-----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, E5OWCMHIH5h8qVNwIS47nmeXQWPfRxLpZVcckqwn6GwAHqbtxPHgEK2wGi6hfPrZ yNHACi33qxcEE3Lp6xImjA== /in/edgar/work/0000950148-00-002040/0000950148-00-002040.txt : 20000930 0000950148-00-002040.hdr.sgml : 20000930 ACCESSION NUMBER: 0000950148-00-002040 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: [7990 ] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04281 FILM NUMBER: 731225 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7028967700 MAIL ADDRESS: STREET 1: 4380 BOULDER HIGHWAY CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 10-K 1 v65925e10-k.txt FORM 10-K (06/30/2000) 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K --------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 0-4281 ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0104066 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6601 S. BERMUDA RD. LAS VEGAS, NEVADA 89119 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER: (702) 270-7600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.10 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common equity held by non-affiliates of the registrant was approximately $18,457,983 as of September 1, 2000. The number of shares of Common Stock, $0.10 par value, outstanding as of September 1, 2000 according to the records of registrant's registrar and transfer agent, was 10,253,296. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year and are incorporated by reference into Part III of this Form 10-K. 1 2 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 PART I ITEM 1. BUSINESS GENERAL Alliance is a diversified, worldwide gaming company that (i) designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, (ii) owns and operates a significant installed base of gaming machines, (iii) owns and operates two casinos and (iv) in Germany, is a full-service supplier of wall-mounted gaming machines and amusement games. Alliance is among the market leaders in each of its business units. Operating under the name Bally Gaming and Systems, the Company is a worldwide leader in designing, manufacturing and distributing gaming machines, having marketed over 75,000 gaming machines during the past five years; it also designs, integrates and sells highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with over 130,000 game monitoring units ("GMUs") installed worldwide. The Company also owns, operates and services an installed base of over 8,700 slot and video gaming machines that are located mostly in non-casino venues in Nevada and Louisiana ("Route Operations"). Alliance is the largest route operator in Nevada and the largest route operator of gaming machines in Louisiana. Alliance also owns and operates what management believes is the most profitable dockside casino in Vicksburg, Mississippi, and a locals casino in Sparks, Nevada, which together have table games and 1,450 gaming machines (collectively, "Casino Operations"). In addition, operating under the Bally Wulff name, the Company believes that it is a leading supplier of wall-mounted gaming machines and amusement games in Germany. In August 2000 the Company signed a definitive agreement with UC Acquisitions Company, LLC, an independent third-party gaming operator, for the sale of its Nevada-based route operations. The gross selling price, which is based on a multiple of cash flows for the 12 month period prior to closing, is estimated to be approximately $118 million, consisting of $6 million in preferred stock and $112 million is cash, which will be utilized to pay down certain lease obligations, pay transactional fees and expenses, with the remainder (estimated to be approximately $95 million) to be used to reduce the Term Loans. This transaction is contingent on the buyer obtaining suitable financing and obtaining approvals from various regulatory bodies, a process which may take 12 months to complete. The Company was incorporated in Nevada on September 30, 1968, under the name Advanced Patent Technology. The Company changed its name to Gaming and Technology, Inc., in 1983, to United Gaming, Inc., in 1988 and to Alliance Gaming Corporation on December 19, 1994. The Company conducts its gaming operations through directly and indirectly owned subsidiaries. On June 18, 1996, the Company acquired Bally Gaming International, Inc. ("BGII"), which includes the Bally Gaming and Systems and Wall Machines and Amusement Games business units. The term "Company" as used herein refers to Alliance Gaming Corporation and subsidiaries unless the context otherwise requires. The Company's principal executive offices are located at 6601 South Bermuda Road, Las Vegas, Nevada 89119; telephone (702) 270-7600. BUSINESS UNITS BALLY GAMING AND SYSTEMS Overview. The Company's primary markets for its gaming machine products are the United States, Canada,Europe, and Latin America, and, to a lesser extent, the Far East and the Caribbean. The following table sets forth the percentage of new gaming machine unit sales by market segment during the periods indicated:
NEW UNITS BY MARKET SEGMENT PERCENTAGE OF NEW GAMING UNITS SOLD Years ended June 30, 1998 1999 2000 ------ ------ ------ Nevada and Atlantic City 25% 22% 14% International 49 59 64 Riverboats 15 4 3 Indian Gaming 10 11 12 Other domestic 1 4 7 ------ ------ ------ 100% 100% 100% ====== ====== ======
2 3 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Markets for Bally Gaming. Within the United States, Nevada represents the largest installed base of gaming machines with an installed base of approximately 200,000 machines as of June 30, 2000. The Company estimates that Atlantic City, the third largest market, had an installed base of approximately 36,000 machines as of June 30, 2000. Product sales of the Company's casino-style gaming equipment in these markets are primarily to established casino customers either to replace existing machines or as 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 tended to increase floor space dedicated to gaming machines. In addition, major casino openings in Nevada, expansions of existing casinos, and the proliferation of casinos in emerging markets have created additional floor space available for new gaming products and are anticipated to further increase competitive pressures on casino operators to replace existing equipment with new machines. Riverboat and dockside casinos began operating in 1991 and, as of June 30, 2000, riverboat and dockside casinos were operating in Indiana, Iowa, Illinois, Mississippi, Missouri and Louisiana. The estimated installed base of gaming machines on riverboats or dockside casinos was approximately 100,000 machines as of June 30, 2000. Casino-style gaming continues to expand on Native American lands. Native American gaming is regulated under the Indian Gaming Regulatory Act of 1988 which permits specific types of gaming. The Company's machines are placed only with Native American gaming operators who have negotiated a compact with the state and received approval from the U.S. Department of the Interior. The Company sells machines to casinos on Native American lands in Arizona, California, Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North Dakota, South Dakota, Washington and Wisconsin. Compacts have also been approved in Oregon, Colorado, and Louisiana, although the Company has made no deliveries in these jurisdictions. In addition to the approved states, compacts are under consideration in several states, including Alabama, Maine, Massachusetts, Rhode Island, and Texas. The installed estimated base of all Native American gaming machines as of June 30, 2000, was approximately 100,000 units. Currently casino gaming also is legal in Colorado, Michigan and South Dakota. The estimated installed base of machines in these markets as of June 30, 2000 was approximately 20,000 machines. In addition to the domestic markets, the gaming industry is also expanding in international markets. The Company's primary international markets are Europe, Canada and Latin America, and, to a lesser extent, the Far East and the Caribbean. The Company conducts its business in Canada through its staff in the United States. In July 1998, the Company's Australian subsidiary, BGI Australia Pty, Ltd., was approved for licensing by the New South Wales Liquor Administration Board which licenses gaming operators and suppliers in New South Wales and in 1999 the Company's game platform and the first of its games were approved for sale in New South Wales. In February 2000 the Company announced plans to reduce its presence in Australia due primarily to difficulty in establishing profitable operations there. The Company also distributes gaming machines, manufactured by Bally Gaming, through its direct and indirect subsidiaries: Bally Gaming International, GmbH ("GmbH"), from its sales office in Hannover, Germany, principally to customers in Europe and Russia; Bally Gaming de Puerto Rico, Inc., principally to customers in Puerto Rico; and Bally Gaming and Systems, SA, in Montevideo, Uruguay, principally to customers in South America. In February 2000 the Company also announced plans to reduce its presence in South Africa and has since closed its sales office located in Johannesburg. Markets for computerized slot data systems. The primary markets for computerized slot data systems (SDS) are the United States and, to a lesser extent, Canada, New Zealand, Latin America, Europe and the Caribbean. Markets for Systems within the United States include traditional land-based casinos predominantly in Nevada and Atlantic City, New Jersey, Native American casinos and riverboats and dockside casinos. Domestically, the Company's market for computerized monitoring systems is new casinos and existing or new customers who either (a) acquire casinos with a competitor's system which is replaced with the Company's system, or (b) expand their casino floors or upgrade their hardware to a new product release. Unlike the United States market, 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 are likely to increase accordingly. The following table sets forth the percentages of revenues provided by each of the Company's major product lines for the periods indicated: 3 4 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
PRODUCT LINE PERCENTAGE OF REVENUES Years ended June 30, 1998 1999 2000 ------ ------ ------ Slot machines 42% 41% 26% Video gaming machines 23 18 31 Computerized slot data systems 21 26 39 Other (primarily used machines, recurring revenue products, parts and services) 14 15 4 ------ ------ ------ 100% 100% 100% ====== ====== ======
Gaming Machine Products. The Company designs, manufactures and distributes a variety of electronic slot and video gaming machines. Gaming machines are differentiated from one another by graphic design and theme, cabinet style and size, pay table, reel-type design, betting denomination and minimum/maximum betting amount. Slot machines are normally produced to specific order, with design and configuration customized to a customer's particular requirements. Customers may also change from one gaming model to another gaming model by ordering a "conversion kit" consisting of artwork, reel strips, and a computer chip. The Company's video gaming machines are designed to simulate various live card games, video reel-spinning games and keno through a video display and can offer the player the chance to play up to ten different games. New games and themes are introduced periodically to satisfy customer demand and to compete with product designs introduced by competitors. The Company introduced its ProSeries(TM) reel-type slot machines in late 1993 and its multi-game touch screen machine, the GameMaker(R), in late 1994. In March 1998 the Company introduced the first major upgrade to both the ProSeries and GameMaker product lines. The ProSeries was the result of a comprehensive product development effort. The development process included extensive testing of the new products in-house and on casino floors for reliability and player appeal. Revenues from sales of ProSeries machines were approximately $45.8 million, $44.6 million and $23.6 million for the years ended June 30, 1998, 1999 and 2000, respectively. The GameMaker can offer up to ten different video games within one gaming device. The ten games can be selected by the casino from a game library that has over 600 games. The games simulate various card games, keno and popular reel-spinning games. The GameMaker machines contain bill acceptors and many other features believed to be popular with casinos and their customers. The GameMaker machines are available in upright, bar top, slim-line and slant top cabinets. Revenues from sales of GameMaker machines were approximately $22.7 million, $17.7 million and $23.6 million for the years ended June 30, 1998, 1999 and 2000, respectively. During the year ended June 30, 1998, the Company introduced a new gaming machine platform, GameMagic (R), a high resolution graphics multi-game, video gaming machine offering up to ten different games. The product has been approved and deployed in Nevada, New Jersey, Iowa, and in several Native American jurisdictions and also deployed outside the United States in jurisdictions that do not require regulatory approval. Revenues from the sale of GameMagic machines were approximately $3.1 million and $5.0 million for the year ended June 30, 1999 and 2000, respectively. During the past two years, the proprietary gaming operations division of Bally Gaming and Systems has moved to become a full service provider of gaming products by adding to its product line wide-area progressive systems and second feature niche games, which are gaming machines that provide bonus features. Many of these gaming machines are placed in casinos and earn recurring revenues and cash flows for the Company rather than being sold on a one time basis. These gaming machines provide a higher level of profitability than the games that are sold outright, but they require the Company to invest capital in the cost of manufacturing the gaming machines and in purchasing signs and seating. The proprietary gaming operations generated recurring revenues of approximately $1.5 million and $20.1 million for the fiscal years ended June 30, 1999 and 2000, respectively. The Company received regulatory approval from the Nevada Gaming Control Board of its wide-area progressive jackpot system named "Thrillions(TM)" in November 1998. The Thrillions system has been designed to allow patrons playing nickel, quarter and dollar machines to compete for the same progressive jackpot with the odds of winning the jackpot adjusted based on the amount wagered. The Thrillions system has been designed to allow casinos to use their own branding for the product. The first products deployed on the Thrillions system were Betty Boop's Big Hit (TM), Pay Day, and Blazing 7's, however the Pay Day and Blazing 7's are proprietary products for Park Place Entertainment for the Nevada and Mississippi markets, 4 5 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 respectively. The Company began deployment of the Betty Boop's Big Hit product in Nevada in March 1999, in Mississippi in July 1999, in Native American jurisdictions in September 1999 and in Atlantic City in May 2000. The Company has introduced three second feature niche games, Roll the Dice (R), Bell Ringer (R), and Love Meter (R) all of which are approved in most major gaming markets. In addition, in conjunction with Shuffle Master, Inc., the Company has designed and deployed the Let's Make a Deal (TM) game on a GameMagic platform. The Company believes that video gaming products and second feature bonus games will continue to gain floor space in casinos. The Company also earns recurring revenues from games deployed with the Delaware State Lottery Commission, and starting in August 1999, games developed under a manufacturing and distribution agreement with Oasis Technologies, Inc. and deployed in Washington compacted Native American tribes. The Company has also developed several other gaming products. In fiscal year 1998, Bally Gaming announced its product called Cash Cage(r) that dispenses paper tokens (currency or casino customized scrip) from a patented bill hopper in partial substitution for complete coin payouts. Pursuant to a long term agreement, the Company has agreed to license JCM American, a U.S. subsidiary of Japan Coin Machine Company, a leading supplier of bill acceptors to the gaming industry, to be its worldwide exclusive manufacturer and distributor of the Cash Cage technology, for which the Company will receive a royalty for each Cash Cage unit shipped. However, this product has not yet been commercialized and there can be no assurance that commercialization of this technology will occur in the future. In fiscal year 1999, the Company received final regulatory approval from the Nevada Gaming Control Board for its patented Remote Access Verification Environment ("RAVE") technology, a system and method that provides regulators assurance that the on-line gaming activity originates from within a particular jurisdiction. In December 1998, the Company signed an exclusive agreement to license a third party to use the RAVE technology in Nevada for sportswagering applications. However this third party has yet to commercialize the product and there can be no assurance that commercialization of this technology will occur in the future. The Company 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. The Company provides several after-sale, value-added services to its customers including customer education programs, a 24-hour customer service telephone hot-line, an Internet web site for technical support, field service support programs, and spare parts programs. The Company's historical warranty expense as a percentage of revenues has been less than 1%. In addition, the Company sells and services used gaming machines and sells parts for existing machines. The Company often accepts used machines as trade-ins toward the purchase of new gaming equipment. While a small secondary market exists in the United States, used machines are typically resold into the international market. Some used equipment is reconditioned for direct sale, but much is sold in container lots on an "as is" basis through independent brokers. Sale of used equipment were approximately $3.6 million, $5.6 million and $3.7 million for the years ended June 30, 1998, 1999 and 2000, respectively. Gaming machines have a mechanical life that can exceed ten years. However, in the established markets, the Company's experience is that casino operators usually replace gaming machines after three to seven years. The factors which result in replacement of gaming machines sooner than their mechanical life include technological advances, development of new entertaining games, new sound and visual features and changing preferences of casino patrons. Casinos typically recoup the purchase cost of their electronic gaming machines in a few months, which allows casinos to replace machines with new models that are popular with casino patrons. System Products. The Company designs, integrates, and sells computerized slot data systems ("SDS") for slot and video gaming machines which provide casino operators with on-line, real time data relative to a machine's accounting, security and cash monitoring functions. When purchased along with other third party player tracking applications, SDS also provides data to and receives data from casinos to track their players to establish and compile individual player profitability and other demographic information. SDS is comprised primarily of (1) hardware consisting of microcontroller-based printed circuit boards installed within the slot and video machines as well as card readers, displays and keypads which provide casinos with the ability to track player gaming activity and monitor access to slot and video machines by the casino's employees, (2) firmware developed by the Company which provides access to the slot machine's and player's activity data gathered by the microcontroller hardware, and (3) business applications software developed by the Company which manages the slot machines' and players' activity information. This 5 6 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 software resides on Unix or PC based servers. Systems also provides software and hardware support services, including maintenance, repair and training for purchasers of its monitoring systems. Product Development. The Company believes that providing games and systems with high entertainment value that are preferred by the casino patron is a key to meeting the demands of casinos. The Company believes that the use of existing computer technology is accelerating which can give newer gaming machines and systems that incorporate this technology a competitive advantage over older gaming machines and systems. Total spending on product research and development by Bally Gaming and Systems was approximately $12.7 million, $13.9 million and $12.6 million during the years ended June 30, 1998, 1999 and 2000, respectively. The decrease in research and development spending in the year ended June 30, 2000, is a result of the comparison to the prior year which included incremental development costs related to the launch of the wide-area progressive product. The Company develops its products for both the domestic and international market. The Company's product development process is divided into two areas: hardware and software. Major areas of hardware development include cabinet style, electronic capability, printer capability, and coin and currency handling. Hardware development efforts are focused on player appeal, product reliability and ease of maintenance. Development cycles for hardware can range from a few days for simple enhancements to more than a year for new electronics or new mechanical packages. The software development process for new games, which includes graphics development, involves a continuous effort requiring relatively significant human resource allocations. Creativity in software development is an important element in product differentiation as the major manufacturers tend to deploy similar hardware and related technology. Ideas for new models are generated internally, from customers and from other third parties, many of whom have entered into strategic relationships with the Company. On an annual basis, the Company expects to introduce approximately 25 new models to the market. However, no assurance can be made with respect to the rate of new model introductions or obtaining of regulatory approvals for them. The Company also focuses on hardware modifications and second feature niche game platforms. Key members from the marketing and design groups meet to analyze machines currently being marketed by the Company and its competitors to assess their strengths and weaknesses and suggest ideas for modifications and new machines. These ideas are reviewed to determine what should be further developed. The Company typically pursues 15 to 20 projects at any given time, and approximately two to three second feature niche gaming machines are submitted for licensing each year. These new machines are built in limited quantities and then test marketed in various locations throughout the U.S. for three to six months. Many 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 the Company's machines and their continued acceptance and success in the marketplace. All new or modified hardware and software are designed to satisfy all applicable testing standards. Typically, new products require regulatory approval for most North American, but generally no approval is needed for other jurisdictions. For Nevada, new gaming machine platforms must be filed with the state gaming laboratory which tests the products for from two to three months or more before a mandatory 30 to 60 day field test is conducted in a casino. For new product platforms, the Nevada State Gaming Control Board and the Nevada Gaming Commission must each approve these products at their monthly, public meetings. For modifications of existing products or casino associated equipment, the process in Nevada is similar to new platforms, except a field test is usually not required and the product can be approved administratively by the Nevada State Gaming Control Board staff. Each jurisdiction that requires regulatory approval of new products has its own filing requirements and process. Once products are approved by the gaming regulators, customers will typically require a 30 to 90 day field trial of the product in their casinos with the right to return the product at any time during the field trial period. The Company does not recognize revenue until the customer ends the field trial and accepts the gaming machines. Product development for the SDS product is also divided into hardware and software. The major areas of hardware development include microcontroller circuit board design and programming as well as user interface devices such as card readers, keypads, and displays. Systems has developed a modular and extendible hardware and software architecture, that allows development to be focused on achieving greater functionality, product reliability, and ease of maintenance for the casino operator and achieving greater visual appeal and ease of use for the slot player. In addition, the architecture allows customers to upgrade existing components or add new components with minimal impact. Development cycles for hardware can vary between a few months for minor revisions to more than a year for major 6 7 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 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 that extend and enhance the SDS product, (2) periodic maintenance releases that enable casino operators to correct problems or improve the usability of the system and (3) documentation needed to install and use the system. The Company developed a form of cashless wagering that uses bar-coded coupons, which can be read by the bill validators in slot machines connected to the SDS system. The Company continues to direct development efforts towards other forms of cashless wagering for use on slot machines and the SDS system. The bar-coded coupon product is currently in regulatory field test in New Jersey and Nevada. Sales and Marketing. Bally Gaming and Systems uses a direct sales force and, to a lessor extent, an independent distributor network to distribute its products. Bally Gaming and Systems' North America sales staff consists of approximately 19 people in offices in Nevada, New Jersey, Mississippi, Illinois, California, Missouri and Florida. Bally Gaming and Systems' direct sales force, other than personnel at GmbH, Australia and South Africa generated approximately 80%, 77% and 53% of new unit machine sales for the years ended June 30, 1998, 1999 and 2000, respectively. On a limited basis, Bally Gaming and Systems uses distributors for sales to certain international jurisdictions. The agreements with distributors do not specify minimum purchases but generally provide that the Company may terminate such agreements if certain performance standards are not met. These independent distributors generated approximately 6%, 7% and 7% of new gaming machine unit sales for the years ended June 30, 1998, 1999 and 2000, respectively. GmbH generated approximately 13%, 13% and 18% of new gaming machine unit sales for the years ended June 30, 1998, 1999 and 2000, respectively. The Company has over 130,000 game monitoring units installed, of which approximately 95% are in the United States. At June 30, 2000, the Company had 123 installed locations. Substantially all System's revenues are generate by its direct sales force. For the year ended June 30, 2000, approximately 87% of the Company's slot and video gaming machine sales were on terms of 90 days or less. Approximately 13% of the Company's sales, primarily in certain emerging markets such as riverboat and Native American gaming casinos, are financed over extended periods as long as 36 months and bear interest at rates ranging from 9% to 14%. International sales are generally consummated on a cash basis backed by a letter of credit or financed over three years or less. In addition, in certain situations the Company has participated in the financing of other gaming-related equipment manufactured by third parties in the emerging markets. For SDS sales, the Company generally offers limited financing terms, normally less than one year, for sales to new installations. Most sales, however, are invoiced on a net 30-day basis. Management believes that financing of customer sales is an important factor in certain emerging markets. For SDS sales, the Company 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 the Company. After an initial warranty period, typically 90 days, the customer is invoiced a monthly hardware and software maintenance fee which provides essentially for repair or replacement of malfunctioning hardware and software, software version upgrades, and on-call support for software. Customers. The demand for slot machines and video gaming machines varies depending on new construction and renovation of casinos and other facilities with needs for new equipment as well as the replacement of existing machines (which have an average replacement cycle of three to seven years). For the years ended June 30, 1998, 1999, and 2000, Bally Gaming and System's largest single customer for gaming machines accounted for approximately 7%, 21% and 6%, respectively, of the Bally Gaming and Systems' revenues, while its ten largest gaming machine customers accounted for approximately 48%, 46%, and 31% of the Bally Gaming and Systems' revenues during such periods, respectively. The demand for computerized slot monitoring systems is driven by regulatory requirements in a given jurisdiction and by a casino operators' competitive need to properly track machine and player activity and establish and compile individual machine and player profitability and other demographic information, all of which is of particular importance to casinos in developing marketing strategies. Revenues for computerized monitoring systems are derived from selling to new installations and to new or existing customers who either (a) acquire casinos with a competitor's system which is replaced with the Company's system or (b) expand their casino floors or upgrade their hardware to a new product 7 8 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 release. For the years ended June 30, 1998, 1999 and 2000, the ten largest computerized monitoring system customers (which include certain multi-site casino operators that have corporate agreements) accounted for approximately 53%, 68% and 90% of game monitoring unit revenues, respectively. Due to the high initial costs of installing a computerized monitoring system, customers for such systems generally have tended not to change suppliers once they have installed such a system. Future growth of Bally Gaming and Systems will be based on continued penetration of the international markets, further expansion in the established and emerging markets, as well as continued development efforts to provide customers with new and innovative hardware and software product offerings. Assembly Operations. Bally Gaming and Systems' Las Vegas facility was completed in 1990 specifically for the design, assembly and distribution of gaming equipment. The 150,000-square foot facility was designed to meet fluctuating product design demands and volume requirements, and management believes the facility enables Bally Gaming and Systems to increase production without significant capital expenditures. Since July 1998 all assembly of game monitoring unit products has also been performed in the Las Vegas facility. In April 1999, the Company entered into a five-year exclusive original equipment manufacturing agreement with Dreamport, Inc., a wholly owned subsidiary of GTECH Corporation. Under the agreement, the Company will manufacture gaming machines, including its GameMaker and Game Magic product lines, for certain lottery markets exclusively for Dreamport. In April 1999, the Company entered into a manufacturing and distribution agreement with Oasis Technologies, Inc. to serve compacted Native American gaming venues in Washington. Oasis Technologies, Inc. owns patented technology for the types of gaming machines required by gaming regulators in Washington. Under the agreement, the Company and Oasis Technologies have jointly developed gaming devices that deploy the Oasis technology in a Bally Gaming device. Oasis Technologies provides the gaming system and a continuing series of games to deploy in the gaming devices. The Company manufactures and distributes the games, gaming devices and the system. Management believes its assembly operations allow for rapid generation of different models to fill orders quickly and efficiently. Another major advantage of the existing plant operation is the system by which machines can be altered in many ways including the size, type and color of glass, sound and payoff patterns to produce a "customized" product for each customer. Bally Gaming and Systems keeps an inventory of parts that allow machines to be altered quickly to conform with a particular customer's design/feature request. Bally Gaming and Systems produces products for individual customer orders, thereby reducing exposure to finished goods inventories. Bally Gaming and Systems designs all of the major assemblies that are incorporated into the final machine configuration. Competition. The market for gaming machines and progressive systems in North America is dominated by a single competitor, International Game Technology, Inc. ("IGT"). Worldwide there are a number of other well-established, well-financed and well-known companies producing gaming machines that compete with each of the Company's lines in each of the Company's markets. The other major competitors are AC Slot and Coin, Anchor Gaming, Casino Data Systems, ("CDS"), Innovative Gaming Corporation of America, Mikohn Gaming Corporation ("Mikohn"), Shuffle Master, Inc., Sigma Games, Inc., Silicon Gaming, Universal Distributing of Nevada, Inc. WMS Industries, Inc. ("WMS"), and companies that market gaming machines under the brand names of Aristocrat, Atronic, Cirsa, Konami, Novomatic and Sega Enterprises Ltd. Many of these companies look to expand their market share by decreasing the Company's current market share. Other companies may enter the gaming machine business and several of these companies offer or plan to offer second feature bonus games. Only IGT, CDS and Mikohn currently offer wide-area progressive systems, although others may enter this area. Competition among gaming product manufacturers, particularly with respect to sales of gaming machines into new and emerging markets, is vigorous and is based on which machines generate the most net win to the casinos, competitive customer pricing and financing terms, quality of the product and having an extensive distribution, sales and support network. The main competition in game monitoring units currently consists of IGT, CDS, and to a lesser extent Gaming Systems International, Mikohn Gaming Corporation, Acres Gaming, Inc. Logical Solutions International, and companies marketing systems under the brand names of Aristocrat and Grips. Competition is keen in this market due to the number of providers and the limited number of casinos and jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all key factors in determining a provider's success in selling its system. 8 9 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Management believes the future success of its operations will be determined by its ability to bring new and innovative products to the market while maintaining its base of loyal existing customers. WALL MACHINES AND AMUSEMENT GAMES Industry Overview Management believes the German wall machine market consists of approximately 200,000 wall machine units. German regulations currently limit the useful life of wall machines to four years. As a result, annual market demand for wall machines in Germany approximates 35,000 to 55,000 units with fluctuations resulting primarily from economic conditions, regulatory changes, and new product development. Management believes that the size of the wall machine market has declined from prior years due to changes in the arcade and tavern markets and an increase in non-payout entertainment games, as well as the impact from the overall slowdown in the German economy. A portion of this annual demand is not available to the Company as it relates to machines in arcades operated by the Company's two main German competitors. Wall machine sales into the arcade market account for approximately 30% of the total wall machine sales in Germany. A significant number of arcades (approximately 10%) are owned by the two largest competitors, Gauselmann AG and NSM AG. Generally these competitors do not purchase wall machines from Bally Wulff for their arcades. Management believes Bally Wulff's share of the German wall machine market was approximately 30%, 22% and 21% for the years ended June 30, 1998, 1999 and 2000, respectively. Market share is impacted by the popularity of the machines in the locations and can fluctuate between periods based on this and a wide range of other factors. The German legislative authorities regulate and monitor the wall machine industry on an ongoing basis to ensure conformance with certain manufacturing standards and the fairness of each machine to users. Existing legislation covers prescribed licensing procedures, the use, installation and operation of wall machines and the taxation of wall machines. Operations of Bally Wulff Products. Bally Wulff's manufacturing operations were founded in Berlin in 1950. Bally Wulff produces and distributes a variety of models of wall machines under the trade name "Bally Wulff" for operation in arcades, hotels, restaurants and taverns primarily in Germany. These wall machines are coin-operated, armless gaming devices similar to slot machines that award winnings for matching numbers or symbols on three to five wheels or drums and differ primarily in appearance, graphic design, theme, pay-table and customer appeal. Each game costs up to 40 pfennigs (approximately $0.20 at the exchange rate of $1.00=DM 2.05 prevailing as of June 30, 2000, which rate is used hereinafter) to play, although the player may deposit larger amounts to provide continuous play but not to increase payoffs. German regulations limit the maximum payout to ten times the player's stake (DM 4.00 or approximately $1.94 per game). Current models of wall machines provide the player the opportunity to win 100 special games on one play, which increases the potential amount that can be won on the minimum wager. German regulations require a minimum payback of 60% for wall machines, although many machines are generally programmed to pay back at somewhat higher rates to encourage play. Bally Wulff has also manufactured non-payout entertainment machines for operation in arcades, hotels, restaurants and taverns in Germany and may continue to do so in the future on a selective basis. In February 1999, Bally Wulff began selling a single-site progressive linked jackpot system under the name Magic Jackpot. Initially, up to ten wall machines could be linked to one system. The average selling price for the system was approximately DM 15,500 (approximately $7,530). Although there were initially strong sales of this product in fiscal year 1999, sales slowed substantially in fiscal year 2000, and virtually no sales of this product are expected in fiscal year 2001. In addition to manufacturing wall machines, Bally Wulff distributes wall machines and other recreational and coin-operated amusement machines manufactured by third parties in order to be a full service provider to its customers. These machines include entertainment games, pool tables, dart games, pinball machines, jukeboxes and arcade games, and are distributed primarily for use in arcades, restaurants, hotels and taverns. The following table sets forth the percentage of Bally Wulff's revenues by product line for the periods indicated: 9 10 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
PRODUCT LINE PERCENTAGE OF REVENUES Years ended June 30, 1998 1999 2000 ------ ------ ------ Sale of wall machines manufactured by Wulff 44% 43% 40% Leasing of wall machines manufactured by Wulff 10 10 14 Entertainment and amusement machines and third party wall machines distributed 26 25 42 Other (primarily used machines, parts and service) 20 22 4 ------ ------ ------ 100% 100% 100% ====== ====== ======
Product Development. Management believes that Bally Wulff's wall machines are viewed as premium products because of their quality, dependability, ease of service and proven ability to attract players and generate revenue. Bally Wulff designs its machines to appeal to each of the three categories of participants in the distribution process: Bally Wulff's sales representatives and independent distributors, the owner/operator of the machines, and the players. The sales representatives and distributors require machines with broad appeal that are easy to demonstrate and sell. The owner/operators desire reasonably priced machines that are easy to collect from and service and that are proven revenue generators. The players prefer entertaining machines that are simple to play and have unique features. Bally Wulff's management has formed design teams that are responsible for generating ideas for creative new machines. These teams are comprised of representatives of each department involved in the production and distribution of machines, such as art design, engineering, manufacturing, marketing and sales. The design teams meet for three days each calendar quarter at a site away from Bally Wulff's headquarters. The teams analyze machines currently being marketed by Bally Wulff and its competitors to assess their strengths and weaknesses and then suggest ideas for new machines. These ideas are reviewed to determine which machines should be produced on a trial basis. Bally Wulff typically pursues 15 to 20 projects at any given time, and approximately 12 to 15 machines are submitted for licensing each year. These new machines are built in limited quantities and then test marketed for three to six months. Generally, fewer than half of the new machines tested are put into full scale production. Management believes this process of generating new ideas and then turning only a limited number of the ideas into machines which will reach the mass market is responsible for the high quality of Bally Wulff's machines and their continued acceptance and success in the marketplace. Total spending on product research and development by Bally Wulff was $3.0 million, $3.2 million and $2.7 million during the years ended June 30, 1998, 1999 and 2000, respectively. Sales and Marketing. Bally Wulff sells virtually all of its products through its direct sales force of approximately 55 individuals located in 20 regional sales offices. Independent German distributors account for approximately 3% of sales. Virtually all 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 in which the offices are responsible for sales, servicing the machines and assisting in collecting customers' accounts receivable balances. The wall machines manufactured and sold by Bally Wulff generally sell for prices ranging from DM 4,000 to DM 7,500 (approximately $1,945 to $3,645). Due to price competition among the three largest manufacturers, selling prices have declined since 1997. Management believes that such declines in prices may continue in the future. For the year ended June 30, 2000 approximately 80% of Bally Wulff machine sales were on terms of 90 days or less. Remaining sales of machines are financed by Bally Wulff generally over a 12-month period, with interest rates between 18% and 24%. For this reason, Bally Wulff establishes an internal credit rating and credit limit for each customer. Under Bally Wulff's conditions of sale, a security interest in a machine is retained by Bally Wulff until the machine has been paid for in full. In addition, Bally Wulff requires security beyond the wall machine itself. Currently, Bally Wulff provides customer financing for approximately 20% of its sales, and management expects this practice to increase during fiscal 2000. Leasing machines to customers accounted for 10%, 10% and 14% of total revenues for the years ended June 30, 1998, 1999 and 2000, respectively. In approximately 95% of its unit sales, Bally Wulff accepts wall machines as trade-ins toward the purchase of new wall machines. To the extent possible, the used machines are then resold. Customers. Each of Bally Wulff's top ten customers in 2000 has maintained its relationship with Bally Wulff for over five years. For the years ended June 30, 1998, 1999 and 2000, Bally Wulff's top ten customers accounted for approximately 12%, 9% and 9% of Bally Wulff's revenues, respectively, while no single customer accounted for more than 3%, 2%, and 2% of Bally Wulff's revenues for such periods, respectively. 10 11 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Bally Wulff's customer base for wall machines may be divided into two categories based on the preferences of their clientele. Operators who place wall machines in arcades are generally interested in purchasing the newest products in the hopes that an innovation will result in a high level of public demand to play the new "hot" product. Street location operators serving hotels, restaurants and taverns, on the other hand, are generally more inclined to purchase lower-priced existing models with proven earnings records to provide as an amenity to customers. Assembly Operations. Bally Wulff's manufacturing process is primarily an assembly operation. Its manufacturing facility consists of a four-story, 100,000-square foot building in Berlin, Germany. Bally Wulff purchases its key raw materials, sub-assemblies and fabricated parts from a variety of suppliers, and most parts are purchased from multiple suppliers. While there exists no formal long-term contract commitments to any single supplier, Bally Wulff has placed certain standing orders with suppliers to help assure the availability of specific quantities on an as-needed basis. These orders are cancelable by Bally Wulff at any time without penalty. Most of the component parts are standard on all models of all Bally Wulff's wall machines, which promotes easy conversion from the production of one model to another in response to customer demand. Except in connection with certain promotions, Bally Wulff generally maintains low inventory levels of assembly parts, and the amount of work-in-process is generally less than the number of machines sold in one week. Because of its manufacturing structure, Bally Wulff is capable of substantially increasing its wall machine output without significant capital expenditures. Bally Wulff continues to improve its manufacturing efficiency and productivity through the use of computer-aided design systems, automated production equipment, and devotion of substantial resources to product quality control. Competition. Germany's wall machine manufacturing industry is dominated by Bally Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management believes these three entities collectively account for approximately 90% of the entire market. Bally Wulff competes with many companies in the distribution of coin-operated amusement games, some of which are larger and have greater resources than Bally Wulff. Bally Wulff's two major competitors own and operate a significant number of arcades, which may give them a competitive advantage arising from a built-in market for their games and the ability to test market new games in their own arcades. Furthermore, 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 and coin-operated amusement game markets are the quality and depth of the product line, price and customer service which includes the ability to fill orders quickly and efficiently. ROUTE OPERATIONS Nevada Operations Overview. In August 2000 the Company signed a definitive agreement with UC Acquisitions Company, LLC, an independent third-party gaming operator, for the sale of its Nevada-based route operations. The gross selling price, which is based on a multiple of cash flows for the 12 month period prior to closing, is estimated to be approximately $118 million, consisting of $6 million in preferred stock and $112 million is cash, which will be utilized to pay down certain lease obligations, pay transactional fees and expenses, with the remainder (estimated to be approximately $95 million) to be used to reduce the Term Loans. This transaction is contingent on the buyer obtaining suitable financing and obtaining approvals from various regulatory bodies, a process which may take 12 months to complete. The Company's Nevada route operations involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other electronic gaming machines in local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores operated by third parties ("local establishments"). The Company's route operations target Nevada residents who generally frequent local establishments close to their homes. 11 12 The following table sets forth certain historical data concerning the Company's Nevada route operations: ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
Years ended June 30, ------------------- 1998 1999 2000 ---- ---- ---- Average number of gaming machines operated 6,460 7,300 7,856 Average number of locations 624 680 687 Average win per day per gaming machine $53.70 $57.20 $63.10
At June 30, 2000, the Company operated approximately 8,000 machines on its Nevada route. The Company has increased the number of gaming machines owned and operated principally through contracting with new locations as they open and strategic takeover of contracts at locations operated by several mid-sized route operators. Contract takeovers added approximately 580, 200, and 470 gaming machines to the Nevada route during the years ended June 30, 1998, 1999 and 2000, respectively. The Company enters into long-term agreements with local establishments through either space leases or revenue-sharing arrangements. Under revenue sharing arrangements, most common with taverns, restaurants and convenience stores, the Company does not pay rent, but rather receives a percentage of the net win from the gaming machines. Under revenue sharing arrangements, the owner of the local establishment must have a gaming license, in addition to the general slot route operators license the Company holds. Under space lease arrangements, most common with supermarkets and drug stores, the Company pays a fixed rental amount to the owner of the local establishment and the Company receives all of the net win derived from the gaming machines. Under space lease arrangements, only the Company (and not the establishment owner) is required to hold a gaming license. Most of the local establishments serviced by the Company are restricted by law to operating no more than 15 gaming machines. Revenue-sharing arrangements accounted for approximately 87%, 88%, and 84% of revenues and 77%, 76%, and 74% of installed machines, respectively, in the Company's Nevada route operations for the years ended June 30 1998, 1999 and 2000. At June 30, 2000, the weighted average remaining term of the Company's revenue sharing arrangements was approximately 3.1 years. Space lease arrangements accounted for approximately 13%, 12%, and 16% of revenues and 23%, 24%, and 26% of installed machines, respectively, in the Company's Nevada route operations for the years ended June 30, 1998, 1999 and 2000. At June 30, 2000, the weighted average remaining term of the Company's space leases was 3.0 years. The Company has historically been able to renew or replace revenues from expiring agreements with revenues generated by renewal or replacement contracts. The Company has emphasized return on investment rather than increasing market share in renewing or entering into new contracts and has undertaken a systematic review process to adjust its contract mix to emphasize higher margin contracts and, where permissible, canceling or not renewing unprofitable contracts. Sales and Marketing. As the largest route operator in Nevada, the Company believes that it is able to differentiate itself from its competitors because it is a full-service operation that provides its customers support for marketing promotional allowances and uses its design capabilities to provide electronic gaming machines with features customized to customers' needs. The Company developed and continues to implement a system called "Gamblers Bonus". Gamblers Bonus is a proprietary cardless slot players' club and player tracking system, which allows multiple local establishments to be linked together into a distributed gaming environment. Through this technology, the Company is able to provide its players and customers with many of the same gaming choices otherwise available only in a larger scale casino environment, choices such as multi-location progressive jackpots, bigger jackpot payouts and traditional players' club enhancements. Additionally, the Company is offering a series of new games available only to Gamblers Bonus members. Since the launch of Gamblers Bonus, the gaming machines linked to Gamblers Bonus have experienced an increase in net win per day per machine. As of June 30, 2000, the Company had the Gamblers Bonus installed in over 3,500 gaming machines at approximately 345 locations or 44% of the installed base of gaming machines. The Company believes Gamblers Bonus will continue to improve both the revenues and operating efficiencies of its Nevada route operations and has the potential to create additional opportunities in the route operations segment of the gaming industry. The Company has benefited from the growth in population in Nevada, creating more gaming venues. Certain local politicians have proposed limiting the number or type of venues where gaming is authorized. Management does not believe the outcome of these proposals will have a material impact on financial results of the Company. 12 13 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Customers. The Company has a diversified customer base with no one customer accounting for more than 5%, 4% and 3% of the Company's revenues generated from Nevada route operations during the years ended June 30, 1998, 1999 and 2000, although approximately 11%, 10% and 17% of such revenues were generated through an affiliated group of such customers for such periods, respectively. The affiliated group consists of eight partnerships each having one individual partner who is common to all such partnerships. For the years ended June 30, 1998, 1999 and 2000, the ten largest customers accounted for approximately 20%, 18%, and 9% of the Nevada route operations revenues, respectively. Assembly Operations. In previous years, the Company's route operations manufactured its own gaming machines for use in its Nevada route operations. These machines represent approximately 41% of the gaming machines currently used in the Nevada route operations at June 30, 2000. In July 1998, the Company received regulatory approval to begin using the Bally GameMaker platform for Gamblers Bonus gaming machines deployed on the Nevada route. At June 30, 2000, approximately 31% of the installed base of gaming machines on the Nevada route were manufactured by Bally Gaming. Competition. The Company is subject to substantial direct competition for its revenue-sharing and space lease locations from several large route operators and numerous small operators, located principally in Las Vegas, Reno and the surrounding areas and from other forms of gaming. The Company, Jackpot Enterprises, Inc., Anchor Gaming, ET&T, and Southwest Gaming are the largest route operators in Nevada. The principal methods of competition for route operators include the economic terms of the revenue sharing or space lease arrangement, the services provided, the Gamblers Bonus product and the reputation of the route operator. Price competition is intense and can reduce the Company's gross margin on such operations if the percentage of the gaming machine revenues retained by the local establishment increases. Louisiana Operations Overview. On the basis of its Nevada route operations expertise, in March 1992 the Company obtained a contract to operate video poker gaming machines in the greater New Orleans, Louisiana area through a subsidiary, Video Services, Inc. ("VSI"). The Company entered into an operating agreement which runs through May 2002 with Fair Grounds Corporation, and its affiliates, Jefferson Downs Corporation and Finish Line Management Corporation (collectively, "Fair Grounds"), for the Company to be the exclusive operator of video poker machines at the only racetrack in the greater New Orleans area and eight associated off-track betting parlors (OTB's). This agreement contains a five-year option for the Company to match any third party offer to operate the machines after May 2002. The Company operates the game rooms where the video poker machines are located for each of the nine facilities owned by Fair Grounds, for which it receives a percentage of the revenue generated by the machines. As of June 30, 2000, the Company had approximately 670 video poker machines in Louisiana. On July 1, 1999, pursuant to a prior vote, video poker became illegal in one parish where the Company operated machines at two OTB's and thus these locations closed. The two OTB's in this parish accounted for $2.4 million of revenues and approximately $0.6 million of operating income for VSI during the year ended June 30, 1999. During fiscal year 2000, the Company redeployed certain of the video poker machines from these two closed sites to other existing sites. The Louisiana legislature has considered other legislation to curtail video poker in the past and may do so again in the future. Under the Louisiana gaming laws and regulations, the majority stockholder of any entity operating video poker machines in Louisiana must be a domiciled resident of the State of Louisiana. As a result, the Company owns 49% of the common stock of VSI and three prominent members of the Louisiana business and legal community own the remaining 51%. The Company, however, owns all the voting stock of VSI and all of its officers and directors are Company employees. The Company has a 71% interest in dividends of VSI in the event dividends are declared. The Company also formed two other Louisiana subsidiaries, Southern Video Services, Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI are structured in a manner similar to VSI except that the Company is entitled to receive 60% of any SVS dividends. Under the terms of its contract with Fair Grounds, the Company must conduct any additional video poker operations in Louisiana other than gaming at racetracks or OTB parlors through SVS. To date, SVS and VDSI have not engaged in business in Louisiana. The Company is prohibited by the Louisiana Act from engaging in both the manufacture and operation of video poker gaming in Louisiana and, therefore, the Company does not manufacture its own video poker machines for use in Louisiana. 13 14 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Sales and Marketing. VSI has developed an extensive marketing program under the names "The Players Room" and "Rockin' Horse Lounge" which is designed to attract primarily local residents to VSI's facilities. Media placement has focused on newspaper and radio advertising with promotions including a player's club, direct mailings and offerings of a wide range of prizes. The Company intends to expand its operations selectively in the greater New Orleans area by increasing the number of video poker machines in certain of its existing locations as demand warrants. While the Company has investigated the addition of new locations under its current contract with the Fair Grounds in areas where competitive factors are favorable, no plans currently exist to add new locations. Under the Louisiana Act, racetracks and OTBs are permitted to install an unlimited number of video poker machines while truckstops and taverns may install only limited numbers of such machines. Competition. The Company is subject to extensive competition for contracts to operate video poker machines and the Company's racetrack and OTB parlors compete with various riverboats, truckstops and locations with liquor licenses throughout the New Orleans area. Each truckstop is permitted to operate up to fifty video poker machines and each tavern is permitted to operate up to three video poker machines. Louisiana has riverboat gaming statewide and three riverboats are currently operating in the greater New Orleans area. Riverboats are permitted to have live table games and an unlimited number of gaming machines, including slot machines. Louisiana has also has one land-based casino currently operating. CASINO OPERATIONS Overview. Rainbow Casino. The Rainbow Hotel Casino located in Vicksburg, Mississippi began operations in July 1994. The facility includes a 25,000-square foot casino, which was expanded in February 2000 and currently has approximately 1,000 gaming machines and 16 table games as well as a 245-seat restaurant. The facility also includes the 89-room Rainbow Hotel, which is owned and operated by a third party. Originally, the facility also included a 10-acre indoor and outdoor entertainment complex called Funtricity Entertainment Park, which was developed by a subsidiary of Six Flags Corporation. In September 1998, the Company acquired the entertainment park for $0.5 million; however the primary facility continues to be used for special events. Rainbow Casino is marketed as a "locals" casino and draws its customers principally from within a 75-mile radius of Vicksburg. The Vicksburg casino market generated approximately $223 million in gaming revenue in the twelve months ended June 30, 2000. The Company is the general partner of Rainbow Casino Vicksburg Partnership, L.P. ("RCVP") the limited partnership that operates the Rainbow Casino. Pursuant to transactions consummated in March 1995, Rainbow Casino Corporation, an independent company that was the former general partner of RCVP became a limited partner and 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 for the proportional revenues above $35.0 million) each year through December 31, 2010. The Company holds the remaining economic interest in the partnership. Rail City Casino. In April 1990, the Company purchased, for an aggregate purchase price of $9.5 million, substantially all of the assets of the Rail City Casino (formerly the Plantation Station Casino) located near the border between the cities of Reno and Sparks in northern Nevada. Rail City is a 20,000 square-foot casino, which as of June 30, 2000 operated approximately 480 gaming machines, 7 table games, and keno. In addition, Rail City Casino includes a 300-seat restaurant, and offers a race and sports book that is leased to an independent race and sports book operator. Rail City Casino is convenient to both Reno and Sparks and caters to the local market. Sales and Marketing. The Company's casinos target the mid-level gaming customers in the market. The Company promotes its casinos primarily through special promotional events and by providing quality food at reasonable prices. Competition. Gaming of all types is available throughout Nevada and Mississippi in numerous locations, including many locations that compete directly or indirectly with the Company's casino operations. The operation of casinos is a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and 14 15 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 success of marketing programs. Many of Rail City Casino's competitors include large casino-hotels that offer more amenities and may be perceived to have more favorable locations than the Company. The Rainbow Casino was the fourth gaming facility to open in Vicksburg and as such faces substantial direct competition for gaming customers in the region. Lady Luck Gaming Corporation owns land in Vicksburg and may in the future develop a project that would include a dockside casino, hotel and related amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel and auto racing complex on the Big Black River which is between Vicksburg and Jackson, Mississippi. The legality of that site for gaming is currently in litigation. At this time management does not know which, if any, of these sites will be developed. Both of these projects will be contingent on several factors including regulatory approval and financing. PATENTS, COPYRIGHTS AND TRADE SECRETS Bally Gaming and Systems is the copyright owner of its games software, artwork and video presentation and has registered some of these copyrights with the U.S. Copyright Office. Some games, cash handling mechanisms, and other gaming device mechanisms (either currently used or reserved for future development including several related to Gamblers Bonus) are covered either by pending patent applications or issued patents, both foreign and domestic. The expiration dates of these patents vary and are based on their filing or issue dates. In addition, many of the games have trademarks registered with the U.S. Patent and Trademark Office, state trademark registries, or both. The Company has over two hundred registered or pending trademark applications in the United States and around the world, including the registered U.S. trademark, Gamblers Bonus. Bally Gaming and Systems is obligated under several patent agreements to pay royalties ranging from approximately $25 to $107 per applicable game depending on the components in the gaming machines. Additionally, based on an amendment to the trademark licensing agreement between the Company and Bally Entertainment Corporation ("BEC") dated May 10, 1996, Bally Gaming and Systems is obligated to pay a royalty of $35 per machine on new machines sold beginning on June 18, 1996, with a minimum annual royalty payment of $1.0 million for the initial five-year term of the amended agreement, which is subject to annual renewals by the Company thereafter. In addition, the Company has obtained the rights to certain game ideas and intellectual property that require Bally Gaming and Systems to pay royalties based on either fixed amounts or variable amounts based upon game performance. Royalty expense for Bally Gaming and Systems for the years ended June 30, 1998, 1999, and 2000 was $2.2 million, $1.9 million and $3.5 million, respectively. EMPLOYEES AND LABOR RELATIONS As of June 30, 2000, the Company and its subsidiaries employed approximately 2,300 persons, including approximately 1,280 persons in Nevada, 75 persons in Louisiana, 500 persons in Mississippi, 40 persons in various other states and 420 persons in Germany. None of such employees is covered by a collective bargaining agreement. Bally Wulff's employees, however, are covered by German regulations which apply industry-wide and are developed, to some extent, through negotiations between representatives of the metal working industry employers and the trade union representing the employees. These regulations are in the nature of collective bargaining agreements and cover the general terms and conditions of such items as wages, vacations and work hours. The regulations codify what are considered the common standards of employment in the German metal working industry. The Company believes its relationships with its employees are satisfactory. GAMING REGULATIONS AND LICENSING General. The manufacture and distribution of gaming machines and the operation of gaming facilities are subject to extensive federal, state, local and foreign regulation. Although the laws and regulations of the various jurisdictions in which the Company operates and into which the Company may expand its gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of these jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines and the operation of gaming facilities, as well as the individual licensing of officers, directors, major stockholders and key personnel of such companies. Any person who acquires a controlling interest in the Company would have to meet the requirements of all governmental bodies that regulate the Company's gaming business. A change in the make-up of the Company's 15 16 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 board of directors and management would require the various gaming authorities to examine the qualifications of the new board and management. Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the "Nevada Act") and (ii) various local ordinances and regulations. The Company's gaming, manufacturing, distributing and slot route operations (herein collectively referred to as "gaming machine operations") are subject to the licensing and regulatory control of the Nevada State Gaming Control Board (the "Nevada Board"), the Nevada Gaming Commission (the "Nevada Commission"), the Clark County Liquor and Gaming Licensing Board (the "Clark County Board"), and various other county and city regulatory agencies, all of which are collectively referred to as the "Nevada Gaming Authorities". The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based on declarations of public policy concerned with, among other things: (i) the prevention of unsavory and unsuitable persons from having any involvement with gaming; (ii) the strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments and the manufacture and distribution of gaming machines, cashless wagering systems and associated equipment; (iii) the establishment and maintenance of responsible accounting practices and procedures; (iv) the maintenance of effective control over the financial practices of licensees, including establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent practices; and (vi) providing a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming-related operations. The Company is registered with the Nevada Commission as a publicly-traded corporation (a "Registered Corporation"). The Company's direct and indirect subsidiaries that conduct gaming operations at various locations, (collectively, the "Nevada Subsidiaries") are required to be licensed by the Nevada Gaming Authorities. The licenses held by the Nevada Subsidiaries require periodic payments of fees and taxes and are not transferable. The Company, through registered intermediary companies (individually an "Intermediary Company" and collectively the "Intermediary Companies"), has been found suitable to own the stock of the Nevada Subsidiaries, each of which is a corporate licensee (individually a "Corporate Licensee" and collectively the "Corporate Licensees") under the terms of the Nevada Act. As a Registered Corporation, the Company is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information the Nevada Commission may require. No person may become a stockholder of or receive any percentage of the profits from the Corporate Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Intermediary Companies and the Corporate Licensees have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses required to engage in gaming activities, gaming machine operations, and in the manufacture and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada. All gaming machines and cashless wagering systems manufactured, sold or distributed for use or play in Nevada or for distribution outside of Nevada must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming machines manufactured for use or play in Nevada must be approved by the Nevada Commission before they are distributed or exposed for play. The approval process for gaming machines and cashless wagering systems includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming machines or cashless wagering system meets strict technical standards set forth in the regulations of the Nevada Commission. Associated equipment (as defined in the Nevada Act) must be administratively approved by the chairman of the Nevada Board before it is distributed in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company, the Intermediary Companies or the Corporate Licensees to determine whether that individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and key employees of the Company and the Intermediary Companies who are actively and directly involved in the licensed activities of the Corporate Licensees are or may be required to be licensed or found suitable by the Nevada Gaming Authorities. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the 16 17 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. The Nevada Gaming Authorities may deny an application for licensing or finding of unsuitability for any cause they deem reasonable. If the Nevada Gaming Authorities were to find an officer, director, or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company, the Intermediary Companies or the Corporate Licensees, the companies involved would have to sever all relationships with that person. In addition, the Nevada Commission may require the Company, the Intermediary Companies or the Corporate Licensees to terminate the employment of any person who refuses to file appropriate applications. Licensing and suitability determinations are not subject to judicial review in Nevada. The Company and the Corporate Licensees that hold nonrestricted licenses are required to submit detailed financial and operating reports to the Nevada Commission. A nonrestricted license is a license for an operation consisting of 16 or more slot machines, or for any number of slot machines together with any other game, gaming device, race book or sports pool at one establishment. Substantially all material loans, leases, sales of securities and similar financing transactions by the Corporate Licensees that hold nonrestricted licenses must be reported to or approved by the Nevada Commission. If it were determined that a Corporate Licensee had violated the Nevada Act, the licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the Intermediary Companies, the Corporate Licensees, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the 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 property) could be forfeited to the state . Limitation, conditioning, or suspension of the gaming licenses of the Corporate Licensees or the appointment of a supervisor could and revocation of any gaming license would, materially adversely affect the gaming-related operations of the Company. The Gaming Authorities may, at their discretion, require the holder of any security of the Company to file applications, be investigated, and be found suitable to own the security of the Company if the Nevada Commission has reason to believe that the holder's ownership would be inconsistent with the declared policies of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of any class of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of any class of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the chairman of the Nevada Board mails written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, that acquires more than 10%, but not more than 15%, of a class of a Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of finding of suitability if the institutional investor holds the securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the corporate charter, bylaws, management, policies or operations of the Registered Corporation or any of its gaming affiliates, or any other action the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with investment only intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the chairman of the Nevada Board may be found unsuitable. The same 17 18 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company, the Intermediary Companies or the Corporate Licensees, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. The Nevada Commission may in its discretion require the holder of any debt securities of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security if the Nevada Commission has reason to believe that such ownership would be inconsistent with the declared policies of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if, without the prior approval of the Nevada Commission, it (i) pays the unsuitable person any dividend, interest or any distribution whatsoever, (ii) recognizes any voting right by such unsuitable person in connection with such securities, (iii) pays the unsuitable person remuneration in any form, or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain in Nevada a current stock ledger, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to impose a requirement that a Registered Corporation's stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Nevada Commission has imposed this requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada or to retire or extend obligations incurred for such purposes. In addition, (i) a Corporate Licensee may not guarantee a security issued by a Registered Corporation pursuant to a public offering without the prior approval of the Nevada Commission; and (ii) restrictions on the transfer of an equity security issued by a Corporate Licensee or Intermediary Company and agreements not to encumber such securities (collectively, "Stock Restrictions") are ineffective without the prior approval of the Nevada Commission. The Nevada Commission has also imposed a requirement on the Company that it must receive the prior administrative approval of the Nevada Board chairman for any offer for the sale of an equity security in a private transaction. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission on a variety of stringent standards before assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as a part of the approval process relating to the transaction. The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees and Registered Corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse affects of these business practices on Nevada's gaming industry and to promote Nevada's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make 18 19 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 exceptional repurchases of voting securities above the current market price (commonly called " greenmail") and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's board of directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purpose of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Licensees' operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based on either (i) a percentage of the gross revenues received, (ii) the number of gaming devices operated, or (iii) the number of games operated. 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 gaming device route operator licenses or manufacturer or distributor licenses also pay certain fees to Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board and thereafter maintain a $10,000 revolving fund to pay the expenses of investigation by the Nevada Board of the Licensee's participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operations who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at establishments operated by a Corporate Licensee is subject to licensing, control and regulation by applicable regulatory agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse affect on the operations of the Corporate Licensees. Louisiana. The manufacture, distribution, servicing and operation of video draw poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw Poker Devices Control Law and the rules and regulations promulgated thereunder (the "Louisiana Act"). Licensing and regulatory control is maintained by a single gaming control board for the regulation of gaming in Louisiana. This Board, created on May 1, 1996, is called the Louisiana Gaming Control Board (the "Louisiana Board") and oversees all licensing for all forms of legalized gaming in Louisiana (including all regulatory enforcement, and supervisory authority that exists in the state as to gaming on Native American lands). 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") performs the investigatory functions for the Louisiana Board. The laws and regulations of Louisiana are based on policies of maintaining the health, welfare and safety of the general public and protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of devices. VSI and SVS, the indirect operating subsidiaries for the Company's gaming operations in Louisiana, has each been granted a license as a device owner by the Division. These gaming subsidiaries are Louisiana Licensees (the "Louisiana Licensees") under the terms of the Louisiana Act. The licenses held by the Louisiana Licensees expire at midnight on June 30 of each year and must be renewed annually through payment of fees. All license fees must be paid on or before May 15 in each year licenses are renewable. The Louisiana Board may deny, impose a condition on or suspend or revoke a license, renewal or application for a license for violations of any rules and regulations of the Louisiana Board or any violations of the Louisiana Act. In addition, fines for violations of gaming laws or regulations may be levied against the Louisiana Licensees and the persons involved for each violation of the gaming laws. The issuance, condition, denial, suspension or revocation is deemed a pure and absolute privilege and is at the discretion of the Louisiana Board under the provisions of the Louisiana Act. A license is not property or a protected interest under the constitution of either the United States or Louisiana. 19 20 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 The Division has the authority to conduct overt and covert investigations of any person involved directly or indirectly in the video gaming industry in Louisiana. These investigations have extended to information regarding a prospective licensee's and his or her spouse's immediate family and relatives and their affiliations with certain organizations or other business entities. The investigation may also extend to any person who has or controls more than a 5% ownership, income or profits interest in an applicant for or holder of a license or who is a key employee, or who has the ability to exercise significant influence over the licensee. All persons or entities investigated must meet all suitability requirements and qualifications for a licensee. The Louisiana Board may deny an application for licensing for any cause it may deem reasonable. The applicant for licensing must pay a filing fee, which applies to the cost of the investigation. In order for a corporation to be licensed as an operator or distributor of video poker gaming devices by the Louisiana Board, a majority of the stock of the corporation must be owned by persons who have been domiciled in Louisiana for at least two years prior to the date of the application. Bally Gaming is not licensed as a manufacturer of devices under the Louisiana Act; however Bally Gaming has been licensed as a manufacturer under the Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana Riverboat Act"). Gaming's application for a permanent manufacturer's license as it relates to the land-based casino in New Orleans is pending before the Louisiana Board. The Louisiana Board has recently promulgated regulations governing its operation and Bally Gaming has filed its application for licensing as a manufacturer, which application is now pending. Mississippi. The manufacture and distribution of gaming and associated equipment and the ownership and operation of casino facilities in Mississippi are subject to extensive state and local regulation, primarily the licensing and regulatory control by the Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi State Tax Commission. The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although not identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The Mississippi Commission has adopted regulations that are also similar in many respects to the Nevada gaming regulations. The laws, regulations and supervisory procedures of Mississippi and the Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Commission; (iv) prevent cheating and fraudulent practices; (v) provide a source of state and local revenues through taxation and licensing fees; and (vi) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi Commission. Changes in Mississippi law or regulations may limit or otherwise materially affect the types of gaming that may be conducted and could have an adverse effect on the Company and the Company's Mississippi gaming operations. The Mississippi Act provides for legalized dockside gaming at the discretion of the 14 counties that either border the Gulf Coast or the Mississippi River, but only if the voters in each of those counties have not voted to prohibit gaming in that county. Currently, dockside gaming is permissible in nine of the 14 eligible counties in the state and gaming operations have commenced in Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under Mississippi law, gaming vessels must be located on the Mississippi River or on navigable waters in eligible counties along the Mississippi River, or in the waters of the State of Mississippi lying south of the state in eligible counties along the Mississippi Gulf Coast. Litigation is pending with respect to the expansion of eligible gaming sites in which a landowner and a license applicant have appealed a finding of suitability by the Mississippi Commission of a site on the Big Black River in Warren County near Interstate 20 between Jackson and Vicksburg, Mississippi, where the Rainbow Casino, operated by RCVP, is located. A Hinds County Circuit Court has ruled that the subject site is legal and suitable for gaming and the Mississippi Commission has appealed the decision to the Mississippi Supreme Court. The law permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space that may be utilized for gaming. There are no limitations on the number of gaming licenses that may be issued in Mississippi. 20 21 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 The Company, RCVP, Bally Gaming, Inc. ("BGI") and their affiliates are subject to the licensing and regulatory control of the Mississippi Commission. The Company is registered under the Mississippi Act as a publicly traded holding company of RCVP and BGI is required to periodically submit detailed financial and operating reports to the Mississippi Commission and furnish any other information the Mississippi Commission may require. If the Company is unable to continue to satisfy the registration requirements of the Mississippi Act, the Company and its affiliates cannot own or operate gaming facilities or continue to act as a manufacturer and distributor in Mississippi. RCVP must maintain a gaming license from the Mississippi Commission to operate a casino in Mississippi and BGI must maintain a manufacturer and distributor license from the Mississippi Commission to manufacture and distribute gaming products. Such licenses are issued by the Mississippi Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations. Gaming and manufacturer and distributor licenses are not transferable, are issued for a three-year period and must be renewed or continued thereafter. In June 2000, RCVP was granted a renewal of its gaming license by the Mississippi Commission, and BGI was granted a renewal of its manufacturer and distributor license. No person may become a stockholder of, or receive any percentage of profits from, a licensed subsidiary of a holding company without first obtaining licenses and approvals from the Mississippi Commission. The Company and its affiliates have obtained the necessary approvals from the Mississippi Commission. Certain officers and employees of the Company and the officers, directors and certain key employees of the Company's licensed subsidiaries must be found suitable or be licensed by the Mississippi Commission. The Company believes it has obtained, applied for, or is in the process of applying for all necessary findings of suitability with respect to such persons affiliated with the Company, RCVP or BGI, although the Mississippi Commission, in its discretion, may require additional persons to file applications for findings of suitability. In addition, any person having a material relationship or involvement with the Company may be required to be found suitable, in which case those persons must pay the costs and fees associated with such investigation. The Mississippi Commission may deny an application for a finding of suitability for any cause it deems reasonable. Changes in certain licensed positions must be reported to the Mississippi Commission. In addition to its authority to deny an application for a findings of suitability, the Mississippi Commission can disapprove a change in a licensed position. The Mississippi Commission has the power to require the Company and its registered or licensed subsidiaries to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities. Employees associated with gaming must obtain work permits that are subject to immediate suspension under certain circumstances. The Mississippi Commission must refuse to issue a work permit to a person convicted of a felony and it may refuse to issue a work permit to a gaming employee if the employee has committed certain misdemeanors or knowingly violated the Mississippi Act or for any other reasonable cause. The Mississippi Commission may, at any time, investigate and require the finding of suitability of any record or beneficial stockholder of the Company. Mississippi law requires any person who acquires more than 5% of the common stock of a publicly traded corporation registered with the Mississippi Commission to report the acquisition to the Mississippi Commission, and such person may be required to be found suitable. Also, any person who becomes a beneficial owner of more than 10% of the common stock of such a company, as reported to the Securities and Exchange Commission, must apply for a finding of suitability by the Mississippi Commission and must pay the costs and fees that the Mississippi Commission incurs in conducting the investigation. The Mississippi Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a public company's common stock. However, the Mississippi Commission has adopted a policy that permits certain institutional investors to own beneficially up to 15% of a registered public company's common stock without a finding of suitability. If a stockholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Mississippi Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the securities of the Company beyond such time as the Mississippi Commission prescribes may be guilty of a misdemeanor. The Company is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or its licensed subsidiaries, the Company: (i) pays the unsuitable person any dividend or other distribution on the voting securities of the Company; (ii) recognizes the exercise, directly or indirectly, of any voting rights conferred 21 22 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 by securities held by the unsuitable person; (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances; or (iv) fails to pursue all lawful efforts to require the unsuitable person to divest himself of the securities, including, if necessary, the immediate purchase of the securities for cash at fair market value. Management believes that compliance by the Company with the licensing procedures and regulatory requirements of the Mississippi Commission will not affect the marketability of the Company's securities. The Company may be required to disclose to the Mississippi Commission on request the identities of the holders of any debt securities. In addition, under the Mississippi Act, the Mississippi Commission may in its discretion (i) require holders of debt securities of registered corporations to file applications, (ii) investigate such holders and (iii) require such holders to be found suitable to own such debt securities. Although the Mississippi Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Commission retains the discretion to do so for any reason, including but not limited to a default or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with the investigation. RCVP and BGI must maintain in Mississippi a current ledger with respect to the ownership of their equity securities and the Company must maintain a current list of stockholders in the principal office of RCVP, which list must reflect the record ownership of each outstanding share of any equity issued by the Company. The ledger and stockholder lists must be available for inspection by the Mississippi Commission at any time. If any securities of the Company are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company must also render maximum assistance in determining the identity of the beneficial owner. The Mississippi Act requires that the certificates representing securities of a registered publicly traded corporation bear a legend to the general effect that such securities are subject to the Mississippi Act and the regulations of the Mississippi Commission. The Company has received from the Mississippi Commission an exemption from this legend requirement. The Mississippi Commission has the power to impose additional restrictions on the holders of the Company's securities at any time. Substantially all loans, leases, sales of securities and similar financing transactions by a licensed gaming subsidiary must be reported to or approved by the Mississippi Commission. A licensed gaming subsidiary may not make a public offering of its securities, but may pledge or mortgage casino facilities as security for a public offering if it obtains the prior approval of the Mississippi Commission. The Company may not make a public offering of its securities without the prior approval of the Mississippi Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. Such approval, if given, does not constitute a recommendation or approval of the investment merits of the securities subject to the offering. Changes in control of the Company through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover cannot occur without the prior approval of the Mississippi Commission. The Mississippi Commission may also require controlling stockholders, officers, directors, and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction. The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi and corporations whose stock is publicly traded that are affiliated with those licensees may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to promote Mississippi's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before the Company may make exceptional repurchases of voting securities above the current market price (commonly called "greenmail") or before a corporate acquisition opposed by management may 22 23 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 be consummated. Mississippi's gaming regulations will also require prior approval by the Mississippi Commission if the Company adopts a plan or recapitalization proposed by its board of directors opposing a tender offer made directly to the stockholders for the purpose of acquiring control of the Company. Neither the Company nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require determinations that, among other things, there are means for the Mississippi Commission to have access to information concerning the out-of-state gaming operations of the Company and its affiliates. The Company has previously obtained a waiver of foreign gaming approval from the Mississippi Commission for operations in Nevada and will be required to obtain the approval or a waiver of such approval from the Mississippi Commission prior to engaging in any additional future gaming operations outside of Mississippi. If the Mississippi Commission decides that a licensed gaming subsidiary violated a gaming law or regulation, the Mississippi Commission could limit, condition, suspend or revoke the license of the subsidiary. In addition, the licensed subsidiary, the Company and the persons involved could be subject to substantial fines for each separate violation. The Mississippi Commission could also attempt to appoint a supervisor to operate the casino facilities. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's and RCVP's gaming operations or BGI's manufacturer and distributor operations, as the case may be. License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Mississippi and to the counties and cities in which a licensed gaming subsidiary's operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based on (i) a percentage of the gross gaming revenues received by the casino operation, (ii) the number of slot machines operated by the casino or (iii) the number of table games operated by the casino. The license fee payable to the State of Mississippi is based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings) and equals 4% of gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000 and less than $134,000 per month, and 8% of gaming receipts over $134,000. The foregoing license fees are allowed as a credit against the Company's Mississippi income tax liability for the year paid. The gross revenue fee imposed by the City of Vicksburg, Mississippi, where RCVP's casino operations are located, equals approximately 4% of gaming receipts. The Mississippi Commission has adopted a regulation requiring as a condition of licensing or license renewal that a gaming establishment's plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities, which will amount to at least 25% of the casino cost. The Mississippi Commission adopted a change to this regulation increasing the infrastructure requirement to 100%; however, the regulation grandfathers existing licensees and applies only to new casino projects and casinos that are not operating at the time of acquisition or purchase by new owners. Management of the Company believes it is in compliance with this requirement. The sale of alcoholic beverages by the Rainbow Casino operated by RCVP is subject to the licensing, control and regulation by both the City of Vicksburg and the Alcoholic Beverage Control Division (the "ABC") of the Mississippi State Tax Commission. The Rainbow Casino area has been designated as a special resort area, which allows the Rainbow Casino to serve alcoholic beverages on a 24-hour basis. The ABC has the full power to limit, condition, suspend or revoke any license for the serving of alcoholic beverages or to place such a licensee on probation with or without conditions. Any such disciplinary action could (and revocation would) have a material adverse effect on the Rainbow Casino's operations. Certain officers and managers of the Rainbow Casino must be investigated by the ABC in connection with its liquor permits, and changes in certain positions must be approved by the ABC. New Jersey. BGI has previously been licensed by the New Jersey Commission as a gaming-related casino service industry ("CSI") in accordance with the New Jersey Casino Control Act (the "Casino Control Act"). Due to the change of ownership of BGI as a result of the merger with Alliance Gaming Corporation, and by operation of state law, BGI's CSI license was deemed to have lapsed. Prior to the change of ownership of BGI and in anticipation of same, the Company submitted an application for qualification. The New Jersey Commission deemed the application complete and as a result thereof, after the merger, the Company's operations in New Jersey continue uninterrupted by full regulatory consent, pursuant to transactional waivers which have been granted by the New Jersey Casino 23 24 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Control Commission with consent of the New Jersey Division of Gaming Enforcement, and which continued to be granted by the New Jersey Casino Control Commission on six-month blanket terms for parts and service and on a sale-by-sale basis for all other products pending final regulatory action on the Company's application for CSI qualification. The New Jersey Casino Control Commission granted Bally Gaming, Inc. final approval of its application for CSI qualification April 14, 1999, with approval of the Company as the parent company. In considering the qualifications of an applicant for a CSI license, the New Jersey Commission may require the officers, directors, key personnel, financial sources and stockholders (in particular those with holdings in excess of 5%) of the applicant and its holding and intermediary companies to demonstrate their qualifications. Such persons and entities may be investigated and may be required to make certain regulatory filings and to disclose and/or to provide consents to disclose personal and financial data. The costs associated with such investigation are typically borne by the applicant. Federal Registration. The operating subsidiaries of the Company that are involved in gaming activities are required to register annually with the Attorney General of the United States in connection with the manufacture, sale, distribution or operation of gaming machines. All currently required filings have been made. From time to time, certain legislators have proposed the imposition of a federal tax on gross gaming revenues. No specific proposals for the imposition of such a federal tax are currently pending. However, no assurance can be given that such a tax will not be imposed in the future. Any such tax could have a material adverse effect on the Company's business, financial condition or results of operations. Germany. German legislative authorities regulate and monitor the wall machine industry so as to ensure certain manufacturing standards and the fairness of each machine to users. The most significant legislation presently affecting the wall machine industry relates to prescribed licensing procedures and the use, installation, operation and taxation of machines. Wall machine manufacturers are dependent on the successful introduction of new products each year and currently are required to receive prior government approval for each new product introduction. Manufacturers are required to apply for licenses through an agency of the German Federal Ministry of Economics. Such agency maintains a policy of accepting only two licensing applications from an individual applicant at any given time. Bally Wulff, through affiliates and subsidiaries, is in a position to file up to six concurrent applications. After receiving a prototype of a machine for which the applicant seeks government licensing approval, the federal agency deliberates for periods that range from approximately 6 to 24 months. If that product is approved, the wall machine manufacturer is permitted to reproduce the sample machine initially submitted for government approval. Every wall machine carries with it a small license card that permits the machine to be operated for up to four years after the initial date of sale, after which it may not be used in Germany. In Germany, wall machines sold via the secondary market may be operated by a new owner but only for the residual time remaining on each machine's four-year life. In addition to licensing requirements for manufacturers, any person or entity that intends to operate a licensed wall machine must apply to local regulatory authorities for a license, which will not be granted by the authorities if facts justify the assumption that the applicant does not possess the requisite reliability. In this proceeding, the applicant must furnish a police certificate of conduct. German legislation prohibits the public play of wall machines by people under 18 years old. Voluntary agreements among manufacturers and certain amusement game trade associations, among other things, restrict wall machine advertising and the ability of a player to play more than two machines at once, require all machines to carry visible warning notices and provide that every wall machine is automatically switched off for three minutes after one hour of continuous play. The Spielverordnung (gaming ordinance) specifically governs wall machines. These regulations limit game payouts to DM 4.00 (approximately $1.92) per game, require a minimum payout percentage, detail where the machines may be installed, how many may be installed and by whom, which games are prohibited, the technical requirements of the machines and technical review and approval. Operators must comply with regulations that specify how many machines may operate within defined square foot areas (15 square meters per machine, with a maximum of ten machines per location). In taverns, restaurants, hotels and certain other establishments, no more than two gaming machines are permitted. 24 25 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs the zoning classification of land and the type and density of development within the various zoning classifications. Effective January 27, 1990, the Baunutzungsverordnung was amended to restrict the development of larger gaming halls to core commercial areas, limit the permissibility of smaller gaming halls in various types of mixed use zones and to ban gaming halls in most types of residential and all types of industrial use areas. Prior to the amendment, gaming halls, regardless of size, were generally allowed in core, business, mixed and industrial zones. In addition, on a case-by-case basis, each local zoning agency is authorized to exclude certain types of otherwise permissible uses, including gaming halls. Subject to certain exceptions, a value-added tax (VAT) of 16% is generally assessed on the sale or supply of any goods and services in Germany. Since the total amount paid for particular goods or services is considered to be the gross price in calculating such tax, the actual rate is 13.79%. The basis for taxation is the cash remaining in the machines. The rule requiring a minimum payout percentage is applied to the amount remaining in the cash box net of such VAT. Depending on the municipality in which a machine is located, operators may also have to pay a monthly leisure tax on each machine of up to DM 600 (approximately $292). During fiscal 2000, Bally Wulff increased the amount of tax reserves by $0.5 million as a result of ongoing audits of open tax years 1992 to 1995. The German tax authorities have proposed preliminary adjustments of $0.3 million, which has also been accrued. The German tax authorities have not yet issued the final assessment from their quadrennial audits. Additional Jurisdictions. The Company, in the ordinary course of its business, routinely considers business opportunities to expand its gaming operations into additional jurisdictions. Although the laws and regulations of the various jurisdictions in which the Company operates or into which the Company may expand its gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of those jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines as well as for the officers, directors, major stockholders and key personnel of such companies. The Company and its key personnel have obtained, or applied for, all government licenses, registrations, findings of suitability, permits and approvals necessary for the manufacture, distribution and, where permitted, operation of their gaming machines in the jurisdictions in which the Company does business. The Company and the holders of its securities may be subject to the provisions of the gaming laws of each jurisdiction where the Company or its subsidiaries are licensed or conduct business, including, without limitation, Arizona, Colorado, Connecticut, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory authorities within each such state as well as Australian, Canadian, South African, and other foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or conduct business. As a result of the consummation of the Acquisition, the Company and its officers and directors have been required to apply for any government licenses, permits and approvals necessary or required by each of these jurisdictions. Holders of common stock of an entity licensed to manufacture and sell gaming machines, and in particular those with holdings in excess of 5%, should note that local laws and regulations may affect their rights regarding the purchase of such common stock and may require such persons or entities to make certain regulatory filings, or seek licensing, findings of qualification or other approvals. In some cases this process may require the holder or prospective holder to disclose or provide consents to disclose personal and financial data in connection with necessary investigations, the costs of which are typically borne by the applicant. The investigatory and approval process can take three to six months to complete under normal circumstances. 25 26 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 ITEM 2. PROPERTIES The following table sets forth information regarding the Company's leased properties (exclusive of space leases in connection with its gaming device routes) as of June 30, 2000, all of which are fully utilized unless otherwise noted:
ANNUAL BUILDING RENTAL LOCATION USE SQUARE FEET PAYMENTS -------- --- ----------- -------- (In 000s) Las Vegas, NV Nevada route operations 18,500 182 Las Vegas, NV Research and development offices 20,000 286 Sparks, NV Administrative offices and warehousing 38,300 345 Sparks, NV Sales offices and warehousing 11,000 132 Absecon, NJ Sales offices and warehousing 15,800 101 Biloxi, MS Sales offices 6,400 41 Golden, CO Sales offices 1,500 18 Westchester, IL Sales offices 4,900 26 Dania, FL Sales offices 3,400 7 Elko, NV Sales office and route operations 4,200 10 Laughlin, NV Sales offices 600 10 Atlantic City, NJ Administrative offices 750 10 San Juan, P R Sales offices 1,000 12 Las Vegas, NV Warehousing 103,500 409 Berlin, Germany Administrative offices and manufacturing 115,500 520 Hannover, Germany Administrative offices and warehousing 20,100 204 Sparks, NV Route operations 12,100 96 Carson City, NV Route operations 2,500 9 Winnemucca, NV Route operations 1,200 5 Pahrump, NV Route operations 750 7 Las Vegas, NV Route location 8,000 476 Las Vegas, NV (1) Ground lease --- 330 Sparks, NV (2) Ground lease --- 5 Vicksburg, MS Administrative offices 2,700 19 Vicksburg, MS Administrative offices 1,200 9 New Orleans, LA Louisiana route operations 6,000 57 Metairie, LA OTB operation 11,000 60 New Orleans, LA OTB operation 5,100 24
(1) Lease consists of ground lease for parking. (2) Lease consists of long-term land lease for parking at Rail City Casino. The following table sets forth information regarding properties owned by the Company as of June 30, 2000, all of which are fully utilized unless otherwise noted:
BUILDING LOCATION USE SQUARE FEET -------- --- ----------- Las Vegas, NV Administrative offices and manufacturing (a) 150,000 Reno/Sparks, NV Casino (a) 35,000 Vicksburg, MS Casino 25,000 Vicksburg, MS Entertainment facility 20,000 Vicksburg, MS Administrative offices 3,200 Vicksburg, MS Vacant- Land -- Las Vegas, NV Tavern/Land 5,000 North Las Vegas, NV Land/Parking --
(a) These facilities are mortgaged collateral for the Company's Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". 26 27 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 In addition, the Company leases 20 bar and tavern properties that have been subleased to other operators in connection with its Nevada route operations. The properties range in size from approximately 1,750 square feet to 7,700 square feet. The remaining terms of the leases range from 3 months to 5 years with monthly payments ranging from approximately $1,700 to $11,600. In addition to the principal facilities, the Company has 20 leased locations and two owned locations in Germany which are primarily used for sales and service offices as well as for warehousing purposes. The properties range in size from approximately 2,300 square feet to 17,000 square feet. The leased locations have terms of occupancy varying from six months to six and one half years with monthly payments ranging from approximately $1,500 to $15,800. See Note 7 of Notes to Consolidated Financial Statements for information as to the Company's lease commitments with respect to the foregoing rental properties. The Company believes its facilities are suitable for its needs and the Company has no future expansion plans that would make these properties inadequate. ITEM 3. LEGAL PROCEEDINGS LITIGATION On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated. The plaintiffs filed suit against BGII and approximately 45 other defendants. Each defendant is involved in the gaming business as a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people into playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1.0 billion, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company is vigorously pursuing all legal defenses available to it. On June 3, 1999, Sierra Design Group filed suit in federal district court in Nevada against Oasis Technologies, Inc., the Company, BGI, and various other affiliates of the Company. The suit seeks a declaratory judgment that a gaming system designed by Sierra Design Group to meet requirements of various Indian gaming compacts does not infringe on an Oasis patent. BGI markets the patented Oasis system, which employs BGI's gaming machines, to Native American casinos in the state of Washington under a non-exclusive license. Sierra Design Group later amended its complaint to allege that the Oasis system infringes on a Sierra patent. Sierra Design also alleges that Oasis interfered with a prospective Sierra Design customer and unfairly competed by telling the prospective customer that a Sierra Design product infringed Oasis's patent. Sierra Design's claims are directed against Oasis rather than BGI. Furthermore, pursuant to its agreement with Oasis, Oasis must indemnify BGI for any third-party patent infringement liability. For these reasons, the litigation is not expected to have a material adverse effect on BGI, the Company, or its other subsidiaries. The Company is also a party to various lawsuits relating to routine matters incidental to its business. Management does not believe that the outcome of such litigation, including the matters above, in the aggregate, will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 27 28 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Common Stock is traded on the Nasdaq Small Cap Index under the symbol "ALLY". The following table sets forth the high and low closing bid price of the Common Stock as reported by Nasdaq for the periods indicated. These prices reflect inter-dealer prices, without retail mark-up or mark-down or commissions and may not necessarily represent actual transactions.
PRICE RANGE OF COMMON STOCK ---------------------- High Low ---- --- FISCAL YEAR ENDED JUNE 30, 1999 1st Quarter $ 14.66 $ 8.75 2nd Quarter 10.28 6.23 3rd Quarter 9.63 4.25 4th Quarter 5.63 3.75 FISCAL YEAR ENDED JUNE 30, 2000 1st Quarter $8.12 $3.69 2nd Quarter 8.81 2.44 3rd Quarter 4.31 2.19 4th Quarter 2.56 1.50
Note: The above applicable common stock prices have been restated to reflect the one-for-three-and-one-half reverse stock split effective February 1, 1999. As of September 1, 2000 the Company had approximately 1,490 holders of record of its Common Stock. There is currently no established public trading market for the Company's Series E Special Stock. The Company has never declared or paid cash dividends on its Common Stock. The indenture for the Company's 10% Senior Subordinated Notes (the "Indenture") and the credit agreement for the Company's bank credit facility each restrict the Company's ability to pay any dividends or make any other payment or distribution of any of its Restricted Subsidiaries' Equity Interests (as defined). The Company intends to follow a policy of retaining earnings, if any, to finance growth of its business and does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on the Common Stock will be at the sole discretion of the Board of Directors and will depend on the Company's profitably, ability to pay dividends under the terms of the Indenture and the Company's financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant. 28 29 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data have been derived from the audited financial statements of the Company. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto. FISCAL YEARS ENDED JUNE 30, - --------------------------------------------------------------------------------
1996(1) 1997(4) 1998 1999 2000 --------- --------- --------- --------- --------- (IN 000'S, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS DATA Revenues: Gaming equipment and systems $ 10,575 $ 134,734 $ 109,597 $ 127,810 $ 135,180 Wall machines and amusement games 3,356 131,934 98,611 90,834 68,952 Route operations 109,938 127,028 148,507 175,854 202,480 Casino operations 48,509 51,450 60,657 63,682 71,468 --------- --------- --------- --------- --------- 172,378 445,146 417,372 458,180 478,080 --------- --------- --------- --------- --------- Costs and expenses: Cost of gaming equipment and systems 7,213 84,496 61,684 69,721 75,508 Cost of wall machines and amusement games 2,022 68,426 54,241 54,035 43,301 Cost of route operations 84,212 95,716 114,645 137,692 161,062 Cost of casino operations 22,046 22,269 25,930 27,011 27,933 Selling, general and administrative 31,270 99,520 86,318 104,104 105,155 Research and development 370 9,954 15,778 17,190 15,318 Depreciation and amortization 10,988 22,606 22,838 23,104 26,788 Direct acquisition costs (2) 55,843 -- -- -- -- Unusual items 5,498 700 (325) -- 2,164 --------- --------- --------- --------- --------- 219,462 403,687 381,109 432,857 457,229 --------- --------- --------- --------- --------- Operating income (loss) (47,084) 41,459 36,263 25,323 20,851 Other income (expense) Interest income 1,571 1,620 813 549 465 Interest expense (8,897) (23,626) (28,600) (31,385) (34,119) Rainbow royalty (3) (4,070) (4,722) (587) -- -- Rainbow Royalty Buyout (3) -- -- (19,000) -- -- Minority interest (963) (1,092) (2,002) (2,053) (2,155) Other, net 301 139 1,025 (431) 924 --------- --------- --------- --------- --------- Income (loss) before income taxes (59,142) 13,778 (12,088) (7,997) (14,034) Income tax provision (755) (7,993) (3,185) (830) (1,001) --------- --------- --------- --------- --------- Income (loss) before extraordinary item (59,897) 5,785 (15,273) (8,827) (15,035) Extraordinary loss without tax benefit -- -- (42,033) -- -- --------- --------- --------- --------- --------- Net income (loss) (59,897) 5,785 (57,306) (8,827) (15,035) Special stock dividends (362) (11,264) (3,551) (1,697) -- Premium on repurchase/redemption of Series B Special Stock -- (710) (16,553) -- -- --------- --------- --------- --------- --------- Net loss applicable to common shares $ (60,259) $ (6,189) $ (77,410) $ (10,524) $ (15,035) ========= ========= ========= ========= ========= Basic net loss per common share (5) $ (16.22) $ (0.68) $ (8.47) $ (1.09) $ (1.47) ========= ========= ========= ========= =========
29 30 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) FISCAL YEARS ENDED JUNE 30, - --------------------------------------------------------------------------------
1996(1) 1997(4) 1998 1999 2000 -------- -------- --------- --------- --------- (IN 000'S, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA Cash and cash equivalents and securities available for sale $ 48,057 $ 28,924 $ 23,487 $ 16,930 $ 34,044 Working capital 111,009 110,795 119,480 108,661 115,979 Total assets 375,504 352,016 366,837 356,307 351,287 Total long term debt, including current maturities 191,344 173,839 325,953 318,706 345,059 Series B Special Stock 51,552 58,981 -- -- -- Total stockholders' equity (deficiency) 69,846 53,555 (23,748) (30,408) (50,795)
(1) The Company acquired BGII on June 18, 1996. Therefore the results of operations for the year ended June 30, 1996 include the results of operations of BGII for the last twelve days of that fiscal year. (2) Includes non-cash accounting loss on debenture conversion of $30.1 million in fiscal year 1996 as a result of the conversion of the Company's Convertible Debentures into equity securities. (3) Represents royalty fee related to the HFS financing at the Rainbow Casino. The Company repurchased this royalty obligation from HFS on August 12, 1997. (4) See discussion of refinancing transaction completed in August 1997 in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". (5) The earnings per share amounts have been restated to reflect the one-for-three-and-one-half reverse stock split effective February 1, 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources At June 30, 2000, the Company had $32.0 million in cash and cash equivalents, $2.0 million in short-term investments, and $4.6 million in unborrowed availability on its revolving credit facility in accordance with borrowing base limitations in the bank credit agreement which is more fully described below. In addition, the Company had net working capital of approximately $116.0 million, an increase of approximately $7.3 million from June 30, 1999, which is explained in the working capital section below. Consolidated cash and cash equivalents at June 30, 2000 includes approximately $22.0 million of cash which is utilized in Casino and Route Operations which is held in vaults, cages or change banks. In August 1997 the Company completed a series of related transactions as described below (the "Refinancing") which consisted of the private placement of $150.0 million of 10% Senior Subordinated Notes and the closing of $230.0 million of bank financing. The bank financing provides for (i) term loans in the aggregate amount of up to $140.0 million, comprised of a $75.0 million tranche with a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with an 8-year term (the "Tranche C Term Loan") and a $25.0 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility," and together with the Tranche B Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a $90.0 million revolving credit facility with a 6-year term (later amended to $80.0 million). At June 30, 2000, the borrowing base for the revolving credit facility consists of eligible receivables and inventory, as defined in the bank credit agreement, totaled $67.0 million. As part of the Refinancing, the Company used the proceeds of the Senior Subordinated Note offering, together with borrowings under the revolving credit facility and the Term Loan Facilities and cash on hand, to fund (a) the 30 31 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 repurchase at a premium of substantially all of the Company's 12 7/8% Notes, plus accrued interest to August 8, 1997 totaling $183.7 million, (b) the redemption at liquidation value of all of the Company's Series B Preferred Stock on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming Corporation of the right to receive royalty payments based on revenues of the Rainbow Casino and the purchase of related debt owed to an HFS affiliate, National Gaming Mississippi, Inc. on August 12, 1997 totaling $26.3 million and (d) the payment of transaction fees and expenses totaling $16.5 million. Additionally, in July 1997 the Company redeemed the remaining balance of its 7 1/2% Convertible Debentures at a price of 104, or a total of $1.7 million. In conjunction with the Refinancing, the Company incurred charges of approximately $77.6 million, including the $27.7 million premium on the repurchase of the 12 7/8% Notes, $16.6 million for the difference between the carrying value and the liquidation value of the Series B Preferred Stock and $19.0 million for the Rainbow Casino royalty buyout. Beginning in August 1998, the Company has received a series of consents from its bank group in order to cure both technical and financial covenant defaults, and to amend certain of the current and future financial maintenance covenants in the credit agreement. At June 30, 2000, the Company is in compliance with such covenants. The Company is also in compliance with the operational covenants contained in the indenture for the Senior Subordinated Notes. In October 1999, the Company received consents from its bank group to pursue the sale of certain route and casino assets. In August 2000, the Company signed a definitive agreement with UC Acquisitions Company, LLC, an independent third-party gaming operator, for the sale of its Nevada-based route operations. The gross selling price, which is based on a multiple of cash flows for the 12 month period prior to closing, is estimated to be approximately $118 million, consisting of $6 million in preferred stock and $112 million is cash, which will be utilized to pay down certain lease obligations, pay transactional fees and expenses, with the remainder (estimated to be approximately $95 million) to be used to reduce the Term Loans. This transaction is contingent on the buyer obtaining suitable financing and obtaining approvals from various regulatory bodies, a process which may take 12 months to complete. Consistent with the Company's plan to expand the proprietary gaming operations of its Bally Gaming and Systems business unit, the Company has increased its investment in leased gaming equipment during the fiscal year ended June 30, 2000. The Company will continue the roll out, and thus increase its investment in, these proprietary games and wide area progressive games in the future. The Company is actively managing its working capital and other assets. As part of the these efforts, during fiscal 2000, the Company received $1.0 million for the release of an option it held to operate gaming machines at a dormant dog racing track in Kansas, sold certain gaming management and development rights for $3.0 million plus $7.0 million in future contingent consideration, and entered into sale and leaseback transactions for $3.2 million for gaming machines deployed in its Nevada Route Operation. As part of this plan, similar dispositions of other assets may continue. Additionally, the Fifth Amendment to the bank credit agreement allows the Company to obtain third party financing for up to $15 million for is proprietary gaming operations of Bally Gaming and Systems. This financing may be in the form of traditional secured borrowings or lease type financing. Management believes that cash flow from operating activities, cash and cash equivalents held and the $80.0 million Revolving Credit Facility, as limited by the borrowing base, will provide the Company with sufficient capital resources and liquidity. At June 30, 2000, the Company had no material commitments for capital expenditures. 31 32 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 WORKING CAPITAL The following table presents the components of consolidated working capital at June 30, 1999 and 2000:
Balance at June 30, ------------------- 1999 2000 Change -------- -------- -------- Cash and cash equivalents $ 16,930 $ 32,044 $ 15,114 Short-term investments -- 2,000 2,000 Accounts and notes receivable, net 92,665 82,444 (10,221) Inventories, net 46,138 32,019 (14,119) Other current assets 11,423 11,198 (225) -------- -------- -------- Total current assets 167,156 159,705 (7,451) Accounts payable 17,372 10,367 (7,005) Accrued liabilities 39,196 32,323 (6,873) Current maturities of long-term debt 1,927 1,036 (891) -------- -------- -------- Total current liabilities 58,495 43,726 (14,769) -------- -------- -------- Net working capital $108,661 $115,979 $ 7,318 ======== ======== ========
The primary fluctuations contributing to the increase in working capital were: (i) a decrease in accounts payable resulting from timing of payments, (ii) a decrease in inventory due to management's efforts to reduce the levels of finished goods, (iii) a net decrease in accounts receivable resulting from cash collections and increases in bad debt reserves (iv) the impact of foreign exchange fluctuations between the dollar and the deutschemark on all working capital categories, and (v) the corresponding impact of the above listed items on cash and cash equivalents. Cash Flow During the year ended June 30, 2000, $3.0 million of cash was used in operating activities resulting from the net loss for the year and cash used to increase inventories and reductions in accounts payable. During the year ended June 30, 2000, the Company used $9.8 million of cash in investing activities resulting primarily from $13.0 million in capital expenditures, $1.5 million of payments made in acquiring gaming rights for route locations, and $2.8 million of payments made to acquire other long term assets. The above cash uses were partially offset by $3.2 million in proceeds from sales-leaseback transactions, $1.0 million received from the release of an option the Company had to operate gaming machines at a dormant dog track in Kansas and cash proceeds of $3.0 million from the sale of certain gaming development and management rights. During the year ended June 30, 2000, cash was provided by drawing down funds from the revolving credit facility ($34.7 million), and was also used for payments on long term debt ($6.5 million). Customer Financing Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Bally Gaming and Systems and Wall Machine and Amusement Games business units. Competitive conditions sometimes require Bally Gaming and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of default may be less than the amount financed. Accordingly, the Company has greater exposure to the financial condition of its customers in emerging markets than had historically been the case in established markets like Nevada and Atlantic City. Bally Wulff provides customer financing for approximately 20% of its sales and also provides lease financing to its customers. Lease terms are generally for six months, but are also available for terms up to 43 months. Year 2000 The Year 2000 readiness issue, which was common to most businesses, arose from the inability of certain information systems, and other time and date sensitive products and systems, to properly recognize and process date-sensitive information on and beyond January 1, 2000. The Company did not experience any significant business or operations disruptions as a result of Year 2000 issues. 32 33 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Euro Currency Conversion The Company's Bally Wulff subsidiary uses the German deutschmark as its functional currency. The new Euro currency will replace the deutschmark as well as most other European currencies after a phase in period, which began January 1, 1999. As most of Bally Wulff's transactions are within Germany, the switch to the Euro is not expected to have a material impact on revenues, expenses or income. The Company's products can be brought into Euro compliance by moving a switch inside the wall machine. The cost of the new front glass showing Euro denominations will generally be borne by the customers. The Company currently has borrowings outstanding on its line of credit facility, a portion of which has a floating rate of interest tied to the Euro deutschmark rate. Upon the full implementation of the Euro, as of January 1, 2002, the interest rate will be tied to this new index. The impact of the change in this index, if any, is not known and can not be quantified at this time. 33 34 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 RESULTS OF OPERATIONS The following table presents the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") and operating income by business unit (with unusual items presented separately):
Years ended June 30, 1998 1999 2000 -------- -------- -------- EBITDA by business unit: Bally Gaming and Systems $ 10,808 $ 9,799 $ 12,385 Wall Machines and Amusement Games 18,661 10,150 3,583 Route Operations 24,577 24,860 24,503 Casino Operations 20,781 21,672 25,954 Corporate expenses (16,051) (18,054) (14,688) Unusual items 325 -- (4,098) -------- -------- -------- Total EBITDA $ 59,101 $ 48,427 $ 47,639 ======== ======== ======== Operating income (loss) by business unit: Bally Gaming and Systems $ 5,238 $ 5,779 $ 4,523 Wall Machines and Amusement Games 13,094 5,334 (2,193) Route Operations 16,432 14,586 15,162 Casino Operations 18,736 19,348 23,805 Corporate expenses (17,562) (19,724) (16,348) Unusual items 325 -- (4,098) -------- -------- -------- Total Operating Income $ 36,263 $ 25,323 $ 20,851 ======== ======== ========
The Company believes that the analysis of EBITDA is a useful, however, this information should not be construed as an alternative to net income (loss) 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. EBITDA may not be comparable to similarly titled measures reported by other companies. 2000 COMPARED WITH 1999 BALLY GAMING AND SYSTEMS For the year ended June 30, 2000, Bally Gaming and Systems reported revenues of $135.2 million, an increase of 6% compared to revenues of $127.8 million in the prior year. Bally Gaming and Systems reported shipments of new gaming machines of approximately 8,700 units, an 30% decrease compared to shipments of approximately 12,300 in the prior year. This decrease was a result of declining demand for the Company's core products and delays in bringing new product to market. By market segment, Bally Gaming and Systems unit sales for the current year consisted of approximately 1,370 units to the Nevada and Atlantic City markets, 2,870 units to international markets and 4,460 units to riverboats, Native American and other domestic markets. Systems reported shipments of 35,300 SDS units, a 59% increase compared to 22,300 units in the prior year. This increase was primarily a result of shipments related to new casino openings and to casinos acquired by Harrah's and Park Place Entertainment that previously used competitors' systems. Revenues from recurring revenue sources totaled $27.1 million, an increase of 286% compared to revenues of $7.0 million in the prior year period. Recurring revenues include revenue received from the operation of the wide-area progressive system, fees received from the operation of certain proprietary and niche games and SDS hardware and software maintenance fees. For the year ended June 30, 2000, gross profit margins remained constant at approximately 46%, which was attributed to the increase in higher margin recurring revenues and SDS sales, offset by lower game sales margins due to low unit volume. Bally Gaming and Systems reported operating income before unusual items of $4.5 million, a decrease of 22% compared to operating income of $5.8 million in the prior year. The decrease in operating income resulted primarily from higher depreciation expenses due to the continued roll out of progressive gaming devices and higher 34 35 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 provisions for uncollectible receivables. Research and development costs totaled $12.6 million, a decrease of 9% over the prior year. WALL MACHINES AND AMUSEMENT GAMES For the year ended June 30, 2000, Wall Machines and Amusement Games reported revenues of $68.9 million, a decrease of 24% compared to revenues of $90.8 million in the prior year. The decrease in revenues resulted primarily from a 18% decrease in the number of new wall machine units sold, a 3% decrease in the selling price of new wall machines, excluding those sold as part of a new single-site progressive jackpot system, and a 9% decrease in leased wall machine and amusement game revenues, due primarily to lower market demand pending the outcome of potential changes to laws regulating wall machines. In addition, due to the potential changes in the laws regulating wall machines, which if passed could have a favorable effect on demand in the future, current demand is soft and will likely remain that way until the outcome of the proposed law changes is known. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar decreased revenues by $7.9 million during the current year. The Wall Machines and Amusement Games business unit continued its leasing program whereby new wall machines and certain amusement games are leased to customers pursuant to operating leases which provide a stream of revenues and cash flows over the term of the leases which range from six months to three and one half years. As of June 30, 2000, a total of 5,500 machines were deployed in the leasing program compared to 5,000 at June 30, 1999, an increase of 10%. For the year ended June 30, 2000, gross profit margin decreased to 37% from 41% in the prior year. The gross margin decrease resulted primarily from the unfavorable impact of lower revenues, and increased competition which has led to offering higher values on used machines taken on trade-ins and a lower fixed cost absorption rate as well as lower sales of the higher margin jackpot systems. Wall Machines and Amusement Games reported operating loss before unusual items of ($2.2) million, compared to operating income of $5.3 million in the prior year period. ROUTE OPERATIONS For the year ended June 30, 2000, the Route Operations business unit reported total revenues of approximately $202.5 million, an increase of 15% compared to revenues of $175.9 million in the prior year. Revenues from the Nevada route operations increased to approximately $183.2 million or 19% over the prior year. This improvement was attributable to an increase in the average net win per gaming machine per day of 11% to $63.30 from $57.20 in the prior year and a 7% increase in the weighted average number of gaming machines during the current year to 7,800 units as compared to 7,300 units in the prior year. Gamblers' Bonus, a cardless players club and player tracking system continued to have a favorable impact on the net win per day. As of June 30, 2000, the Gamblers' Bonus product was installed in over 3,500 gaming machines at approximately 345 locations statewide or 44% of the installed base of gaming machines. Revenues from route operations in Louisiana totaled $19.2 million, a decrease of 11% compared to the prior year. This decrease was primarily the result of a decline in the net win per gaming machine per day of 4% to $77.50 from $80.50 in the prior year and a 9% decrease in the average number of machines to 680 from 740 in the prior year resulting from the loss of two locations due to parish gaming referendums. For the year ended June 30, 2000, cost of revenues for Route Operations totaled as a percentage of revenues, increased to 80% from 78% in the prior year. This increase was primarily due to higher space lease and participation costs for the Nevada route operations. Cost of route revenues for Route Operations includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor including payroll taxes and benefits. For the fiscal year ended June 30, 2000, the Route Operations business unit reported operating income of $15.2 million, an increase of 4% compared to operating income of $14.6 million in the prior year. The increase in operating income resulted from the aforementioned increase in revenues, offset by an increase in selling, general, and administrative expenses as a percentage of revenues, principally marketing and promotion costs at the Nevada route operations, and a higher provision for doubtful receivables for the Nevada route operations. CASINO OPERATIONS For the year ended June 30, 2000, the Casino Operations business unit reported revenues of $71.5 million, an increase of 12% compared to revenues of $63.7 million in the prior year. This improvement is due to a 9% increase in revenues 35 36 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 at the Rainbow Casino and a 22% increase in revenues at the Rail City Casino. The improvement at the Rainbow Casino was attributable to a 16% increase in the average number of gaming machines, offset by a 7% decrease in the net win per day to $148, both of which are a result of the casino expansion completed during the current fiscal year. The revenue improvement at the Rail City Casino was attributable to an increase in the average gaming machine net win per day of 20% to $78 from $65 in the prior year and a 7% increase in the average number of gaming machines. For the year ended June 30, 2000, the cost of revenues for Casino Operations as a percentage of revenues, improved to 39% compared to 42% for the prior year. This improvement was a result of the increase in revenues which were achieved without incremental increases in certain operating costs. Cost of casino revenues includes cost of goods sold, gaming taxes, rent and direct labor including payroll taxes and benefits. UNUSUAL ITEMS During the year ended June 30, 2000, the Company recorded the following unusual items: - - Restructuring and related charges totaling $8.1 million. The restructuring and related costs were incurred pursuant to a plan adopted by the Company for staff reductions at the Bally Gaming and Systems, Wall Machine and Amusement Games, and at its corporate office. Included in the restructuring costs described above is a $1.9 million charge for a valuation reserve for certain inventory for the Australian market, which is included in the cost of gaming equipment and systems in the Consolidated Statement of Operations. - - Gains from the sale of certain gaming management and development rights totaling $4.0 million. There were no items classified as unusual in the fiscal year ended June 30, 1999. CONSOLIDATED Total revenues for the year ended June 30, 2000 were approximately $478.1 million, an increase of 4% compared to revenues of $458.2 million in the prior year. Each of the Company's business units reported year over year growth in revenues, except for its Wall Machines and Amusement Games business unit. Cost of revenues as a percentage of total revenues increased slightly to 64% from 63% in the prior year period. Selling, general and administrative expenses for the year ended June 30, 2000 were approximately $105.2 million, an increase of 1% compared to costs of $104.1 million in the prior year. This increase was due to the increases in expenses at all of the business units, except Wall Machine and Amusement Games and Corporate Administrative costs. Research and development costs for the year ended June 30, 2000 were approximately $15.3 million, a decrease of 11% compared to costs of $17.2 million in the prior year, which is discussed above. Depreciation and amortization for the year ended June 30, 2000 were approximately $26.8 million, a 16% increase compared to $23.1 million in the prior fiscal year. In the prior year the Company incurred higher levels of research and development costs related to the launch of the wide-area progressive system. INTEREST INCOME AND EXPENSE AND INCOME TAXES Net interest expense in the year ended June 30, 2000, increased to $33.7 million, an increase of 9% compared to the net interest expense of $30.8 million in the prior year. The increase is due primarily to fees totaling $1.0 million associated with amendments to the bank credit agreement, coupled with a higher average amount of debt in the current year and higher interest rates. The Company recorded an income tax provision of $1.0 million in the year ended June 30, 2000, compared to a provision of $0.8 million in the prior year. The current year provision is due primarily to establishing additional reserves for open tax years currently under audit in Germany, and domestic state income taxes. At June 30, 2000, the Company had net operating loss carry forwards for federal income tax purposes of approximately $75 million which are available to offset future federal taxable income, if any, expiring in the years 2007 through 2020. At June 30, 2000 the Company had foreign tax credit carry forwards of approximately $7.5 million and alternative minimum tax credit 36 37 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 (AMT) carry forwards of approximately $1.3 million. Foreign tax credits have expiration dates ranging from 2001 to 2005 unless utilized prior to such time. AMT credits are available to be carried forward indefinitely and may be utilized against regular U.S. corporate tax to the extent it does not exceed computed AMT calculations. In addition, approximately $2.0 million of the net operating loss carryforwards cannot be utilized until fiscal year 2001, pursuant to Section 382 of the Internal Revenue Code. 1999 COMPARED WITH 1998 BALLY GAMING AND SYSTEMS For the year ended June 30, 1999, Bally Gaming and Systems reported revenues of $127.8 million, an increase of 17% compared to revenues of $109.6 million in the fiscal year ended June 30, 1998. Bally Gaming and Systems reported shipments of new gaming machines of approximately 12,300 units, an 8% decrease compared to shipments of approximately 13,400 in the prior year. By market segment, Bally Gaming and Systems unit sales for the current year consisted of approximately 2,700 units to the Nevada and Atlantic City markets, 7,300 units to international markets and 2,300 units to riverboats, Native American and other domestic markets. Systems shipments totaled 22,300 SDS units, compared to 23,900 in the prior year. This decrease was primarily a result of the timing of shipments related to new casino openings and to casinos acquired by Harrah's and Park Place Entertainment that previously used competitors' systems. Revenues from recurring revenue sources were $7.0 million, an increase of 82% compared to revenues of $3.8 million in the prior year period, which resulted from the launch of the wide-are progressive system and increases in the installed base of proprietary and niche games. For the year ended June 30, 1999, gross profit margins improved to 45% from 44% in the prior year period. The improvement was due primarily to a change in product mix to higher margin gaming machines, an increase in higher margin SDS unit revenues and higher revenues from machines that provide recurring revenues, partially offset by an increase in the provision for inventory obsolescence in the current year. Bally Gaming and Systems reported operating income of $5.8 million, an increase of 10% compared to operating income of $5.2 million in the prior year. The increase in operating income resulted primarily from higher revenues and improved margins and a decrease in depreciation as certain intangible assets related to the acquisition of Bally Gaming International, Inc. were fully amortized in the prior year, partially offset by higher selling, general and administrative expenses, primarily higher marketing costs related to new product launches and the implementation of a product management organization focus, an increase in the provision for doubtful receivables, and an increase in research and development costs. Research and development costs totaled $13.9 million, an increase of 10% over the prior year, resulting from the Company's ongoing efforts to expand its new and existing product offerings. WALL MACHINES AND AMUSEMENT GAMES For the year ended June 30, 1999, Wall Machines and Amusement Games reported revenues of $90.8 million, a decrease of 8% compared to revenues of $98.6 million in the prior year. The decrease in revenues resulted primarily from a 22% decrease in the number of new wall machine units sold, a 3% decrease in the selling price of new wall machines, excluding those sold as part of a new single-site progressive jackpot system, a 13% decrease in amusement game revenues and a 9% decrease in leased wall machine revenues, all due primarily to lower market demand pending the outcome of potential changes to laws regulating wall machines. This was partially offset by sales of wall machines coupled with a new single-site progressive jackpot system which resulted in a 13% overall increase in average selling price of new machines. The Company does not foresee any reversal of the pricing pressures in the near future. In addition, due to the potential changes in the laws regulating wall machines, which if passed could have a favorable effect on demand in the future, current demand is soft and will likely remain that way until the outcome of the proposed law changes is known. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar increased revenues by $2.1 million during the current year. The Wall Machines and Amusement Games business unit continued its leasing program whereby new wall machines are leased to customers pursuant to operating leases which provide a stream of revenues and cash flows over the term of the leases which range from six months to three and one half years. As of June 30, 1999, a total of 5,000 machines were deployed in the leasing program compared to 5,700 at June 30, 1998, a decrease of 13%. This decrease was due to the completion of a large lease program in September 1998 quarter that was not renewed by Bally Wulff. 37 38 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 For the year ended June 30, 1999, gross profit margin decreased to 41% from 45% in the prior year. The gross margin decrease resulted primarily from the unfavorable impact of lower revenues, increased competition which has led to offering higher values on used machines taken on trade-ins and a lower fixed cost absorption rate, partially offset by sales of the higher margin progressive jackpot system. Wall Machines and Amusement Games reported operating income of $5.3 million, a decrease of 59% compared to $13.1 million in the prior year period. The decrease in operating income resulted primarily from the aforementioned decrease in revenues and gross margins and an increase in selling, general and administrative expenses, principally certain separation accruals and a higher provision for doubtful receivables, partially offset by lower depreciation expense resulting from a lower installed base of leased equipment. ROUTE OPERATIONS For the year ended June 30, 1999, the Route Operations business unit reported total revenues of approximately $175.9 million, an increase of 18% compared to revenues of $148.5 million in the prior year. Revenues from the Nevada route operations increased to approximately $154.2 million or 21% over the prior year. This improvement was attributable to an increase in the average net win per gaming machine per day of 7% to $57.20 from $53.70 in the prior year and a 13% increase in the weighted average number of gaming machines during the current year to 7,300 units as compared to 6,460 units in the prior year. Gamblers' Bonus, a cardless players club and player tracking system continued to have a favorable impact on the net win per day. As of June 30, 1998, the Gamblers' Bonus product was installed in over 2,600 gaming machines at approximately 240 locations statewide or 35% of the installed base of gaming machines, up 29% over June 30, 1999. Revenues from route operations in Louisiana improved to $21.7 million, an increase of 3% compared to the prior year. This increase was the result primarily of an improvement in the net win per gaming machine per day of 4% to $80.50 from $77.40 in the prior year, partially offset by a 1% decrease in the average number of machines to 740 from 750 in the prior year. For the year ended June 30, 1999, cost of revenues for Route Operations as a percentage of revenues, increased to 78% from 77% in the prior year. Cost of revenues for the Nevada route operations increased, as a percent of related revenues, increased to 80% from 79% in the prior year. The increase was due primarily to lower margins on new and renewed locations (due to competitive pressures), an increase in rental and participation payments on gaming machines and higher direct payroll costs. Costs of revenues for route operations in Louisiana increased, as a percent of related revenues, to 66% from 64% in the prior year. The increase was due primarily to an increase in direct costs, principally health insurance costs. CASINO OPERATIONS For the year ended June 30, 1999, the Casino Operations business unit reported revenues of $63.7 million, an increase of 5% compared to revenues of $60.7 million in the prior year. This improvement is due to a 4% increase in revenues at the Rainbow Casino and an 8% increase in revenues at the Rail City Casino. The improvement at the Rainbow Casino was attributable to an increase in the average gaming machine net win per day of 6% to $159 from $150 in the prior year and a 2% increase in the average number of gaming machines. The revenue improvement at the Rail City Casino was attributable to an increase in the average gaming machine net win per day of 8% to $65 from $60 in the prior year and an 8% increase in the average number of gaming machines. For the year ended June 30, 1999, the cost of revenues for Casino Operations as a percentage of revenues, improved to 42% compared to 43% for the prior year. UNUSUAL ITEMS There were no items classified as unusual in the fiscal year ended June 30, 1999. During the year ended June 30, 1998, the Company recorded the following unusual items: - - The Company settled a dispute with Alpha Hospitality and General Electric Credit Corporation concerning certain customer notes receivable on which the Company had certain recourse obligations. The Company contributed $2.5 million to the final settlement with the holder of the notes, and reversed $6.0 million of reserves previously established for these recourse obligations. In addition, as part of the settlement the Company became the owner of approximately 566,000 shares of Alpha Hospitality common stock, which trades 38 39 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 on the NASDAQ Small Cap market. Pursuant to the limitations provided for in the settlement agreement, the Company subsequently sold these shares. - - As a result of settling a dispute over the exclusive use of certain technologies and changes in gaming regulations, the Company evaluated the cash flow of certain of its technology assets, in accordance with the provisions of the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," and determined certain items met the definition of having become impaired. During the year ended June 30, 1998 the Company recorded write-downs totaling $2.8 million for these items. - - The Company accrued $0.7 million for the present value of contractual payments due to a former member of the board of directors who was not re-elected to the board at the December 1997 annual shareholders meeting. - - The Company accrued $0.6 million as restructuring charges for Bally Gaming and Systems. - - The Company recorded a $1.6 million charge for final settlement of litigation related to the acquisition of BGII. CONSOLIDATED Total revenues for the year ended June 30, 1999 were approximately $458.2 million, an increase of 10% compared to revenues of $417.4 million in the prior year. The increase is due primarily to the increases in revenues at the Bally Gaming and Systems, Route Operations and Casino Operations business units, partially offset by the decrease in revenues at the Wall Machines and Amusement Games business unit. Cost of revenues as a percentage of total revenues increased slightly to 63% from 62% in the prior year period. Selling, general and administrative expenses for the year ended June 30, 1999 were approximately $104.1 million, an increase of 21% compared to costs of $86.3 million in the prior year. This increase was due to the increases in expenses at all of the business units, an increase in corporate administrative costs, principally higher payroll and related expenses, and a higher provision for doubtful receivables. Research and development costs for the year ended June 30, 1999 were approximately $17.2 million, an increase of 9% compared to costs of $15.8 million in the prior year. This increase was due to an increase in costs at the Bally Gaming and Systems and the Wall Machines and Amusement Games business units to develop and support a greater number of products. Depreciation and amortization for the year ended June 30, 1999, were approximately $23.1 million, a slight increase of 1% compared to depreciation and amortization of $22.8 million in the prior fiscal year. This increase was due primarily to an increase in amortization of deferred financing costs and an increase in depreciation at the Route Operations and Casino Operations business units, mostly offset by a decrease in depreciation at the Bally Gaming and Systems and Wall Machines and Amusement Games business units. INTEREST INCOME AND EXPENSE AND INCOME TAXES Net interest expense in the year ended June 30, 1999, increased to $30.8 million, an increase of 11% compared to the net interest expense of $27.8 million in the prior year. The increase is due primarily to a fee associated with amending the bank credit agreement, coupled with a higher average amount of debt in the current year, partially offset by lower interest rates. The Company recorded an income tax provision of $0.8 million in the year ended June 30, 1999, compared to a provision of $3.2 million in the prior year. The current year provision is due primarily to establishing a valuation allowance against deferred tax assets for the Wall Machine and Amusement business unit and domestic state income taxes. 39 40 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 RISK FACTORS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The information contained in this Form 10-K and the Company's other filings with the Securities Exchange Commission may contain "forward-looking" statements within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1933, as amended, and is subject to the safe harbor created thereby. Such information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements herein. Future operating results may be adversely affected as a result of a number of factors. Set forth below are certain important factors that could cause actual results to differ materially from those in such "looking forward" statements. HIGH LEVERAGE; ABILITY TO SERVICE DEBT, LIQUIDITY The Company has a substantial amount of indebtedness. As of June 30, 2000 the aggregate outstanding principal amount of the Company's long-term indebtedness including current maturities was $345.1 million. The Company also has available to it up to $17.6 million in unborrowed capacity under the Revolving Credit Facility. The Company had a net capital deficiency at June 30, 2000 of $50.8 million. The Company's credit facility and indenture contain a number of significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests (as defined) or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries (as defined), engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. There can be no assurance that such restrictions will not adversely affect the Company's ability to finance its future operations or capital needs or engage in other business activities that may be in the interest of the Company. In addition, the bank credit facility also requires the Company to maintain compliance with certain financial ratios. The ability of the Company to comply with such ratios may be affected by events beyond the Company's control. A breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in a default under the bank credit facility. In the event of any such default, the lenders under the new credit facility could elect to declare all borrowings outstanding under the bank credit facility, together with accrued interest and other fees, to be due and payable, to require the Company to apply all of its available cash to repay such borrowings or to prevent the Company from making debt service payments on the Senior Subordinated Notes, any of which would be an event of default under the Senior Subordinated Notes. If the Company were unable to repay any such borrowings when due, the lenders could proceed against their collateral. If the indebtedness under the bank credit facility or the Notes were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness in full. Due to the low amount of consolidated EBITDA and increased borrowings under the credit facility, the Company did not meet the financial covenants in the bank credit facility at both December 31, 1998 and March 31, 2000. The Company and the banks amended the current and future financial maintenance covenants in the bank credit facility effective December 31, 1998 and again at March 31, 2000. Consent fees paid to the bank group totaled $0.5 million and $1.0 million in the fiscal years ended June 30, 1999 and 2000, respectively. The Company is in compliance with such amended covenants, but no assurance can be given that the Company will continue to meet the amended covenants in the future. The Company's obligations to make principal and interest payments on outstanding indebtedness, and to comply with the covenants in the Indenture and the agreements governing borrowings under the bank credit facility, will have several important effects on its future operations including the following: (i) the portion of the Company's cash flow from operations which will be dedicated to the payment of principal and interest on its indebtedness will not be available for other purposes; (ii) certain of the Company's borrowings are at variable rates of interest, which could result in higher expense in the event of increases in interest rates; (iii) the Company may be more vulnerable to downturns in its business or in the general economy and may be restricted from making acquisitions, introducing new technologies or exploiting business opportunities; and (iv) the Company's ability to obtain additional financing 40 41 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 in the future for working capital, capital expenditures, general corporate or other purposes may be impaired. Additionally, the Company's ability to meet its debt service obligations and to reduce its total debt will be dependent upon the Company's future performance, which will be subject to general economic and regulatory conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. No assurance can be given that the Company will be able to generate the cash flow necessary to permit the Company to meet its fixed charges and repayment obligations. Any inability of the Company to service its fixed charges and repayment obligations would have a significant adverse effect on the Company. OPERATING HISTORY--RECENT LOSSES The Company incurred net losses of $8.8 million for the fiscal year ended June 30, 1999 and $15.0 million for the year ended June 30, 2000, including certain unusual charges. There can be no assurance that the Company will be profitable, and that it will not incur unusual or non-recurring charges, in the future. COMPETITION Bally Gaming and Systems. The market for gaming machines is extremely competitive, and there are a number of established, well-financed and well-known companies producing machines that compete with each of Bally Gaming and Systems product lines in each of Bally Gaming and Systems markets. The domestic market for gaming machines is dominated by a single competitor, International Game Technology ("IGT"), with a number of smaller competitors in the field. In addition, certain technology-oriented companies have recently entered or may enter the gaming machine market. Management believes that some of these competitors have greater capital resources than the Company. Competition among gaming machine manufacturers, particularly with respect to sales of gaming machines to new and emerging markets, is based on competitive customer pricing and financing terms, appeal to the player, product quality, 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 currently consists of IGT, Casino Data Systems and, to a lesser extent, Acres Gaming, Inc., Gaming Systems International, Inc., Mikohn Gaming Corporation and Logical Solutions International. Competition is keen in this market due to the number of providers and the limited number of casinos and the jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all main factors in determining a provider's success in selling its system. Bally Gaming and Systems believes the future success of its operations will be determined by its ability to bring new and innovative products to the marketplace while at the same time maintaining the base of loyal existing customers. Wall Machines and Amusements Games. Germany's wall machine manufacturing industry is dominated by Bally Wulff and two of its competitors. Management believes these three entities collectively account for more than 90% of the entire market for wall machines, which exists almost exclusively in Germany. Bally Wulff's two major competitors have greater resources than the Company and own and operate a significant number of arcades, which gives them a competitive advantage arising from a built-in market for their games and the ability to test market new games in their own arcades. In addition, wall machines compete for floor space in arcades with non-payout entertainment machines, which have gathered an increasing amount of the space in arcades. These machines are not subject to the strict German licensing requirements governing wall machines. Bally Wulff has not fully participated in the non-payout entertainment machine market. The wall machine industry is subject to a number of regulations which are currently being reviewed by the German legislature. The outcome of this review and whether it will be favorable or unfavorable to Bally Wulff cannot be predicted at this time. The potential for changes in these regulations is currently having a negative demand on the market. Route Operations. The competition for obtaining and renewing route contracts in Nevada is high and continues to intensify. Such competition has, over time, reduced the Company's gross profit margins for such operations. In addition, such competition has required the Company to provide financial incentives to retain or obtain certain route locations. Such incentives include long-term lease commitments, guarantees of leases in favor of owners of local establishments, substantial promotional allowances and advance deposits, payments of lease rentals in advance, payment of one-time fees for the right to operate gaming locations and loans for buildings and tenant-improvement 41 42 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 costs. Notwithstanding the Company's business strategy of emphasizing profitability rather than market share, the future success of the Company's Route Operations will continue to be dependent to some extent on its ability and willingness to provide such financial inducements. Although the Company has historically generated sufficient new route contracts to offset the loss of old route contracts, due to increased competition, the increased sophistication and bargaining power of customers and possibly other factors not yet known, there can be no assurance that the Company will be able to obtain new route contracts or renew or extend its route contracts upon their expiration or termination, or that, if renewed or extended, the terms will be as favorable to the Company. In Louisiana, the Company's Route Operations at the racetrack and OTBs compete with various truck stops and locations with liquor licenses throughout the New Orleans area, as well as riverboat gaming and one land-based casino which re-opened in New Orleans in October 1999. Casino Operations. The operation of casinos is also a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and success of marketing programs. In Sparks, Nevada, the principal competition for the Company's operations comes from larger casinos focusing on the local market. The Company's Rainbow Casino in Vicksburg, Mississippi faces intense direct competition from other gaming facilities serving the Vicksburg market. Competition from casinos in nearby locations may also be reducing the market from which Vicksburg casinos draw most of their patrons. Moreover, additional potential gaming sites remain in and around Vicksburg and Sparks; some of these sites may be closer to larger population centers and, if developed, might enjoy a competitive advantage over the Company's casinos. Lady Luck Gaming Corporation owns a site in Vicksburg and may develop a project that would include a dockside casino, hotel and related amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel and auto racing complex on the Big Black River between Vicksburg and Jackson, Mississippi. The legality of that site for gaming is currently in litigation. At this time management does not know which, if any, of these sites will be developed. Both of these projects will be contingent on several factors including regulatory approval and financing. PRODUCT DEVELOPMENT The future success of the Company depends to a large extent upon its ability to design, manufacture and market technologically sophisticated and entertaining products that achieve high levels of player acceptance. The development of a successful new product or product design by a competitor could adversely affect sales of the Company's products and force it to attempt to respond quickly with its own competing products. Response speed is lower in jurisdictions requiring product approvals prior to commercialization. The Company's plans with respect to the introduction of more sophisticated technology into the electronic gaming machine market are designed to lead to an increase in market share and profitability for the Company. However, there is no assurance that any such products will be developed, or that if developed they will receive necessary regulatory approvals or be commercially successful. Although the Company is developing a number of new products, there can be no guarantee of commercial acceptance of any of its products. The gaming industry is employing new technology in many new areas, and the Company and its competitors continue to file for patents protecting such technologies. Although the Company is not aware of any patent violations, there can be no assurances that patents currently pending may be determined to have infringed upon an existing patent held by a third party. Bally Gaming and Systems has recently deployed new products that are placed in casinos and earn recurring revenues and cash flows. The amount of revenues earned is dependent on the earning power of the game. The games will likely have a shorter life than more traditional games, and the Company will have to continue to design and deploy successful games to maintain this stream of revenue. There can be no assurance that the games recently deployed will be successful or that the Company will be able to design and deploy new recurring revenue games. 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 on 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 42 43 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Company's participation in any such markets, or jurisdictions currently permitting gaming will continue to do so in the future. Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Bally Gaming and Systems and Wall Machine and Amusement Games business units. Competitive conditions sometimes require Bally Gaming and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of default may be less than the amount financed. Accordingly, the Company has greater exposure to the financial condition of its customers in emerging markets than had historically been the case in established markets like Nevada and Atlantic City. Bally Wulff provides customer financing for approximately 20% of its sales and also provides lease financing to its customers. Lease terms are generally for six months, but are also available for terms up to 43 months. 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. As of June 30, 2000, Bally Gaming and Systems has $26.4 million of receivables from countries outside of the United States most of which are denominated in U.S. dollars. The Company does not generally enter into foreign exchange contracts to hedge its exposure to foreign exchange rate fluctuations. DEPENDENCE ON KEY PERSONNEL The success of the Company will be dependent, to a significant extent, on 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 on the Company's operations. STRICT REGULATION BY GAMING AUTHORITIES The manufacture and distribution of gaming machines and the conduct of gaming operations are subject to extensive federal, state, local and foreign regulation by various gaming authorities (each, a "Gaming Authority"). Although the laws and regulations of the various jurisdictions in which the Company operates vary in their technical requirements and are subject to amendment from time to time, virtually all these jurisdictions require licenses, permits, documentation of the qualification, including evidence of integrity and financial stability, and other forms of approval for companies engaged in gaming operations and the manufacture and distribution of gaming machines as well as for the officers, directors, major stockholders and key personnel of such companies. The Company and its key personnel have obtained, or applied for, all government licenses, registrations, findings of suitability, permits and approvals necessary for the manufacture and distribution, and operation where permitted, of its gaming machines in the jurisdictions in which it currently does business. However, there can be no assurance that such licenses, registrations, findings of suitability, permits or approvals will be given or renewed in the future or that the Company will obtain the licenses necessary to operate in emerging markets. During the past twelve months, the regulations governing the conduct of gaming for route locations in Nevada have been modified. While the Company believes such regulations will not significantly impact its operations or financial results, no assurance can be given that future changes in regulations will not be enacted that would negatively impact operations or financial results. The Company's business is dependent on regulatory requirements. For example, recurring demand exists for Bally Wulff's products because German regulations limit the permissible use of wall machines to a period of four years. A change in applicable regulations could adversely affect the market for the Company's products and services. The Company currently has an agreement with Fair Grounds Corporation, Jefferson Downs Corporation and Finish Line Management Corporation to be the exclusive operator of video poker machines at the only racetrack and ten associated OTBs in the greater New Orleans area. On November 5, 1996 voters in Louisiana approved a proposition to eliminate video poker in one of the seven parishes in which the Company operates gaming machines in OTBs in 43 44 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 the greater New Orleans area. These operations also depend on the financial viability of the racetrack and the OTBs, which is beyond the control of the Company. See "Business--Gaming Regulations and Licensing". Additionally, there can be no assurance that any regulatory agency will not enact new rules or change regulations that would negatively impact the Company's ability to operate or its financial results. GAMING TAXES AND VALUE ADDED TAXES Gaming operators are typically subject to significant taxes and fees in addition to corporate and state income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees, which could occur prospectively or retroactively, would adversely affect the Company. Sales of Bally Wulff's products in Germany are generally subject to value added taxes ("V.A.T."). During fiscal 2000, Bally Wulff increased the amount of tax reserves by $0.5 million (to a total reserve of $0.8 million) as a result of developments in ongoing quadrennial audits of Wulff's tax returns for the years 1992 through 1995. The German tax authorities have proposed preliminary adjustments of $0.3 million, which has been accrued. The German tax authorities have not yet issued the final assessment from their quadrennial audits. The Company pays and expects to continue to pay substantial taxes and fees in Nevada, Louisiana and Mississippi and expects to pay substantial taxes and fees in any other jurisdiction in which it conducts gaming operations. There can be no assurance as to future changes in taxation on gaming operations. CHANGE OF CONTROL Upon the occurrence of a Change of Control (as defined), each holder of the Senior Subordinated Notes may require the Company to repurchase the Senior Subordinated Notes held by such holder at 101% of the principal amount thereof, plus accrued interest to the date of repurchase. The bank credit facility prohibits the Company from purchasing any Senior Subordinated Notes, and provides that the occurrence of certain change of control events with respect to the Company would constitute a default thereunder. In the event of a change of control, the Company must offer to repay all borrowings under the bank credit facility or obtain the consent of its lenders under the credit agreement to the purchase of Senior Subordinated Notes. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Senior Subordinated Notes. In such case, the Company's failure to repurchase tendered Senior Subordinated Notes would constitute a default under the indenture, which, in turn, would constitute a default under the credit facility. There can be no assurance that the Company will have the financial ability to purchase the Senior Subordinated Notes on the occurrence of a change of control. There can be no assurance that the Company will be able to comply with all of its obligations under the new credit facility, the indenture, and its other indebtedness on the occurrence of a change of control. CURRENCY RATE FLUCTUATIONS The Company derives revenues from its non-U.S. subsidiaries, all of which revenues are denominated in their local currencies, and their results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Most of the currencies in countries in which the Company has foreign operations weakened versus the U.S. dollar in 1999 and 2000, which resulted in assets and liabilities denominated in local currencies being translated into fewer dollars. The Company does not currently utilize hedging instruments. MARKET RISKS During the normal course of business the Company is routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest and currency rate movements, collectibility of accounts and notes receivable, and recoverability of residual values on leased assets. The Company constantly assesses these risks and has established policies and practices designed to protect against the adverse effects of these and other potential exposures. Although the Company does not anticipate any material losses in these risk areas, no assurances can be made that material losses will not be incurred in these areas in the future. The Company has performed a sensitivity analysis of its financial instruments, which consist of the Company's cash and cash equivalents and debt. The Company has no derivative financial instruments. In performing the sensitivity 44 45 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 analysis, the Company defines risk of loss as the hypothetical impact on earnings, of changes in the market interest rates or currency exchange rates. The results of the sensitivity analysis at June 30, 2000, are as follows: Interest Rate Risk: The Company had total debt as of June 30, 2000 of $345.1 million, of which $132.2 million of borrowings under the Term Loan Facilities and $40.0 million of borrowings on the Revolving Credit Facility are at a floating rate based on LIBOR and $22.4 million of German borrowings on revolving credit facilities are at a floating rate based on the Eurodeutschmark borrowing rate. If the LIBOR and Eurodeutschmark rates were each to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would decrease or increase by approximately $2.0 million on a pre-tax basis, all other factors remaining constant. Foreign Currency Exchange Rate Risk: The Company has subsidiaries with the following functional currencies: German Deutschemark, Australian Dollar and South African Rand, although the only subsidiaries currently with material amounts of assets, liabilities and revenues are in Germany. If the German deutschemark declined 10% against the U.S. dollar, there would be a corresponding decrease in earnings reported in the consolidated group, of approximately $0.6 million. Such a change in the German deutschemark would result in an immaterial transaction loss, but would result in a charge to accumulated other comprehensive loss, which is a component of stockholder's equity, of approximately $4.7 million, all other factors remaining constant. ESTIMATES The Company's financial statements are prepared using estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results may differ from these estimates either favorably or unfavorably, which may impact future results. ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to Item 7 of this Report- "Risk Factors- Currency Rate Fluctuations and Market Risks." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements, including the notes thereto, and supplementary financial information are listed in Part IV, Item 14, of this Report and are included after the signature page beginning at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective June 1, 2000, Alliance Gaming Corporation (the "Company") dismissed KPMG LLP ("KPMG"). The decision to change accountants was approved by the Audit Committee and the Board of Directors of the Company. The reports of KPMG on the Company's consolidated balance sheets as of June 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1999, did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. There were no disagreements between the Company and KPMG as to any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused it to make a reference to the subject matter of the disagreement in connection with its reports on the financial statements for such periods within the meaning of Item 304 (a)(1)(iv) of Regulation S-K. 45 46 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 Effective June 1, 2000, the Company engaged the firm of Arthur Andersen LLP as independent public accountants for the Company's fiscal year ending June 30, 2000 to replace KPMG. The Company's Board of Directors approved the selection of Arthur Andersen LLP as independent accountants upon the recommendation of the Company's Audit Committee. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. 46 47 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: PAGE ---- 1. Financial Statements: Reports of Independent Public Accountants F-1 - F-2 Consolidated Balance Sheets as of June 30, 1999 and 2000 F-3 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1999 and 2000 F-4 Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended June 30, 1998, 1999 and 2000 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1999 and 2000 F-6 Notes to Consolidated Financial Statements F-7 2. Consolidated Supplemental Schedules: Not applicable. 3. Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------ ----------- [S] [C] 2.1 Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October 18, 1995, as amended and restated (incorporated herein by reference to Annex I to the prospectus included in Alliance's Form S-4, Registration Number 333-02799 ). 2.2 Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 2.3 Consolidation Agreement, dated March 29, 1995 among United Gaming Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 3.1 Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to Alliance's Form S-2, Registration Number 33-72990). 3.2 Revised and Amended By-Laws of the Registrant (incorporated herein by reference to Alliance's Form 10-Q for the quarter ended December 31, 1997.) 3.3 Certificate of Designations, Preferences, and Relative, Participating, Optional and Other Special Rights of Special Stock and Qualifications, Limitations and Restrictions of 11 1/2% Non-Voting, Pay-in-Kind Special Stock, Series E (incorporated herein by reference to Exhibit 9(c)(5) to Amendment No. 1 to Alliance's Schedule S-4 dated May 9, 1996). 47 48 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 4.1 Form of Indenture among the Company, certain Guarantors referred to therein and United States Trust Company of New York, as Trustee, in respect of Alliance's 10% Senior Subordinated Notes due 2007 (including form of Senior Subordinated Note and Guarantee) (incorporated by reference to Alliance's Form S-4 dated December 1, 1997). 4.2 Credit Agreement among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston, dated August 8, 1997 (incorporated herein by reference to the Company's annual report on Form 10-K dated June 30 1997). 4.3 First Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston, dated August 31, 1998 (incorporated herein by reference to the Company's annual report on Form 10-K dated June 30, 1998). 4.4 Second Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston, dated January 27, 1999 (incorporated herein by reference to the Company's quarterly report on Form 10-Q dated December 30, 1998). 4.5 Third Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston as administrative agent dated October 28, 1999 (omits certain information that has been filed separately with the Commission, and is incorporated herein by reference to the Company's Form 10Q dated September 30, 1999). 4.6 Fourth Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston as administrative agent dated December 16, 1999 (incorporated herein by reference to the Company's Form 10Q dated December 31, 1999). 4.7 Fifth Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston as administrative agent dated April 24, 2000 (incorporated herein by reference to the Company's Form 10Q dated March 31, 2000). 4.8 Sixth Amendment and Consent among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse First Boston as administrative agent dated May 4, 2000 (incorporated herein by reference to the Company's Form 10Q dated March 31, 2000). 4.10 Rights Agreement dated as of March 9, 1998 between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to Form 8-A dated March 10, 1998). 4.11 First Amendment to the Rights Agreement dated as of September 15, 1998 between the Company and American Stock Transfer & Trust Company (incorporated herein by reference to the Company's annual report on Form 10-K dated June 30, 1998).
48 49 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 4.12 Form of Certificate of Designations with respect to Series F Special Stock (attached as Exhibit A to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998). 4.13 Form of Right Certificate (attached as Exhibit B to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998). 4.14 Summary of Rights to Purchase Series F Special Shares (attached as Exhibit C to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998). 10.4 Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated herein by reference to the Company's Form S-8 filed August 12, 1997).* 10.5 Letter of Agreement dated June 25, 1993 among United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation and as to certain provisions, Alfred H. Wilms, including Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of Stockholders Agreement), Exhibit C (Form of Certificate of Designations of Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.6 Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms, including Exhibit A (Form of Warrant Agreement) and Exhibit B (Form of press release) thereto (incorporated herein by reference to Alliance's Form 8-K dated June 25, 1993). 10.7 United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308).* 10.8 Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated herein by reference to Alliance's Form S-8 Registration Number 2-98777).* 10.9 Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investments Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.12 Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., and Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.13 Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by reference to Alliance's Form S-8 Registration Number 33-45811 and Registration Number 33-75308).
49 50 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.14 Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by reference to Alliance's Form S-3 Registration Number 33-58233). 10.15 Securities Purchase Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P. and Kirkland Investment Corporation (incorporated herein by reference to Alliance's Form 8-K dated September 21, 1993). 10.19 Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager (incorporated herein by reference to Alliance's Form 8-K dated October 29, 1993). 10.28 Letter Agreement, dated as of June 29,1994, among United Gaming, Inc., Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.29 Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.30 Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.31 Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994 (incorporated herein by reference to Alliance's Form 8-K dated August 11, 1994). 10.32 Second Amended and Restated Agreement of Limited Partnership, dated March 29,1995, between United Gaming Rainbow and Rainbow Casino Corporation (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.43 Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens & Cannada (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.44 Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.45 Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.46 Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc. (incorporated herein by reference to Alliance's Form 8-K dated March 29, 1995). 10.50 Trademark License Agreement, dated November 11, 1991 between Bally Manufacturing Corporation and Bally Gaming International, Inc. (incorporated herein by reference to exhibit 10(i)(d) included in BGII's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
50 51
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.51 Amended and Restated Trademark License Agreement, dated July 8, 1992, by and between Bally Gaming International, Inc. and Bally Manufacturing Corporation (incorporated herein by reference to exhibit 10(i)(d) included in BGII's Registration Statement on Form S-1 No. 33-48347 filed on July 9, 1992). 10.53 Second Amendment to Trademark License Agreement and Settlement Agreement, dated March 31, 1995, by and between Bally Entertainment Corporation and Bally Gaming International, Inc. (incorporated herein by reference to Exhibit I, included in BGII's Current Report on Form 8-K dated April 3, 1995). 10.54 Third Amendment to Trademark License Agreement and Settlement Agreement, dated May 10, 1996, by and between Bally Entertainment Corporation, Alliance Gaming Corporation and BGII Acquisition Corp. (incorporated by reference to exhibit 10.77 to S-2 Registration Statement No. 333-02147). 10.65 Employment Agreement between Hans Kloss and Alliance Gaming Corporation dated July 1, 1998 (incorporated herein by reference).* 10.72 Employment Agreement Supplement, dated as of August 29, 1996, between the Company and Joel Kirschbaum (incorporated by reference to the Company quarterly report on Form 10-Q for March 31, 1997).* 10.73 Employment Agreement Supplement, dated as of August 29, 1996, between the Company and Anthony DiCesare (incorporated by reference to the Company quarterly report on Form 10-Q for March 31, 1997).* 10.76 Employment Agreement, dated July 1, 1997 between the Company and Joel Kirschbaum (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997).* 10.77 Employment Agreement, dated July 1, 1997 between the Company and Anthony DiCesare (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997).* 10.78 Agreement, between the Company and Kirkland Investment Corporation dated July 1, 1997 (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997). 10.79 Amendment Number 1 to the agreement between the Company and Kirkland Investment Corporation dated July 1, 1997 (incorporated herein by reference to the Company's Annual Report on Form 10-K dated June 30 1997). 10.80 Amended and Restated Employment Agreement, effective November 4, 1999, between the Company and Robert L. Miodunski. (incorporated by reference to the Company's quarterly report on Form 10-Q for September 30, 1999). 10.81 Amendment to Employment Agreement between the Company and Anthony L. DiCesare, effective January 4, 2000, (incorporated by reference to the Company's quarterly report on Form 10-Q for March 31, 2000). 10.82 Amendment to Employment Agreement between the Company and Joel Kirschbaum, effective January 4, 2000, (incorporated by reference to the Company's quarterly report on Form 10-Q for March 31, 2000). 10.83 Amendment #2 to the Agreement between the Company and Kirkland Investment Corporation effective January 4, 2000, (incorporated by reference to the Company's quarterly report on Form 10-Q for March 31, 2000). 10.84 Purchase Agreement dated as of August 11, 2000 among UC Acquisition Company of Nevada, LLC, Alliance Gaming Corporation, and APT Games, Inc. with respect to United Coin Machine Co.
51 52 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 21 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen, LLP 23.2 Consent of KPMG LLP 27.1 Financial Data Schedule * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: On June 6, 2000, the Company filed a report on Form 8-K, reporting that the Company had dismissed KPMG LLP as the Company's independent accountants, and that the Board of Directors had engaged Arthur Andersen LLP. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above.
52 53 ALLIANCE GAMING CORPORATION FORM 10-K YEAR ENDED JUNE 30, 2000 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE GAMING CORPORATION DATED: September 27, 2000 By /s/ Robert L. Miodunski ------------------------------------------- Robert L. Miodunski, Director, President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Robert L. Miodunski Director, President and Chief Operating September 27, 2000 - ---------------------------------- Officer (Principal Executive Officer) Robert L. Miodunski /s/ Robert L. Saxton Sr. Vice President, Secretary, Treasurer September 27, 2000 - ---------------------------------- and Chief Financial Officer (Principal Robert L. Saxton Financial and Accounting Officer) /s/ Jacques Andre Director September 27, 2000 - ---------------------------------- Jacques Andre /s/ Anthony DiCesare Director September 27, 2000 - ---------------------------------- Anthony DiCesare /s/ Joel Kirschbaum Director September 27, 2000 - ---------------------------------- Joel Kirschbaum /s/ David Robbins Director and Chairman of the Board September 27, 2000 - ---------------------------------- David Robbins Director - ---------------------------------- Morton Topfer
53 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders of Alliance Gaming Corporation: We have audited the accompanying consolidated balance sheet of Alliance Gaming Corporation and Subsidiaries as of June 30, 2000 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the year ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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, 2000, and the results of their operations and their cash flows for the year ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Las Vegas, Nevada August 16, 2000 55 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Alliance Gaming Corporation: We have audited the accompanying consolidated balance sheet of Alliance Gaming Corporation and Subsidiaries as of June 30, 1999 and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the two-year period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 1999, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 1999, in conformity with accounting principles generally accepted in the United States. KPMG LLP Phoenix, Arizona August 11, 1999 56 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In 000's except share amounts) ASSETS
June 30, June 30, 1999 2000 --------- --------- Current assets: Cash and cash equivalents $ 16,930 $ 32,044 Short-term investments -- 2,000 Accounts and notes receivable, net of allowance for doubtful accounts of $12,705 and $19,255 92,665 82,444 Inventories, net of reserves of $7,077 and $6,660 46,138 32,019 Other current assets 11,423 11,198 --------- --------- Total current assets 167,156 159,705 --------- --------- Long-term notes receivable, net of allowance for doubtful accounts of $991 and $954 5,782 4,043 Leased gaming equipment, net of accumulated depreciation of $5,111 and $10,713 10,981 16,959 Property, plant and equipment, net of accumulated depreciation and amortization of $51,686 and $60,028 74,159 76,823 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $4,604 and $5,946 57,593 54,994 Intangible assets, net of accumulated amortization of $18,351 and $20,609 26,854 21,850 Deferred tax assets, net of valuation allowance 8,982 12,174 Other assets, net of reserves of $3,468 and $1,813 4,800 4,739 --------- --------- $ 356,307 $ 351,287 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $ 17,372 $ 10,367 Accrued liabilities 39,196 32,323 Current maturities of long term debt 1,927 1,036 --------- --------- Total current liabilities 58,495 43,726 --------- --------- Long term debt, net 316,779 344,023 Other liabilities 9,458 12,972 --------- --------- Total liabilities 384,732 400,721 --------- --------- Minority interest 1,983 1,361 Commitments and contingencies Stockholders' deficiency: Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 153,802 shares and 46,242 shares issued and outstanding 15,380 4,624 Common Stock, $.10 par value; 50,000,000 shares authorized, 9,791,000 and 10,335,000 shares issued 979 1,034 Treasury stock, at cost, 85,300 shares and 83,000 shares (522) (508) Additional paid-in capital 129,991 141,130 Accumulated other comprehensive losses (15,986) (21,790) Accumulated deficit (160,250) (175,285) --------- --------- Total stockholders' deficiency (30,408) (50,795) --------- --------- $ 356,307 $ 351,287 ========= =========
See accompanying notes to consolidated financial statements. F-3 57 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except per share amounts)
Years Ended June 30, ----------------------------------------- 1998 1999 2000 --------- --------- --------- Revenues: Gaming equipment and systems $ 109,597 $ 127,810 $ 135,180 Wall machines and amusement games 98,611 90,834 68,952 Route operations 148,507 175,854 202,480 Casino operations 60,657 63,682 71,468 --------- --------- --------- 417,372 458,180 478,080 --------- --------- --------- Costs and expenses: Cost of gaming equipment and systems 61,684 69,721 75,508 Cost of wall machines and amusement games 54,241 54,035 43,301 Cost of route operations 114,645 137,692 161,062 Cost of casino operations 25,930 27,011 27,933 Selling, general and administrative 86,318 104,104 105,155 Research and development costs 15,778 17,190 15,318 Depreciation and amortization 22,838 23,104 26,788 Unusual items (325) -- 2,164 --------- --------- --------- 381,109 432,857 457,229 --------- --------- --------- Operating income 36,263 25,323 20,851 Other income (expense): Interest income 813 549 465 Interest expense (28,600) (31,385) (34,119) Rainbow royalty (587) -- -- Rainbow royalty buyout (19,000) -- -- Minority interest (2,002) (2,053) (2,155) Other, net 1,025 (431) 924 --------- --------- --------- Loss before income taxes (12,088) (7,997) (14,034) Income tax provision (3,185) (830) (1,001) --------- --------- --------- Net loss before extraordinary item (15,273) (8,827) (15,035) Extraordinary loss, without tax benefit (42,033) -- -- --------- --------- --------- Net loss (57,306) (8,827) (15,035) Special Stock dividends (3,551) (1,697) -- Premium on repurchase/redemption of Series B Special Stock (16,553) -- -- --------- --------- --------- Net loss applicable to common shares $ (77,410) $ (10,524) $ (15,035) ========= ========= ========= Basic and diluted loss per share: Loss before extraordinary item $ (3.87) $ (1.09) $ (1.47) Extraordinary loss (4.60) -- -- --------- --------- --------- Net loss $ (8.47) $ (1.09) $ (1.47) ========= ========= ========= Basic and diluted weighted average common shares outstanding 9,142 9,665 10,221 ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 58 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (In 000's)
Total Accumulated Stock- Common Stock Additional Other holders' ----------------- Series E Treasury Paid-in Comprehensive Accum. Equity Shares Dollars Special Stock Stock Capital Income Deficit (Deficiency) ------ ------- ------------- ----- ------- ------ ------- ----------- Balances at June 30, 1997 31,852 $3,185 $12,368 $-- $138,590 $(11,719) $(88,869) $53,555 Net loss -- -- -- -- -- -- (57,306) (57,306) Shares issued upon exercise of options 250 25 -- -- 830 -- -- 855 Special Stock dividends -- -- 1,479 -- -- -- (3,551) (2,072) Conversion of Series E Special Stock to common stock 20 2 (115) -- 113 -- -- -- Special Stock redemption premium -- -- -- -- (16,553) -- -- (16,553) Foreign currency translation adjustment -- -- -- -- -- (2,227) -- (2,227) ------- ------- -------- ----- --------- -------- --------- -------- Balances at June 30, 1998 32,122 3,212 13,732 -- 122,980 (13,946) (149,726) (23,748) Net loss -- -- -- -- -- -- (8,827) (8,827) 1-for-3.5 reverse common stock split (22,916) (2,291) -- -- 2,291 -- -- -- Shares issued upon exercise of options and warrants 585 58 -- -- 4,720 -- -- 4,778 Special Stock dividends -- -- 1,648 -- -- -- (1,697) (49) Repurchases of common stock for treasury -- -- -- (522) -- -- -- (522) Foreign currency translation adjustment -- -- -- -- -- (2,040) -- (2,040) ------- ------- -------- ----- --------- -------- --------- -------- Balances at June 30, 1999 9,791 979 15,380 (522) 129,991 (15,986) (160,250) (30,408) ------- ------- -------- ----- --------- -------- --------- -------- Net loss -- -- -- -- -- -- (15,035) (15,035) Treasure shares issued upon exercise of options -- -- -- 14 (4) -- -- 10 Issuance of Special Stock -- -- 442 -- -- -- -- 442 Shares issued upon conversion of Special Stock 544 55 (11,198) -- 11,143 -- -- -- Foreign currency translation adjustment -- -- -- -- -- (5,804) -- (5,804) ------- ------- -------- ----- --------- -------- --------- -------- Balances at June 30, 2000 10,335 $ 1,034 $ 4,624 $(508) $ 141,130 $(21,790) $(175,285) $(50,795) ======= ======= ======== ===== ========= ======== ========= ========
See accompanying notes to consolidated financial statements. F-5 59 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's)
Years Ended June 30, -------------------- 1998 1999 2000 --------- -------- -------- Cash flows from operating activities: Net loss $ (57,306) $ (8,827) $(15,035) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 22,838 23,104 26,788 Amortization of debt discounts 44 52 52 Extraordinary item 42,033 -- -- Write down of other assets 2,329 828 411 (Gain) loss on sale of assets 133 225 (4,158) Provision for losses on (recovery of) receivables (7,194) 3,174 7,927 Other (51) (1,171) 351 Change in operating assets and liabilities, net of effects of businesses acquired: Accounts and notes receivable 1,946 (1,553) 130 Inventories (9,221) (13,649) (3,445) Other current assets (3,012) (429) (1,911) Accounts payable (3,793) 6,940 (6,870) Accrued liabilities 2,594 (139) (7,199) --------- -------- -------- Net cash provided by (used in) operating activities (8,660) 8,555 (2,959) --------- -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (15,541) (11,755) (13,012) Proceeds from disposal of assets 55 356 4,316 Proceeds from sale/leaseback transaction -- 5,240 3,169 Additions to other long-term assets (9,633) (5,943) (4,305) --------- -------- -------- Net cash used in investing activities (25,119) (12,102) (9,832) --------- -------- -------- Cash flows from financing activities: Conversion/refinancing fees and expenses (32,752) -- -- Capitalized debt issuance costs (11,456) -- -- Proceeds from long-term debt 303,734 -- -- Reduction of long-term debt (179,747) (5,089) (6,467) Net change in credit lines 25,398 (2,077) 34,661 Repurchase/redemption of Series B Special Stock (77,568) -- -- Purchase of common stock for treasury -- (522) -- Proceeds from exercise of stock options and warrants 855 4,778 10 --------- -------- -------- Net cash provided by (used in) financing activities 28,464 (2,910) 28,204 --------- -------- -------- Effect of exchange rate changes on cash (122) (100) (299) --------- -------- -------- Cash and cash equivalents: Increase (decrease) for year (5,437) (6,557) 15,114 Balance, beginning of year 28,924 23,487 16,930 --------- -------- -------- Balance, end of year $ 23,487 $ 16,930 $ 32,044 ========= ======== ========
See accompanying notes to consolidated financial statements. F-6 60 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998, 1999 AND 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS Description of business Alliance Gaming Corporation ("Alliance" or the "Company"), a Nevada Corporation, is a diversified, worldwide gaming company that (i) designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, (ii) owns and manages a significant installed base of gaming machines, (iii) owns and operates two regional casinos and (iv) in Germany, designs, manufactures and distributes wall-mounted gaming machines and distributes third-party manufactured amusement games. Principles of consolidation The accompanying consolidated financial statements include the accounts of Alliance Gaming Corporation, and its wholly-owned and partially owned, controlled subsidiaries. In the case of Video Services, Inc. ("VSI"), the Company owns 100% of the voting stock. The Company is entitled to receive 71% of dividends declared by VSI, if any, at such time that dividends are declared. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year financial statements to conform with the current year presentation. Cash and cash equivalents Cash equivalents consist of highly liquid debt instruments purchased with an original maturity of three months or less at the date of purchase and are carried at cost, which approximates market value. Cash and cash equivalents also includes $15.4 million and $22.0 million at June 30, 1999 and 2000 utilized in Casino and Route Operations which is held in vaults, cages or change banks. The Company maintains a restricted cash account to ensure availability of funds to pay progressive jackpot liabilities which at June 30, 2000 totaled approximately $1.3 million. Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead. Inventories, net of reserves, consist of the following:
1999 2000 ---- ---- (In 000's) Raw materials $16,676 $14,143 Work-in-process 2,057 948 Finished goods 27,405 16,928 ------ ------ Total inventories $46,138 $32,019 ======= =======
Property, plant and equipment and leased gaming equipment Property, plant and equipment are stated at cost and depreciated over the estimated useful lives or lease terms, if less, using the straight line method as follows: buildings and improvements, 30-50 years; gaming equipment, 3-7 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements, 5-20 years. Leased gaming equipment is stated at cost and depreciated over estimated useful lives ranging from 3-4 years. Significant replacements and improvements are capitalized; other maintenance and repairs are expensed. The cost and accumulated depreciation of assets retired or otherwise disposed of are eliminated from the accounts and any resulting gain or loss is credited or charged to income as appropriate. F-7 61 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Property, plant and equipment consists of the following:
1999 2000 ---- ---- (In 000's) Land and land improvements $21,195 $18,989 Buildings and leasehold improvements 31,537 24,940 Gaming equipment 47,751 78,487 Furniture, fixtures and equipment 25,362 14,435 Less accumulated depreciation and amortization (51,686) (60,028) ------- ------- Total property, plant and equipment, net $74,159 $76,823 ======= =======
Excess of costs over net assets of acquired businesses The excess of the cost over the fair value of net assets of acquired businesses is generally amortized on the straight-line method over a period of 40 years, and primarily results from the acquisition of Bally Gaming International, Inc. in 1996. Subsequent to an acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of such an intangible asset may warrant revision or that the remaining balance may not be recoverable. When factors indicate that an impairment evaluation is required, the Company uses estimates of future undiscounted cash flows in determining if the asset value is recoverable. Intangible assets Intangible assets consist primarily of costs associated with the acquisition of location leases which are capitalized and amortized over the expected life of the leases, ranging from one to 17 years, with an average life of approximately 6 years, and deferred issuance costs for financings which are amortized over the life of the related financing. Accrued liabilities Accrued liabilities consists of the following:
1999 2000 ---- ---- (In 000's) Payroll and related costs $ 11,887 $8,966 Interest 8,352 7,111 Professional and consulting fees 2,476 1,399 Sales, use and income taxes 4,098 3,527 Deferred revenues 2,194 4,709 Other 10,189 6,611 ------ ----- Total accrued liabilities $39,196 $32,323 ======= =======
Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition The Company sells gaming equipment and systems on normal credit terms (90 days or less), or over terms of generally up to 36 months or more or through payments from net winnings of the machines until the purchase price is paid. Revenue from sales of gaming machines and amusement games is normally F-8 62 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS recognized at the time products are shipped and title has passed to the customer. Revenue from sales of software included in computerized monitoring systems is recognized at the time the system is accepted by the customer, which normally coincides with installation of the equipment. Revenue from sales of hardware included in computerized monitoring systems is recognized at the time the product is shipped. The Company's Bally Gaming and Systems business unit earns revenues from recurring revenue sources which consist of the operations of the multi-site linked progressive jackpot systems, the operation of gaming machines at customer locations, exclusive of route operations, the revenues from gaming machines owned by the Company and placed in a casino on a daily lease or rental basis, and revenues from computer monitoring system maintenance and support services. Revenue is normally recognized based on the Company's share of coins wagered, on its share of net winnings, or on the lease or rental rate. Revenues from computer monitoring system maintenance and support services are recognized monthly over the life of the respective maintenance contracts. In accordance with industry practice, the Company recognizes gaming revenues as the net win from gaming machine operations, which is the difference between coins and currency deposited into the machines and payments to customers and, for other games, the difference between gaming wins and losses. The Company recognizes total net win from gaming machines as revenues for route operations which operate under revenue-sharing arrangements and revenue-sharing payments as a cost of route operations. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Unusual items The Company separately discloses certain income and expense items that are unusual or infrequently occurring. Generally such items are netted together and shown as a separate component of Operating Income (loss); items reflected elsewhere in the consolidated statements of operations are separately identified below. During the year ended June 30, 2000, the Company recorded the following unusual items: - Restructuring and related charges totaling $8.1 million. The restructuring and related costs were incurred pursuant to a plan adopted by the Company for staff reductions at the Bally Gaming and Systems, Wall Machine and Amusement Games, and at its corporate office. Included in the restructuring costs described above is a $1.9 million charge for a valuation reserve for certain inventory for the Australian market, which is included in the cost of gaming equipment and systems in the accompanying consolidated statement of operations. - Gains from the sale of certain gaming management and development rights totaling $4.0 million. The Company recorded no unusual items during the year ended June 30, 1999. During the year ended June 30, 1998, the Company recorded the following unusual items: - As a result of settling a dispute over the exclusive use of certain technologies and changes in gaming regulations, the Company evaluated the cash flow of certain of its technology assets, in accordance with the provisions of the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," and determined certain items met the definition of having become impaired. During the year ended June 30, 1998 the Company recorded write-downs totaling $2.8 million for these items. - The Company accrued $0.7 million for the present value of contractual payments due to a former member of the board of directors who was not re-elected to the board at the December 1997 annual shareholders meeting. - The Company accrued $0.6 million as restructuring charges for Bally Gaming and Systems. - The Company recorded a $1.6 million charge for final settlement of litigation related to the acquisition of BGII. - The Company settled a dispute with Alpha Hospitality and General Electric Credit Corporation concerning certain customer notes receivable on which the Company had certain recourse obligations. The Company contributed $2.5 million to the final settlement with the holder of the notes, and reversed $6.0 million of reserves previously established for these recourse obligations. F-9 63 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition, as part of the settlement the Company became the sole owner of approximately 566,000 shares of Alpha Hospitality common stock, all of which has subsequently been sold. Foreign currency translation The functional currency of the Company's foreign subsidiaries is their local currency. Assets and liabilities of foreign operations are translated into U.S. dollars at the rate of exchange at the end of the period, and the income and expense accounts are translated at the average rate of exchange for the period. Translation adjustments are reflected as a separate component of stockholders' deficiency. Gains and losses on foreign currency transactions are included in the accompanying consolidated statements of operations. Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Taxes on income of the Company's foreign subsidiaries are provided at the tax rates applicable to the tax jurisdictions in which they are located. Loss per share of common stock In February 1997, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS No. 128"), which supersedes APB Opinion No. 15. This statement replaces primary EPS with basic EPS, and generally requires dual presentation of basic and diluted EPS. Under FAS No. 128, basic and diluted earnings per share are computed based on the weighted average number of shares of Common Stock outstanding. The following computation of basic and diluted loss per share from continuing operations, extraordinary loss and loss applicable to common shares is as follows:
Fiscal Years ended June 30, ----------------------------------------- 1998 1999 2000 --------- --------- --------- (In 000's except per share amounts) Loss before extraordinary item $ (15,273) $ (8,827) $ (15,035) Extraordinary loss (42,033) -- -- --------- --------- --------- Net Loss (57,306) (8,827) (15,035) Special Stock dividends 3,551 1,697 -- Premium on repurchase/redemption of Series B Special Stock 16,553 -- -- --------- --------- --------- Loss applicable to common shares $ (77,410) $ (10,524) $ (15,035) ========= ========= ========= Weighted average common shares outstanding 9,142 9,665 10,221 Effect of dilutive securities -- -- -- --------- --------- --------- Weighted average common and dilutive shares outstanding 9,142 9,665 10,221 ========= ========= ========= Loss per diluted share: Loss before extraordinary item $ (3.87) $ (1.09) $ (1.47) Extraordinary item (4.60) -- -- --------- --------- --------- BASIC AND DILUTED EPS $ (8.47) $ (1.09) $ (1.47) ========= ========= =========
F-10 64 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following securities were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the periods presented:
Fiscal Years ended June 30, --------------------------------- 1998 1999 2000 ------- ------- ------- (in 000's) Stock options 1,553 1,483 1,623 Warrants 2,891 2,294 929 Series E Special stock 667 747 225 ------- ------- ------- 5,111 4,524 2,777 ======= ======= ======= Adjusted for application of the treasury stock method 579 -- -- ======= ======= =======
Fair value of financial instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts at June 30, 1999 and 2000 for the Company's financial instruments approximate fair value. 2. RECEIVABLES The Gaming Equipment and Systems and Wall Machines and Amusement Games business units grant customers payment terms under contracts of sale. These contracts are generally for terms of one to three years, with interest at prevailing rates, and are generally collateralized by the related equipment sold, although the value of such equipment, if repossessed, may be less than the receivable balance outstanding. See "Concentration of Credit Risk". The Company's Nevada route operations from time to time makes loans to location operators for build-outs, tenant improvements and initial operating expenses, which are generally secured by the personal guarantees of the operators and the locations' assets. The majority of the loans bear interest rates between 8% to 10.75% and are expected to be repaid over a period of time not to exceed the life of the revenue sharing arrangement and have due dates ranging from September 2000 to August 2009. The following table represents, at June 30, 2000, scheduled collections of accounts and notes receivable (net of allowances for doubtful accounts) by fiscal year:
Years ending June 30, - -------------------------------------------------------------------------------------------------------------- (In 000's) 2001 2002 2003 2004 2005 Thereafter Total - ------- ----------- ----------- ----------- ----------- ----------- ----------- $82,444 $ 2,445 $ 963 $ 350 $ 285 $ -- $ 86,487 ======= =========== =========== =========== =========== =========== ===========
3. DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION Long-term debt and lines of credit at June 30, 1999 and 2000 consisted of the following:
1999 2000 -------- -------- (In 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount of $702 and $649 149,298 $149,351 Term loan facilities: Tranche B Term Loan 72,380 70,641 Tranche C Term Loan 38,744 37,776 Delayed Draw Term Facility 24,372 23,789 Revolving credit facility 32,200 62,360 Other, secured by related equipment 1,712 1,142 -------- -------- 318,706 345,059 Less current maturities 1,927 1,036 -------- -------- Long-term debt, less current maturities $316,779 $344,023 ======== ========
F-11 65 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In August 1997 the Company effected a series of related transactions (the "Refinancing"). The Refinancing consisted of the private placement of $150.0 million of Senior Subordinated Notes and the closing of $230.0 million of bank financing as later amended. The bank financing provides for (i) term loans in the aggregate amount of up to $140.0 million, comprised of a $75.0 million tranche with a 7-year term (the "Tranche B Term Loan"), a $40.0 million tranche with an 8-year term (the "Tranche C Term Loan"), and a $25.0 million tranche with a 7-year term (the "Delayed Draw Term Facility" and together with the Tranche B Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a $90.0 million revolving credit facility (later amended to $80.0 million) with a 6-year term. Each of these credit facilities is a variable rate borrowing in accordance with a credit grid. The interest rates at the highest level of the credit grid and maturity dates are as follows:
Initial Maturity Rate Date ---- ---- Tranche B Term Loan LIBOR + 4.25% January 31, 2005 Tranche C Term Loan LIBOR + 4.50% July 31, 2005 Delayed Draw Term Facility LIBOR + 4.25% January 31, 2005 Revolving Credit Facility LIBOR + 3.75% July 31, 2003
The Revolving Credit Facility also allows for German Deutschemark borrowings at the Eurodeutschemark rate plus 3.75% (or 8.34% at June 30, 2000). At June 30, 2000, borrowings under the $80.0 million Revolving Credit facility totaled $62.4 million, of which $22.4 million were German Deutschemark borrowings. Based on the terms of the revolving credit facility, the Company would have been able to borrow an additional $4.6 million as of June 30, 2000. The borrowing base for the revolving credit facility includes eligible receivables and inventory (as defined). The bank credit facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity which holds the Company's interest in its Louisiana operations and other non-material subsidiaries (as defined), and secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and it and the indenture have other significant covenants that, among other things, restrict the ability of the Company and certain of its subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of the Company's subsidiaries, engage in mergers or acquisitions, or engage in certain transactions with subsidiaries and affiliates, and that otherwise restrict corporate activities. In the quarter ended March 31, 2000, the Company did not meet certain covenants in the credit agreement. The Company and the banks have amended the current and future financial maintenance covenants in the bank credit agreement effective March 31, 2000 such that the Company is in compliance with such covenants. As of June 30, 2000 the Company is in compliance with these covenants. The Company is also in compliance with the operational covenants contained in the indenture for the Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are general unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt (as defined) of the Company, including indebtedness under the bank facility. The Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several senior subordinated basis by all existing and future domestic Restricted Subsidiaries of the Company, subject to certain exceptions including the partially-owned entities through which its Mississippi casino and Louisiana route operations are conducted. The Subsidiary Guarantees are general unsecured obligations of the Guarantors, ranking subordinate in right of payment to all Senior Debt of the Guarantors. The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Senior Subordinated Notes were issued. The Indenture for the Company's Senior Subordinated Notes contains various covenants, including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Senior Subordinated F-12 66 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes may not be redeemed for the first five years. Upon the occurrence of a Change of Control (as defined), the holders of the Senior Subordinated Notes will have the right to require the Company to purchase their notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. As a result of the Refinancing described above, in the fiscal year ended June 30, 1998 the Company recorded an extraordinary loss of $42.0 million consisting of the $27.7 million premium paid to repurchase the Company's 12-7/8% Senior Secured Notes, the payment of related transaction fees and expenses (including $2.0 million paid to related parties pursuant to employment agreements), and the charge-off of the unamortized debt discount and deferred financing fees. There was no tax benefit recognized for the extraordinary item as a valuation allowance was recorded to fully reserve the net operating losses created. Additionally, in the fiscal year ended June 30, 1998, the Company also recorded a $19.0 million charge for the cost of the Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6 million charge to equity and a corresponding increase in the net loss applicable to common shares for the difference between the carrying value and the liquidation value of the Series B Special Stock, all of which was redeemed on September 8, 1997 at the liquidation price of $100 per share, plus accrued dividends. Maturities of long-term debt, for each of the five fiscal years ending subsequent to June 30, 2000 are as follows:
Years endin June 30, ------------------------------------------------------------------------------------------------- (In 000's) 2001 2002 2003 2004 2005 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- $1,036 $1,228 $75,657 $55,287 $57,856 $153,995 $345,059 ====== ====== ======= ======= ======= ======== ========
4. STOCKHOLDERS' EQUITY, OPTIONS, WARRANTS AND RIGHTS Special Stock The Company's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of special stock ("Special Stock"). To date, there have been four series of Special Stock authorized for issuance: the Initial Series, the Series B, the Series E and the Series F. Special Stock consists of non-voting stock where no holder of the Special Stock shall be entitled to vote at any meeting of stockholders or otherwise, except as may be specifically provided by law or as approved by the Board of Directors in certain limited circumstances at the time of the stock issuance. The Special Stock may be issued from time to time in one or more series, each series having such designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions as shall be stated and expressed in the resolution providing for the issuance of Special Stock or any series thereof adopted by the Board of Directors. In June 1996, the Company completed an offering of 200,000 shares of its 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B (the "Series B Special Stock"). The Series B Special Stock was also issued as part of the consideration in the acquisition of Bally Gaming International, Inc. As discussed in Note 3, on September 8, 1997 the Company redeemed all of the outstanding shares of Series B Special Stock at their liquidation price of $100 per share, plus accrued dividends. The Company recorded non-cash dividends in the form of additional shares of Series B Special Stock totaling $2.0 million for fiscal year ended June 30, 1998. In June 1996, the Company issued 113,160 shares of Series E Special Stock to certain holders of the Company's 7-1/2% Convertible Subordinated Debentures who elected to receive such stock in lieu of receiving common stock. The holders of shares of Series E Special Stock have no voting rights except as required by law. Each share of Series E Special Stock accrued non-cash cumulative dividends until July 7, 1999 at an annual rate of 11-1/2%, at which point the dividends ceased on July 1, 1999, the total shares of Series E Special Stock outstanding was 158,224, convertible into approximately 769,000 shares of common stock. The Series E Special Stock is convertible into common stock at a conversion price of $20.58 per share (equivalent to a conversion rate of approximately 4.859 shares of common stock per share of Series E Special Stock), subject to adjustment under certain circumstances, and has a $100 liquidation preference per F-13 67 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS share. During the fiscal year ended June 30, 2000, approximately 112,000 shares of Series E Special Stock were converted into approximately 544,000 shares of common stock. Stock Option Plans In 1984, the Company created an Employee Stock Option Plan (the "1984 Plan") that provides for the issuance of up to 571,000 shares of common stock to Company employees and directors. Generally, options are granted at the fair market value of the Company's Common Stock at the date of the grant and are exercisable over ten years. In 1992, the Company created the 1991 Long Term Incentive Plan (the "1991 Plan") that, as amended, provides for the issuance of up to 857,000 shares of common stock to Company employees and directors. Generally, options are granted at the fair market value of the Company's Common Stock at the date of the grant and are exercisable over five to ten years. In April 1997 the Company's shareholders approved the 1996 Long-Term Incentive Plan (the "1996 Plan") which provides for the issuance of up to 857,000 shares of common stock to Company employees, directors and designated paid consultants. Generally, options are granted at the fair value of the Company's common stock at the date of grant and are exercisable over five to ten years. On August 29, 1996, the Board of Directors repriced the exercise price of previously issued, unexercised options for substantially all current employees and directors to $12.0312 per share which was the closing price of the Company's common stock on the closing date of the BGII acquisition, June 18, 1996. The closing price of the Company's common stock on August 29, 1996 was $8.75. Transactions involving stock options are summarized as follows:
Options Outstanding ------------------- Weighted-Average Shares Exercise Price ------ -------------- Balance, June 30, 1997 1,318,947 $ 13.44 - ---------------------- Granted 419,115 15.30 Exercised (71,453) 13.30 Canceled (114,095) 24.33 ---------- ---------- Balance, June 30, 1998 1,552,514 13.20 - ---------------------- Granted 228,914 7.67 Exercised (13,596) 15.76 Canceled (284,944) 12.30 ---------- ---------- Balance, June 30, 1999 1,482,888 12.50 - ---------------------- Granted 486,978 2.25 Exercised (2,333) 2.25 Canceled (340,016) 2.69 ---------- ---------- Balance, June 30, 2000 1,627,517 $ 10.03 - ---------------------- ========== ========== Exercisable at June 30, 2000 1,440,468 $ 10.08 ========== ==========
F-14 68 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At June 30, 2000, the range of exercise prices for options outstanding was $2.25 to $22.31. The weighted average remaining contractual life, by range of exercise price, for options outstanding and exercisable at June 30, 2000 is as follows:
Options Outstanding Options Exercisable ------------------------------------- ------------------- Weighted-Avg. Weighted-Avg. Range of Remaining Outstanding Remaining Outstanding Exercise Prices Contractual Life Shares Contractual Life Shares --------------- ---------------- ------ ---------------- ------ $2.25 - $4.00 9.60 365,000 9.60 358,333 $4.01 - $5.00 3.87 24,167 3.87 15,334 $5.01 - $10.00 5.76 230,852 4.33 125,930 $10.01 - $15.00 2.43 845,030 2.45 804,479 over $15.01 1.37 162,468 1.13 136,392 -------- -------- All 4.42 1,627,517 4.28 1,440,468 ========= =========
The Company accounts for its stock-based employee compensation awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price on date of grant, no compensation expense is recognized. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, "Accounting for Stock Based Compensation," the Company's net loss applicable to common shares would have increased from a loss of $77.4 million (or $8.47 per share) to $79.3 million (or $8.67 per share) on a pro forma basis for the year ended June 30, 1998, from a loss of $10.5 million (or $1.09 per share) to $12.4 million (or $1.29 per share) on a pro forma basis for the year ended June 30, 1999 and from a loss of $15.0 million (or $1.47 per share) to $17.8 million (or $1.75 per share) on a pro forma basis for the year ended June 30, 2000. The pro forma net loss reflects only options granted in 1998, 1999, and 2000. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period, generally three years, and compensation cost for options granted prior to July 1, 1995 is not considered. The per share weighted-average fair value of stock options granted during 1998, 1999 and 2000 was $1.71, $2.74 and $1.55 respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1998, 1999 and 2000: expected dividend yield of 0%, risk free interest rates ranging from 3.9% to 6.5%, a volatility factor of .69, .62, and .74 for 1998, 1999 and 2000, respectively, and expected lives varying from 3 to 10 years. Warrants Upon closing of a private placement of debt and an equity investment by Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") on September 21, 1993, the Company issued warrants to Kirkland to purchase up to 785,714 shares of Common Stock at $5.25 per share, however the warrants became exercisable only after the market price of the Common Stock reached $38.50, $45.50 and $52.50. Under the same terms, the Company issued warrants to purchase 357,143 and 8,571 shares of Common Stock to Gaming Systems Advisors, L.P. ("GSA") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"), respectively. All of these warrants expired in fiscal year 2000. The Company also issued warrants to purchase 142,857 and 71,429 shares of Common Stock at $28.875 per share to the initial purchasers of the private placement debt; Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Oppenheimer & Co., Inc. ("Oppenheimer"), respectively, each of which expired on September 21, 1999. During fiscal year 1996, in connection with the commencement of employment with the Company, the then Board Chairman and then Vice-Chairman were each granted warrants to purchase 71,429 shares of common stock on the same terms as the Kirkland warrants described above except that such warrants expire on September 21, 2000. At the completion of the BGII acquisition in fiscal year 1996, GSA was issued an additional 714,286 warrants on the same terms as the original warrants issued to Kirkland described above, except with an F-15 69 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS expiration date of June 18, 2002. During the financing stage of the BGII acquisition, Cerberus Partners L.P. and certain affiliates of Canyon Partners, Inc. were issued warrants to purchase 71,429 shares of Common Stock at $17.50 per share which expire on August 31, 2002. None of the warrants described above were exercisable at June 30, 2000. Share Repurchase Plan In January 1999 the Company's Board of Directors approved a share repurchase plan for up to 1.18 million shares of its Common Stock. Under the plan, subject to price and market conditions, purchases of shares were made from time to time during calendar 1999 in the open market or in privately negotiated transactions using available cash financing. As of June 30, 1999, the Company had repurchased 85,300 shares of common stock at a cost of $522,500 and no additional shares have been purchased since that time. The Company has issued 2,333 of the acquired common shares to satisfy obligations pursuant to the exercise of stock options under the Company's stock option plan. At June 30, 2000, shares of the Company's Common Stock were reserved for future issuance as follows:
Shares underlying stock options issued or issuable under its stock option plans 1,623,000 Shares underlying all warrants issued 929,000 Shares underlying Series E Special Stock issued 225,000 --------- Total 2,777,000 =========
Reverse Stock Split On January 14, 1999 the Company's Board of Directors announced a one-for-three-and-one-half reverse stock split of its Common Stock effective February 1, 1999. The effects of the reverse split were to reduce the authorized number of common shares from 175.0 million to 50.0 million and to decrease the number of shares of Common Stock then outstanding from 34.3 million to 9.8 million. In connection with the reverse split, the share number, exercise price and the trigger prices, as applicable, for the Company's stock options and warrants were proportionately adjusted. In lieu of fractional shares resulting from the reverse split, stockholders received a cash payment from the sale of the aggregate fractional shares on the open market. The reverse split also impacted the conversion ratio on the Company's Series E Special Stock. Each share of Series E Special Stock is now convertible into 4.859 shares of Common Stock instead of 17.007 shares. All share and per share data included in these financial statements have been restated to reflect the reverse split. Stockholder Rights Plan In February 1998, the Company's Board of Directors adopted a Stockholder Rights Plan ("Plan"). The Plan is designed to preserve the long-term value of the shareholders' investment in the Company. Pursuant to the Plan, each shareholder received a distribution of one Right for each share of the Company's outstanding common stock of record on March 12, 1998. Each Right expires on March 12, 2008, and entitles the holder to purchase one one-hundredth (1/100) of a share of a Series F Special Stock for $87.50. Initially the Rights are represented by the Company's common stock certificates and are not exercisable. The Rights become exercisable only after a person or group acquires beneficial ownership of 10% or more of the Company's Common Stock (or 15% if the acquirer is an institutional investor) or publicly announces its intention to commence a tender offer that would result in that beneficial ownership level. Under certain circumstances involving a buyer's acquisition of 10% of the Company's Common Stock (or 15% in the case of an institutional investor), all Rights holders except the buyer will be entitled to purchase Common Stock at half price. If the Company is acquired through a merger, after such an acquisition, all Rights holders except the buyer will be entitled to purchase stock in the buyer at half price. The Company may redeem the rights at $0.0035 at any time before a buyer acquires 10% (or 15% in the case of an institutional investor) of the Company's Common Stock. F-16 70 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INCOME TAXES The components of the Company's income tax expense for the years ended June 30, 1998, 1999 and 2000 are as follows:
1998 1999 2000 ------- ------- ------- (In 000s) Current tax expense: U. S. Federal $ -- $ -- $ -- Foreign 2,743 64 280 State 568 510 527 ------- ------- ------- 3,311 574 807 ------- ------- ------- Deferred tax expense U. S. Federal -- -- -- Foreign (126) 256 194 State -- -- -- ------- ------- ------- Total provision for income taxes $ 3,185 $ 830 $ 1,001 ======= ======= =======
A reconciliation of the Company's income tax provision (benefit) as compared to the tax provision calculated by applying the statutory federal tax rate (35%) to the income (loss) before income taxes for the years ended June 30, 1998, 1999 and 2000 are as follows:
1998 1999 2000 -------- ------- ------- (In 000's) Computed expected income tax expense (benefit) at 35% $(18,942) $(2,799) $(4,911) Permanent differences (601) (1,677) (1,874) Change in valuation allowance 17,613 (591) 1,895 State income taxes, net of federal benefit 369 332 343 Net effect of German operations 754 1,958 -- Expired foreign tax credits 1,770 3,607 -- Other, net 2,222 -- 5,548 -------- ------- ------- $ 3,185 $ 830 $ 1,001 ======== ======= =======\
The major components of the deferred tax assets and liabilities as of June 30, 1999 and 2000 are presented below:
1999 2000 ------- ------- (In 000's) Deferred tax assets: Net operating loss carry forwards $17,668 $26,250 Foreign tax credit carry forwards 7,527 7,527 Inventory obsolescence reserves 3,307 2,946 Bad debt reserves 2,697 3,805 Accruals not currently deductible for tax purposes 3,373 3,430 Refinancing costs being amortized for tax purposes 10,683 8,582 Other 8,170 9,493 ------- ------- Total gross deferred tax assets 53,425 62,033 Less: Valuation allowance 44,443 49,859 ------- ------- Deferred tax assets $ 8,982 $12,174 ======= ======= Deferred tax liabilities: Property and equipment, due principally to depreciation differences $ 3,349 $ 6,629 Other 3,580 3,687 ------- ------- Total gross deferred tax liabilities (a) 6,929 10,316 ------- ------- Net deferred tax assets $ 2,053 $ 1,858 ======= =======
(a) Included in the other non-current liabilities in the accompanying consolidated balance sheets. F-17 71 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management has considered certain tax planning strategies as permitted by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Management has determined that tax benefits associated with recorded deferred tax assets, net of valuation allowance, are more likely than not realizable through future taxable income and future reversals of existing taxable temporary differences. At June 30, 2000, the Company had net operating loss carry forwards for federal income tax purposes of approximately $75 million which are available to offset future federal taxable income, if any, expiring in the years 2007 through 2020. In addition, approximately $2.0 million of the Company's net operating loss are not deductible until the year ended June 30, 2001 pursuant to Section 382 of the Internal Revenue Code. At June 30, 2000 the Company had foreign tax credit carry forwards of approximately $7.5 million and alternative minimum tax credit (AMT) carry forwards of approximately $1.3 million. Foreign tax credits have expiration dates ranging from 2001 to 2005. AMT credits are available to be carried forward indefinitely and may be utilized against regular U.S. corporate tax to the extent it does not exceed computed AMT calculations. 6. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the consolidated statements of cash flows. The Company recorded the following significant non-cash items for the years ended June 30, 1998, 1999 and 2000:
1998 1999 2000 ------- ------- ------- (In 000's) Reclassify inventory to property, plant and equipment and leased gaming equipment $ 4,132 $ 9,613 $16,174 Dividends for Series E and Series B Special Stock 3,551 1,697 442 Translation rate adjustment 2,105 1,940 5,505 Reclassify other assets to property, plant and equipment -- 444 242 Reclassify receivables to other assets 540 376 -- Deferred gain on sale/leaseback transaction -- 1,057 1,546 Reclassify excess costs over net assets of acquired business to property, plant and equipment -- -- 500 Conversion of Series E Stock to Common Stock -- -- 11,198
Payments for interest expense in fiscal years, 1998, 1999 and 2000 were approximately $19.9 million, $31.6 million and $34.0 million, respectively. Payments for income taxes, net of refunds received, in fiscal years 1998, 1999 and 2000 were approximately $7.3 million, $3.3 million and $(0.1) million, respectively. 7. COMMITMENTS AND CONTINGENCIES Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, or other sources are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The Company is obligated under several patent agreements to pay royalties ranging from approximately $25 to $107 per applicable game depending on the components in the gaming machines. Additionally, based on an amendment to the trademark licensing agreement between BGII and Bally Entertainment Corporation dated May 10, 1996, the Company is obligated to pay a royalty on new machines sold or leased after June 18, 1996 of $35 per machine with a minimum annual royalty payment of $1.0 million for the initial five-year term of the amended agreement, which is subject to annual renewals thereafter at the option of the Company. Royalty expense under this agreement for the years ended June 30, 1998, 1999 and 2000 was $1.0 million. Total royalty expense for the Company for the years ended June 30, 1998, 1999 and 2000 was $2.2 million, $1.9 million and $3.4 million, respectively. In addition, the Company has obtained the rights to certain game ideas and intellectual property that call for payment of royalties based on either fixed amounts or variable amounts based on game performance. The Company leases office space, equipment, warehouse and repair facilities, Route Operation locations, casino and other locations under non-cancelable operating leases. Certain Route Operation location leases F-18 72 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS provide only for contingent rentals based upon a percentage of gaming revenue and are cancelable at any time by either party. Future minimum rentals under non-cancelable operating leases at June 30, 2000 are:
Years ended June 30, ---------------------------------------------------------------------------------------- (In 000's) 2001 2002 2003 2004 2005 Thereafter Total -------- -------- -------- -------- -------- ---------- --------- Minimum rentals $ 26,528 $ 23,525 $ 20,141 $ 15,383 $ 12,777 $ 63,127 $ 161,481 Total sublease income (1,376) (1,379) (1,003) (970) (803) (1,802) (7,333) -------- -------- -------- -------- -------- -------- --------- Net minimum rentals $ 25,152 $ 22,146 $ 19,138 $ 14,413 $ 11,974 $ 61,325 $ 154,148 ======== ======== ======== ======== ======== ======== =========
Operating lease rental expense, including contingent lease rentals, for years ended June 30, 1998, 1999 and 2000 was as follows:
1998 1999 2000 --------- --------- --------- (In 000's) Minimum rentals $ 15,534 $ 17,147 $ 27,322 Contingent rentals 85,915 105,568 120,877 --------- --------- --------- 101,449 122,715 148,199 Sublease rental income (2,136) (1,574) (1,416) --------- --------- --------- $ 99,313 $ 121,141 $ 146,783 ========= ========= =========
The Company has entered into a series of sale lease-back transactions with a third party finance company. The transactions involve gaming devices and have a term of 48 months, with a fair value purchase option at the end of the term, and are being treated as operating leases. Proceeds from these sale lease-back transactions totaled $5.2 million and $3.2 million for the years ended June 30, 1999 and 2000. The Company has recorded deferred gains from these transactions totaling $1.1 million and $1.5 million for the years ended June 30, 1999 and 2000, respectively, which are being amortized straight-line over the term of the respective leases as a reduction in rental expense. Pursuant to the transactions consummated in March 1995, Rainbow Casino Corporation (RCC), the former owner of 55% of the Rainbow Casino, is now entitled to receive 10% of the net available cash flow after debt service and other items, as defined (which amount increases to 20% of such amount when revenues exceed $35.0 million but only on such incremental amount), for a period of 15 years. During fiscal 2000, Bally Wulff increased the amount of tax reserves by $0.5 million (to a total reserve of $0.8 million) as a result of developments in ongoing quadrennial audits of Wulff's tax returns for the years 1992 through 1995. The German tax authorities have proposed preliminary adjustments of $0.3 million, which has been accrued. The German tax authorities have not yet issued the final assessment from their quadrennial audits. LITIGATION On September 25, 1995, BGII was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated. The plaintiffs filed suit against BGII and approximately 45 other defendants. Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1.0 billion, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. The Company is also a party to various lawsuits relating to routine matters incidental to its business. Management does not believe that the outcome of such litigation, including the matters above, in the aggregate, will have a material adverse effect on the Company. F-19 73 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. CONCENTRATION OF CREDIT RISK The financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts and notes receivable. Each of the Company's business units conducts business in and the resulting receivables are concentrated in specific legalized gaming regions. The Company also distributes its products through third party distributors resulting in distributor receivables. At June 30, 2000 net accounts and notes receivable by region as a percentage of total net receivables are as follows:
Gaming Wall Machines Equipment and Amusement Route Casino and Systems Games Operations Operations Total ------------ ------------ ------------ ------------ ------------ Germany 0.4% 36.5% -% -% 36.9% Other international jurisdictions 30.5 0.2 -- -- 30.7 Nevada 9.9 -- 6.1 -- 16.0 Others individually less than 5% 16.4 -- -- -- 16.4 ------------ ------------ ------------ ------------ ------------ 57.2% 36.7% 6.1% -% 100.0% ============ ============ ============ ============ ============
Receivables from emerging market customers contain increased risk factors compared to receivables at the Bally Wulff entities or other traditional markets for Bally Gaming and Systems. 9. SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates in four business segments: (i) Gaming Equipment and Systems which designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, (ii) Wall Machines and Amusement Games designs, manufactures and distributes wall-mounted gaming machines and distributes third party manufactured amusement games, (iii) Route Operations (see Note 11) owns and manages a significant installed base of gaming machines, and (iv) Casino Operations which owns and operates two regional casinos. The tables below presents information as to the Company's revenues, operating income, identifiable assets, capital expenditures and depreciation and amortization by segment:
(In $000's) Years Ended June 30, ----------------------------------------- 1998 1999 2000 ---- ---- ---- Revenues: Gaming Equipment and Systems $109,597 $127,810 $135,180 Wall Machines and Amusement Games 98,611 90,834 68,952 Route Operations 148,507 175,854 202,480 Casino Operations 60,657 63,682 71,468 -------- ------- ------- Total revenues $417,372 $458,180 $478,080 ======== ======== ======== Intersegment revenues: Gaming Equipment and Systems $1,640 $ 751 $1,907 Wall Machines and Amusement Games 226 413 232 Route Operations - - - Casino Operations - - - --- -- -- Total intersegment revenues $1,866 $1,164 $2,139 ====== ====== ======
F-20 74
Years Ended June 30, ----------------------------------------- 1998 1999 2000 --------- --------- --------- Operating income (loss): Gaming Equipment and Systems $ 5,238 $ 5,779 $ 4,523 Wall Machines and Amusement Games 13,094 5,334 (2,193) Route Operations 16,432 14,586 15,162 Casino Operations 18,736 19,348 23,805 Corporate/other (17,237) (19,724) (20,446) --------- --------- --------- Total operating income $ 36,263 $ 25,323 $ 20,851 ========= ========= ========= Identifiable assets: Gaming Equipment and Systems $ 141,167 $ 153,183 $ 145,051 Wall Machines and Amusement Games 96,135 87,620 76,235 Route Operations 66,659 62,487 62,946 Casino Operations 43,980 44,592 48,043 Corporate/other 18,896 8,425 19,012 --------- --------- --------- Total identifiable assets $ 366,837 $ 356,307 $ 351,287 ========= ========= ========= Capital expenditures: Gaming Equipment and Systems $ 1,769 $ 2,587 $ 3,226 Wall Machines and Amusement Games 1,306 1,129 515 Route Operations 8,336 5,476 3,993 Casino Operations 3,980 2,414 5,112 Corporate/other 150 149 166 --------- --------- --------- Total capital expenditures $ 15,541 $ 11,755 $ 13,012 ========= ========= ========= Depreciation and amortization: Gaming Equipment and Systems $ 5,570 $ 4,020 $ 7,862 Wall Machines and Amusement Games 5,567 4,816 5,776 Route Operations 8,145 10,274 9,341 Casino Operations 2,045 2,324 2,149 Corporate/other 1,511 1,670 1,660 --------- --------- --------- Total depreciation and amortization $ 22,838 $ 23,104 $ 26,788 ========= ========= =========
The Company has operations based primarily in Germany and the United States. The German operation's customers are a diverse group of operators of wall machines and amusement games at arcades, hotels, restaurants and taverns, primarily in Germany. Gaming Equipment and Systems' customers are primarily casinos and gaming machine distributors in the United States and abroad. Receivables of the German operations and Gaming Equipment and Systems are generally collateralized by the related equipment. See "Concentration of Credit Risk". The table below presents information as to the Company's revenues, operating income, identifiable assets capital expenditures and depreciation and amortization by geographic region:
Years Ended June 30, ------------------------------------ 1998 1999 2000 -------- -------- -------- (In $000's) Revenues: United States $305,082 $350,339 $388,203 Germany 111,279 100,939 79,330 Other foreign 1,011 6,902 10,547 -------- -------- -------- Total revenues $417,372 $458,180 $478,080 ======== ======== ========
F-21 75 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1998 1999 2000 --------- --------- --------- Operating income (loss): United States $ 23,677 $ 22,329 $ 32,561 Germany 13,978 3,451 (4,994) Other foreign (1,392) (457) (6,716) --------- --------- --------- Total operating income $ 36,263 $ 25,323 $ 20,851 ========= ========= ========= Identifiable assets: United States $ 252,092 $ 248,470 $ 255,454 Germany 111,559 103,687 91,800 Other foreign 3,186 4,150 4,033 --------- --------- --------- Total identifiable assets $ 366,837 $ 356,307 $ 351,287 ========= ========= ========= Capital expenditures: United States $ 14,124 $ 10,314 $ 12,348 Germany 1,372 1,141 521 Other foreign 45 300 143 --------- --------- --------- Total capital expenditures $ 15,541 $ 11,755 $ 13,012 ========= ========= ========= Depreciation and amortization: United States $ 16,410 $ 17,437 $ 19,818 Germany 5,747 4,998 5,924 Other Foreign 681 669 1,046 --------- --------- --------- Total depreciation and amortization $ 22,838 $ 23,104 $ 26,788 ========= ========= =========
10. INTERIM FINANCIAL INFORMATION (UNAUDITED) Following is the unaudited quarterly results of the Company for the years ended June 30, 1999 and 2000. This information is not covered by the Independent Auditors' Report.
Quarter --------------------------------------------------------- First Second Third Fourth --------- --------- -------- -------- (In 000's, except per share data) 1999 ---- Revenues $ 98,771 $ 103,910 $ 125,733 $129,766 Operating income (loss) 6,310 (1,777) 9,678 11,112 Net income (loss) (2,276) (9,757) 1,191 2,015 Net income (loss) applicable to common shares (2,682) (10,175) 761 1,572 Income (loss) per diluted share $ (0.28) $ (1.04) $ 0.08 $ 0.16 2000 ---- Revenues $ 117,202 $ 114,487 $ 117,544 $128,847 Operating income 8,397 2,445 1,056 8,953 Net income (loss) applicable to common shares 445 (7,176) (9,090) 786 Income (loss) per diluted share $ 0.04 $ (0.70) $ (0.89) $ 0.08
F-22 76 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. SUBSEQUENT EVENTS In August 2000 the Company signed a definitive agreement with UC Acquisitions Company, LLC, an independent third-party gaming operator, for the sale of its Nevada-based route operations. The gross selling price, which is based on a multiple of cash flows for the 12 month period prior to closing, is estimated to be approximately $118 million, consisting of $6 million in preferred stock and $112 million is cash, which will be utilized to pay down certain lease obligations, pay transactional fees and expenses, with the remainder (estimated to be approximately $95 million) to be used to reduce the Term Loans. This transaction is contingent on the buyer obtaining suitable financing and obtaining approvals from various regulatory bodies, a process which may take more than 12 months to complete. 12. CONSOLIDATING FINANCIAL STATEMENTS The following consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company's Senior Subordinated Notes which were issued in the Refinancing transaction completed in August 1997 (see note 3). The financial information presented includes Alliance Gaming Corporation (the "Parent") and its wholly-owned guaranteeing subsidiaries (together the "Parent and Guaranteeing Subsidiaries"), and the non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that holds the Company's German interests) (together the "Non-Guaranteeing Subsidiaries"). The notes to consolidating financial statements should be read in conjunction with these consolidating financial statements. F-23 77 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS June 30, 1999 (In 000's)
ASSETS Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries --------------- --------------- --------------- --------------- Current assets: Cash and cash equivalents $ 6,065 $ 10,865 $ -- $ 16,930 Accounts and notes receivable, net 46,423 50,917 (4,675) 92,665 Inventories, net 30,513 16,154 (529) 46,138 Other current assets 8,510 2,913 -- 11,423 --------------- --------------- --------------- --------------- Total current assets 91,511 80,849 (5,204) 167,156 --------------- --------------- --------------- --------------- Long-term notes receivable, net 99,961 1,797 (95,976) 5,782 Leased equipment, net 3,923 7,058 -- 10,981 Property, plant and equipment, net 41,880 32,279 -- 74,159 Excess of costs over net assets of acquired businesses, net 38,904 18,689 -- 57,593 Intangible assets, net 26,448 406 -- 26,854 Investments in subsidiaries 86,993 -- (86,993) -- Deferred tax assets 4,122 4,860 -- 8,982 Other assets, net 21,190 (12,197) (4,193) 4,800 --------------- --------------- --------------- --------------- $ 414,932 $ 133,741 $ (192,366) $ 356,307 =============== =============== =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 14,706 $ 2,666 $ -- $ 17,372 Accrued liabilities 26,771 13,746 (1,321) 39,196 Current maturities of long-term debt 6,175 3,299 (7,547) 1,927 --------------- --------------- --------------- --------------- Total current liabilities 47,652 19,711 (8,868) 58,495 --------------- --------------- --------------- --------------- Long term debt 388,220 24,379 (95,820) 316,779 Other liabilities 7,370 2,330 (242) 9,458 --------------- --------------- --------------- --------------- Total liabilities 443,242 46,420 (104,930) 384,732 --------------- --------------- --------------- --------------- Minority interest 1,983 -- -- 1,983 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 15,380 -- -- 15,380 Common Stock 979 17,832 (17,832) 979 Treasury stock (522) (522) Additional paid-in capital 129,991 68,700 (68,700) 129,991 Accumulated other comprehensive loss (15,845) (16,143) 16,002 (15,986) Retained earnings (accumulated deficit) (160,276) 16,932 (16,906) (160,250) --------------- --------------- --------------- --------------- Total stockholders' equity (deficiency) (30,293) 87,321 (87,436) (30,408) --------------- --------------- --------------- --------------- $ 414,932 $ 133,741 $ (192,366) $ 356,307 =============== =============== =============== ===============
See accompanying unaudited notes. F-24 78 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS June 30, 2000 (In 000's)
ASSETS Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Eliminations and Subsidiaries Subsidiaries Subsidiaries --------------- --------------- --------------- --------------- Current assets: Cash and cash equivalents $ 19,528 $ 12,516 $ -- $ 32,044 Short-term investments -- 2,000 -- 2,000 Accounts and notes receivable, net 44,889 41,603 (4,048) 82,444 Inventories, net 18,452 13,567 -- 32,019 Other current assets 8,831 2,367 -- 11,198 --------------- --------------- --------------- --------------- Total current assets 91,700 72,053 (4,048) 159,705 --------------- --------------- --------------- --------------- Long-term notes receivable, net 104,342 942 (101,241) 4,043 Leased equipment, net 9,618 7,341 -- 16,959 Property, plant and equipment, net 42,152 34,671 -- 76,823 Excess of costs over net assets of acquired businesses, net 37,845 17,149 -- 54,994 Intangible assets, net 21,567 283 -- 21,850 Investments in subsidiaries 70,933 -- (70,933) -- Deferred tax assets 9,288 2,886 -- 12,174 Other assets, net 30,137 (21,486) (3,912) 4,739 --------------- --------------- --------------- --------------- $ 417,582 $ 113,839 $ (180,134) $ 351,287 =============== =============== =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 8,232 $ 2,135 $ -- $ 10,367 Accrued liabilities 20,743 12,707 (1,127) 32,323 Current maturities of long-term debt 4,488 3,498 (6,950) 1,036 --------------- --------------- --------------- --------------- Total current liabilities 33,463 18,340 (8,077) 43,726 --------------- --------------- --------------- --------------- Long term debt 421,328 23,897 (101,202) 344,023 Other liabilities 12,225 879 (132) 12,972 --------------- --------------- --------------- --------------- Total liabilities 467,016 43,116 (109,411) 400,721 --------------- --------------- --------------- --------------- Minority interest 1,361 -- -- 1,361 Commitments and contingencies Stockholders' equity (deficiency): Series E Special Stock 4,624 -- -- 4,624 Common Stock 1,034 17,832 (17,832) 1,034 Treasury stock (508) (508) Additional paid-in capital 141,130 7,862 (7,862) 141,130 Accumulated other comprehensive loss (21,790) (21,810) 21,810 (21,790) Retained earnings (accumulated deficit) (175,285) 66,839 (66,839) (175,285) --------------- --------------- --------------- --------------- Total stockholders' equity (deficiency) (50,795) 70,723 (70,723) (50,795) --------------- --------------- --------------- --------------- $ 417,582 $ 113,839 $ (180,134) $ 351,287 =============== =============== =============== ===============
See accompanying unaudited notes. F-25 79 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Year ended June 30, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries --------------- --------------- --------------- --------------- Revenues: Gaming equipment and systems $ 104,141 $ 13,455 $ (7,999) $ 109,597 Wall machines and amusement games -- 98,759 (148) 98,611 Route operations 127,424 21,083 -- 148,507 Casino operations 13,426 47,231 -- 60,657 --------------- --------------- --------------- --------------- 244,991 180,528 (8,147) 417,372 --------------- --------------- --------------- --------------- Costs and expenses: Cost of gaming equipment and systems 60,154 9,555 (8,025) 61,684 Cost of wall machines and amusement games -- 54,389 (148) 54,241 Cost of route operations 101,052 13,593 -- 114,645 Cost of casino operations 8,278 17,652 -- 25,930 Selling, general and administrative 47,066 39,252 -- 86,318 Research and development 12,739 3,039 -- 15,778 Depreciation and amortization 14,181 8,657 -- 22,838 Unusual items (370) 45 -- (325) --------------- --------------- --------------- --------------- 243,100 146,182 (8,173) 381,109 --------------- --------------- --------------- --------------- Operating income 1,891 34,346 26 36,263 Earnings in consolidated subsidiaries 22,844 -- (22,844) -- Other income (expense): Interest income 1,339 418 (944) 813 Interest expense (27,581) (1,963) 944 (28,600) Rainbow royalty 4,884 (5,471) -- (587) Rainbow royalty buyout (19,000) -- -- (19,000) Minority interest (2,002) -- -- (2,002) Other, net 1,136 (111) -- 1,025 --------------- --------------- --------------- --------------- Income (loss) before income taxes (16,489) 27,219 (22,818) (12,088) Income tax (provision) benefit 1,190 (4,375) -- (3,185) --------------- --------------- --------------- --------------- Net income (loss) before extraordinary item (15,299) 22,844 (22,818) (15,273) Extraordinary loss, without tax benefit (42,033) -- -- (42,033) --------------- --------------- --------------- --------------- Net income (loss) (57,332) 22,844 (22,818) (57,306) Special Stock dividends (3,551) -- -- (3,551) Premium on repurchase of Series B Special Stock (16,553) -- -- (16,553) --------------- --------------- --------------- --------------- Net income (loss) applicable to common shares $ (77,436) $ 22,844 $ (22,818) $ (77,410) =============== =============== =============== ===============
See accompanying unaudited notes. F-26 80 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Year ended June 30, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries --------------- --------------- --------------- --------------- Revenues: Gaming equipment and systems $ 124,022 $ 12,416 $ (8,628) $ 127,810 Wall machines and amusement games -- 91,178 (344) 90,834 Route operations 154,171 21,683 -- 175,854 Casino operations 14,549 49,133 -- 63,682 --------------- --------------- --------------- --------------- 292,742 174,410 (8,972) 458,180 --------------- --------------- --------------- --------------- Costs and expenses: Cost of gaming equipment and systems 67,726 10,623 (8,628) 69,721 Cost of wall machines and amusement games -- 54,046 (11) 54,035 Cost of route operations 123,444 14,248 -- 137,692 Cost of casino operations 8,644 18,367 -- 27,011 Selling, general and administrative 63,032 41,405 (333) 104,104 Research and development 13,947 3,243 -- 17,190 Depreciation and amortization 14,996 8,108 -- 23,104 --------------- --------------- --------------- --------------- 291,789 150,040 (8,972) 432,857 --------------- --------------- --------------- --------------- Operating income 953 24,370 -- 25,323 Earnings in consolidated subsidiaries 14,875 -- (14,875) -- Other income (expense): Interest income 960 427 (838) 549 Interest expense (30,495) (1,728) 838 (31,385) Rainbow royalty 5,679 (5,679) -- -- Minority interest (2,053) -- -- (2,053) Other, net 221 (652) -- (431) --------------- --------------- --------------- --------------- Income (loss) before income taxes (9,860) 16,738 (14,875) (7,997) Income tax (provision) benefit 1,033 (1,863) -- (830) --------------- --------------- --------------- --------------- Net income (loss) (8,827) 14,875 (14,875) (8,827) Special Stock dividends (1,697) -- -- (1,697) --------------- --------------- --------------- --------------- Net income (loss) applicable to common shares $ (10,524) $ 14,875 $ (14,875) $ (10,524) =============== =============== =============== ===============
See accompanying unaudited notes. F-27 81 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Year ended June 30, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries --------------- --------------- --------------- --------------- Revenues: Gaming equipment and systems $ 132,261 $ 20,926 $ (18,007) 135,180 Wall machines and amusement games -- 69,122 (170) 68,952 Route operations 183,244 19,236 -- 202,480 Casino operations 17,715 53,753 -- 71,468 --------------- --------------- --------------- --------------- 333,220 163,037 (18,177) 478,080 --------------- --------------- --------------- --------------- Costs and expenses: Cost of gaming equipment and systems 74,445 19,070 (18,007) 75,508 Cost of wall machines and amusement games -- 43,301 -- 43,301 Cost of route operations 148,587 12,475 -- 161,062 Cost of casino operations 8,932 19,001 -- 27,933 Selling, general and administrative 64,115 41,210 (170) 105,155 Research and development 12,642 2,676 -- 15,318 Depreciation and amortization 17,942 8,846 -- 26,788 Unusual items, net (1,891) 4,055 -- 2,164 --------------- --------------- --------------- 324,772 150,634 (18,177) 457,229 --------------- --------------- --------------- Operating income 8,448 12,403 -- 20,851 Earnings in consolidated subsidiaries 2,402 -- (2,402) -- Other income (expense): Interest income 571 537 (643) 465 Interest expense (32,829) (1,933) 643 (34,119) Rainbow royalty 6,173 (6,173) -- -- Minority interest (2,155) -- -- (2,155) Other, net 1,406 (482) -- 924 --------------- --------------- --------------- --------------- Income (loss) before income taxes (15,984) 4,352 (2,402) (14,034) Income tax (provision) benefit 949 (1,950) -- (1,001) --------------- --------------- --------------- --------------- Net income (loss) applicable to common shares $ (15,035) $ 2,402 $ (2,402) $ (15,035) =============== =============== =============== ===============
See accompanying unaudited notes. F-28 82 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Year ended June 30, 1998 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries ------------ ------------ -------------- ------------- Cash flows from operating activities: Net income (loss) $ (57,332) $ 22,844 $ (22,818) $ (57,306) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 14,181 8,657 -- 22,838 Amortization of debt discounts 44 -- -- 44 Extraordinary item 42,033 -- -- 42,033 Write down of other assets 2,447 -- (118) 2,329 (Gain) loss on sale of assets 185 (52) -- 133 Provision for losses on (recovery of) receivables (8,278) 1,084 -- (7,194) Other (140) (3) 92 (51) Net change in operating assets and liabilities: Accounts and notes receivable (4,795) 3,318 3,423 1,946 Inventories (8,870) (200) (151) (9,221) Other current assets (1,100) (1,912) -- (3,012) Intercompany accounts (17,688) (430) 18,118 -- Accounts payable (2,563) (1,158) (72) (3,793) Accrued liabilities 6,150 (3,022) (534) 2,594 ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (35,726) 29,126 (2,060) (8,660) Cash flows from investing activities: Additions to property, plant and equipment (11,534) (4,007) -- (15,541) Proceeds from disposal of property, plant and equipment (88) 143 -- 55 Additions to long-term assets (9,263) (5,873) 5,503 (9,633) ------------ ------------ ------------ ------------ Net cash used in investing activities (20,885) (9,737) 5,503 (25,119) ------------ ------------ ------------ ------------ Cash flows from financing activities: Refinancing fees and expenses (32,752) -- -- (32,752) Capitalized debt issuance costs (11,456) -- -- (11,456) Proceeds from long-term debt 309,318 -- (5,584) 303,734 Reduction of long-term debt (179,348) (2,540) 2,141 (179,747) Net change in credit lines 22,738 2,660 -- 25,398 Redemption of Series B Special Stock (77,568) -- -- (77,568) Proceeds from exercise of stock options 855 -- -- 855 Dividends received (paid) 16,971 (16,971) -- -- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 48,758 (16,851) (3,443) 28,464 ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash -- (122) -- (122) Cash and cash equivalents: Increase (decrease) for period (7,853) 2,416 -- (5,437) Balance, beginning of period 16,462 12,462 -- 28,924 ------------ ------------ ------------ ------------ Balance, end of period $ 8,609 $ 14,878 $ -- $ 23,487 ============ ============ ============ ============
See accompanying unaudited notes. F-29 83 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Year ended June 30, 1999 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss (8,827) $ 14,875 $ (14,875) $ (8,827) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 14,996 8,108 -- 23,104 Amortization of debt discounts 52 -- -- 52 Write down of other assets 814 14 -- 828 (Gain) loss on sale of assets 246 (21) -- 225 Provision for losses on receivables 1,539 1,635 -- 3,174 Other (690) (580) 99 (1,171) Net change in operating assets and liabilities: Accounts and notes receivable 1,761 (1,002) (2,312) (1,553) Inventories (8,304) (5,345) -- (13,649) Other current assets (510) 81 -- (429) Intercompany accounts (20,947) 6,111 14,836 -- Accounts payable 7,331 (391) -- 6,940 Accrued liabilities (689) 873 (323) (139) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (13,228) 24,358 (2,575) 8,555 Cash flows from investing activities: Additions to property, plant and equipment (8,286) (3,469) -- (11,755) Proceeds from disposal of property, plant and equipment 279 77 -- 356 Proceeds from sale/leaseback transaction 5,240 -- -- 5,240 Additions to long-term assets (5,684) (5,034) 4,775 (5,943) ------------ ------------ ------------ ------------ Net cash used in investing activities (8,451) (8,426) 4,775 (12,102) ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt 4,775 -- (4,775) -- Reduction of long-term debt (4,350) (3,314) 2,575 (5,089) Net change in credit lines (9,800) 7,723 -- (2,077) Purchase of common stock for treasury (522) -- -- (522) Proceeds from exercise of stock options and warrants 4,778 -- -- 4,778 Dividends received (paid) 24,253 (24,253) -- -- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 19,134 (19,844) (2,200) (2,910) ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash 1 (101) -- (100) Cash and cash equivalents: Decrease for period (2,544) (4,013) -- (6,557) Balance, beginning of period 8,609 14,878 -- 23,487 ------------ ------------ ------------ ------------ Balance, end of period $ 6,065 $ 10,865 $ -- $ 16,930 ============ ============ ============ ============
See accompanying unaudited notes. F-30 84 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Year ended June 30, 2000 (In 000's)
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing and Subsidiaries Subsidiaries Eliminations Subsidiaries ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ (15,035) $ 2,402 $ (2,402) $ (15,035) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 17,942 8,846 -- 26,788 Amortization of debt discounts 52 -- -- 52 Write down of other assets 411 -- -- 411 (Gain) loss on sale of assets (4,152) (6) -- (4,158) Provision for losses on receivables 5,077 2,850 -- 7,927 Other 395 (154) 110 351 Net change in operating assets and liabilities: Accounts and notes receivable (8,935) 4,427 4,638 130 Inventories 992 (4,437) -- (3,445) Other current assets (335) (1,576) -- (1,911) Intercompany accounts 275 5,037 (5,312) -- Accounts payable (6,451) (419) -- (6,870) Accrued liabilities (6,961) (432) 194 (7,199) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (16,725) 16,538 (2,772) (2,959) Cash flows from investing activities: Additions to property, plant and equipment (6,883) (6,129) -- (13,012) Proceeds from disposal of assets 4,263 53 -- 4,316 Proceeds from sale/leaseback transaction 3,169 -- -- 3,169 Additions to long-term assets (4,305) -- -- (4,305) ------------ ------------ ------------ ------------ Net cash used in investing activities (3,756) (6,076) -- (9,832) ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt -- -- -- -- Reduction of long-term debt (5,939) (3,300) 2,772 (6,467) Net change in credit lines 29,750 4,911 -- 34,661 Purchase of common stock for treasury -- -- -- -- Proceeds from exercise of stock options and warrants 10 -- -- 10 Dividends received (paid) 10,948 (10,948) -- -- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 34,769 (9,337) 2,772 28,204 ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash -- (299) -- (299) Cash and cash equivalents: Decrease for period 14,288 826 -- 15,114 Balance, beginning of period 5,240 11,690 -- 16,930 ------------ ------------ ------------ ------------ Balance, end of period $ 19,528 $ 12,516 $ -- $ 32,044 ============ ============ ============ ============
See accompanying unaudited notes. F-31 85 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1998, 1999 AND 2000 BASIS OF PRESENTATION These notes to consolidating financial statements should be read in conjunction with the consolidated financial statements and notes thereto. Certain reclassifications have been made to prior years' financial statements to conform with the current year presentation. DEBT AND LINES OF CREDIT Long-term debt and lines of credit at June 30, 1999 consist of the following:
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------ ------------ ------------ ------------ (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount $ 149,298 $ $ $ 149,298 Term loan facilities: Tranche B Term Loan 72,380 72,380 Tranche C Term Loan 38,744 38,744 Delayed Draw Term Facility 24,372 24,372 Revolving Credit Facility 12,900 19,300 32,200 Intercompany notes payable 96,701 6,666 (103,367) -- Other 1,712 1,712 ------------ ------------ ------------ ------------ 394,395 27,678 (103,367) 318,706 Less current maturities 6,175 3,299 (7,547) 1,927 ------------ ------------ ------------ ------------ Long-term debt, less current maturities $ 388,220 $ 24,379 $ (95,820) $ 316,779 ============ ============ ============ ============
Long-term debt and lines of credit at June 30, 2000 consist of the following :
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------- ------------- ------------- ------------- (in 000's) 10% Senior Subordinated Notes due 2007, net of unamortized discount $ 149,351 $ $ $ 149,351 Term loan facilities: Tranche B Term Loan 70,641 70,641 Tranche C Term Loan 37,776 37,776 Delayed Draw Term Facility 23,789 23,789 Revolving Credit Facility 40,000 22,360 62,360 Intercompany notes payable 104,256 3,939 (108,195) -- Other -- 1,142 1,142 ------------- ------------- ------------- ------------- 425,813 27,441 (108,195) 345,059 Less current maturities 8,508 3,498 (10,970) 1,036 ------------- ------------- ------------- ------------- Long-term debt, less current maturities $ 417,305 $ 23,943 $ (97,225) $ 344,023 ============= ============= ============= =============
F-32 86 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES The federal, foreign and state income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of June 30, 1999 are as follows:
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------- ------------- ------------- ------------- (in 000's) Deferred tax assets: Net operating loss carry forwards $ 17,668 $ $ $ 17,668 Foreign tax credit carry forwards 7,527 7,527 Inventory obsolescence reserves 2,564 743 3,307 Bad debt reserves 2,694 3 2,697 Accruals not currently deductible for tax purposes 3,046 327 3,373 Refinancing costs being amortized for tax purposes 10,683 10,683 Other 2,003 6,167 8,170 ------------- ------------- ------------- ------------- Total gross deferred tax assets 46,185 7,240 53,425 Less: Valuation allowance (42,063) (2,380) (44,443) ------------- ------------- ------------- ------------- Deferred tax assets $ 4,122 $ 4,860 $ -- $ 8,982 ------------- ------------- ------------- ============= Deferred tax liabilities: Property and equipment, principally due to depreciation differences $ 2,650 $ 699 $ $ 3,349 Other 1,586 1,994 3,580 ------------- ------------- ------------- ------------- Total gross deferred tax liabilities 4,236 2,693 6,929 ------------- ------------- ------------- ------------- Net deferred tax assets (liabilities) $ (114) $ 2,167 $ -- $ 2,053 ============= ============= ============= =============
F-33 87 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The federal, foreign and state income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of June 30, 2000 are as follows:
Alliance Gaming Parent and Non- Corporation Guaranteeing Guaranteeing Elimina- and Subsidiaries Subsidiaries tions Subsidiaries ------------- ------------- ------------- ------------- (in 000's) Deferred tax assets: Net operating loss carry forwards $ 26,250 $ $ $ 26,250 Foreign tax credit carry forwards 7,527 7,527 Inventory obsolescence reserves 2,447 499 2,946 Bad debt reserves 3,800 5 3,805 Accruals not currently deductible for tax purposes 3,182 248 3,430 Refinancing costs being amortized for tax purposes 8,582 8,582 Other 2,464 7,029 9,493 -------- ------- ---- -------- Total gross deferred tax assets 54,252 7,781 62,033 Less: Valuation allowance (44,964) (4,895) (49,859) -------- ------- ---- -------- Deferred tax assets $ 9,288 $ 2,886 $ -- $ 12,174 ======== ======= ==== ======== Deferred tax liabilities: Property and equipment, principally due to depreciation differences $ 6,238 $ 391 $ $ 6,629 Other 3,687 -- 3,687 -------- ------- ---- -------- Total gross deferred tax liabilities 9,925 391 10,316 -------- ------- ---- -------- Net deferred tax assets (liabilities) $ (637) $ 2,495 $ -- $ 1,858 ======== ======= ==== ========
F-34 88 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. RESERVES AND ALLOWANCES The following tables represent the activity for each of the fiscal years ended June 30, 1998, 1999 and 2000 for each of the valuation reserve and allowance accounts (in 000's):
Balance at Balance at Beginning of End of Year Additions Deductions Year ---- --------- ---------- ---- Allowance for doubtful accounts: Year ended June 30, 2000 $13,696 $7,405 $ 893 $20,208 Year ended June 30, 1999 13,041 3,817 3,162 13,696 Year ended June 30, 1998 23,901 2,722 13,582(a) 13,041 Inventory valuation allowance: Year ended June 30, 2000 $ 7,077 $2,837 $ 3,254 $ 6,660 Year ended June 30, 1999 6,797 2,273 1,993 7,077 Year ended June 30, 1998 8,856 355 2,414 6,797 Other assets valuation reserve: Year ended June 30, 2000 $ 3,468 $ -- $ 1,655 $ 1,813 Year ended June 30, 1999 3,488 -- 20 3,468 Year ended June 30, 1998 3,502 18 32 3,488
- ---------- (a) Includes the $6.0 million net reversal of bad debt reserves related to the resolution of certain receivables sold with recourse to General Electric Capital Corporation. Such amount was included in unusual items in the accompanying consolidated statement of operations. F-35 EX-10.84 2 v65925ex10-84.txt EXHIBIT 10.84 1 Exhibit 10.84 PURCHASE AGREEMENT dated as of August 11, 2000 among UC ACQUISITION COMPANY OF NEVADA, LLC ALLIANCE GAMING CORPORATION and APT GAMES, INC. with respect to UNITED COIN MACHINE CO. 2 This PURCHASE AGREEMENT dated as of August 11, 2000 is made and entered into among UC Acquisition Company of Nevada, LLC, a Delaware limited liability company (the "Purchaser"), APT Games, Inc., a Nevada corporation ("Seller"), and Alliance Gaming Corporation, a Nevada corporation ("Parent"). Capitalized terms not otherwise defined herein have the meanings set forth in Section 13.01. WHEREAS, Seller owns 2,500 shares of common stock, par value $0.10 per share, of United Coin Machine Co., a Nevada corporation (the "Company"), constituting all issued and outstanding shares of capital stock of the Company (the "Shares"); WHEREAS, Parent is the direct owner of all the issued and outstanding capital stock of Seller; WHEREAS, the Company is engaged in the business of selecting, owning, installing, operating and maintaining video poker devices, reel-type slot machines and other electronic gaming machines in local establishments in Nevada (the "Business"); WHEREAS, subject to certain conditions, including approval of the Governmental or Regulatory Authorities, on the Closing Date, Seller shall cause the Company to be merged into United Coin, LLC, a Nevada limited liability company to be formed ("United Coin, LLC"), with United Coin, LLC surviving such merger (the "Merger"), pursuant to which the Shares shall be exchanged for common membership interests in United Coin, LLC, constituting all issued and outstanding common membership interests in United Coin, LLC (the "Membership Interest") and for preferred membership interests; and WHEREAS, Seller desires to sell, and Purchaser desires to purchase, the Membership Interest on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE OF MEMBERSHIP INTEREST; CLOSING; PARENT INVESTMENT 1.01 Purchase and Sale. Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from Seller, all of the right, title and interest of Seller in and to the Membership Interest at the Closing on the terms and subject to the conditions set forth in this Agreement. 1.02 Purchase Price. The purchase price for the Membership Interest shall be equal to the sum of One Hundred Eighteen Million Dollars ($118,000,000): (a) increased by the product of (i) the amount by which Adjusted EBITDA for the fiscal year ending June 30, 2001 (or if the Closing Date is earlier than August 1, 2001, then as of the twelve month period ending on the Determination Date) exceeds the sum of Twenty-seven Million Five Hundred Thousand Dollars ($27,500,000) multiplied (ii) by a factor of 4 and 29/100ths (4.29 ) or (b) decreased by the product of (i) the amount by which Adjusted EBITDA, for the fiscal year ending June 30, 2001 (or if the Closing Date is earlier than August 1, 2001, then as of the twelve month period ending on the Determination Date), is less than the sum of Twenty-seven Million Five Hundred Thousand Dollars ($27,500,000) multiplied (ii) by a factor of 4 and 29/100ths (4.29 )(the "Purchase Price"). The 1 3 Purchase Price shall be payable at the Closing as follows: (a) Ninety-five percent (95%) of the Purchase Price in immediately available United States funds; and (b) The balance of the Purchase Price by the retention by Seller of senior preferred equity ("Senior Preferred Equity") of United Coin, LLC for the balance of the Purchase Price, having the rights and preferences set forth in the form of amended and restated operating agreement for United Coin, LLC (the "LLC Agreement") attached hereto as Exhibit A. Purchaser shall have the right to make changes to the form of the LLC Agreement prior to the Closing Date; provided, however that the provisions of the Operating Agreement requiring Seller's consent as described in Section 16.3 of the LLC Agreement and any other change to the LLC Agreement to the extent that such amendment, modification or revision would adversely affect Seller's rights, privileges or preferences may only be changed upon the approval of Seller, which approval, in the case of such other change(s), shall not be unreasonably withheld. The definitive agreements for the debt finance described in Section 5.05(a) hereof shall provide for the ability of United Coin, LLC to redeem the Senior Preferred Equity at the time and in the amounts set forth in Article VIII of the LLC Agreement in the absence of a default by Purchaser or United Coin, LLC under such definitive debt agreements. 1.03 Closing. The Closing will take place at the offices of James, Driggs, Walch, Santoro, Kearney, Johnson, & Thompson, 3773 Howard Hughes Pkwy., Suite 290N, Las Vegas, Nevada 89109 or at such other place as Purchaser and Seller mutually agree, at 10:00 A.M. local time, on the Closing Date. At the Closing, Purchaser shall pay the cash component of the Purchase Price by delivery of the Deposit and the wire transfer of immediately available funds to such account as Seller may reasonably direct by written notice delivered to Purchaser by Seller at least two Business Days before the Closing Date and Seller shall retain the Senior Preferred Equity. Simultaneously, Seller will assign and transfer to Purchaser all of Seller's right, title and interest in and to the Membership Interest by delivering to Purchaser a certificate or certificates representing the Membership Interest, in genuine and unaltered form, duly endorsed in blank with requisite transfer tax stamps, if any, attached. At the Closing, (a) there shall also be delivered to Seller and Purchaser the certificates and opinions to be delivered under Articles VI and VII, (b) United Coin, LLC shall enter into a supply agreement with Bally in the form of Exhibit F hereto (the "Supply Agreement") and (c) Purchaser and United Coin, LLC shall enter into a license agreement with Parent in the form of Exhibit G hereto with respect to the Alliance Intellectual Property and the United Intellectual Property (the "Intellectual Property License Agreement"). 1.04 Excluded Liabilities. The Seller and Parent shall pay in full or assume any continuing liability on and after the Closing for the following obligations of the Company (the "Excluded Obligations"): (a) All capital leases, long term Liabilities for borrowed money (including current maturities thereof), certain real estate leases and the obligations for leased or financed gaming equipment located at locations under contract with the Company, consisting of the leases and Liabilities described on Section 1.04(a) of the Disclosure Schedule which Disclosure Schedule shall be updated as of the Closing Date; 2 4 (b) Obligations accrued as of the Closing Date to employees and former employees of Seller as set forth in Sections 9.02(b), 9.05, and 9.07; and (c) Any and all obligations to Bally for the lease of gaming equipment not described on Schedule 1.04(c). The Excluded Obligations to be paid in full on the Closing Date are identified on Section 1.04(a) of the Disclosure Schedule which Disclosure Schedule shall be updated as of the Closing Date. The Excluded Obligations to be assumed on the Closing Date are identified on Section 1.04(b) of the Disclosure Schedule which Disclosure Schedule shall be updated as of the Closing Date. (d) Parent and Seller shall fully assume, and secure for the benefit of Purchaser and United Coin, LLC, a complete release of Company and United Coin, LLC, from any and all obligations of the Company under that certain lease between Jorai Enterprises, a Nevada general partnership, as landlord, and The Junior Corp., a Nevada corporation, as tenant, dated August 8, 1989, as subsequently assigned to the Company, pursuant to the terms of that certain Assignment, Delegation, Assumption and Consent Agreement dated August 14, 1989 (the "Jorai Lease"). If Parent and Seller are unable to secure a full and complete release of Company and United Coin, LLC from the obligations under the Jorai Lease by the first day of the thirty-fifth (35th) month following the Closing Date, then Purchaser shall have the right to set-off against the sums payable in redemption of the Senior Preferred Equity on the third, fourth and fifth anniversary dates of the Closing Date an amount equal to the cost of a commercial annuity issued by an insurance company having a Best rating of A or better that, if purchased as of the third anniversary date of the Closing Date, would provide a sufficient monthly annuity to discharge the tenant's monetary obligations under the Jorai Lease over the remaining term thereof. If Purchaser exercises this right of set-off, then Purchaser shall assume the continuing obligation to make payments under the Jorai Lease as the tenant thereof. Purchaser shall provide Seller with written notice of its election to set-off the amount of the cost of the commercial annuity not later than the first day of the thirty-fifth (35th) month following the Closing Date together with written evidence of the cost of such commercial annuity. Seller shall have ten (10) days from the receipt of such notice in which to dispute the cost of the commercial annuity. If Seller disputes the cost of the commercial annuity, then Seller shall select an independent insurance broker to obtain a quote from an insurance company having a Best rating of A or better. Seller's independent insurance broker and Purchaser's independent insurance broker shall jointly select a third independent insurance broker. The quote of the independent insurance broker whose quote for the cost of the commercial annuity is neither the highest nor the lowest, shall be binding and conclusive on Seller and Purchaser. 1.05 Further Assurances; Post-Closing Cooperation (a) Subject to the terms and conditions of this Agreement, at any time or from time to time after the Closing, each of the parties hereto shall execute and deliver such other documents and instruments, provide such materials and information, and take such other actions as may reasonably be necessary, proper or advisable, to the extent permitted by Law, to fulfill its obligations under this Agreement. (b) Following the Closing, each party will afford the other party, its counsel and 3 5 its accountants, during normal business hours, upon prior written notice specifying the nature of the inquiry and the information sought, with copies of the Books and Records relating to the Business or Condition of the Company in its possession with respect to periods prior to the Closing and the right to make copies and extracts therefrom, to the extent that such access may be reasonably required by the requesting party in connection with (i) the preparation of Tax Returns, (ii) the determination or enforcement of rights and obligations under this Agreement, (iii) compliance with the requirements of any Governmental or Regulatory Authority, or (iv) in connection with any actual or threatened Action or Proceeding. Further, each party agrees for a period extending six years after the Closing Date not to destroy or otherwise dispose of any such Books and Records and other data unless such party shall first offer in writing to surrender such Books and Records and other data to the other party and such other party shall not agree in writing to take possession thereof during the ten-day period after such offer is made. (c) If, in order properly to prepare its Tax Returns, other documents or reports required to be filed with Governmental or Regulatory Authorities or its financial statements or to fulfill its obligations hereunder, it is necessary that a party be furnished with additional information, documents or records relating to the Business or Condition of the Company not referred to in paragraph (b) above, and such information, documents or records are in the possession or control of the other party, such other party agrees to use its best efforts to furnish or make available such information, documents or records (or copies thereof) at the recipient's request, cost and expense. Any information obtained by Parent or Seller in accordance with this paragraph shall be held confidential by Parent or Seller in accordance with Section 14.05. (d) Notwithstanding anything to the contrary contained in this Section, if the parties are in an adversarial relationship in litigation or arbitration, the furnishing of information, documents or records in accordance with any provision of this Section shall be subject to applicable rules relating to discovery. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT Seller and Parent hereby represent and warrant to Purchaser as follows: 2.01 Corporate Existence of Seller and Parent. Each of Seller and Parent is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Nevada. Each of Seller and Parent has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby, including, in the case of Seller, without limitation to own, hold, sell and transfer (pursuant to this Agreement) the Shares. 2.02 Authority. The execution and delivery by each of Seller and Parent of this Agreement, and the performance by each of Seller and Parent of their respective obligations hereunder, have been duly and validly authorized by the Board of Directors of Seller and Parent, respectively, no other corporate action on the part of Seller or Parent being necessary. This Agreement has been duly and validly executed and delivered by each of Seller and Parent and 4 6 constitutes a legal, valid and binding obligation of Seller and of Parent enforceable against Seller and Parent in accordance with its terms. 2.03 Corporate Existence of the Company. The Company is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Nevada, and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its Assets and Properties. The Company is duly qualified, licensed or admitted to do business and is in good standing in those jurisdictions specified in Section 2.03 of the Disclosure Schedule, which are the only jurisdictions in which the ownership, use or leasing of its Assets and Properties, or the conduct or nature of the Business, makes such qualification, licensing or admission necessary, except for those jurisdictions in which the adverse effects of all such failures by the Company to be qualified, licensed or admitted and in good standing could not in the aggregate reasonably be expected to have a material adverse effect on the Business or Condition of the Company. Seller has prior to the execution of this Agreement delivered to Purchaser true and complete copies of the articles of incorporation and by-laws of the Company as in effect on the date hereof. The Company has no Subsidiaries. 2.04 Capital Stock. The authorized capital stock of the Company consists solely of 2,500 shares of Common Stock, of which only the Shares have been issued. The Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable. Except as disclosed in Section 2.04 of the Disclosure Schedule, Seller owns the Shares, beneficially and of record, free and clear of all Liens. Except for this Agreement and as disclosed in Section 2.04 of the Disclosure Schedule, there are no outstanding Options with respect to the Company. The delivery of a certificate or certificates at the Closing representing the Shares in exchange for the Membership Interest in connection with the Merger will transfer good and valid title to the Shares, free and clear of all Liens other than Liens created or suffered to exist by Purchaser. 2.05 Membership Interest. On the Closing Date, and effective upon the Merger, the authorized and issued membership interests in United Coin, LLC, shall consist of the Membership Interest and the Senior Preferred Equity. The delivery of a certificate or certificates at the Closing representing the Membership Interest will transfer good and valid title to the Membership Interest, free and clear of all Liens other than Liens created or suffered to exist by Purchaser. 2.06 No Conflicts. The execution and delivery by each of Seller and Parent of this Agreement do not, and the performance by Seller and Parent of their respective obligations under this Agreement and the consummation of the transactions contemplated hereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the certificate or articles of incorporation or by-laws (or other comparable corporate charter documents) of Seller, Parent or the Company; (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Section 2.07 of the Disclosure Schedule, conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Seller, Parent or 5 7 the Company or any of their respective Assets and Properties (other than such conflicts, violations or breaches (i) which could not in the aggregate reasonably be expected to adversely affect the validity or enforceability of this Agreement or to have a material adverse effect on the Business or Condition of the Company or (ii) as would occur solely as a result of the identity or the legal or regulatory status of Purchaser or any of its Affiliates); or (c) except as disclosed in Section 2.06 of the Disclosure Schedule or as could not, individually or in the aggregate, reasonably be expected to be materially adverse to the Business or Condition of the Company or to adversely affect the ability of Seller and Parent to consummate the transactions contemplated hereby or to perform its obligations hereunder, (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Seller, Parent or the Company to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in or give to any Person any right of termination, cancellation, acceleration or modification in or with respect to, or (v) result in the creation or imposition of any Lien upon Seller, Parent or the Company or any of their respective Assets and Properties under, any Contract or License to which Seller, Parent or the Company is a party or by which any of their respective Assets and Properties is bound. 2.07 Governmental Approvals and Filings. Except as disclosed in Section 2.07 of the Disclosure Schedule, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Seller, Parent, or the Company, is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except: (a) where the failure to obtain any such consent, approval or action, to make any such filing or to give any such notice could not reasonably be expected to adversely affect the ability of Seller or Parent to consummate the transactions contemplated by this Agreement or to perform its obligations hereunder, or to have a material adverse effect on the Business or Condition of the Company, and (b) those as would be required solely as a result of the identity or the legal or regulatory status of Purchaser or any of its Affiliates. 2.08 Books and Records. The minute books and other similar records of the Company as made available to Purchaser prior to the execution of this Agreement contain a true and complete record, in all material respects, of all action taken at all meetings and by all written consents in lieu of meetings of the stockholders, the boards of directors and committees of the boards of directors of the Company. The stock transfer ledgers and other similar records of the Company as made available to Purchaser prior to the execution of this Agreement accurately reflect all record transfers prior to the execution of this Agreement in the capital stock of the Company. 2.09 Financial Statements and Condition. (a) Prior to the execution of this Agreement, Seller has delivered to Purchaser true and complete copies of the unaudited balance sheet of the Company as of June 30, 2000 and the related unaudited statement of operations for the year then ended. The foregoing financial statement together with the financial statements to be provided Purchaser under Section 4.05 are referred to herein collectively as the "Disclosed Financial Statements." Except as disclosed in Section 2.09(a) of the Disclosure Schedule, the Disclosed Financial Statements: (i) were and shall be prepared in 6 8 all material respects in accordance with the Books and Records of Seller, Parent and Company; (ii) set forth and shall present fairly in accordance with GAAP the Company's financial condition and the results of operations as at the relevant dates thereof and for the periods covered thereby, (iii) were and shall be prepared, in all material respects, in accordance with GAAP, subject to year end adjustments and except for the lack of footnotes; and (iv) in the case of interim financial statements, contain and reflect and shall reflect all adjustments necessary for a fair presentation of Company's financial condition and the results of operations for the periods covered by the Disclosed Financial Statements. Except to the extent reflected or reserved against in Company's balance sheet dated as June 30, 2000 (the "Unaudited Financial Statement Date"), or except as disclosed in Section 2.09(a) of the Disclosure Schedule, on the Unaudited Financial Statement Date the Company has or had no material Liability (secured, unsecured, contingent or otherwise) of a nature customarily reflected in a balance sheet prepared in accordance with GAAP. Seller, Parent and Company are not in material monetary default with respect to any term or condition of any material Indebtedness or Liability. There is no material Liability of Company of the type required to be recorded on balance sheets that is not set forth in this Agreement, in the Disclosed Financial Statements or in the Schedules and Exhibits attached to this Agreement other than Liabilities incurred or to be incurred in the ordinary course of business, consistent with past practice. (b) The Company has devised and maintained a system of internal accounting controls sufficient to provide reasonable assurances: (i) that transactions are executed in accordance with management's general or specific authorization; (ii) that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements and to maintain proper accountability for items; (iii) that access is permitted only in accordance with management's general or specific authorization; (iv) that the recorded accountability for items is compared with the actual levels at reasonable intervals, and appropriate action is taken with respect to differences, if any; and (v) that applicable requirements imposed by the Nevada Gaming Commission are materially complied with. (c) Except for the execution and delivery of this Agreement and the transactions to take place pursuant hereto on or prior to the Closing Date and as disclosed in Section 2.09(b) of the Disclosure Schedule, since the Unaudited Financial Statement Date the Business of the Company has been operated in all material respects in the ordinary course and there has not been any Material Adverse Change in the Business or Condition of the Company. 2.10 Taxes. Except as disclosed in Section 2.10 of the Disclosure Schedule (with paragraph references corresponding to those set forth below): (a) The Company has timely filed (taking into account all available extensions) all Tax Returns (or such Tax Returns have or will be filed on its behalf) required by Law to be filed before or as of the Closing Date. All such Tax Returns and amendments thereto are or will be true, complete and correct in all material respects. All Taxes payable by Company, or by Seller or Parent on behalf of Company, or otherwise arising from, imposed in connection with, or applicable to the Assets or Properties, the operations and/or the Business of Company, in respect to any period ending before or as of the Closing Date, have been, or will have been paid, on or before the Closing Date, 7 9 or, where payment is not yet due, Seller, Parent or Company has established, or will establish or cause to be established on or before the Closing Date, an adequate accrual for the payment of all such Taxes. The reserves and provisions for Taxes as set forth on the Disclosed Financial Statements are adequate for all open years and for the current fiscal period. (b) As of the date hereof, Seller, Parent or Company have not received notice from any Governmental or Regulatory Authority that it intends to audit the Tax Returns of Seller, Parent of Company for any open year, nor is there an audit currently in progress. As of the date hereof, neither the Company, Parent nor Seller on behalf of the Company has executed any outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Taxes or Tax Returns. (c) As of the date hereof, to the Knowledge of Seller, no unpaid Tax deficiencies have been proposed by any Governmental or Regulatory Authority with respect to Taxes of the Company. To the Knowledge of Seller there is no proposed material additional assessment for Taxes of the Company that has not been fully reserved against. There are no liens with respect to any Taxes upon any of the Assets or Properties of the Company, other than (i) Taxes, the payment of which is not yet due, or (ii) Taxes being contested. (d) Company has withheld (or has had withheld on its behalf) proper and accurate amounts from Company's employee payrolls for all periods in material compliance with all Tax-withholding provisions (including, without limitation, income Tax withholding, social security and unemployment Taxes, if any) of applicable Law. 2.11 Legal Proceedings. Except as disclosed in Section 2.11 of the Disclosure Schedule (with paragraph references corresponding to those set forth below): (a) there are no Actions or Proceedings pending or, to the Knowledge of Seller, threatened against, relating to or affecting Seller, Parent or the Company or any of their respective Assets and Properties, that could reasonably be expected (i) to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement, or (ii) individually or in the aggregate with other such Actions or Proceedings, to result in a Material Adverse Change in the Business or Condition of the Company; and (b) there are no Orders outstanding against the Company which, individually or in the aggregate with other such Orders, materially adversely affect the Business or Condition of the Company. Section 2.11 of the Disclosure Schedule describes the applicable court, agency or tribunal, case name and identity of counsel, if any, for each matter thereon so identified, including a description of insurance coverage, if applicable. 2.12 Compliance With Laws and Orders. Except as disclosed in Section 2.12 of the Disclosure Schedule, the Company is not in violation of or in default under any Law or Order 8 10 applicable to the Company or any of its Assets and Properties the effect of which, individually or in the aggregate with other such violations and defaults, could reasonably be expected to be materially adverse to the Business or Condition of the Company. The Company has during the last three (3) years received no notification alleging any such violation. 2.13 Employees; Labor and Employment Agreements (a) Section 2.13 of the Disclosure Schedule contains a complete list of the names and Social Security Numbers of all officers, directors, employees, and consultants of the Company who are employed in or render services to the Company in connection with the Company's conduct of the Business, together with the date of hire of each of such persons and the annual or hourly rate of compensation, the job title, job description, job classification (i.e., full-time or part-time) and Plan participation of each of such persons on the date of this Agreement. (b) Except as provided in Article IX, Purchaser shall have no liability, cost or obligation whatsoever under or by reason of any program or past practice of any kind of Seller, Parent or the Company relating to any of the employees of the Company for any race, color, religion, sex or gender, sexual orientation or preference, handicap or disability, age, national origin or ancestry, discrimination, harassment or retaliation claims asserted against Parent, the Company or Seller or any of their officers, employees, agents or representatives relating to facts, events or circumstances that occurred or existed before the Closing Date. (c) Company is, and on the Closing Date, the Company shall have been, in full compliance with all applicable Law affecting the employment of Company's employees, including, without limitation, those relating to wages, hours, working conditions, collective bargaining, affirmative action, discrimination, harassment, retaliation, occupational safety and health, immigration, withholding and payment of applicable income Taxes and FICA, Medicare and similar employment-related Taxes, and any and all other obligations pertaining to employee benefits or employee compensation, the non-compliance with which would reasonably be expected to have a material adverse effect on the Business or Condition of the Company conducted on the date of this Agreement or as conducted immediately before the Closing Date. 2.14 Labor Disputes, Complaints and Proceedings. Except as set forth on Section 2.14 of the Disclosure Schedule, the Company is not, and on the Closing Date the Company shall not have been, subject to any pending labor difficulty or to any pending or, to the Knowledge of Seller, threatened grievance, labor dispute, union organizing drive or union "corporate campaign," employee representation proceeding, strike, picketing, handbilling, slowdown, sickout, work-to-rule or work stoppage of any kind that would reasonably be expected to materially affect adversely the Business or Condition of the Company, and there is no, and on the Closing Date there shall not have been any, charge or complaint against the Company or any of the Company's officers or employees by or before any Governmental or Regulatory Agency, involving any charge or complaint of any unfair labor practice or involving any employee representation proceeding which could reasonably 9 11 be expected to have such an effect. Section 2.14 of the Disclosure Schedule shall indicate thereon the applicable court, agency or tribunal, case name and number and identity of counsel, if any, for each matter thereon so identified, including a description of insurance coverage if applicable. 2.15 Benefit Plans; ERISA. (a) Section 2.15(a) of the Disclosure Schedule contains a true and complete list of each material Benefit Plan. (b) The Company does not maintain and is not obligated to provide material benefits under any life, medical or health plan (other than as an incidental benefit under a Qualified Plan) which provides benefits to retirees or other terminated employees other than benefit continuation rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (c) Neither the Company, any ERISA Affiliate nor any other corporation or organization controlled by or under common control with any of the foregoing within the meaning of Section 4001 of ERISA has at any time contributed to any "multiemployer plan," as that term is defined in Section 4001 of ERISA. (d) None of the Benefit Plans of the Company and no Plans of any ERISA Affiliate are subject to Title IV of ERISA. (e) Complete and correct copies of the following documents have been furnished, or made available, to Purchaser prior to the execution of this Agreement: (i) the Benefit Plans and any related trust agreements; (ii) current summary Plan descriptions of each Benefit Plan subject to ERISA; (iii) the most recent Form 5500 and Schedules thereto for each Benefit Plan subject to ERISA reporting requirements; and (iv) the most recent determination of the IRS with respect to the qualified status of each Qualified Plan. 2.16 Marketable Assets and Properties Generally. Company has good title to the Assets and Properties owned by it and material to its business or condition, including, without limitation, all real property and leasehold estates and all other tangible and intangible assets, free and clear of Liens except for Liens (a) that are reflected in the Disclosed Financial Statements, (b) that constitute statutory liens arising in the ordinary course of business or (c) Permitted Liens. 2.17 Necessary Assets and Properties Generally. Except as set forth on Section 2.17 of the Disclosure Schedule, the Assets and Properties of Company include all Assets and Property, including, without limitation, equipment and other personal property, and all Contract rights and other intangible property used to conduct the Business of Company as such Business was conducted by Company before the date of this Agreement. 2.18 Real Property. (a) Section 2.18(a) of the Disclosure Schedule contains a true and correct list of (i) each parcel of real property owned by the Company, (ii) each parcel of real property leased by the Company (as lessor or lessee) and (iii) all Liens (other than Permitted Liens) relating to or 10 12 affecting any parcel of real property referred to in clause (i). (b) Except as disclosed in Section 2.18(a) of the Disclosure Schedule, the Company has good title to each parcel of real property owned by it. Except for the real property leased or subleased to others referred to in clause (ii) of paragraph (a) above, the Company is in possession of each parcel of real property owned by it, together with all buildings, structures, facilities, fixtures and other improvements thereon. (c) The Company has a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real properties leased by it as lessee under leases referred to in clause (ii) of Section 2.18(a) above for the full term of the lease thereof. There are no oral or written modifications or amendments to any of such leases that have not been made available to Purchaser. Each such lease is a legal, valid and binding agreement of the Company, enforceable in accordance with its terms and, to the Knowledge of Seller, of each other Person that is a party thereto, and except as set forth in Section 2.18(a) of the Disclosure Schedule, to the Knowledge of Seller there is no material default (or any condition or event which, after notice or lapse of time or both, would constitute a material default). (d) Seller has delivered to Purchaser prior to the execution of this Agreement true and complete copies of (i) all deeds, leases, mortgages, deeds of trust, certificates of occupancy, title insurance policies, title reports, surveys and similar documents, and all amendments thereof, with respect to the real property owned by the Company, and (ii) all leases and subleases (including any amendments and renewal letters) with respect to the real property leased by the Company. To the Knowledge of Seller there are no Liens on, or claims to, or covenants, conditions and restrictions, easements, rights of way or other matters not known to the general public that materially adversely affect the real property owned by Company which are not of record. (e) At the Closing Date, Seller shall obtain at its sole cost and expense a CLTA standard form owner's policy of title insurance with Western regional exceptions (a "CLTA Title Policy") issued by Escrow Holder in the amount of the Purchase Price allocated to the fee interests in the Company's real property insuring title to the real property as vested in Company subject only to Permitted Liens. (f) Except as disclosed in Section 2.18(f) of the Disclosure Schedule, the improvements on the real property identified in Section 2.18(a) of the Disclosure Schedule are in all material respects in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, are adequate and suitable for the purposes for which they are presently being used and, to the Knowledge of Seller, there are no condemnation or appropriation proceedings pending or threatened against any of such real property or the improvements thereon. 11 13 2.19 Tangible Personal Property. Section 2.19 of the Disclosure Schedule contains a true and correct list of depreciation schedules setting forth the tangible personal property of the Company necessary to the operation of the Business, prepared as of June 30, 2000. The Company is in possession of and has good title to, or has valid leasehold interests in or valid rights under Contract to use, all tangible personal property used in and individually or in the aggregate with other such property material to the Business or Condition of the Company. All such tangible personal property is free and clear of all Liens, other than Permitted Liens, Liens disclosed in Section 2.19 of the Disclosure Schedule, and Liens that neither individually nor in the aggregate could reasonably be expected to have a material adverse effect on the Business or Condition of the Company, and is in all material respects in good working order and condition, ordinary wear and tear excepted. 2.20 Intellectual Property Rights. Section 2.20 of the Disclosure Schedule discloses all Intellectual Property used in and individually or in the aggregate with other such Intellectual Property material to the Business or Condition of the Company, each of which the Company either has all right, title and interest in or valid and binding rights under Contract to use. (a) Seller and Parent represent and warrant that those rights granted to Parent, Seller and their Affiliates pursuant to that certain Assignment and License Agreement between Michael W. Wood and Parent dated August 20, 1997, specifically referencing United States Patent Number 5,401,023 entitled "Variable Awards Wagering System" and United States Patent Number 5,511,781 entitled "Stop Play Award Wagering System" constitute rights to older game programs that are not embodied in the Gamblers Bonus technology and that no Person shall have any basis to assert against Company or United Coin, LLC that the Gamblers Bonus technology or trademarks associated therewith may only be used in the State of Nevada or require the payment of any royalty or other fee with respect to the use by the Company or United Coin, LLC, or its successors and assigns, of the Gamblers Bonus technology. (b) Except as disclosed in Section 2.20 of the Disclosure Schedule, (i) all registrations with and applications to Governmental or Regulatory Authorities in respect of Intellectual Property owned by the Company, Parent or its Affiliates and disclosed in Section 2.20 of the Disclosure Schedule are valid and in full force and effect, (ii) there are no material restrictions on the direct or indirect transfer of any Contract, or any interest therein, held by the Company, Parent or its Affiliates in respect of Intellectual Property disclosed in Section 2.20 of the Disclosure Schedule, (iii) to the Knowledge of Seller the Company is not in default (or with the giving of notice or lapse of time or both, would be in default) in any material respect under any Contract to use the Intellectual Property disclosed in Section 2.20 of the Disclosure Schedule, (iv) to the Knowledge of Seller the Intellectual Property does not conflict with the rights of any Person, and no Person has any right from Company, Parent or its Affiliates to use the Intellectual Property, the effect of which would reasonably be expected to be material, except as set forth on Section 2.20 of the Disclosure Schedule. Company, Parent and/or its Affiliates have, in all material respects, performed all the obligations required to be performed by them to date under any Contract relating to the Intellectual Property, except for failures to perform that would not reasonably be expected to result in the restriction or termination of the Company's rights under such Contract and (v) to the Knowledge of Seller the Intellectual Property disclosed in Section 2.20 of the Disclosure Schedule is not being infringed by any other Person. Except as disclosed in Section 2.20 of the Disclosure Schedule, 12 14 neither Seller, Parent, its Affiliates nor the Company has received notice that Parent, its Affiliates or Company is infringing any Intellectual Property of any other Person, to the Knowledge of Seller no claim is pending or has been made to such effect that has not been resolved and, to the Knowledge of Seller, the Company, Parent or its Affiliates is not infringing any Intellectual Property of any other Person the effect of which, individually or in the aggregate, could reasonably be expected to be materially adverse to the Business or Condition of the Company. 2.21 Location Contracts. (a) Section 2.21(a) of the Disclosure Schedule (with paragraph references corresponding to those set forth below) contains a true and complete list of each of the following Location Contracts (true and complete copies or, if none, reasonably complete and accurate written descriptions of which, together with all amendments and supplements thereto, have been delivered or made available to Purchaser prior to the execution of this Agreement), to which the Company is a party: (i) All Space Lease Agreements; and (ii) All Participation Agreements; (b) Each Location Contract required to be disclosed in Section 2.21(b) of the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, of the Company and, to the Knowledge of Seller, of each other party thereto. Except as disclosed in Section 2.21(b) of the Disclosure Schedule, the Company is not in violation or breach of or default under any Location Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Location Contract) which Location Contract during the twelve (l2) month period ending on June 30, 2000, accounted for Fifty Thousand Dollars ($50,000) or more: (i) in Total Win (if such location is operated under a Space Lease Agreement) or (ii) Net Win (if such location is operated under a Participation Agreement), the effect of which would reasonably be expected to result in the termination of the Company's rights under such Location Contract. (c) Section 2.21(c) of the Disclosure Schedule sets forth a schedule of Location Contracts requiring the payment or potential payment, pursuant to the terms of any such Location Contracts by the Company of more than $10,000 in addition to the payment of rental under any Space Lease Agreement or the location share under a Participation Agreement. (d) Section 2.21(d) of the Disclosure Schedule sets forth those Location Contracts that require the consent of third parties in connection with this transaction which the failure to obtain such consent would reasonably be expected to have a material adverse effect on the Company. Seller and Company shall use their commercially reasonable efforts to obtain consent of each Person under any Location Contract whose consent is required in connection with this transaction. (e) Except as set forth in Section 2.21(e) of the Disclosure Schedule, to the Knowledge of Seller no customer of the Company as of June 30, 2000, which by itself accounted for 2% or more of the Company's revenues for the twelve (l2) month period then ended, has cancelled or otherwise terminated, or orally or in writing advised the Company or any officer or director or other employee of the Company of such Customer's intent to cancel or otherwise terminate its or their relationship with the Company. 2.22 Contracts. (a) Section 2.22(a) of the Disclosure Schedule (with paragraph references 13 15 corresponding to those set forth below) contains a true and complete list of each of the following Contracts (true and complete copies or, if none, reasonably complete and accurate written descriptions of which, together with all amendments and supplements thereto, have been made available to Purchaser prior to the execution of this Agreement), to which the Company is a party or by which any of its Assets and Properties is bound: (i) all Contracts with any Person containing any provision or covenant prohibiting or materially limiting the ability of the Company to engage in any business activity or compete with any Person or prohibiting or materially limiting the ability of any Person to compete with the Company; (ii) all material partnership, joint venture, shareholders' or other similar Contracts with any Person; (iii) all Contracts relating to Indebtedness of the Company in excess of $50,000 or to preferred stock issued by the Company (other than Indebtedness owing to or preferred stock owned by the Company); (iv) all Contracts with distributors, dealers, manufacturer's representatives, sales agencies or franchisees which in any case involve the payment or potential payment, pursuant to the terms of any such Contract, by or to the Company of more than $50,000 annually; (v) all Contracts relating to (A) the future disposition or acquisition of any Assets and Properties individually or in the aggregate material to the Business or Condition of the Company, other than dispositions or acquisitions in the ordinary course of business, and (B) any merger or other business combination executed within the last 24 months; (vi) all Contracts between or among the Company, on the one hand, and Seller, any officer, director or Affiliate (other than the Company) of Seller, on the other hand, and providing for annual payments by or to the Company exceeding $50,000; (vii) all Contracts (other than this Agreement) that (A) limit or contain restrictions on the ability of the Company to declare or pay dividends on, to make any other distribution in respect of or to issue or purchase, redeem or otherwise acquire its capital stock, to incur Indebtedness, to incur or suffer to exist any Lien, to purchase or sell any Assets and Properties, to change the lines of business in which it participates or engages or to engage in any merger or other business combination or (B) require the Company to maintain specified financial ratios or levels of net worth or other indicia of financial condition; and (viii) all other Contracts (other than Benefit Plans, leases listed in Section 2.18 of the Disclosure Schedule, Location Contracts listed in Section 2.21(a) of the Disclosure Schedule and insurance policies listed in Section 2.24 of the Disclosure Schedule) that (A) involve the payment or potential payment, pursuant to the terms of any such Contract, by or to the Company of more than $50,000 annually and (B) cannot be terminated within thirty (30) days after giving notice of termination without resulting in any material cost or penalty to the Company. (b) Each Contract required to be disclosed in Section 2.22(a) of the Disclosure Schedule is in full force and effect and constitutes a legal, valid and binding agreement, enforceable 14 16 in accordance with its terms, of the Company and, to the Knowledge of Seller, of each other party thereto; and except as disclosed in Section 2.22 (b) of the Disclosure Schedule neither the Company, nor, to the Knowledge of Seller, any other party to such Contract is in violation or breach of or default under any such Contract (or with notice or lapse of time or both, would be in violation or breach of of or default under any such Contract), the effect of which, individually or in the aggregate, could reasonably be expected to be materially adverse to the Business or Condition of the Company. 2.23 Licenses. Section 2.23 of the Disclosure Schedule contains a true and complete list of all Licenses used in and individually or in the aggregate with other such Licenses material to the Business or Condition of the Company (and all pending applications for any such Licenses), setting forth the grantor, the grantee, the function and the expiration and renewal date of each. Prior to the execution of this Agreement, Seller has delivered to Purchaser true and complete copies of all such Licenses. Except as disclosed in Section 2.23 of the Disclosure Schedule: (i) the Company owns or validly holds all such Licenses; (ii) each such License is valid, binding and in full force and effect; (iii) to the Knowledge of Seller the Company is not in default (or with the giving of notice or lapse of time or both, would be in default) under any such License in any material respect; and (iv) no suspension, cancellation or termination of any of the licenses, permits or certificates referred to in this Section 2.23 has been made by any governmental authority (and no such claim is anticipated by Seller) on the basis that Seller's operation of the Business fails to comply in any respect with any Law, or that a License or Order not listed on Section 2.23 of the Disclosure Schedule is necessary with respect to operation of the Business or Company's ownership of its Assets and Properties the effect of which would reasonably be expected to result in the suspension or revocation of any such License. 2.24 Insurance. Section 2.24 of the Disclosure Schedule contains a true and complete list of all material insurance policies currently in effect that insure the Business, operations or employees of the Company or affect or relate to the ownership, use or operation of any of the Assets and Properties of the Company and that (i) have been issued to the Company or (ii) have been issued to any Person (other than the Company) for the benefit of the Company (a) Section 2.24(a) of the Disclosure Schedule contains the following information with respect to each material insurance policy (including material policies providing property, casualty, liability, and workers' compensation coverage, bond and surety arrangements, aviation, marine, fiduciary liability, crime, directors and officers liability, employment practices liability and environmental) to which the Company is, or has been for the last three (3) years, a named insured or beneficiary: (i) The name, address, and telephone number of the agent; (ii) The name of the insurer, the name of the policy holder, and the name of each insured; (iii) The policy number and the period of coverage; (iv) The scope (including an indication of whether the coverage was on a claims-made, occurrence, or other basis) of coverage; and (v) Any policy for which the limits have been exhausted. 15 17 (b) With respect to each current insurance policy: (i) the policy is in full force and effect; (ii) the policy will continue to be in full force and effect in accordance with the terms of the policy following the consummation of the transactions contemplated hereby with respect to claims arising prior to Closing to the extent the policies provide therefor; (iii) no policy is in any material respect in breach or default (including with respect to the payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default so as to permit termination or modification of the policy by the insurer; and (iv) no party to the policy has repudiated any provision thereof. The Company has been continuously covered during the past three (3) years by insurance in scope and amount customary and reasonable for the Business in which it has engaged during the aforementioned period. Appropriate reserves determined in accordance with standard industry practice and actuarial practice exist for each self-insurance, captive insurance company, retroactive premium adjustment, or other loss sharing arrangement, and for deductibles and self-insured retentions. Appropriate reserves exist with respect to each insurance program subject to premium revisions or audits. Neither Company, Parent or Seller has received any written notice from the insurance company which issued any material insurance policies stating in effect that such insurance policy will not be renewed. 2.25 Affiliate Transactions. Except as disclosed in Section 2.25(a) of the Disclosure Schedule, (a) there is no Indebtedness between the Company, on the one hand, and Seller, Parent, any officer, director or Affiliate (other than the Company) of Seller or Parent, on the other, (b) neither Seller, Parent nor any such officer, director or Affiliate provides or causes to be provided any assets, services or facilities to the Company which are individually or in the aggregate material to the Business or Condition of the Company, (c) the Company does not provide or cause to be provided any assets, services or facilities to Seller, Parent, or any such officer, director or Affiliate which are individually or in the aggregate material to the Business or Condition of the Company and (d) the Company does not beneficially own, directly or indirectly, any Investment Assets issued by Seller, Parent or any such officer, director or Affiliate. Except as disclosed in Section 2.25(b) of the Disclosure Schedule, each of the Liabilities and transactions listed in Section 2.25(a) of the Disclosure Schedule was incurred or engaged in, as the case may be, on an arm's-length basis. 2.26 Environmental Matters. (a) The Company has obtained all Licenses which are required under applicable Environmental Laws in connection with the conduct of the business or operations of the Company, except where the failure to obtain any such License could not reasonably be expected to be, individually or in the aggregate with other such failures, materially adverse to the Business or Condition of the Company. Each of such Licenses is in full force and effect and the Company is in compliance with the terms and conditions of all such Licenses and with any applicable Environmental Law, except where the failure to be in compliance could not reasonably be expected to be, individually or in the aggregate with other such failures, materially adverse to the Business or Condition of the Company. (b) Except as disclosed in Section 2.26(b) of the Disclosure Schedule, to the Knowledge of Seller no oral or written notification of a Release of a Hazardous Material has been filed by or on behalf of the Company and no site or facility now or previously owned, operated or leased by the Company is listed or proposed for listing on the NPL, CERCLIS or any similar state 16 18 or local list of sites requiring investigation or clean-up. (c) Seller has delivered to Purchaser, Phase 1 environmental assessments for the real property owned by the Company as prepared by an environmental engineer selected by the Company. There have been no other environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or that are in the possession of, the Company in relation to any site or facility now or previously owned, operated or leased by the Company which have not been delivered to Purchaser prior to the execution of this Agreement. (d) All property owned or leased by Company and all property on which Seller has conducted operations (excluding property owned by Persons under Location Contract) fully comply with all applicable Environmental Law, except to the extent that failure to comply would not reasonably be expected to result in a material Liability. (e) Company has not caused, has not permitted and does not know of, and, to the Knowledge of Seller (which knowledge, in the case of the real property owned by Company, is limited to knowledge based upon the Phase 1 environmental assessments previously delivered to Purchaser), no other person has caused or permitted, any Release or threatened Release of any Hazardous Material in, on, under or from any of Company's real property in a reportable quantity or in violation of applicable Environmental Law, the effect of which would reasonably be expected to result in a material Liability. Neither the Company nor, to the Knowledge of Seller (which knowledge, in the case of the real property owned by Company, is limited to knowledge based upon the Phase 1 environmental assessments previously delivered to Purchaser), any predecessor of the Company, nor any employee or other agent of the Company or any predecessor of the Company has at any time before the date of this Agreement or will have at any time before the Closing Date conducted or permitted any activity at or on any of Company's real property or at or on any other location that has caused or threatens to cause a release of any Hazardous Material in, on, under or from any of the Company's real property within the meaning of any Environmental Law the effect of which would result in a material Liability. (f) To the Knowledge of Seller (which knowledge, in the case of the real property owned by Company, is limited to knowledge based upon the Phase 1 environmental assessments previously delivered to Purchaser) no past or present environmental conditions or circumstances at Company's real property poses a risk to the environment or to the health and safety of persons or could reasonably form the basis of any claim against Company (or any person or entity for whom Company could be responsible by Law or Contract) under any applicable Environmental Law. 2.27 Customer Database. Company maintains a patron data base currently containing approximately fifty thousand (50,000) names. Company shall maintain and update Company's patron data base files and records in accordance with past practices. Except for information shared in the ordinary course of business, no employee, representative, agent of the Company has delivered or shall deliver Company's patron data base files and records to a third party or allow a third party access to Company's patron data base files and records in each case other than representatives of Governmental or Regulatory Authorities or as required by Law. 2.28 Contractual Promotions. Company is not committed to any complimentary arrangement for food or beverage for Customers under Location Contracts or other contractual promotions other than as set forth in a Location Contract, and Company shall not extend any such complimentary arrangement or contractual promotions except in accordance with past practices. 17 19 2.29 Accounts and Notes Receivable . All of the Company's accounts and notes receivable are carried as retained in-house accounts and notes receivable. All of the accounts and notes receivable listed in the Disclosed Financial Statements as of June 30, 2000, and any notes and accounts receivable arising subsequent thereto, shall be incurred in the ordinary course of the Company's Business. 2.30 Brokers. Except for Wasserstein Perella & Co, Inc., whose fees, commissions and expenses are the sole responsibility of Parent, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Seller directly with Purchaser without the intervention of any Person on behalf of Seller in such manner as to give rise to any valid claim by any Person against Purchaser or the Company for a finder's fee, brokerage commission or similar payment. 2.31 Accuracy of Information. All lists or other statements, information or documents set forth in or attached to any Schedule delivered or to be delivered in the future pursuant to this Agreement shall be deemed to be representations and warranties of the Seller and Parent with the same force and effect as if such lists, statements, information and documents were set forth herein. Any list, statement, document or any information set forth in or attached to any Schedule delivered or to be delivered pursuant to any provision of this Agreement shall be deemed to constitute disclosure for purposes of any other Schedule required to be delivered pursuant to any other provision of this Agreement. The statements, representations and warranties made by Seller and Parent in this Agreement and in the Schedules and Exhibits attached hereto are true, and all lists contained in the Schedules attached hereto are complete and correct, subject in all cases to the materiality, knowledge and other limitations, assumptions and qualifications set forth in this Agreement. None of the representations and warranties of Seller and Parent set forth herein did contain or will contain, at the respective times when such representations and warranties were or are made, any untrue statement of a material fact, or omitted or will omit to state any material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as follows: 3.01 Existence. Purchaser is a limited liability company duly formed, validly existing and in good standing under the Laws of the State of Delaware. Purchaser has full limited liability company power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 3.02 Authority. The execution and delivery by Purchaser of this Agreement, and the performance by Purchaser of its obligations hereunder, have been duly and validly authorized by its Managers, no other limited liability company action on the part of it or its members being necessary. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a legal, valid and binding obligation enforceable against Purchaser in accordance with its terms. 3.03 No Conflicts. The execution and delivery by Purchaser of this Agreement does not, and the performance by it of its obligations under this Agreement and the consummation of the transactions contemplated hereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions 18 20 or provisions of the certificate of formation or operating agreement of Purchaser (or other comparable charter document). (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Schedule 3.04 hereto, conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Purchaser or any of its Assets and Properties (other than such conflicts, violations or breaches which could not in the aggregate reasonably be expected to adversely affect the validity or enforceability of this Agreement); or (c) except as disclosed in Schedule 3.03 hereto or as could not, individually or in the aggregate, reasonably be expected to adversely affect the ability of Purchaser to consummate the transactions contemplated hereby or to perform its obligations hereunder, (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Purchaser to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, or (iv) result in the creation or imposition of any Lien upon Purchaser or any of its Assets or Properties under, any Contract or License to which it is a party or by which any of its Assets and Properties are bound. 3.04 Governmental Approvals and Filings. Except as disclosed in Schedule 3.04 hereto, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority on the part of Purchaser is required in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except where the failure to obtain any such consent, approval or action, to make any such filing or to give any such notice could not reasonably be expected to adversely affect the ability of either to consummate the transactions contemplated by this Agreement or to perform its obligations hereunder. 3.05 Legal Proceedings. There are no Actions or Proceedings pending or, to the knowledge of Purchaser threatened against, relating to or affecting any of its Assets and Properties which could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement. 3.06 Purchase for Investment. The Membership Interest to be acquired by Purchaser shall be acquired by Purchaser (or, if applicable, its assignee pursuant to Section 14.09) for its own account for the purpose of investment, it being understood that the right to dispose of such Membership Interests shall be entirely within the discretion of Purchaser (or such assignee, as the case may be). Purchaser (or such assignee, as the case may be) will refrain from transferring or otherwise disposing of the Membership Interest, or any interest therein, in such manner as to cause Seller to be in violation of the registration requirements of the Securities Act of 1933, as amended, or applicable state securities or blue sky laws. 3.07 Brokers. Except for GMS Group, LLC and U.S. Bancorp Libra, whose fees, commissions and expenses are the sole responsibility of Purchaser, all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by Purchaser directly with Seller without the intervention of any Person on behalf of Purchaser in such manner as to give rise to any valid claim by any Person against Seller or the Company for a finder's fee, brokerage commission or similar payment. 3.08 Financing. Purchaser has no reason to believe that the financing described in Section 5.05 hereof will not be available at the Closing. 19 21 ARTICLE IV COVENANTS OF PARENT AND SELLER Parent and Seller covenant and agree with Purchaser that, at all times from and after the date hereof until the Closing, Parent and Seller will comply with all covenants and provisions of this Article IV, except to the extent Purchaser may otherwise consent in writing. 4.01 Regulatory and Other Approvals. Parent and Seller will, and will cause the Company to, as promptly as practicable (a) take all commercially reasonable steps necessary or desirable to obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other Person required of Parent, Seller or the Company to consummate the transactions contemplated hereby, including without limitation those described in Sections 2.06 and 2.07 of the Disclosure Schedule, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as such Governmental or Regulatory Authorities, Purchaser or other Persons may reasonably request in connection therewith and (c) provide reasonable cooperation to Purchaser in connection with the performance of its obligations under Sections 5.01 and 5.02. Seller will provide prompt notification to Purchaser when any such consent, approval, action, filing or notice referred to in clause (a) above is obtained, taken, made or given, as applicable, and will advise Purchaser of any communications (and, unless precluded by Law, provide copies of any such communications that are in writing) with any Governmental or Regulatory Authority or other Person regarding any of the transactions contemplated by this Agreement. 4.02 HSR Filings. In addition to and not in limitation of Seller's covenants contained in Section 4.01, Seller will (a) take promptly all actions necessary to make the filings required of Seller or its Affiliates under the HSR Act, (b) comply at the earliest practicable date with any request for additional information received by Seller or its Affiliates from the Federal Trade Commission or the Antitrust Division of the Department of Justice pursuant to the HSR Act and (c) cooperate with Purchaser in connection with Purchaser's filing under the HSR Act and in connection with resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by either the Federal Trade Commission or the Antitrust Division of the Department of Justice or state attorneys general. 4.03 Nonenticement. Seller and Parent will, for a period of one year from the Closing Date, refrain from, either alone or in conjunction with any other Person, or directly or indirectly through its present or future Affiliates, employing, engaging or seeking to employ or engage any Person who within the prior six months had been an officer or employee of the Company, unless such officer or employee (a) resigns voluntarily (without any solicitation from Seller, Parent or any of their Affiliates), (b) is terminated by the Company after the Closing Date, or (c) is also an officer or director of Parent or Seller. 4.04 Conduct of Business. Parent and Seller will cause the Company to conduct business only in the ordinary course consistent with past practice. Without limiting the generality of the foregoing, Seller will cause the Company to use commercially reasonable efforts, to the extent the officers of the Company believe such action to be in bests interests of the Company, to (a) preserve intact the present business organization and reputation of the Company in all material respects, (b) keep available (subject to dismissals, resignations and retirements in the ordinary course of business) the services of the key officers and employees of the Company, (c) maintain the Assets and Properties of the Company in good working order and condition, ordinary wear and tear 20 22 excepted, (d) maintain the good will of customers, suppliers and lenders and other Persons with whom the Company otherwise has significant business relationships and (e) make necessary capital expenditures in the ordinary course of business; provided, however, that subsequent to June 30, 2001, the Company may deviate from its ordinary course of business of replacing older or obsolete machines in existing Locations unless said replacement is required in connection with the renewal of Location Contracts during the period subsequent to June 30, 2001 and preceding the Closing Date. 4.05 Financial Statements and Reports; Budget. (a) As promptly as practicable and in any event no later than thirty (30) days after the end of each month ending after the date hereof and before the Closing Date (other than the fourth quarter) or twenty-seven (27) days after the end of each fiscal year ending after the date hereof and before the Closing Date, as the case may be, Seller will deliver to Purchaser true and complete copies of the unaudited balance sheet, and the related unaudited statements of operations of the Company, in each case as of and for the fiscal year then ended or as of and for each such month and the portion of the fiscal year then ended, as the case may be. (b) As promptly as practicable, Seller will deliver to Purchaser true and complete copies of such other regularly-prepared financial statements, reports and analyses as may be prepared or received by Seller, Parent or the Company relating to the business or operations of the Company. (c) As promptly as practicable, Seller will deliver to Purchaser true and complete copies of the year 2001 budget of the Company (the "Annual Budget"). (d) Seller shall cause to be prepared and delivered to Purchaser, at Seller's expense, audited financial statements concerning the Company for the 1998, 1999 and 2000 fiscal years (collectively, the "Audited Financial Statements"). The Audited Financial Statements (i) shall be prepared in accordance with the Books and Records and shall be prepared by forty-five (45) days from the date hereof, in respect to the 1998 and 1999 fiscal years and in the case of the Audited Financial Statements for 2000 by September 30, 2000, (ii) shall fairly present in all material respects the financial position, results of operations and cash flows of the Company as of the respective dates and for the respective periods referred to therein, in accordance with GAAP, applied on a basis consistent with that of prior years or periods except as specified therein and (iii) shall be in material compliance with the requirements of Regulation S-X promulgated under the Securities Act. Without limiting the foregoing, Seller shall use its commercially reasonable best efforts to request Seller's accountants to consent to the inclusion of their reports and other Audited Financial Statements in any private placement memorandum and/or registration statement and/or similar document prepared by or on behalf of Purchaser and its Affiliates, and to consent to be named as experts therein. 4.06 Certain Restrictions. Except as disclosed in Section 4.06 of the Disclosure Schedule, Parent and Seller will cause the Company to refrain from: (a) amending its certificates of incorporation or by-laws (or other comparable corporate charter documents) in any material respect or taking any action with respect to any such amendment or any recapitalization, reorganization, liquidation or dissolution of any such corporation, except the Merger; (b) other than in the ordinary course of business, acquiring or disposing of, or 21 23 incurring any Lien (other than a Permitted Lien) on, any Assets and Properties individually or in the aggregate material to the Business or Condition of the Company; (c) entering into, amending, modifying, terminating (partially or completely), granting any waiver under or giving any consent with respect to any Contract or License material to the Business or Condition of the Company other than in the ordinary course of business or as required by Law; (d) other than in the ordinary course of business (i) voluntarily incurring Indebtedness in an aggregate principal amount exceeding One Hundred Thousand Dollars ($100,000) (net of any amounts of Indebtedness discharged during such period or constituting Excluded Liabilities to be paid at the Closing Date), or (ii) canceling, discharging (in whole or in part) or waiving any right under any Indebtedness owed the Company in an aggregate principal amount exceeding One Hundred Thousand Dollars ($100,000); (e) engaging with any Person in any merger or other business combination other than the Merger; (f) except to the extent required by applicable Law or reasonably and in good faith believed by the officers of the Company to be in the best interests of the Company, making any material change in (i) any pricing, investment, accounting, financial reporting, inventory, credit, allowance or Tax practice or policy, or (ii) any method of calculating any bad debt, contingency or other reserve for accounting, financial reporting or Tax purposes; (g) other than in the ordinary course of business or to the extent required by applicable Law, adopting, entering into or becoming bound by any material Benefit Plan, employment-related Contract or collective bargaining agreement, or amending, modifying or terminating (partially or completely) any such Benefit Plan, employment-related Contract or collective bargaining agreement; (h) making any change in its fiscal year; (i) selling, assigning, transferring, sublicensing or otherwise disposing of the Intellectual Property, except for the sublicensing in the ordinary course of business to end users not in competition with the Business of the Company ; (j) failing to keep the Assets and Properties insured in accordance with customary industry practice and the past practices of the Company; (k) failing to maintain the Assets and Properties in good repair, order and condition (reasonable wear and use and damage by fire or other casualty excepted); (l) failing to maintain Books and Records materially in the usual, regular and ordinary manner on a basis consistent with that heretofore employed including, without limitation, the recording of reserves for Taxes; (m) failing to comply materially with all Laws applicable to any of the Assets and Properties or to the conduct of the Business; (n) failing to timely file or cause to be timely filed all Tax Returns required to be filed for periods ending prior to the Closing Date or failing to pay any material applicable Taxes due on or before the Closing Date, except for Taxes the liability for which is disputed; (o) failing to maintain a level of newspaper, television and other advertising reasonably comparable to that existing during the ninety (90) day period immediately preceding the date of this Agreement; and 22 24 (p) entering into any Contract to do or engage in any of the foregoing. 4.07 Affiliate Transactions. Except for the leases of gaming equipment from Bally described on Section 1.04(c) of the Disclosure Schedule, immediately prior to the Closing, all Indebtedness and other amounts owing under Contracts between Seller, Parent, any officer, director or Affiliate (other than the Company) of Seller or Parent, on the one hand, and the Company, on the other, will be paid in full, and Seller and Parent will terminate and will cause any such officer, director or Affiliate to terminate each Contract with the Company, including, but not limited to, any Tax sharing or similar agreement. Prior to the Closing, the Company will not enter into any Contract or amend or modify any existing Contract, and will not engage in any transaction outside the ordinary course of business other than on an arm's-length basis (other than pursuant to Contracts disclosed in Section 2.22(a)(vii) of the Disclosure Schedule or not required to be disclosed therein in accordance with Section 2.22(a)(vii)), with Seller, Parent or any such officer, director or Affiliate. 4.08 Release. Parent and Seller will use commercially reasonable efforts to have the Company released from any liability under any guarantees by or from the Company of the obligations of Parent, Seller or any of their Affiliates (other than the Company) (collectively, the "Existing Guarantees") and to have the Existing Guarantees terminated prior to the Closing Date. Section 4.08 of the Disclosure Schedule sets forth a list of the Existing Guarantees. 4.09 Fulfillment of Conditions. Seller will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Purchaser contained in this Agreement and will not, and will not permit the Company to, take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. 4.10 Non-competition. (a) For a period of five years from the Closing Date, Parent and Seller shall not, and shall each cause their Subsidiaries, successor and assigns, not to, directly or indirectly conduct in Nevada a business which is the same as the Business as conducted on the Closing Date, including without limitation as a shareholder, consultant, partner, owner, lender (other than in the ordinary course of business), principal, member, officer, employee or otherwise, of any entity that is conducting such business in the State of Nevada. (b) Notwithstanding the foregoing, however: (a) nothing contained in this Agreement shall prohibit Seller or Parent from purchasing and holding an investment in Purchaser, nor purchasing and holding as an investment not more than 5% of any class of the issued and outstanding and publicly traded (on a recognized national or regional securities exchange or in the over-the-counter market) security of any corporation, partnership or other business entity that conducts a business in competition with Purchaser or the Business and (b) the continued placement by Bally in the ordinary course of business as conducted on the date hereof of gaming devices or games by Bally under participation agreements or daily fee arrangements, or in wide area progressive networks under authority of the Nevada slot route operator's license held by Bally shall not be considered to be competitive with Purchaser so long as Bally performs the customary activities of: (i) a distributor or manufacturer of gaming devices or (ii) operator of a wide area 23 25 progressive network. No Person will be deemed to be conducting a business in competition with Purchaser or the Business if such business constitutes less than 10% of such Person's revenues. (c) Seller and Parent are agreeing to these provisions in consideration for the Purchase Price set forth in Section 1.02 hereof. (d) Seller and Parent each agrees that any claim for breach of this Section 4.10 against either of them may be brought by Purchaser or any Affiliate of Purchaser in lieu of Purchaser. (e) Seller and Parent each acknowledges and agrees that the covenants contained in this Section 4.10 are fair and reasonable and of a special unique character which gives them peculiar value and exist in order to protect Purchaser's investment in the Business purchased under this Agreement and that Purchaser would not have entered into this Agreement without such covenants being made. However, if any such covenants shall be determined by any court to be invalid by reason of their duration or geographical scope, or both, as the case may be, shall be considered to be reduced to the longest duration or greatest geographic scope, or both, which will cure such invalidity. Seller and Parent each further acknowledge that monetary damages alone will not be an adequate remedy for any breach of any of the covenants contained in this Section 4.10, and accordingly, they each expressly agree that, in addition to all other remedies which Purchaser or its Affiliates have, they shall be entitled to injunctive relief, both preliminary and permanent, in any court of competent jurisdiction. 24 26 4.11 Purchaser's Investigations. At any time and from time to time before the Closing Date, at the request of Purchaser, Seller shall (and shall cause Seller's representatives to) take such actions as Purchaser may reasonably request in the preparation of, or delivery of, documents necessary for the purpose of assisting Purchaser in obtaining Purchaser's financing; provided, however, that Seller assumes no obligation for, or liability with respect to, any documentation submitted by Purchaser or its Affiliates to the Securities Exchange Commission, or to third parties with respect to Purchaser's financing. Upon reasonable request by Purchaser, Seller shall provide Michael S. Luzich, on behalf of Purchaser, with copies of new Location Contracts and any renewals of Location Contracts prior to the Closing Date. 4.12 Control of Company's Operations. Nothing contained in this Agreement shall give to Purchaser, directly or indirectly, any right to control or direct the Company's operations prior to the Closing Date. Prior to the Closing Date, the Company shall exercise complete control and supervision of the Business consistent with the terms and conditions of this Agreement. 4.13 Seller's Bank Accounts. The existing bank accounts of the Company shall be designated as the Seller's Bank Accounts. Seller shall be liable for any over drafts in Seller's Bank Accounts on the Closing Date, and shall be entitled to all cash in Seller's Bank Accounts in excess of: (a) outstanding items and (b) required Cash on Hand. Outstanding items shall be determined as of 12:01 A.M. on the Closing Date. 4.14 Cash on Hand. The Assets and Properties of United Coin, LLC, on the Closing Date shall include cash on hand in game loads (net of tokens), location change banks and drawers, LAT drawers, bill loads, bill dispensers, bill dispenser inventory, coin and currency inventory, markers (at 5:00 P.M. on the Closing Date), imprest bank balances, remaining collector credits, together with a sum sufficient to pay the cash suspense jackpot/fills (location and UC share) ("Cash on Hand"). Cash on Hand shall be an amount equal to the greater of: (a) the sum of $8,000,000 plus $1,000 per gaming machine in excess of 8,000 gaming machines installed as of the Determination Date, or (b) the average of the actual Cash on Hand balance for each day during the period beginning on September 1, 2000 and ending on the Determination Date. Seller shall count down the cash in the Company vault beginning at 7:00 A.M. on the Closing Date. If the Closing shall occur on the Closing Date, then Purchaser shall be entitled to all Company collections received on and after the Cut-off Time. Adjusted Working Capital shall not be less than zero on the Closing Date. The calculation of Cash on Hand and of Adjusted Working Capital and post closing payments, if any, required to be paid by Seller with respect to Cash on Hand and Adjusted Working Capital shall be made as provided in Section 8.04. 4.15 Insurance and Insurance Benefits. (a) On or after the Closing Date, Parent and/or Seller shall deliver to Purchaser any and all proceeds received under those insurance policies maintained by Seller and/or Parent relating to pre-Closing losses of the Company to the extent Seller has not theretofore paid for such losses with its own funds. Seller shall execute whatever 25 27 instruments are necessary to enable Purchaser to receive the insurance proceeds arising from such losses. If subsequent to the Closing, any insurance plan associated with or providing benefits under the Benefit Plans described in Section 2.15(a) of the Disclosure Schedule maintained by or on behalf of the Company by Parent or Seller prior to the Closing Date is audited and, as a result thereof, there is an assessment or additional premium assessment, then Seller shall pay any such assessment or additional premium. Seller shall receive any premium refunds as a result of any audits described in the immediately preceding sentence. On the Closing Date, Seller and Parent shall assume all obligations of indemnity to any Person who shall have served as a director or officer of the Company prior to the Closing Date in respect to actions taken in such capacity on or prior to the Closing Date. (b) If, prior to the Closing Date: (i) any of the Assets and Properties of the Company are damaged by fire or other casualty, (ii) such damage or other casualty is material, (iii) Seller would reasonably repair such damage or replace such Assets and Properties in the ordinary course of business, and (iv) such repair or replacement has not been completed as of the Closing Date, then the Purchaser shall be entitled to receive the insurance proceeds, if any, arising out of such damage or other casualty, including the benefits of business interruption coverage, as provided above. If, in the circumstances described in the proceeding sentence, the insurance proceeds, if any, arising from such damage or other casualty are not sufficient to repair such damage or replace the Assets or Properties, Purchaser shall receive at Closing a credit against the Purchase Price equal to: (i) the estimated cost of repairing such damage or replacing such Assets and Properties in excess of the insurance proceeds paid to Purchaser, as such amount shall be determined by a qualified independent third party selected by Purchaser and Seller (ii) less the amount of any deductible provided for in the insurance policy(s) under which such proceeds are paid. Subsequent to the Closing Date, Seller and/or Parent shall not settle any claim for damage or loss to any of the Assets and Properties of the Company with any insurer without the prior written consent of Purchaser to the extent Purchaser is entitled to receive the insurance proceeds as provided above, which written consent shall not be unreasonably withheld. 4.16 Management Information Systems. As disclosed on Section 2.25 of the Disclosure Schedule, the Company shares with Parent its accounting and computer network. Company shall investigate the requirements for installing a stand alone computer, necessary related hardware, and necessary accounting and network software at the Company's business premises located at 600 Pilot Road, Las Vegas, Nevada. Company shall prepare and present to Purchaser for its approval (subject to any limitations on such approval right under Law) a budget for the costs of such computer, related hardware and software. Purchaser shall have fifteen (15) days from the receipt of such budget in which to approve the selection of the computer, related hardware, software, and costs associated therewith (subject to any limitations on such approval right under Law). If such budget is approved by Purchaser then Seller shall purchase, install and make operational the required computer, related hardware and software in order for the Company's management information systems to operate on a stand alone basis on the Closing Date. 4.17 Notification. From the date of this Agreement to the Closing Date, Seller shall 26 28 promptly notify Purchaser if to the Knowledge of Seller: (a) Seller receives notice from any Governmental or Regulatory Authority in connection with the transactions contemplated by this Agreement (except for Tax notices of which Seller must only advise Purchaser if such notices would result in a Lien on the Assets and Properties); (b) any fact or circumstance makes any representation or warranty of Seller or Parent set forth in this Agreement untrue or inaccurate in any material respect as of the Closing Date or as of the date of this Agreement; or (c) there occurs material damage to the Assets and Properties. 4.18 Updated Disclosure Schedules. On the Closing Date, Seller shall provide Purchaser with Updated Disclosure Schedules that shall contain as of the date thereof all lists, descriptions, exceptions and other information required to be included therein in order to make all statements, representations, warranties and covenants of Parent and Seller that reference Disclosure Schedules complete and correct as of the Closing Date. ARTICLE V COVENANTS OF PURCHASER Purchaser covenants and agrees with Parent and Seller that, at all times from and after the date hereof until the Closing and, in the case of Section 5.03, thereafter, Purchaser will comply with all covenants and provisions of this Article V, except to the extent Parent or Seller may otherwise consent in writing. 5.01 Regulatory and Other Approvals. Purchaser will as promptly as practicable (a) take all commercially reasonable steps necessary or desirable to obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other Person required of Purchaser to consummate the transactions contemplated hereby, including without limitation those described in Schedules 3.03 and 3.04 hereto, (b) provide such other information and communications to such Governmental or Regulatory Authorities or other Persons as such Governmental or Regulatory Authorities or other Persons may reasonably request in connection therewith and (c) provide reasonable cooperation to Parent, Seller and the Company in connection with the performance of their obligations under Sections 4.01 and 4.02. Purchaser will provide prompt notification to Seller when any such consent, approval, action, filing or notice referred to in clause (a) above is obtained, taken, made or given, as applicable, and will advise Seller of any communications (and, unless precluded by Law, provide copies of any such communications that are in writing) with any Governmental or Regulatory Authority or other Person regarding any of the transactions contemplated by this Agreement. 5.02 HSR Filings. In addition to and without limiting Purchaser's covenants contained in Section 5.01, Purchaser will (a) take promptly all actions necessary to make the filings required of Purchaser or its Affiliates under the HSR Act, (b) comply at the earliest practicable date with any request for additional information received by Purchaser or its Affiliates from the Federal Trade Commission or the Antitrust Division of the Department of Justice pursuant to the HSR Act and (c) cooperate with Parent or Seller in connection with Parent's or Seller's filing under the HSR Act and 27 29 in connection with resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement commenced by either the Federal Trade Commission or the Antitrust Division of the Department of Justice or state attorneys general. 5.03 Nonenticement. Except at provided in Article IX hereof, Purchaser will, for a period of one year from the Closing Date, refrain from, either alone or in conjunction with any other Person, or directly or indirectly through its present or future Affiliates, employing, engaging or seeking to employ or engage any Person who within the prior six months had been an officer or employee of the Seller, Parent or any of their Affiliates (other than the Company), unless such officer or employee: (a) resigns voluntarily (without any solicitation from Purchaser or any of its Affiliates) or (b) is terminated by the Seller or Parent after the Closing Date. 5.04 Fulfillment of Conditions. Purchaser will take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of Seller contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. 5.05 Financing. (a) Not later than sixty (60) days from the date hereof, Purchaser shall deliver to Seller a letter from investment bankers of recognized national standing arranging for the placement of Purchaser's debt in form and in substance customary for transactions similar to the present, confirming their ability to arrange debt to finance: (i) the purchase of the Membership Interest, (ii) pay the fees and expenses in connection with this transaction and (iii) provide for the working capital needs of United Coin, LLC. (b) Not later than sixty (60) days from the date hereof, Purchaser shall deliver to Parent and to Seller reasonable written assurances from equity investors and/or investment bankers of recognized national standing arranging for the placement of Purchaser's equity in form and in substance customary for transactions similar to the present, confirming that such equity has been committed. Parent and Seller acknowledge that US Bancorp Libra is an investment bank of recognized national standing. Purchaser will use reasonable best efforts to enter into definitive financing agreements providing for the financing referred to in clause (a) above, containing terms reasonably satisfactory to Purchaser, and to obtain on the Closing Date the financing contemplated by such definitive financing agreements. Purchaser will not take or fail to take any action that could reasonably be expected to result in the failure to obtain on the Closing Date such financing. Purchaser will keep Parent and Seller apprised of the status of such efforts and of Purchaser's communications with any sources of such financing. Purchaser will be under no obligation under any circumstances to be capitalized with equity of more than Twenty-five Million Dollars ($25,000,000) in cash. 5.06 Purchaser's Bank Accounts. Purchaser shall open new bank accounts for United Coin, LLC. Such bank accounts shall be utilized as a depository for any monies received by United Coin, LLC after the Closing Date. Such bank accounts shall be designated as the Purchaser's Bank Accounts. 5.07 Reimbursement of Costs of Audited Financial Statements. In the event this 28 30 Agreement is breached by Purchaser and Seller elects to rightfully terminate this Agreement as provided in Section 12.03(d)(iv), Purchaser shall reimburse Seller, within ten (10) days from the date of receipt of invoices from the accountants who prepared the Audited Financial Statements described in Section 4.05, the costs actually and reasonably incurred in the preparation of such Audited Financial Statements prior to the date of Seller's notice of termination. 5.08 Stand Alone Computer System. On the Closing Date, Purchaser shall reimburse Parent for the Purchaser approved budgeted costs of the hardware and software associated with the installation of the stand alone computer, related hardware and software described in Section 4.16, and for any cost overruns actually and reasonably incurred in such installation. In the event this Agreement is breached by Purchaser and Seller elects to rightfully terminate this Agreement as provided in Section 12.03(d)(iv) or if Purchaser terminates this Agreement as provided in Section 12.03(c), Purchaser shall reimburse Seller, within ten (10) days from the date of receipt of third- party invoices and other documentation supporting such costs, for the costs of the hardware and software associated with the installation of the stand alone computer, related hardware and software described in Section 4.16, actually and reasonably incurred prior to the date of Seller's notice of termination. Upon payment of the costs described in this Section 5.08, Seller shall deliver to Purchaser the hardware and software purchased by Seller for such installation. 5.09 Notification. From the date of this Agreement to the Closing Date, to the extent known by it, Purchaser shall promptly notify Seller of any: (a) notice from any Governmental or Regulatory Authority in connection with the transactions contemplated by this Agreement or (b) fact or circumstance that would make any representation or warranty of Purchaser set forth in this Agreement untrue or inaccurate in any material respect as of the Closing Date or as of the date of this Agreement. ARTICLE VI CONDITIONS TO OBLIGATIONS OF PURCHASER The obligations of Purchaser hereunder to purchase the Shares are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Purchaser in its sole discretion). 6.01 Representations and Warranties. The representations and warranties made by Seller and Parent in this Agreement, taken as a whole, shall be true and correct, in all respects material to the validity and enforceability of this Agreement and to the Business or Condition of the Company, on and as of the Closing Date as though made on and as of the Closing Date or, in the case of representations and warranties made as of a specified date earlier than the Closing Date, on and as of such earlier date. 29 31 6.02 Performance. Seller and Parent shall have performed and complied with, in all material respects, the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Seller and Parent at or before the Closing. 6.03 Officers' Certificates and Updated Disclosure Schedules. Seller and Parent shall have delivered to Purchaser a certificate, dated the Closing Date and executed in the name and on behalf of Seller and Parent by the Chairman of the Board or any officer of each of Seller and Parent, substantially in the form and to the effect of Exhibit "B" hereto, and a certificate, dated the Closing Date and executed by the Secretary or any Assistant Secretary of each of Seller and Parent, substantially in the form and to the effect of Exhibit "C" hereto. Seller and Parent shall have delivered to Purchaser the Updated Disclosure Schedules. 6.04 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement. 6.05 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Purchaser, Parent and Seller to perform their obligations under this Agreement and to consummate the transactions contemplated hereby shall have been duly obtained, made or given and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement, including under the HSR Act, shall have occurred. 6.06 Third Party Consents. The consents and releases (or in lieu thereof waivers) listed in Schedule 6.06 hereto shall have been obtained and shall be in full force and effect. 6.07 No Material Adverse Changes. Since the Unaudited Financial Statement Date, whether or not in the ordinary course of business, there has been no Material Adverse Change in the Business or Condition of the Company. 6.08 Financing. Purchaser shall have obtained the financing described in Section 5.05, under terms reasonably acceptable to Purchaser; provided, however the condition set forth in this Section 6.08 shall be deemed to be waived by Purchaser as of the first day of the Commitment Term. 6.09 Opinion. Purchaser shall have received an opinion of Jones, Vargas, special Nevada counsel to the Seller, or other special Nevada counsel to Seller reasonably acceptable to Purchaser, dated as of the Closing Date, substantially in the form attached hereto as Exhibit "I, and such other customary and normal opinions as may reasonably be requested by Purchaser. 30 32 ARTICLE VII CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller hereunder to sell the Membership Interests are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Seller in its sole discretion): 7.01 Representations and Warranties. The representations and warranties made by Purchaser in this Agreement, taken as a whole, shall be true and correct in all material respects on and as of the Closing Date as though made on and as of the Closing Date. 7.02 Performance. Purchaser shall have performed and complied with, in all material respects, the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Purchaser at or before the Closing. 7.03 Managers' Certificates. Purchaser shall have delivered to Seller a certificate, dated as of the Closing Date and executed in the name and on behalf of Purchaser by the Managers of Purchaser, substantially in the form and to the effect of Exhibit "D" hereto, and a certificate, dated as of the Closing Date and executed by a Manager of Purchaser, substantially in the form and to the effect of Exhibit "E" hereto. 7.04 Orders and Laws. There shall not be in effect on the Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement. 7.05 Regulatory Consents and Approvals. All consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Seller, Parent and Purchaser to perform their obligations under this Agreement and to consummate the transactions contemplated hereby shall have been duly obtained, made or given and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement, including under the HSR Act, shall have occurred. 7.06 Third Party Consents. The consents and releases (or in lieu thereof waivers) listed in Schedule 7.06 hereto shall have been obtained and shall be in full force and effect. 7.07 Opinion of Purchaser's Counsel. Seller shall have received from Purchaser's counsel an opinion, dated as of the Closing Date, in substantially the form attached hereto as Exhibit J, and such other customary and normal opinions as may reasonably be requested by Parent. 7.08 LLC Agreement. The parties shall have agreed upon the form of the LLC Agreement. 31 33 ARTICLE VIII MERGER, TAX MATTERS 8.01 Merger. On the Closing Date the Company shall merge with United Coin, LLC, with United Coin, LLC surviving the merger. The parties acknowledge that the Purchaser's purchase of the Membership Interest in United Coin, LLC, constitutes an "applicable asset acquisition" under Section 1060 of the Code. The Purchase Price shall be allocated among the assets of United Coin in a manner set forth in Section 8.04 hereof, consistent with the requirements of Section 1060 of the Code and the regulations promulgated thereunder. The fair market value of Class III assets, as such term is defined under Treasury Regulations promulgated under Section 338 of the Code, including, but not limited to, tangible personal property, real property, and premium leases, shall be based upon the appraisal of such assets by independent third-party appraisers mutually acceptable to the parties. If Parent, Seller and Purchaser are unable to agree on such allocation, such dispute shall be resolved by independent accountants of both parties, whose fees and expenses shall be paid equally by both Seller and Purchaser as provided in Section 8.04 hereof. Parent, Seller and Purchaser (a) shall be bound by such allocation for purposes of determining any Taxes, (b) shall prepare and file all Tax Returns to be filed with any taxing authority in a manner consistent with such allocation, and (c) shall take no position inconsistent with such allocation in any Tax Return, any proceeding before any Governmental or Regulatory Authority or otherwise. 8.02 Additional Costs and Taxes; Governmental and Regulatory Licensing Fees. Purchaser shall pay all Governmental and Regulatory Authority licensing and investigative fees imposed by the Governmental and Regulatory Authorities in connection with their consideration and approval of the Merger. Purchaser shall reimburse Parent for all additional reasonable fees, costs expenses and Taxes in excess of the fees, costs, expenses and Taxes that would have been incurred had the transaction been structured as a stock purchase under an Internal Revenue Code Section 338(h)(10) election upon presentation of invoices, receipts and statements evidencing same. The Parties agree that to the extent the Merger or any action to complete the Merger shall result in any breach of any representation, warranty, covenant or agreement of Parent or Seller or nonfulfillment of any condition for Closing in this Agreement, such breach or nonfulfillment shall be disregarded for deemed purposes of this Agreement or such representation, warranty, covenant or condition shall be waived to the extent necessary to comply with the provisions of this Agreement in order to close the transaction as contemplated by Section 1.03. 8.03 Taxes. Purchaser agrees to indemnify, defend and hold Parent, Seller and their Affiliates harmless for any Transfer Taxes arising out of or in connection with the transactions effected pursuant to this Agreement net of any Tax Benefit Actually Realized by Parent and/or Seller in connection with the payment of such Taxes. Seller and Parent shall take such actions as are necessary to terminate on the Closing Date the income tax periods of the Company which commence within twelve months prior to the Closing Date. Seller and Parent agree to pay, indemnify, defend and hold Purchaser and United Coin, LLC, harmless from any Taxes imposed on the Company with respect to taxable periods ending on or before the Closing Date, including partial periods ending on the Closing Date, and including any Taxes arising as a result of the 32 34 application of Treas. Reg. Section 1.1506-6, net of any Tax Benefit Actually Realized by Purchaser in connection with the payment of any such Taxes. Parent will include the Company in Parent's group of consolidated federal income tax returns for all pre-Closing periods or partial periods ending on the Closing Date. Purchaser shall pay, indemnify, defend and hold Parent and Seller harmless for any Taxes imposed on the Company with respect to any period commencing after the Closing Date, net of any Tax Benefit Actually Realized by Parent or Seller in connection with the payment of any such Taxes. 8.04 Purchase Price Allocations and Closing Calculations. The accountants selected by Purchaser ("Purchaser's Accountants") may on reasonable notice enter the premises of the Business at all reasonable times approved by the President and/or Chief Operating Officer of Parent, which approval shall not be unreasonably withheld, for the purpose of making such examinations and audits of the Business and of the Books and Records of the Business as Purchaser's Accountants may deem necessary in a manner that does not unreasonably interfere with the Company's operations. (a) Tentative Allocation of the Purchase Price. Purchaser shall inform Seller in writing of the expected date upon which Purchaser's applications for Nevada gaming licenses are expected to appear on the agenda of the Nevada Gaming Control Board (the "Agenda Date"), which written notice shall be sent not later than one hundred thirty-five (135) days prior to the Agenda Date. Based on such preliminary audits and examinations as Purchaser's Accountants shall have conducted prior thereto, Purchaser's Accountants shall deliver to Seller and to Purchaser not later than fifteen (15) days after the Tentative Allocation Date a preliminary schedule setting forth: (i) the projected Purchase Price, (ii) the projected amount of Cash On Hand, (iii) the proposed allocation of the Purchase Price under Section 1060 of the Code, (iv) the projected net amount of Excluded Liabilities to be paid, discharged or assumed by Seller on the Closing Date, and (v) the projected additional reasonable fees, costs expenses and Taxes in excess of the fees, costs, expenses and Taxes that would have been incurred had the transaction been structured as a stock purchase under an Internal Revenue Code Section 338(h)(10) election that Purchaser is obligated to pay under Section 8.03 above ("Tentative Allocation Schedule"). Seller shall have fifteen (15) days from the date of its receipt of the Tentative Allocation Schedule in which to accept or reject the Tentative Allocation Schedule. If, within fifteen (15) days after receipt of the Tentative Allocation Schedule, Seller notifies Purchaser that Seller disapproves of such Tentative Allocation Schedule and specifies in reasonable detail the reason for Seller's disapproval, then Purchaser's Accountants and Seller's Accountants shall jointly attempt to resolve the dispute. If such dispute is not resolved within ten (10) days after Seller's notice, then Purchaser's Accountants and Seller's Accountants shall jointly submit such dispute to another firm of independent certified public accountants of recognized standing in the casino gaming industry for the resolution of such dispute within ten (10) days thereafter. The determination of such firm of independent certified public accountants shall be conclusive and binding on Purchaser and Seller. The parties shall equally share all costs, fees and expenses directly incurred in connection with the determination of such firm of independent certified public accountants. (b) Preliminary Closing Statement. Based on such preliminary audits and inventories as Purchaser's Accountants shall have conducted prior to the Closing Date, Purchaser 33 35 shall prepare and deliver to Seller not later than the Agenda Date a preliminary closing statement setting forth: (i) the Purchase Price, (ii) the allocation of the Purchase Price under Section 1060 of the Code, (iii) the net amount of Excluded Liabilities to be paid, discharged or assumed by Seller on the Closing Date, (iv) required Cash on Hand, (v) projected Adjusted Working Capital, and (vi) the projected additional reasonable fees, costs expenses and Taxes in excess of the fees, costs, expenses and Taxes that would have been incurred had the transaction been structured as a stock purchase under an Internal Revenue Code Section 338(h)(10) election that Purchaser is obligated to pay under Section 8.03 above (a "Preliminary Closing Statement"). If, within ten (10) days after receipt of either the Preliminary Closing Statement or the Final Closing Statement, Seller notifies Purchaser that Seller disapproves of such Closing Statement and specifies in reasonable detail the reason for Seller's disapproval, then Purchaser's Accountants and Seller's Accountants shall jointly attempt to resolve the dispute. If such dispute is not resolved within ten (10) days after Seller's notice, then Purchaser's Accountants and Seller's Accountants shall jointly submit such dispute to another firm of independent certified public accountants of recognized standing in the casino gaming industry for the resolution of such dispute within ten (10) days thereafter, and the determination of such firm of independent certified public accountants shall be conclusive and binding on Purchaser, Seller and Parent. If a dispute arises between the parties under this Section 8.04(b) that is not resolved prior to the Closing Date, then the Closing Date shall be extended to the date that is five (5) days after the resolution of the dispute or the date of the determination of the firm of independent certified public accountants, as the case may be. Based upon the Preliminary Closing Statement and such dispute resolution, at the Cut-off Time on the Closing Date, Seller shall remove from the Company all cash in excess of required Cash on Hand. If Adjusted Working Capital is less than zero on the Closing Date, Seller shall pay to United Coin, LLC, on the Closing Date the amount by which Adjusted Working Capital is less than zero. Based upon the Preliminary Closing Statement and such dispute resolution, on the Closing Date, Seller shall pay such Excluded Liabilities as are described on Section 1.04(a) of the Disclosure Schedule as updated as of the Closing Date in the amounts determined under the Preliminary Closing Statement. (c) Final Closing Statement. Within one hundred twenty (120) days after the Closing Date, Purchaser's Accountants shall deliver a final closing statement (a "Final Closing Statement") to Purchaser, to Seller and to Escrow Holder setting forth the final determination of all items to be included in the closing statements, including, but not limited to the Purchase Price and any adjustment required for Adjusted Working Capital. If, within fifteen (15) days after receipt of the Final Closing Statement, Seller notifies Purchaser that Seller disapproves of such Closing Statement and specifies in reasonable detail the reason for Seller's disapproval, then Purchaser's Accountants and Seller's Accountants shall jointly attempt to resolve the dispute. If such dispute is not resolved within ten (10) days after Seller's notice, then Purchaser's Accountants and Seller's Accountants shall jointly submit such dispute to another firm of independent certified public accountants of recognized standing in the casino gaming industry, and the determination of such firm of independent certified public accountants shall be conclusive and binding on Purchaser, Seller and Parent. The parties shall equally share all costs, fees and expenses directly incurred in connection with the determination of such firm of independent certified public accountants. Amounts determined to be owed by Seller to Purchaser or by Purchaser to Seller which are not 34 36 disputed shall be settled in cash between Purchaser and Seller within ten (10) days after receipt of the Final Closing Statement. Amounts determined to be owed by Seller to Purchaser or by Purchaser to Seller which are disputed shall be settled in cash between Purchaser and Seller within ten (10) days after resolution of the dispute or the date of the determination of the firm of independent certified public accountants, as the case may be. ARTICLE IX EMPLOYEES AND EMPLOYEE BENEFITS MATTERS 9.01 Continuation of Benefits. During the period from the Closing Date until of the end of the 12-month period following the Closing Date, Purchaser shall maintain or cause to be maintained, wages, compensation levels, employee pension and welfare plans for the benefit of then employees of the Company that are comparable, in the aggregate, to those wages, compensation levels and other benefits provided under the employee pension and welfare plans that are in effect on the date hereof. Thereafter, there shall be no limitation whatsoever upon changes to or elimination of any or all of the foregoing. 9.02 Severance Policy and Other Agreements. (a) With respect to any current officer or employee who is covered by a severance policy or plan separate from the standard severance policy for the Company's employees, (and who continue as an officer or employee of Purchaser after the Closing Date) the Purchaser shall maintain or cause to be maintained such separate policy or plan as in effect as of the date hereof, and as to all other officers and employees, Purchaser shall maintain or cause to be maintained the Company's standard severance policy as in effect as of the date hereof for a period of at least 12 months from the Closing Date. (b) Except in respect to the severance obligations described in Section 9.02(a) of the Disclosure Schedule which obligations shall be that of the Seller, Purchaser shall honor or cause to be honored all monetary obligations under severance agreements and employment agreements with the Company's directors, officers and employees incurred after the Closing Date arising from termination of employment of such directors, officers or employees after the Closing Date. Purchaser shall have no obligation for any such obligations arising prior to the Closing Date. 9.03 Bonus. Purchaser will maintain, or cause to be maintained, the Company's bonus Plans, as in effect on the date hereof, through the end of the fiscal year in which the Closing occurs, with bonuses to be paid to the employee participating thereunder at the greater of (a) the target level, if applicable, (b) the prior year's bonus, or (c) such bonus as the employee would have earned if the transaction contemplated by this Agreement had not occurred, in all events on a basis consistent with past practice. 9.04 Waiver of Preexisting Conditions; Credit for Deductibles; Service Credit. Purchaser 35 37 shall use its commercially reasonable best efforts to cause the Company to: (a) waive all limitations as to pre-existing conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the employees of the Company under any welfare plan that such employees may be eligible to participate in after the Closing Date, (b) provide each employee of the Company with credit for any co-payments and deductibles paid prior to the Effective Time in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such employees are eligible to participate in after the Closing Date, and (c) provide each employee of the Company with credit for all service with the Company and its Affiliates under each employee benefit plan, program, or arrangement of Purchaser or its Affiliates in which such employees are eligible to participate; provided, however, that in no event shall the employees be entitled to any credit to the extent that it would result in a duplication of benefits with respect to the same period of service. 9.05 Welfare Plans. Seller shall retain responsibility for and continue to pay all medical, life insurance, disability and other welfare plan expenses and benefits for each employee and former employee of the Company with respect to claims incurred by such employees or former employees or their covered dependents prior to the Closing Date. Expenses and benefits with respect to claims incurred by employees of United Coin, LLC or their covered dependents on or after the Closing Date shall be the responsibility of Purchaser. For purposes of this paragraph, a claim is deemed incurred when the services that are the subject of the claim are performed, in the case of life insurance, when the death occurs, and, in the case of short-term or long-term disability benefits, when the disability occurs. 9.06 COBRA. On the Closing Date, the Purchaser shall assume, or shall cause United Coin, LLC to assume, any and all obligations of Seller, Parent and their affiliates (including, but not limited to, any health or medical plans sponsored by Seller, Parent or their affiliates) to provide continuation coverage to employees of United Coin, LLC pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. 9.07 401(k) Plan Assets. Employees of the Company shall cease to accrue benefits and service credits under the Alliance Gaming Corporation Profit Sharing 401(k) Plan (the "Seller 401(k) Plan") as of the Closing Date. Effective as of the Closing Date, the Purchaser shall, or shall cause United Coin, LLC to establish a new savings plan (the "Purchaser 401(k) Plan") and associated trust. The assets of the Seller 401(k) Plan attributable to employees of the Company prior to the Closing Date shall be retained or distributed under the terms of the Seller 401(k) Plan as provided under the Seller 401(k) Plan. Purchaser shall accept rollovers from the Seller 401(K) Plan for the Company employees employed by United Coin, LLC on the Closing Date. Purchaser shall provide to Seller evidence reasonably satisfactory to Seller that the Purchaser 401(k) Plan and the associated trust have been established and that the Purchaser 401(k) Plan qualifies under the requirements of Section 401(a) of the Code. Seller shall provide to Purchaser evidence reasonably satisfactory to Purchaser that the Seller 401(k) Plan remains qualified under the requirements of Section 401(a) of the Code. Purchaser shall assume no Liabilities of Seller, Parent and their affiliates with respect to employees under the Seller 401(k) Plan. Seller shall remain responsible for all acts, omissions and transactions under or in connection with the Seller 401(k) Plan. 36 38 9.08 Management Services. For a period of twelve (12) months following the Closing Date, Parent shall provide to Purchaser, at no cost to Purchaser, on reasonable advance notice, the services of Robert Miodunski, on a limited, non-exclusive and reasonable basis (taking into consideration Robert Miodunski's time commitments, duties and responsibilities as Chief Operating Officer of Parent), to advise and consult with Purchaser's managers, officers, and employees regarding Company's technical and marketing activities, operations and business strategies. Periodically prior to the Closing Date, Parent shall make Robert Miodunski available to Purchaser, upon reasonable prior notice (taking into consideration Robert Miodunski's time commitments, duties and responsibilities as Chief Operating Officer of Parent), for the purposes of: (a) reviewing the technical and marketing activities, operations and business strategies of the Company and (b) meeting with Purchaser's proposed senior lenders, subordinated senior lenders, and equity owners for the purposes of providing relevant information regarding the Company. Neither Robert Miodunski, Parent or Seller or any of their Affiliates shall be liable in any manner for any advice or consultation given by Robert Miodunski to, and at the request of Purchaser or any manager, officer of employee of Purchaser regarding the Company or the Company's activities. Purchaser shall indemnify Robert Miodunski and the Seller Indemnitees, as the case may be, in respect of, and hold each of them harmless from any and all Losses or liabilities arising out of, resulting from or relating to any such advice or consultation. Purchaser hereby acknowledges that Robert Miodunski may be involved in other activities that may conflict with Purchaser's activities with respect to the Company, and neither Robert Miodunski, Parent, Seller or any of their Affiliates shall be subject to any limitations on their activities as a result of the services provided by Robert Miodunski hereunder and agrees that: (x) Purchaser's requests for advice and consultation may not unreasonably interfere with Robert Miodunski's duties in any manner, (y) Purchaser, its officers, managers or employees may request the advice of, or consult Robert Miodunski within the period established hereby, only so long as Robert Miodunski remains actively employed by Parent (or if such employment is terminated, under terms that Robert Miodunski might agree with Purchaser), and (z) will reimburse Parent, Seller and their Affiliates for any out-of-pocket expenses incurred related to the advice and consultation provided by Robert Miodunski, at the request of Purchaser, pursuant to this Section 9.08. 9.09 Employees. Upon prior reasonable notice, and in the presence of designated Representatives of Seller, Seller shall permit Purchaser's Representatives to meet with the employees of the Company, either singularly or in groups, as the parties may agree, to discuss Purchaser's plans for the Company and Purchaser's proposed employment policies and other employment-related issues, unless such meetings are prohibited by Law. Seller has delivered to Purchaser information relating to the following named key employees of Company, including, without limitation, their compensation and benefits: Roy Garrett, Craig Soper, Dave Sloan, Rob Woodson, Bob Craig, Susan Stone, Bill Trimble and Mark Mullins. Purchaser shall have the right to discuss the payment of retention bonuses, and only retention bonuses, with the above named employees prior to the Closing Date upon reasonable notice to Seller, and in the presence of designated Representatives of Seller, unless such discussions are prohibited by Law. 9.10 WARN Act. Seller shall provide Purchaser with an accurate and complete list of all 37 39 employees whose employment was terminated during the one (1) year immediately preceding the Closing Date, together with the dates of such employees' employment, the location of employment and the reason that employment was terminated (e.g., reduction-in-force, misconduct, voluntary termination, retirement, death, etc.). 9.10.1 As soon as practicable before the Closing Date, Company shall physically give written notice to each of Company's employees of the cessation of their employment with Company as of the Closing Date, in form and content satisfactory to Purchaser. After the date on which Company so notifies all of Company's employees of their said employment cessation with Company, and before the Closing Date, Purchaser shall determine which of Company's employees Purchaser desires to offer employment. Purchaser agrees that Purchaser shall offer employment commencing on the day after the Closing Date to at least that number of Company's employees that is equal to the arithmetic remainder of the total number of Company's employees as of the Closing Date, minus fifty (50). Seller and Purchaser accordingly contemplate that an insufficient number of employees will experience an "employment loss" as defined in the U.S. Worker Adjustment and Retraining Notification Act ("WARN"), as amended, 29 U.S.C. Section 2101, et seq., on account of Purchaser's purchase of the Membership Interest to trigger any 60-day notice requirement under the WARN Act on or before the Closing Date. Purchaser shall have no liability, cost or obligation whatsoever to Seller, Parent or Company or to any of Company employees with respect to those of Company's employees to whom Purchaser does not make such an offer of employment, or with respect to those of Company's employees to whom Purchaser offers employment but who do not timely accept such offer, or with respect to those of Company's employees to whom Purchaser does make such an offer of employment (other than to comply with the terms of such offer of employment). Purchaser has not assumed, is not assuming and at no later time ever shall assume, and Seller shall indemnify and hold harmless Purchaser and United Coin, LLC for, any liability, cost or obligation whatsoever of Seller, Parent or Company under the WARN Act. ARTICLE X SURVIVAL; NO OTHER REPRESENTATIONS 10.01 Post-Closing Survival of Representations, Warranties, Covenants and Agreements. The representations, warranties, covenants and agreements of Seller and Parent and Purchaser contained in this Agreement will survive the Closing (a) indefinitely with respect to the representations and warranties contained in Sections 2.01, 2.02, 2.04, 2.05, 2.30, 3.01, 3.02 and 3.07 and the covenants and agreements contained in Sections 1.04, 4.08, 4.10, 4.15, 5.07, 5.08, 14.03 and 14.05, (b) until the expiration of all applicable statutes of limitation (including all periods of extension, whether automatic or permissive) with respect to matters covered by Sections 2.10 and Article VIII and (insofar as they relate to ERISA or the Code) Sections 2.13 and Article IX, or (c) until eighteen (18) months following the Closing Date in the case of each other representation, warranty, covenant and agreement (other than the agreements contained in Sections 4.03 and 5.03 which shall survive for the period specified therein), except that any representation, warranty, covenant or agreement that would otherwise terminate in accordance with clause (b) or (c) above 38 40 will continue to survive if a Claim Notice or Indemnity Notice (as applicable) shall have been timely given in good faith based on facts reasonably expected to establish a valid claim under Article XI on or prior to such termination date, until the related claim for indemnification has been satisfied or otherwise resolved as provided in Article XI; and except that the representations and warranties made by Seller and Parent under Section 2.26 with respect to real property owned by the Company shall not survive the Closing. 10.02 No Other Representations. Notwithstanding anything to the contrary contained in this Agreement, it is the explicit intent of each party hereto that Seller and Parent are making no representation or warranty whatsoever, express or implied, except those representations and warranties contained in this Agreement and in any certificate delivered pursuant to Section 6.03. In particular, Seller and Parent make no representation or warranty to Purchaser with respect to any financial projection or forecast relating to the Business or Condition of the Company. With respect to any projection or forecast delivered by or on behalf of Seller and Parent to Purchaser, Purchaser acknowledges that (i) there are uncertainties inherent in attempting to make such projections and forecasts, (ii) it is familiar with such uncertainties, (iii) it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts furnished to it and (iv) it shall have no claim against Seller and Parent with respect thereto. ARTICLE XI INDEMNIFICATION 11.01 Indemnification. (a) Subject to paragraph (c) of this Section and the other Sections of this Article XI, on and after the Closing Date Parent and Seller shall indemnify Purchaser, United Coin, LLC and their respective managers, members, employees, Affiliates and their respective successors and assigns ("Purchaser Indemnitees") in respect of, and hold it harmless from and against, any and all Losses arising after the Closing Date suffered, incurred or sustained by it or to which it becomes subject, resulting from, arising out of or relating to any breach of representation or warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of Parent and Seller contained in this Agreement and from the Excluded Obligations. (b) Subject to subsection (d) of this Section and other Sections of this Article XI, on and after the Closing Date, Purchaser shall indemnify Parent and Seller and their respective stockholders, officers, directors, employees, Affiliates and their respective successors and assigns ("Seller Indemnitees") in respect of, and hold each of them harmless from and against, any and all Losses arising after the Closing Date suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to any breach of representation or warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of Purchaser contained in this Agreement. (c) Notwithstanding anything to the contrary contained in this Agreement, no amounts of indemnity shall be payable as a result of any claim in respect to a Loss arising under paragraph (a) of Section 11.01: 39 41 (i) (A) unless, until and then only to the extent that the Purchaser Indemnitees have suffered, incurred, sustained or become subject to Losses referred to in such paragraph in excess of $400,000, in the aggregate, in which event the Seller Indemnitees shall be entitled to claim indemnity for Losses over and above such amount, and (B) no amounts of indemnity shall be payable to the Purchaser Indemnitees once they have received payments in respect of claims made under such paragraph of $5,000,000 in the aggregate; or (ii) If the Purchaser Indemnitee has not given the Seller and Parent a Claim Notice or Indemnity Notice, as applicable, with respect to such claim, setting forth in reasonable detail the specific facts and circumstances pertaining thereto, (A) as soon as practical following the time at which the Purchaser Indemnitee discovered or reasonably should have discovered such claim (except to the extent Seller and Parent are not prejudiced by any delay in the delivery of such notice) and (B) in any event prior to the applicable Cut-off Date; or (iii) to the extent that: (A) a Purchaser Indemnitee had a reasonable opportunity, but failed in good faith to mitigate the Loss, including but not limited to the failure to use commercially reasonable efforts to recover under a policy of insurance or under a contractual right of set-off or indemnity; or (B) the Loss arises from or was caused by actions taken or failed to be taken by a Purchaser Indemnitee or any of its Affiliates after the Closing; provided that the limitations contained in clauses (c)(i)(A) and (B) shall not apply to Losses arising from breach of the representations contained in Section 2.30, the covenants contained in Sections 1.04, 4.08 and 4.10 or the agreements of Seller contained in Section 14.05. (d) Notwithstanding anything to the contrary contained in this Agreement, no amounts of indemnity shall be payable as a result of any claim in respect to a Loss arising under paragraph (b) of Section 11.01: (i) (A) unless, until and then only to the extent that the Seller Indemnitees have suffered, incurred, sustained or become subject to Losses referred to in such paragraph in excess of $400,000 in the aggregate, in which event the Seller Indemnitees shall be entitled to claim indemnity for Losses over and above such amount; and (B) no amounts of indemnity shall be payable to the Seller Indemnitees once they have received payments in respect of claims made under such paragraph of $5,000,000 in the aggregate; or (iii) if the Seller Indemnitee has not given the Purchaser a Claim Notice or Indemnity Notice, as applicable, with respect to such claim, setting forth in reasonable detail the specific facts and circumstances pertaining thereto, (A) as soon as practical following the time at which the Seller Indemnitee discovered or reasonably should have discovered such claim (except to the extent Purchaser is not prejudiced by any delay in the delivery of such notice) and (B) in any event prior to the applicable Cut-off Date; or (iv) to the extent that: (A) the Seller Indemnitee had a reasonable opportunity, but failed, in good faith to mitigate the Loss, including but not limited to the failure to use commercially reasonable efforts to recover under a policy of insurance or under a contractual right of set-off or indemnity; or (B the Loss arises from or was caused by actions taken or failed to be taken by Seller, Parent or any of its Affiliates after the Closing; 40 42 provided that the limitations contained in clauses (d)(i)(A) and (B) shall not apply to Losses arising from breach of the representations contained in Sections 3.07, 5.07, 5.08 and 14.05. 11.02 Method of Asserting Claims. All claims for indemnification by any Indemnified Party under Section 11.01 will be asserted and resolved as follows: (a) In the event any claim or demand in respect of which an Indemnified Party might seek indemnity under Section 11.01 is asserted against or sought to be collected from such Indemnified Party by a Person other than Seller or any Affiliate of Seller or of Purchaser (a "Third Party Claim"), the Indemnified Party shall deliver a Claim Notice with reasonable promptness to the Indemnifying Party. The Indemnifying Party will notify the Indemnified Party as soon as practicable within the Dispute Period whether the Indemnifying Party disputes its liability to the Indemnified Party under Section 11.01 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. (i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 11.02(a), then the Indemnifying Party will have the right to defend, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings will be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party. The Indemnifying Party will have full control of such defense and proceedings, including any settlement thereof; provided, however, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnifying Party and its counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest, or, if appropriate and related to the Third Party Claim in question, in making any counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person (other than the Indemnified Party or any of its Affiliates). Notwithstanding the foregoing, the Indemnified Party may retain or take over the control of the defense or settlement of any Third Party Claim the defense of which the Indemnifying Party has elected to control if the Indemnified Party irrevocably waives its right to indemnity under Section 11.01 with respect to such Third Party Claim. (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to Section 11.02(a), then the Indemnified Party will have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be vigorously and diligently prosecuted by the Indemnified Party to a final conclusion or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including (except as provided in the immediately preceding sentence) any settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting, or, if appropriate and related to the Third Party Claim in question, in making any 41 43 counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person (other than the Indemnifying Party or any of its Affiliates). Notwithstanding the foregoing provisions of this clause (ii), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this clause (ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may retain separate counsel to represent it in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this clause (ii), and the Indemnifying Party will bear its own costs and expenses with respect to such participation. (iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability to the Indemnified Party with respect to the Third Party Claim under Section 11.01 or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability to the Indemnified Party with respect to such Third Party Claim, the Loss arising from such Third Party Claim will be conclusively deemed a liability of the Indemnifying Party under Section 11.01 and the Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on demand following the final determination thereof. If the Indemnifying Party has timely disputed its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by arbitration in accordance with paragraph (d) of this Section 11.02. (iv) Any sums due Purchaser as the Indemnified Party for Losses arising from such Third Party Claim, to the extent not otherwise paid by the Indemnifying Party, may be set-off as provided in Section 11.04. (b) In the event any Indemnified Party should have a claim under Section 11.01 against any Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver an Indemnity Notice with reasonable promptness to the Indemnifying Party. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim described in such Indemnity Notice, the Loss arising from the claim specified in such Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under Section 11.01 and the Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on demand following the final determination thereof. If the Indemnifying Party has timely disputed its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by arbitration in accordance with paragraph (d) of this Section 11.02. Any sums due Purchaser as the Indemnified Party for Losses, to the extent not otherwise paid by the Indemnifying Party, may 42 44 be set-off as provided in Section 11.04. (c) In the event of any claim for indemnity under Section 11.01(a), Purchaser agrees to give Seller and its Representatives reasonable access to the Books and Records and employees of the Company in connection with the matters for which indemnification is sought to the extent Seller reasonably deems necessary in connection with its rights and obligations under this Article XI. (d) Any dispute not resolved within the Resolution Period shall be submitted to arbitration to be finally and conclusively determined. Not later than five (5) days after the expiration of the Resolution Period, the parties shall select one neutral arbitrator (the "Arbitrator"). If the parties are unable to mutually agree upon the Arbitrator within the five (5) day period described above, the dispute shall be determined by a Board of Arbitration consisting of three (3) members (hereinafter sometimes called the "Board of Arbitration") selected as hereinafter provided. Each of the Indemnified Party and the Indemnifying Party shall select one (1) member and the third member shall be selected by mutual agreement of the other members, or if the other members fail to reach agreement on a third member within twenty (20) days after their selection, such third member shall thereafter be selected by the American Arbitration Association upon application made to it for a third member possessing expertise or experience appropriate to the dispute jointly by the Indemnified Party and the Indemnifying Party. The Arbitrator or Board of Arbitration, as the case may be, shall reach and render a decision in writing (concurred in by a majority of the members of the Board of Arbitration in the event such Board of Arbitration is constituted) with respect to the amount, if any, which the Indemnifying Party is required to pay to the Indemnified Party in respect of a Claim Notice or Indemnity Notice. In connection with rendering its decisions, the Arbitrator or the Board of Arbitration, as the case may be, shall adopt and follow such rules and procedures as the Arbitrator, or a majority of the members of the Board of Arbitration, as the case may be, deems necessary or appropriate. To the extent practical, decisions of the Arbitrator or Board of Arbitration, as the case may be, shall be rendered no more than thirty (30) days following commencement of proceedings with respect thereto. The Arbitrator or the Board of Arbitration, as the case may be, shall cause its written decision to be delivered to the Indemnified Party and the Indemnifying Party. Any decision made by the Arbitrator, or Board of Arbitration, as the case may be (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Indemnified Party and the Indemnifying Party and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. All reasonable expenses including legal fees in connection with the arbitration of a dispute shall be paid by the non prevailing party to the dispute in accordance with the decision of the Arbitrator or Board of Arbitration, as the case may be. 11.03 Method of Calculating Losses. (a) The amount of any payment to an Indemnified Party shall be reduced by the amount of any Tax Benefit Actually Realized by the Indemnified Party from payment of the liability upon which the claim for indemnity is based. (b) "Tax Benefit" shall mean the sum of the amount by which the actual Tax liability (after giving effect to any alternative minimum or similar Tax) of an Indemnified Party (or in the case of Purchaser or United Coin, LLC, the Tax liability of their members) to the appropriate taxing authority is reduced by the payment of the liability upon which the claim for indemnity (or 43 45 other claim) is based (including, without limitation, by or as a result of a deduction, increase in basis, entitlement to refund, credit or otherwise, whether available in the current taxable year, as an adjustment to the taxable income in any other taxable year or as a carryforward or carryback, as applicable) plus any interest (on an after-Tax basis) from such government or jurisdiction relating to such Tax liability. For purposes of this Agreement, a Tax Benefit shall be deemed to have been "Actually Realized" at the time any refund of Taxes is actually received or applied against other Taxes due, or at the time of the filing of a Tax Return (including any Tax Return relating to estimated Taxes) on which a loss, deduction or credit or increase in basis is applied to reduce the amount of Taxes which would otherwise be payable. Where a Tax Benefit may be realized that may result in the reduction of a payment to the Indemnified Party, the Indemnified Party will as promptly as practicable take or cause its Affiliates to take such reasonable or appropriate steps (including, without limitation, the filing of an amended Tax Return or claim for refund) to obtain at the earliest possible time any such reasonably available Tax Benefit. (c) For purposes of any Tax Benefit Actually Realized determined under subsection (b) above: (i) No later than 45 days after the filing of a Tax Return for any taxable period that includes a date upon which any amount was paid or accrued by the Indemnified Party in respect of the liability upon which the claim for indemnity is based, the Indemnified Party shall provide the Indemnifying Party a detailed statement ("Tax Benefit Statement") specifying the amount, if any, of any Tax Benefit that was Actually Realized by the Indemnified Party for such Tax period. To the extent that any deductions or other Tax items (including basis) that could give rise to a Tax reduction or savings do not result in the actual realization of such a Tax reduction or savings in the year described in the previous sentence, this subsection 11.03(c)(i) shall apply to each subsequent taxable period of the Indemnified Party, as the case may be, until either such Tax savings are Actually Realized (resulting in a Tax Benefit) or the losses or other carryforwards to which such deductions or other Tax items (including basis) gave rise expire unused, if applicable. For each relevant taxable period, the Indemnifying Party shall be provided with full access to the non-proprietary work papers and other materials and information of the Indemnified Party's accountants in connection with the review of the Tax Benefit Statement. If the Indemnifying Party disagrees in any respect with the Indemnified Party's computation of the amount of the Tax Benefit Actually Realized, the Indemnifying Party may, on or prior to 45 days after the receipt of the Tax Benefit Statement, deliver a notice to the Indemnified Party setting forth in reasonable detail the basis for the Indemnifying Party's disagreement therewith ("Tax Benefit Dispute Notice"). If no Tax Benefit Dispute Notice is received by the Indemnified Party on or prior to the 45th day after the Indemnifying Party's receipt of the Tax Benefit Statement from the Indemnified Party, the Tax Benefit Statement shall be deemed accepted. (ii) Within 15 days after the Indemnified Party's receipt of a Tax Benefit Dispute Notice, unless the matters in the Tax Benefit Dispute Notice have otherwise been resolved by mutual agreement of the parties, the Indemnified Party and the Indemnifying Party shall jointly select a nationally-recognized independent certified public accountant (the "Tax Benefit Accountant"); provided, however, if the Indemnified Party and the Indemnifying Party are unable to agree upon the Tax Benefit Accountant within such 15-day period, then the Indemnified Party and the Indemnifying Party shall each select a nationally-recognized independent certified public 44 46 accountant which shall then jointly choose the Tax Benefit Accountant within 15 days thereafter. The Tax Benefit Accountant shall conduct such review of the work papers and such other materials and information, and the Tax Benefit Dispute Notice, and any supporting documentation as the Tax Benefit Accountant in its sole discretion deems necessary, and the Tax Benefit Accountant shall conduct such hearings or hear such presentations by the parties or obtain such other information as the Tax Benefit Accountant in its sole discretion deems necessary. (iii) The Tax Benefit Accountant shall, as promptly as practicable and in no event later than 45 days following the date of its retention, deliver to the Indemnifying Party and the Indemnified Party a report (the "Tax Benefit Report") in which the Tax Benefit Accountant shall, after reviewing the disputed items set forth in the Tax Benefit Dispute Notice, determine what adjustments, if any, should be made to the amount of the Tax Benefit Actually Realized. The Tax Benefit Report shall set forth, in reasonable detail, the Tax Benefit Accountant's determination with respect to the disputed items or amounts specified in the Tax Benefit Dispute Notice, and the revisions, if any, to be made to the amount of the Tax Benefit Actually Realized, together with supporting calculations. All fees and expenses relating to this work of the Tax Benefit Accountant shall be borne equally by the Indemnified Party and the Indemnifying Party. The Tax Benefit Report shall be final and binding upon the Indemnified Party and the Indemnifying Party, shall be deemed a final arbitration award that is binding on each of the Indemnified Party and the Indemnifying Party, and no party shall seek further recourse to courts, other arbitral tribunals or otherwise. The amount, if any, of the Tax Benefit Actually Realized set forth in the Tax Benefit Report shall reduce the payment of the liability upon which the claim for indemnity is based and the net amount of such payment shall be paid to the Indemnified Party. 11.04 Right of Set-Off. Purchaser and/or United Coin, LLC, on behalf of the Purchaser Indemnitees, shall have the right to set-off against sums: (a) due Seller under the terms of the Senior Preferred Equity, (b) due Bally under the Supply Agreement, or (c) due Bally under the lease of gaming equipment by United Coin, LLC, from Bally, amounts due Purchaser for Losses incurred for which Parent and/or Seller are obligated to indemnify Purchaser under this Article XI. In the event Purchaser and/or United Coin, LLC, claims that the right of set-off on behalf of a Purchaser Indemnitee, and Seller has disputed its liability with respect thereto, Purchaser or Company may deliver such funds which become payable to Seller, Parent or Bally or their assigns to Escrow Holder, to be held by Escrow Holder pending such determination pursuant to the terms and provisions of the escrow instructions attached hereto as Exhibit K (the "Set-Off Escrow Instructions"). Purchaser shall pay the costs of the Escrow Holder. Delivery of such funds to Escrow Holder shall be deemed to constitute payment or delivery to the Seller, Parent, or Bally, as the case may be, or their assigns of the funds. The right of set-off provided for in this Section 11.04 shall only be asserted in an amount equal to the amount asserted in the Claim Notice or Indemnity Notice. Purchaser shall have the right to direct the Escrow Holder to deliver funds deposited with such Escrow Holder as provided above at any time after Seller or Parent fails to dispute a Indemnity Notice or a Claim Notice in the manner set forth in Section 11.02 (a) (iii) or 11.02(b). Delivery of funds held by the Escrow Holder as provided above shall be made to the party entitled thereto: (i) if Seller or Parent have disputed a Claim Notice or Indemnity Notice, at any time after resolution of such dispute during the Resolution Period, or during the period such dispute is in arbitration, in the 45 47 amount determined by agreement of the parties, or (ii) if the parties have arbitrated such Claim Notice or Indemnity Notice, to the party(s) and in the amount(s) awarded by the Arbitrator, or Board of Arbitration, as the case may be, on the seventh (7th) day after delivery of the decision of the Arbitrator or the Board of Arbitration, as the case may be. 11.05 Exclusivity. After the Closing, to the extent permitted by Law, the indemnities set forth in this Article XI shall be the exclusive remedies of Purchaser and Seller and their respective officers, directors, employees, agents and Affiliates for any misrepresentation, breach of warranty or nonfulfillment or failure to be performed of any covenant or agreement contained in this Agreement, and the parties shall not be entitled to a rescission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof, all of which the parties hereto hereby waive. ARTICLE XII DEPOSIT, TERMINATION, TERMINATION FEE 12.01 Deposits by Purchaser. (a) Upon execution of this Agreement, Purchaser shall deposit with Escrow Holder One Million Dollars ($1,000,000) in cash (the "Deposit") (all references in this Agreement to cash shall be deemed to mean payment by certified or bank cashier's check or wire transfer of immediately available funds), which amount is paid for the purpose of securing the performance of Purchaser in accordance with the terms and conditions of this Agreement and the Deposit Escrow Agreement, the form of which is attached hereto as Exhibit "H." Upon Seller's payment of the Purchaser approved costs described in Section 4.16, Purchaser shall deposit with Escrow Holder the amount of such Purchaser approved costs (the "System Deposit"). The System Deposit shall be held by Escrow Holder in accordance with the terms and conditions of this Agreement and the Deposit Escrow Agreement. In the absence of an uncured material breach of the Agreement by Purchaser, the Deposit, and the System Deposit, if made, shall be returned to Purchaser if this Agreement is rightfully terminated as provided in Sections 12.03(a), (b), (d)(i)-(iii) or (e). In the absence of an uncured material breach by Purchaser, the Deposit and the System Deposit, if made, shall be returned to Purchaser at any time during the Initial Term or the Extension Term, if during either the Initial Term or the Extension Term Purchaser elects to rightfully terminate this Agreement as provided in Section 12.03(c) and: (a) there is an uncured material breach of any representation, warranty, covenant or agreement on the part of Parent or Seller set forth in this Agreement, or (b) there is a Material Adverse Change in the Business or Condition of the Company, or (c) after using its reasonable best efforts, Purchaser is unable to obtain necessary gaming regulatory approvals required under Section 6.05, or (d) after using its reasonable best efforts, Purchaser is unable to obtain the financing described in Section 5.05, under terms reasonably acceptable to Purchaser. In the absence of an uncured material breach by Purchaser, the Deposit and the System Deposit, if made, shall be returned to Purchaser at any time during the Commitment Term, if Purchaser elects to rightfully terminate this Agreement as provided in Section 12.03(c) and: (a) there is an uncured material breach of any representation, warranty, covenant or agreement on the part of Parent or Seller set forth in this Agreement, or (b) there is a Material Adverse Change in the Business or Condition of the Company, or (c) Purchaser, after using its reasonable best efforts, is unable to obtain necessary gaming regulatory approvals described in Section 6.05. If Seller shall elect to rightfully terminate this Agreement under Section 12.03(d)(iv), the Deposit and the System Deposit, if made, shall be and become the property of Seller. 46 48 12.02 Term. The initial term of the Agreement shall be (9) months from the execution of this Agreement (the "Initial Term"). If there is not an uncured material breach by Purchaser of this Agreement, the Initial Term shall be extended for three (3) additional one (1) month periods if Purchaser delivers confirmation in writing to Parent prior to the beginning of each such month, from gaming counsel to Purchaser, confirming that: (a) Purchaser is continuing to seek all necessary gaming regulatory approvals required of Purchaser under Section 6.05 and (b) such counsel has not become aware of any reason why such approvals will not be obtained within fifteen (15) months after execution of the Agreement (the "Extension Term"). If there is not an uncured material breach by Purchaser of this Agreement, Purchaser shall be granted three (3) additional one (1) month extensions after the aforementioned Extension Term (i.e. a maximum term of 15 months) if Purchaser delivers to Parent confirmation of: (a) a commitment to Purchaser for the financing described in Section 5.05(a); and (b) with respect to each such extension, confirmation in writing prior to the beginning of each such month, from gaming counsel to Purchaser, confirming that: (i) Purchaser is continuing to seek all necessary gaming regulatory approvals required of Purchaser under Section 6.05 and (ii) such counsel has not become aware of any reason why such approvals will not be obtained within fifteen (15) months after execution of the Agreement (the "Commitment Term"). If at the end of the Commitment Term, the gaming license applications required of Purchaser are on the agenda for the meeting of the Nevada Gaming Control Board to be held immediately following the expiration of the Commitment Term, then the term of the Agreement shall be extended, at no cost or expense to Purchaser, to the date that is ten (10) Business Days after the last of the local gaming regulatory approvals required to be obtained by Purchaser is obtained by Purchaser in order to permit Purchaser to close the Acquisition; provided, further that: (a) Purchaser may not unilaterally reschedule its appearance before any gaming regulatory agency, but any such appearance may be rescheduled at the request of third parties due to matters beyond Purchaser's control, and (b) Purchaser shall diligently pursue in good faith all necessary gaming regulatory approvals required to be obtained by Purchaser to close the Acquisition. In no event shall the term of this Agreement extend beyond the date that is ninety (90) days from the date Purchaser's Nevada gaming licenses are approved by the Nevada Gaming Commission. In the event of a dispute between the parties relating to the Preliminary Closing Schedule, the Closing Date shall be extended as provided in Section 8.04(b). 12.03 Termination. This Agreement may be terminated, and the transactions contemplated hereby may be abandoned: (a) at any time before the Closing, by mutual written agreement of Seller and Purchaser; (b) at any time before the Closing, by Seller or Purchaser, in the event that any Order or Law becomes effective restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement, upon notification of the non-terminating party by the terminating party; (c) by Purchaser, upon notification to Seller by Purchaser, if the Closing shall not have occurred on or before such date and such failure to consummate is not caused by an uncured breach of this Agreement by Purchaser at any time during: (i) the Initial Term or the Extension Term, if: (A) Purchaser after using its reasonable best efforts reasonably determines that it will not 47 49 be able to obtain the financing described in Section 5.05, under terms reasonably acceptable to Purchaser, or (B) Purchaser after using its reasonable best efforts reasonably determines that it will not obtain the necessary gaming regulatory approvals required of Purchaser under Section 6.05, or (C) there is an uncured material breach of any representation, warranty, covenant or agreement on the part of Parent or Seller as set forth in this Agreement or (D) there is a Material Adverse Change in the Business or Condition of the Company; or (ii) during the Commitment Term, if: (X) Purchaser after using its reasonable best efforts reasonably determines that it will not be able to obtain the necessary gaming regulatory approvals required of Purchaser under Section 6.05, or (Y) there is an uncured material breach of any representation, warranty, covenant or agreement on the part of Parent or Seller as set forth in this Agreement or (Z) there is a Material Adverse Change in the Business or Condition of the Company. (d) by Parent or Seller, if: (i) the Board of Directors of Parent so determines and Parent shall have paid the Purchaser the Termination Fee described in Section 12.04; or (ii) at any time after 60 days after the date hereof Purchaser shall not have furnished the letters referred to in Section 5.05(a) and (b); (iii) the letters referred to in Section 5.05(a) and (b) shall fail to be in full force and effect, (iv) there exists an uncured material breach of any representation, warranty, covenant or agreement of Purchaser, or (v) not later than ten (10) days following the delivery to Purchaser of Unaudited Financial Statements for the Company fiscal year ending as of June 30, 2001, or as of the Determination Date, if earlier, if Adjusted EBITDA as of June 30, 2001, or the Determination Date, if earlier, is less than $26 million. (e) By Purchaser if: (i) Catfish Bend Casinos, L.C. fails to obtain the approval of the Iowa Racing and Gaming Commission by September 16, 2000 to make an investment in Purchaser, by giving Seller notice thereof not later than September 18, 2000, or (ii) not later than ten (10) days following the receipt by Purchaser of Unaudited Financial Statements for the Company fiscal year ending as of June 30, 2001, or on the Determination Date, if earlier, if Adjusted EBITDA as of June 30, 2001 or the Determination Date, if earlier, is: (x) less than $26 million or (y) greater than $29 million; provided, however, that if within five (5) days of the receipt by Seller of Purchaser's notice of Purchaser's election to terminate this agreement under this clause (y) Seller notifies Purchaser, in writing, that it elects to complete the transaction and to compute the Purchase Price as if Adjusted EBITDA as of June 30, 2001, or on the Determination Date, if earlier, was $29 million, then Purchaser shall not have the right to terminate this Agreement under this clause (y). 12.04 Effect of Termination. (a) If this Agreement is validly terminated pursuant to Section 12.03, this Agreement will forthwith become null and void, and there will be no liability or obligation on the part of Seller or Parent (or any of their respective officers, directors, employees, agents or other representatives or Affiliates) or Purchaser (or any of its respective managers, members, employees, agents or other representatives or Affiliates), except as provided in Sections 5.07 , 5.08, 12.01, 12.05 and in this Section, and except that the provisions with respect to expenses in Section 14.03 (as modified by the provisions below relating to the payment of the Termination Fee and Purchaser's fees, costs and expenses) and confidentiality in Section 14.05 will continue to apply following any such termination. If this Agreement is terminated pursuant to Section 12.03(e)(ii)(y), Purchaser shall pay to Seller within ten (10) days of demand, the reasonable fees, costs, and expenses incurred by Seller in connection with the transaction which is the subject to this Agreement, including, but not limited to, the reasonable fees, costs and expenses of Seller's 48 50 attorneys, accountants , and financial advisors, in an amount not to exceed the sum of Five Hundred Thousand Dollars ($500,000) as evidenced by receipts, invoices, and/or billing statements. If this Agreement is terminated pursuant to Section 12.03(d)(v) or Section 12.03(e)(ii)(x) above, Seller shall pay to Purchaser within ten (10) days of demand, the reasonable fees, costs, and expenses incurred by Purchaser in connection with the transaction which is the subject to this Agreement, including, but not limited to, the fees, costs and expenses of Purchaser's attorneys, accountants, and financial advisors, in an amount not to exceed the sum of Five Hundred Thousand Dollars ($500,000) as evidenced by receipts, invoices, and/or billing statements. If this Agreement is terminated pursuant to Section 12.03(d)(i) hereof Seller shall pay to Purchaser a fee in the sum of Two Hundred Fifty Thousand Dollars ($250,000) the ("Termination Fee") plus Purchaser's reasonable fees, costs and expenses incurred, including the reasonable fees, costs and expenses of Purchaser's attorneys, accountants and financial advisors. The Termination Fee shall increase: (i) to the sum of Five Hundred Thousand Dollars ($500,000) at the end of the first thirty (30) day period after the date of execution of this Agreement, and (b) to the sum of Seven Hundred Fifty Thousand Dollars ($750,000) at the later of: (A) the date Purchaser delivers the letters described in Section 5.05 and (B) the date all gaming applications for Purchaser and its principals are filed with the Nevada Gaming Control Board. The Termination Fee shall increase at the rate of $250,000 for each thirty (30) day period after the later of the events described in clauses (A) or (B) above, up to a maximum of Three Million Dollars ($3,000,000), plus the reasonable fees, costs and expenses as aforesaid. Seller shall pay the Termination Fee to Purchaser within two (2) days of the date Parent gives written notice to Purchaser of its intent to terminate this Agreement, and shall pay to Purchaser within ten (10) days of the receipt of statements and invoices supporting same, the reasonable expenses, costs and fees incurred by Purchaser in connection with this Agreement including the reasonable fees of Purchaser's attorneys, accountants and professional advisors. (b) If this Agreement is terminated during the Commitment Term, and the failure of Purchaser to obtain the necessary governmental and regulatory approvals described in Section 6.05 hereof is not by reason of any uncured material breach of any representation, warranty, covenant or agreement on the part of Parent or Seller set forth in this Agreement or any Material Adverse Change in the Business or Condition of the Company, Seller may direct Escrow Holder, by giving written notice to Purchaser and Escrow Holder, to release the Deposit to Parent. 12.05 Notice of Breach; Cure Period. If there shall a material breach of a representation, warranty, covenant or agreement on the part of a party, the non-breaching party shall give written notice thereof the breaching party. The breaching party shall have thirty (30) days from the date of notice thereof from the non-breaching party to cure such material breach, if such material breach can reasonably be cured within such thirty (30) day period. During such thirty (30) day cure period, if such breach can reasonably be cured within such (30) day period, the non breaching party shall not be permitted to terminate this Agreement by reason of such breach. If this Agreement is terminated pursuant to Section 12.03(d)(iv) above, the Deposit shall be delivered to Seller and Purchaser shall pay to Seller within ten (10) days of demand, the reasonable fees, costs, and expenses incurred by Seller in connection with the transaction which is the subject of this Agreement, including, but not limited to, the reasonable fees, costs and expenses of Seller's attorneys, accountants (to the extent not included in the costs described in Section 5.07), and financial advisors in an amount not to exceed the sum of Five Hundred Thousand Dollars ($500,000) 49 51 as evidenced by receipts, invoices, and/or billing statements. The Deposit together with reimbursement of Seller's fees and costs as provided in this Section 12.05 shall be liquidated damages for the failure of Purchaser to perform the duties, liabilities and obligations imposed upon it by the terms and provisions of this Agreement and because of the difficulty, inconvenience and uncertainty of ascertaining actual damages. Purchaser acknowledges that the Deposit together with reimbursement of Seller's fees and costs as provided in this Section 12.05 represents a fair and reasonable amount for liquidated damages. If this Agreement is terminated pursuant to Section 12.03(c) above by reason of an uncured material breach of any representation, warranty, covenant or agreement of Seller, Seller shall pay to Purchaser within ten (10) days of demand: (a) the reasonable fees, costs, and expenses incurred by Purchaser in connection with the transaction which is the subject of this Agreement, including, but not limited to, the reasonable fees, costs and expenses of Purchaser's attorneys, accountants and financial advisors in an amount not to exceed the sum of Five Hundred Thousand Dollars ($500,000) as evidenced by receipts, invoices, and/or billing statements and (b) the sum of One Million Dollars ($1,000,000), such sums being agreed upon as liquidated damages for the failure of Seller to perform the duties, liabilities and obligations imposed upon it by the terms and provisions of this Agreement and because of the difficulty, inconvenience and uncertainty of ascertaining actual damages. Seller acknowledges that such sums represent a fair and reasonable amount for liquidated damages. ARTICLE XIII DEFINITIONS 13.01 Definitions. (a) Defined Terms. As used in this Agreement, the following defined terms have the meanings indicated below: "Actions or Proceedings" means any action, suit, proceeding, arbitration or Governmental or Regulatory Authority investigation. "Adjusted EBITDA" means the actual EBITDA of the Company for the twelve (12) month period ending on June 30, 2001 or the Determination Date, if earlier, plus all payments made by the Company during the twelve (12) month period ending on June 30, 2001 or the Determination Date, if earlier, in respect to the liabilities, operating leases, and other obligations to be paid at the Closing by Seller as described on Section 1.04(a) of the Disclosure Schedule. "Adjusted Working Capital" means and shall be calculated, as of the Closing Date, as current assets (excluding cash, prepaid Nevada state, county and local gaming taxes and licensing fees, prepaid insurance, and the current portion of notes receivable from locations maturing after one month from the Closing Date) less current liabilities (excluding amounts accrued with respect to Excluded Obligations to be paid or assumed by Parent and/or Seller at the Closing Date). "Affiliate" means any Person that directly, or indirectly through one of more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by Contract or otherwise and, in any event and without limitation of the previous sentence, any Person owning 10% or more of the voting securities of another Person shall be deemed to control that Person. "Agenda Date" means the date Purchaser's applications for Nevada gaming licenses are expected to appear on the meeting agenda of the Nevada Gaming Control Board. 50 52 "Agreement" means this Purchase Agreement and the Exhibits, the Disclosure Schedule and the Schedules hereto and the certificates delivered in accordance with Sections 6.03 and 7.03, as the same shall be amended from time to time. "Arbitrator" has the meaning ascribed to it in Section 11.02(d). "Assets and Properties" of any Person means all assets and properties of every kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible, and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person. "Audited Financial Statements" has the meaning ascribed to it in Section 4.05. "Bally" means Bally Gaming, Inc., a subsidiary of Parent. "Benefit Plan" means any Plan established by the Company, or any predecessor or Affiliate of the Company, existing at the Closing Date or at any time within the two-year period prior thereto, to which the Company contributes, has contributed, has made payments or is obligated to make payments, or under which any employee, former employee or director of the Company or any beneficiary thereof is covered, is eligible for coverage, may receive payments under, or has benefit rights. "Board of Arbitration" has the meaning ascribed to it in Section 11.02(d). "Books and Records" means all files, documents, instruments, papers, books and records relating to the Business or Condition of the Company, including without limitation financial statements, Tax Returns and related work papers and letters from accountants, budgets, ledgers, journals, deeds, title policies, minute books, stock certificates and books, stock transfer ledgers, Contracts, Licenses, customer lists, computer files and programs, retrieval programs, operating data and plans and environmental studies and plans. "Business" has the meaning ascribed to it in the forepart of this Agreement. "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the States of Nevada or New York are authorized or obligated to close. "Business or Condition of the Company" means the business, financial condition or results of operations of the Company. "Cash on Hand" has the meaning ascribed to it in Section 4.14. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations promulgated thereunder. "CERCLIS" means the Comprehensive Environmental Response and Liability Information System, as provided by 40 C.F.R. Section 300.5. "Claim Notice" means written notification pursuant to Section 11.02(a) of a Third Party Claim as to which indemnity under Section 11.01 is sought by an Indemnified Party, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim against the Indemnifying Party under Section 11.01, together with the amount or, if not then reasonably determinable, the estimated amount, determined in good faith, of the Loss arising from such Third Party Claim. "Closing" means the closing of the transactions contemplated by Section 1.03. "Closing Date" means (a) the tenth (10) Business Day after the day on which the last of the consents, approvals, actions, filings, notices or waiting periods described in or related to the filings described in Sections 6.05 and 6.06 and Sections 7.05 and 7.06 has been obtained, made or 51 53 given or has expired, as applicable, unless extended for the period described in Section 8.04(b), or (b) such other date as Purchaser and Seller mutually agree upon in writing. "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Commitment Term" has the meaning ascribed to it in Section 12.02. "Common Stock" means the common stock, par value $0.10 per share, of the Company. "Company" has the meaning ascribed to it in the forepart of this Agreement. "Contract" means any agreement, lease, license, evidence of Indebtedness, mortgage, indenture, security agreement or other contract. "Cut-off Date" means, with respect to any representation, warranty, covenant or agreement contained in this Agreement, the date on which such representation, warranty, covenant or agreement ceases to survive as provided in clause (b) or (c) of Section 10.01, as applicable. "Cut-Off Time" means 10:30 A.M. on the Closing Date. "Defined Benefit Plan" means each Benefit Plan which is subject to Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of ERISA. "Deposit" has the meaning ascribed to it in Section 12.01. "Deposit Escrow Agreement" means that certain escrow agreement the form of which is attached hereto as Exhibit "H." "Determination Date" means the last day of the month preceding the Closing Date. "Disclosed Financial Statements" means the financial statements of the Company delivered to Purchaser pursuant to Section 2.09 or 4.05 "Disclosure Schedule" means the record delivered to Purchaser by Seller herewith and dated as of the date hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included therein by Seller pursuant to this Agreement as updated as of the Closing Date. "Dispute Period" means the period ending 60 days following receipt by an Indemnifying Party of either a Claim Notice or an Indemnity Notice. "EBITDA" means the Company's earnings before interest, taxes, depreciation and amortization as determined under GAAP. "Environmental Law" means any Law or Order relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "ERISA Affiliate" means any Person who is in the same controlled group of corporations or who is under common control with Seller or, before the Closing, the Company (within the meaning of Section 414(b) or 414(c) of the Code). "Escrow Holder" means Nevada Title Company. 52 54 "Excluded Obligations" has the meaning ascribed to it in Section 1.04. "Existing Guarantees" has the meaning ascribed to it in Section 4.08. "Extension Term" has the meaning ascribed to it in Section 12.02. "Final Closing Statement" has the meaning ascribed to it in Section 8.04. "GAAP" means generally accepted accounting principles. "Governmental or Regulatory Authorities" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or any state, county, city or other political subdivision, including those with regulatory control or jurisdiction over the conduct of lawful gaming or gambling. "Hazardous Material" means (i) any petroleum or petroleum products, flammable explosives, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs); (ii) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants" or words of similar import under any Environmental Law; and (C) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated by any Governmental or Regulatory Authority under any Environmental Law. "HSR Act" means Section 7A of the Clayton Act (Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and the rules and regulations promulgated thereunder. "Income Taxes" means United States federal income tax and any state or local taxes imposed on or measured by net income. "Income Tax Returns" means all returns required by applicable law to be filed with respect to Income Taxes. "Indebtedness" of any Person means all obligations of such Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (iv) under capital leases and (v) in the nature of guarantees of the obligations described in clauses (i) through (iv) above of any other Person. "Indemnified Party" means any Person claiming indemnification under any provision of Article XI. "Indemnifying Party" means any Person against whom a claim for indemnification is being asserted under any provision of Article XI. "Indemnity Notice" means written notification pursuant to Section 11.02(b) of a claim for indemnity under Article XI by an Indemnified Party, specifying the nature of and basis for such claim, together with the amount or, if not then reasonably determinable, the estimated amount, determined in good faith, of the Loss arising from such claim. "Initial Term" has the meaning ascribed to it in Section 12.02. "Intellectual Property" means all patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, copyrights and copyright rights, and all pending 53 55 applications for and registrations of patents, trademarks, service marks and copyrights. "Intellectual Property Licensing Agreement" means the agreement attached hereto as Exhibit "G." "Investment Assets" means all debentures, notes and other evidences of Indebtedness, stocks, securities (including rights to purchase and securities convertible into or exchangeable for other securities), interests in joint ventures and general and limited partnerships, mortgage loans and other investment or portfolio assets owned of record or beneficially by the Company and issued by any Person other than the Company (other than trade receivables generated in the ordinary course of business of the Company). "IRS" means the United States Internal Revenue Service. "Jorai Lease" has the meaning ascribed to it in Section 1.04. "Knowledge of Seller" means the actual knowledge of Robert Miodunski, Robert Saxton, Dave Sloan, Mark Lerner, Roy Garrett, Craig Soper and Rob Woodson. "Laws" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States or any state, county, city or other political subdivision or of any Governmental or Regulatory Authority. "Liabilities" means all Indebtedness, obligations and other liabilities of a Person (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due). "Licenses" means all licenses, permits, certificates of authority, authorizations, approvals, registrations, franchises and similar consents granted or issued by any Governmental or Regulatory Authority. "Liens" means any mortgage, pledge, assessment, security interest, lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale Contract, title retention Contract or other Contract to give any of the foregoing. "LLC Agreement" means the Limited Liability Company Agreement of United Coin, LLC. "Location" means a bar, restaurant, lounge, convenience store, or other location under contract with Company for the placement of gaming devices. "Location Contracts" means the Space Lease Agreements and Participation Agreements. "Loss" means any and all damages, fines, penalties, deficiencies, losses and expenses (including without limitation interest, court costs, reasonable fees of attorneys, accountants and other experts or other reasonable expenses of litigation or other proceedings or of any claim, default or assessment). "Material Adverse Change in the Business or Condition of the Company" or "Material Adverse Change" means any event, change or effect which is materially adverse to the Business or Condition of the Company, other than those occurring as a result of general economic or financial conditions or other developments which are not unique to the Company but also affect other Persons who participate or are engaged in the lines of business in which the Company participates or is engaged occurring subsequent to the date hereof. "Membership Interest" has the meaning ascribed to it in the Recitals to this Agreement. "Merger" has the meaning ascribed to it in the Recitals to this Agreement. 54 56 "Net Win" means with respect to a Location under a Participation Agreement, the total drop, less jackpots and fills and the Location's share of revenue. "NPL" means the National Priorities List under CERCLA. "Option" with respect to any Person means any security, right, subscription, warrant, option, "phantom" stock right, stock appreciation, deferred compensation arrangement or other Contract that gives the right to (i) purchase or otherwise receive or be issued any shares of capital stock of such Person or any security of any kind convertible into or exchangeable or exercisable for any shares of capital stock of such Person or (ii) receive or exercise any benefits or rights similar to any rights enjoyed by or accruing to the holder of shares of capital stock of such Person, including any rights to participate in the equity or income of such Person or to participate in or direct the election of any directors or officers of such Person or the manner in which any shares of capital stock of such Person are voted. "Order" means any writ, judgment, decree, injunction or similar order of any Governmental or Regulatory Authority (in each such case whether preliminary or final). "Parent" has the meaning ascribed to it in the forepart of this Agreement. "Participation Agreements" means those certain slot route leases with Locations identified in Section 2.21(a) of the Disclosure Schedule. "PBGC" means the Pension Benefit Guaranty Corporation established under ERISA. "Pension Benefit Plan" means each Benefit Plan which is a pension benefit plan within the meaning of Section 3(2) of ERISA. "Permitted Lien" means (i) any Lien for Taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of Law with respect to a Liability that is not yet due or delinquent and (iii) any minor imperfection of title or similar Lien which individually or in the aggregate with other such Liens could not reasonably be expected to materially adversely affect the Business or Condition of the Company. "Person" means any natural person, corporation, limited liability company, general partnership, limited partnership, limited liability partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. "Plan" means any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, split dollar life insurance, deferred compensation, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workmen's compensation or other insurance, severance, separation or other employee benefit plan, practice, policy or arrangement of any kind, whether written or oral, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of ERISA. "Pre-closing Date" means the date that is five (5) days after the meeting of the Nevada Gaming Control Board at which Purchaser's gaming licenses are recommended for approval by the Nevada Gaming Control Board. "Preliminary Closing Statement" has the meaning ascribed to it in Section 8.04. "Purchase Price" has the meaning ascribed to it in Section 1.02. "Purchaser" has the meaning ascribed to it in the forepart of this Agreement. 55 57 "Purchaser 401(k) Plan" has the meaning ascribed to it in Section 9.07. "Purchaser Indemnitees" has the meaning ascribed to in Section 11.01. "Purchaser's Accountants" has the meaning ascribed to it in Section 8.04. "Purchaser's Bank Accounts" means the bank accounts for United Coin, LLC to be opened and maintained by Purchaser on and after the Closing Date. "Qualified Plan" means each Benefit Plan which is intended to qualify under Section 401 of the Code. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata. "Representatives" means a Person's officers, employees, counsel, accountants, financial advisors, consultants and other representatives. "Resolution Period" means the period ending 60 days following receipt by an Indemnified Party of a written notice from an Indemnifying Party stating that it disputes all or any portion of a claim set forth in a Claim Notice or an Indemnity Notice. "Seller" has the meaning ascribed to it in the forepart of this Agreement. "Seller's Accountants" means the accountants engaged by Seller to prepare the Company's Audited Financial Statements. "Seller's Bank Accounts" means the bank accounts of the Company. "Seller 401(k) Plan" has the meaning ascribed to it in Section 9.07. "Seller Indemnitees" has the meaning ascribed to in Section 11.01(b). "Senior Preferred Equity" has the meaning ascribed to it in Section 1.02(b). "Set-off Escrow Agreement" means that certain escrow agreement the form of which is attached hereto as Exhibit "K." "Shares" has the meaning ascribed to it in the forepart of this Agreement. "System Deposit" has the meaning ascribed to it in Section 12.01. "Space Lease Agreements" means those certain slot route leases with Locations as identified in Section 2.21(a) of the Disclosure Schedule. "Subsidiary" means any Person in which the Company, directly or indirectly through Subsidiaries or otherwise, beneficially owns more than 50% of either the equity interests in, or the voting control of, such Person. "Tax Benefit" has the meaning ascribed to it in Section 11.03. "Tax Benefit Accountant" has the meaning ascribed to it in Section 11.03. "Tax Benefit Actually Realized" has the meaning ascribed to it in Section 11.03. "Tax Benefit Dispute Notice" has the meaning ascribed to it in Section 11.03. "Tax Benefit Report" has the meaning ascribed to it in Section 11.03. "Tax Benefit Statement" has the meaning ascribed to it in Section 11.03. "Tax Return" means a report, return or other information required to be supplied to a Governmental or Regulatory Authority with respect to or concerning Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes the Company. "Taxes" means any federal, state, local or foreign taxes, charges, fees, levies, other 56 58 assessments, or withholding taxes or charges imposed by any governmental entity, ad includes any interest and penalties on or additions to any such taxes and any expenses incurred in connection with the determination, settlement or litigation of any Tax liability. "Tentative Allocation Date" means the last day of the calendar month that is four calendar months prior to the month containing the projected Agenda Date. "Tentative Allocation Schedule" has the meaning ascribed to it in Section 8.04. "Termination Fee" has the meaning ascribed to it in Section 12.04. "Total Win" means with respect to a Location under a Space Lease Agreement, the total drop less jackpots and machine fills. "Third Party Claim" has the meaning ascribed to it in Section 11.02(a). "Transfer Taxes" means all sales and use taxes imposed by Chapters 372 and 374 of the Nevada Revised Statutes and the real property transfer tax under NRS 375.090 arising out of or in connection with the transfers effected pursuant to this Agreement. "Unaudited Financial Statement Date" means June 30, 2000. "United Coin, LLC" means the Nevada limited liability company into which the Company will be merged in the Merger on the Closing Date. "Unaudited Financial Statements" means the Financial Statements for the most recent month or fiscal year of the Company delivered to Purchaser pursuant to Section 2.09(a). "United Intellectual Property" means the Intellectual Property described on Section 2.20(a) of the Disclosure Schedule. "Updated Disclosure Schedules" means the schedules attached to this agreement as updated, amended and supplemented through and including the Closing Date. (b) Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement; and (v) the phrase "ordinary course of business" refers to the business of the Company. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP. Any representation or warranty contained herein as to the enforceability of a Contract shall be subject to the effect of any bankruptcy, insolvency, reorganization, moratorium or other similar law affecting the enforcement of creditors' rights generally and to general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at Law). ARTICLE XIV MISCELLANEOUS 14.01 Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to Purchaser, to: UC Acquisition Company of Nevada, LLC 7137 Mission Hills Dr. Las Vegas, Nevada 89113 57 59 Attn: Michael S. Luzich, Manager Facsimile No.: 702-247-6822 with a copy to: James, Driggs, Walch, Santoro, Kearney, Johnson & Thompson 3773 Howard Hughes Pkwy., Suite 290N Las Vegas, Nevada 89109 Attn: Michael E. Kearney Facsimile No.: 702-791-1912 If to Parent or Seller, to: Alliance Gaming Corporation 6601 South Bermuda Road Las Vegas, Nevada 89119 Facsimile No.: 702-270-7990 Attn: Legal Department with a copy to: Milbank, Tweed, Hadley & McCloy LLP One Chase Manhattan Plaza New York, New York 10005 Facsimile No.: 212-530-5219 Attn: Mark L. Weissler All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (iii) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. 14.02 Entire Agreement. This Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof and contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 14.03 Expenses. Except as otherwise expressly provided in this Agreement (including, without limitation, as provided in Section 12.04), whether or not the transactions contemplated hereby are consummated, each party will pay its own costs and expenses incurred in connection with the negotiation, execution and closing of this Agreement and the transactions contemplated hereby. 14.04 Public Announcements. At all times at or before the Closing, Parent, Seller, the Company and Purchaser will not issue or make any reports, statements or releases to the public with respect to this Agreement or the transactions contemplated hereby without the consent of the other, which consent shall not be unreasonably withheld. If either party is unable to obtain the approval of its public report, statement or release from the other party and such report, statement or release is, in the opinion of legal counsel to such party, required by Law in order to discharge such party's disclosure obligations, then such party may make or issue the legally required report, statement or release and promptly furnish the other party with a copy thereof. Parent, Seller, the Company and Purchaser will also obtain the other party's prior approval of any press release to be issued immediately following the Closing announcing the consummation of the transactions contemplated by this Agreement. 14.05 Confidentiality. Each party hereto will hold, and will use its best efforts to cause its Affiliates, and in the case of Purchaser, any Person who has provided, or who is considering providing, financing to Purchaser to finance all or any portion of the Purchase Price, and their respective Representatives to hold, in strict confidence from any Person (other than any such Affiliate, Person who has provided, or who is considering providing, financing or Representative), unless (a) compelled to disclose by judicial or administrative process (including without limitation in connection with obtaining the necessary approvals of this Agreement and the transactions contemplated hereby of Governmental or Regulatory Authorities) or by other requirements of Law 58 60 or (b) disclosed in an Action or Proceeding brought by a party hereto in pursuit of its rights or in the exercise of its remedies hereunder, all documents and information concerning the other party or any of its Affiliates furnished to it by the other party or such other party's Representatives in connection with this Agreement or the transactions contemplated hereby, except to the extent that such documents or information can be shown to have been (i) previously known by the party receiving such documents or information, (ii) in the public domain (either prior to or after the furnishing of such documents or information hereunder) through no fault of such receiving party or (iii) later acquired by the receiving party from another source if the receiving party is not aware that such source is under an obligation to another party hereto to keep such documents and information confidential; provided that following the Closing the foregoing restrictions will not apply to Purchaser's use of documents and information concerning the Company furnished by Seller hereunder. In the event the transactions contemplated hereby are not consummated, upon the request of the other party, each party hereto will, and will cause its Affiliates, any Person who has provided, or who is providing, financing to such party and their respective Representatives to, promptly (and in no event later than five Business Days after such request) redeliver or cause to be redelivered all copies of confidential documents and information furnished by the other party in connection with this Agreement or the transactions contemplated hereby and destroy or cause to be destroyed all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon prepared by the party furnished such documents and information or its Representatives. 14.06 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. 14.07 Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. 14.08 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person other than any Person entitled to indemnity under Article XI. 14.09 No Assignment; Binding Effect. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other party hereto and any attempt to do so will be void, except that Purchaser may assign any or all of its rights, interests and obligations hereunder to an Affiliate provided that any such Affiliate agrees in writing to be bound by all of the terms, conditions and provisions contained herein; provided such assignment does not materially adversely affect Parent and Seller's rights under this Agreement nor delay the Closing. No such assignment shall relieve Purchaser of its obligations hereunder. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. 59 61 14.10 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 14.11 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. 14.12 Consent to Jurisdiction. Notwithstanding the provisions of Section 11.02(d), in the event of a breach of the provisions of Sections 4.03. 4.10, 5.03, or 14.05 the non breaching party shall be entitled to injunctive relief as well as any other applicable remedies at law or in equity. Each party hereby irrevocably submits to the exclusive jurisdiction of the United States District Court for the District of Nevada (Unofficial Southern District) or any court of the State of Nevada located in the City of Las Vegas in any action, suit or proceeding arising out of the breach of Sections 4.03. 4.10, 5.03, or 14.05, for the enforcement of any award of the Arbitrator or Board of Arbitrators, as the case may be, or in respect to recovery of liquidated damages as set forth in Section 12.05 for breach of this Agreement, and agrees that any such action, suit or proceeding shall be brought only in such court; provided, however, that such consent to jurisdiction is solely for the purpose referred to in this Section and shall not be deemed to be a general submission to the jurisdiction of said courts or in the State of Nevada other than for such purpose. Each party hereby irrevocably waives, to the fullest extent permitted by Law, any objection that it may now or hereafter have to the laying of the venue of any such action, suit or proceeding brought in such a court and any claim that any such action, suit or proceeding brought in such a court has been brought in an inconvenient forum. 14.13 Governing Law. This Agreement shall be governed by and construed in accordance 60 62 with the Laws of the State of Nevada applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 14.14 Attorney's Fees. If a dispute arises with respect to the matters described in Section 14.12 above, then the party prevailing in such dispute shall be entitled to recover all reasonable expenses, including, without limitation, reasonable attorneys' fees and expenses, incurred in ascertaining such party's rights and in preparing to enforce and/or defend and in enforcing and/or defending such party's rights under this Agreement. 14.15 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party hereto as of the date first above written. UC ACQUISITION COMPANY OF NEVADA, LLC By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ APT GAMES, INC. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ ALLIANCE GAMING CORPORATION By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ 61 EX-21 3 v65925ex21.txt EXHIBIT 21 1 Exhibit 21 Subsidiaries All subsidiaries are wholly owned except as indicated. Alliance Gaming Corporation Alliance Holding Company Bally Gaming International, Inc. Bally Gaming, Inc. Bally Gaming de Puerto Rico, Inc. BGI Australia Pty. Limited Bally Gaming Africa Pty. Limited Bally Gaming and Systems, S.A. Alliance Automaten GmbH & Co. KG (99%) APT Games, Inc. Plantation Investments, Inc. United Coin Machine Co. Bally Gaming Missouri, Inc. Casino Electronics, Inc. Entertainment Systems Technology, Inc. Foreign Gaming Ventures, Inc. Alpine Willow Investments, Inc. Kansas Alliance Corporation Kansas Gaming Ventures, Inc. Kansas Financial Partners, LLC (50%) Kansas Gaming Partners, LLC (50%) Louisiana Ventures, Inc. Southern Video Services, Inc. (49%) Video Distributing Services, Inc. (49%) Video Services, Inc. (49%) United Gaming Rainbow Rainbow Casino-Vicksburg Partnership, L.P. (a) United Native American, Inc. Native American Investment, Inc. Alliance Automaten Verwaltungs GmbH Alliance Automaten GmbH & Co. KG (1%) Bally Wulff Automaten GmbH Bally Wulff Vertriebs GmbH Bally Gaming International GmbH Bally Wulff Beteiligungs GmbH Bally Wulff Billiards, GmbH Bally Wulff Security, GmbH Erkens Vertriebs GmbH Geda Automaten GmbH Grosshandel Kupper GmbH Westav Automaten GmbH (a) There is a limited minority interest holder. For further information see Item 1 - "Business - Casino Operations". EX-23.1 4 v65925ex23-1.txt EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Alliance Gaming Corporation As independent public accountants, we hereby consent to the incorporation of our report dated August 16, 2000 included in this Annual Report on Form 10-K, into the Company's previously filed Registration Statements (Nos. 33-45811, 33-45810, 333-25515, 333-20685, 333-10011 and 333-34077) on Forms S-3 and S-8. Arthur Andersen LLP Las Vegas, Nevada September 27, 2000 EX-23.2 5 v65925ex23-2.txt EXHIBIT 23.2 1 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Alliance Gaming Corporation We consent to incorporation by reference in the registration statements (Nos. 33-45811, 33-45810, 333-25515, 333-20685, 333-10011 and 333-34077) on Forms S-3 and S-8 of Alliance Gaming Corporation of our report dated August 11, 1999, relating to the consolidated balance sheet of Alliance Gaming Corporation and Subsidiaries as of June 30, 1999 and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the years in the two-year period ended June 30, 1999, which report appears in the June 30, 2000 annual report on Form 10-K of Alliance Gaming Corporation. KPMG LLP Phoenix, Arizona September 25, 2000 EX-27.1 6 v65925ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXCERPTED FROM FORM 10-K FOR THE YEAR ENDED JUNE 30, 2000. 1,000 12-MOS JUN-30-2000 JUN-30-2000 32,044 2,000 101,699 19,255 32,019 159,705 136,851 60,028 351,287 43,726 0 0 4,624 1,034 (56,453) 351,287 204,132 478,080 118,809 307,804 149,425 7,927 34,119 (14,034) 1,001 (15,035) 0 0 0 (15,035) (1.47) (1.47)
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