in operating income of $1.4 million was caused primarily by slightly lower gross profit margins as a percentage of revenues, higher selling, general and administrative costs and a higher provision for bad debts offset, in part, by the aforementioned increase in revenues. Selling, general and administrative expenses increased $1.1 million due to higher sales levels, increased staffing levels and increased facility costs. The provision for bad debts increased $0.8 million due to the increase in revenues and higher accounts receivable balances outstanding during the period. CONSOLIDATED Revenues for the year ended December 31, 1994 were $236.2 million, net of eliminations, compared to $168.7 million in 1993, an increase of 40%. This increase is due to the aforementioned increase at Gaming and Systems partially offset by the aforementioned decrease in Wulff's revenues. BGII had operating income of $13.4 million for 1994 compared to an operating loss of $18.5 million in the 1993 period. The improvement in operating results of $31.9 million was caused principally by the aforementioned improvement in Gaming's operating results partially offset by the aforementioned decline in operating income at Systems and Wulff. Interest expense was $6.8 million in 1994 compared to $4.4 million in 1993. This increase was caused by higher borrowings outstanding and higher interest rates in 1994. BGII's effective tax rate in 1994 and 1993 differs from the U.S. statutory rate of 34% principally due to the lack of tax benefits available for operating losses generated in the U.S. IMPACT OF INFLATION AND FOREIGN CURRENCY TRANSLATION Inflation has not had a significant effect on Alliance's operations for the three years ended June 30, 1995 or the nine-month period ended March 31, 1996, or BGII's operations during the three years ended December 31, 1995 or the three-month period ended March 31, 1996. Substantially all of Wulff's transactions are denominated in Deutsche Marks. The Deutsche Mark is the functional currency used by BGII to translate Wulff's financial statements. Therefore, BGII is exposed to foreign exchange rate risk. BGII does not generally enter into foreign exchange contracts to hedge its exposure to foreign exchange rate fluctuations. 116 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. The Merger is subject to significant conditions, including obtaining financing on specified terms and receipt of regulatory approvals. Even if the Exchange Offer is consummated there is no assurance that the Merger will occur. 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 if the Merger occurs will be on the Gaming and Systems business unit, key elements of which include: CAPITALIZE ON BGII'S CURRENT SALES MOMENTUM. Since 1993, BGII's management has initiated steps to increase its share of gaming machine sales in traditional markets and capture increased gaming machine market share in new and emerging jurisdictions. In the mid-1980s, BGII management's slow response to rapidly evolving technology, new competitors and changing customer preferences contributed to a significant reduction in Gaming's market position. Hans Kloss, who became President of BGII in 1993, and other members of the current BGII senior management have led BGII's efforts to rebuild its market position, and have effectively increased its presence in major casinos in the Las Vegas market, including Caesars Palace and the MGM Grand. As part of its long-term growth strategy, Gaming has increased its research and 117 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 Game Maker-Registered Trademark- during the third quarter of 1994, which have contributed significantly to an increase in Gaming's unit sales which have approximately doubled the level of unit sales in 1993. See "-- Gaming Machine Manufacturing and Systems -- Gaming -- Products". DEVELOP AND MARKET PREMIER GAMING ENTERTAINMENT PRODUCTS EMPLOYING NEW TECHNOLOGY. The Company intends to continue to develop, market and sell premier gaming entertainment products and systems that employ available information technology currently in common use in other segments of the entertainment industry, but not yet prevalent in the gaming industry. The Company believes that technological enhancements are the key to improving the appeal of its games and locations. To implement this strategy, the Company will draw upon the resources of Dr. Craig Fields, Vice Chairman of the Board, who has over 20 years of experience with advanced information technology from his work with several leading companies and government agencies. Alliance has developed and is currently marketing a next-generation computerized product called "Gambler's Bonus", a cardless slot players' club and player tracking system for use in its gaming machine management operations which will allow multiple locations to be linked together into a distributed gaming environment. Management believes that "Gambler's Bonus" offers a wider variety of gaming choices to players than any other gaming device currently available for use in route locations. Additionally, BGII is in the process of developing an innovative form of cashless wagering that uses bar-coded coupons which can be read by bill validators in slot machines with the resulting information being transmitted to a computerized monitoring system, subject to testing and regulatory approval. In addition, both BGII and Alliance have developed electronic gaming machines with bill acceptor and ticket printer features, as well as touch screen and multi-game capabilities. ENHANCE OPERATING EFFICIENCIES AND IMPROVE THE QUALITY OF THE COMPANY'S PRODUCTS AND SERVICES. The Company is taking a number of steps in different business units to improve its operating efficiencies while at the same time improving the quality of its products and services, including (i) engineering improvements in its gaming machine manufacturing operations and reducing per unit costs by increasing production throughput and negotiating decreases in materials costs; (ii) continuing to improve Wulff's manufacturing efficiency and productivity through the use of computer-aided design systems, automated production equipment and devotion of substantial resources to product quality control in its wall machine operations; (iii) expanding the installed base of electronic gaming machines equipped with Gambler's Bonus, and updated bill-acceptor devices throughout its Nevada gaming machine management operations, which is expected to improve Alliance's revenues and operating efficiencies; (iv) initiating improved customer service programs and increasing employee responsiveness to customers' needs for after-sale services. Management will continue to seek cost reductions and efficiencies and (v) eliminating duplicative executive, insurance, rent, outside professional services and other administrative costs. 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 118 machines), (iii) gaming machine management operations and (iv) casino operations. The business units described in clauses (i) and (ii) are currently operated by BGII and will be part of the Company only if the Merger occurs, and the business units described in clauses (iii) and (iv) are currently operated by Alliance. 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. 119 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 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 120 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. 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 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 121 hardware technology. Ideas for new models are generated both internally and from customers. Gaming can design the software and artwork for a new model in as little as two weeks, excluding regulatory approval. All new or modified hardware and software is designed to satisfy all applicable testing standards and must receive the approval of the appropriate gaming regulatory agency based 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. 122 ASSEMBLY OPERATIONS. Gaming's Las Vegas facility was built in 1990 specifically for the design, manufacture and distribution of gaming equipment. The 150,000-square foot facility was designed to meet fluctuating product design demands and volume requirements, and management believes the facility enables Gaming to increase production without significant capital expenditures. Management believes that its assembly operations allow for rapid generation of different models to fill orders quickly and efficiently. Another major advantage of the existing plant operation is the system by 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 123 development efforts are focused upon the casino operator in terms of functionality, product reliability and ease of maintenance and customer appeal in terms of appearance and ease of use. Development cycles for hardware can vary between a few months for minor revisions to more than a year for major design changes or for changes made by various slot manufacturers with which Systems' product must communicate and be physically integrated. Software development results in (1) periodic product releases that include new features which extend and enhance the SDS 6000 product, (2) periodic maintenance releases which enable casino operators to correct problems or improve the usability of the system and (3) documentation needed to install and use the system. In 1995, the hardware and software groups from Systems, as well as engineers from Gaming, coordinated efforts to develop a form of cashless wagering that uses bar-coded coupons which can be read by the bill validators in Gaming's slot machines which are connected to an SDS 6000 system. Testing and regulatory approval is being pursued by Systems in anticipation of a 1996 release to casino operators. In 1996, Systems and Gaming development groups will continue to direct development efforts towards other forms of cashless wagering for use on Gaming's slot machines and the SDS 6000 system. During 1993, 1994 and 1995, Systems spent $1.4 million, $1.7 million and $1.9 million, respectively on product research and development. SALES AND MARKETING. Systems has a direct sales force which produces the majority of its sales. Gaming's sales force and Gaming's independent distributor network produce the balance of Systems' sales, primarily in situations where customers are making slot machine and computerized slot monitoring system purchase decisions at the same time. Worldwide, Systems has approximately 60,000 GMUs installed, or in the process of being installed, of which approximately 53,000 are in the United States. Over the past three years, Systems' own sales force has generated approximately 78% of its sales. Systems offers its customers the option of signing separate hardware and software maintenance agreements at the time of sale. These agreements are for periods of one year and automatically renew unless otherwise canceled in writing by the customer or Systems. After an initial warranty period, typically 90 days, the customer is invoiced a monthly hardware and software maintenance fee which provides essentially for repair and/or replacement of malfunctioning hardware and software, software version upgrades, and on-call support for software. Systems offers limited financing terms, normally less than one year, for sales to new installations. Most sales, however, are invoiced on a net 30 day basis. CUSTOMERS. The demand for computerized slot monitoring systems is driven either by regulatory requirements in a given jurisdiction and/or by a casino operator's competitive need to properly track their players' activity and establish and compile individual player profitability and other demographic information, all of which is of particular importance to casinos in developing marketing strategies. Systems' revenues are derived equally from selling to new installations as well as to existing customers who are either expanding their casino floors or are upgrading their hardware to a new product release. For the year ended December 31, 1995, Systems' ten largest customers (which includes certain multi-site casino operators that have corporate agreements with Systems) accounted for approximately 92% of Systems' revenues. Due to the high initial costs of installing a computerized monitoring system, customers for such systems generally have tended not to change suppliers once they have installed such a system. Future growth will be based on further expansion in the established and emerging markets as well as continued development efforts by Systems to provide customers with new and innovative hardware and software product offerings. COMPETITION. Although there are numerous companies providing computerized slot monitoring systems to casino operators, the competition currently consists of IGT, CDS, and to a lesser extent, Gaming Systems International and Acres Gaming. Competition is keen in this market due to the number of providers and the limited number of casinos and the jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all main factors in determining a provider's success in selling its system. Systems believes the future success of its operations will be determined by its ability to bring new and innovative products to the market place and at the same time maintain a base of loyal existing customers. 124 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 1.43 as of December 31, 1995 hereinafter) to play, although the player may deposit larger amounts to provide continuous play but not to increase payoffs. German regulations limit the maximum payout to ten times the player's stake (DM 4.00 or approximately $2.80 per game). Current models of wall 125 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. 126 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 127 major competitors own and operate a significant number of arcades, which may give them a competitive advantage arising from a built-in market for their games and the ability to test market new games in their own arcades. Increased foreign competition in Germany may have an adverse impact on the Company's future wall machine revenues. Management believes that the primary competitive factors in the wall machine coin-operated amusement game market are the quality and depth of the product line, price and customer service which includes the ability to fill orders quickly and efficiently. Management believes that the market for token machines has expanded rapidly, from sales of approximately 3,900 units in 1993 to approximately 16,700 units in 1995. Management believes that token machines have in recent years competed directly with wall machines due to the lower prices and the popularity of the token machines. Furthermore, management believes that the token machine market may have reached its potential and that sales may decline because token machines are not subject to the four-year operation limit set by German regulations. See "Gaming Regulation and Licensing -- Germany". Increased foreign competition in Germany may have an adverse impact on the Company's future wall machine revenues. 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 MARCH 31, 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- ------------ 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 77% of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the nine-month period ended March 31, 1996, respectively. At March 31, 1996, the weighted average remaining term of Alliance's revenue-sharing arrangements was approximately 3.6 years. Space lease arrangements accounted for approximately 20%, 14%, 14% and 14% of the Nevada gaming machine management revenues and 23%, 20%, 22% and 23% of its operating Nevada gaming machines in 1993, 1994 and fiscal 1995 and the nine-month period ended March 31, 1996. At March 31, 1996, the weighted average remaining term of Alliance's space leases was 2.8 years. Alliance has historically been able to renew or replace revenues from expiring agreements with revenues generated by renewal or replacement contracts. However, during the past few years, greater competitive pressures in the gaming machine management business have increased the portion of gaming machine 128 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 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 April 1, 1996, Alliance had 360 machines linked to the Gambler's Bonus system, and management expects to have Gambler's Bonus in approximately 88 locations, with 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 129 poker devices at the only racetrack and ten associated OTB parlors in the greater New Orleans area. Alliance selects, installs, manages and services video poker devices for each of the ten facilities owned by Fair Grounds for which it receives a percentage of the revenue generated by the devices. Alliance currently has installed 694 video poker devices in Louisiana. Under the Louisiana gaming laws and regulations, the majority stockholder of any entity operating video poker devices in Louisiana must be a domiciled resident of the State of Louisiana. As a result, Alliance owns 49% of the capital stock of VSI and three prominent members of the Louisiana business and legal community own the remaining 51%. Pursuant to the terms of the VSI Loan, VSI may not pay cash dividends or make any distribution of its property. The VSI Loan amortizes quarterly until due in full in September 1998 and may be prepaid at any time without penalty. Alliance, however, owns all the voting stock of VSI and the majority of its officers and directors are Alliance employees. Alliance has a 71% interest in dividends of VSI in the event dividends are declared. Alliance also formed two other Louisiana subsidiaries, Southern Video Services, Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI are structured in a manner similar to VSI except that Alliance is entitled to receive 60% of any SVS dividends. Under the terms of its contract with Fair Grounds, Alliance must conduct any additional video poker operations in Louisiana other than gaming at racetracks or OTB parlors through SVS. To date, SVS and VDSI have not engaged in business in Louisiana. In addition, Alliance and Fair Grounds may have certain mutual rights of first refusal to participate in certain Louisiana riverboat gaming opportunities of the other party on terms and conditions to be specified. Alliance is prohibited by the Louisiana Act from engaging in both the manufacture and operation of gaming machines in Louisiana and, therefore, Alliance does not manufacture its own gaming machines for use in Louisiana. Further, the Louisiana legislature recently passed a bill which could have the effect of curtailing the Company's activities in Louisiana. See "Risk Factors -- Strict 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 130 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. 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 March 31, 1996, amounts outstanding under the HFS facility and the related financings aggregated $9.7 million. As adjusted, RCC is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of such amount if revenues exceed $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. In addition, if during any continuous 12-month period until December 31, 1999 the casino achieved earnings from the project of at least $10.5 million before deducting depreciation, amortization, royalty and income taxes, then Alliance would be obligated to pay to certain principals of the original partnership an amount aggregating $1 million in cash or shares of Common Stock 180 days after the occurrence. The casino has achieved the required earnings as adjusted, and Alliance is obligated to make the required payment or issue the Common Stock (with the issuance being its expected course of action) by September 30, 1996. Also, Alliance's 5.2% royalty on gross revenues was terminated on the date it became the general partner. PLANTATION STATION. In April 1990, Alliance purchased, for an aggregate purchase price of $9,700,000, substantially all of the assets of the Plantation Station casino ("Plantation Station") located near the border 131 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. SALES AND MARKETING. Alliance's casinos target the cost-conscious local market. Alliance promotes its casinos primarily by providing quality food at reasonable prices and through special promotional events. Alliance believes its experience with operating small casinos targeted to local markets will enable it to effectively operate casinos in emerging gaming jurisdictions that have similar characteristics. COMPETITION. Gaming of all types is available throughout Nevada in numerous locations, including many locations similar to those at which Alliance operates gaming machines. All of these gaming opportunities may compete directly or indirectly with Alliance's casino operations. Many of Alliance's competitors possess substantially greater financial and other resources than Alliance. Many of such competitors include large casino-hotels which offer more variety and amenities and may be perceived to have more favorable locations than Alliance. The operation of casinos is a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and success of marketing programs. Plantation Station's primary casino operations focus on the local market rather than the tourist market. The Rainbow Casino generally appeals to both locals and visitors. Accordingly, Alliance believes that the principal competition for Plantation Station's operations comes from larger "locals" casinos. The Rainbow Casino appeals to both locals and visitors to historic Vicksburg, Mississippi. The Rainbow Casino is the fourth gaming facility to open in Vicksburg, Mississippi and as such, faces substantial direct competition for gaming customers in the region. BUSINESS DEVELOPMENT ACTIVITY As described in "Unaudited Pro Forma Condensed Combined Financial Information", the Company intends to reduce Alliance development expenses, which related to mergers, acquisitions and joint ventures, following the Transaction. The reduction reflects the elimination of costs that were being incurred prior to Alliance's accomplishment of its strategic plan to acquire a major electronic gaming machine manufacturing company. To accomplish this reduction the Company intends to reduce payroll costs and fees paid to consultants and legal costs related to non-BGII transactions Alliance had been pursuing. PATENTS, COPYRIGHTS AND TRADE SECRETS Alliance has copyrighted both the source code and the video presentation of its games and registered many of these copyrights with the U.S. Copyright Office under the Copyright Act of 1976. Game version upgrades and new games are currently in the process of United States patent and copyright registration. Such copyrights expire at various dates from September 2056 to October 2065. In addition, some of the games have Federal and/or state trademarks registered with the U.S. Patent and Trademark Office. Some of the games (either currently used or reserved for future development) also are covered by patents filed with the U.S. Patent and Trademark Office. Such patents expire at various dates from May 2008 to March 2012. BGII is obligated under several patent agreements to pay royalties ranging from approximately $50 to $200 per game depending on the components in the gaming machines. Additionally, based on an amendment to the trademark licensing agreement between BGII and BEC dated March 31, 1995, BGII is obligated to pay a royalty on new machines sold of $25 to $30 per machine beginning on March 31, 1995 with a minimum annual royalty payment of $500,000 for the initial five-year term of the amended agreement, which is subject to annual renewals thereafter. Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0 million, respectively. Pursuant to a Trademark and License Agreement, as amended, between BEC and BGII (the "License Agreement"), BGII licenses the name "Bally" from BEC for use in the businesses of BGII. In 1992, BGII paid $3.5 million to BEC in the form of an offset against a tax receivable which was owed by BEC to BGII for the licensing rights. See "Notes to BGII's Consolidated Financial Statements -- Summary of Significant 132 Accounting Policies -- Intangible and other 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 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 -- Certain Litigation -- 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 March 31, 1996, approximately $1.0 million had been spent relating to this commitment. In connection with a settlement agreement entered between BEC, Gaming, BGI Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest in the Casino Interlink Multiple Location Progressive System (the "Progressive System") to IGT. BGII reserved certain rights in the sale, including the rights to continue to sell the Progressive System (i) within Europe, (ii) for use in single locations, and (iii) worldwide in lottery applications. BGII agreed to discontinue general sales of the Progressive System or any similar system outside of Europe for a period of five years. This agreement is binding on all successors and assigns of BGII, including the Company, from the date of the settlement agreement. The Company has registered the trademark "CEI" and its design and the logos of United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and Trademark Office. EMPLOYEES AND LABOR RELATIONS As of December 31, 1995, Alliance employed approximately 683 persons in the State of Nevada and approximately 8 persons in various states related to its business development activities, VSI employed approximately 73 persons in the State of Louisiana, RCVP employed 374 persons in the State of Mississippi, and BGII and its subsidiaries employed approximately 500 persons in various states and 440 persons in Germany. None of such employees is covered by a collective bargaining agreement. Wulff's employees, however, are covered by German regulations which apply industry-wide and are developed, to some extent, through negotiations between representatives of the metal working industry employers and the trade union representing the employees. These regulations are in the nature of collective bargaining agreements and cover the general terms and conditions of such items as wages, vacations and work hours. The regulations codify what are considered the common standards of employment in the German metal working industry. The Company believes its relationships with its employees are satisfactory. LITIGATION RELATING TO THE MERGER On or about June 19, 1995, three purported class actions were filed in the Chancery Court of Delaware by BGII stockholders against BGII and its directors (the "Fiorella, Cignetti and Neuman Actions") in 133 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 certain circumstances; compelling an auction of BGII and the provision of due diligence to Alliance; scheduling an immediate meeting of BGII stockholders; and awarding compensatory damages. Management believes these claims to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against BGII for BGII's failure to pay $4.8 million upon termination of the WMS Agreement. Management intends to vigorously defend this action. On November 22, 1995, BGII answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Agreement by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising BGII that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to indemnify BGII against such a claim under certain circumstances. On September 14, 1995, a stockholders' class and derivative action was commenced by Richard Iannone, an Alliance stockholder, against Alliance, the members of its current Board of Directors and certain of its former directors in Federal District Court in Nevada asserting, among other matters, that Alliance has wasted corporate assets in its efforts to acquire BGII by, among other things, agreeing to onerous and burdensome financing arrangements that threaten Alliance's ability to continue as a going concern and that Alliance had made false and misleading statements and omissions in connection with that effort by failing to disclose the need to refinance an additional $53 million of existing BGII indebtedness, by failing to disclose how Alliance would recapitalize the indebtedness of a combined Alliance/BGII and by failing to disclose the leading role played by Richard Rainwater in Alliance's efforts to acquire control of BGII which, given assurances made by Alliance to gaming regulators in Nevada that the unlicensed Mr. Rainwater would not play an active role in the management of Alliance, could expose Alliance to suspension or revocation of its Nevada gaming license. In addition, the stockholder action against Alliance alleges that (i) Alliance substantially inflated its results of operations by selling gaming machines at inflated prices in exchange for promissory notes (without any down payment) which Alliance knew could not be paid in full but which Alliance nevertheless recorded at full value, (ii) Alliance doctored reports sent to its route customers and (iii) the directors of Alliance had caused Alliance to engage in self-dealing transactions with certain directors which resulted in the exchange of Alliance assets for assets and services of vastly lesser value. On September 21, 1995, a United States magistrate denied the plaintiffs' request for expedited discovery, stating that Mr. Iannone was not an adequate representative and was not likely to succeed on the merits. On October 4, 1995, the defendants filed a motion to dismiss the action. On December 18, 1995, the plaintiff filed an amended shareholder derivative complaint. The plaintiff is no longer asserting any class claims. On March 5, 1996 the defendants filed a motion to dismiss the amended complaint. In June 1995, BEC asserted that a certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits the use by BGII of the trade name "Bally" if it is merged with a company that is in the 134 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, 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. On April 24, 1996 the Delaware court entered a similar order on consent dismissing the Alliance 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. 135 Prior to the conclusion of the Federal criminal case, BGII's activities with regard to its former VLT distributor in Louisiana were the subject of inquiries by gaming regulators and a report by the New Jersey Division of Gaming Enforcement dated August 24, 1995. The New Jersey Commission has indicated that it will hold a hearing on the matter, but no date has been set at this time. The New Jersey report made no specific recommendations for action by the New Jersey Commission. The gaming authorities in Ontario, Canada, who have investigated the matter, issued a gaming registration to Gaming on February 8, 1996. On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated (the "plaintiffs"). The plaintiffs filed suit against BGII and approximately 45 other defendants (each a "defendant", and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people into playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. ENVIRONMENTAL MATTERS The Company is subject to Federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, past spills, disposals or other releases of hazardous substances (together, "Environmental Laws"). The Company uses certain substances and generates certain wastes that are regulated or may be deemed hazardous under applicable Environmental Laws. From time to time, the Company's operations may result in certain noncompliance with applicable requirements under Environmental Laws. Any past noncompliance with applicable requirements under Environmental Laws has not had a material adverse effect on the Company's results of operations or financial condition. Further, the Company believes that any noncompliance or cleanup liability under current Environmental Laws would not have a material adverse effect on the Company's results of operations or financial condition. 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 136 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 assurance 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"). Alliance's direct and indirect subsidiaries conduct gaming operations at various locations, conduct gaming machine management operations and manufacture and distribute electronic gaming machines (collectively, the "Alliance Nevada Subsidiaries"). Gaming, the operating subsidiary for BGII's domestic gaming operations, which manufactures and distributes electronic gaming machines, is also required to be licensed by the Nevada Gaming Authorities. The licenses held by the Alliance Nevada Subsidiaries and Gaming require the periodic payments of fees, or fees and taxes, and are not transferable. Alliance and BGII have been found suitable to own the stock of the Alliance Nevada Subsidiaries and Gaming, respectively, each of which is a corporate licensee (individually, a "Corporate Licensee" and collectively, "Corporate Licensees") under the terms of the Nevada Act. As Registered Corporations, Alliance and BGII are required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of the profits from, the Corporate Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. Alliance, BGII and the Corporate Licensees have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities, gaming machine management operations, and in the manufacture and distribution of gaming machines for use or play in Nevada or for distribution outside of Nevada, as the case may be. The Merger must be approved in advance by the Nevada Board and the Nevada Commission. Hearings are currently scheduled before the Nevada Board on May 8, 1996 and before the Nevada Commission on May 23, 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 137 must be approved by the Nevada Commission before distribution or exposure for play. The approval process for gaming machines and cashless wagering systems includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming machines or cashless wagering system meets strict technical standards that are set forth in the regulations of the Nevada Commission. Associated equipment must be administratively approved by the Chairman of the Nevada Board before it is distributed for use in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or the Corporate Licensees in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and key employees of the Company who are actively and directly involved in the licensed activities of the Corporate Licensees may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities who, in addition to their authority to deny an application for a finding of suitability or licensure, have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or the Corporate Licensees, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or the Corporate Licensees to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and the Corporate Licensees that hold nonrestricted licenses are required to submit detailed financial and operating reports to the Nevada Commission. A nonrestricted license is a license for an operation consisting of 16 or more slot machines, or a license for any number of slot machines together with any other game, gaming device, race book or sports pool at one establishment. Substantially all material loans, leases, sales of securities and similar financing transactions by the Corporate Licensees that hold a nonrestricted license must be reported to or approved by the Nevada Commission. If it were determined that the Nevada Act was violated by a Corporate Licensee, the licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company and the Corporate Licensees and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate any nonrestricted gaming establishment operated by a Corporate Licensee and, under certain circumstances, earnings generated during the supervisor's appointment (except for reasonable rental of the casino) could be 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, 138 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 the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. The Nevada Commission may, in its discretion, require the holder of any debt securities of a Registered Corporation, such as the Senior Notes, Old Convertible Debentures or New Convertible Debentures, to file applications, be investigated and be found suitable to own the debt security if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if, without the prior approval of the Nevada Commission, it (i) pays the unsuitable person any dividend, interest or any distribution whatsoever, (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain 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 Preferred Stock, Senior Notes, New Convertible Debentures, Common Stock and Series E Special Stock without the prior approval of the 139 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, the Exchange Offer and related transactions, including stock pledges, negative pledges and security interests in connection with the Note Offering. However, there can be no assurance that the Offerings or the Exchange Offer or related transactions 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 filed a request for administrative approval of the Private Placement and the Nevada Board Chairman has approved the Private Placement. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he or she obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as a part of the approval process relating to the transaction. The Merger and certain related transactions require the prior approval of the Nevada Commission. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices on Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada, and to the counties and cities in which the Licensees' respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either (i) a percentage of the gross revenues received, (ii) the number of gaming machines operated, or (iii) the number of games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. The Corporate Licensees that hold a license as an operator of a gaming device route or a manufacturer's or distributor's license also pay certain fees to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of its participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to 140 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 Louisiana Legislature recently passed a bill which enacts a single gaming control board for the regulation of gaming in Louisiana. This Board is called the Louisiana Gaming Control Board (The "Louisiana Board") who will issue all licensing after May 1, 1996 for video draw poker devices. The Division will continue to perform investigatory functions for the Louisiana Board. The laws and regulations of Louisiana are based upon a primary consideration of maintaining the health, welfare and safety of the general public and upon a policy which is concerned with protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of Devices. The Louisiana legislature recently passed a bill which would allow each parish to decide whether to disallow video poker devices, riverboat casinos and, in Orleans Parish, land-based casinos. If any parish in which the Company operates elects to disallow video poker devices, the Company would have to cease its video poker operations there by June 30, 1999. The Company cannot predict which parishes will so elect; however, if all of the parishes in which the Company operates so elect, the cessation of the Company's video poker operations would have a material adverse effect on the operations of the Company. See "Risk Factors -- Strict Regulation by Gaming Authorities". Each of the indirect operating subsidiaries for the Company's gaming operations in Louisiana, VSI and SVS, has been granted a license as a Device owner by the Division. Another indirect subsidiary of the Company, VDSI, has been granted a license as a distributor by the Division. Gaming has been granted a license as a manufacturer by the Division. These gaming subsidiaries are "Louisiana Licensees" under the terms of the Louisiana Act. The licenses held by such Louisiana Licensees expire at midnight on June 30 of each year and must be renewed annually through payment of fees. All license fees must be paid on or before May 15 in each year licenses are renewable. The Louisiana Board may deny, impose a condition on or suspend or revoke a license, renewal or application for a license for violations of any rules and regulations of the Louisiana Board 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 revocation is a pure and absolute privilege and is at the discretion of the Board in accordance with the provisions of the Louisiana Act. A license is not property or a protected interest under the constitution of either the United States or the State of Louisiana. The Division has the authority to conduct overt and covert investigations of any person involved directly or indirectly in the video gaming industry in Louisiana. This investigation may extend to information regarding a person's immediate family and relatives and their affiliations with certain organizations or other business entities. The investigation may also extend to any person who has or controls more than a 5% ownership, income or profits interest in an applicant for or holder of a license or who is a key employee, or who has the ability to exercise significant influence over the licensee. All persons or entities investigated 141 must meet all suitability requirements and qualifications for a licensee. The Board may deny an application for licensing for any cause which it may deem reasonable. The applicant for licensing must pay a filing fee which also covers the cost of the investigation. In order for a corporation to be licensed as a distributor by the Board, a majority of the stock of the corporation must be owned by persons who have been domiciled in Louisiana for a period of at least two years prior to the date of the application. In addition to licensure as a manufacturer of Devices under the Louisiana Act, Gaming has been licensed by the Division as a manufacturer under the Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana Riverboat Act"). Gaming's application for a permanent manufacturer's license as it relates to the land-based casino was pending before LEDGC at the time the operator of the land-based casino filed for bankruptcy reorganization and ceased operations, resulting in the termination of funding for the LEDGC regulatory operations and the effective closure of the LEDGC's operations. See "Risk Factors -- Ongoing BGII Regulatory Investigations" and "Business -- Other Litigation". The Division notified Alliance that it would be necessary to obtain approval from it prior to the Effective Time which approval will now have to be issued by the Board. To that effect, the Company has made all requests necessary to obtain any such licenses, permits or approvals required to be obtained prior to the Effective Time. MISSISSIPPI The manufacture, distribution, ownership and operation of gaming machines in Mississippi is subject to extensive state and local laws and regulations, including the Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the "Mississippi Regulations") promulgated thereunder. The Mississippi Gaming Commission (the "Mississippi Commission") oversees licensing and regulatory compliance. Gaming in Mississippi can be legally conducted only on vessels of a certain minimum size in navigable waters of the Mississippi River or in waters of the State of Mississippi which lie adjacent and to the south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison and Jackson, and only in counties in Mississippi in which the registered voters have not voted to prohibit such activities. The voters in Jackson County, the southeastern-most county of Mississippi, have voted to prohibit gaming in that county. However, gaming could be authorized in Jackson County should the voters fail to disapprove of gaming in that county in any referendum, which could be held annually. The underlying policy of the Mississippi Act is to ensure that gaming operations in Mississippi are conducted (i) honestly and competitively, (ii) free of criminal and corruptive influences and (iii) in a manner which protects the rights of the creditors of gaming operations. The Mississippi Act requires that a person (including any corporation or other entity) must be licensed to conduct gaming activities in Mississippi. A license to own and operate gaming machines will be issued only for a specified location which has been approved as a gaming site by the Mississippi Commission. Alliance through its interest in RCVP must apply for renewal of such licenses every two years, which renewal cannot be assured. Gaming holds a license to manufacture and distribute gaming machines. The current license at the Rainbow Casino will expire on June 1, 1996 unless renewed in advance of that date. Alliance knows of no reason why such license will not be renewed. The Mississippi Act also requires that each officer or director of a gaming licensee, or other person who exercises a significant influence over the licensee, either directly or indirectly, must be found suitable by the Mississippi Commission. In addition, any employee of the licensee who is directly involved in gaming must obtain a work permit from the Mississippi Commission. The Mississippi Commission will not issue a license or make a finding of suitability unless it is satisfied, only after an extensive investigation paid for by the applicant, that the persons associated with the gaming licensee or applicant for a license are of good character, honesty and integrity, with no relevant or material criminal record. In addition, the Mississippi Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources, and that persons associated with the applicant have sufficient business probity, competence and experience to engage in the proposed gaming enterprise. The Mississippi Commission may refuse to issue a work permit to a gaming employee (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or knowingly violated the Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable cause. If an employee is denied a license, the Company must terminate his or her employment. 142 The Merger must be approved in advance by the Mississippi Commission. A hearing is scheduled before the Mississippi Commission on May 16, 1996 to obtain the necessary approval. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or fine any person, as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or person who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but filing of such petition does not necessarily stay any action by the Mississippi Commission pending a decision by the Circuit Court. Each gaming licensee must pay a license fee to the State of Mississippi based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings). The license fee equals 4% of gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000 and up to $134,000 per month and 8% of gaming receipts over $134,000 per month. The foregoing license fees are allowed as a credit against any Mississippi State income tax liability for the year paid. An additional license fee, equal to $100 for each table game conducted or planned to be conducted on the gaming premises, is payable to the State of Mississippi annually in advance. Municipal and county fees may also be assessed and vary from jurisdiction to jurisdiction. All taxes and fees must be paid timely in order to retain a gaming license. The Mississippi Act also imposes certain audit and record keeping laws and regulations, primarily to ensure compliance with the Mississippi Act, including compliance with the provisions relating to the payment of license fees. Under the Mississippi Regulations, a gaming licensee cannot be publicly held, although an affiliated corporation, such as the Company, may be publicly held so long as the Company registers with and gets the approval of the Mississippi Commission. In addition, approval of any subsequent public offerings of the securities of the Company must be obtained from the Mississippi Commission if any part of the proceeds from that offering are intended to be used to pay for or reduce debt used to pay for the construction, acquisition or operation of any gaming facility in Mississippi. Under the Mississippi Regulations, a person is prohibited from acquiring control of a licensee without the prior approval of the Mississippi Commission. Any person who, directly or indirectly, or in association with others, acquires beneficial ownership of more than five percent of a licensee must notify the Mississippi Commission of this acquisition. The Mississippi Commission may require that a person be found suitable if that person holds between a five percent and ten percent ownership position and must require that a person be found suitable if that person owns more than ten percent of a licensee. Furthermore, regardless of the amount of ownership, any person who acquires beneficial ownership may be required to be found suitable if the Mississippi Commission has reason to believe that the acquisition of such ownership would be inconsistent with the declared policy of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit with the State Tax Commission a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission will not be permitted to have any direct or indirect ownership in the licensee. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in the licensee if found unsuitable, is guilty of a misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied or 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. 143 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. 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. 144 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. In April 1993, the German government increased the maximum coin drop per game effective May 7, 1993 from 30 pfennigs (approximately $0.21) to 40 pfennigs (approximately $0.28) although 30-pfennig machines are still permitted to be manufactured and sold. The Spielverordnung (gaming ordinance) specifically governs wall machines. These regulations limit game payouts to DM 4.00 (approximately $2.80 per game), require a minimum payout percentage, detail where the machines may be installed, how many may be installed and by whom, which games are prohibited, the technical requirements of the machines and technical review and approval. Operators must comply with regulations which stipulate how many machines may operate within defined square foot areas (15 square 145 meters per machine, with a maximum of ten machines per location). The Spielverordnung was modified in 1985 to achieve a significant reduction of gaming machines. Gaming halls which through December 19, 1985 had more gaming machines than permitted under the revised regulations, had a transition period through December 31, 1995 to comply with the revised regulations. Such facilities were allowed to keep the 1985 number of wall machines until December 31, 1990. During the period January 1, 1991 to December 31, 1995 they were entitled to two-thirds of such total number, but had to be in compliance with the new limits by January 1, 1996. In taverns, restaurants, hotels and certain other establishments, no more than two gaming machines are permitted. See "Risk Factors -- Operating History -- Recent Losses". The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs the zoning classification of land and the type and density of development within the various zoning classifications. Effective January 27, 1990, the Baunutzungsverordnung was amended essentially to restrict the development of larger gaming halls to core commercial areas, limit the permissibility of smaller gaming halls in various types of mixed use zones and to ban gaming halls in most types of residential and all types of industrial use areas. Prior to such amendment, gaming halls, regardless of size, were generally allowed in core, business, mixed and industrial zones. In addition, on a case by case basis, each local zoning agency is authorized to exclude certain types of otherwise permissible uses, including gaming halls. Subject to certain exceptions, V.A.T. of 15% is generally assessed on the sale or supply of any goods and services in Germany. Since the total amount paid for particular goods or services is considered to be the gross price in calculating such tax, the actual rate is 13.04%. With respect to operators of gaming machines, prior to January 1, 1994, V.A.T. was to have been assessed at a rate of 0.1304 times a multiplier of, with respect to the period from January 1, 1991 through December 31, 1992, 2.0 times the amount remaining in the cash box after payoffs to players and, with respect to the period from January 1, 1993 through December 31, 1993, 2.5 times the amount remaining in the cash box after payouts to players. Commencing January 1, 1994 the tax rate was changed to 0.1304 times the cash handled by a machine. During mid-1994, the German government effected a tax law revision based on a European Court ruling whereby V.A.T. charged to the operators of wall machines was significantly reduced. See "Business -- German Operations -- Industry Overview". In accordance with the ruling, for all cases arising on or after, or that were pending on, July 5, 1994, the basis for taxation has been the cash remaining in the machines. The rule requiring a minimum payout percentage is applied to the amount remaining in the cash box net of such V.A.T. Depending on the municipality in which a machine is located, operators may also have to pay a monthly leisure tax on each machine of up to DM 600 (approximately $419). The business conducted by Wulff had benefitted from the Berlin Promotion Act, a special tax statute which was intended to support the economy of West Berlin in various ways. With the reunification of Germany, the need for benefits provided by the law is perceived to have decreased. Consequently, the German government has enacted amendments to the Berlin Promotion Act which are designed to phase out, over a number of years, most of the tax benefits and incentives provided by the law. These tax benefits and incentives have been changed in five ways: (i) the V.A.T. rebates of up to 10% to enterprises located in West Berlin for sales to German customers outside West Berlin were eliminated by January 1, 1994, which began with an initial 30% decrease on January 1, 1992, and continued with further decreases of 20% on July 1, 1992, 25% on January 1, 1993 and 25% on January 1, 1994; (ii) the V.A.T. rebates of 4.2% for German (other than West Berlin) enterprises which purchase goods from West Berlin taxpayers' enterprises were abolished effective July 1, 1991; (iii) special accelerated depreciation allowances which permitted West Berlin taxpayers to pay to write off 75% of the cost of qualifying fixed assets at any time during the first three years after acquisition have been modified to limit the write off to 50%; (iv) certain special investment subsidies have been restricted and were completely eliminated by the end of 1994; and (v) tax credits on German federal income taxes were reduced from 22.5% in 1990 to 20% in 1991, 13.5% in 1992, 9.0% in 1993 and 4.5% in 1994, and were phased out completely by December 31, 1994. During 1995, Wulff increased the amount of V.A.T. reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's tax returns for the years 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. 146 MANAGEMENT The name, age, present principal occupation or employment and five-year employment history of each of the directors and executive officers of Alliance as of May , 1996 is set forth below. No director or executive officer is related by blood, marriage or adoption to any other director or executive officer.
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 45 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 Alliance as President and Chief Executive Officer in August 1994, was appointed a director in October 1994, and became Chairman of the Board in March 1995. Mr. Greathouse, who has held various positions in the gaming industry since 1974, most recently served as the President of the Harrah's Casino Hotels Division of The Promus Companies Incorporated from September 1993 to July 1994. In this position, Mr. Greathouse had responsibility for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City. From July 1991 to September 1993, Mr. Greathouse served as President and (from 1990) Chief Operating Officer of Harrah's Southern Nevada, overseeing the operations of Harrah's Las Vegas and Harrah's Laughlin. From 1990 to July 1991, Mr. Greathouse served as Executive Vice President of Harrah's Southern Nevada. Mr. Greathouse is an active member and has served as the Chairman of the Board of the Nevada Resort Association and is on the Executive Committee of United Way of Southern Nevada. He has also served as a member of the Board of Directors of the Las Vegas Convention and Visitors Authority and on the Executive Committee of the Nevada Development Authority. Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and joined Alliance as Executive Vice President -- Development and as a director in July 1994. Prior to that time and following his graduation from business school in 1989 he was employed as an associate at Wasserstein, Perella & Co., Inc. from September 1989 to April 1991, where he worked in the Mergers and Acquisitions group. Dr. Craig Fields was appointed a director in October 1994 and became Vice Chairman of the Board in March 1995. Dr. Fields was employed by the U.S. Department of Defense Advanced Research Projects Agency ("ARPA") from 1974 to 1990. He joined the Microelectronics and Computer Technology Corporation ("MCC") in 1990 as President and later became Chairman and CEO. He left MCC in 1994, and serves as director of two publicly-traded corporations in addition to Alliance, 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 147 established, and GSI and GSA since June 1993. Prior to that time, he worked at Goldman, Sachs & Co. for 13 years, during the last six of which he was a General Partner. When he established KIC and Kirkland, Mr. Kirschbaum resigned his general partnership interest in Goldman, Sachs & Co. and became a limited partner. Mr. Kirschbaum resigned his limited partnership interest in Goldman, Sachs & Co. in November 1993. David Robbins was appointed a director in July 1994. Mr. Robbins has been an attorney with O'Sullivan, Graev & Karabell from September 1995 to the present. From May 1993 to September 1995, Mr. Robbins was an attorney with Kramer, Levin, Naftalis, Kamin & Frankel. From September 1984 to May 1993, Mr. Robbins was an attorney with Cahill Gordon & Reindel. Alfred H. Wilms has served as a director of Alliance since November 1983. He served as Chief Executive Officer of Alliance from December 1984 to July 1994 and as Chairman of the Board of Alliance from August 1986 to July 1994. From 1976 through 1989, Mr. Wilms served as President of Wilms Distributing Company, Inc. and Wilms Export Company, N.V., a Belgian company engaged in the distribution of amusement and gaming equipment. From 1971 through 1976, Mr. Wilms held various positions with Bally Continental, including positions in research and development, marketing, sales, gaming operation and management, and, from 1974 through 1979, he served as a director of Bally Manufacturing Corp. Mr. Wilms is currently President and a director of Aqualandia, the largest waterpark in Europe; President and a director of Gibsa, a real estate company located in Spain; and a director of Jardin Parks, a real estate company located in Spain. Mr. Wilms is a citizen and resident of Belgium. Christopher Baj has provided financial and operational consulting services to various clients since April 1987. From January 1993 to December 1995, Mr. Baj was also employed as the senior manager of Stanley L. Levin, CPA. From April 1987 to December 1992, Mr. Baj was employed as the senior consultant at Levin, Callaghan & Nawrocki, CPA's. Mr. Baj is a Certified Public Accountant. Shannon L. Bybee joined Alliance in July 1993 and served as President and Chief Operating Officer until July 1994. In July 1994, Mr. Bybee assumed the roles of Executive Vice President--Government Affairs and Special Advisor to the Board of Directors and also took a position as Associate Professor with the William F. Harrah College of Hotel Administration and the UNLV International Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee currently serves as a member of the board of directors of The Claridge Hotel and Casino Corporation, a position he has held since August 1988. Prior to his association with Alliance, Mr. Bybee had served as Chief Executive Officer of The Claridge Hotel and Casino Corporation from August 1989 to July 1993. From 1983 to 1987 Mr. Bybee served as Senior Vice President and from 1978 to 1981 as Vice President of Golden Nugget, Inc. (now Mirage Resorts, Inc.). John W. Alderfer joined Alliance in September 1990 as Vice President, Chief Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to Senior Vice President -- Finance and Administration, in December 1993. Prior to joining Alliance, Mr. Alderfer was the Chief Financial Officer of The Bicycle Club, a Los Angeles-based card casino, from February 1989 to September 1990. David D. Johnson joined Alliance as Senior Vice President, General Counsel and Secretary in March 1995. Previously, Mr. Johnson developed extensive gaming industry experience representing a diverse group of casino clients as a Senior Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, a Nevada law firm where he was employed from January 1987 to April 1995. Prior to joining Schreck, Jones, Bernhard, Woloson & Godfrey, Mr. Johnson served as Chief Deputy Attorney General for the gaming division of the Nevada Attorney General's Office. Mr. Johnson serves as Vice Chairman of the Executive Committee of the Nevada State Bar's Gaming Law Section and is an officer and founding member of the Nevada Gaming Attorneys Association. Robert L. Miodunski joined Alliance as Senior Vice President -- Nevada Route Group in March 1994. From January 1991 to March 1994, Mr. Miondunski was President of Mulholland-Harper Company, a sign manufacturing and service company. From 1984 through 1990, Mr. Miodunski held various positions with Federal Signal Company, the most recent being Vice President and General Manager of the Midwest Region of the Sign Group. 148 Robert M. Hester joined Alliance in October 1993 as Director of Human Resources and was promoted to Vice President -- Human Resources and Administration in December 1993. From 1989 to 1993, Mr. Hester was Director of Human Resources for Sam's Town Hotel and Casino in Las Vegas. Johnann F. McIlwain joined Alliance in June 1994 as Vice President -- Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of Marketing of Greenwood, Inc. a Philadelphia-based gaming and entertainment company. From 1989 to 1991, she was Director of Marketing Services for Hospitality Franchise Systems, Inc. in Parsippany, New Jersey. Prior to joining Hospitality Franchise Systems, Inc. Ms. McIlwain served as Director of Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal Casino Hotel. Robert L. Saxton joined the Company in 1982 as Corporate Controller and was elected Vice President -- Casino Group in December 1993. Since joining Alliance, Mr. Saxton has held various management positions with the Nevada Route Group and is currently responsible for casino operations. He also serves as President of Alliance's Louisiana subsidiaries. Robert A. Woodson joined Alliance in 1988 as Director of Gaming Compliance and was promoted to Vice President -- Regulatory Compliance in September 1993. Prior to joining Alliance, Mr. Woodson was with the Investigation Division of the State of Nevada Gaming Control Board for 10 years. Following consummation of the Merger, the Company intends to evaluate the composition of its Board of Directors to insure that the Board includes individuals having appropriate skills and experience in light of the expanded scope of the Company's operations following the Merger. With the exception of Hans Kloss, who subject to regulatory approval will continue as President of BGII and Managing Director of Wulff, and Robert Conover, who will continue as President of Systems, and Richard Gillman and Neil Jenkins, who will not continue with the Company, the current executive officers of BGII, if any, who will be employed by the Company after the Merger have not yet been determined. The Company expects that a substantial number of BGII officers will remain employed by the Company following consummation of the Merger. Hans Kloss has been a Director of BGII since August 1991 and President and Chief Operating Officer of BGII since May 1993. Mr. Kloss has been the Managing Director of BGII's German subsidiaries, Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH, since 1981 and has been employed by those companies since 1970. Robert Conover is the President of Systems and has held that position since November 1990. Mr. Conover also serves as Vice-President and Chief Information Officer of BEC and has served as such since December 1992. Mr. Conover is also Senior Vice-President in charge of Management Information Systems Operations at the BEC subsidiaries that operate casino hotels, and has held that position since 1983. 149 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT The following table sets forth certain information as of May , 1996 with respect to the beneficial ownership of the Common Stock, which constitutes Alliance's only outstanding class of voting securities, by (i) each person who, to the knowledge of Alliance, beneficially owned more than 5% of the Common Stock, (ii) each director of the Company, (iii) the named executive officers of Alliance (as defined in the Exchange Act) and (iv) all executive officers and directors of Alliance as a group:
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% 25.7% Donaldson, Lufkin & Jenrette Securities 1,695,500(5) 11.6% 6.3% Corporation ................................ 277 Park Avenue New York, New York 10172 Joel Kirschbaum ............................. 1,333,333(6) 10.3% 5.3% Kirkland Investment Corporation Kirkland-Ft. Worth Corporation Investment Partners, L.P. 535 Madison Avenue New York, New York 10022 Gaming Systems Advisors, L.P. ............... --(7) -- -- 535 Madison Avenue New York, New York 10022 Steve Greathouse............................. 333,333(8) 1.9% 1.3% Anthony L. DiCesare.......................... --(9) -- -- Craig Fields................................. 125,000(10) * * David Robbins................................ 20,000(11) * * 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% 28.8%
- ------------------------ * Less than 1%. (1) Excludes the effect of (a) the issuance of (i) 2,750,000 shares subject to warrants to Kirkland in connection with the Kirkland Investment, (ii) 1,250,000 shares subject to warrants to GSA pursuant to the GSA Advisory Agreement on September 21, 1993 and 2,500,000 shares subject to additional warrants issuable to GSA upon consummation of the Merger, both of which become exercisable in equal amounts only when the stock price reaches $11, $13 and $15, and (iii) 750,000, 250,000 and 30,000 shares subject to warrants issued to Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer & Co. Inc. ("Oppenheimer") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"), respectively, in connection with the issuance of the Old Convertible Debentures, and (iv) 250,000 shares subject to warrants issued to Cerberus Partners L.P. and certain affiliates of Canyon Partners, Inc., in September 1995, and (b) shares covered by employee stock options other than those deemed beneficially owned by executive officers and directors. 150 (2) Assumes the issuance of approximately 735,000 shares to BGII stockholders in the Merger, approximately 1,250,000 shares in the Private Placement, approximately 933,000 shares in partial satisfaction of BGII employee contract termination costs and performance unit awards and approximately 9,450,000 shares in the Exchange Offer and Automatic Conversion. (3) Excludes the effect of BGII obligations assumed by Alliance with respect to each outstanding stock option and warrant to purchase shares of BGII common stock, which options and warrants represented an aggregate of 752,500 and 1,498,000 shares of BGII common stock, respectively. (4) Includes 2,000,000 shares represented by the warrants issued to Mr. Wilms. Mr. Wilms' mailing address is 4380 Boulder Highway, Las Vegas, Nevada 89121. (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 Old 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. The Post-Transaction Percent of Class assumes no participation in the Exchange Offer although Alliance has no indication of such holder's intent with respect thereto. (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 become exercisable in equal amounts only when the stock price reaches $11, $13 and $15. (9) Based upon information contained in a Schedule 13D filed on June 23, 1994, as amended on September 28, 1995 and November 6, 1995 and provided to Alliance by Mr. Kirschbaum, KIC, Kirkland and GSA. As set forth in such Schedule 13D, as amended, Mr. DiCesare has certain rights to receive a portion of the securities that KIC would be entitled to receive upon dissolution of Kirkland and that GSI would be entitled to receive upon dissolution of GSA. (10) Includes 125,000 shares subject to options that are currently exercisable or will become exercisable within 60 days. Excludes warrants exercisable for 250,000 shares portions of which become exercisable in equal amounts only when the stock price reaches $11, $13 and $15 and options exercisable for 150,000 shares which will be issued within 30 days of the consummation of the Merger. (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. (14) Includes 66,667 shares subject to options that are currently exercisable or will become exercisable within 60 days. 151 (15) Includes 17,000 shares subject to options that are currently exercisable or will become exercisable within 60 days. (16) Includes 2,676,000 shares subject to options and warrants that are currently exercisable or will become exercisable within 60 days. STOCKHOLDERS AGREEMENT On July 14, 1994, as contemplated by the Stockholders Agreement dated as of September 21, 1993 by and among Alliance, KIC, GSA, Kirkland and Mr. Wilms (as amended, the "Stockholders Agreement"), the Alliance Board of Directors was reconfigured to consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, David Robbins and Jay R. Gottlieb) and three persons designated by Mr. Wilms (Messrs. Wilms, David A. Scheinman and Sidney Sosin). The Stockholders Agreement and related transactions are more fully described in the Alliance Forms 8-K dated June 25, 1993, September 21, 1993 and July 14, 1994 and in its Information Statement dated June 29, 1994. On October 20, 1994, the Stockholders Agreement was amended to reconfigure the Board of Directors of Alliance to consist of four persons designated by KIC (Messrs. Kirschbaum, DiCesare, Robbins and Gottlieb), one person designated by Mr. Wilms (Mr. Wilms) and two new directors designated by a majority of the Board of Directors of Alliance. The Stockholders Agreement obligates Mr. Wilms to vote his shares for such persons nominated by KIC. On October 20, 1994 Mr. Greathouse and Dr. Fields were appointed to the Board to fill vacancies created upon the resignation of Messrs. Scheinman and Sosin. As amended, the Stockholders Agreement also provides that Mr. Wilms may designate two persons (currently Messrs. Scheinman and Sosin) (the "Advisors") who will be observers of, and advisors to, the Board of Directors and who will be entitled to attend all of the Alliance Board of Directors' meetings and receive all information furnished to members of the Board. Mr. Wilms and/or at least one Advisor will be entitled to attend all meetings of the committees of Alliance's and its subsidiaries' Boards of Directors. In addition, Mr. Wilms is contractually obligated until September 21, 1997 to vote his shares of Common Stock in favor of four nominees of KIC to the Alliance Board of Directors. OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES Immediately following the Transaction (and assuming that $50.0 million principal amount of New Convertible Debentures are exchanged and converted to Common Stock and none into Series E Preferred Stock pursuant to the Automatic Conversion and that $35.0 million in Old Convertible Debentures remain outstanding), the Company will have outstanding options, warrants and convertible securities which will be exercisable in the aggregate for approximately 15,900,000 shares of Common Stock, as described below. 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 2,162,834 shares were outstanding and options covering 1,088,644 shares were exercisable as of March 31, 1996. In addition, Alliance has agreed to issue to Dr. Fields options exercisable for 150,000 shares within 30 days of the consummation of the Merger. WARRANTS. Alliance has issued warrants to purchase shares of Common Stock to the following persons in the amounts set forth below: (1) Mr. Wilms: warrants to purchase 2,000,000 shares at a purchase price of $2.50 per share (and in certain circumstances in a "cashless" transaction), and which expire on September 1, 1998, issued in connection with the VSI Loan; (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; 152 (3) GSA: warrants to purchase 1,250,000 shares at a purchase price of $1.50 per share, divided equally among warrants which become exercisable when the price of the Common Stock reaches $11, $13 and $15 per share and which expire on September 21, 1999, issued pursuant to the GSA Advisory Agreement, and additional warrants to purchase 2,500,000 shares issuable on the same terms (other than their respective expiration dates) upon consummation of the Merger; (4) Donaldson, Lufkin & Jenrette Securities Corporation: warrants to purchase 500,000 shares at a purchase price of $8.25 per share, issued in connection with the issuance of the Old Convertible Debentures, and additional warrants to purchase 250,000 shares at a purchase price of $8.25 per share which will vest when the price of the Common Stock reaches $13 per share following consummation of the Merger or any similar transaction, all of which expire on September 21, 1999; (5) Oppenheimer & 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 Old Convertible Debentures; (6) Cerberus Partners, L.P. and Canyon Partners, Inc.: warrants expiring in 2002 to purchase 250,000 shares of Common Stock at a purchase price of $3.75 per share, issued in connection with a firm commitment by Cerberus Partners, L.P. and affiliates of Canyon Partners, Inc. to Alliance in September 1995 relating to financing for Alliance's tender offer and consent solicitation; (7) Mr. Greathouse: warrants to purchase 250,000 shares on terms substantially the same as the warrants issued to GSA described in clause (3) above and which expire on August 15, 2000, issued in connection with his employment; (8) Dr. Fields: warrants to purchase 250,000 shares on terms substantially the same as the warrants issued to GSA described in clause (3) above and which expire on September 21, 2000, issued in connection with an agreement between Dr. Fields and Alliance upon his becoming a director; and (9) Friend: warrants to purchase 30,000 shares at a purchase price of $1.50 per share divided equally among warrants which become exercisable when the price of Common Stock reaches $11, $13 and $15 per share and which expire on September 21, 1999, issued in connection with the issuance of the Old Convertible Debentures. BGII OPTIONS. BGII has three stock option plans currently in effect: the 1991 Incentive Plan (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, 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, to the underwriters of the initial public offering of BGII's common stock, of which 2,000 warrants have been exercised. 153 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". DESCRIPTION OF CAPITAL STOCK Alliance's Articles of Incorporation, as amended (the "Articles of Incorporation"), authorize the issuance of 185,000,000 shares of capital stock, of which 175,000,000 shares are designated as Common Stock, par value $0.10 per share, and 10,000,000 shares are designated as Special Stock, par value $0.10 per share. As of March 31, 1996, approximately 12,988,000 shares of Common Stock were issued and outstanding and no shares of Special Stock were issued and outstanding. See "Security Ownership of Certain Beneficial Holders and Management". Alliance expects to issue approximately 735,000 shares of Common Stock to BGII stockholders and 933,000 shares of Common Stock in partial satisfaction of BGII employee contract termination costs and performance unit awards, and 350,000 shares of 15% Preferred Stock pursuant to the Merger Agreement (in each case, based on 10,799,501 shares of BGII common stock outstanding, less 1,000,000 shares owned by Alliance and a Common Stock price of $4.00 per share) and expects to issue approximately 9,450,000 shares of Common Stock and no shares of Series E Preferred Stock upon Automatic Conversion of the New Convertible Debentures and as a financial advisory fee assuming the exchange of $50 million principal amount of New Convertible Debentures and no election by the holders of New Convertible Debentures to receive Series E Preferred Stock in the conversion and 1,250,000 shares of Common Stock in the Private Placement (based on a Common Stock price of $4.00 per share) and 150,000 shares of 15% Preferred Stock in the 15% Preferred Stock Offering. COMMON STOCK Holders of Common Stock are entitled to cast one vote per share on all matters on which Alliance's stockholders are entitled to vote. The number of votes required to take any action by Alliance's stockholders are as provided in Title 7 of the Nevada Revised Statutes (the "Nevada Revised Statutes") or the Articles of Incorporation. Holders of Common Stock are not entitled to cumulate their votes. Holders of Common Stock are entitled to receive dividends when and as declared by the Alliance Board out of funds legally available for the payment thereof. The Articles of Incorporation provide that once the subscription price or par value of any share of Common Stock has been paid in, such share shall be non-assessable and shall not be subject to assessment to pay the debts of Alliance. Subject to any preferential rights which may be granted to holders of certain series of Special Stock, holders of Common Stock are entitled to share ratably in all assets of Alliance that are legally available for distribution to its stockholders in the event of its liquidation or dissolution. Holders of Common Stock have no preemptive rights nor are there any subscription, redemption or conversion privileges associated with the Common Stock. The Common Stock is quoted on the NASDAQ NMS under the symbol "ALLY". SPECIAL STOCK The Articles of Incorporation provide that the Special Stock may be issued from time to time upon such terms and conditions and for such consideration as may be provided by the Board. The Special Stock may be issued in one or more series, each series having such designations, rights, preferences and privileges as may be determined by the Board at the time of issuance. Alliance has no current intention to issue any series of Special Stock with the exception of the 15% Preferred Stock and the Series E Preferred Stock described herein. 154 15% NON-VOTING PAY-IN-KIND SPECIAL STOCK, SERIES B Alliance's Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof (the "15% Preferred Stock Certificate of Designations") of the 15% Non-Voting Pay-in-Kind Special Stock, Series B (previously defined as the "15% Preferred Stock") provides that holders of shares of 15% Preferred Stock are entitled to receive quarterly dividends, as and when declared by the Alliance Board, in an amount per share equal to $3.75 payable in cash, except that Alliance may at its option pay any such dividend accruing through and including the Series B Dividend Payment Date (as defined below) occurring next after the seventh anniversary of the effective time of the Merger in whole or in part in additional shares of 15% Preferred Stock (or fractions thereof) in an amount equal to such dividend, with each share of 15% Preferred Stock valued at $100, provided that after the first Series B Dividend Payment Date occurring next after the fifth anniversary of the effective time of the Merger the portion of any such dividend that may be so paid is limited to $2.00. Dividends are payable on the first day of the first, fourth, seventh and tenth months of each year following the date of initial issuance beginning on the first day of the fourth month following the date of initial issuance or such other dates as set by the Alliance Board (each a "Series B Dividend Payment Date"). Dividends are cumulative and will accrue from and after the date of initial issuance. Dividends payable for any partial dividend period (including the period from May 3, 1996 until the first day of the month next following the month in which the date of initial issuance occurred) will be computed on the basis of the actual days elapsed in such period over a year of 365 or 366 days. Unless all dividends that have accrued are paid on the 15% Preferred Stock, no dividend or other distribution can be paid to holders of any equity security ranking junior to or pari passu with the 15% Preferred Stock (including the Series E Preferred Stock) and no shares of such junior security can be purchased or redeemed by Alliance. Alliance currently expects that so long as the 15% Preferred Stock remains outstanding, it will, subject to the terms thereof, pay dividends accruing through the first dividend payment date occurring after the seventh anniversary of the effective time of the Merger on the 15% Preferred Stock in additional shares of such stock. Upon liquidation, the holders of shares of 15% Preferred Stock are entitled (subject to prior preferences and other rights of any senior securities and on a parity with other securities ranking equally) to be paid out of assets of Alliance in cash or property valued at its fair market value (as determined in good faith by the Alliance Board) an amount equal to $100 plus an amount equal to all accrued and unpaid dividends and distributions thereon. Alliance may not issue equity securities ranking senior in right of payment to the 15% Preferred Stock. Therefore, immediately following the Merger, no equity security will be senior to or pari passu with the 15% Preferred Stock and only the Common Stock and Series E Preferred Stock will be junior to the 15% Preferred Stock. The 15% Preferred Stock has no voting rights except as required by law and except in the case where dividends payable on shares of the 15% Preferred Stock have been in arrears for six consecutive Series B Dividend Payment Dates, at which time the number of directors constituting the Alliance Board will be increased by two and the holders of shares of 15% Preferred Stock will have the right, voting separately as a class, to elect two directors to the Alliance Board until all dividends accumulated on such shares have been paid or set apart for payment in full. Alliance may at its option redeem all, or any number less than all, of the outstanding shares of 15% Preferred Stock at any time at a price per share equal to $100 per share plus an amount equal to all accrued and unpaid dividends and distributions thereon to the date of redemption. Alliance is required to redeem at the above-mentioned price all of the outstanding shares of 15% Preferred Stock by the eighth anniversary of original issuance. If Alliance fails to redeem such shares on that date, then the number of directors constituting the Alliance Board will be increased by two and the holders of the shares of 15% Preferred Stock will have the right to elect two directors to the Alliance Board. The total number of directors which the holders of 15% Preferred Stock shall have the right to elect may not exceed two. Holders of the 15% Preferred Stock have no remedy other than those described above if Alliance fails to redeem all the outstanding shares of 15% Preferred Stock on such date. The terms of the Senior Notes (which are expected 155 to mature in seven years) will restrict Alliance's ability to effect any such redemption so long as any Senior Notes remain outstanding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources of the Company (Pro Forma)". Fractional shares of 15% Preferred Stock will entitle the holder to receive dividends and distributions and to exercise voting rights in proportion to the fractional holding. Alliance has applied for NASDAQ NMS quotation for the 15% Preferred Stock under the symbol "ALLYP". 10% NON-VOTING JUNIOR CONVERTIBLE PAY-IN-KIND SPECIAL STOCK, SERIES E Alliance's Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof (the "Series E Certificate of Designations") of the 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E (previously defined as the "Series E Preferred Stock") to be filed with the Secretary of State of Nevada provides that holders of shares of Series E Preferred Stock are entitled to receive quarterly dividends, as and when declared by the Alliance Board, in an amount per share equal to $2.50 payable in cash, except that Alliance may at its option pay any such dividend accruing through and including the Series E Dividend Payment Date (as defined below) occurring next after the fifteenth anniversary of the effective time of the Merger in whole or in part in additional shares of Series E Preferred Stock (or fractions thereof) in an amount equal to such dividend, with each share of Series E Preferred Stock valued at $100. Dividends are payable on the first day in each year of the first, fourth, seventh and tenth months of each year following the date of initial issuance beginning on the first day of the fourth month following the date of initial issuance or such other dates as set by the Alliance Board (each a "Series E Dividend Payment Date"). Dividends are cumulative and will accrue from and after the date of initial issuance. Dividends payable for any partial dividend period (including the period from the date of initial issuance until the first day of the month next following the month in which the date of initial issuance occurred) will be computed on the basis of the actual days elapsed in such period over a year of 365 or 366 days. Unless all dividends that have accrued are paid on the Series E Preferred Stock, no dividend or other distribution can be paid to holders of any equity security ranking junior to or pari passu with the Series E Preferred Stock and no shares of such junior security can be purchased or redeemed by Alliance. Alliance currently expects that so long as the Series E Preferred Stock remains outstanding, it will, subject to the terms thereof, pay dividends accruing through the first Series E Dividend Payment Date occurring after the fifteenth anniversary of the effective time of the Merger on the Series E Preferred Stock in additional shares of such stock. Shares of Series E Preferred Stock are convertible into shares of Common Stock at any time, initially at a conversion price of $6.56 per share, subject to adjustment as provided below (the "Series E Conversion Price"). The right to convert shares of Series E Preferred Stock called for redemption will expire at the close of business on the fifth business day prior to the redemption date. The Series E Conversion Price is subject to adjustment in certain events, including (i) dividends (and other distributions) payable in shares of Common Stock on any class of capital stock of Alliance, (ii) the issuance to all holders of shares of Common Stock or rights or warrants entitling them to subscribe for or purchase shares of Common Stock at less than the current market price (as defined in the Series E Certificate of Designations), (iii) subdivisions, combinations and reclassifications of shares of Common Stock, (iv) certain tender offers by Alliance or any subsidiary of Alliance for shares of Common Stock and (v) distributions by Alliance to all holders of shares of Common Stock of evidences of indebtedness, securities other than shares of Common Stock or other assets (including securities but excluding those dividends, rights, warrants and distributions referred to above and excluding dividends and distributions paid in cash or other property out of the retained earnings of Alliance), provided that, in the event that the fair market value of the assets, evidences of indebtedness or other securities so distributed applicable to one share of Common Stock equals or exceeds such current market price per share of Common Stock or such current market price exceeds such fair market value by less than $0.10 per share, the Series E Conversion Price will not be adjusted until such time as the cumulative amount of all such distributions exceed $0.10 per share. 156 In addition to the foregoing adjustments, Alliance is permitted to make such reductions in the Series E Conversion Price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of the shares of Common Stock. In case of certain reclassifications, consolidations or mergers to which Alliance is a party or the transfer of all or substantially all of the assets of Alliance, each share of Series E Preferred Stock then outstanding would, without the consent of any holders of such shares, become convertible only into the kind and amount of securities, cash and other property receivable upon the reclassification, consolidation, merger or transfer by a holder of the number of shares of Common Stock into which such shares might have been converted immediately prior to such reclassification, consolidation, merger or transfer (assuming such holder of shares of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares). Fractional shares of Common Stock will not be issued upon conversion, but, in lieu thereof, Alliance will pay a cash adjustment based upon market price (as determined in accordance with the Series E Certificate of Designations). Fractional shares of Series E Preferred Stock may be issued under certain circumstances (including in payment of dividends payable in shares of Series E Preferred Stock) and will entitle the holder to receive dividends and distributions and to exercise voting rights in proportion to the fractional holding. Upon liquidation, the holders of shares of Series E Preferred Stock are entitled (subject to prior preferences and other rights of any senior equity securities including the 15% Preferred Stock and on a parity with other securities ranking equally) to be paid out of assets of Alliance in cash or property valued at its fair market value (as determined in good faith by the Alliance Board) an amount equal to $100 plus an amount equal to all accrued and unpaid dividends and distributions thereon. The Series E Preferred Stock has no voting rights except as required by law and except in the case where dividends payable on shares of the Series E Preferred Stock have been in arrears for six consecutive Series E Dividend Payment Dates, at which time the number of directors constituting the Alliance Board will be increased by two and the holders of shares of Series E Preferred Stock, together with the holders of any other class of Special Stock ranking on a parity with the Series E Preferred Stock as to the payment of dividends, will have the right, voting separately as a class, to elect two directors to the Alliance Board until all dividends accumulated on such shares have been paid or set apart for payment in full. Alliance may at its option redeem all, or any number less than all, of the outstanding shares of Series E Preferred Stock at any time at a price per share equal to $100 per share plus an amount equal to all accrued and unpaid dividends and distributions thereon to the date of redemption. PROVISIONS APPLICABLE TO CERTAIN HOLDERS The Nevada Revised Statutes contains a control share provision with respect to the acquisition of more than 20% of the voting shares of a Nevada corporation. Alliance, however, has opted out of this provision in accordance with the Nevada Revised Statutes by adopting an amendment to its by-laws to such effect. INTEREST IN OLD CONVERTIBLE DEBENTURES Based upon Alliance's records and upon information provided to Alliance by its directors, executive officers and affiliates, neither Alliance nor any associate or subsidiary of Alliance nor any of the directors or executive officers of Alliance, or any of its affiliates or its subsidiaries, has effected any transactions in the Old Convertible Debentures during the 40 business days preceding the date of this filing. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE OLD CONVERTIBLE DEBENTURES Neither Alliance nor any of its affiliates, directors or executive officers, or any of the executive officers or directors of its subsidiaries, is a party to any contract, arrangement, understanding or relationship with any other person relating, directly or indirectly, to the Exchange Offer with respect to any securities of Alliance 157 (including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies, consents or authorizations), except as described in "The Exchange Offer -- Exchange Agent and Information Agent" and "-- Dealer Managers". LEGAL MATTERS Certain legal matters related to the Series E Preferred Stock and Common Stock to be issued upon the conversion of the New Convertible Debentures are being passed upon for Alliance by Schreck, Jones, Bernhard, Woloson & Godfrey, Las Vegas, Nevada. Certain legal matters relating to the New Convertible Debentures are being passed upon for Alliance by Milbank, Tweed, Hadley & McCloy, New York, New York. EXPERTS The consolidated financial statements of Alliance Gaming Corporation and subsidiaries as of June 30, 1994 and 1995, and for each of the years in the three-year period ended June 30, 1995 included herein have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to a change in the method of accounting for income taxes, effective July 1, 1993. As noted under "Forecast of Operations", KPMG Peat Marwick LLP has not examined the Forecast presented under "Forecast of Operations" and, accordingly, does not express an opinion or any other form of assurance with respect thereto. The consolidated balance sheets of BGII as of December 31, 1994 and 1995, and the consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 included herein have been included herein in reliance upon the report of Coopers & Lybrand L.L.P., independent accountants, appearing elsewhere herein, given on the authority of that firm as experts in accounting and auditing. As noted under "Forecast of Operations", Coopers & Lybrand L.L.P. neither examined nor compiled nor had any other involvement with the preparation of the Forecast presented under "Forecast of Operations" and accordingly does not express an opinion or any other form of assurance with respect thereto, nor do they assume any responsibility for the Forecast. 158 INDEX TO FINANCIAL STATEMENTS
PAGE ALLIANCE GAMING CORPORATION AUDITED CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report........................................................................ F-2 Consolidated Balance Sheets as of June 30, 1994 and 1995............................................ F-3 Consolidated Statements of Operations for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-5 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended June 30, 1993, 1994 and 1995............................................................................................... F-6 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1993, 1994 and 1995....... F-7 Notes to Consolidated Financial Statements.......................................................... F-8-F-21 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 1995 (audited) and March 31, 1996 (unaudited)........................................................................................ F-22 Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 1995 and 1996........................................................................................... F-23 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1995 and 1996........................................................................................... F-24 Notes to Unaudited Condensed Consolidated Financial Statements...................................... F-25-F-29 BALLY GAMING INTERNATIONAL, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants................................................................... F-30 Consolidated Balance Sheets, December 31, 1994 and 1995............................................. F-31 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995.......... F-32 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995............................................................................................... F-33 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995.......... F-34 Notes to Consolidated Financial Statements.......................................................... F-35-F-63 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of December 31, 1995 (audited) and March 31, 1996 (unaudited)........................................................................................ F-64 Consolidated Statements of Operations (unaudited) -- for the Three Months Ended March 31, 1995 and 1996............................................................................................... F-65 Consolidated Statement of Stockholders' Equity (unaudited) -- for the Three Months Ended March 31, 1996............................................................................................... F-66 Condensed Consolidated Statements of Cash Flows (unaudited) -- for the Three Months Ended March 31, 1995 and 1996...................................................................................... F-67 Notes to Condensed Consolidated Financial Statements (unaudited).................................... F-68-F-81
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, $.10 par value; authorized 10,000,000 shares; issued 1,333,333 (1994 and 1995).................................................................................. 133 133 Paid-in capital......................................................................... 26,716 32,134 Unrealized loss on securities available for sale, net................................... (421) (316) Accumulated deficit..................................................................... (12,380) (23,131) ---------- ---------- Total stockholders' equity............................................................ 15,099 9,985 ---------- ---------- $ 119,416 $ 126,348 ---------- ---------- ---------- ----------
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 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Gaming: Routes................................................................... $ 96,282 $ 102,830 $ 106,827 Casinos and taverns...................................................... 12,526 15,679 21,287 Food and beverage sales.................................................... 4,184 4,480 3,847 Net equipment sales........................................................ 99 65 27 ---------- ---------- ---------- 113,091 123,054 131,988 ---------- ---------- ---------- Costs and expenses: Cost of gaming: Routes................................................................... 72,614 76,332 79,875 Casinos and taverns...................................................... 8,667 11,871 11,436 Cost of food and beverage.................................................. 2,876 3,084 2,795 Cost of equipment sales.................................................... 49 20 12 Selling, general & administrative.......................................... 12,667 13,555 14,633 Business development expenses.............................................. 900 1,192 7,843 Corporate expenses......................................................... 6,191 7,882 9,735 Bad debt expense........................................................... 461 705 400 Loss on abandoned small casinos............................................ -- 3,713 -- Loss on abandoned taverns.................................................. -- 2,638 -- Depreciation and amortization.............................................. 8,718 9,530 9,520 ---------- ---------- ---------- 113,143 130,522 136,249 ---------- ---------- ---------- Operating loss............................................................... (52) (7,468) (4,261) Other income (expense): Interest income............................................................ 998 2,084 2,798 Interest expense........................................................... (5,046) (6,830) (8,133) Minority share of income................................................... -- (506) (397) Equity in income of affiliate.............................................. -- -- 31 Other, net................................................................. 450 (167) (524) ---------- ---------- ---------- Loss before income taxes..................................................... (3,650) (12,887) (10,486) Income tax expense........................................................... -- (241) (265) ---------- ---------- ---------- Net loss..................................................................... $ (3,650) $ (13,128) $ (10,751) ---------- ---------- ---------- ---------- ---------- ---------- Net loss per common share.................................................... $(0.38) $(1.28) $(0.95) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding................................... 9,696 10,251 11,300 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. F-5 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1993, 1994 AND 1995 (IN THOUSANDS)
UNREALIZED RETAINED LOSS ON TOTAL COMMON STOCK SPECIAL STOCK EARNINGS SECURITIES STOCKHOLDERS' --------------- ---------------- PAID-IN (ACCUMULATED AVAILABLE EQUITY SHARES DOLLARS SHARES DOLLARS CAPITAL DEFICIT) FOR SALE ------------ ------ ------- ------ ------- ------- -------- ---------- 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-6 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 (used in) provided by financing activities........................... 2,430 45,742 (2,660) --------- --------- --------- Cash and cash equivalents: Increase (decrease) for year...................................................... (659) 27,505 (23,351) Balance, beginning of year........................................................ 10,239 9,580 37,085 --------- --------- --------- Balance, end of year.......................................................... $ 9,580 $ 37,085 $ 13,734 --------- --------- --------- --------- --------- ---------
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 cannot estimate when or how many of these locations will be obtained and subsequently disposed. 3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS In fiscal 1994, due to continuing losses from operations, negative cash flows and incompatibility with the Company's long-term growth strategy, the Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming market and 2) dispose of the currently operated small independent taverns on commercially reasonable terms as market conditions warrant. As a result of the decision to exit the downtown Las Vegas gaming market, the Company substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. The Company has entered into an agreement to sell all of its tavern locations to an unaffiliated third party. The sale is contingent upon, among other conditions, approval by Nevada gaming authorities. In addition to the items noted above, the Company's lease on the Mizpah Hotel and Casino has a remaining term of approximately 7.5 years with an option on the Company's behalf to terminate the lease arrangement with 120 days written notice at any time after December 31, 1995. The Company has notified the landlord of the Mizpah of its intention to exercise the termination clause of the lease at that time. As a result of this decision, the Company recognized an expense of $467,500 in fiscal 1994. 4. DEBT Long-term debt at June 30 consists of the following:
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 --------- ---------- ----------- (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)
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 12, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. Through a wholly-owned subsidiary, the Company originally purchased a 45% limited partnership interest in RCVP, a Mississippi limited partnership which owns the casino, all assets (including the gaming equipment) associated with the casino and certain adjacent parcels of land. As consideration for its 45% limited partnership interest, the Company paid $2,000,000 in cash and issued 600,000 shares of its common stock to RCC and its two shareholders. The 55% general partnership interest in RCVP was held by RCC. In connection with the completion of the casino, the Company funded a $3,250,000 advance to RCC on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to payments due to HFS). On March 29, 1995, the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in RCVP and increased its partnership interest. In exchange for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a financing fee payable to HFS) related to the completion of certain incomplete elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy), a related $652,000 cash payment by the Company to NGM and commitments by the Company and NGM to fund additional financing required to complete the project (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As a result of these transactions, RCVP assumed $1,304,000 of new debt of which 50% was payable to the Company. Under the adjusted partnership interests, RCC is entitled to receive 10% of the net available cash flows after debt service and other items, as defined, (which amount shall increase to 20% of cash above $35,000,000 (i.e., only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. This transaction was accounted for as an acquisition using the purchase method. Accordingly, the purchase price F-19 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 ------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNT) 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- 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) BGII agreement, the Company's tender offer and the level of cooperation of BGII's board of directors. Subsequent to filing its lawsuit against the Company, BGII adopted a poison pill provision designed to discourage the Company's acquisition efforts. In response to the poison pill adoption, the Company announced it had increased its tender offer to $13.00 per share of BGII common stock and increased to 5,400,000 the number of BGII common shares being sought in the tender offer. F-21 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, MARCH 31, 1995 1996 ---------- ----------- ASSETS Current assets: Cash, cash equivalents and securities available for sale............................... $ 37,414 $ 25,562 Receivables, net....................................................................... 3,316 2,060 Inventories............................................................................ 714 661 Prepaid expenses....................................................................... 4,148 3,289 Other.................................................................................. 517 486 ---------- ----------- Total current assets................................................................. 46,109 32,058 ---------- ----------- Property and equipment, net.............................................................. 50,352 52,065 Receivables, net......................................................................... 5,309 5,600 Excess of costs over net assets of an acquired business, net of accumulated amortization............................................................................ 3,842 2,074 Intangible assets, net of accumulated amortization....................................... 12,405 11,273 Investment in minority owned subsidiary.................................................. 1,585 -- Other.................................................................................... 6,746 8,218 ---------- ----------- Total assets....................................................................... $ 126,348 $ 111,288 ---------- ----------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of long-term debt................................................... $ 3,995 $ 4,041 Accounts payable....................................................................... 1,758 2,089 Accrued expenses, including due to related parties..................................... 8,610 10,345 ---------- ----------- Total current liabilities............................................................ 14,363 16,475 Long-term debt, less current maturities.................................................. 97,402 95,048 ---------- ----------- Other liabilities........................................................................ 3,955 4,325 ---------- ----------- Total liabilities.................................................................... 115,720 115,848 ---------- ----------- Commitments and contingencies Minority interest........................................................................ 643 1,035 Stockholders' equity (deficiency): Common stock, $.10 par value; authorized 175,000,000 shares; issued and outstanding 11,654,150 and 12,987,483........................................................... 1,165 1,298 Special stock, $.10 par value; authorized 10,000,000 shares; issued and outstanding 1,333,333 and 0..................................................................... 133 -- Paid-in capital...................................................................... 32,134 32,134 Unrealized loss on securities available for sale, net................................ (316) (1,067) Accumulated deficit.................................................................. (23,131) (37,960) ---------- ----------- Total stockholders' equity (deficiency).............................................. 9,985 (5,595) ---------- ----------- Total liabilities and stockholders' equity (deficiency)............................ $ 126,348 $ 111,288 ---------- ----------- ---------- -----------
See notes to unaudited condensed consolidated financial statements. F-22 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1995 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996 --------- ---------- Revenues: Gaming: Routes................................................................................. $ 79,389 $ 81,111 Casinos and taverns.................................................................... 11,523 32,698 Food and beverage sales.................................................................. 2,842 2,976 Net equipment sales...................................................................... 22 11 --------- ---------- 93,776 116,796 --------- ---------- Costs and expenses: Cost of gaming: Routes................................................................................. 59,411 62,293 Casinos and taverns.................................................................... 6,743 14,726 Cost of food and beverage................................................................ 2,038 1,992 Cost of equipment sales.................................................................. 10 3 Selling, general and administrative...................................................... 9,279 14,308 Business development expenses............................................................ 5,647 14,233 Corporate expenses....................................................................... 6,258 4,606 Provision for impaired assets............................................................ -- 3,179 Depreciation and amortization............................................................ 6,934 7,328 --------- ---------- 96,320 122,668 --------- ---------- Operating loss........................................................................... (2,544) (5,872) Other income (expense): Interest income.......................................................................... 2,235 1,206 Interest expense......................................................................... (5,844) (6,341) Minority share of income................................................................. (252) (708) Royalty Fee.............................................................................. (27) (2,931) Other, net............................................................................... 33 398 --------- ---------- Loss before income taxes................................................................... (6,399) (14,248) Income tax expense......................................................................... (394) (581) --------- ---------- Net loss................................................................................... $ (6,793) $ (14,829) --------- ---------- --------- ---------- Loss per share of common stock............................................................. $ (.61) $ (1.21) --------- ---------- --------- ---------- Weighted average common shares outstanding................................................. 11,192 12,245 --------- ---------- --------- ----------
See notes to unaudited condensed consolidated financial statements. F-23 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 1995 AND 1996 (DOLLARS IN THOUSANDS)
1995 1996 ---------- ---------- Cash flows from operating activities: Net loss................................................................................ $ (6,793) $ (14,829) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization......................................................... 6,934 7,328 Loss on sale of property and equipment................................................ 825 277 Write off of other assets............................................................. 1,620 396 Provision for losses on receivables................................................... 380 46 Amortization of debt discounts........................................................ 237 177 Equity in losses of affiliate......................................................... 386 -- Provision for impaired assets......................................................... -- 3,179 Deferred income tax provision......................................................... -- 388 Net change in operating assets and liabilities: Decrease (increase) in: Inventories........................................................................... (14) 23 Prepaid expenses...................................................................... 1,627 864 Refundable income taxes............................................................... -- 361 Other assets.......................................................................... (47) 201 Increase (decrease) in: Accounts and slot contracts payable................................................... (271) 331 Accrued expenses...................................................................... (4,163) 735 Minority interests.................................................................... 251 392 Other liabilities..................................................................... (805) (402) ---------- ---------- Net cash provided by (used in) operating activities................................. 167 (533) ---------- ---------- Cash flows from investing activities: Additions to property and equipment..................................................... (7,816) (6,624) Proceeds from sale of property and equipment............................................ 328 2,213 Additions to receivables................................................................ (10,251) (9,303) Cash collections on receivables......................................................... 11,063 9,774 Net cash provided by acquisition of business............................................ 2,481 -- Investment in subsidiary................................................................ (1,585) -- Proceeds from sale (purchase) of securities available for sale.......................... (577) 12,950 Additions to intangible assets.......................................................... (282) (487) Additions to other long-term assets..................................................... (3,152) (3,268) ---------- ---------- Net cash (used in) provided by investing activities................................... (9,791) 5,255 ---------- ---------- Cash flows from financing activities: Reduction of long-term debt............................................................. (1,975) (3,167) Proceeds from long-term debt............................................................ -- 682 Issuance of stock....................................................................... 466 -- ---------- ---------- Net cash (used in) financing activities............................................... (1,509) (2,485) ---------- ---------- Cash and cash equivalents: Increase (decrease) for period.......................................................... (11,133) 2,237 Balance, beginning of period............................................................ 37,085 13,734 ---------- ---------- Balance, end of period................................................................ $ 25,952 $ 15,971 ---------- ---------- ---------- ----------
See notes to unaudited condensed consolidated financial statements. F-24 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED MARCH 31, 1995 AND 1996 1. ADJUSTMENTS FOR FAIR PRESENTATION In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results to be expected for a full year. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the financial statements and notes in the Company's annual report on Form 10-K. All intercompany accounts and transactions have been eliminated in consolidation. 2. RECLASSIFICATIONS Certain reclassifications have been made to prior period financial statements to conform with current period presentations. 3. CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE For balance sheet presentation the following account balances have been combined:
JUNE 30 MARCH 31 1995 1996 --------- ----------- (In thousands) Cash and cash equivalents............................................... $ 13,734 $ 15,971 Securities available for sale........................................... 23,680 9,591 --------- ----------- Total................................................................... $ 37,414 $ 25,562 --------- ----------- --------- -----------
As of March 31, 1996 unrealized losses for securities available for sale was $1,067,000 net of a tax effect of $550,000 and is included as a component of stockholders' equity. 4. RECEIVABLES The Company's gaming route operations from time to time involve making loans to location operators in order to participate in revenues over extended periods of time. These loans, generally made for buildouts, tenant improvements and initial operating expenses, are generally guaranteed on a full recourse basis by the location owner and are secured by the assets of the location. The majority of the loans are interest bearing and are expected to be repaid over a period of time not to exceed the life of the related revenue sharing agreement. The loans have varying payment terms requiring either weekly or monthly payments. Annual interest rates on the loans range from prime plus 1.5% to stated rates of 12% with various maturity dates ranging through 2007. The loans are expected to be repaid from the locations' cash flows or proceeds from the sale of the leaseholds. Receivables consist of the following:
JUNE 30 MARCH 31 1995 1996 --------- ----------- (In thousands) Notes receivable--location operators.................................... $ 7,760 $ 6,160 Other receivables....................................................... 865 1,500 --------- ----------- 8,625 7,660 Less current amounts.................................................... (3,316) (2,060) --------- ----------- Long-term receivables, excluding current amounts........................ $ 5,309 $ 5,600 --------- ----------- --------- -----------
F-25 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NINE MONTHS ENDED MARCH 31, 1995 AND 1996 4. RECEIVABLES (CONTINUED) Receivables are presented net of an allowance for doubtful accounts of approximately $1,659,000 and $1,363,000 as of June 30, 1995 and March 31, 1996, respectively. The allowance is allocated between current and long-term receivables on a pro rata basis related to notes receivable from location operators. 5. DEBT Long-term debt at June 30, 1995 and March 31, 1996 consists of the following:
JUNE 30 MARCH 31 1995 1996 ---------- ----------- (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 7.5%), net of discount of $747,619 and $570,551.............. 3,309 2,535 Hospitality Franchise Systems due 2001, 7.5%..................................... 9,065 8,173 National Gaming Mississippi due 2002, 10.0%...................................... 631 1,188 Other debt....................................................................... 3,392 2,193 ---------- ----------- 101,397 99,089 Less current maturities.......................................................... 3,995 4,041 ---------- ----------- Long-term debt, less current maturities.......................................... $ 97,402 $ 95,048 ---------- ----------- ---------- -----------
Accrued interest of approximately $1,991,000 (June 30) and $372,000 (March 31) is included in accrued expenses in the unaudited condensed consolidated balance sheets. Amounts due to stockholder include amounts owed to affiliates of Alfred H. Wilms, the Company's largest stockholder and a member of the Board of Directors of the Company, relating to funding of the Company's majority-controlled subsidiary, Video Services, Inc.'s ("VSI") gaming device route operations. 6. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to losses and the lack of available carrybacks, the Company recognized no federal income tax expense or benefit for the nine-month periods ended March 31, 1996 and 1995 other than the tax effects of changes in the unrealized gains (losses) on securities available for sale. At March 31, 1996, the Company had estimated net operating loss carryforwards for federal income tax purposes of approximately $48,000,000 which are available to offset future federal taxable income, if any, expiring 2007 through 2009. The deferred tax asset related to the net operating losses has been fully reserved. 7. IMPAIRED ASSETS The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, L.L.C. ("KGP") and Kansas Financial Partners, L.L.C. ("KFP"), both Kansas limited liability companies. Under an option agreement (the "option agreement") granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown") and The Racing Association of Kansas-Southeast F-26 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NINE MONTHS ENDED MARCH 31, 1995 AND 1996 7. IMPAIRED ASSETS (CONTINUED) ("TRAK Southeast"), KGP has been granted the exclusive right, which right expires on September 13, 2013, to operate gaming devices and/or casino-type gaming at Camptown's racing facility in Frontenac, Kansas if and when such gaming is permitted in Kansas. In December 1994, Camptown received a $3,205,000 loan from Boatmen's Bank which was guaranteed by KFP. The Company and Casino Magic Corporation each invested $1,580,000 in KFP which was used to purchase a certificate of deposit to collateralize its guaranty. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. The racing facility was temporarily closed on November 5, 1995 due to poor financial results. Camptown filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1996 and has stated an intention to reopen for business following bankruptcy reorganization. Boatmen's Bank demanded payment of the Camptown loan from KFP under the terms of the guaranty. KFP paid the loan and Boatmen's Bank returned KFP's certificate of deposit and KFP assumed Boatmen's Bank's position in the loan to Camptown which is secured by a second mortgage on Camptown's greyhound racing facility in Frontenac, Kansas. TRAK Southeast and Camptown continue to be bound by the Option Agreement. KFP intends to vigorously pursue all of its rights and remedies which may include, among other things, seeking authority from the bankruptcy court to commence a foreclosure action. In the case of a foreclosure action, KFP would be required to assume or pay the existing first mortgage of approximately $2,000,000 if KFP becomes the purchaser at any such sale. The Kansas legislature considered gaming bills during the 1996 session although none passed. There can be no assurance that gaming of any type will ever be legalized in Kansas. Management has evaluated this investment and determined it to be impaired because it does not appear to be recoverable. The Company fully reserved the net book value of approximately $1,585,000 through a charge to operations which has been recorded in the quarter ended March 31, 1996. Native American Investments, Inc. ("NAI"), a wholly-owned subsidiary has a contract to develop Class II and III gaming opportunities with an Indian tribe in California. Class II gaming is subject to the concurrent jurisdiction of the National Indian Gaming Commission ("NIGC") and the applicable Indian tribe. Class III gaming is a residual category composed of all forms of gaming that are not Class I gaming or Class II gaming, including casino style gaming. The contract is subject to negotiations resulting in satisfactory compacts with the state and approval of the contract by the NIGC. The Governor of California has to date refused to negotiate a compact covering Class III electronic gaming machines and house-banked games in California and is currently engaged in related litigation over the scope of gaming issues with certain Indian tribes. There can be no assurance as to the ultimate outcome of these litigation activities or successful completion of any part of the Company's project. On March 27, 1996, the United States Supreme Court ruled that a portion of the Indian Gaming Regulatory Act was unconstitutional. As a result, Federal courts cannot oversee negotiations between Indian tribes and state officials. The Company believes that this ruling will have a materially adverse effect upon its Native American casino development activities in California. Accordingly, Management has evaluated this investment and determined it to be impaired because it now appears to be unrecoverable. Management has fully reserved the net book value of approximately $1,594,000 through a charge to operations which has been recorded in the quarter ended March 31, 1996. Management will continue to monitor the status of Class II and III gaming in California. 8. RAINBOW CASINO VICKSBURG PARTNERSHIP On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. In connection with the completion of the casino and the acquisition of its 45% limited partnership interest, through a wholly-owned subsidiary, the Company funded a $3,250,000 advance to Rainbow Casino Corporation ("RCC") on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS"). On March 29, 1995 the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in Rainbow Casino Vicksburg Partnership ("RCVP") and increased its partnership interest and since that date the operations of RCVP have been consolidated. In F-27 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NINE MONTHS ENDED MARCH 31, 1995 AND 1996 8. RAINBOW CASINO VICKSBURG PARTNERSHIP (CONTINUED) exchange for commitments by the Company and National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, to provide additional financing (up to a maximum of $2,000,000 each) to be used for the completion of certain elements of the project which survived the opening of a casino (for which RCC was to have been responsible for, but failed to satisfy), the following occurred: (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. RCC is entitled to receive 10% of the net available cash flows from gaming revenues, as defined (which amount shall increase to 20% of the incremental cash flow generated from gaming revenues above $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. In addition, if during any continuous 12-month period until December 31, 1999 the casino achieved earnings from the project of at least $10,500,000 before deducting depreciation, amortization, royalty and income taxes, then the Company would be obligated to pay to certain principals of the original partnership, as additional consideration for the purchase of the general partnership interest, an amount aggregating $1,000,000 in cash or shares of Common Stock (at the Company's option) 180 days after the occurrence. The casino has achieved the required earnings as adjusted, and the Company is obligated to make the required payment or issue the Common Stock by September 30, 1996. 9. PROPOSED BGII MERGER TRANSACTION On October 18, 1995, the Company and Bally Gaming International, Inc. ("BGII") entered into a definitive merger agreement ("Merger") under which the outstanding shares of BGII common stock would each be exchanged for $13 in cash and shares of the Company's common stock. On January 22, 1996, the parties reached an agreement to amend the terms of the Merger. Under the amended agreement, each share of BGII common stock outstanding (10,799,501 as of September 30, 1995 less the 1,000,000 shares already owned by the Company) will receive $7.83 per share in cash, $3.57 per share in the Company's Series B Special Stock which is a Pay-in-Kind (PIK) preferred stock, and $0.30 per share of the Company's common stock totaling $11.70 per share of BGII common stock. The PIK preferred stock has an eight-year maturity and has a dividend rate of 15% as follows: PIK at 15% for the first five years; 8% PIK and 7% cash for years six and seven; and 15% cash in the eighth year of the term. All shares of Series B Special Stock are mandatorily redeemable by the eighth anniversary of the date of initial issuance. If the Company fails to redeem such shares by that date, then the number of directors constituting the Company's Board will be increased by two and the holders of the shares of Series B Special Stock will have the right to elect no more than two directors total to the Company's Board. The holders of Series B Special Stock will have no other remedies upon such failure to redeem the outstanding shares of Series B Special Stock by such date. Other than as described herein, the holders of shares of Series B Special Stock have no other voting rights except as stated by law. The Company intends to seek to have the Series B Special Stock quoted on NASDAQ. The aggregate amount of cash is unchanged from the previous agreement. On April 2, 1996, shareholders of both companies approved the pending Merger. The Company has filed registration statements with the Securities and Exchange Commission covering offerings of $140,000,000 senior secured notes and $15,000,000 Series B Special Stock, the proceeds of which will be used to fund the cash portion of the consideration of the merger agreement, to refinance existing BGII debt, and for working capital purposes. On April 17, 1996, both companies agreed to a Mutual Waiver of Agreement and Plan of Merger extending the termination date of the Merger until June 18, 1996. In addition the Company will pay interest at the rate of 5.5% on the cash portion of the merger consideration to BGII shareholders from May 3, 1996 through the effective date of the transaction. Similarly, the dividend on the PIK preferred stock portion of the merger consideration will begin accruing on May 3, 1996. In addition, in order to facilitate completion of F-28 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NINE MONTHS ENDED MARCH 31, 1995 AND 1996 9. PROPOSED BGII MERGER TRANSACTION (CONTINUED) the offerings, the Company has filed a registration statement in respect of an offer to exchange for its outstanding convertible subordinated debentures new convertible subordinated debentures which would be senior to the outstanding debentures. The new debentures would automatically convert on consummation of the Merger into shares of the Company's common stock at a conversion price of $5.56 per share (or, at the option of the holder, into a new series of junior convertible pay-in-kind preferred stock). The transaction is subject to obtaining customary regulatory approvals, the successful completion of the offerings, and certain other conditions. The merger is expected to occur no later than June 18, 1996. 10. LEGAL PROCEEDINGS In June 1995, Bally Entertainment Corporation ("BEC") asserted that a certain agreement between BEC and BGII (the "Noncompete Agreement") prohibits the use of the trade name "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1996. BGII believes such claim is entirely without merit since the restriction referred to expires on January 8, 1996 and in any event does not relate to the use of the "Bally" trade name, which is covered by the License Agreement. The restriction in the Noncompete Agreement will not have any impact on the combined company after the Merger since the effective time of the Merger contemplates a closing of the Merger after the restriction in the Noncompete Agreement lapses. BEC has not reasserted this position since it was informed by BGII in July 1995 that the restriction lapses on January 8, 1996. Consequently, BGII believes BEC has determined not to contest with BGII's position. BEC has also asserted that its permission is required for use of the "Bally" trade name by any entity other than BGII and that a merger between BGII and another company would violate the terms of the License Agreement. BGII has denied these claims and believes that the surviving company in a merger will be permitted to use the "Bally" trade name in accordance with the terms of such License Agreement. BGII believes that no breach of such License Agreement is caused by the Merger and the use of the "Bally" trade name by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995 the Company, the Company's Merger Subsidiary, and BGII commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, among other things, that the surviving company in the Merger will be permitted to use the "Bally" trade name in accordance with the terms of the License Agreement, and seeking injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced an action against BGII, Bally Gaming (a BGII subsidiary), the Company, and the Company's Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" trade name (the "BEC Action"). The BEC Action alleges that BGII's continued use of the trade name after the Merger will (1) constitute a prohibited assignment of BGII's rights to use the trade name and (2) exceed the scope of the license granted to BGII because BGII will be under control of the Company. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC Action. BGII, Bally Gaming, the Company, and the Company's Merger Subsidiary intend to vigorously defend their position in these actions. However, there can be no assurance that BEC will not be successful in its action to prohibit the surviving corporation in the Merger from using the "Bally" trade name. The loss of the "Bally" trade name may have a material adverse effect on the gaming machine operations of the surviving corporation in the Merger. 11. INITIAL SERIES SPECIAL STOCK In September 1993, Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") invested $5,000,000 in the Company in exchange for 1,333,333 shares of the Company's Non-Voting Junior Convertible Special Stock, which are convertible on a share for share basis into shares of the Company's Common Stock, and warrants to purchase up to 2,750,000 shares of common stock subject to certain conditions. In December 1995, Kirkland elected to convert the entire 1,333,333 shares of Special Stock into shares of the Company's Common Stock. F-29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Bally Gaming International, Inc. We have audited the accompanying consolidated balance sheets of Bally Gaming International, Inc. as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bally Gaming International, Inc. as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada February 13, 1996 F-30 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-31 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-32 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (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 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-33 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-34 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Bally Gaming International, Inc. (the "Company") was formed in August 1991 by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine manufacturing and distribution operations of BEC. These operations are conducted in Germany under the name Bally Wulff ("Wulff") and in the United States under the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs, manufactures (through the Company's wholly-owned subsidiary "Automaten") and distributes (through the Company's wholly-owned subsidiary "Vertriebs") wall-mounted, coin-operated, armless gaming devices similar to slot machines known as wall machines and also distributes recreational and amusement machines manufactured by third parties. Gaming designs, manufactures and distributes electronic slot machines and video gaming machines. Systems designs, assembles and sells computerized monitoring systems for slot and video gaming machines. In three transactions dated November 1991, July 1992 and September 1993, BEC divested substantially all its interests in the Company. Certain reclassifications have been made to prior years' financial statements to conform with the 1995 presentation. Hereafter, references to the Company are to the consolidated operations of Wulff, Gaming and Systems including the predecessor operations. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with original maturities of three months or less which are readily convertible into cash. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead. PROPERTY, PLANT AND EQUIPMENT Depreciation is provided by using the straight-line method over the estimated economic lives of the related assets and the terms of the applicable leases for leasehold improvements, which range from 3 to 30 years. Significant replacements and improvements are capitalized; other maintenance and repairs are expensed. The cost and accumulated depreciation of assets retired or otherwise disposed of are eliminated from the accounts and any resulting gain or loss is credited or charged to income as appropriate. INTANGIBLE AND OTHER ASSETS Intangible assets include the cost in excess of net assets of acquired businesses, which are being amortized using the straight-line method over periods ranging up to 40 years from dates of acquisition. In July 1992, the Company reached an agreement for an exclusive license until December 31, 2005, subject to extension, of a patent relating to the use of credit cards in gaming machines, and acquired 1% of the stock of Scotch Twist, Inc., a private company which granted this license, in exchange for the issuance of 100,001 shares of the Company's Common Stock. The licensing agreement requires the Company to commit F-35 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) $1.2 million in research and development costs related to the patent, plus any costs related to obtaining required regulatory approvals and licenses. As of December 31, 1995 approximately $1 million has been spent relative to this commitment. In July 1992 and again in March 1995, the Company and BEC amended a trademark license agreement ("License Agreement") pursuant to which the Company licensed the use of the name "Bally" for its use in the gaming machine business worldwide. Prior to 1995, the trademark licensing rights were being amortized using the straight-line method over a 20 year period. Pursuant to the terms of the March 1995 amendment, the Company reduced the remaining amortization period to five years effective March 31, 1995, resulting in an increase in amortization expense of approximately $315,000 for the year ended December 31, 1995. In January 1993, as part of an amendment to an intercorporate agreement between the Company and BEC, a long-term income tax receivable from BEC of $1,971,000 was exchanged for certain assets owned by BEC but managed by the Company, a reduction in the period from six years to three years of certain non- competition restrictions previously imposed on the Company by BEC and the settlement of certain other intercompany service arrangements with BEC. This transaction resulted in an increase to intangible assets of approximately $1,515,000 which is being amortized over a 6 year period. In June 1994, the Company acquired a paid up license for use of a patent on slot machines manufactured or sold during the life of the patent. The owner of the patent had recently filed an infringement action against various casinos in Atlantic City alleging infringement of a certain patent by these casino companies. As a result of the agreement, the casino operator defendants will be released from any claims relating to the past and future use of certain gaming machines manufactured by the Company. The Company agreed to pay $2 million over a 5 year period, without interest, for the paid up license. The asset is fully amortized as of December 31, 1995. The carrying value of intangible assets is periodically reviewed by management and impairment losses, if any, are recognized when the expected non-discounted future operating cash flows derived from such intangible assets is less than their carrying value. In 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") was issued which will be effective for the Company's year ended December 31, 1996. This statement requires that long-lived assets and certain identifiable intangible assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Management believes that if SFAS No. 121 had been early adopted at December 31, 1995, it would not have had a material effect on the financial position, results of operations or cash flows of the Company. INCOME TAXES Taxes on income of Wulff are provided at the tax rates applicable to the tax jurisdictions in Germany, as Wulff files separate foreign income tax returns. German withholding taxes and related United States federal income taxes are provided on Wulff earnings. REVENUE RECOGNITION The Company sells products on normal credit terms (90 days or less), over longer term installments of up to 36 months or more or through payments from the net winnings of the machines until the purchase price is paid. Revenue from sales of gaming machines and recreational and amusement equipment is normally recognized at the time products are shipped and title has passed to the customer. Revenue from sales of software included in computerized management systems is recognized at the time the systems are accepted by the customer, which normally coincides with installation of the equipment. Revenue from sales of hardware included in computerized management systems is recognized at the time the product is shipped. F-36 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency of Wulff is the Deutsche Mark. Assets and liabilities of Wulff are translated at the rate of exchange at the end of the period, and the statements of operations are translated at the average rate of exchange for the period. Translation adjustments are reflected as a separate component of stockholder's equity. Gains and losses on foreign currency transactions are included in net income. RESEARCH AND DEVELOPMENT The Company expenses product research and development costs as incurred. Research and development costs for the years ended December 31, 1993, 1994 and 1995 were $7.8 million, $8.7 million and $9.2 million, respectively. STOCK-BASED EMPLOYEE COMPENSATION AWARDS The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options and stock performance rights equals the market price on date of grant, no compensation expense is recognized. In 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") was issued which will be effective for the Company's year ended December 31, 1996. SFAS No. 123 provides alternative accounting treatment to APB No. 25 with respect to stock-based compensation and requires certain additional disclosures, including disclosures if the Company elects not to adopt the accounting requirements of SFAS No. 123. At this point, the Company does not anticipate adopting the accounting requirements of SFAS No. 123 and therefore in future years would expect to provide the required additional disclosures in the footnotes to the consolidated financial statements. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding totaling 10,685,054, 10,726,556 and 10,775,699 for the years ended December 31, 1993, 1994 and 1995. Common stock equivalents were not included in the computation of earnings (loss) per common share as their effect would have been antidilutive or immaterial. MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION On October 17, 1995, the Board of Directors of the Company approved an Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant to the Merger Agreement, the Company will merge with a subsidiary of Alliance ("Alliance Merger Subsidiary") with the Company being the surviving corporation and becoming a wholly-owned subsidiary of Alliance ("Alliance Merger"). The Merger Agreement provides that the Company's stockholders will have the right to receive, in exchange for each of their issued and outstanding shares of the Company's common stock (i) an amount of cash determined by dividing $76,700,000 by the number of shares of the Company's common stock outstanding immediately prior to the effective time of the Merger (other than shares which are held by the Company, Alliance or their respective subsidiaries) ("Converted Shares"), (ii) a fraction of a share of common stock, $.10 par value, of Alliance ("Alliance F-37 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-38 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-39 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) million) and the redemption price of $21.6 million. The Senior Secured Notes are collateralized by a pledge of the outstanding capital stock of Automaten and Vertriebs and a guarantee by Bally Gaming, Inc. The Notes are subject to redemption, at the option of the Company, at a redemption price equal to 103% and 101.5% of the principal amount of the Notes if redeemed during the twelve month period beginning on the anniversary of the issue date in the years 1996 and 1997, respectively. During March 1993, Vertriebs obtained two bank lines of credit for the purpose of financing the acquisition of assets acquired from an independent distributor. The agreements provide for borrowings of DM2,250,000 and DM16,000,000 (approximately $1,600,000 and $11,200,000) at December 31, 1995, respectively. Availability of the DM2,250,000 line of credit is reduced by DM250,000 per quarter and expires on March 31, 1998. Borrowings under this line of credit bear interest at 6.95%. The working capital revolving credit line of DM16,000,000 bears interest at a rate tied to an international borrowing rate plus 1% (5.3% at December 31, 1995) and is due on demand. These lines are collateralized by a pledge of the assets acquired. Approximately $12,751,000 was outstanding under these lines at December 31, 1995. In May 1993, Vertriebs obtained a DM16,300,000 (approximately $11,400,000 at December 31, 1995) revolving line of credit for general working capital purposes. This agreement bears interest at a rate tied to an international borrowing rate plus 1% (4.8% at December 31, 1995) and is due on demand. This line is collateralized by the receivables of Vertriebs. Approximately $3,144,000 was outstanding under this line at December 31, 1995. Vertriebs and Automaten are jointly and severally liable under these lines of credit. In March 1993, Bally Gaming, Inc. obtained a bank revolving line of credit which, as amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the credit agreement) inventory and accounts receivable with a maximum borrowing capacity of $15,000,000. Borrowings under this agreement, which expires March 31, 1997, bear interest at one and one-half percent above the bank's prime rate (10% at December 31, 1995). The Company must pay an annual facility fee of one-half of one percent of the maximum borrowing capacity and a monthly unused line fee of one-quarter of one percent of the difference between the maximum borrowing capacity and the average daily outstanding balance during any month. This line of credit is collateralized by property, plant and equipment and the eligible inventory and accounts receivable. The agreement and subsequent amendments also contain certain financial and other restrictive covenants, including the maintenance by Bally Gaming, Inc. of specified levels of minimum net working capital, working capital ratio, tangible net worth, net worth ratio, and minimum net income after taxes, all as defined in the credit agreement. Eligible borrowing capacity under this agreement at December 31, 1995 was approximately $15,000,000. Approximately $9,400,000 was outstanding at December 31, 1995. Aggregate annual maturities of long-term debt for the five years after December 31, 1995 are $14.9 million, $11.5 million, $43.6 million, $.3 million and none. STOCK PLANS, AWARDS AND RIGHTS 1991 INCENTIVE PLAN On November 6, 1991, the Company adopted the 1991 Incentive Plan of Bally Gaming International, Inc. (the "Plan") for directors (employee directors that are not members of the Compensation and Stock Option Committee of the Board of Directors), officers, key employees and consultants (collectively "Participants"). The Plan provides for the grant of stock options, stock appreciation rights ("SARs") and restricted stock (collectively "Awards"). The aggregate number of shares of common stock which may be delivered under the Plan and the 1991 Non-Employee Directors' Option Plan described below may not exceed 1,250,000 shares. No awards may be granted after November 6, 2001. The Plan provides for granting incentive as well as nonqualified stock options. Unless the Compensation and Stock Option Committee of the Board of Directors, in its discretion, determines otherwise, F-40 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) nonqualified stock options will be granted with an option price equal to the fair market value of the shares of common stock at the date of grant. Incentive stock options must be granted at not less than the fair market value of the shares of common stock at the date of grant. SARs are rights granted to Participants to receive shares of common stock and/or cash in an amount equal to the excess of (i) the fair market value of the shares of common stock on the date the SARs are exercised over (ii) the fair market value of the shares of common stock on the date the SARs were granted or, at the discretion of the Compensation and Stock Option Committee of the Board of Directors, the date the option was granted, if granted in tandem with an option granted on a different date. Restricted stock awards are rights granted to an employee to receive shares of common stock without payment but subject to forfeiture and other restrictions as set forth in the Plan. Generally, the restricted stock awarded, and the right to vote such stock or to receive dividends thereon, may not be sold, exchanged or otherwise disposed of during the restricted period. The Compensation and Stock Option Committee of the Board of Directors, in its discretion, will determine the restrictions and the forfeiture provisions applicable to restricted stock awards. The Plan provides that, at the discretion of the Compensation and Stock Option Committee of the Board of Directors, the Company may pay cash to Participants to insure that the Participant will receive the common stock net of all taxes imposed on such Participant related to the receipt of common stock and cash payments under the Plan. During 1991, restricted stock awards for 72,500 shares of common stock were granted under the Plan to key employees effective January 1, 1992. These awards are fully vested at December 31, 1995. In 1993, 100,000 shares of restricted common stock were granted to an officer of the Company. This award vests ratably over a five-year period. As of December 31, 1995, 40,000 shares of this award were vested. The Plan is administered by the Compensation and Stock Option Committee which will determine the participants to whom awards will be granted, the provisions applicable to each award and the time periods during which the awards may be exercised. Each option and SAR granted under the Plan may be exercisable for a term of not more than ten years after the date of grant. Incentive stock options and SARs granted in tandem with incentive stock options may only be exercised when the fair market value of common stock is greater than the option price. Certain other restrictions apply in connection with the timing of exercise. In the event of a change of control (as defined in the Plan), the date on which all SARs and options outstanding under the Plan may first be exercised is accelerated, and restrictions on restricted stock awards lapse. Generally, all SARs and options terminate 90 days after a change of control. 1991 NON-EMPLOYEE DIRECTORS' OPTION PLAN The 1991 Non-Employee Directors' Option Plan of the Company (the "Directors' Plan") was also adopted in November 1991. The Directors' Plan provides for the granting of stock options at the Company's initial public offering price to persons who, on the consummation of the Company's initial public offering, were members of the Board of Directors and who are not employees of the Company or its subsidiaries ("Non-Employee Directors"), and thereafter, options are granted at fair market value to persons who become members of the Board of Directors after the Company's initial public offering and who are not employees of the Company or its subsidiaries at the time they become members of the Board of Directors. Each of the Non-Employee Directors received, or will receive, an option, for ten years, to purchase 25,000 shares of common stock that vests over three years. Administration, the term of the Directors' Plan and change of control features for the Directors' Plan are consistent with the above described Plan. F-41 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-42 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-43 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-44 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-45 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) shares on the date of the awards and are recorded as unearned compensation and a capital contribution in the accompanying financial statements. Unearned compensation is charged to operations over the vesting periods of the awards. In connection with the Company's initial public offering, the Company and BEC entered into an intercorporate agreement which was amended in July 1992, and again in January 1993, which provided, among other things, that BEC would perform certain accounting, tax, treasury, legal, data processing, employee benefits and other services which the Company reasonably requests, and that the Company would reimburse BEC for the reasonable cost of all services rendered, including salaries and expenses of BEC's employees while they are rendering such services. Charges by BEC to the Company under the intercorporate agreement for the years ended December 31, 1993, 1994 and 1995 were $295,000, $90,000 and none, respectively. The Company participated in BEC's insurance program for general liability and directors' and officers' liability coverage through June 1993. Under these programs, insurance expenses were charged to the Company based on claims experience and for reimbursements of premium payments made by BEC. Insurance expense charged to the Company was $281,000, none, and none for the years ended December 31, 1993, 1994 and 1995, respectively. The Company had a long-term income tax receivable from BEC totaling $1,971,000 at December 31, 1992. As part of an amendment to the intercorporate agreement between the Company and BEC, which was entered into in January 1993, the income tax receivable of $1,971,000 was exchanged for certain assets previously owned by BEC but managed by the Company, a reduction in the period from six years to three years of certain non-competition restrictions previously imposed on the Company by BEC and settlement of certain other intercompany service arrangements with BEC. This transaction resulted in an increase to intangible assets of approximately $1,515,000 which is being amortized over a six-year period. Waters, McPherson, McNeill, P.C., a law firm of which Mr. McPherson, a director of the Company, is Senior Lawyer and Chairman, provides legal services to the Company, primarily relating to litigation involving the Company's former distributor in Louisiana. As of December 31, 1994 and 1995, the Company was indebted to the firm for approximately $200,000 and $480,000, respectively, for legal services rendered. During the years ended December 31, 1993, 1994 and 1995, Waters, McPherson, McNeill, P.C. billed the Company approximately $1.0 million, $1.3 million and $1.5 million, respectively, for legal services provided to the Company. EMPLOYEE BENEFIT PLANS Until February 28, 1994 the Company participated in BEC's defined contribution plans which covered certain full-time employees and which were considered part of the Company's overall retirement program. Effective March 1, 1994, the Company ceased its participation in BEC's defined contribution plans and formed its own plan. This program consists of a savings plan to which employees may contribute a percentage of their compensation. Employee contributions to the savings plan, up to certain limits, may be matched by the Company. The Company's contribution accrued for the savings plan for the years ended December 31, 1993, 1994 and 1995 was approximately $91,000, $120,000 and $140,000, respectively. COMMITMENTS AND CONTINGENCIES The Company is obligated under several patent agreements to pay royalties ranging from approximately $50 to $200 per game depending on the components in the gaming machines. Additionally, based on an amendment to the trademark licensing agreement between the Company and BEC dated March 31, 1995, the Company is obligated to pay a royalty on new machines sold of $25 to $30 per machine beginning on March 31, 1995 with a minimum annual royalty payment of $500,000 for the initial five-year term of the amended agreement, which is subject to annual renewals thereafter. Royalty expense for the years ended December 31, 1993, 1994 and 1995 was $1.1 million, $2.9 million and $3.0 million, respectively. F-46 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-47 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) the Company had in place a shareholders' right plan, commonly know as a "poison pill." The Cignetti Action sought an injunction requiring the Company to negotiate with all bona fide parties or other potential acquirees or to conduct an unencumbered market check in a manner designed to maximize shareholder value, and preventing the Company from implementing any unlawful barriers to the acquisition of the Company by any third party or taking other actions that would lessen its attractiveness as an acquisition candidate. The Cignetti Action also specifically requested an injunction barring triggering of the Company's alleged "poison pill" until full consideration was given to the Alliance Proposal (subsequently superseded by the execution of the Merger Agreement with Alliance), and sought compensatory damages. Also on or about June 19, 1995, a purported class action was filed in the Delaware Court of Chancery by a Company stockholder against the Company and its directors and Alliance (the "Strougo Action"). The Strougo Action alleged that the Alliance Proposal (subsequently superseded by the execution of the Alliance Merger Agreement) to acquire the Company stock was at a grossly unfair and inadequate price; that the Company's directors had breached their fiduciary duties by failing seriously to consider potential purchasers for the Company other than Alliance; and that the transaction proposed by Alliance was wrongful, unfair and harmful to the Company's public stockholders. The Strougo Action sought a declaration that defendants had breached their fiduciary duties; an injunction preventing the consummation of the Alliance transaction or requiring its rescission; an order requiring defendants to permit a stockholders' committee to participate in any process undertaken in connection with the sale of the Company; and compensatory damages. On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs") filed with the Court a motion to consolidate the four actions. On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an amended complaint (the "Amended Fiorella Action") that adopted certain allegations concerning self-dealing by the Company's directors in connection with the WMS Merger; added a claim relating to the Company's alleged failure to hold an annual meeting as required and added WMS as defendant. The Amended Fiorella Action also alleged that the Company intended, in violation of Delaware law, to sell Wulff without first seeking stockholder approval of the sale. The action sought an order enjoining defendants from proceeding with, consummating or closing the WMS Merger, or rescinding it if it closed; preventing the sale of Wulff without prior stockholder approval; declaring invalid the Company's agreement to pay WMS a fee if the WMS Merger is terminated by the Company in certain circumstances; compelling an auction of the Company and the provision of due diligence to Alliance; scheduling an immediate meeting of the Company stockholders; and awarding compensatory damages. The Company believes these lawsuits to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against the Company for the Company's failure to pay $4.8 million upon termination of the WMS Merger. The Company believes this lawsuit to be without merit and intends to vigorously defend this action. On November 22, 1995, the Company answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Merger by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising the Company that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of the Company to perform the WMS Merger. On February 8, 1996 WMS moved for summary judgement. The Company's response to that action is presently due on March 15, 1996. Pursuant to the Merger Agreement, Alliance has agreed to indemnify the directors and officers of the Company in certain circumstances. In June 1995, BEC asserted that a certain agreement between BEC and the Company (the "Non-compete Agreement") prohibits the use by the Company of the tradename "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1999. The Company believes such a claim is entirely without merit since the restriction referred F-48 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) to expired on January 8, 1996 and in any event does not relate to the use of the "Bally" tradename, which is covered by the License Agreement. The restriction in the Non-compete Agreement will not have any impact on the combined company after the Merger since the effective time of the Alliance Merger contemplates a closing of the Alliance Merger after the restriction in the Non-compete Agreement lapses. BEC has not reasserted this position since it was informed by the Company in July 1995 that the restriction lapses on January 8, 1996. Consequently, the Company believes BEC has determined not to contest the Company's position. On February 16, 1996, the Company received notice from BEC alleging that the Company has violated the License Agreement by, among other things, granting to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which provides Bally Gaming, Inc.'s revolving line of credit, a security interest in general intangibles. In such notice, BEC also stated that as a result of the foregoing, it was immediately terminating the License Agreement. The Company does not believe that it has violated the terms of the License Agreement and the Company will defend its position against BEC's claims. BEC has also asserted that its permission is required for use of the "Bally" tradename by any entity other than the Company and that a merger between the Company and another company would violate the terms of the License Agreement. The Company has denied these claims and believes that the surviving company in the Alliance Merger will be permitted to use the "Bally" tradename in accordance with the terms of such License Agreement. The Company believes that no breach of such License Agreement is caused by the Alliance Merger and use of the "Bally" tradename by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995, Alliance, the Alliance Merger Subsidiary and the Company commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, among other things, that the surviving company in the Alliance Merger will be permitted to use the "Bally" tradename in accordance with the terms of the License Agreement, and seeking injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced an action against the Company, Bally Gaming, Inc., Alliance and the Alliance Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" tradename (the "BEC Action"). The BEC Action alleges that the Company's continued use of the tradename after the Alliance Merger will (1) constitute a prohibited assignment of the Company's rights to use the tradename and (2) exceed the scope of the license granted to the Company because the Company will be under the control of Alliance. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC Action. On December 15, 1995 BEC filed a motion to dismiss, transfer to New Jersey or stay the Alliance Action pending resolution of the BEC Action. On December 15, 1995, BEC filed a motion for a preliminary injunction in the BEC Action. At a hearing on January 17, 1996, the court declined to issue a preliminary injunction, but held BEC's motion in abeyance pending the defendant's motion to dismiss and for summary judgment, which defendants had filed on December 26, 1995. After a second hearing on February 20, 1996 the court stated it would attempt to rule on both motions in fourteen days. The Company, Bally Gaming Inc., Alliance and the Alliance Merger Subsidiary intend to vigorously defend their position in these actions. In 1994, after an intensive federal investigation of Gaming's former distributor, eighteen individuals were indicted on charges of racketeering and fraud against Gaming and the Louisiana regulatory system. Among those indicted were the former distributor's stockholders, directors, employees and others alleged to be associated with organized crime. Fifteen entered pleas of guilty before trial and the remaining three were convicted in October 1995. Gaming was never a subject or target of the federal investigation. Prior to the conclusion of the federal case, the Company's activities with regard to its former VLT distributor in Louisiana were the subject of inquiries by gaming regulators and a report by the New Jersey Division of Gaming Enforcement ("DGE") dated August 24, 1995. The New Jersey Casino Control Commission ("CCC") has indicated that it may hold a hearing on the matter, but no date has been set at this time. F-49 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (TABULAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED) The New Jersey report makes no specific recommendations for action by the CCC. The gaming authorities in Ontario, Canada, who have investigated the matters, have issued a gaming registration to the Company's subsidiary Bally Gaming, Inc. on February 8, 1996. The DGE's report is similar in many respects to one prepared by the President of the Louisiana Economic Development and Gaming Corporation ("LEDGC") in January 1995. Hearings on that report were held in January 1995 and on February 7, 1995 the Board of Directors of the LEDGC found all of the allegations in its President's report to be without merit and granted a license to the Company and has announced that it will continue to monitor the Company's conduct in light of any further information disclosed as a result of the trial of the eighteen defendants (all of whom have now plead, or been found, guilty) and other regulatory proceedings. In November 1995, the operator of the land based casino in New Orleans filed for bankruptcy reorganization and ceased operations. That action resulted in the termination of funding for the LEDGC regulatory operations and, shortly thereafter, the Attorney General of Louisiana took control of the agency and effectively closed its operations. LEDGC's President and employees were dismissed. The foregoing occurred prior to the completion of review of the Company's pending application. The Company believes that the information contained in the DGE's report does not differ in any material respect from the prior report to the LEDGC the conclusions of which were found to be without merit in February 1995. An adverse determination by a gaming regulator in any jurisdiction could result in the loss of the Company's ability to do business in that jurisdiction. Further regulatory scrutiny in other jurisdictions would be likely to follow. The Company would appeal any adverse finding, as was the case when the Company successfully appealed the LEDGC President's decision in January 1995. On September 25, 1995, the Company was named as defendant in a class action lawsuit filed in the United States District Court, District of Nevada, by Larry Schreier on behalf of himself and all others similarly situated (the "plaintiffs"). The plaintiffs filed suit against the Company and approximately 45 other defendants (each a "defendant," and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people in playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable federal law. The Company believes the plaintiffs' lawsuit to be without merit and intends to vigorously defend these actions. While the ultimate results of the matters described above are not presently known, management does not expect that the results will have a material adverse effect on the Company's results of operations, financial position or cash flows. The Company and its subsidiaries are from time to time also subject to litigation incidental to the conduct of their business. The Company believes that the results of such litigation and other pending legal proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows. CONCENTRATION OF CREDIT RISK The financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts and notes receivable and customer obligations guaranteed by the Company. F-50 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-51 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-52 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-53 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-54 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-55 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-56 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-57 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-58 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-59 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-60 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-61 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-62 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-63 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1995 ------------ MARCH 31, 1996 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................................... $ 5,526 $ 2,009 Accounts and notes receivable, net of allowance for doubtful accounts of $16,281 and $17,054............................................................................ 87,176 82,872 Inventories, net: Raw materials and work-in process................................................. 16,066 17,342 Finished goods.................................................................... 35,525 34,619 ------------ ----------- 51,591 51,961 Other current assets................................................................ 3,983 4,450 ------------ ----------- Total current assets.......................................................... 148,276 141,292 Long-term notes receivable, net of allowance for doubtful accounts of $7,869 and $7,887............................................................................... 9,981 9,696 Property, plant and equipment, net.................................................... 23,244 23,615 Intangible assets, less accumulated amortization of $13,720 and $14,045............... 10,814 10,417 Other assets.......................................................................... 2,001 1,916 ------------ ----------- $ 194,316 $ 186,936 ------------ ----------- ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 18,556 $ 14,707 Accrued liabilities and other payables.............................................. 17,406 16,258 Current maturities of long-term debt................................................ 14,957 24,678 ------------ ----------- Total current liabilities......................................................... 50,919 55,643 ------------ ----------- 10 3/8 Senior Secured Notes due 1998, net of unamortized discount of $344 and $312.... 39,656 39,688 Other long-term debt, less current maturities......................................... 15,331 5,605 ------------ ----------- Commitments and contingencies Stockholders' equity: Preferred stock..................................................................... -- -- Common stock........................................................................ 108 108 Additional paid-in capital.......................................................... 68,345 68,345 Retained earnings................................................................... 1,842 1,329 Cumulative translation adjustments.................................................. 18,662 16,708 Unearned compensation............................................................... (547) (490) ------------ ----------- Total stockholders' equity........................................................ 88,410 86,000 ------------ ----------- $ 194,316 $ 186,936 ------------ ----------- ------------ -----------
See accompanying notes. F-64 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED ------------------------ MARCH 31, MARCH 31, 1995 1996 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Sales.................................................................................... $ 67,658 $ 57,435 Other.................................................................................... 631 1,109 ----------- ----------- 68,289 58,544 ----------- ----------- Costs and expenses: Cost of sales............................................................................ 43,500 37,757 Selling, general and administrative...................................................... 16,998 16,526 Provision for doubtful receivables....................................................... 1,154 991 Unusual charges.......................................................................... -- 996 ----------- ----------- 61,652 56,270 ----------- ----------- Operating income........................................................................... 6,637 2,274 Interest expense........................................................................... 1,733 1,665 ----------- ----------- Income before income taxes................................................................. 4,904 609 Provision for income taxes................................................................. 2,042 1,122 ----------- ----------- Net income (loss).......................................................................... $ 2,862 $ (513) ----------- ----------- ----------- ----------- Net income (loss) per common share......................................................... $0.27 $(0.05 ) ----------- ----------- ----------- ----------- Weighted average number of common shares and common stock equivalents outstanding.......... 10,751 10,805 ----------- ----------- ----------- -----------
See accompanying notes. F-65 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS) (UNAUDITED)
ADDITIONAL CUMULATIVE TOTAL COMMON PAID-IN- RETAINED TRANSLATION UNEARNED STOCKHOLDERS' STOCK CAPITAL EARNINGS ADJUSTMENTS COMPENSATION EQUITY ----------- ----------- ----------- ------------ ------------- ------------ Balance at December 31, 1995........ $ 108 $ 68,345 $ 1,842 $ 18,662 $ (547) $ 88,410 Net loss.......................... -- -- (513) -- -- (513) Foreign currency translation adjustments...................... -- -- -- (1,954) -- (1,954) Amortization of unearned compensation..................... -- -- -- -- 57 57 ----------- ----------- ----------- ------------ ------ ------------ Balance at March 31, 1996........... $ 108 $ 68,345 $ 1,329 $ 16,708 $ (490) $ 86,000 ----------- ----------- ----------- ------------ ------ ------------ ----------- ----------- ----------- ------------ ------ ------------
COMMON STOCK SHARE AMOUNTS ISSUED - -------------------------------------------------------------------------------------------------------- ----------- Balance at December 31, 1995 and March 31, 1996..................................................................................... 10,800 ----------- -----------
See accompanying notes. F-66 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED ------------------------ MARCH 31, MARCH 31, 1995 1996 ----------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss)........................................................................ $ 2,862 $ (513) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization.......................................................... 1,440 1,898 Provision for doubtful receivables..................................................... 1,154 991 Provision for inventory valuation...................................................... 158 538 Changes in operating assets and liabilities............................................ (10,795) (4,299) Other, net............................................................................... (424) (372) ----------- ----------- Cash used in operating activities...................................................... (5,605) (1,757) Cash flows from investing activities: Purchases of property, plant and equipment............................................... (2,232) (2,733) Proceeds from disposals of property, plant and equipment................................. 410 554 Other.................................................................................... (286) (39) ----------- ----------- Cash used in investing activities...................................................... (2,108) (2,218) Cash flows from financing activities: Net change in lines of credit............................................................ 2,602 817 Repayments of long-term debt............................................................. (914) (227) ----------- ----------- Cash provided by financing activities.................................................. 1,688 590 Effect of exchange rate changes on cash.................................................... 780 (132) ----------- ----------- Decrease in cash and cash equivalents...................................................... (5,245) (3,517) Cash and cash equivalents, beginning of period............................................. 9,204 5,526 ----------- ----------- Cash and cash equivalents, end of period................................................... $ 3,959 $ 2,009 ----------- ----------- ----------- ----------- Supplemental cash flows information: Operating activities include cash payments for interest and income taxes as follows: Interest paid............................................................................ $ 2,721 $ 2,598 Income taxes paid........................................................................ 1,333 1,264
See accompanying notes. F-67 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Bally Gaming International, Inc. (the "Company") was formed in August 1991 by Bally Entertainment Corporation ("BEC") to consolidate the gaming machine manufacturing and distribution operations of BEC. These operations are conducted in Germany under the name Bally Wulff ("Wulff") and in the United States under the name Bally Gaming ("Gaming") and Bally Systems ("Systems"). Wulff designs, manufactures (through its wholly-owned subsidiary Bally Wulff Automaten GmbH, "Automaten") and distributes (through its wholly-owned subsidiary Bally Wulff Vertriebs GmbH. ("Vertriebs")) wall-mounted, coin-operated, armless gaming machines similar to slot machines known as wall machines and also distributes recreational and amusement machines manufactured by third parties. Gaming designs, manufactures and distributes electronic slot machines and video gaming machines. Systems designs, assembles and sells computerized slot monitoring systems for slot and video gaming machines. In three transactions dated November 1991, July 1992, and September 1993, BEC divested all of its interests in the Company. The accompanying condensed consolidated financial statements reflect all adjustments which management believes necessary to present fairly the financial position, results of operations and cash flows of the Company. All such adjustments are of a normal recurring nature. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The condensed consolidated balance sheet at December 31, 1995 was derived from audited financial statements, but does not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to prior years' financial statements to conform with the 1996 presentation. MERGER AGREEMENT, TENDER OFFER AND RELATED LITIGATION On October 17, 1995 the Board of Directors of the Company approved an Agreement and Plan of Merger with Alliance Gaming Corporation ("Alliance") which was subsequently amended as of January 23, 1996 ("Merger Agreement"). Pursuant to the Merger Agreement, the Company will merge with a subsidiary of Alliance ("Alliance Merger Subsidiary") with the Company being the surviving corporation and becoming a wholly-owned subsidiary of Alliance ("Merger"). The Merger Agreement and certain mutual waivers entered into by the parties provide that the Company's stockholders will have the right to receive, in exchange for each of their issued and outstanding shares of the Company's common stock (i) an amount of cash determined by dividing $76,700,000 by the number of shares ("Converted Shares") of the Company's common stock outstanding immediately prior to the effective time of the Merger (other than shares which are held by the Company, Alliance or their respective subsidiaries) ("Cash Consideration"), plus interest accruing at a rate of 5.5% per annum from May 3, 1996 to the effective time of the merger, (ii) a fraction of a share of common stock, $.10 par value, of Alliance ("Alliance Common Stock") having a value determined in accordance with the Merger Agreement of $.30 (the "Common Stock Consideration") and (iii) that number of shares (or fractions thereof) of 15% Non-Voting Junior Special Stock, Series B, $.10 par value, of Alliance (the "Series B Special Stock") having a value determined in accordance with the Merger Agreement equal to $11.40 less the Cash Consideration, plus dividends accruing at a rate of 15% per annum from May 3, 1996. The obligations of Alliance and the Company to consummate the Merger are subject to various conditions, including obtaining requisite regulatory approvals and Alliance's obtaining $150 million in financing on commercially reasonable terms, at least two-thirds of which must be in the form of bank debt, other debt having a term of at least four years or equity. In conjunction with the Merger Agreement, Alliance terminated its unsolicited tender offer and consent solicitation and withdrew its litigation against the Company and the Company withdrew its litigation against Alliance. The Company and Alliance have extended the unilateral termination date of the Merger Agreement until June 18, 1996. F-68 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) LONG-TERM DEBT AND LINES OF CREDIT Long-term debt and lines of credit consists of the following (in thousands):
DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $344 and $312................................................... $ 39,656 $ 39,688 -------- -------------- -------- -------------- Other long-term debt: Wulff revolving lines of credit................................... $ 15,905 $ 16,289 Bally Gaming, Inc. revolving line of credit....................... 9,400 9,332 Notes payable 5% to 12%........................................... 4,983 4,662 Less current maturities........................................... (14,957) (24,678) -------- -------------- $ 15,331 $ 5,605 -------- -------------- -------- --------------
INCOME TAXES The Company's effective tax rate in the 1995 and 1996 periods differs from the U.S. statutory rate of 35% principally due to a higher effective tax rate on income earned in Germany and the lack of current tax benefits available for losses in the U.S. RESEARCH AND DEVELOPMENT Wulff, Gaming and Systems expense product research and development costs as incurred. Research and development costs were as follows (in thousands):
THREE MONTHS ENDED MARCH 31, -------------------- 1995 1996 --------- --------- Wulff................................................................................ $ 853 $ 868 Gaming............................................................................... 971 877 Systems.............................................................................. 473 502 --------- --------- $ 2,297 $ 2,247 --------- --------- --------- ---------
UNUSUAL CHARGES During the quarter ended March 31, 1996, the Company incurred approximately $1.0 million in legal, accounting, investment banking, public and investor relations and printing costs in connection with the pending Merger. All of these costs have been expensed as incurred. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding totaling 10,751,299 and 10,805,262 for the three months ended March 31, 1995 and 1996, respectively. COMMITMENTS AND CONTINGENCIES In conjunction with sales by Gaming, with recourse to Gaming and/or the Company, of certain trade receivables to third parties, Gaming and/or the Company have guaranteed amounts due from various customers of approximately $16.7 million at March 31, 1996. It is possible that one or more of Gaming's customers whose obligation has been guaranteed by Gaming and/or the Company may be unable to make payments as such become due. In this case Gaming and/or the Company may become responsible for repayment of at least a portion of such amounts over the term of the receivables. At March 31, 1996, amounts due from one customer under three contracts totaling $3.7 million were past due and these amounts and subsequent installments have not been paid. In general, under the terms of these contracts, Gaming and/or the Company may be responsible for monthly payments of the outstanding obligations. The F-69 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) third party holder of these contracts has not yet asserted demands under these contracts although such demands may be imminent. The Company intends to pursue a restructuring of the contracts although no assurance can be given that such a restructuring would be successfully negotiated. The outcome of this issue is not anticipated to have a material effect on the financial position, results of operations or cash flows of the Company. A provision for doubtful accounts of approximately $6.6 million on all receivables with recourse is included in the Company's allowance for doubtful accounts at March 31, 1996. During 1995, Wulff increased the amount of value added tax reserves by $1.0 million as a result of developments to date in an ongoing quadrennial audit of Wulff's returns for the years 1988 through 1991. While no written claim or assessment has been issued, the German tax authorities have orally proposed preliminary adjustments which range from $1.4 million (which has been accrued) to $5.0 million. The Company has accrued the liability as, based on current developments, the Company's estimate of the ultimate outcome and its experience in contesting these matters, it is probable that a liability has been incurred and a range of costs can be reasonably estimated. As the scope of the liability is better determined, there could be changes in the estimate of the ultimate liability. Management believes that the preliminary proposed adjustments are without merit and the ultimate results of the audit will not have a material adverse effect on the Company's financial position, results of operations or cash flows. In early 1995, the Governor of the State of New Mexico signed compacts with certain Indian tribes to permit casino gaming on tribal lands in New Mexico. These compacts went through appropriate federal approval processes and a number of casinos began operating. In July 1995 the Supreme Court of New Mexico found that the Governor did not have proper authority to sign the compacts. The Indian tribes have filed a lawsuit in federal court to seek resolution to this issue. Gaming and Systems had sold product to the Indian tribes prior to this ruling. At March 31, 1996, the Company has $4.6 million in accounts and notes receivable from an operator of two casinos for two different Indian tribes including $1.9 million of trade receivables sold to a third party with recourse to Gaming. This operator is currently four months ahead on payments. No provision for doubtful accounts for this customer has been included in the accompanying financial statements at March 31, 1996. Management believes the receivable is properly valued at March 31, 1996. As events change during 1996, management will reevaluate its estimate of the realizability of the receivable. On or about June 19, 1995, three purported class actions were filed in the Chancery Court of Delaware by Company stockholders against the Company and its directors (the "Fiorella, Cignetti and Neuman Actions"). The Fiorella and Neuman Actions in identical complaints alleged that the Company's directors had breached their fiduciary duties of good faith, fair dealing, loyalty and candor by approving the merger agreement with WMS Industries Inc. ("WMS Merger") instead of the unsolicited tender offer transaction proposed by Alliance ("Alliance Proposal"), by not properly exposing the Company for sale, and by failing to take all reasonable steps to maximize stockholder value. These actions sought injunctions to prevent the Company from proceeding with, consummating or closing the WMS Merger, and to rescind it should it be consummated, as well as compensatory damages. The Cignetti Action made similar allegations, and also alleged that the Company had in place a shareholders' right plan, commonly known as a "poison pill". The Cignetti Action sought an injunction requiring the Company to negotiate with all BONA FIDE parties or other potential acquirees or to conduct an unencumbered market check in a manner designed to maximize shareholder value and preventing the Company from implementing any unlawful barriers to the acquisition of the Company by any third party or taking other actions that would lessen its attractiveness as an acquisition candidate. The Cignetti Action also specifically requested an injunction barring triggering of the Company's alleged "poison pill" until full consideration was given to the Alliance Proposal (subsequently superseded by the execution of the Merger Agreement with Alliance) ("Alliance Merger"), and sought compensatory damages. Also on or about June 19, 1995, a purported class action was filed in the Delaware Court of Chancery by a Company stockholder against the Company and its directors and Alliance (the "Strougo Action"). The F-70 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Strougo Action alleged that the Alliance Proposal (subsequently superseded by the execution of the Alliance Merger Agreement) to acquire the Company stock was at a grossly unfair and inadequate price; that the Company's directors had breached their fiduciary duties by failing seriously to consider potential purchasers for the Company other than Alliance; and that the transaction proposed by Alliance was wrongful, unfair and harmful to the Company's public stockholders. The Strougo Action sought a declaration that defendants had breached their fiduciary duties; an injunction preventing the consummation of the Alliance transaction or requiring its rescission; an order requiring defendants to permit a stockholders' committee to participate in any process undertaken in connection with the sale of the Company; and compensatory damages. On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman Actions and the Strougo Action (collectively, the "Stockholder Plaintiffs") filed with the Court a motion to consolidate the four actions. On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an amended complaint (the "Amended Fiorella Action") that adopted certain allegations concerning self-dealing by the Company's directors in connection with the WMS Merger, added a claim relating to the Company's alleged failure to hold an annual meeting as required and added WMS as defendant. The Amended Fiorella Action also alleged that the Company intended, in violation of Delaware law, to sell Wulff without first seeking stockholder approval of the sale. The action sought an order enjoining defendants from proceeding with, consummating or closing the WMS Merger, or rescinding if it closed; preventing the sale of Wulff without prior stockholder approval; declaring invalid the Company's agreement to pay WMS a fee if the WMS Merger is terminated by the Company in certain circumstances; compelling an auction of the Company and the provision of due diligence to Alliance, scheduling an immediate meeting of the Company stockholders; and awarding compensatory damages. The Company believes these lawsuits to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against the Company for the Company's failure to pay $4.8 million upon termination of the WMS Merger. The Company believes the lawsuit to be without merit and intends to vigorously defend this action. On November 22, 1995, the Company answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Merger by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising the Company that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of the Company to perform the WMS Merger. On February 8, 1996 WMS moved for summary judgment. On April 2, 1996, the Company opposed WMS's motion for summary judgment and cross-moved for summary judgment. Pursuant to the Merger Agreement, Alliance has agreed to indemnify the directors and officers of the Company under certain circumstances. In June 1995, BEC asserted that a certain agreement between BEC and the Company (the "Non-compete Agreement") prohibits the use by the Company of the tradename "Bally" if it is merged with a company that is in the casino business within or without the United States and operates such business prior to January 8, 1999. The Company believes such a claim is entirely without merit since the restriction referred to expired on January 8, 1996 and in any event does not relate to the use of the "Bally" tradename, which is covered by the License Agreement. The restriction in the Non-compete Agreement will not have any impact on the combined company after the Merger since the effective time of the Alliance Merger contemplates a closing of the Alliance Merger after the restriction in the Non-compete Agreement lapses. BEC has not reasserted this position since it was informed by the Company in July 1995 that the restriction lapses on January 8, 1996. Consequently, the Company believes BEC has determined not to contest the Company's position. On February 16, 1996, the Company received notice from BEC alleging that the Company has violated the License Agreement by, among other things, granting to Marine Midland Business Loans, Inc. ("Marine Midland"), the lender which provides Bally Gaming, Inc.'s revolving line of credit, a security interest in F-71 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) general intangibles. In such notice, BEC also stated that as a result of the foregoing, it was immediately terminating the License Agreement. The Company does not believe that it has violated the terms of the License Agreement and the Company will defend its position against BEC's claims. BEC has also asserted that its permission is required for use of the "Bally" tradename by any entity other than the Company and that 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 the License Agreement. The Company believes that no breach of such License Agreement is caused by the Alliance Merger and the use of the "Bally" tradename by the surviving corporation. In a letter dated November 9, 1995, BEC reasserted its position. On November 20, 1995, Alliance, the Alliance Merger Subsidiary and the Company commenced an action against BEC in Federal District Court in Delaware seeking a declaratory judgment, among other things, that the surviving company in the Alliance Merger will be permitted to use the "Bally" tradename in accordance with the terms of the License Agreement, and seeking injunctive relief (the "Alliance Action"). On November 28, 1995, BEC commenced an action against the Company, Bally Gaming, Inc., Alliance and the Alliance Merger Subsidiary in Federal District Court in New Jersey to enjoin the defendants from using the "Bally" tradename (the "BEC" Action). The BEC Action alleges that the Company's continued use of the tradename after the Alliance Merger will (1) constitute a prohibited assignment of the Company's rights to use the tradename and (2) exceed the scope of the license granted to the Company because the Company will be under the control of Alliance. Also on November 28, 1995, BEC filed a motion to dismiss, transfer to New Jersey, or stay the Alliance Action pending resolution of the BEC action. On December 15, 1995 BEC filed a motion to dismiss, transfer to New Jersey or stay the Alliance Action pending resolution of the BEC Action. On December 15, 1995, BEC filed a motion for a preliminary injunction in the BEC Action. At a hearing on January 17, 1996, the court declined to issue a preliminary injunction, but held BEC's motion in abeyance pending the defendant's motion to dismiss and for summary judgment, which defendants had filed on December 26, 1995. Thereafter the parties advised the court that they are negotiating a settlement of the BEC Action. On March 29, 1996, at the court's request, the parties entered into a consent order providing for the administrative dismissal of the BEC Action, subject to its reopening should the settlement not be consummated. If the parties do not agree on a settlement, the Company, Bally Gaming, Inc., Alliance and the Alliance Merger Subsidiary intend to vigorously defend their position in these actions. In 1994, after an intensive federal investigation of Gaming's former distributor, eighteen individuals were indicted on charges of racketeering and fraud against Gaming and the Louisiana regulatory system. Among those indicted were the former distributor's stockholders, directors, employees and others alleged to be associated with organized crime. Fifteen entered pleas of guilty before trial and the remaining three were convicted in October 1995. The Company, its subsidiaries and its current employees were not subject to such investigation. Prior to the conclusion of the federal criminal case, the Company's activities with regard to its former VLT distributor in Louisiana were the subject of inquiries by gaming regulators and a report by the New Jersey Division of Gaming Enforcement ("DGE") dated August 24, 1995. The New Jersey Casino Control Commission ("CCC") has indicated that it may hold a hearing on the matter, but no date has been set at this time. The New Jersey report makes no specific recommendations for action by the CCC. The gaming authorities in Ontario, Canada, who have investigated the matters, issued a gaming registration to the Company's subsidiary Bally Gaming, Inc. on February 8, 1996. The DGE's report is similar in many respects to one prepared by the President of the Louisiana Economic Development and Gaming Corporation ("LEDGC") in January 1995. Hearings on that report were held in January 1995. On February 7, 1995 the Board of Directors of the LEDGC found all of the allegations in its President's report to be without merit and granted a license to the Company and has announced that it will continue to monitor the Company's conduct in light of any further information F-72 BALLY GAMING INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) disclosed as a result of the trial of the eighteen defendants (all of whom have now pled, or been found, guilty) and other regulatory proceedings. In November 1995, the operator of the land-based casino in New Orleans filed for bankruptcy reorganization and ceased operations. That action resulted in the termination of funding for the LEDGC regulatory operation and shortly thereafter the Attorney General of Louisiana took control of the agency and effectively closed its operations. LEDGC's President and employees were dismissed. The foregoing occurred prior to completion of review of the Company's pending application. The Company believes that the information contained in the DGE's report does not differ in any material respect from the prior report to the LEDGC the conclusions of which were found to be without merit in February 1995. An adverse determination by a gaming regulator in any jurisdiction could result in the loss of the Company's ability to do business in that jurisdiction. Further regulatory scrutiny in other jurisdictions would be likely to follow. The Company would appeal any adverse finding, as was the case when the Company successfully appealed the LEDGC President's decision in January 1995. On September 25, 1995, the Company was named as defendant in a class action lawsuit filed in the United States District Court, District of Nevada, by Larry Schreier on behalf of himself and all others similarly situated (the "plaintiffs"). The plaintiffs filed suit against the Company and approximately 45 other defendants (each a "defendant," and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people in playing their gaming machines based on a false belief concerning how these machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable federal law. The Company believes the plaintiffs' lawsuit to be without merit and intends to vigorously defend these actions. While the ultimate results of the matters described above are not presently known, management does not expect that the results will have a material adverse effect on the Company's results of operations, financial position or cash flows. The Company and its subsidiaries are from time to time also subject to litigation incidental to the conduct of their business. The Company believes that the results of such litigation and other pending legal proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements are presented to provide information regarding Bally Gaming, Inc., as guarantor of the Senior Secured Notes, and Automaten and Vertriebs, because substantially all of the common stock of these entities is pledged as collateral for the Senior Secured Notes. The results herein are presented by each legal entity rather than by business segment as presented elsewhere in these financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Such business segment information for Gaming and Wulff includes an allocation of parent company revenues and expenses whereas the following condensed consolidating financial statements do not reflect these allocations to the subsidiaries. The condensed consolidating financial statements should be read in conjunction with the notes to the condensed consolidated financial statements provided herein, as well as the notes to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the year and ended December 31, 1995. F-73 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1995 (IN THOUSANDS)
BALLY BALLY CONSOLIDATING BALLY GAMING BALLY 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 receivable, net of allowance for doubtful accounts of $48 and $7,821 for Vertriebs and Gaming.... -- 1,654 8,327 -- -- 9,981 Long-term receivables from affiliate.... 23,208 -- -- 28,380 (51,588) -- Property, plant and equipment, net...... 1,332 12,057 12,070 -- (2,215) 23,244 Intangible assets, less accumulated amortization of $11,527, $94 and $2,099 for Vertriebs, Gaming and Parent....... -- 6,089 156 4,569 -- 10,814 Investment in subsidiaries.............. -- -- -- 90,766 (90,766) -- Other assets............................ 332 561 113 497 498 2,001 ----------- --------- --------- ---------- ------------- ------------- $ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316 ----------- --------- --------- ---------- ------------- ------------- ----------- --------- --------- ---------- ------------- -------------
(Continued) F-74 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEETS--(CONTINUED) DECEMBER 31, 1995 (IN THOUSANDS)
BALLY BALLY CONSOLIDATING BALLY GAMING BALLY WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC PARENT ADJUSTMENTS INC. ----------- --------- --------- ---------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................... $ 557 $ 6,386 $ 19,342 $ 31 $ (7,760) $ 18,556 Accrued liabilities and other payables............................. 3,807 4,501 6,611 2,507 (20) 17,406 Current maturities of long-term debt................................. -- 14,333 212 412 -- 14,957 ----------- --------- --------- ---------- ------------- ------------- Total current liabilities........... 4,364 25,220 26,165 2,950 (7,780) 50,919 Long-term payables to affiliate......... -- 26,421 28,380 -- (54,801) -- 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $344 -- -- -- 39,656 -- 39,656 Other long-term debt, less current maturities............................. -- 4,721 9,435 1,175 -- 15,331 Commitments and contingencies Stockholders' equity: Preferred stock....................... -- -- -- -- -- -- Common stock.......................... 2,638 15,142 -- 108 (17,780) 108 Additional paid-in-capital............ 19,191 6,455 34,596 74,439 (66,336) 68,345 Retained earnings (accumulated deficit) 2,155 286 (5,273) 11,969 (7,295) 1,842 Cumulative translation adjustments.... 9,439 10,249 7 (206) (827) 18,662 Unearned compensation................. -- -- -- (547) -- (547) ----------- --------- --------- ---------- ------------- ------------- Total stockholders' equity.......... 33,423 32,132 29,330 85,763 (92,238) 88,410 ----------- --------- --------- ---------- ------------- ------------- $ 37,787 $ 88,494 $ 93,310 $ 129,544 $ (154,819) $ 194,316 ----------- --------- --------- ---------- ------------- ------------- ----------- --------- --------- ---------- ------------- -------------
F-75 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEETS MARCH 31, 1996 (IN THOUSANDS) (UNAUDITED)
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................... $ 502 $ 2,626 $ (1,119) $ -- $ -- $ 2,009 Accounts and notes receivable, net of allowance for doubtful accounts of $30, $7,319 and $9,705 for Automaten, Vertriebs and Gaming................................. 2,890 48,566 35,951 5,331 (9,866) 82,872 Inventories, net: Raw materials and work-in-process......... 5,295 -- 12,047 -- -- 17,342 Finished goods............................ 3,426 13,231 19,684 -- (1,722) 34,619 ----------- --------- --------- ---------- ------------- ------------- 8,721 13,231 31,731 -- (1,722) 51,961 Other current assets........................ 1,028 1,655 731 837 199 4,450 ----------- --------- --------- ---------- ------------- ------------- Total current assets.................... 13,141 66,078 67,294 6,168 (11,389) 141,292 Long-term notes receivable, net of allowance for doubtful accounts of $66 and $7,821 for Vertriebs and Gaming......................... -- 2,052 7,644 -- -- 9,696 Long-term receivables from affiliate.......... 24,325 -- -- 25,170 (49,495) -- Property, plant and equipment; net............ 1,149 12,703 11,866 -- (2,103) 23,615 Intangible assets, less accumulated amortization of $11,597, $100 and $2,348 for Vertriebs, Gaming and Parent................. -- 5,947 150 4,320 -- 10,417 Investment in subsidiaries.................... -- -- -- 90,766 (90,766) -- Other assets.................................. 313 524 113 449 517 1,916 ----------- --------- --------- ---------- ------------- ------------- $ 38,928 $ 87,304 $ 87,067 $ 126,873 $ (153,236) $ 186,936 ----------- --------- --------- ---------- ------------- ------------- ----------- --------- --------- ---------- ------------- -------------
(Continued) F-76 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEETS MARCH 31, 1996 (IN THOUSANDS) (UNAUDITED)
BALLY BALLY BALLY BALLY CONSOLIDATING GAMING WULFF WULFF GAMING AND OTHER INTERNATIONAL AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- --------- --------- ---------- ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 831 $ 5,637 $ 16,365 $ 31 $ (8,157) $ 14,707 Accrued liabilities and other payables....... 4,315 3,891 6,045 1,907 100 16,258 Current maturities of long-term debt......... -- 14,765 9,460 453 -- 24,678 ----------- --------- --------- ---------- ------------- ------------ Total current liabilities.............. 5,146 24,293 31,870 2,391 (8,057) $ 55,643 Long-term payables to affiliate................ -- 27,484 25,170 -- (52,654) -- 10 3/8% Senior Secured Notes due 1998, net of unamortized discount of $312.................. -- -- -- 39,688 -- 39,688 Other long-term debt, less current maturities.................................. -- 4,578 15 1,012 -- 5,605 Commitments and contingencies Stockholders' equity: Preferred stock.............................. -- -- -- -- -- -- Common stock................................. 2,638 15,142 -- 108 (17,780) 108 Additional paid-in-capital................... 19,191 6,455 34,596 74,439 (66,336) 68,345 Retained earnings (accumulated deficit)...... 3,546 87 (4,571) 9,931 (7,664) 1,329 Cumulative translation adjustments........... 8,407 9,265 (13) (206) (745) 16,708 Unearned compensation........................ -- -- -- (490) -- (490) ----------- --------- --------- ---------- ------------- ------------ Total stockholders' equity................... 33,782 30,949 30,012 83,782 (92,525) 86,000 ----------- --------- --------- ---------- ------------- ------------ $ 38,928 $ 87,304 $ 87,067 $ 126,873 $ (153,236) $ 186,936 ----------- --------- --------- ---------- ------------- ------------ ----------- --------- --------- ---------- ------------- ------------
F-77 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS) (UNAUDITED)
BALLY BALLY BALLY BALLY CONSOLIDATING GAMING WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- --------- --------- --------- ------------- ------------- Revenues: Sales................................ $ 18,742 $ 31,186 $ 33,991 $ -- $ (16,261) $ 67,658 Other................................ 282 732 127 335 (845) 631 ----------- --------- --------- --------- ------------- ------------- 19,024 31,918 34,118 335 (17,106) 68,289 ----------- --------- --------- --------- ------------- ------------- Costs and expenses: Cost of sales........................ 10,859 26,475 21,690 -- (15,524) 43,500 Selling, general and administrative...................... 2,292 5,782 7,387 1,533 4 16,998 Provision for doubtful receivables... 9 130 1,015 -- -- 1,154 ----------- --------- --------- --------- ------------- ------------- 13,160 32,387 30,092 1,533 (15,520) 61,652 ----------- --------- --------- --------- ------------- ------------- Operating income (loss)................ 5,864 (469) 4,026 (1,198) (1,586) 6,637 Interest expense....................... -- 329 1,038 1,161 (795) 1,733 ----------- --------- --------- --------- ------------- ------------- Income (loss) before income taxes...... 5,864 (798) 2,988 (2,359) (791) 4,904 Provision (benefit) for income taxes... 2,677 (363) 1,048 (995) (325) 2,042 ----------- --------- --------- --------- ------------- ------------- Net income (loss)...................... $ 3,187 $ (435) $ 1,940 $ (1,364) $ (466) $ 2,862 ----------- --------- --------- --------- ------------- ------------- ----------- --------- --------- --------- ------------- -------------
F-78 BALLY GAMING INTERNATIONAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS) (UNAUDITED)
BALLY BALLY BALLY BALLY CONSOLIDATING GAMING WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- --------- --------- --------- ------------- ------------- Revenues: Sales................................ $ 12,947 $ 28,025 $ 28,311 $ -- $ (11,848) $ 57,435 Other................................ 143 751 335 671 (791) 1,109 ----------- --------- --------- --------- ------------- ------------- 13,090 28,776 28,646 671 (12,639) 58,544 ----------- --------- --------- --------- ------------- ------------- Costs and expenses: Cost of sales........................ 8,540 22,289 18,440 -- (11,512) 37,757 Selling, general and administrative...................... 2,009 6,032 7,503 959 23 16,526 Provision for doubtful receivables... 12 360 619 -- -- 991 Unusual charges...................... -- -- 50 946 -- 996 ----------- --------- --------- --------- ------------- ------------- 10,561 28,681 26,612 1,905 (11,489) 56,270 ----------- --------- --------- --------- ------------- ------------- Operating income (loss)................ 2,529 95 2,034 (1,234) (1,150) 2,274 Interest expense....................... -- 330 972 1,113 (750) 1,665 ----------- --------- --------- --------- ------------- ------------- Income (loss) before income taxes...... 2,529 (235) 1,062 (2,347) (400) 609 Provision (benefit) for income taxes... 1,138 (36) 360 (309) (31) 1,122 ----------- --------- --------- --------- ------------- ------------- Net income (loss)...................... $ 1,391 $ (199) $ 702 $ (2,038) $ (369) $ (513) ----------- --------- --------- --------- ------------- ------------- ----------- --------- --------- --------- ------------- -------------
F-79 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1995 (IN THOUSANDS) (UNAUDITED)
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- ----------- --------- --------- ------------- ------------- Cash flows from operating activities: Net income (loss).............................. $ 3,187 $ (435) $ 1,940 $ (1,364) $ (466) $ 2,862 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization................ 516 652 514 248 (490) 1,440 Provision for doubtful receivables........... 9 130 1,015 -- -- 1,154 Provision for inventory valuation............ -- -- 158 -- -- 158 Changes in operating assets and liabilities................................. (3,927) (845) (6,574) (1,116) 1,667 (10,795) Other, net..................................... -- -- -- -- (424) (424) ----------- ----------- --------- --------- ------ ------------- Cash provided by (used in) operating activities................................ (215) (498) (2,947) (2,232) 287 (5,605) Cash flows from investing activities: Purchases of property, plant and equipment..... (386) (1,296) (550) -- -- (2,232) Proceeds from disposals of property, plant and equipment..................................... 11 399 -- -- -- 410 Other.......................................... -- -- -- -- (286) (286) ----------- ----------- --------- --------- ------ ------------- Cash used in investing activities.......... (375) (897) (550) -- (286) (2,108) Cash flows from financing activities: Net changes in lines of credit -- (388) 2,592 -- -- 2,204 Repayments of long-term debt................... -- (1) (396) (118) (1) (516) Change in payables to/receivables from affiliates.................................... -- (2,285) (65) 2,350 -- -- ----------- ----------- --------- --------- ------ ------------- Cash provided by (used in) financing activities................................ -- (2,674) 2,131 2,232 (1) 1,688 Effect of exchange rate changes on cash.......... 132 648 -- -- -- 780 ----------- ----------- --------- --------- ------ ------------- Decrease in cash and cash equivalents............ (458) (3,421) (1,366) -- -- (5,245) Cash and cash equivalents, beginning of period... 1,362 7,487 355 -- -- 9,204 ----------- ----------- --------- --------- ------ ------------- Cash and cash equivalents, end of period......... $ 904 $ 4,066 $ 1,011 $ -- $ -- $ 3,959 ----------- ----------- --------- --------- ------ ------------- ----------- ----------- --------- --------- ------ -------------
F-80 BALLY GAMING INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS) (UNAUDITED)
BALLY BALLY BALLY CONSOLIDATING BALLY GAMING WULFF WULFF GAMING, AND OTHER INTERNATIONAL, AUTOMATEN VERTRIEBS INC. PARENT ADJUSTMENTS INC. ----------- --------- --------- --------- --------------- ------------- Cash flows from operating activities: Net income (loss)............................... $ 1,391 $ (199) $ 702 $ (2,038) $ (369) $ (513) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation an amortization.................. 233 905 426 355 (21) 1,898 Provision for doubtful receivables:........... 12 360 619 -- -- 991 Provision for inventory valuation:............ -- -- 538 -- -- 538 Changes in operating assets and liabilities:................................. (581) (2,393) (1,072) (1,045) 792 (4,299) Other, net:..................................... -- 7 (20) -- (359) (372) ----------- --------- --------- --------- ----- ------------- Cash provided by (used in) operating activities:................................ 1,055 (1,320) 1,193 (2,728) 43 (1,757) Cash flows from investing activities: Purchase of property, plant and equipment....... (82) (2,428) (223) -- -- (2,733) Proceeds from disposals of property, plant and equipment...................................... -- 554 -- -- -- 554 Other........................................... -- 3 1 -- (43) (39) ----------- --------- --------- --------- ----- ------------- Cash used in investing activities........... (82) (1,871) (222) -- (43) (2,218) Cash flows from financing activities: Net change in lines of credit................... -- 885 (68) -- -- 817 Repayments of long-term debt.................... -- -- (104) (123) -- (227) Change in payables to/receivables from affiliates..................................... (1,787) 1,787 (2,851) 2,851 -- -- ----------- --------- --------- --------- ----- ------------- Cash provided by (used in) financing activities................................. (1,787) 2,672 (3,023) 2,728 -- 590 Effect of exchange rate changes on cash........... (37) (95) -- -- -- (132) ----------- --------- --------- --------- ----- ------------- Decrease in cash and cash equivalents............. (851) (614) (2,052) -- -- (3,517) Cash and cash equivalents, beginning of period.... 1,353 3,240 933 -- -- 5,526 ----------- --------- --------- --------- ----- ------------- Cash and cash equivalents, end of period.......... $ 502 $ 2,626 $ (1,119) $ -- $ -- $ 2,009 ----------- --------- --------- --------- ----- ------------- ----------- --------- --------- --------- ----- -------------
F-81 Facsimile copies of the Letter of Transmittal will be accepted. Letters of Transmittal, certificates for the Old Convertible Debentures and any other required documents should be sent by each debentureholder or his broker, dealer, commercial bank, trust company or other nominee to the Exchange Agent at one of the addresses set forth below: THE EXCHANGE AGENT IS: The Bank of New York BY MAIL OR BY HAND: The Bank of New York 101 Barclay Street, Corporate Trust Operations, 7E New York, New York 10286 Attention: Enrique Lopez Telephone: (212) 815-2742 BY FACSIMILE: (212) 571-3080 TOLL FREE NUMBER: (800) 254-2826 Any questions or requests for assistance or additional copies of this Prospectus, the Letter of Transmittal and/or the Notice of Guaranteed Delivery may be directed to the Information Agent at its telephone number and address set forth below. You may also contact your broker, dealer, commercial bank or trust company or other nominee for assistance concerning the Exchange Offers. THE INFORMATION AGENT IS: [LOGO] Wall Street Plaza New York, NY 10005 TOLL FREE NUMBER: (800) 223-2064 Banks and Brokerage Firms please call collect: (212) 440-9800 THE DEALER MANAGERS FOR THE EXCHANGE OFFER ARE: Deutsche Morgan Grenfell Jefferies & Company, Inc. Ladenburg, Thalmann & Co. Inc. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article VI of the Company's Articles of Incorporation limits the liability of the Company's directors and officers. It provides that a director or officer of the Company will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director or officer, except for liability (i) for acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) for the payment of dividends in violation of Section 78.300 of the Nevada General Corporation Law. It also provides that any repeal or modification of the foregoing provision 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. Section 78.751 of the Nevada General Corporation Law permits the Registrant to indemnify its directors and officers as follows: 1. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except any action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. 2. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been II-1 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibit 1.1 -- Form of Dealer Manager Agreement.(24) 2.1 -- Amended and Restated Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October 18, 1995. Incorporated by reference to Annex I to the Registrant's Joint Proxy Statement/Prospectus dated March 11, 1996.(24) 2.2 -- Mutual Waiver to Agreement and Plan of Merger dated as of April 17, 1996.(24) 2.3 -- 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.(12) 2.4 -- 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.(14) 2.5 -- Asset Purchase Agreement between Plantation Investments, Inc. and Richards- Schnack Development Corp. dated April 2, 1990.(1) 2.6 -- First Amendment to Agreement of Purchase and Sale between Plantation Investments, Inc. and Richards-Schnack Development Corp.(1) 2.7 -- Bill of Sale between Plantation Investments, Inc. and Richards-Schnack Development Corp.(1) 2.8 -- 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.(23) 3.1 -- Restated Articles of Incorporation of the Registrant, as amended.(16) 3.2 -- Revised By-Laws of the Registrant.(20) 4.1 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Special Stock and Qualifications, Limitations and Restrictions thereof of 15% Non-Voting Special Stock, Series B, $.10 par value, of Alliance Gaming Corporation. Incorporated by reference to Annex VII to the Registrant's Form S-4 Reg. No. 333-01527. 4.2 -- Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Special Stock and Qualifications, Limitations and Restrictions thereof of 15% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, par value $.10 per share, of Alliance Gaming Corporation.(24) 4.3 -- Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment with Video Services, Inc.(6) 4.4 -- Indenture, dated as of September 14, 1993, between United Gaming, Inc. and The Bank of New York, as successor Trustee in respect of Old Convertible Debentures.(16) 4.5 -- Form of Old Convertible Debenture (included in Exhibit 4.4, above). 4.6 -- Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H. Friend, Weinress & Frankson, Inc.(16) 4.7 -- Form of Indenture by and among Alliance Gaming Corporation and The Bank of New York in respect of New 7 1/2% Convertible Senior Subordinated Debentures due 2003, including form thereof. 5.1 -- Opinion of Schreck, Jones, Bernhard, Woloson & Godfrey(24) 5.2 -- Opinion of Milbank, Tweed, Hadley & McCloy(24)
II-3 8 -- Opinion of Milbank, Tweed, Hadley & McCloy(24) 10.1 -- Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services, Inc. and Alfred H. Wilms.(6) 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.(2) 10.3 -- Employment Agreement between United Gaming, Inc. and Ira S. Levine.(13) 10.4 -- Amendment to Employment Agreement between United Gaming, Inc. and Ira S. Levine.(21) 10.5 -- Employment Agreement between United Gaming, Inc. and John W. Alderfer.(13) 10.6 -- Amendment to Employment Agreement between United Gaming, Inc. and John W. Alderfer.(20) 10.7 -- 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 Special Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (Form of press release) thereto.(7) 10.8 -- 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.(7) 10.9 -- United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (10) 10.10 -- Gaming and Technology, Inc. 1984 Employee Stock Option Plan (11) 10.11 -- 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.(8) 10.12 -- 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.(8) 10.13 -- 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.(8) 10.14 -- 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.(8) 10.15 -- Amendment to Stockholders Agreement dated as of October 20, 1994.(16) 10.16 -- Selling Stockholder Letter Agreement dated as of March 20, 1995.(22) 10.17 -- 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.(8) 10.18 -- Confidential Separation and Consulting Agreement with Carole A. Carter (including mutual release) dated July 15, 1993.(9) 10.19 -- Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993.(9) 10.20 -- Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993.(20)
II-4 10.21 -- Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc.(12) 10.22 -- 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.(12) 10.23 -- 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).(12) 10.24 -- 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.(12) 10.25 -- Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming International, Inc. and I.G.Davis, Jr.(15) 10.26 -- Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred H. Wilms and Video Services, Inc.(16) 10.27 -- Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H. Wilms.(16) 10.28 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.(16) 10.29 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Oppenheimer & Co. Inc.(16) 10.30 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and L.H. Friend, Weinress & Frankson, Inc.(16) 10.31 -- Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.(16) 10.32 -- Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United Gaming, Inc.(16) 10.33 -- 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.(17) 10.34 -- Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel.(18) 10.35 -- 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.(19) 10.36 -- 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.(19) 10.37 -- 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.(19) 10.38 -- Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994.(19) 10.39 -- Second Amended and Restated Agreement of Limited Partnership, dated March 29, 1995, between United Gaming Rainbow and RCC.(23)
II-5 10.40 -- Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation.(19) 10.41 -- Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation.(19) 10.42 -- Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc.(19) 10.43 -- 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.(19) 10.44 -- Employment Agreement between United Gaming, Inc. and Johnann McIlwain.(20) 10.45 -- Settlement Agreement, dated December 4, 1994, by and among Alliance, United Gaming of Iowa, Inc., GDREC and Joseph and Paula Zwack.(16) 10.46 -- Employment Agreement, dated August 15, 1994, between Alliance and Steve Greathouse.(22) 10.47 -- Warrant Agreement, dated August 15, 1994, between Alliance and Steve Greathouse.(22) 10.48 -- Agreement, dated September 1, 1994, between Alliance and Craig Fields(22) 10.49 -- Warrant Agreement, dated September 1, 1994, between Alliance and Craig Fields.(22) 10.50 -- Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum.(22) 10.51 -- Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada.(23) 10.52 -- Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow.(23) 10.53 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow.(23) 10.54 -- Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc.(23) 10.55 -- 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).(23) 10.56 -- 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.(23) 12. -- Ratio of Earnings to Combined Fixed Charges 21.1 -- Consent of Schreck, Jones, Bernhard, Woloson & Godfrey (included in Exhibit 5.1). 21.2 -- Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibits 5.2 and 8). 23.1 -- Consent of KPMG Peat Marwick LLP. 23.2 -- Consent of Coopers & Lybrand L.L.P. 24 -- Power of Attorney.(24) 25 -- Statement of eligibility and qualification of The Bank of New York designated to act as trustee on Form T-1.(24) 99.1 -- Form of Letter of Transmittal
II-6 99.2 -- Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.(24) 99.3 -- Form of Letter from Alliance Gaming Corporation to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. 99.4 -- Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees to their Clients. 99.5 -- Form of Notice of Guaranteed Delivery.
- ------------------------ (1) Incorporated by reference to the Registrant's Form 8-K dated April 9, 1990 as amended. (2) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1989. (3) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1990. (4) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1991. (6) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1992. (7) Incorporated by reference to the Registrant's Form 8-K dated June 25, 1993. (8) Incorporated by reference to the Registrant's Form 8-K dated September 21, 1993. (9) Incorporated by reference to the Registrant's Form 10-Q dated September 30, 1993. (10)Incorporated by reference to the Registrant's Form S-8 Reg. Nos. 33-45811 and 33-75308. (11)Incorporated by reference to the Registrant's Form S-8 Reg. No. 2-98777. (12)Incorporated by reference to the Registrant's Form 8-K dated October 29, 1993. (13)Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1993. (14)Incorporated by reference to the Registrant's Form 8-K dated November 5, 1993. (15)Incorporated by reference to the Registrant's Form 8-K dated December 10, 1993. (16)Incorporated by reference to the Registrant's Form S-2 Reg. No. 33-72990 and subsequent amendments thereto. (17)Incorporated by reference to the Registrant's Form 8-K dated March 7, 1994. (18)Incorporated by reference to the Registrant's Form 8-K dated March 15, 1994. (19)Incorporated by reference to the Registrant's Form 8-K dated August 11, 1994. (20)Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1994. (21)Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1994. (22)Incorporated by reference to the Registrant's Form S-3 Reg. No. 33-58233. (23)Incorporated by reference to the Registrant's Form 8-K dated March 29, 1995. (24)Previously filed. ITEM 22. UNDERTAKINGS. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Item 4, 10(b), 11, or 13 of this form within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. II-7 The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i)To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 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 the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Alliance Gaming Corporation has duly caused this amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on May 9, 1996. ALLIANCE GAMING CORPORATION By: /S/ JOHN W. ALDERFER ----------------------------------- John W. Alderfer CHIEF FINANCIAL OFFICER 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 - ------------------------------------------------------ ----------------------------------------- -------------- STEVE GREATHOUSE* Chairman of the Board of May 9, 1996 ------------------------------------------- Directors, President and Steve Greathouse Chief Executive Officer (Principal Executive Officer) /s/ JOHN W. ALDERFER Senior Vice President May 9, 1996 ------------------------------------------- Treasurer and Chief John W. Alderfer Financial Officer (Principal Financial and Accounting Officer) ANTHONY DICESARE* Director and Executive May 9, 1996 ------------------------------------------- Vice President Anthony DiCesare DR. CRAIG FIELDS* Director (Vice Chairman May 9, 1996 ------------------------------------------- of the Board) Dr. Craig Fields JOEL KIRSCHBAUM* Director May 9, 1996 ------------------------------------------- Joel Kirschbaum ALFRED H. WILMS* Director May 9, 1996 ------------------------------------------- Alfred H. Wilms DAVID ROBBINS* Director May 9, 1996 ------------------------------------------- David Robbins *By: JOHN W. ALDERFER -------------------------------------- John W. Alderfer ATTORNEY-IN-FACT
II-9 EX-4.7 2 EXHIBIT 4.7 - ------------------------------------------------------------------------------- ALLIANCE GAMING CORPORATION and THE BANK OF NEW YORK, Trustee Indenture Dated as of _____________, 1996 $85,000,000 7 1/2% Convertible Senior Subordinated Debentures due 2003 - ------------------------------------------------------------------------------- ALLIANCE GAMING CORPORATION Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of ___________, 1996 between Alliance Gaming Corporation and The Bank of New York, as Trustee
Trust Indenture Indenture Act Section Section Section 310(a)(1). . . . . . . . . . . . . . . . . 5.9 (a)(2). . . . . . . . . . . . . . . . . . . . 5.9 (a)(3). . . . . . . . . . . . . . . . . . . . Not Applicable (a)(4). . . . . . . . . . . . . . . . . . . . Not Applicable (a)(5). . . . . . . . . . . . . . . . . . . . 5.9 (b) . . . . . . . . . . . . . . . . . . . . 5.8, 5.10 (c) . . . . . . . . . . . . . . . . . . . . Not Applicable Section 311(a) . . . . . . . . . . . . . . . . . . 5.13 (b) . . . . . . . . . . . . . . . . . . . . 5.13 (c) . . . . . . . . . . . . . . . . . . . . Not Applicable Section 312(a) . . . . . . . . . . . . . . . . . . 2.5, 3.6 (b) . . . . . . . . . . . . . . . . . . . . 6.6 (c) . . . . . . . . . . . . . . . . . . . . 6.6 Section 313(a) . . . . . . . . . . . . . . . . . . 3.8 (b)(1). . . . . . . . . . . . . . . . . . . . Not Applicable (b)(2). . . . . . . . . . . . . . . . . . . . 3.8 (c) . . . . . . . . . . . . . . . . . . . . 3.8 (d) . . . . . . . . . . . . . . . . . . . . 3.8 Section 314(a) . . . . . . . . . . . . . . . . . . 3.7, 3.5 (b) . . . . . . . . . . . . . . . . . . . . Not Applicable (c)(1). . . . . . . . . . . . . . . . . . . . 10.5 (c)(2). . . . . . . . . . . . . . . . . . . . 10.5 (c)(3). . . . . . . . . . . . . . . . . . . . 10.5 (d) . . . . . . . . . . . . . . . . . . . . Not Applicable (e) . . . . . . . . . . . . . . . . . . . . 10.5 Section 315(a) . . . . . . . . . . . . . . . . . . 5.1 (b) . . . . . . . . . . . . . . . . . . . . 5.1 (c) . . . . . . . . . . . . . . . . . . . . 5.1 (d) . . . . . . . . . . . . . . . . . . . . 5.1 (e) . . . . . . . . . . . . . . . . . . . . 4.11 Section 316(a)(1)(A) . . . . . . . . . . . . . . . 4.9 (a)(1)(B) . . . . . . . . . . . . . . . . . . 4.10 (a)(2). . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . 4.7 (c) . . . . . . . . . . . . . . . . . . . . 6.2 Section 317(a)(1). . . . . . . . . . . . . . . . . 4.2 (a)(2). . . . . . . . . . . . . . . . . . . . 4.2 (b) . . . . . . . . . . . . . . . . . . . . 2.4 Section 318(a) . . . . . . . . . . . . . . . . . . 10.7 ____________ NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.
TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS Section 1.1 Certain Terms Defined. . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 THE SECURITIES Section 2.1 Form and Dating. . . . . . . . . . . . . . . . . . . . . . 7 Section 2.2 Execution and Authentication . . . . . . . . . . . . . . . 7 Section 2.3 Registrar and Paying Agent . . . . . . . . . . . . . . . . 8 Section 2.4 Paying Agent to Hold Money in Trust. . . . . . . . . . . . 8 Section 2.5 Holder Lists . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2.6 Transfer and Exchange. . . . . . . . . . . . . . . . . . . 9 Section 2.7 Replacement Securities . . . . . . . . . . . . . . . . . . 10 Section 2.8 Reserved . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 2.9 Treasury Securities. . . . . . . . . . . . . . . . . . . . 10 Section 2.10 Temporary Securities . . . . . . . . . . . . . . . . . . . 11 Section 2.11 Cancellation . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.12 Defaulted Interest . . . . . . . . . . . . . . . . . . . . 11 Section 2.13 Cusip Numbers. . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 3 COVENANTS OF THE ISSUER AND THE TRUSTEE Section 3.1 Payment of Principal and Interest. . . . . . . . . . . . . 11 Section 3.2 Offices for Payments, etc. . . . . . . . . . . . . . . . . 12 Section 3.3 Appointment to Fill a Vacancy in Office of Trustee . . . . . . . . . . . . . . . . . . 12 Section 3.4 Paying Agents. . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.5 Certificate to Trustee . . . . . . . . . . . . . . . . . . 13 Section 3.6 Securityholders' Lists . . . . . . . . . . . . . . . . . . 13 Section 3.7 Reports by the Issuer. . . . . . . . . . . . . . . . . . . 13 Section 3.8 Reports by the Trustee . . . . . . . . . . . . . . . . . . 13 Section 3.9 Transactions with Affiliates . . . . . . . . . . . . . . . 14 ARTICLE 4 REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT Section 4.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default . . . . . . . . . . . . . 15 Section 4.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . . . . . . . . 17 Section 4.3 Application of Proceeds. . . . . . . . . . . . . . . . . . 19 Section 4.4 Suits for Enforcement. . . . . . . . . . . . . . . . . . . 20
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Page ---- Section 4.5 Restoration of Rights on Abandonment of Proceeding. . . . . . . . . . . . . . . . 21 Section 4.6 Limitation on Suits by Securityholders . . . . . . . . . . 21 Section 4.7 Rights of Holders to Receive Payment . . . . . . . . . . . 21 Section 4.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. . . . . . . . . . . . 22 Section 4.9 Control by Securityholders . . . . . . . . . . . . . . . . 22 Section 4.10 Waiver of Past Defaults . . . . . . . . . . . . . . . . . 23 Section 4.11 Undertaking for Costs . . . . . . . . . . . . . . . . . . 23 ARTICLE 5 CONCERNING THE TRUSTEE Section 5.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default . . . . . . . . . . . . . . . 24 Section 5.2 Certain Rights of the Trustee. . . . . . . . . . . . . . . 25 Section 5.3 Trustee Not Responsible for Recital, Disposition of Securities or Application of Proceeds Thereof. . . . . . . . . . . . . 27 Section 5.4 Trustee and Agents May Hold Securities; Collections, etc.. . . . . . . . . . . . . . 27 Section 5.5 Moneys Held by Trustee.. . . . . . . . . . . . . . . . . . 27 Section 5.6 Compensation and Indemnification of Trustee and Its Prior Claim. . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.7 Right of Trustee to Rely on Officers' Certificate, etc.. . . . . . . . . . . . . . . . . . . . 28 Section 5.8 Disqualification; Conflicting Interests. . . . . . . . . . 28 Section 5.9 Persons Eligible for Appointment as Trustee.. . . . . . . . . . . . . . . . . . . . . . . 28 Section 5.10 Resignation and Removal; Appointment of Successor Trustee.. . . . . . . . . . . . . . . . . . 28 Section 5.11 Acceptance of Appointment by Successor Trustee. . . . . . . . . . . . . . . . . . . . 30 Section 5.12 Merger, Conversion, Consolidation or Succession to Business of Trustee . . . . . . . . . . . . . . . . 31 Section 5.13 Preferential Collection of Claims Against the Issuer. . . . . . . . . . . . . . . . 31 ARTICLE 6 CONCERNING THE SECURITYHOLDERS Section 6.1 Evidence of Action Taken by Securityholders . . . . . . . 31 Section 6.2 Proof of Execution of Instruments and of Holding of Securities; Record Date. . . . . . . . . . . . . . . . . 32 Section 6.3 Holders to be Treated as Owners. . . . . . . . . . . . . . 32 Section 6.4 Securities Owned by Issuer Deemed Not Outstanding. . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.5 Right of Revocation of Action Taken. . . . . . . . . . . . 33
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Page ---- Section 6.6 Communications by Holders With Other Holders . . . . . . . 33 ARTICLE 7 SUPPLEMENTAL INDENTURES Section 7.1 Supplemental Indentures Without Consent of Securityholders. . . . . . . . . . . . . . . . . . . . . 33 Section 7.2 Supplemental Indentures With Consent of Securityholders. . . . . . . . . . . . . . . . . . . . . 35 Section 7.3 Effect of Supplemental Indenture . . . . . . . . . . . . . 36 Section 7.4 Documents to Be Given to Trustee . . . . . . . . . . . . . 36 Section 7.5 Notation on Securities in Respect of Supplemental Indentures. . . . . . . . . . . . . . . . . 36 ARTICLE 8 CONSOLIDATION, MERGER, SALE OR CONVEYANCE Section 8.1 Covenant Not to Merge, Consolidate, Sell or Convey Property Except Under Certain Conditions . . . . . . . . 37 Section 8.2 Successor Entity Substituted . . . . . . . . . . . . . . . 37 Section 8.3 Opinion of Counsel to Trustee. . . . . . . . . . . . . . . 38 ARTICLE 9 SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS Section 9.1 Satisfaction and Discharge of Indenture. . . . . . . . . . 38 Section 9.2 Application by Trustee of Funds Deposited for Payment of Securities. . . . . . . . . . . 39 Section 9.3 Repayment of Moneys Held by Paying Agent . . . . . . . . . 39 Section 9.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years. . . . . . . . . . . . . . . . . 39 ARTICLE 10 MISCELLANEOUS PROVISIONS Section 10.1 Incorporators, Stockholders, Officers and Directors of Issuer and Others Exempt from Individual Liability. . . . . . . . . . . . . . . . . . . . . . . . 40 Section 10.2 Provisions of Indenture for the Sole Benefit of Parties and Securityholders. . . . . . . . . . . . . . . . . . . . . 40 Section 10.3 Successors and Assigns of Issuer Bound by Indenture . . . . . . . . . . . . . . . . . . . 40
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Page ---- Section 10.4 Notices and Demands on Issuer, Trustee and Securityholders. . . . . . . . . . . . . . . 40 Section 10.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. . . . . . . . . . . . . . . . . . . . 41 Section 10.6 Payments Due on Saturdays, Sundays and Holidays . . . . . . . . . . . . . . . . . . . . . . 42 Section 10.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . 42 Section 10.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . 42 Section 10.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 43 Section 10.10 Effect of Headings . . . . . . . . . . . . . . . . . . . 43 ARTICLE 11 REDEMPTION OF SECURITIES Section 11.1 Right of Optional Redemption; Prices. . . . . . . . . . . 43 Section 11.2 Notice of Redemption; Partial Redemptions . . . . . . . . 44 Section 11.3 Payment of Securities Called for Redemption . . . . . . . . . . . . . . . . . . . . . 45 Section 11.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption . . . . . . . . . . . . . . . . 46 ARTICLE 12 SUBORDINATION OF SECURITIES Section 12.1 Agreement to Subordinate. . . . . . . . . . . . . . . . . 46 Section 12.2 Payments to Securityholders . . . . . . . . . . . . . . . 47 Section 12.3 Subrogation of Securities . . . . . . . . . . . . . . . . 49 Section 12.4 Authorization by Securityholders. . . . . . . . . . . . . 50 Section 12.5 Notice to Trustee . . . . . . . . . . . . . . . . . . . . 50 Section 12.6 Trustee's Relation to Senior Indebtedness . . . . . . . . 51 Section 12.7 No Impairment of Subordination. . . . . . . . . . . . . . 52 Section 12.8 Securities Senior to Old Convertible Debentures . . . . . 52 ARTICLE 13 CONVERSION OF SECURITIES Section 13.1 Conversion Privilege; Mandatory Conversion Upon Consummation of Merger . . . . . . . . . . . . . . . . . 52 Section 13.2 Exercise of Conversion Privilege. . . . . . . . . . . . . 53 Section 13.3 Fractional Interests. . . . . . . . . . . . . . . . . . . 56 Section 13.4 Conversion Price. . . . . . . . . . . . . . . . . . . . . 56 Section 13.5 Adjustment of Conversion Price. . . . . . . . . . . . . . 56 Section 13.6 Continuation of Conversion Privilege in Case of Reclassification, Change,
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Page ---- Merger, Consolidation or Sale of Assets. . . . . . . . . 60 Section 13.7 Notice of Certain Events. . . . . . . . . . . . . . . . . 62 Section 13.8 Taxes on Conversion . . . . . . . . . . . . . . . . . . . 63 Section 13.9 Issuer to Provide Stock . . . . . . . . . . . . . . . . . 63 Section 13.10 Disclaimer of Responsibility for Certain Matters. . . . . . . . . . . . . . . . . . . 64 Section 13.11 Return of Funds Deposited for Redemption of Converted Securities . . . . . . . . . . . 64 ARTICLE 14 RIGHT TO REQUIRE REDEMPTION Section 14.1 Right to Require Redemption . . . . . . . . . . . . . . . 64 Section 14.2 Notices; Method of Exercising Redemption Right, etc. . . . . . . . . . . . . . . . . . 65 EXHIBIT A . . . . . . . . . . . . . . . . . . . . . . . A-1
v INDENTURE, dated as of ___________, 1996 between Alliance Gaming Corporation, a Nevada corporation, and The Bank of New York, as Trustee (the "Trustee"). Each party hereto agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Issuer's 7 1/2% Convertible Senior Subordinated Debentures due 2003 (the "Securities"): ARTICLE I DEFINITIONS Section 1.1 CERTAIN TERMS DEFINED. The following terms (except as otherwise expressly provided or unless the context otherwise clearly requires), for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act are referred to in the Trust Indenture of 1939 (except as herein otherwise expressly provided or unless the context otherwise clearly requires), shall have the meanings assigned to such terms in the Trust Indenture Act of 1939 and in the Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings given to them in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" or "GAAP" shall mean such accounting principles which are generally accepted at the date or time of any computation or at the date hereof. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article I include the plural as well as the singular. "AFFILIATE" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "AGENT" means any Paying Agent or Registrar. "BOARD OF DIRECTORS" means either the Board of Directors of the Issuer or any committee of such Board duly authorized to act hereunder. "BUSINESS DAY" means a Trading Day which in the city (or in any of the cities, if more than one) where amounts are payable in respect of the Securities, as specified on the face of the form of Security, is neither a legal holiday nor a day on which banking institutions in the State of New York are authorized or required by law or regulation to close. "CAPITAL LEASE OBLIGATION" of any Person means the portion of any obligation of such Person and its subsidiaries on a consolidated basis, under any capital lease of real or personal property which, in accordance with generally accepted accounting principles, has been recorded as a capitalized lease obligation. "CAPITAL STOCK" of any Person means any and all shares, interests, participations, or other equivalents (however designated) of such Person's capital stock whether now outstanding or issued after the date hereof. "CHANGE OF CONTROL" means at such time as (i) any person or group (as the term "person" or "group" is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than an Exempt Person has become the beneficial owner of 50% or more of the Issuer's Capital Stock having the power to vote in the election of directors under ordinary circumstances ("Voting Stock"), (ii) there shall be consummated any consolidation or merger of the Issuer that is not approved by at least a majority of the Continuing Directors (A) in which the Issuer is not the continuing or surviving corporation or (B) pursuant to which any Voting Stock of the Issuer would be converted into cash, securities or other property, in each case other than a consolidation or merger in which the holders of such Voting Stock immediately prior thereto have at least a majority of the Voting Stock, directly or indirectly, of the resulting or surviving corporation immediately after the consolidation or merger or (iii) any Person acquires all or substantially all of the assets of the Issuer; PROVIDED, HOWEVER, that a Change in Control shall not be deemed to have occurred if either (x) the closing price per share of the Issuer's Common Stock for any five Trading Days within the period of ten consecutive Trading Days ending immediately before the Change in Control shall equal or exceed 105% of the Conversion Price (as defined in Section 13.5 hereof) in effect on such Trading Day, or (y) with respect to a Change in Control described in clause (ii) or clause (iii) above, at least 90% of the consideration to be paid for the Voting Stock of the Issuer in the transaction or transactions constituting the Change in Control consists of common stock traded on a national securities exchange or quoted on the National Association of Securities Dealers Automated Quotation/National Market System and, as a result of the transaction or transactions referred to in clause 2 (ii) or clause (iii) above, the Securities become convertible principally into such common stock. "COMMON STOCK" means the Common Stock, par value $.10 per share, of the Issuer as the same exists at the date of execution and delivery of this Indenture or as such stock may be reconstituted from time to time. For purposes of calculating the number of shares of Common Stock at any time outstanding, shares of Common Stock held in the treasury of the Issuer shall not be considered outstanding. "CONTINUING DIRECTOR" means a director of the Issuer who was either (i) a member of the board of directors of the Issuer on the date hereof or (ii) subsequently became a director of the Issuer and whose election or nomination for election is approved or recommended by a vote of a majority of the board of directors of the Issuer, which majority includes a majority of the then existing Continuing Directors then on the board of directors of the Issuer. "CORPORATE TRUST OFFICE" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located at 101 Barclay Street, Floor 21 West, New York, New York 10286, Attention: Corporate Trust Trustee Administration. "EVENT OF DEFAULT" means any event or condition specified as such in Section 4.1 hereof which shall have continued for the period of time, if any, therein designated. "EXEMPT PERSON" means (i) the Issuer, any subsidiary of the Issuer or any employee benefit plan or stock ownership plan of either the Issuer or any subsidiary of the Issuer or (ii) 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 any successor to Mr. Wilms 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. "GSA" means Gaming System Advisors, L.P., a Delaware limited partnership, and its successors and assigns. "GUARANTEE" by any Person, means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase of payment of) such Indebtedness or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement 3 conditions or otherwise), or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "HOLDER," "HOLDER OF SECURITIES," "SECURITYHOLDER" or other similar terms means the registered holder of any Security. "INDEBTEDNESS" of any Person means (i) all indebtedness of such Person, including the principal of and premium, if any, and interest on such indebtedness, whether outstanding currently or hereafter created, for borrowed money, for indebtedness incurred in connection with acquisitions, and for money owed or reimbursement obligations under letters of credit or under any lease of any real or personal property, which obligations are capitalized on such Person's books, (ii) all currency or interest rate hedging obligations of such Person and (iii) all interest on any of the foregoing that would accrue but for the filing of a bankruptcy or similar proceeding at the rate specified in the instrument governing such Indebtedness, whether or not such interest is an allowable claim in such proceeding. Such term shall also include Guarantees of any of the foregoing and any renewals, extensions, refinancings, refundings, deferrals, restructurings, amendments and modifications thereof, or any securities, notes or other evidences of indebtedness issued in exchange for such indebtedness. "INDENTURE" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented. "ISSUER" means Alliance Gaming Corporation, a Nevada corporation, and subject to Article 8 hereof, its successors and assigns. "KIC" means Kirkland Investment Corporation, a Delaware corporation, and its successors and assigns. "KIRKLAND" means Kirkland-Ft. Worth Investment Partners, L.P., a Delaware limited partnership, and its successors and assigns. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For purposes of this Indenture, the Issuer shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. 4 "MERGER" means the merger of a wholly-owned subsidiary of the Issuer with and into Bally Gaming International, Inc., pursuant to that certain Agreement and Plan of Merger, dated as of October 1995, as amended on January __, 1996, and as the same may be hereinafter amended from time to time. "NASDAQ/NMS" means the National Association of Securities Dealers Automated Quotation/National Market System. "OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of the Board of Directors or Vice Chairman of the Board of Directors or the President or any Vice President (whether or not designated by a number or numbers or a word or words added before or after the title "Vice President") and by the Chief Financial Officer or the Secretary or any Assistant Secretary of the Issuer and delivered to the Trustee. Each such certificate shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in Section 10.5 hereof, if and to the extent required thereby. Any of the foregoing persons may be referred to herein as "Officers." "OLD CONVERTIBLE DEBENTURES" means the 7-1/2% Convertible Subordinated Debentures due 2003 issued pursuant to the Indenture dated as of September 14, 1993 between the Issuer (then named United Gaming, Inc.) and NationsBank of Texas, N.A., as Trustee. "OPINION OF COUNSEL" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer or who may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall comply with Section 314 of the Trust Indenture Act and include the statements provided for in Section 10.5 hereof, if and to the extent required hereby. "ORIGINAL ISSUE DATE" of any Security (or portion thereof) means the earlier of (a) the date of such Security and (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly), on registration of transfer, exchange or substitution. "OUTSTANDING" when used with reference to Securities, shall, subject to the provisions of Section 6.4 hereof, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for the payment or redemption of which moneys or direct obligations of the United States of America backed by its full faith and credit in the necessary amount shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Issuer) or shall have been set aside, segregated and held in trust by the Issuer (if the Issuer shall act as its own Paying Agent); PROVIDED that if such Securities are to be redeemed prior to the maturity thereof, notice of such redemption 5 shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice; (iii) Securities in substitution for which other Securities shall have been authenticated and delivered, or which shall have been paid, pursuant to the terms of Section 2.6 hereof (unless proof satisfactory to the Trustee is presented that any such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuer); (iv) Securities converted into Common Stock or Special Stock pursuant hereto; and (v) Securities not deemed outstanding pursuant to Section 11.2 hereof. Except as set forth in Section 2.9 hereof, a Security does not cease to be Outstanding because the Issuer or an Affiliate holds the Security. "PERSON" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PRINCIPAL" wherever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any." "REDEMPTION EVENT" shall be deemed to have occurred at such time as (i) there is a Change of Control of the Issuer or (ii) the Issuer's Common Stock (or other Common Stock into which the Securities are then convertible) is not listed for trading on a United States national securities exchange or admitted for trading in the NASDAQ/NMS or the National Association of Securities Dealers Automated Quotation listing of Small Capitalization Stocks. "RESPONSIBLE OFFICER" when used with respect to the Trustee means any officer of the Trustee to administer its corporate trust matters. "SECURITY" or "SECURITIES" means any Convertible Subordinated Debenture referred to in the second paragraph of this Indenture, authenticated and delivered under this Indenture. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SENIOR INDEBTEDNESS" means (i) all Indebtedness of the Issuer unless, by the terms of the instrument creating or evidencing such Indebtedness, it is provided that such Indebtedness is not superior in right of payment to the Securities or to other Indebtedness which is pari passu with, or subordinated to, the Securities, and (ii) any modifications, refunding, deferrals, renewals or extensions of any such Indebtedness or securities, notes or other evidences of Indebtedness issued in exchange for such Indebtedness; PROVIDED, HOWEVER, that Senior Indebtedness shall not include the Old 6 Convertible Debentures or any other Indebtedness which is PARI PASSU with, or subordinated to, the Old Convertible Debentures. "SPECIAL STOCK" means the Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, par value $.10 per share, of the Issuer as the same exists at the date of execution and delivery of this Indenture or as such stock may be reconstituted from time to time. "SUBSIDIARY" means any corporation a majority of the voting stock of which is owned, directly or indirectly, by the Issuer. "TRADING DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange or in the applicable securities market. "TRUSTEE" means the entity identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article 5 hereof, shall also include any successor trustee. "TIA" OR "TRUST INDENTURE ACT OF 1939" means the Trust Indenture Act of 1939, as amended. "MR. WILMS" means Alfred H. Wilms, the holder of approximately 46.9% of the Common Stock of the Issuer as of the date of this Indenture. ARTICLE 2 THE SECURITIES Section 2.1 FORM AND DATING. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A to this Indenture. The Securities shall be in a principal amount at maturity of no greater than $85,000,000. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication. The Securities shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Issuer and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Section 2.2 EXECUTION AND AUTHENTICATION. Two Officers shall sign the Securities for the Issuer by manual or facsimile signature. The Issuer's seal shall be reproduced on the Securities and may be in facsimile form. 7 If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities for original issue up to the aggregate Principal amount stated in paragraph 4 of the Securities, upon a written order of the Issuer signed by an Officer to a Responsible Officer of the Trustee. The aggregate Principal amount of Securities Outstanding at any time may not exceed such amount except as provided in Section 2.7 hereof. The Trustee may appoint an authenticating agent acceptable to the Issuer to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Issuer or an Affiliate of the Issuer. Section 2.3 REGISTRAR AND PAYING AGENT. The Issuer shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("REGISTRAR") and an office or agency where Securities may be presented for payment ("PAYING AGENT"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Issuer may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Issuer may change any Paying Agent or Registrar without notice to any Holder. The Issuer shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Issuer fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Issuer or any of its subsidiaries may act as Paying Agent or Registrar. The Issuer initially appoints the Trustee to act as Paying Agent and Registrar. Section 2.4 PAYING AGENT TO HOLD MONEY IN TRUST. The Issuer shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust of the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of Principal or interest on the Securities, and will notify the Trustee of any default by the Issuer in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Issuer at any time may require a Paying Agent 8 to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Issuer or a Subsidiary) shall have no further liability for the money. If the Issuer or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Section 2.5 HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with the Trust Indenture Act of 1939 Section 312(a). If the Trustee is not the Registrar, the Issuer shall furnish to the Trustee at least seven Business Days before each Interest Payment Date (as defined in Paragraph 1 of the form of Security attached as Exhibit A hereto), and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may require of the names and addresses of Holders, and the Issuer shall otherwise comply with the Trust Indenture Act of 1939 Section 312(a). Section 2.6 TRANSFER AND EXCHANGE. (a) When Securities are presented to the Registrar with the request (x) to register the transfer of the Securities or (y) to exchange such Securities for an equal Principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; PROVIDED, HOWEVER, that the Securities presented or surrendered for register of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by the Holder thereof or by his attorney, duly authorized in writing. (b) To permit registrations of transfers, exchanges and partial conversions, the Issuer shall execute and the Trustee shall authenticate Securities at the Registrar's request. (c) No service charge shall be made to a Holder for any registration, transfer, exchange or conversion, but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Section 11.1 hereof). (d) The Registrar shall not be required to register the transfer or exchange of any Security selected for redemption in whole or in part after such selection as provided for herein, except the unredeemed portion of any Security being redeemed in part. (e) All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations 9 of the Issuer, evidencing the same debt, and entitled to the same benefits under the Indenture, as the Securities surrendered upon such registration of transfer or exchange. (f) The Issuer shall not be required: (i) to issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption under Section 11.2 hereof and ending at the close of business on the day of mailing of the notice of such selection, or (ii) to register the transfer of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. (g) Prior to due presentment for registration of transfer of any Security, the Trustee, any Agent and the Issuer may deem and treat the person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of Principal of and interest on such Security, whether or not such payment is overdue, and neither the Trustee, any Agent nor the Issuer shall be affected by notice to the contrary. Section 2.7 REPLACEMENT SECURITIES. If any mutilated Security is surrendered to the Trustee, or the Issuer and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, the Issuer shall issue and the Trustee, upon the written order of the Issuer signed by an Officer, shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or the Issuer, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Issuer to protect the Issuer, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Issuer and the Trustee may charge for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Issuer and shall be entitled to all benefits of this Indenture equally and proportionately with all other Securities duly issued hereunder. Section 2.8 Reserved. Section 2.9 TREASURY SECURITIES. In determining whether the Holders of the required Principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Issuer, or by an Affiliate of the Issuer shall be considered as though not Outstanding, except that for the purposes of determining whether the Trustee shall be 10 protected in relying on any such direction, waiver or consent, only Securities which a Trustee actually knows are so owned shall be so disregarded. Section 2.10 TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Issuer may prepare and the Trustee shall authenticate temporary securities upon a written order of the Issuer signed by an Officer and delivered or caused to be delivered to a Responsible Officer. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Issuer considers appropriate for temporary Securities. Without unreasonable delay, the Issuer shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Holders of temporary Securities shall be entitled to all benefits of this Indenture. Section 2.11 CANCELLATION. The Issuer at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall return such cancelled Securities to the Issuer. The Issuer may not issue new Securities to replace Securities that it has paid or that have been delivered to the Trustee for cancellation. Section 2.12 DEFAULTED INTEREST. If the Issuer defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are holders on a subsequent special record date, in each case at the rate provided in the Securities and in Section 4.3 hereof. The Issuer shall, with the consent of the Trustee, fix each such special record date and payment date. At least 15 days before the record date, the Issuer (or the Trustee, in the name of and at the expense of the Issuer) shall mail to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. Section 2.13. CUSIP NUMBERS. The Issuer in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; PROVIDED that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Issuer will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE 3 COVENANTS OF THE ISSUER AND THE TRUSTEE Section 3.1 PAYMENT OF PRINCIPAL AND INTEREST. The Issuer covenants and agrees that it will duly and punctually pay or cause to be paid the Principal of, and interest on, each of the Securities at the place or places, at the respective times and in the manner provided in the Securities. All payments in respect of the Securities shall be made by mailing checks for such interest payable to or upon the written order of the holders 11 of Securities entitled thereto as they shall appear on the registry books of the Issuer. Section 3.2 OFFICES FOR PAYMENTS, ETC. So long as any of the Securities remain Outstanding, the Issuer will maintain in New York City, New York, the following: (a) an office or agency where the Securities may be presented for payment, (b) an office or agency where the Securities may be presented for registration of transfer and for exchange and conversion as in this Indenture provided and (c) an office or agency where notices and demands to or upon the Issuer in respect of the Securities or of this Indenture may be served. The Issuer will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. The Issuer hereby initially designates The Bank of New York, 101 Barclay Street, New York, New York 10286 as the office or agency for each such purpose. In case the Issuer shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof presentations and demands may be made and notices may be served at such address. Section 3.3 APPOINTMENT TO FILL A VACANCY IN OFFICE OF TRUSTEE. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 5.10 hereof, a Trustee, so that there shall at all times be a Trustee hereunder; it being understood that the occurrence of any of the events affecting the Trustee under Section 5.10(b) hereunder shall not be a default hereunder. Section 3.4 PAYING AGENTS. Whenever the Issuer shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 3.4, (a) that it will hold all sums received by it as such agent for the payment of the Principal of or interest on the Securities (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities) in trust for the benefit of the holders of the Securities or of the Trustee, (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities) to make any payment of the Principal of or interest on the Securities when the same shall be due and payable, and (c) that it will pay any such sums so held in trust by it to the Trustee upon the Trustee's written request at any time during the continuance of the failure referred to in clause (b) above. The Issuer will, prior to each due date of the Principal of or interest on the Securities, deposit with the Paying Agent a sum sufficient to pay such Principal or interest, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own Paying Agent, it will, on or before each due date of the Principal of or interest 12 on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such Principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Issuer or any Paying Agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 9.3 and 9.4 hereof. Section 3.5 CERTIFICATE TO TRUSTEE. The Issuer will furnish to the Trustee on or before September 1 in each year (beginning with 1996) a brief certificate (which need not comply with Section 10.5 hereof) from the principal executive, financial or accounting officer of the Issuer as to his or her knowledge of the Issuer's compliance with all conditions and covenants under this Indenture (such compliance to be determined without regard to any period of grace or requirement of notice provided under this Indenture) and as to any default in such performance. Section 3.6 SECURITYHOLDERS' LISTS. If and so long as the Trustee shall not be the Registrar, the Issuer will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may require of the names and addresses of the holders of the Securities pursuant to Section 312 of the Trust Indenture Act (a) semi-annually not more than 15 days after each record date for the payment of semi-annual interest on the Securities, as hereinabove specified, as of such record date, and (b) at such other times as the Trustee may request in writing, within 30 days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished. Section 3.7 REPORTS BY THE ISSUER. The Issuer covenants to file with the Trustee, within 15 days after the Issuer is required to file the same with the Securities and Exchange Commission ("SEC"), copies of the annual reports and of the information, documents, and other reports which the Issuer may be required to file with the SEC pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. The Issuer shall also comply with the other provisions of Section 314(a) of the Trustee Indenture Act of 1939. Section 3.8 REPORTS BY THE TRUSTEE. Any Trustee's report required under Section 313(a) of the Trustee Indenture Act of 1939 shall be transmitted by mail to each Securityholder and certain other holders in accordance with Section 313(c) of the Trust Indenture Act of 1939 within 60 days after March 15 of each year 13 beginning March 15, 1994. The Trustee shall also comply with Section 313(b) of the Trust Indenture Act of 1939. A copy of each report at the time of its mailing to Securityholders shall be mailed to the Issuer and filed with the SEC and each stock exchange, if any, on which the Securities are listed. Section 3.9 TRANSACTIONS WITH AFFILIATES. The Issuer will not, and will not permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to the Issuer or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Subsidiary with an unrelated person and (b) the Issuer delivers to the Trustee with respect to any Affiliate Transaction involving aggregate payments in excess of $500,000, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (a) above and such Affiliate Transaction is approved by a majority of the independent members of the Board of Directors; PROVIDED, HOWEVER, that none of the following shall be deemed Affiliate Transactions: (i) any employment agreement entered into by the Issuer or any of its subsidiaries in the ordinary course of business, (ii) the continuation, extension or renewal of any transaction entered into between the Issuer or any of its subsidiaries and any Affiliate on or prior to October 31, 1993, (iii) transactions among the Issuer and any of Kirkland, KIC, GSA, Mr. Wilms, or their respective Affiliates pursuant to or contemplated by agreements existing on October 31, 1993 as in effect on such date, (iv) any agreement between the Issuer, KIC, Kirkland, GSA or their respective Affiliates providing for the payment by the Issuer of management or related fees in connection with providing services to the Issuer in an aggregate amount not exceeding $1.4 million per annum, plus reimbursement of reasonable related expenses, (v) any agreement between the Issuer and Mr. Wilms or any of his Affiliates providing for the payment by the Issuer of consulting fees or similar fees in an aggregate amount not to exceed $500,000 per annum, (vi) any agreement with Mr. Wilms pursuant to which the Issuer loaned funds to Mr. Wilms to be used to exercise stock purchase warrants if such exercise occurred so that Mr. Wilms could comply with his commitment to the Issuer to obtain sufficient shares to approve (A) the investment by Kirkland and certain other parties concurrently with the original issuance of the Old Convertible Debentures of $5,000,000 in the Issuer's Capital Stock and various related transactions and (B) the increase in the authorized number of shares of the Issuer's Common Stock to 100,000,000 or (vii) transactions between or among the Issuer and/or its Subsidiaries or among the Subsidiaries. 14 ARTICLE 4 REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT Section 4.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF DEFAULT. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) failure to pay Principal with respect to any Securities when due, whether or not such payment is prohibited by the subordination provisions of this Indenture; (b) failure to pay any interest on any Securities when due, continued for 30 days, whether or not such payment is prohibited by the subordination provisions of this Indenture; (c) failure on the part of the Issuer duly to observe or perform any other of the covenants or agreements on the part of the Issuer in the Securities or in this Indenture and continuance of such failure for a period of 60 days after the date on which written notice specifying such failure, stating that such notice is a "Notice of Default" hereunder and demanding that the Issuer remedy the same, shall have been given by registered or certified mail, return receipt requested, to the Issuer by the Trustee, or to the Issuer and the Trustee by the holders of at least 25% in aggregate Principal amount of the Securities at the time Outstanding; (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Issuer or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (e) the Issuer shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a 15 receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Issuer or for any substantial part of its property, or make any general assignment for the benefit of creditors; (f) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Subsidiaries, and as a result of such default the maturity of such Indebtedness has been accelerated prior to its express maturity and the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness the maturity of which has been accelerated, aggregates $5 million or more, PROVIDED that if such default under such indenture or instrument shall be remedied or cured by the Issuer or waived by the holders of such Indebtedness within 90 days of the date of acceleration of such Indebtedness, then the Event of Default under this Indenture by reason thereof shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of either the Trustee or any of the holders; or (g) a final judgment or judgments or order or orders for the payment of money which aggregates $5 million or more is entered against the Issuer or one or more of its subsidiaries, which judgment or judgments or order or orders shall not have been discharged or stayed pending appeal within 75 days after the entry thereof or discharged within 75 days after the expiration of any such stay; then, and in each such case (other than in the case of an Event of Default specified in Sections 4.1(d) or (e) hereof), unless the Principal of all of the Securities shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate Principal amount of the Securities then Outstanding hereunder, by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire Principal of all the Securities and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default specified in Section 4.1(d) or (e) hereof occurs, the entire Principal of all of the Securities and the interest accrued thereon shall automatically become due and payable without any declaration or other act on the part of the Trustee or any Securityholder. This provision, however, is subject to the condition that if, at any time after the Principal of the Securities shall have become due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities and the Principal of any and all Securities which shall have become due otherwise than by acceleration (with interest upon 16 such Principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest specified in the Securities, to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other reasonable agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under this Indenture, other than the non-payment of the Principal of Securities which have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein, then and in every such case the holders of a majority in aggregate Principal amount of the Securities then outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults and rescind and annul an acceleration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. Section 4.2 COLLECTION OF INDEBTEDNESS BY TRUSTEE; TRUSTEE MAY PROVE DEBT. The Issuer covenants that (a) in case default shall occur in the payment of any installment of interest on any of the Securities when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall occur in the payment of all or any part of the Principal of any of the Securities when the same shall have become due and payable, whether upon maturity or upon any redemption or by declaration or otherwise, then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the holders of the Securities the whole amount that then shall have become due and payable on all such Securities for Principal or interest, as the case may be (with interest to the date of such payment upon the overdue Principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest specified in the Securities); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith. Until such demand is made by the Trustee, the Issuer may pay the Principal of and interest on the Securities to the Holders, whether or not the Securities are overdue. In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the 17 collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon the Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon the Securities, wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under the United States Bankruptcy Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the Principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of Principal and interest owing and unpaid in respect of the Securities, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all reasonable expenses and liabilities incurred, and all reasonable advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities, or to the creditors or property of the Issuer or such other obligor; (b) unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings; and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf, and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and in the 18 event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. Section 4.3 APPLICATION OF PROCEEDS. Any moneys collected by the Trustee pursuant to this Article 4 shall be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of Principal or interest, upon presentation of the several Securities and stamping (or otherwise noting) thereon the payment, or issuing Securities in reduced Principal amounts in exchange for the presented Securities if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each 19 predecessor Trustee except as a result of negligence or bad faith; SECOND: In case the Principal of the Securities shall not have become and be then due and payable, to the payment of interest in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest, to the extent permitted by applicable law, at the same rate as the rate of interest specified in the Securities, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; THIRD In case the Principal of the Securities shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities for Principal and interest (unless already applied pursuant to section "SECOND" above), with interest upon the overdue Principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest, to the extent permitted by applicable law, at the same rate as the rate of interest specified in the Securities; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities, then to the payment of such Principal and interest (unless already applied pursuant to section "SECOND" above), without preference or priority of Principal over interest, or of interest over Principal, or of any installment of interest over any other installment of interest, or of any Security over any other Security, ratably to the aggregate of such Principal payments accrued and unpaid interest; and FOURTH: To the payment of the remainder, if any, to the Issuer or any other person lawfully entitled thereto. Section 4.4 SUITS FOR ENFORCEMENT. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce 20 the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 4.5 RESTORATION OF RIGHTS ON ABANDONMENT OF PROCEEDINGS. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. Section 4.6 LIMITATION ON SUITS BY SECURITYHOLDERS. No holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate Principal amount of the Securities then Outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceedings and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 4.9 hereof; it being understood and intended, and being expressly covenanted by the taker and holder of every Security with every other taker and holder and the Trustee, that no one or more holders of Securities shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. 21 Section 4.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of Principal of and interest on the Securities as set forth herein, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to bring suit for the enforcement of the right to convert the Security shall not be impaired or affected without the consent of the Holder. Section 4.8 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF DEFAULT. No right or remedy herein conferred upon or reserved to the Trustee or to the Securityholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 4.6 hereof, every power and remedy given by this Indenture or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. Section 4.9 CONTROL BY SECURITYHOLDERS. The holders of a majority in aggregate Principal amount of the Securities at the time Outstanding shall 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 by this Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and provided further that (subject to the provisions of Section 5.1 hereof) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forbearances specified in or 22 pursuant to such direction shall be unduly prejudicial to the interests of holders of the Securities not joining in the giving of said direction, it being understood that (subject to Section 5.1) the Trustee shall have no duty to ascertain whether or not such actions or forbearances are unduly prejudicial to such holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction by Securityholders. Section 4.10 WAIVER OF PAST DEFAULTS. Prior to the declaration of acceleration of the maturity of the Securities as provided in Section 4.1 hereof, the holders of a majority in aggregate Principal amount of the Securities at the time Outstanding may on behalf of the holders of all the Securities waive any past default or Event of Default hereunder and its consequences, except a default (a) in the payment of Principal of or interest on any of the Securities or (b) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the holders of the Securities shall be restored to their former positions and rights hereunder, respectively, but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 4.11 UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 4.11 does not apply to any suit instituted by the Issuer, to any suit instituted by the Trustee, to any suit instituted by any Holder pursuant to Section 4.7, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities. 23 ARTICLE 5 CONCERNING THE TRUSTEE Section 5.1 DUTIES AND RESPONSIBILITIES OF THE TRUSTEE; DURING DEFAULT; PRIOR TO DEFAULT. The Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. The Trustee shall give the Securityholders notice of all defaults or Events of Default known to the Trustee within 90 days of the occurrence thereof. Except in the case of a default or an Event of Default in payment of any Security, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interest of Securityholders. No provisions of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default which may have occurred: (i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the 24 same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in Principal amount of the Securities at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. The Trustee shall have no responsibility for making any calculations hereunder, including without limitation the amount of any additional interest owing on the Securities hereunder. The Issuer shall deliver to the Trustee an Officers' Certificate specifying the amount of any additional interest due hereunder on or before the 15th day prior to the date such amount is required to be paid. This Section 5.1 is in furtherance of and subject to Sections 315 and 316 of the Trust Indenture Act of 1939. Section 5.2 CERTAIN RIGHTS OF THE TRUSTEE. In furtherance of and subject to the Trust Indenture Act of 1939, and subject to Section 5.1 hereof: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuer mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the 25 Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the holders of not less than a majority in aggregate Principal amount of the Securities then Outstanding; PROVIDED that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnify against such expenses or liabilities as a condition to proceeding; the expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor trustee, shall be repaid by the Issuer upon demand; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder whether directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. 26 Section 5.3 TRUSTEE NOT RESPONSIBLE FOR RECITAL, DISPOSITION OF SECURITIES OR APPLICATION OF PROCEEDS THEREOF. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. Section 5.4 TRUSTEE AND AGENTS MAY HOLD SECURITIES COLLECTIONS, ETC. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not the Trustee or such agent and may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. Section 5.5 MONEYS HELD BY TRUSTEE. Subject to the provisions of Section 9.4 hereof, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee in the absence of negligence of such persons, shall be under any liability for interest on any moneys received by it hereunder. Section 5.6 COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS PRIOR CLAIM. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as the Issuer and the Trustee shall from time to time agree in writing (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ), except to the extent any such expense, disbursement or advance may arise from its negligence or bad faith. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder and the performance of its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises, except to the extent any such loss, liability or expense is due to its own negligence or bad faith. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay 27 or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of some but not all of the Securities, and the Securities are hereby subordinated to such senior claim. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 4.1(d) or Section 4.1(e) the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law. Section 5.7 RIGHT OF TRUSTEE TO RELY ON OFFICERS' CERTIFICATE, ETC. Subject to Section 5.1 and 5.2 hereof, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. Section 5.8 DISQUALIFICATION; CONFLICTING INTERESTS. If the Trustee has or shall acquire a conflicting interest within the meaning of Section 310(b) of the Trust Indenture Act of 1939, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of the Trust Indenture Act of 1939 and this Indenture. Nothing herein shall prohibit the Trustee from filing the application provided for by the penultimate paragraph of Section 310(b) of the Trust Indenture Act of 1939. Section 5.9 PERSONS ELIGIBLE FOR APPOINTMENT AS TRUSTEE. The Trustee hereunder shall at all times be a corporation having a combined capital and surplus of at least $50,000,000, and which is eligible in accordance with the provisions of Section 310(a) of the Trust Indenture Act of 1939. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of a Federal, State or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Section 5.10 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR TRUSTEE. (a) The Trustee may at any time resign by giving written notice of resignation to the Issuer and by mailing notice thereof by first-class mail to holders of Securities 28 at their last addresses as they shall appear on the Security register. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide holder of a Security or Securities for at least six months may, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 5.8 hereof after written request therefor by the Issuer or by any Securityholder who has been a bona fide holder of a Security or Securities for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 5.9 hereof and this Section 5.10 and shall fail to resign after written request therefor by the Issuer or by any such Securityholder; or (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; or (iv) the Trustee shall be found unsuitable by the Nevada Gaming Commission or the Nevada Gaming Control Board, then, in any such case, the Issuer may remove the Trustee and promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be delivered to the Trustee so removed and one copy of the successor trustee, or, subject to Section 315(e) of the Trust Indenture Act of 1939, any Securityholder who has been a bona fide holder of a Security or Securities for at least 29 six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate Principal amount of the Securities at the time Outstanding may at any time remove the Trustee and appoint a successor trustee by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 6.1 hereof of the action in that regard taken by the Securityholders. (d) Any resignation or removal of the Trustee and any appointment of a successor trustee pursuant to any of the provisions of this Section 5.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 5.11 hereof. Section 5.11 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in this Section 5.11 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 9.4 hereof, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 5.6 hereof. Upon acceptance of appointment by a successor trustee as provided in this Section 5.11 hereof, the Issuer shall mail notice thereof by first-class mail to the holders of Securities at their last addresses as they shall appear in the Security register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 5.10 hereof. If the Issuer fails to mail such notice within 10 days after acceptance of appointment by the 30 successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Issuer. Section 5.12 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF TRUSTEE. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be eligible under the provisions of Section 5.10 hereof, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 5.13 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE ISSUER. If and when the Trustee shall be, or shall become a creditor, directly or indirectly, secured or unsecured of the Issuer (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of Section 311 of the Trust Indenture Act of 1939. ARTICLE 6 CONCERNING THE SECURITYHOLDERS Section 6.1 EVIDENCE OF ACTION TAKEN BY SECURITYHOLDERS. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such 31 agent shall be sufficient for any purpose of this Indenture and (subject to Sections 5.1 and 5.2 hereof) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article 6. Section 6.2 PROOF OF EXECUTION OF INSTRUMENTS AND OF HOLDING OF SECURITIES; RECORD DATE. Subject to Section 5.1 and 5.2 hereof, the execution of any instrument by a Securityholder or his agent or proxy may be proved in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Securities shall be proved by the Security register or by a certificate of the Registrar thereof. The Issuer may set a record date for purposes of determining the identity of holders of Securities entitled to vote or consent to any action referred to in Section 6.1 hereof, which record date may be set at any time or from time to time by notice to the Trustee, for any date or dates (in the case of any adjournment or resolicitation) not more than 60 days nor less than 15 days prior to the proposed date of such vote or consent, and thereafter, notwithstanding any other provisions hereof, only holders of Securities of record on such record date shall be entitled to so vote or give such consent or to draw such vote or consent. Section 6.3 HOLDERS TO BE TREATED AS OWNERS. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the Principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. Section 6.4 SECURITIES OWNED BY ISSUER DEEMED NOT OUTSTANDING. In determining whether the holders of the requisite aggregate Principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Issuer or any other obligor on the Securities or any Affiliate of the Issuer or any other obligor on the Securities shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith and in respect of which the pledgee 32 possesses voting rights may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any Affiliate of the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advise of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 5.1 and 5.2 hereof, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. Section 6.5 RIGHT OF REVOCATION OF ACTION TAKEN. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 6.1 hereof, of the taking of any action by the holders of the percentage in aggregate Principal amount of the Securities specified in this Indenture, in connection with such action, any holder of a Security the serial number of which is shown by the evidence to be included among the serial numbers of the Securities the holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such actions taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security and of any Securities issued in exchange or substitution therefor or upon registration or transfer thereof, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the holders of the percentage in aggregate Principal amount of the Securities specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the holders of all the Securities. Section 6.6 COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS. Securityholders may communicate pursuant to Section 312(b) of the Trust Indenture Act of 1939 with respect to their rights under this Indenture or the Securities. The Issuer, the Trustee, the Registrar and any other person shall have the protection of Section 312(c) of the Trust Indenture Act of 1939. 33 ARTICLE 7 SUPPLEMENTAL INDENTURES Section 7.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF SECURITYHOLDERS. The Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities any property or assets; (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article 8 hereof; (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as its Board of Directors and the Trustee shall consider to be for the protection of the holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the holders of a majority in aggregate Principal amount of the Securities to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; (e) to make such other provisions in regard to matters or questions arising under this Indenture or under any supplemental indenture as the Board of Directors may deem necessary or desirable and which shall not adversely affect the interests of the holders of the Securities; (f) to make any changes required by amendments to the TIA; 34 (g) to unilaterally reduce the Conversion Price (as defined in Section 13.5 hereof) or the Special Conversion Price (as defined in Section 13.5 hereof); and (h) subject to Section 5.10(c) of this Indenture, appoint a successor Trustee. The Trustee is hereby authorized to join in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which adversely affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the holders of any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 7.2 hereof. Section 7.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF SECURITYHOLDERS. With the consent (evidenced as provided in Article 6 hereof) of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding, the Issuer, when authorized by a resolution of its Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental Indenture or modifying in any manner the rights of the holders of the Securities; PROVIDED, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the Principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or alter the redemption provisions thereof, or impair or affect the right of any Securityholder to institute suit for the payment or conversion thereof, or amend Section 4.10 hereof, or adversely affect the right to convert the Securities into Common Stock or Special Stock or the right to require the Issuer to redeem the Securities upon a Redemption Event (as defined in Section 14.3 hereof) in accordance herewith without the consent of the holder of each Security so affected, PROVIDED, no consent of any Holder of any Security shall be necessary under this Section 7.2 to permit the Trustee and the Issuer to execute supplemental indentures pursuant to Section 7.1 hereof and Section 13.6 hereof of this Indenture or (b) reduce the aforesaid percentage in aggregate principal amount of Securities, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of all Securities then Outstanding. Notwithstanding any other provision thereof, no such supplemental indenture shall modify any provision of this Indenture so as to affect adversely the rights under Article 12 35 hereof of any holder of Senior Indebtedness at the time outstanding without the consent of such holder. Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors certified by the Secretary or an Assistant Secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders and other documents, if any, required by Section 6.1 hereof, the Trustee shall join with the Issuer in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Issuer shall mail a notice thereof by first-class mail to the holders of Securities at their addresses as they shall appear on the registry books of the Issuer, setting forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. Section 7.3 EFFECT OF SUPPLEMENTAL INDENTURE. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Issuer and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 7.4 DOCUMENTS TO BE GIVEN TO TRUSTEE. The Trustee, subject to the provisions of Sections 5.1 and 5.2 hereof, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such supplemental indenture complies with the applicable provisions of this Indenture. Section 7.5 NOTATION ON SECURITIES IN RESPECT OF SUPPLEMENTAL INDENTURES. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved 36 by the Trustee as to any matter provided for by such supplemental indenture or as to any action taken at any such meeting. If the Issuer or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities then Outstanding. ARTICLE 8 CONSOLIDATION, MERGER, SALE OR CONVEYANCE Section 8.1 COVENANT NOT TO MERGE, CONSOLIDATE, SELL OR CONVEY PROPERTY EXCEPT UNDER CERTAIN CONDITIONS. The Issuer covenants that it will not merge or consolidate with any corporation, partnership or other entity and will not sell, lease or convey all or substantially all its assets to any entity, unless the Issuer shall be the surviving entity, or the successor entity that acquires all or substantially all of the assets of the Issuer shall be a corporation, partnership or limited liability company or trust organized under the laws of the United States or a State therein or the District of Columbia and shall expressly assume by supplemental indenture all obligations of the Issuer under this Indenture and the Securities, and immediately after giving effect to such merger, consolidation, sale, lease or conveyance, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing. Section 8.2 SUCCESSOR ENTITY SUBSTITUTED. In case of any such consolidation, merger, sale, lease or conveyance, and following such an assumption by the successor entity, such successor entity shall succeed to and be substituted for the Issuer, with the same effect as if it had bene named herein. Such successor entity may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor entity, instead of the Issuer, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all such Securities had been issued at the date of the execution hereof. 37 In case of any such consolidation, merger, sale, lease or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued as may be appropriate. In the event any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor entity which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. Section 8.3 OPINION OF COUNSEL TO TRUSTEE. The Trustee, subject to the provisions of Sections 5.1 and 5.2 hereof, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, lease or conveyance, and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture. Section 8.4 SUBSIDIARY AS SUCCESSOR. In the event that a subsidiary of the Issuer is or becomes the holder of all or substantially all of the assets of the Issuer, then such subsidiary shall expressly assume by supplemental indenture all obligations of the Issuer under this Indenture and the Securities. Notwithstanding the assumption of the Issuer's obligations by a subsidiary of the Issuer, the Issuer will remain fully obligated under this Indenture and the Securities. ARTICLE 9 SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS Section 9.1 SATISFACTION AND DISCHARGE OF INDENTURE. If at any time (a) the Issuer shall have delivered to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.7 hereof) and Securities for whose payment money has theretofore been deposited in trust with the Trustee or a paying agent and repaid pursuant to Section 9.4 hereof or (b)(i) all such Securities not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements reasonably satisfactory to the Trustee for the giving of notice of redemption, and (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any Paying Agent to the Issuer in accordance with Section 9.4 hereof) or direct obligations of the United States of America backed by its full faith and credit, maturing as to Principal and interest in such amounts and at such times as in the written opinion of a firm of nationally recognized 38 independent public accountants delivered to the Trustee will insure the availability of cash sufficient to pay at maturity or upon redemption all such Securities not theretofore delivered to the Trustee for cancellation, including Principal and interest due or to become due to such date of maturity or redemption as the case may be, and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer, then this Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer, conversion and exchange, and the Issuer's right to optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of holders to receive payments of Principal thereof and interest thereon upon the original stated due dates therefor (but not upon acceleration), (iv) the rights, obligations and immunities of the Trustee hereunder and (v) the rights of the Securityholders as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them), and the Trustee, on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture, provided that the rights of holders of the Securities to receive amounts in respect of Principal of and interest on the Securities held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities. Section 9.2 APPLICATION BY TRUSTEE OF FUNDS DEPOSITED FOR PAYMENT OF SECURITIES. Subject to Section 9.4 hereof, all moneys deposited with the Trustee pursuant to Section 9.1 hereof shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the holders of the particular Securities for the payment or redemption for which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for Principal and interest, but such money need not be segregated from other funds except to the extent required by law. Moneys held in trust pursuant to Section 9.1 hereof shall not be subject to the claims of holders of Senior Indebtedness under Article Twelve. Section 9.3 REPAYMENT OF MONEYS HELD BY PAYING AGENT. In connection with the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent under the provisions of this Indenture shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such Paying 39 Agent shall be released from all further liability with respect to such moneys. Section 9.4 RETURN OF MONEYS HELD BY TRUSTEE AND PAYING AGENT UNCLAIMED FOR TWO YEARS. Any moneys deposited with or paid to the Trustee or any Paying Agent for the payment of the Principal of, interest on, or payments in respect of redemptions of any Security and not applied but remaining unclaimed for two years after the date upon which such Principal, interest or redemption payment shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee or such Paying Agent, and the holder of such Security shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease. ARTICLE 10 MISCELLANEOUS PROVISIONS Section 10.1 INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS OF ISSUER AND OTHERS EXEMPT FROM INDIVIDUAL LIABILITY. No recourse under or upon any obligations, covenant or agreement contained in this Indenture, or in any Security, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such, or against any past, present or future stockholder, officer, director, employee, manager, agent or Affiliate, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities by the holders thereof and as part of the consideration for the issue of the Securities. Section 10.2 PROVISIONS OF INDENTURE FOR THE SOLE BENEFIT OF PARTIES AND SECURITYHOLDERS. Nothing in this Indenture or in the Securities, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the holders of Senior Indebtedness and the holders of the Securities, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and the holders of Senior Indebtedness and of the holders of the Securities. Section 10.3 SUCCESSORS AND ASSIGNS OF ISSUER BOUND BY INDENTURE. All the covenants, stipulations, promises and 40 agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. Section 10.4 NOTICES AND DEMANDS ON ISSUER, TRUSTEE AND SECURITYHOLDERS. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Securities to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail or a national next-day delivery service (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to Alliance Gaming Corporation, 4380 Boulder Highway, Las Vegas, Nevada 89121. Any notice, direction, request or demand by the Issuer or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if in writing and given or made at the Corporate Trust Office. Where this Indenture provides for notice to holders, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each holder entitled thereto, at his last address as it appears in the Security register. In any case where notice to holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular holder shall affect the sufficiency of such notice with respect to other holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer and Securityholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 10.5 OFFICERS' CERTIFICATES AND OPINIONS OF COUNSEL; STATEMENTS TO BE CONTAINED THEREIN. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any 41 provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. Section 10.6 PAYMENTS DUE ON SATURDAYS, SUNDAYS AND HOLIDAYS. If the date of maturity of interest on or Principal of 42 the Securities or the date fixed for redemption of any Security shall not be a Business Day, then payment of interest or Principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. Section 10.7 CONFLICT OF ANY PROVISION OF INDENTURE WITH TRUST INDENTURE ACT OF 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture by operation of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, which Sections are incorporated herein by reference and made a part hereof (an "incorporated provision"), such incorporated provision shall control. Section 10.8 GOVERNING LAW. This Indenture and each Security shall be deemed to be a contract under, and shall be governed by and construed under the laws of the State of New York, except as otherwise required by mandatory provisions of Nevada law, including without limitation, the Nevada Gaming Control Act and the regulations promulgated thereunder. Section 10.9 COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. Section 10.10 EFFECT OF HEADINGS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. ARTICLE 11 REDEMPTION OF SECURITIES Section 11.1 RIGHT OF OPTIONAL REDEMPTION; PRICES. (a) The Issuer at its option may, at any time, redeem all, or from time to time any part of, the Securities upon payment of the optional redemption prices set forth in the form of Security attached as Exhibit A hereto, together with accrued but unpaid interest to the date fixed for redemption to the extent not theretofore paid, if any; provided, that until September 15, 1996 the Securities cannot be so redeemed at the option of the Issuer unless the last sale price of the Common Stock as reported on the Composite Tape for New York Stock Exchange Listed Stocks (or if not listed or admitted to trading on such Exchange, then on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ/NMS or a similar organization if NASDAQ/NMS is no longer reporting 43 information) has equaled or exceed 250% of the then existing Conversion Price (as defined in Section 13.5 hereof) per share for at least 20 out of any 30 consecutive Trading Days ending within 60 days before the notice of redemption is first mailed. (b) Notwithstanding any other provision hereof, if a Holder or beneficial owner of a Security or any underlying Common Stock or Special Stock is required by the Nevada Gaming Commission to be found suitable, the Holder or beneficial owner shall apply for a finding of suitability within 30 days after the Nevada Gaming Commission's request. The applicant for a finding of suitability shall pay all costs of the investigation for such finding of suitability. If a Holder or beneficial owner is required to be found suitable and is not found suitable by the Nevada Gaming Commission, at the Issuer's option (i) the Holder or beneficial owner shall, upon request of the Issuer, dispose of his Securities and underlying Common Stock or Special Stock within 30 days or within that time prescribed by the Nevada Gaming Commission, whichever is earlier, or (ii) the Issuer may, at its option, redeem the Holder's or beneficial owner's Securities at the lesser of (x) the principal amount thereof and (y) the price at which the Securities were acquired by the Holder or beneficial owner, together with, in either case, accrued interest to the date of the finding of unsuitability by the Nevada Gaming Commission. Section 11.2 NOTICE OF REDEMPTION; PARTIAL REDEMPTIONS. Notice of redemption to the Holders of Securities to be redeemed as a whole or in part shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 20 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities at their last addresses as they shall appear upon the registry books. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part, shall not affect the validity of the proceedings for the redemption of any other Security. The notice of redemption to each such Holder shall identify the Securities to be redeemed (including CUSIP numbers) and shall specify the Principal amount of each Security held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued but unpaid to the date fixed for redemption will be paid as specified in said notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue and shall also specify the Conversion Price (as defined in Section 13.5 hereof) then in effect and the date on which the right to convert such Securities or the portions thereof to be redeemed will expire. In case any Security is to be redeemed in part only the notice of redemption shall state the portion of the Principal amount 44 thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in Principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. At least one Business Day prior to the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more Paying Agents (or, if the Issuer is acting as its own Paying Agent, set aside, segregate and hold in trust as provided in Section 3.4 hereof) an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption (other than those theretofore surrendered for conversion into Common Stock or Special Stock), at the appropriate redemption price, together with accrued but unpaid interest to the date fixed for redemption. If any Security called for redemption is converted pursuant hereto, any money deposited with the Trustee or any Paying Agent or so segregated and held in trust for the redemption of such Security shall be paid to the Issuer upon the Issuer's request, or, if then held by the Issuer, shall be discharged from such trust. The Issuer will deliver to the Trustee no less than 10 Business Days prior to the mailing of notices of redemption as required by this Section 11.2 an Officers' Certificate stating the aggregate Principal amount of Securities to be redeemed, as well as all other information required to be in such notices. If less than all the Securities are to be redeemed, the Trustee shall select, by lot, pro rata or in such manner as the Trustee shall deem fair and equitable, Securities to be redeemed in whole or in part. Securities may be redeemed in part in integral multiples of $1,000 only. The Trustee shall promptly notify the Issuer in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the Principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the Principal amount of such Security which has been or is to be redeemed. If any Security selected for partial redemption is surrendered for conversion after such selection, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Upon any redemption of less than all the Securities, the Issuer and the Trustee may treat as Outstanding Securities surrendered for conversion during the period of 15 days next preceding the mailing of a notice of redemption, and need not treat as Outstanding any Security authenticated and delivered during such period in exchange for 45 the unconverted portion of any Security converted in part during such period. Section 11.3 PAYMENT OF SECURITIES CALLED FOR REDEMPTION. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued but unpaid to the date fixed for redemption, and on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued but unpaid to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue and, except as provided in Sections 5.5 and 9.4 hereof, such Securities shall cease from and after the date fixed for redemption to be convertible into Common Stock or Special Stock and to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities at a place of payment specified in said notice, said Securities or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; PROVIDED that any semi-annual payment of interest becoming due on the date fixed for redemption shall be payable to the holders of such Securities registered as such on the relevant record date subject to the terms and provisions of Section 2.4 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the Principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Security and such Security shall remain convertible into Common Stock or Special Stock until the Principal of such Security shall have been paid or duly provided for. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the holder thereof, at the expense of the Issuer, a new Security or Securities, of authorized denominations, in Principal amount equal to the unredeemed portion of the Security so presented. Section 11.4 EXCLUSION OF CERTAIN SECURITIES FROM ELIGIBILITY FOR SELECTION FOR REDEMPTION. Securities shall be excluded from eligibility for selection for redemption if they are identified by registration and certificate number in a written statement signed by an authorized officer of the Issuer and delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by 46 either (a) the Issuer or (b) an entity specifically identified in such written statement as an Affiliate of the Issuer. ARTICLE 12 SUBORDINATION OF SECURITIES Section 12.1 AGREEMENT TO SUBORDINATE. The Issuer covenants and agrees, and each holder of Securities issued hereunder by his acceptance thereof likewise covenants and agrees, that all Securities shall be issued subject to the provisions of this Article 12; and each person holding any Security, whether upon original issue or upon transfer, assignment or exchange thereof accepts and agrees that the Principal of, interest on and payments in respect of redemption at the option of Holders of all Securities issued hereunder shall, to the extent and in the manner herein set forth, be subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness. Section 12.2 PAYMENTS TO SECURITYHOLDERS. No payment on account of Principal of, interest on and redemptions at the option of Holders of the Securities shall be made if at the time of such payment or immediately after giving effect thereto there shall have occurred and be continuing a default in any payment with respect to any Senior Indebtedness permitting the holders thereof to accelerate the maturity thereof or a default in any payment due thereon at maturity or any judicial proceeding shall be pending with respect to any such default and such event of default shall not have been cured or waived or shall not have ceased to exist. In addition, upon the occurrence of any other default with respect to any Senior Indebtedness permitting any holder of or agent for a syndicate of lenders which syndicate in the aggregate holds in excess of $5 million of Senior Indebtedness to accelerate the maturity thereof, and upon receipt by the Issuer and the Trustee of written notice of such occurrence (a "Blockage Notice") by any of the foregoing Persons, no payment on account of Principal of, interest on and redemptions at the option of Holders of the Securities in cash, property or securities shall be made by the Issuer to the Trustee or any holder of the Securities during a period (the "Payment Blockage Period") commencing on the date of receipt of a Blockage Notice by the Issuer and ending 179 days thereafter (unless such Payment Blockage Period shall be earlier terminated by written notice to the Trustee), or such earlier date, if any, on which the Senior Indebtedness to which such event of default relates is paid in full or such event of default is waived in writing by the holders or owners of such Senior Indebtedness or otherwise cured. Not more than one Payment Blockage Period may be commenced with respect to the Securities during any period of 360 consecutive days. 47 Upon (i) any acceleration of the Principal amount due on the Securities or (ii) any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, assignment for the benefit of creditors, marshalling of assets and liabilities or total or partial liquidation or arrangement or reorganization of the Issuer, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash, or payment thereof provided for in accordance with its terms, before any payment is made on account of the Principal of, interest on or redemptions at the option of the Holders of the Securities, and upon any such dissolution, winding-up, assignment for the benefit of creditors, marshalling of assets and liabilities or liquidation, arrangement or reorganization, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, to which the holders of the Securities or the Trustee under this Indenture would be entitled, except for the provisions hereof, shall be paid by the Issuer or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holders of the Securities or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders) or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full in cash (including, without limitation, except to the extent, if any, prohibited by mandatory provisions of law, post-petition interest, in any such proceedings), after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the holders of the indebtedness evidenced by the Securities or to the Trustee under this Indenture. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee under this Indenture or by any Holder of the Securities before all Senior Indebtedness is paid in full or provision is made for such payment in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in 48 full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness. For purposes of this Article 12, the words, "cash, property or securities" shall not be deemed to include shares of stock of the Issuer as reorganized or readjusted, or securities of the Issuer or any other corporation provided for by a plan of arrangement, reorganization or readjustment, the payment of which is subordinated (to a greater extent than provided in this Article with respect to the Securities) to the payment of all Senior Indebtedness which may at the time be outstanding; provided, that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from any such arrangement, reorganization or readjustment, and (ii) the rights of the holders of the Senior Indebtedness are not, without the consent of such holders, altered by such arrangement, reorganization or readjustment. The consolidation of the Issuer with, or the merger of the Issuer into, another corporation or the liquidation or dissolution of the Issuer following the conveyance or transfer of all or substantially all of its assets, to another corporation upon the terms and conditions provided in Article 8 hereof shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 12.2 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article 8 hereof. Nothing in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 5.6 hereof, except as provided therein. This Section 12.2 shall be subject to the further provisions of Section 12.5 hereof. Section 12.3 SUBROGATION OF SECURITIES. Subject to the payment in full of all Senior Indebtedness, the Holders of the Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property, securities of the Issuer applicable to the Senior Indebtedness until the Principal of and interest on and redemption prices payable at the option of the Holders of the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee on their behalf would be entitled except for the provisions of this Article 12, and no payment pursuant to the provisions of this Article 12 to the holders of Senior Indebtedness by Holders of the Securities or the Trustee on their behalf shall, as between the Issuer, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, be deemed to be a payment by the Issuer to or on account of the Senior Indebtedness, and no payments or distributions of cash, property or securities to or for the benefit of the Securityholders pursuant to the subrogation provision of this Article 12, which would otherwise have been paid to the holders of Senior Indebtedness shall be deemed to be 49 a payment by the Issuer to or for the account of the Securities. It is understood that the provisions of this Article 12 are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article 12 or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Issuer, its creditors other than the holders of Senior Indebtedness, and the Holders of the Securities, the obligation of the Issuer, which is absolute and unconditional, to pay to the Holders of the Securities the Principal of, interest on and redemption prices payable at the option of the Holders of the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Issuer other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Holder of any Security or the Trustee on his behalf from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 12 of the holders of Senior Indebtedness in respect of cash, property or securities of the Issuer received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Issuer referred to in this Article 12, the Trustee, subject to the provisions of Sections 5.1 and 5.2 hereof, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such bankruptcy, dissolution, winding-up, liquidation, arrangement or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, delivered to the Trustee or to the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Issuer, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. Section 12.4 AUTHORIZATION BY SECURITYHOLDERS. Each Holder of a Security by his acceptance thereof authorizes the Trustee in his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article 12 and appoints the Trustee his, her or its attorney- in-fact for any and all such purposes. Section 12.5 NOTICE TO TRUSTEE. The Issuer shall give prompt written notice to the Trustee and to any Paying Agent of any fact known to the Issuer which would prohibit the making of any payment of moneys to or by the Trustee or any Paying Agent in respect of the Securities pursuant to the provisions of this 50 Article 12. Regardless of anything to the contrary contained in this Article 12 or elsewhere in this Indenture, the Trustee shall not be charged with knowledge of the existence of any Senior Indebtedness or of any default or event of default with respect to any Senior Indebtedness or of any other facts which would prohibit the making of any payment of moneys to or by the Trustee, unless and until the Trustee shall have received notice in writing at its Corporate Trust Office to that effect signed by an officer of the Issuer, or by a holder or agent of a holder of Senior Indebtedness who shall have been certified by the Issuer or otherwise established to the reasonable satisfaction of the Trustee to be such holder or agent, or by the trustee under any indenture pursuant to which Senior Indebtedness shall be outstanding, and, prior to the receipt of any such written notice, the Trustee shall, subject to Sections 5.1 and 5.2 hereof, be entitled to assume that no such facts exist; provided that if on a date at least one Business Day prior to the date upon which by the terms hereof any such moneys shall become payable for any purpose (including, without limitation, the payment of the Principal of, or interest on, any Security) the Trustee shall not have received with respect to such moneys the notice provided for in this Section, then, regardless of anything herein to the contrary, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. Regardless of anything to the contrary herein, nothing shall prevent (a) any payment by the Issuer or the Trustee to the Securityholders of amounts in connection with a redemption of Securities if (i) notice of such redemption has been given pursuant to Article 11 prior to the receipt by the Trustee of written notice as aforesaid, and (ii) such notice of redemption is given not earlier than 60 days before the redemption date, or (b) any payment by the Trustee to the Securityholders of amounts deposited with it pursuant to Section 9.1 hereof. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article 12, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article 12, and if such evidence is not furnished the Trustee may 51 defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 12.6 TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee and any agent of the Issuer or the Trustee shall be entitled to all the rights set forth in this Article 12 with respect to any Senior Indebtedness which may at any time be held by it in its individual or any other capacity to the same extent as any other holder of Senior Indebtedness and nothing in this Indenture shall deprive the Trustee, or any such agent, of any of its rights as such holder. Nothing in this Article 12 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 5.6 hereof. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if the Trustee shall in good faith without gross negligence pay over or distribute to Holders of Securities or to the Issuer or to any other person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article 12 or otherwise. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article 12, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. Section 12.7 NO IMPAIRMENT OF SUBORDINATION. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Issuer or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Issuer with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. No modification, amendment, extension or renewal of any Senior Indebtedness shall impair the rights of the holders of such Senior Indebtedness under the subordination provisions of this Article 12. Section 12.8. SECURITIES SENIOR TO OLD CONVERTIBLE DEBENTURES. The Securities shall be superior in right of payment to the Old Convertible Debentures and to any other Indebtedness which is pari passu with, or subordinated to, the Old Convertible Debentures. ARTICLE 13 CONVERSION OF SECURITIES Section 13.1 CONVERSION PRIVILEGE; MANDATORY CONVERSION UPON CONSUMMATION OF MERGER. (a) Subject to and upon compliance with the provisions of this Article 13 and subject to Sections 14.2(b) and (d) hereof, at the option of the Holder thereof, any Security may, at any time until and including, but not after the close of business on the second Business Day prior to September 15, 2003 or in case such Security or some portion thereof shall be called for redemption prior to such date, then, with respect to such 52 Security or portion thereof as is so called, until and including, but (if no default is made in making due provision for the payment of the redemption price) not after, the close of business on, the fifth Business Day prior to the date fixed for redemption, be converted, in whole, or in part in integral multiples of $1,000 principal amount, into fully paid and non-assessable shares of Common Stock issuable upon conversion of the Securities, at the Conversion Price (as defined in Section 13.5 hereof) in effect at the Date of Conversion (as hereinafter defined). (b) In the event that prior to ____________, 1996 the Merger becomes effective under Section 251 of the Delaware General Corporation Law, then at the time and date of such effectiveness (the "Effective Time of the Merger"), each Security then outstanding shall be automatically, and without any further action on the part of the Issuer, the Trustee or any Securityholder, converted into fully paid and non-assessable shares of Common Stock, at the Special Conversion Price (as defined in Section 13.5 hereof) in effect at the Effective Time of the Merger; provided, however, that, if so specified on the face of any Security, then, in lieu of such shares of Common Stock, such Security shall be automatically converted into fully paid and non-assessable shares of Special Stock, at the conversion rate of ten shares of Special Stock for each $1,000 principal amount of Securities held by such Securityholders immediately prior to the Effective Time of the Merger. From and after the Effective Time of the Merger, all of the Securities shall cease to be convertible into Common Stock pursuant to Section 13.1(a) hereof, and the holders thereof shall have no right in respect of the Securities (including without limitation the right to receive interest and Principal except the right to receive shares of Common Stock or Special Stock in accordance with this Section 13.1(b) and the procedures set forth in Section 13.2(b) hereof. Section 13.2 EXERCISE OF CONVERSION PRIVILEGE. (a) In order to exercise the conversion privilege, the holder of any Security to be converted pursuant to Section 13.1(a) hereof shall surrender such Security to the Issuer at any time during usual business hours at its office or agency maintained for the purpose as provided in this Indenture, accompanied by a fully executed written optional conversion notice, in substantially the form set forth on the reverse of the Security, that the holder elects to convert such Security or a stated portion thereof constituting an integral multiple of $1,000 principal amount, and, if such Security is surrendered for conversion during the period between the close of business on March 1 or September 1 in any year and the opening of business on the following March 15 or September 15 and has not been called for redemption on a redemption date within such period accompanied also by payment of an amount equal to the interest 53 payable on such March 15 or September 15 on the principal amount of the Security being surrendered for conversion. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock shall be issued. Securities surrendered for conversion pursuant to Section 13.1(a) hereof shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Trustee duly executed by, the holder or his attorney duly authorized in writing. As promptly as practicable after the receipt of such notice and the surrender of such Security as aforesaid, the Issuer shall, subject to the provisions of Section 13.8 hereof, issue and deliver at such office or agency to such holder, or on his written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion of Securities pursuant to Section 13.1(a) hereof in accordance with the provisions of this Article and cash, as provided in Section 13.3 hereof, in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date (herein called the "Date of Conversion") on which such notice shall have been received by the Issuer and such Security shall have been surrendered as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on the Date of Conversion the holder or holders of record of the shares represented thereby; PROVIDED, HOWEVER, that any such surrender on any date when the stock transfer books of the Issuer shall be closed shall constitute the person or persons in whose name or names the certificate or certificates for such shares are to be issued as the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open but such conversion shall nevertheless be at the Conversion Price in effect at the close of business on the date when such Security shall have been so surrendered with the conversion notice. In the case of conversion of a portion, but less than all, of a Security pursuant to Section 13.1(a) hereof, the Issuer shall execute, and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Issuer, a Security or Securities in the aggregate principal amount of the unconverted portion of the Security surrendered. Except as otherwise expressly provided in this Indenture, no payment or adjustment shall be made for interest accrued on any Security (or portion thereof) converted pursuant to Section 13.1(a) hereof or for dividends or distributions on any Common Stock issued upon any such conversion. (b) As soon as practicable (but in any case within five Business Days) after the Effective Time of the Merger, the Issuer shall give written notice thereof (the "Issuer's Notice") to the Trustee and each holder of Securities in accordance with Section 10.4 hereof. The Issuer's Notice shall specify (i) that 54 the Merger has become effective, (ii) the time and date of the Effective Time of the Merger, (iii) that all of the Securities outstanding as of the Effective Time of the Merger were automatically, and without any further action on the part of the Issuer, the Trustee or any Securityholder, converted into (A) fully paid and non-assessable shares of Common Stock at the Special Conversion Price or (B) or Special Stock at a conversion rate of ten shares of Special Stock for each $1,000 princpal amount of Securities in accordance with Section 13.1(b) hereof and (iv) that from and after the Effective Time of the Merger, all of the Securities ceased to be convertible into Common Stock pursuant to Section 13.1(a) hereof, and the holders thereof no longer have any right in respect of the Securities (including without limitation the right to receive interest and Principal in respect thereof) except the right to receive shares of Common Stock or Special Stock in accordance with Section 13.1(b) hereof and the procedures set forth in this Section 13.2(b). Any Issuer's Notice which is sent in the manner provided in Section 10.4 hereof shall be conclusively presumed to have been duly given, whether or not the Trustee or any Holder receives such notice. Failure to give the Issuer's Notice, or any defect in the Issuer's Notice to the Trustee or any Holder, shall not in any way affect the validity of the conversion pursuant to Section 13.1(b). Following the Effective Time of the Merger, the holder of any Security may surrender such Security to the Issuer at any time during usual business hours at its office or agency maintained for the purpose as provided in this Indenture, accompanied by a fully executed written notice, in substantially the form set forth on the reverse of the Security, that the Security is being surrendered for conversion in accordance with Section 13.1(b) hereof. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock or Special Stock shall be issued. Securities surrendered for conversion shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer or the Trustee duly executed by, the holder or his attorney duly authorized in writing. As promptly as practicable after the receipt of such notice and the surrender of such Security as aforesaid, the Issuer shall, subject to the provisions of Section 13.8 hereof, issue and deliver at such office or agency to such holder, or on his written order, a certificate or certificates for the number of full shares of Common Stock and/or 55 Special Stock issuable on such conversion of Securities in accordance with the provisions of this Article and cash, as provided in Section 13.3 hereof, in respect of any fraction of a share of Common Stock or Special Stock otherwise issuable upon such conversion. Such conversion shall be deemed to have been effected at the Effective Time of the Merger, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock or Special Stock shall be issuable upon such conversion shall be deemed to have become at the Effective Time of the Merger the holder or holders of record of the shares represented thereby; provided, however, that no holder or holders of Securities shall be entitled to vote, or to receive any dividends or distributions on, any shares of Common Stock or Special Stock issuable upon conversion thereof until such time as such Securities are surrendered for conversion pursuant to this Section 13.2(b). No payment or adjustment shall be made for interest accrued on any Security converted pursuant to Section 13.1(b) or for dividends or distributions on any Common Stock or Special Stock issued upon any such conversion. Section 13.3 FRACTIONAL INTERESTS. No fractions of shares of Common Stock or scrip representing fractions of shares of Common Stock shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate Principal amount of the Securities so surrendered. If any fraction of a share of Common Stock would, except for the provisions of this Section, be issuable on the conversion of any Security or Securities, the Issuer shall make payment in lieu thereof in an amount of United States dollars equal to the value of such fraction computed on the basis of the last sale price of the Common Stock as reported on the Composite Tape for New York Exchange Listed Stocks (or if not listed or admitted to trading on such Exchange, then on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ/NMS or a similar organization if NASDAQ/NMS is no longer reporting information) on the last Trading Day priorto the Date of Conversion or if no such sale takes place on such day, the last sale price for such day shall be the average of the closing bid and asked prices regular way on the New York Stock Exchange (or if not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the average of the highest bid and lowest asked prices on NASDAQ/NMS or a similar organization if NASDAQ/NMS is no longer reporting information) for such day (any such last sale price being hereinafter referred to as the "Last Sale Price"). If on such Trading Day the Common Stock is not quoted by any such organization, the fair value of such Common Stock on suchday, as determined by the Board of Directors, shall 56 be used. Fractional shares of Special Stock (in integral multiples of one ten-thousandth of a share of Special Stock) shall be issued, if and to the extent necessary to effectuate any conversion into Special Stock pursuant to Section 13.1(b) hereof, and no adjustment in cash shall be made for any fractional shares of Special Stock. Section 13.4 CONVERSION PRICE. The conversion price per share of Common Stock issuable upon conversion of the Securities pursuant to Section 13.1(a) hereof shall initially be $8.33. The conversion price per share of Common Stock issuable upon conversion of the Securities pursuant to Section 13.1(b) hereof shall initially be $5.56. Section 13.5 ADJUSTMENT OF CONVERSION PRICE AND SPECIAL CONVERSION PRICE. The conversion price per share of Common Stock issuable upon conversion of the Securities pursuant to Section 13.1(a) hereof (herein called the "Conversion Price") and the conversion price per share of Common Stock issuable upon conversion of the Securities pursuant to Section 13.1(b) hereof (herein called the "Special Conversion Price") shall be subject to adjustment from time to time as follows: (a) In case the Issuer shall (1) pay a dividend or make a distribution in shares of Common Stock on any class of Capital Stock of the Issuer, (2) subdivide its outstanding shares of Common Stock into a greater number of shares or (3) combine its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price and Special Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any Security thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which he would have owned immediately following such action had such Security been converted immediately prior thereto. An adjustment made pursuant to this subsection (a) shall become effective immediately, except as provided in subsection (g) below, after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) In case the Issuer shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (as determined pursuant to subsection (e) below) of the Common Stock on the record date mentioned below, the Conversion Price and the Special Conversion Price shall be adjusted to a price, computed to the nearest cent, so that the same shall equal the price determined by multiplying: (i) the Conversion Price or the Special Conversion Price, as the case may be, in effect immediately prior to the date of issuance of such rights or warrants by a fraction, of which 57 (ii) the numerator shall be (A) the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus (B) the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such current market price (determined by multiplying such total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by such current market price), and of which (iii) the denominator shall be (A) the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus (B) the number of additional shares of Common Stock which are so offered for subscription or purchase. Such adjustment shall become effective immediately, except as provided in subsection (g) below, after the record date for the determination of holders entitled to receive such rights or warrants. No adjustment will be made under this Section 13.5(b) in the event of the issuance or exercise of any warrants issued by the Issuer to Kirkland, KIC or GSA pursuant to any agreement among such parties and the Issuer which was entered into prior to the date of this Indenture. (c) In case the Issuer or any subsidiary of the Issuer shall distribute to all holders of Common Stock, any of its assets, evidences of indebtedness or securities other than Common Stock (other than (x) ordinary dividends in cash or other property whether or not paid out of retained earnings of the Issuer or (y) any dividend or distribution referred to in subsection (a) or (b) above) then in each such case the Conversion Price and the Special Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price or the Special Conversion Price, as the case may be, in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in subsection (e) below) of the Common Stock immediately prior to the record date mentioned below less the then fair market value (as determined by the Board of Directors, whose determination shall, if made in good faith, be conclusive evidence of such fair market value) of the portion of the assets so distributed or of such subscription rights or warrants applicable to one share of Common Stock, and of which the denominator shall be such current market price per share of the Common Stock. Such adjustment shall become effective immediately, except as provided in subsection (g) below, after the record date for the determination of stockholders entitled to receive such distribution. Notwithstanding the 58 foregoing, in the event that the fair market value of the assets, evidences of indebtedness or other securities so distributed applicable to one share of Common Stock equals or exceeds such current market price per share of Common Stock or such current market price exceeds such fair market value by less than $0.10 per share, the Conversion Price and the Special Conversion Price shall not be adjusted pursuant to this subsection (c) until such time as the cumulative amount of all such distributions exceeds $0.10 per share. (d) Unless provision is made, to the Trustee's reasonable satisfaction, for the Contingent Conversion (as defined below) by the Holders of the Securities in connection with an Offer (as defined below), then, the Issuer or any Subsidiary of the Issuer shall be prohibited from making a tender or exchange offer for all or any portion of the Issuer's Common Stock (any such tender or exchange offer being referred to as an "Offer") which involves (i) per share consideration the fair market value of which is in excess of 120% of the current market price per share (determined as provided in subsection (e) of this Section) prevailing three Business Days prior to the commencement of such Offer and (ii) an aggregate consideration having a fair market value as of the expiration of such Offer (the "Expiration Time") that, exceeds 110% of the product of the current market price per share (determined as provided in subsection (e) of this Section) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time. For purposes of this subsection (d), (i) the fair market value of any consideration with respect to an Offer shall be determined by the Board of Directors, whose determination shall be conclusive and described in a board resolution and (ii) a Contingent Conversion shall mean a conversion of Securities pursuant to Section 13.1(a) hereof pursuant to which the Holder of Securities can tender such Securities for conversion subject to the Common Stock issuable upon such conversion being acquired by the Issuer or any Subsidiary of the Issuer pursuant to an Offer and, to the extent such Common Stock is not so acquired, the portion of the Securities which would have been converted upon such acquisition but which were not acquired pursuant to the Offer shall be considered for all purposes under this Indenture as if such Securities were never tendered for conversion hereunder. (e) For the purpose of any computation under subsections (b), (c) and (d) above, the current market price per share of Common Stock on any date shall be deemed to be the average of the Last Sale Prices of a share of Common Stock for the five consecutive Trading Days selected by the Issuer commencing not more than 20 Trading Days before, and ending not later than, the earlier of the date in question 59 and the date before the "`ex' date," with respect to the issuance, distribution or Offer requiring such computation. If on any such Trading Day the Common Stock is not quoted by any organization referred to in the definition of Last Sale Price in Section 13.3 hereof, the fair value of the Common Stock on such day, as determined by the Board of Directors, shall be used. For purposes of this paragraph, the term "`ex' date," when used with respect to any issuance, distribution or payments with respect to an Offer, means the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock trades or on which the Common Stock is listed or admitted to trading without the right to receive such issuance, distribution or Offer. (f) In addition to the foregoing adjustments in subsections (a), (b), (c) and (d) above, the Issuer will be permitted to make such reductions in the Conversion Price or the Special Conversion Price, as the case may be, as its considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will be not be taxable to the holders of the shares of Common Stock. (g) In any case in which this Section 13.5 shall require that an adjustment (including by reason of the last sentence of subsection (a) or (c) above) be made immediately following a record date, the Issuer may elect to defer the effectiveness of such adjustment (but in no event until a date later than the effective time of the event giving rise to such adjustment), in which case the Issuer shall, with respect to any Security converted after such record date and on and before such adjustment shall have become effective (i) defer paying any cash payment pursuant to Section 13.3 hereof or issuing to the Holder of such Security the number of shares of Common Stock and other capital stock of the Issuer (or other assets or securities) issuable upon such conversion in excess of the number of shares of Common Stock and other capital stock of the Issuer issuable thereupon only on the basis of the Conversion Price or the Special Conversion Price, as the case may be, prior to adjustment, and (ii) not later than five Business Days after such adjustment shall have become effective, pay to such Holder the appropriate cash payment pursuant to Section 13.3 hereof and issue to such Holder the additional shares of Common Stock and other capital stock of the Issuer issuable on such conversion. (h) No adjustment in the Conversion Price or the Special Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% of the Conversion Price or the Special Conversion Price, as the case may be; PROVIDED, that any adjustments which by reason of this subsection (h) are not required to be made 60 shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 13 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (i) Whenever the Conversion Price or the Special Conversion Price is adjusted as herein provided, the Issuer shall promptly (i) file with the Trustee and each conversion agent an Officers' Certificate setting forth the Conversion Price and the Special Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment, and (ii) mail or cause to be mailed a notice of such adjustment to each holder of Securities at his address as the same appears on the registry books of the Issuer. Section 13.6 CONTINUATION OF CONVERSION PRIVILEGE IN CASE OF RECLASSIFICATION, CHANGE, MERGER, CONSOLIDATION OR SALE OF ASSETS. If any of the following shall occur, namely: (a) any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Securities pursuant to Section 13.1 hereof (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (b) any consolidation or merger of the Issuer with or into any other Person, or any other Person with or into the Issuer (other than a merger which does not result in any reclassification, change, conversion, exchange or cancellation of outstanding shares of Common Stock) or (c) sale or conveyance of all or substantially all of the assets of the Issuer, then the Issuer, or such successor or purchasing entity, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale or conveyance, execute and deliver to the Trustee a supplemental indenture providing that, upon conversion of the Securities pursuant to Section 13.1 hereof, the holder of each Security then Outstanding shall have the right to convert such Security into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock issuable upon conversion of such Security pursuant to Section 13.1(a) hereof or Section 13.1(b) hereof, as the case may be, immediately prior to such reclassification, change, consolidation, merger, sale or conveyance assuming such holder of Common Stock of the Issuer (i) is not a Person with which the Issuer consolidated or into which the Issuer merged or which merged into the Issuer or to which such sale, transfer or conveyance was made, as the case may be ("Constituent Person") or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of an election, if any, as to the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance (PROVIDED that if the kind or amount of securities, cash, and other property receivable upon 61 such reclassification, change, consolidation, merger, sale, transfer or conveyance is not the same for each share of Common Stock of the Issuer held immediately prior to such reclassification, change, consolidation, merger, sale, transfer or conveyance by others than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 13. If, in the case of any such consolidation, merger, sale or conveyance, the stock or other securities, and property (including cash) receivable thereupon by a holder of shares of Common Stock includes shares of stock or other securities and property (including cash) of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the holders of the Securities as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The provisions of this Section shall similarly apply to successive consolidations, mergers, sales or conveyances. Notice of the execution of each such supplemental indenture shall be mailed by the Trustee to each Holder of Securities at his address as the same appears on the registry books of the Issuer. Neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any such supplemental indenture relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by holders of Securities upon the conversion of their Securities after any such reclassification, change, consolidation, merger, sale or conveyance or to any adjustment to be made with respect thereto, but, subject to the provisions of Sections 5.1 and 5.2 hereof, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Issuer shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. Section 13.7 NOTICE OF CERTAIN EVENTS. In case: (a) the Issuer shall declare a dividend (or any other distribution) payable to the holders of Common Stock 62 otherwise than in cash dividends paid out of retained earnings; or (b) the Issuer shall authorize the granting to all the holders of Common Stock of rights to subscribe for or purchase any shares of stock of any class or of any other rights; or (c) the Issuer shall authorize any reclassification or change of the Common Stock (other than a subdivision or combination of its outstanding shares of Common Stock), or any consolidation or merger to which the Issuer is a party and for which approval of any stockholders of the Issuer is required, or the sale or conveyance of all or substantially all the property or business of the Issuer; or (d) there shall be proposed any voluntary or involuntary dissolution, liquidation or winding-up of the Issuer; then, the Issuer shall cause to be filed at the office or agency maintained for the purpose of conversion of the Securities as provided in Section 3.2 hereof, and shall cause to be mailed to each Holder of Securities, at his address as it shall appear on the registry books of the Issuer, at least 20 days before the date hereinafter specified (or the earlier of the dates hereinafter specified, in the event that more than one date is specified), a notice stating the date on which (i) a record is expected to be taken for the purpose of such dividend, distribution or rights, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (ii) such reclassification, change, consolidation, merger, sale, conveyance, dissolution, liquidation or winding-up is expected to become effective and the date, if any is to be fixed, as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, change, consolidation, merger, sale, conveyance, dissolution, liquidation or winding-up. Section 13.8 TAXES ON CONVERSION. The Issuer will pay any and all documentary, stamp or similar taxes payable to the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of shares of Common Stock or Special Stock on conversion of Securities pursuant to Section 13.1 hereof; PROVIDED, HOWEVER, that the Issuer shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock or Special Stock in a name other than that of the Holder of the Securities to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Issuer 63 the amount of any such tax or has established, to the satisfaction of the Issuer, that such tax has been paid. The Issuer extends no protection with respect to any other taxes imposed in connection with conversion of Securities. Section 13.9 ISSUER TO PROVIDE STOCK. The Issuer shall reserve from time to time, free from preemptive rights, out of its authorized but unissued shares, or, with respect to no more than 5% of the number of shares issuable upon conversion of the Outstanding Securities, shall otherwise cause to be made available, sufficient shares to provide for the conversion of the Securities as such Securities are presented for conversion, PROVIDED, that nothing contained herein shall be construed to preclude the Issuer from satisfying its obligations in respect of the conversion of Securities by delivery of repurchased shares of Common Stock or Special Stock which are held in the treasury of the Issuer. If any shares of Common Stock or Special Stock to be reserved for the purpose of conversion of Securities hereunder require registration with or approval of any governmental authority under any Federal or State law before such shares may be validly issued or delivered upon conversion, then the Issuer covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be, PROVIDED, HOWEVER, that nothing in this Section shall be deemed to affect in any way the obligations of the Issuer to convert Securities into Common Stock or Special Stock as provided in this Article 13. Before taking any action which would cause an adjustment reducing the Conversion Price or the Special Conversion Price below the then par value, if any, of the Common Stock, the Issuer will take all corporate action which may, in the Opinion of Counsel, be necessary in order that the Issuer may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Conversion Price or Special Conversion Price. The Issuer covenants that all shares of Common Stock or Special Stock which may be issued upon conversion of Securities will upon issue be fully paid and non-assessable by the Issuer and free of preemptive rights. Section 13.10 DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS. Neither the Trustee nor any agent of the Trustee shall at any time be under any duty or responsibility to any Holder of Securities to determine whether any facts exist which may require any adjustment of the Conversion Price or the Special Conversion Price, or with respect to the Officers' Certificate referred to in Section 13.5 hereof, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture (or whether such supplemental indenture is required) provided to be employed, in making the same, or whether the Effective Time of 64 the Merger has occurred. Neither the Trustee nor any agent of the Trustee shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock or Special Stock, or of any securities or property (including cash), which may at any time be issued or delivered upon the conversion of any Security; and neither the Trustee nor any conversion agent makes any representation with respect thereto. Neither the Trustee nor any agent of the Trustee shall be responsible for any failure of the Issuer to issue, register the transfer of or deliver any shares of Common Stock or Special Stock or stock certificates or other securities or property (including cash) upon the surrender of any Security for the purpose of conversion or, subject to Sections 5.1 and 5.2 hereof, to comply with any of the covenants of the Issuer contained in this Article. Section 13.11 RETURN OF FUNDS DEPOSITED FOR REDEMPTION OF CONVERTED SECURITIES. Any funds which at any time shall have been deposited by the Issuer or on its behalf with the Trustee or any other Paying Agent for the purpose of paying the Principal of and interest on any of the Securities and which shall not be required for such purposes because of the conversion of such Securities, as provided in this Article 13, shall after such conversion be repaid to the Issuer by the Trustee or such other Paying Agent. ARTICLE 14 RIGHT TO REQUIRE REDEMPTION Section 14.1 RIGHT TO REQUIRE REDEMPTION. If at any time there shall occur any Redemption Event of the Issuer, then each Holder shall have the right, at such Holder's option, to require the Issuer to redeem, and upon the exercise of such right the Issuer shall redeem, all or any part of such Holder's Securities that is $1,000 or any integral multiple thereof, on the date (the "Repurchase Date") that is 45 days after the date of the Issuer Notice (as defined below) at a redemption price in cash equal to 101% of the Principal amount of such Securities to be redeemed, plus accrued and unpaid interest thereon to the Repurchase Date (the "Repurchase Price"). Section 14.2 NOTICES; METHOD OF EXERCISING REDEMPTION RIGHT, ETC. (a) Unless the Issuer shall have theretofore called for redemption of all the Securities then Outstanding pursuant to Article 11 hereof, within 15 days after the occurrence of a Redemption Event, the Issuer or, at the request of the Issuer, the Trustee, shall mail to all Holders of record of the Securities a notice (the "Issuer Notice") of the occurrence of the Redemption Event and of the redemption right set forth herein arising as a result thereof in the manner provided in Section 10.4 hereof. The Issuer shall also deliver a copy of the Issuer Notice to the 65 Trustee prior to or promptly after the mailing of such Issuer Notice. Each Issuer Notice of a redemption right shall state: (1) the Repurchase Date; (2) the date by which the redemption right must be exercised; (3) the Repurchase Price; (4) a description of the procedure which a Holder must follow to exercise a redemption right including a form of the irrevocable written notice referred to in Section 14.2 hereof; and (5) the Conversion Price (as defined in Section 13.5 hereof) and Special Conversion Price (as defined in Section 13.5 hereof) then in effect, the date on which the right to convert the Principal amount of the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion. No failure of the Issuer to give the foregoing notices or any defect therein shall limit any Holder's right to exercise a redemption right or affect the validity of the proceedings for the redemption of Securities. (b) To exercise a redemption right, a Holder shall deliver to the Trustee on or before the 15th Business Day after the date of the Issuer Notice (i) irrevocable written notice of the Holder's exercise of such rights, which notice shall set forth the name of the Holder, the amount of the Securities to be redeemed, a statement that an election to exercise the redemption right is being made thereby, and (ii) the Securities with respect to which the redemption right is being exercised, duly endorsed for transfer to the Issuer. Securities held by a securities depository may be delivered in such other manner as may be agreed to by such securities depository, the Issuer and the Trustee. Such written notice shall be irrevocable. Subject to the provisions of paragraph (d) below, Securities surrendered for redemption together with such irrevocable written notice shall cease to be convertible from the date of delivery of such notice. If the Repurchase Date falls after the record date and before the following Interest Payment Date, any Securities to be redeemed must be accompanied by payment of an amount equal to the interest thereon which the registered Holder thereof is to receive on such Interest Payment Date, and, notwithstanding such redemption, such interest payment will be made by the Issuer to the registered Holder thereof on the applicable record date; provided that any semi-annual 66 payment of interest becoming due on the Repurchase Date shall be payable to the holders of such Securities registered as such on the relevant record date subject to the terms Section 2.4 hereof. (c) In the event a redemption right shall be exercised in accordance with the terms hereof, the Issuer shall pay or cause to be paid the Repurchase Price in cash, to the Holder on the Repurchase Date. (d) If any Security surrendered for redemption shall not be so redeemed on the Repurchase Date, such Security shall be convertible at any time from the Repurchase Date until redeemed and, until redeemed, continue to bear interest to the extent permitted by applicable law from the Repurchase Date at the same rate borne by such Security. The Issuer shall pay to the Holder of such Security the additional amounts arising from this Section 14.2 at the time that it pays the Repurchase Price, and if applicable such Security shall remain convertible into Common Stock pursuant to Section 13.1(a) hereof, or Common Stock or Special Stock pursuant to Section 13.1(b) hereof, until the Repurchase Price plus any additional amounts owing on such Security shall have been paid or duly provided for. (e) Any Security which is to be redeemed only in part shall be surrendered at any office or agency of the Issuer designated for that purpose pursuant to Section 3.2 hereof (with, if the Issuer or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Issuer shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate Principal amount equal to and in exchange for the unredeemed portion of the Security so surrendered. 67 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of May __, 1996. ALLIANCE GAMING CORPORATION By:_________________________ Name: Title: Attest: By:________________________ Name: Title: THE BANK OF NEW YORK, as Trustee By:_________________________ Name: Title: Attest: By:_______________________ Name: Title: 68 EXHIBIT A [FORM OF FACE OF SECURITY] 7 1/2% Convertible Senior Subordinated Debenture due 2003 This Security will be automatically converted into [Common Stock] [Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E] of the Issuer if the Merger is consummated prior to _____________, 1996. See the reverse of this Security. CUSIP # $_______ No. Alliance Gaming Corporation promises to pay to __________________________________________ or registered assigns, the principal sum of ______________________ Dollars on September 15, 2003. Interest Payment Dates: March 15 and September 15. Record Dates: March 1 and September 1. ALLIANCE GAMING CORPORATION By:____________________________ _________________, President By:____________________________ _________________, Secretary Authenticated: Dated: __________________ THE BANK OF NEW YORK, as Trustee By:_________________________ Authorized Signatory A-1 [FORM OF REVERSE OF SECURITY] 7 1/2% Convertible Senior Subordinated Debenture due 2003 In addition, the Securities shall bear any additional legends which are required pursuant to applicable law. Capitalized terms used herein shall have the meanings ascribed to them in the Indenture unless otherwise indicated. 1. INTEREST. Alliance Gaming Corporation (the "Issuer") promises to pay interest on the Principal amount of this Security at 7 1/2% per annum from the date of issuance until maturity. The Issuer will pay interest semi-annually on March 15 and September 15 of each year or, if any such day is not a Business Date, on the next succeeding Business Date (each an "Interest Payment Date"). Interest on the Securities will accrue from the most recent date on which interest has been paid, or, if no interest has been paid, from the date of issuance; PROVIDED that if there is no existing Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; PROVIDED, FURTHER, that the first Interest Payment Date shall be September 15, 1996. The issuer shall pay interest (including post-petition interest in any proceeding under Bankruptcy Law) on overdue Principal and premium, if any, from time to time on demand at the same rate per annum on the Securities then in effect; it shall pay interest (including post-petition interest in any proceeding under Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods), from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. METHOD OF PAYMENT. The Issuer will pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders of Securities at the close of business on the March 1 or September 1 next preceding the Interest Payment Date, even if such Securities are canceled or converted after such record date and on or before such Interest Payment Date. All payments in respect of the Securities will be made by check mailed to the Holders of the Securities at their addresses set forth in the register of Holders of Securities. 3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuer may change any Paying Agent or Registrar without notice to any Holder. The Issuer or any of its subsidiaries may act in any such capacity. A-2 4. INDENTURE. The Issuer issued the Securities under an Indenture dated as of ___________, 1996 ("Indenture") between the Issuer and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are general unsecured obligations of the Issuer limited to $85,000,000 in aggregate Principal amount. 5. SUBORDINATION. The Issuer's payment of the Principal of, interest on and redemptions at the option of the Holders of the Securities is subordinated to the prior payment in full of the Issuer's Senior Indebtedness. Each Holder of Securities by his or her acceptance hereof covenants and agrees that all payments of the Principal of, interest on and redemptions at the option of the Holders of the Securities by the Issuer shall be subordinated in accordance with the provisions of Article 12 of the Indenture, and each Holder accepts and agrees to be bound by such provisions. 6. CONVERSION RIGHTS; AUTOMATIC CONVERSION IN CERTAIN EVENTS. (a) Subject to the provisions of the Indenture, the Holder of this Security has the right, at his option, at any time until and including, but not after the close of business on, the second Business Day prior to September 15, 2003 (except that, (i) in case this Security or a portion hereof shall be called for redemption and the Issuer shall not thereafter default in making due provision for the payment of the redemption price, such right shall terminate with respect to this Security or such portion hereof at the close of business on the second Business Day prior to the date fixed for redemption and (ii) in the case the holder of this Security exercises his right to require the Issuer to redeem this Security or a portion hereof, such conversion right shall terminate with respect to this Security or portion hereof on the date this Security is presented for redemption together with written notice to the Issuer of the holder's exercise of such right or, if the Issuer fails to redeem this Security or portion hereof on the date set for such redemption, upon redemption), to convert the principal of this Security, or any portion thereof which is $1,000 or a multiple of $1,000, into fully paid and non-assessable shares of Common Stock of the Issuer, as said shares shall be constituted at the date of conversion, at the conversion price of $8.33 in principal amount of Securities for each share of such Common Stock, or at the adjusted conversion price in effect at the date of conversion if an adjustment has been made, determined as provided in the Indenture, upon surrender of this Security to the Issuer at the office or agency of the Issuer maintained for the purpose in the Borough of Manhattan, The City of New York, together with a fully executed notice of optional conversion substantially in the form set forth at the foot hereof that the holder elects so to convert this Security (or any portion hereof which is a multiple of A-3 $1,000) and, if this Security is surrendered for conversion during the period between the close of business on March 1 or September 1 in any year and the opening of business on the following March 15 or September 15 and has not been called for redemption on a redemption date within such period, shall be accompanied by payment of an amount equal to the interest payable on such March 15 or September 15 on the principal amount of the Security being surrendered for conversion. Except as provided in the preceding sentence or as otherwise expressly provided in the Indenture, no payment or adjustment shall be made on account of interest accrued on this Security (or portion thereof) so converted or on account of any dividend or distribution on any such Common Stock issued upon conversion. If so required by the Issuer or the Trustee, this Security, upon surrender for conversion as aforesaid, shall be duly endorsed by, or be accompanied by instruments of transfer, in form satisfactory to the Issuer, duly executed by, the holder or by his duly authorized attorney. The conversion price from time to time in effect is subject to adjustment as provided in the Indenture. No fractions of shares will be issued on conversion pursuant to this paragraph 6(a), but an adjustment in cash will be made for any fractional interest as provided in the Indenture. (b) Subject to the provisions of the Indenture, in the event that prior to _________, 1996 the Merger (as defined in the Indenture) becomes effective under Section 251 of the Delaware General Corporation Law, then at the effective time of the Merger (except that, (i) in case this Security or a portion hereof shall be called for redemption and the Issuer shall not thereafter default in making due provision for the payment of the redemption price, such provision for automatic conversion shall terminate with respect to this Security or such portion hereof at the close of business on the second Business Day prior to the date fixed for redemption and (ii) in the case the holder of this Security exercises his right to require the Issuer to redeem this Security or a portion hereof, such provision for automatic conversion shall terminate with respect to this Security or portion hereof on the date this Security is presented for redemption together with written notice to the Issuer of the holder's exercise of such right or, if the Issuer fails to redeem this Security or portion hereof on the date set for such redemption, upon redemption), this Security shall be automatically, and without any further action on the part of the Issuer, the Trustee or the holder of this Security, converted into fully paid and non-assessable shares of Common Stock, at the special conversion price of $5.56 in principal amount of Securities for each share of Common Stock, or at the special conversion price in effect at the Effective Time of the Merger if an adjustment has been made, determined as provided in the Indenture (provided, however, that if so specified on the face of this Security, then, in lieu of such shares of Common Stock, this Security shall be automatically converted into fully paid and non-assessable shares of Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E (the "Special Stock"), of the Issuer, at the conversion rate of ten shares of Special Stock for each $1,000 principal amount of Securities), upon surrender of this Security to the Issuer at the office or agency of the Issuer maintained for the purpose in the Borough of Manhattan, together with a fully executed form of surrender for mandatory conversion substantially in the form set forth at the foot hereof. Except as otherwise expressly provided in the Indenture, no payment or adjustment shall be made on account of interest accrued on this Security (or portion thereof) so converted or on account of any dividend or distribution on any such Common Stock issued upon conversion. If so required by the Issuer or the Trustee, this Security, upon surrender for conversion as aforesaid, shall be duly endorsed by, or be accompanied by instruments of transfer, in form satisfactory to the Issuer, duly executed by, the holder or by his duly authorized attorney. The special conversion price from time to time in effect is subject to adjustment as provided in the Indenture. No fractions of shares of Common Stock will be issued on conversion pursuant to this paragraph 6(b), but an adjustment in cash will be made for any fractional shares of Common Stock as provided in the Indenture. Fractional shares of Special Stock will be issued, if and to the extent necessary, upon conversion pursuant to this paragraph 6(b), and no adjustment in cash will be made for any fractional shares of Special Stock. (c) No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the Principal of and interest on this Security at the place, times, and rate, and in the currency, herein prescribed. 7. OPTIONAL REDEMPTION. The Issuer may redeem all or any of the Securities, in whole or in part, at any time, at a redemption price equal to the percentages of the Principal amount thereof set forth below, plus accrued and unpaid interest to the redemption date; provided, however, that until September 15, 1996 the Securities cannot be redeemed at the option of the Issuer unless the closing price of the Issuer's Common Stock has equaled or exceeded 250% of the then existing per share Conversion Price set forth in Paragraph 6, as adjusted, for at least 20 out of any 30 consecutive Trading Days ending within 60 days before the notice of redemption is first mailed. If redeemed during the twelve-month period beginning September 15 of each year indicated:
Year Percentage 1995 105.63% 1996 104.69% 1997 103.75% 1998 102.81% 1999 101.88% 2000 100.94% 2001 and thereafter 100.00%;
A-4 provided that if the date fixed for redemption is a March 15 or September 15, then the interest payable on such date shall be paid to the holder of record on the next proceeding March 1 or September 1. 8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 20 days but not more than 60 days before the Redemption Date to each Holder whose Securities are to be redeemed at its registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Securities held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Securities or portions thereof called for redemption. 9. RIGHT TO REQUIRE REDEMPTION UPON CERTAIN EVENTS. If a Redemption Event (as defined below) occurs, each Holder of the Securities shall have the right, subject to certain conditions, at the Holder's option, to require the Issuer to redeem all of such Holder's Securities, or any portion thereof that is an integral multiple of $1,000, on the date (the "Redemption Date") that is 45 days after the date of the Issuer Notice (as defined below), for cash at a price equal to 101% of the Principal amount of such Securities to be redeemed (the "Redemption Price"). Within 15 Business Days after the occurrence of a Redemption Event, the Issuer is obligated to mail to all holders of record of the Securities a notice (the "Issuer Notice") of the occurrence of such Redemption Event and of the redemption right arising as a result thereof. The Issuer must deliver a copy of the Issuer Notice to the Trustee. To exercise the redemption right a holder of such Securities must deliver on or before the 15th Business Day after the date of the Issuer Notice irrevocable written notice to the Trustee of the holder's exercise of such right, together with the Securities with respect to which the right is being exercised, duly endorsed for transfer to the Issuer. A Redemption Event will be deemed to have occurred at such time as: (i) there is a Change of Control (as defined in the Indenture) of the Issuer, or (ii) the Issuer's Common Stock (or other common stock into which the Securities are then convertible) is not listed for trading on a United States national securities exchange or admitted for trading in the NASDAQ/NMS or the National Association of Securities Dealers Automated Quotation listing of Small Capitalization Stocks. 10. DISPOSITION IN EVENT OF UNSUITABILITY. If a Holder or beneficial owner of a Security or any underlying Common A-5 Stock or Special Stock is required by the Nevada Gaming Commission to be found suitable, the Holder or beneficial owner must apply for a finding of suitability within 30 days after the Nevada Gaming Commission's request. If a Holder or beneficial owner is required to be found suitable and is not found suitable by the Nevada Gaming Commission, at the option of the Issuer, (i) the Holder or beneficial owner shall, upon request of the Issuer, dispose of his or her Securities and underlying Common Stock and Special Stock within 30 days or within that time prescribed by the Nevada Gaming Commission, whichever is earlier, or (ii) the Issuer may, at its option, redeem the Holder's or beneficial owner's Securities at the lesser of (x) the principal amount thereof or (y) the price at which the Securities were acquired by the Holder or beneficial owner, together with, in each case, accrued interest to the date of the finding of unsuitability by the Nevada Gaming Commission. 11. DENOMINATIONS, TRANSFER, EXCHANGE. The Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may required a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer need not exchange or register the transfer of any Security or portion of a Security selected for redemption, except for the unredeemed portion of any Security being redeemed in part. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 12. PERSONS DEEMED OWNERS. The registered Holder of a Security may be treated as its owner for all purposes. 13. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented and any existing Default under, or compliance with any provision of, the Indenture may be waived with the written consent of the Holders of at least a majority in Principal amount of the Securities then outstanding (including consents obtained in connection with a tender offer or exchange offer for Securities). Without the consent of any Holder, the Issuer and the Trustee may amend or supplement the Indenture or the Securities to cure any ambiguity, defect or inconsistency; to provide for uncertificated Securities in addition to or in place of certificated Securities; to comply with Section 8.1 of the Indenture; to make any change that would provide any additional rights or benefits to the Holders or that does not adversely affect the rights under the Indenture of any Holder to make changes required by the TIA; or to appoint a successor Trustee. A-6 Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Securities held by a nonconsenting Holder): (i) reduce the Principal amount of Securities whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the Principal of or change the fixed maturity of any Security or alter the provisions with respect to the redemption or purchase price in connection with repurchases under Section 11.1 of the Indenture; (iii) reduce the rate of or change the time for payment of interest on any Security; (iv) waive a Default or Event of Default in the payment of the Principal of, or interest on Securities or that resulted from a failure to comply with Article 14 of the Indenture (except a rescission of acceleration of the Securities by Holders of at least a majority in Principal amount of the Securities); (v) make any change in Section 4.10 of the Indenture; or (vi) waive a redemption payment with respect to any Security. In addition, no amendment may adversely affect the rights under Section 12 of the Indenture of any holder of outstanding Senior Indebtedness without such holder's consent. The right of any Holder to participate in any consent required or sought pursuant to any provision of the Indenture (and the obligation of the Issuer to obtain any such consent otherwise required from such Holder) may be subject to the requirement that such Holder shall have been the Holder of record of any Securities with respect to which such consent is required or sought as of a date identified by the Trustee in a notice furnished to Holders in accordance with the terms of this Indenture. 14. DEFAULTS AND REMEDIES. An Event of Default is: default for 30 days in payment of interest on the Securities; default in payment of Principal of the Securities; failure by the Issuer for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Securities; certain defaults under and acceleration prior to maturity of other indebtedness; certain final judgments which remain undischarged; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in Principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Securities become due and payable immediately without further action or notice. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, holders of a majority in Principal amount in the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of Principal or interest) if it determines that withholding notice is in their A-7 interests. The Issuer must furnish an annual compliance certificate to the Trustee. 15. TRUSTEE DEALINGS WITH ISSUER. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Issuer or its Affiliates, and may otherwise deal with the Issuer or its Affiliates, as if it were not Trustee. 16. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator, manager, agent or stockholder of the Issuer, as such, shall not have any liability for any obligations of the Issuer under the Securities or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 17. AUTHENTICATION. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/[G][T]/M/A (= Uniform [Gifts] [Transfers] to Minors Act). 19. GOVERNING LAW. This Security shall be deemed to be a contract under, and shall be governed by and conserved under the laws of the State of New York, except as otherwise required by mandatory provisions of Nevada law, including with limitation, the Nevada Gaming Control Act and the regulations promulgated thereunder. The Issuer will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Alliance Gaming Corporation 4830 Boulder Highway Las Vegas, NV 89121 Attention: Corporate Secretary A-8 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ______________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ___________________________ agent to transfer this Security on the books of the Issuer. The agent may substitute another to act for him. ______________________________________________________________________________ Date: _____________________ Signature(s): ______________________________ (Sign exactly as your name(s) appear(s) on the face of this Security) Signature Guaranteed by: ____________________________ IMPORTANT NOTICE: The signature guarantee provided on this Notice must comply with the regulations of one of the nationally recognized medallion signature guarantee programs. A-9 [FORM OF OPTIONAL CONVERSION NOTICE] To: Alliance Gaming Corporation The undersigned owner of this Security hereby: (1) irrevocably exercises the option to convert this Security, or the portion hereof below designated, pursuant to Section 13.1(a) of the Indenture referred to in this Security for shares of Common Stock of Alliance Gaming Corporation in accordance with the terms of such Indenture and (ii) directs that such shares of Common Stock deliverable upon the conversion, together with any payment for fractional shares and any Security(ies) representing any unconverted Principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares are to be delivered registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated:__________________ ______________________________ Signature(s) (Sign exactly as your name(s) appear(s) on the Security) Signature Guaranteed by: __________________________ IMPORTANT NOTICE: The signature guarantee provided on this Notice must comply with the regulations of one of the nationally recognized medallion signature guarantee programs. If the stock certificate is to be issued in a name other than the registered holder on the reverse hereof, the assignment below must be completed. ______________________________ Social Security or other Taxpayer Identifying Number _____________________________ (Name) _____________________________ (Street Address) _____________________________ (City, State and Zip Code) (Please print name and address) Principal amount to be Converted (if less than all): $___________________________ A-10 [FORM OF SURRENDER FOR MANDATORY CONVERSION] To: Alliance Gaming Corporation The undersigned owner of this Security hereby: (i) surrenders this Securities for conversion, in accordance with Section 13.1(b) of the Indenture referred to in this Security, into shares of Common Stock (or, if and to the extent indicated below, into shares of Special Stock) of Alliance Gaming Corporation in accordance with the terms of such Indenture and (ii) directs that the shares of Common Stock or Special Stock deliverable upon the conversion, together with any payment for fractional shares, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares are to be delivered are registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated:______________ ___________________________________________________ Signature(s) (Sign exactly as your name(s) appear(s) on the Security) Signature Guaranteed by: ______________________________ IMPORTANT NOTICE: The signature guarantee provided on this Notice must comply with the regulations of one of the nationally recognized medallion signature guarantee programs. If the stock certificate(s) is (are) to be issued in a name other than the registered holder on the reverse hereof, the assignment below must be completed. ______________________________________________________ Social Security or other Taxpayer Identifying Number _________________________ (Name) _________________________ (Street Address) _________________________ (City, State and Zip Code) (Please print name and address) A-11 EX-12 3 EXHIBIT 12 EXHIBIT 12 ALLIANCE GAMING CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND (DOLLARS IN THOUSANDS)
PRO FORMA COMBINED FINANCIAL INFORMATION NINE MONTHS ENDED ----------- FISCAL YEARS ENDED JUNE 30, MARCH 31 YEAR ENDED ----------------------------------------------------- -------------------- JUNE 30, 1991 1992 1993 1994 1995 1995 1996 1995 --------- --------- --------- --------- --------- --------- --------- ----------- Earnings: Net loss......................... $ (15,816) $ (4,680) $ (3,650) $ (13,128) $ (10,752) $ (6,793) $ (14,829) $ (3,719) Income taxes..................... (5,958) -- -- 241 265 394 581 2,555 Imputed interest on rents(1)..... 16,485 16,647 19,966 21,700 22,287 16,548 17,070 21,843 Interest and debt discount amortization.................... 4,663 4,505 5,046 6,830 8,133 5,844 6,341 23,229 --------- --------- --------- --------- --------- --------- --------- ----------- Earnings (loss) as defined for ratio......................... $ (626) $ 16,472 $ 21,362 $ 15,643 $ 19,933 $ 15,993 $ 9,163 $ 43,908 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Fixed Charges: Imputed interest on rents(1)..... $ 16,485 $ 16,647 $ 19,966 $ 21,700 $ 22,287 $ 5,844 $ 6,341 $ 21,843 Interest and debt discount amortization.................... 4,663 4,505 5,046 6,830 8,133 16,548 17,070 23,229 --------- --------- --------- --------- --------- --------- --------- ----------- Fixed charges as defined for ratio......................... $ 21,148 $ 21,152 $ 25,012 $ 28,530 $ 30,420 $ 22,392 $ 23,411 $ 45,072 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Ratio of earnings to fixed charges........................... -- -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Amounts by which earnings were inadequate to cover fixed charges........................... $ (21,774) $ (4,680) $ (3,650) $ (12,887) $ (10,487) $ (6,399) $ (14,248) $ (1,164) --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Pro forma fixed charge for Preferred Stock dividend.......... -- -- -- -- -- -- -- (8,038) --------- --------- --------- --------- --------- --------- --------- ----------- Amount by which pro forma earnings were inadequate to cover fixed charges and Preferred Stock dividend.......................... -- -- -- -- -- -- -- (9,202) --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- NINE MONTH PERIOD ENDED MARCH 31, 1996 ------------- Earnings: Net loss......................... $ (11,329) Income taxes..................... 1,508 Imputed interest on rents(1)..... 10,721 Interest and debt discount amortization.................... 16,922 ------------- Earnings (loss) as defined for ratio......................... $ 17,822 ------------- ------------- Fixed Charges: Imputed interest on rents(1)..... $ 16,922 Interest and debt discount amortization.................... 10,721 ------------- Fixed charges as defined for ratio......................... $ 27,643 ------------- ------------- Ratio of earnings to fixed charges........................... -- ------------- ------------- Amounts by which earnings were inadequate to cover fixed charges........................... $ (9,821) ------------- ------------- Pro forma fixed charge for Preferred Stock dividend.......... (15,916) ------------- Amount by which pro forma earnings were inadequate to cover fixed charges and Preferred Stock dividend.......................... (15,737) ------------- -------------
- ------------------------ (1) Imputed interest on rents is calculated by taking 33% of total rents in each period presented. EX-23.1 4 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Alliance Gaming Corp.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the registration statement. As noted under the captions "Forecast of Operations" and "Experts", KPMG Peat Marwick LLP has not examined the Forecast presented under "Forecast of Operations" and, accordingly we do not express an opinion or any other form of assurance with respect thereto. KPMG PEAT MARWICK LLP Las Vegas, Nevada May 7, 1996 EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4 of our report, dated February 13, 1996, on our audits of the consolidated financial statements of Bally Gaming International, Inc. We also consent to the reference to our firm under the caption "Experts." As noted under the captions "Forecast of Operations" and "Experts," Coopers & Lybrand L.L.P. neither examined nor compiled nor had any other involvement with the preparation of the accompanying prospective financial information included in this registration statement and, accordingly, we do not express an opinion or any other form of assurance with respect thereto, nor do we assume any responsibility for such prospective financial information. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada May 7, 1996 EX-99.1 6 EXHIBIT 99.1 LETTER OF TRANSMITTAL TO TENDER 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 OF ALLIANCE GAMING CORPORATION PURSUANT TO THE PROSPECTUS DATED MAY __, 1996 OF ALLIANCE GAMING CORPORATION THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE __, 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. TO: THE BANK OF NEW YORK, EXCHANGE AGENT BY MAIL OR BY HAND: The Bank of New York 101 Barclay Street, Corporate Trust Operations, 7E New York, New York 10286 Attention: Enrique Lopez Telephone: (212) 815-2742 BY FACSIMILE: (212) 571-3080 TOLL FREE NUMBER: 1-800-254-2826 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OR TELEX, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. The instructions accompanying this Letter of Transmittal should be read carefully before this Letter of Transmittal is completed. Except as otherwise provided herein, all signatures on this Letter of Transmittal must be guaranteed in accordance with the procedures set forth herein. See Instruction 1. This Letter of Transmittal is to be used only if 7 1/2% Convertible Subordinated Debentures due 2003 (the "Securities" or the "Old Convertible Debentures") of Alliance Gaming Corporation ("Alliance") are to be physically delivered to the Exchange Agent or delivered by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the book-entry transfer procedures set forth in the Prospectus of Alliance dated May , 1996 (as the same may be amended or supplemented from time to time, the "Prospectus") under the heading "The Exchange Offer -- Procedures for Tendering - -- Book-Entry Transfer". See Instruction 2. Delivery of documents to DTC does not constitute delivery to the Exchange Agent. HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW CONVERTIBLE DEBENTURES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD CONVERTIBLE DEBENTURES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. Holders whose Securities are not immediately available or who cannot deliver their Securities and all other required documents to the Exchange Agent, or who cannot complete the procedure for book-entry transfer, on or prior to the Expiration Date, may nevertheless tender their Securities in accordance with the guaranteed delivery procedures set forth in the Prospectus under the heading "The Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery. See Instruction 2. All capitalized terms used herein and not otherwise defined herein are used herein with the meanings ascribed to them in the Prospectus. HOLDERS WHO WISH TO TENDER THEIR SECURITIES MUST, AT A MINIMUM, PROVIDE THEIR NAMES AND ADDRESSES AND COMPLETE COLUMNS (1) AND (2) IN THE BOX HEREIN ENTITLED "DESCRIPTION OF SECURITIES TENDERED" AND SIGN IN THE APPROPRIATE BOX BELOW. If only columns (1) and (2) are completed, the holder will be deemed to have tendered all the Securities listed in the table and all New Convertible Debentures issued in exchange for the Securities will be automatically converted into Common Stock if the Automatic Conversion occurs. If a holder wishes to tender less than all of such Securities, column (3) must be completed in full, and such holder should refer to Instruction 4. If a holder wishes the New Convertible Debentures issued upon exchange of his Securities to be converted into Series E Preferred Stock in the event of the Automatic Conversion, column (3) must be completed in full, and such holder should refer to instruction 8. / / CHECK HERE IF TENDERED SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution Account Number Transaction Code Number / / CHECK HERE IF TENDERED SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s): _________________________________________ Window Ticket No. (if any): ______________________________________________ Date of Execution of Notice of Guaranteed Delivery: ______________________ Name of Institution which Guaranteed Delivery: If delivered by book-entry transfer, provide the following information: DTC Account Number: Transaction Code Number:
The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned has made with respect to the Exchange Offer. DESCRIPTION OF SECURITIES TENDERED NAME(S) AND ADDRESS(ES) OF HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON SECURITIES) SECURITIES TENDERED (ATTACH ADDITIONAL SCHEDULE, IF NECESSARY) (1) (2) (3) (4) Security Total Principal Principal Amount Principal Amount Number(s)* Amount of Securities Tendered to Be Converted (if less than all)** into Series E Preferred Stock*** Total *Need not be completed by holders tendering by book-entry transfer (see below). **Completion of column (2) will constitute the tender by you of all Securities delivered unless otherwise specified in column (3). See Instruction 4. ***Unless otherwise indicated in column (4), all New Convertible Debentures received in exchange for Securities tendered hereby will be converted into Common Stock in the event the Automatic Conversion occurs. See Instruction 8.
NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: By execution hereof, the undersigned hereby acknowledges receipt of the Prospectus and this Letter of Transmittal relating to Alliance's offer to exchange (the "Exchange Offer") up to $85 million principal amount of the 7 1/2% Convertible Senior Subordinated Debentures due 2003 of Alliance (the "New Convertible Debentures") for a like principal amount of the Old Convertible Debentures, upon the terms and subject to the conditions set forth in the Prospectus. Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to Alliance the principal amount of Securities indicated above. Subject to, and effective upon, the acceptance by Alliance of the principal amount of Securities tendered hereby for exchange pursuant to the terms of the Exchange Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, Alliance, all right, title and interest in and to, and any and all claims in respect of or arising or having arisen as a result of the undersigned's status as a holder of, all Securities tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney-in-fact of the undersigned with respect to such Securities, with full power of substitution (such power-of-attorney being deemed to be an irrevocable power coupled with an interest) to (a) deliver such Securities, or transfer ownership of such Securities on the account books maintained by DTC, together, in either case, with all accompanying evidences of transfer and authenticity, to or upon the order of Alliance, (b) present such Securities for transfer on the books of the Alliance, and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Securities, all in accordance with the terms of the Exchange Offer. The undersigned hereby represents and warrants that (a) the undersigned has full power and authority to tender, sell, assign and transfer the Securities tendered hereby, and to give the waiver contained herein, and (b) when such Securities are accepted for exchange by Alliance, Alliance will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances, and none of such Securities will be subject to any adverse claim or right. The undersigned, upon request, will execute and deliver all additional documents deemed by the Exchange Agent or Alliance to be necessary or desirable to complete the sale, assignment and transfer of the Securities tendered hereby and the giving of the waiver and release contained herein. The undersigned understands that tenders of Securities pursuant to any of the procedures described in the Prospectus under the caption "The Exchange Offer - -- Procedures for Tendering" and in the instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the Exchange Offer. Alliance's acceptance of such Securities for exchange pursuant to the terms of the Exchange Offer will constitute a binding agreement between the undersigned and Alliance upon the terms and subject to the conditions of the Exchange Offer. The undersigned understands that (a) except to the extent otherwise indicated in column (4) of the box entitled "Description of Securities Tendered", in the event the proposed merger between Bally Gaming International, Inc. and a wholly-owned subsidiary of Alliance (the "Merger") is consummated within 60 days after the issuance of the New Convertible Debentures in exchange for the Securities tendered hereby, such New Convertible Securities will be automatically converted (the "Automatic Conversion") into shares of Common Stock of Alliance, par value $.10 per share ("Common Stock"), at a conversion price of $5.56 per share (equivalent to a conversion rate of approximately 180 shares per $1,000 principal amount of New Convertible Debentures), subject to adjustment under certain circumstances, (b) to the extent so indicated in column (4) of the box entitled "Description of Securities Tendered", in the event the Automatic Conversion occurs, the New Convertible Debentures issued in exchange for the Securities tendered hereby will be automatically converted into ten shares of 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, of Alliance, par value $.10 per share ("Series E Preferred Stock"), for each $1,000 principal amount of New Convertible Debentures and (c) after the issuance of the New Convertible Debentures pursuant to the Exchange Offer, the holder of such New Convertible Debentures will not be able to change the election made by the undersigned in accordance with this paragraph. See Instruction 8. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives. SECURITIES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. See the information set forth under the heading "The Exchange Offer -- Withdrawal of Tenders" in the Prospectus. Unless otherwise indicated herein in the box entitled "Special Payment Instructions" below, please issue the New Convertible Debentures, and any Securities not tendered or not accepted for exchange, in the name(s) of the registered holder(s) appearing in the box entitled "Description of Securities Tendered" (and, in the case of Securities tendered by book-entry transfer, by credit to the account at DTC). Similarly, unless otherwise indicated herein in the box entitled "Special Delivery Instructions", please deliver the New Convertible Debentures, together with any Securities not tendered or not accepted for exchange (and accompanying documents, as appropriate), to the address(es) of the registered holder(s) appearing in the box entitled "Description of Securities Tendered". If both the "Special Payment Instructions" box and the "Special Delivery Instructions" box are completed, please issue the New Convertible Debentures, and any Securities not tendered or not accepted for exchange, in the name(s) of, and deliver such New Convertible Debentures and any such Securities to, the person(s) at the address(es) so indicated. Please return any Securities tendered hereby and delivered by book-entry transfer, but which are not accepted for exchange, by crediting the account at DTC. The undersigned recognizes that Alliance has no obligation pursuant to the "Special Payment Instructions" box or "Special Delivery Instructions" box provisions of this Letter of Transmittal to transfer any Securities from the name of the registered holder(s) thereof if Alliance does not accept any of such Securities for exchange pursuant to the terms of the Exchange Offer. SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) (SEE INSTRUCTIONS 1, 5, 6 AND 7) TO BE COMPLETED ONLY IF SECURITIES TO BE COMPLETED ONLY IF SECURITIES NOT NOT TENDERED OR NOT ACCEPTED FOR ACCEPTED FOR EXCHANGE, AND/OR NEW EXCHANGE, AND/OR NEW CONVERTIBLE CONVERTIBLE DEBENTURES, ARE TO BE SENT DEBENTURES, ARE TO BE ISSUED IN THE TO SOMEONE OTHER THAN THE UNDERSIGNED, NAME OF SOMEONE OTHER THAN THE UNDER- OR TO THE UNDERSIGNED AT AN ADDRESS SIGNED. OTHER THAN THAT SHOWN ABOVE. Issue: / / Securities Deliver: / / Securities / / New Convertible Debentures to: / / New Convertible Debentures to: Name: Name: (Please (Please Print) Print) Address: Address: Zip Code Zip Code
SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS OF SECURITIES REGARDLESS OF WHETHER SECURITIES ARE BEING PHYSICALLY DELIVERED HEREWITH) X Signature(s) of Holder(s) or Authorized Signatory Date:, 1996 Must be signed by the registered holder(s) of the Securities tendered hereby exactly as their name(s) appear(s) on such Securities or, if tendered by a participant in DTC, exactly as such participant's name appears on a security position listing as the owner of the Securities, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, agent or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 5. Name(s): (Please Print) Capacity (full title): Address: (Including Zip Code) Area Code and Telephone No. SIGNATURE GUARANTEE (See Instructions 1 and 5 below) (Name of Eligible Institution Guaranteeing Signatures) (Address (including zip code) and Telephone Number (including area code) of Eligible Institution) (Authorized Signature) (Printed Name) (Title) Date: , 1996
INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal must be guaranteed by a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States or by any other "Eligible Guarantor Institution" as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (each of the foregoing being referred to herein as an "Eligible Institution") unless (a) this Letter of Transmittal is signed by the registered holder of the Securities tendered herewith (or by a participant in DTC whose name appears on a security position listing as the owner of such Securities) and neither the "Special Payment Instructions" box nor the "Special Delivery Instructions" box of this Letter of Transmittal has been completed or (b) such Securities are tendered for the account of an Eligible Institution. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND SECURITIES; GUARANTEED DELIVERY PROCEDURES. To validly tender Securities, a confirmation of any book-entry transfer into the Exchange Agent's account with DTC of Securities tendered electronically, or physical delivery of Securities as well as properly completed and duly executed copy or facsimile of this Letter of Transmittal together with any signature guarantees and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth on the cover page hereof on or prior to the Expiration Date. If Securities are forwarded to the Exchange Agent in multiple deliveries, a properly completed and validly executed Letter of Transmittal must accompany each such delivery. If a holder desires to tender Securities pursuant to the Exchange Offer and (a) such Securities are not immediately available, (b) time will not permit this Letter of Transmittal, such Securities or all other required documents to reach the Exchange Agent prior to the Expiration Date or (c) such holder cannot complete the procedures for book-entry transfer on or prior to the Expiration Date, such holder may effect a tender of Securities in accordance with the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery". Pursuant to such procedure: (a) such tender must be made by or through an Eligible Institution; (b) on or prior to the Expiration Date, the Exchange Agent must have received from such Eligible Institution, at the address of the Exchange Agent set forth on the cover page hereof, a properly completed and validly executed Notice of Guaranteed Delivery (by telegram, facsimile, mail or hand delivery) in substantially the form provided by Alliance, setting forth the name and address of the registered holder and the principal amount of Securities being tendered and stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the date of the Notice of Guaranteed Delivery, this Letter of Transmittal validly executed (or a facsimile hereof), together with the Old Convertible Debentures (or confirmation of book-entry transfer of such Old Convertible Debentures into the Exchange Agent's account with DTC), and any other documents required by this Letter of Transmittal and these instructions, will be deposited by such Eligible Institution with the Exchange Agent; and (c) this Letter of Transmittal or a facsimile hereof, properly completed and validly executed, together with any required signature guarantees, the Securities in proper form for transfer (or confirmation of book-entry transfer into the Exchange Agent's account with DTC) and all other documents required by this Letter of Transmittal must be received by the Exchange Agent within three New York Stock Exchange trading days after the date of such Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE SECURITIES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE DTC SYSTEM, TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE TENDERING HOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, THE MAILING SHOULD BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF SECURITIES WILL BE ACCEPTED. BY EXECUTION OF THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), ALL TENDERING HOLDERS WAIVE ANY RIGHT TO RECEIVE ANY NOTICE OF THE ACCEPTANCE OF THEIR SECURITIES FOR EXCHANGE. 3. INADEQUATE SPACE. If the space provided herein under "Description of Securities Tendered" is inadequate, the certificate numbers of the Securities and the principal amount of Securities tendered should be listed on a separate schedule and attached hereto. 4. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). Tenders of Securities will be accepted only in integral multiples of $1,000 principal amount. The aggregate principal amount of all Securities delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If tenders of Securities are made with respect to less than the entire principal amount of Securities delivered herewith, Securities in the aggregate principal amount not tendered will be issued and sent to the registered holder, unless otherwise specified in the "Special Payment Instructions" or "Special Delivery Instructions" boxes in this Letter of Transmittal. 5. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Securities tendered hereby, the signature(s) must correspond with the name(s) as written on the face of such Securities without alteration, enlargement or any other change whatsoever. If this Letter of Transmittal is signed by a participant in DTC whose name is shown on a security position listing as the owner of the Securities tendered hereby, the signature must correspond with the name shown on the security position listing as the owner of the Securities. If any Securities tendered hereby are owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any Securities tendered hereby are registered in the names of different holders, it will be necessary to complete, sign and submit as many separate Letters of Transmittal, and any necessary accompanying documents, as there are different registrations of such Securities. If this Letter of Transmittal is signed by the registered holder of Securities tendered hereby, no endorsements of such Securities or separate bond powers are required, unless the New Convertible Debentures are to be issued to, or Securities not tendered or not accepted for exchange are to be issued in the name of, a person other than the registered holder(s), in which case the Securities tendered hereby must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Securities (and with respect to a participant in DTC whose name appears on a security position listing as the owner of Securities, exactly as the name(s) of the participant(s) appear(s) on such security position listing as the owner of the Securities). Signatures on such Securities and bond powers must be guaranteed by an Eligible Institution. See Instruction 1. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Securities tendered hereby, the Securities must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Securities. Signatures on such Securities and bond powers must be guaranteed by an Eligible Institution. See Instruction 1. If this Letter of Transmittal or any Securities or bond powers are signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Alliance of such person's authority so to act must be submitted with this Letter of Transmittal. 6. TRANSFER TAXES. Except as otherwise provided in this Instruction 6, Alliance will pay all transfer taxes with respect to the delivery and exchange of Securities pursuant to the Exchange Offer. If, however, the New Convertible Debentures, or Securities not tendered or not accepted for exchange, are to be issued in the name of a person other than the registered holder(s), the amount of any transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such other person will be payable by the tendering holder unless evidence satisfactory to Alliance of the payment of such taxes, or exemption therefrom, is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Securities tendered hereby. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the New Convertible Debentures, or Securities not tendered or not accepted for exchange, are to be issued in the name of a person other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal but at an address other than that shown in the box entitled "Description of Securities Tendered", the appropriate boxes in this Letter of Transmittal must be completed. All Securities tendered by book-entry transfer and not accepted for exchange will be returned by crediting the account at DTC as the account from which such Securities were delivered. 8. ELECTION TO RECEIVE SERIES E PREFERRED STOCK UPON AUTOMATIC CONVERSION. If a holder tendering Securities pursuant to the Exchange Offer desires to receive Series E Preferred Stock upon the Automatic Conversion with respect to all or any part of the New Convertible Debentures issued in exchange for such Securities, such holder must so indicate in column (4) of the box entitled "Description of Securities Tendered". Except to the extent so indicated, in the event the Automatic Conversion occurs, all of the New Convertible Debentures issued in exchange for the Securities tendered hereby will be automatically converted into shares of Common Stock. Elections to receive shares of Series E Preferred Stock upon the Automatic Conversion will be accepted only in integral multiples of $1,000 principal amount. 9. TAXPAYER IDENTIFICATION NUMBER. Each tendering holder is required to provide the Exchange Agent with the holder's correct taxpayer identification number ("TIN"), generally, the holders' social security or federal employer identification number, on Substitute Form W-9, which is provided under "Important Tax Information" below, and to certify whether such person is subject to backup withholding of federal income tax. A holder must cross out item (2) in the Part III Certification box of Substitute Form W-9 if such holder is subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering holder to 31% federal income tax backup withholding on the reportable payments made to the holder or other payee with respect to Securities exchanged pursuant to the Exchange Offer. The box entitled "Applied For" in Part I of the form should be checked if the tendering holder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the "Applied For" box is checked and the Exchange Agent is not provided with a TIN within 60 days, thereafter the Exchange Agent will hold 31% of all reportable payments until a TIN is provided to the Exchange Agent. 10. CONFLICTS. In the event of any conflict between the terms of the Prospectus and the terms of this Letter of Transmittal, the terms of the Prospectus will control. 11. IRREGULARITIES. All questions as to the form of all documents, the validity (including time of receipt) and acceptance of tenders of the Securities will be determined by Alliance, in its reasonable discretion, and Alliance's determination shall be final and binding. Alternative, conditional or contingent tenders of Securities will not be valid. Alliance reserves the absolute right to reject any or all tenders of Securities that are not in proper form or the acceptance of which, in Alliance's opinion, would be unlawful. Alliance also reserves the absolute right to waive any defects, irregularities or conditions of tender as to particular Securities. If Alliance waives its right to reject a defective, irregular or conditional tender of Securities, the holder will be entitled to New Convertible Debentures in exchange for such Securities. Alliance's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding. Any defect or irregularity in connection with tenders of Securities must be cured within such time as Alliance determines, unless waived by Alliance. Tenders of Securities shall not be deemed to have been made until all defects and irregularities have been waived by Alliance or cured. None of Alliance, the Dealer Managers, the Exchange Agent, the Information Agent, the trustee under the indenture for the Securities (the "Trustee") or any other person will be under any duty to give notice of any defects or irregularities in tenders of Securities, or will incur any liability to holders for failure to give any such notice. 12. WAIVER OF CONDITIONS. Alliance reserves the absolute right, in its sole discretion, to waive any or all of the conditions to the Exchange Offer (except for any required approvals of the Nevada Gaming Commission and the Mississippi Gaming Commission). 13. MUTILATED, LOST OR MISSING CERTIFICATES. If a holder desires to tender Securities pursuant to the Exchange Offer but such Securities have been mutilated, lost, stolen or destroyed, such holder should write to or telephone the Trustee, at the address or telephone number listed in the Prospectus, about procedures for obtaining replacements for such Securities or arranging for indemnification or any other matter that requires handling by the Trustee. 14. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Any questions or request for assistance or additional copies of the Prospective, this Letter of Transmittal and/or the Notice of Guaranteed Delivery may be directed to the Information Agent at its telephone number and address set forth below. IMPORTANT TAX INFORMATION Under the federal income tax law, a holder whose tendered Securities are accepted for exchange is required by law to provide the Exchange Agent (as payer) with such holder's correct TIN on Substitute Form W-9 below. If such holder is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and delivery of New Convertible Debentures may be subject to backup withholding. Certain holders (including, among others, corporations) are not subject to these backup withholdings and reporting requirements. Exempt holders should indicate their exempt status on Substitute Form W-9. In order for a foreign individual to qualify as an exempt recipient, such individual must submit a properly completed IRS Form W-8, signed under penalties of perjury, attesting to such individual's exempt status. A Form W-8 can be obtained from the Exchange Agent. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional instructions. If backup withholding applies, the Exchange Agent is required to withhold 31% of any reportable payments made to the holder or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on reportable payments made with respect to Securities accepted for exchange pursuant to the Exchange Offer, the holder is required to notify the Exchange Agent of such holder's correct TIN by completing the form below, certifying that the TIN provided on the Substitute Form W-9 is correct (or that such holder is awaiting a TIN) and that (a) such holder is exempt from backup withholding, (b) such holder has not been notified by the Internal Revenue Service that he is subject to backup withholding as a result of a failure to report all interest or dividends or (c) the Internal Revenue Service has notified such holder that such holder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The holder is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the holder of the Securities tendered hereby. If the Securities are held in more than one name or are not held in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. SUBSTITUTE FORM W-9 REQUEST FOR TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION PAYER'S NAME: THE BANK OF NEW YORK PAYEE INFORMATION (Please print or type) Individual or business name (if joint account, list first and circle the name of person or entity whose number you furnish in Part I below): Check appropriate box: / / Individual/Sole proprietor / / Corporation / / Partnership / / Other Address (number, street, and apt. or suite no.): City, state, and ZIP code: PART I TAXPAYER IDENTIFICATION NUMBER ("TIN") PART II PAYEES EXEMPT Enter you TIN below. For individuals, this is your social security FROM BACK WITHHOLDING number. For other entities, it is your employer identification Check box (see page 2 number. Refer to the chart on page 1 of the Guidelines for of the Guidelines for Certification of Taxpayer Identification Number on Substitute Form further clarification. W-9 (the "Guidelines") for further clarification. If you do not Even if you are exempt have a TIN, see instructions on how to obtain a TIN on page 2 of from backup the Guidelines, check the appropriate box below indicating that you withholding, you have applied for a TIN and, in addition to the Part III should still complete Certification, sign the attached Certification of Taxpayer Awaiting and sign the Identification Number. certification below): Social security number: / / / / / / - / / / / / / - / / / / / / / / EXEMPT / / Applied For Employer identification number: / / / / - / / / / / / / / / / / / / / PART III CERTIFICATION Certification Instructions: You must cross out item 2 below if you have been notified by the Internal Revenue Service (the "IRS") that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return (see page 2 of the Guidelines for further clarification). Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and 2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the IRS that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. Signature Date
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED THE BOX "APPLIED FOR" IN PART I OF SUBSTITUTE FORM W-9 CERTIFICATE OF TAXPAYER AWAITING IDENTIFICATION NUMBER I certify, under penalties of perjury, that a TIN has not been issued to me, and either (a) I have mailed or delivered an application to receive a TIN to the appropriate IRS Center or Social Security Administration Office, or (b) I intend to mail or deliver an application in the near future. I understand that I must provide a TIN to the payer within 60 days of submitting this Substitute Form W-9 and that if I do not provide a TIN to the payer within 60 days, the payer is required to withhold 31% of all reportable payments thereafter to me until I furnish the payer with a TIN. ------------------------------------ Signature ------------------------------------ Date
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS: ABCDEF Wall Street Plaza New York, NY 10005 Toll Free (800) 223-2064 Banks and Brokerage Firms please call collect: (212) 440-9800 EX-99.3 7 EXHIBIT 99.3 ALLIANCE GAMING CORPORATION OFFER FOR ALL OUTSTANDING 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 IN EXCHANGE FOR 7 1/2% SENIOR CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 CUSIP NO. 01859P THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE , 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. May , 1996 TO BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER NOMINEES: We are enclosing herewith the material listed below relating to the offer (the "Exchange Offer") by Alliance Gaming Corporation ("Alliance") to exchange up to $85 million principal amount of Alliance's 7 1/2% Convertible Senior Subordinated Debentures due 2003 (the "New Convertible Debentures") for a like principal amount of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003 (the "Securities"). Consummation of the Exchange Offer is subject to, among other things, satisfaction of the conditions set forth in the Prospectus referred to below under the heading "The Exchange Offer -- Conditions to the Exchange Offer". We are asking you to contact your clients for whom you hold Securities registered in your name or in the name of your nominee. In addition, we are asking you to contact your clients who, to your knowledge, hold Securities registered in their own name. Enclosed for your information and use are copies of the following documents: 1. Alliance's Prospectus dated May , 1996 (as the same may be further amended or supplemented from time to time, the "Prospectus"); 2. A BLUE Letter of Transmittal (the "Letter of Transmittal") for your use in connection with the tender of Securities and for the information of your clients; 3. A YELLOW form of letter that may be sent to your clients for whose accounts you hold Securities registered in your name or the name of your nominee, with space provided for obtaining the clients' instructions with regard to the Exchange Offer; 4. A GREEN form of Notice of Guaranteed Delivery; 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 6. A return envelope addressed to the Exchange Agent. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE , 1996, UNLESS EXTENDED. SECURITIES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS, AT ANY TIME PRIOR TO THE EXPIRATION DATE. In all cases, New Convertible Debentures will be issued in exchange for Securities accepted for exchange pursuant to the Exchange Offer only after timely receipt by the Exchange Agent of such Securities (or confirmation of book-entry transfer of such Securities into the Exchange Agent's account at the Depositary Trust Company), a Letter of Transmittal (or facsimile thereof), properly completed and validly executed, and any other required documents. If holders of Securities wish to tender, but it is impracticable for them to forward their Securities or other required documents prior to the Expiration Date, a tender may be effected by following the guaranteed delivery procedures described in the Prospectus under the heading "The Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery". Procedures for tendering Securities are set forth in the Prospectus under the caption "The Exchange Offer -- Procedures for Tendering". Holders of Securities who wish to tender their Securities must use either the Letter of Transmittal or a facsimile thereof or such Securities must be transferred pursuant to the procedures for book-entry transfer set forth in the Prospectus under the heading "The Exchange Offer -- Procedures for Tendering -- Book-Entry Transfer". In addition, holders of Securities who are following the procedures for guaranteed delivery set forth in the Prospectus must use the Notice of Guaranteed Delivery distributed with the Prospectus. Alliance will not pay any fees or commissions to any broker, dealer or other person in connection with the solicitation of tenders of Securities pursuant to the Prospectus. However, Alliance will reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. Alliance will pay or cause to be paid any transfer taxes payable with respect to the transfer of Securities to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Exchange Offer should be addressed to, and additional copies of the enclosed materials may be obtained from Georgeson & Company, Inc., the Information Agent, at its address and telephone number set forth on the back cover page of the Prospectus. Very truly yours, DEUTSCHE MORGAN GRENFELL JEFFERIES & COMPANY, INC. LADENBURG, THALMANN & CO., INC. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF ALLIANCE, THE DEALER MANAGERS, THE INFORMATION AGENT OR THE EXCHANGE AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. EX-99.4 8 EXHIBIT 99.4 ALLIANCE GAMING CORPORATION OFFER FOR ALL OUTSTANDING 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 IN EXCHANGE FOR 7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003 THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK TIME, ON JUNE , 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. May , 1996 TO OUR CLIENTS: Enclosed for your consideration is the Prospectus dated May , 1996 (as the same may be further amended or supplemented from time to time, the "Prospectus") and a related form of Letter of Transmittal and instructions thereto (the "Letter of Transmittal") relating to the offer (the "Exchange Offer") by Alliance Gaming Corporation ("Alliance") to exchange up to $85 million principal amount of Alliance's 7 1/2% Convertible Senior Subordinated Debentures due 2003 (the "New Convertible Debentures") for a like principal amount of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003 (the "Securities"). WE ARE THE REGISTERED HOLDER OF SECURITIES HELD BY US FOR YOUR ACCOUNT. A TENDER OF ANY SUCH SECURITIES CAN BE MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE BLUE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SECURITIES HELD BY US FOR YOUR ACCOUNT. Accordingly, we request instructions as to whether you wish us to tender any or all of the Securities held by us for your account pursuant to the terms and conditions set forth in the Prospectus and the Letter of Transmittal. We urge you to read the Prospectus and the Letter of Transmittal carefully before instructing us to tender your Securities. Your instructions to us should be forwarded as promptly as possible in order to permit us to tender Securities on your behalf in accordance with the provisions of the Exchange Offer. The Exchange Offer will expire at 12:00 midnight, New York City time, on June , 1996, unless extended. Securities tendered pursuant to the Exchange Offer may be withdrawn, subject to the procedures described in the Prospectus, at any time prior to the Expiration Date. The Prospectus contains important information you should consider carefully. Among other things, your attention is directed to the following: 1. The Exchange Offer is for all outstanding Securities. 2. Holders whose Securities are accepted for exchange in the Exchange Offer will receive on the next interest payment date for the Securities payment in respect of interest (provided such holders' New Convertible Debentures have not theretofore converted) and (to the extent such holder was entitled thereto) liquidated damages on the Securities, in each case accrued to the date of issuance of the New Convertible Debentures. 3. Consummation of the Exchange Offer is subject to, among other things, satisfaction of the conditions set forth in the Prospectus under the heading "The Exchange Offer -- Conditions to the Exchange Offer". 4. Any transfer taxes incident to the transfer of Securities from the tendering holder to Alliance will be paid by Alliance, except as provided in the Prospectus and the instructions to the Letter of Transmittal. 5. In the event the proposed merger between Bally Gaming International, Inc. and a wholly-owned subsidiary of Alliance (the "Merger") is consummated within 60 days after the issuance of the New Convertible Debentures, then at the effective date of the Merger, the New Convertible Debentures will be automatically converted into Common Stock, par value $.10 per share, of Alliance or, if a holder tendering Securities in the Exchange Offer so elects at the time such Securities are tendered, the New Convertible Debentures received in exchange for such Securities will be automatically converted into 10% Non-Voting Junior Convertible Pay-in-Kind Special Stock, Series E, par value $.10 per share, of Alliance. If you wish to have us tender any or all of the Securities held by us for your account, please so instruct us by completing, executing and returning to us the instruction form that follows. INSTRUCTIONS REGARDING THE EXCHANGE OFFER WITH RESPECT TO THE 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 OF ALLIANCE GAMING CORPORATION The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer of Alliance Gaming Corporation. This will instruct you whether to tender the principal amount of Securities indicated below held by you for the account of the undersigned pursuant to the terms and conditions set forth in the Prospectus and the Letter of Transmittal. Box 1 / / Please tender the Securities held by you for my account. Box 2 / / Please do not tender any Securities held by you for my account. Date: , 1996 Signature(s) Please print name(s) here Please type or print address Principal Amount of Securities to be Tendered: $* Area Code and Telephone Number Principal Amount of New Convertible Taxpayer Identification or Debentures to be Converted into Series E Social Security Number Preferred Stock in Event of Automatic Conversion: $** My Account Number With You * UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL SECURITIES OF SUCH BENEFICIAL OWNER(S). ** UNLESS OTHERWISE INDICATED, ALL NEW CONVERTIBLE DEBENTURES RECEIVED IN EXCHANGE FOR SECURITIES TENDERED IN THE EXCHANGE OFFER WILL BE CONVERTED INTO COMMON STOCK IN THE EVENT OF THE AUTOMATIC CONVERSION.
EX-99.5 9 EXHIBIT 99.5 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF 7 1/2% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003 OF ALLIANCE GAMING CORPORATION This Notice of Guaranteed Delivery or a form substantially equivalent hereto must be used to accept Alliance Gaming Corporation's ("Alliance") offer (the "Exchange Offer") to exchange up to $85 million principal amount of Alliance's 7 1/2% Convertible Senior Subordinated Debentures due 2002 (the "New Convertible Debentures") for a like principal amount of Alliance's 7 1/2% Convertible Subordinated Debentures due 2003 (the "Securities"), if (a) certificates representing the Securities are not immediately available, (b) the procedures for book-entry transfer cannot be completed prior to the Expiration Date (as defined) or (c) time will not permit the Securities and all other required documents to each the Exchange Agent prior to the Expiration Date. This form may be delivered by an Eligible Institution by mail or hand delivery or transmitted, via facsimile, telegram or telex to the Exchange Agent as set forth below. All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Prospectus dated May , 1996 of Alliance (as the same may be amended or supplemented from time to time, the "Prospectus"). THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE , 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. To: THE BANK OF NEW YORK, EXCHANGE AGENT BY MAIL OR BY HAND: The Bank of New York 101 Barclay Street, Corporate Trust Operations, 7E New York, New York 10286 Attention: Enrique Lopez Telephone: (212) 815-2742 BY FACSIMILE: (212) 571-3080 TOLL FREE NUMBER: 1-800-254-2826 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OR TELEX, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tender(s) to Alliance Gaming Corporation ("Alliance"), upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Securities set forth below, pursuant to the guaranteed delivery procedures set forth in the Prospectus under the heading "The Exchange Offer -- Procedures for Tendering -- Guaranteed Delivery." All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representation of the undersigned. PLEASE SIGN AND COMPLETE Signature(s) of Registered Holder(s) or Authorized Signatory: Address(es): Name(s) of Registered Holder(s): Area Code and Telephone No.: If Securities will be delivered by book- entry transfer, provide the account num- ber at The Depository Trust Company: Account No.: Certificate No(s). of Securities (if available): Principal Amount of Securities Tendered: $ Principal Amount of New Convertible Debentures to be Converted into Series E Preferred Stock in Event of Automatic Conversion: $ * Date: * Unless otherwise specified, all New Convertible Debentures received in exchange for Securities tendered in the Exchange Offer will be converted into Common Stock in the event the Automatic Conversion occurs.
This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Securities exactly as their name(s) appear(s) on the certificates representing such Securities or on a security position listing as the owner(s) of the Securities, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, guardian, attorney-in-fact, officer of a corporation, executor, administrator, agent or other representative, such person must provide the following information. PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Capacity: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Address(es): - -------------------------------------------------------------------------------- Do not send Securities with this form. Securities should be sent to the Exchange Agent, together with a properly completed and validly executed Letter of Transmittal. GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or a correspondent in the United States or another "Eligible Guarantor Institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees that, within three New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and validly executed Letter of Transmittal (or a facsimile thereof), together with Securities tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Securities into the Exchange Agent's account at a Book-Entry Transfer Facility, pursuant to the procedure for book-entry transfer set forth in the Prospectus under the heading "The Exchange Offer -- Procedures for Tendering -- Book-Entry Transfer"), and all other required documents will be deposited by the undersigned with the Exchange Agent at one of its addresses set forth above. Name of Firm: --------------------------------------- ----------------------------------- Authorized Signature Address: --------------------------------------------- Name: ----------------------------- Title: - ----------------------------------------------------- ------------------------------ Area Code and Telephone No.: ------------------------ Date: -----------------------------------------------
DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS. -----END PRIVACY-ENHANCED MESSAGE-----