0000950148-01-501915.txt : 20011009 0000950148-01-501915.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950148-01-501915 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04281 FILM NUMBER: 1746736 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: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 10-K 1 v75843e10-k.htm FORM 10-K DATED JUNE 30, 2001 ALLIANCE GAMING CORP. FORM 10-K DATED JUNE 30, 200
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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 ACTS OF 1934
For the fiscal year ended June 30, 2001

[  ] 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
(State or other jurisdiction of
incorporation or organization)
 
88-0104066
(I.R.S. Employer
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 $385,352,000 as of September 7, 2001.

The number of shares of Common Stock, $0.10 par value, outstanding as of September 7, 2001 according to the records of registrant’s registrar and transfer agent, was 21,907,207.

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.

 


PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 4.2
EXHIBIT 10.30
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 23.2


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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 74,000 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 147,000 game monitoring units (“GMUs”) installed worldwide. The Company also owns, operates and services an installed base of over 8,800 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 approximately 26 table games and 1,450 gaming devices (collectively, “Casino Operations”). In addition, operating under the Bally Wulff name, the Company is a leading supplier of wall-mounted gaming machines and amusement games in Germany, having sold over 63,000 wall machines and amusement games during the last five years.

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 primary operating subsidiaries of Bally Gaming, Inc. (a.k.a. Bally Gaming and Systems) and Bally Wulff (a.k.a. Wall Machines and Amusement Games). The terms “the Company”, “we”, “our” as used herein refer 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 Bally Gaming and Systems business unit consists of three separate divisions: Gaming Products, Gaming Operations and Gaming Systems. The following table sets forth the percentages of revenues provided by each of the Bally Gaming and Systems divisions for the periods indicated:

                         
    Percentage of Revenues
Revenue by division   Years ended June 30,
 
    1999   2000   2001
   
 
 
Gaming Products
    74 %     55 %     54 %
Gaming Systems
    25       30       28  
Gaming Operations
    1       15       18  
 
   
     
     
 
 
    100 %     100 %     100 %
 
   
     
     
 

Markets. The Company believes that the domestic installed base of gaming machines now exceeds 600,000 units. The state of Nevada has the largest installed base, totaling approximately 200,000 units as of June 30, 2001.

The gaming industry continues to expand in international markets. The Company’s primary international markets are Europe, Canada and Latin America, and, to a lesser extent, the Far East and the Caribbean. The Company conducts its business in Canada through its staff in the United States. The Company also distributes gaming machines,

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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, 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.

Gaming Products. The Company designs, manufactures and sells 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 card games, video reel-spinning games and keno through a video display and can offer the player the chance to play a multitude of 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™ reel-type slot machines in late 1993 and its multi-game touch screen machine, the GameMaker®, in late 1994. In March 1998 the Company introduced the first major upgrade to both the ProSeries and upgraded the GameMaker product line, to the V7200 platform that is capable of multi-line video and multi-coin functionality.

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 $44.6 million, $23.6 million and $32.3 million for the years ended June 30, 1999, 2000 and 2001, respectively.

The V7200 can offer up to ten different video games within one gaming device, or can be configured as a dedicated single title game. The 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 V7200 machines contain bill acceptors and many other features believed to be popular with casinos and their customers. The V7200 machines are available in upright, bar top, slim-line and slant top cabinets. Revenues from sales of V7200 machines (and its predecessor, the GameMaker) were approximately $17.7 million, $23.6 million and $30.2 million for the years ended June 30, 1999, 2000 and 2001, respectively.

The Company commenced development of a new game platform in January 2000, with the intent of creating enhanced audio and video capabilities for its video product line. The Company engaged Microsoft to assist in the development of an NT™ based graphics and audio package addition to the legacy V7000 game board. The result was the Evolution platform, or EVO™, that offers superior audio and graphic capabilities on the wealth of Windows® based software and content programmers available in the marketplace. This new game platform will allow for the creation of game content at much faster rates than before, thus reducing the time to market for new products developed.

The Company typically offers a 90-day parts and labor 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 equipments were approximately $5.6 million, $3.7 million and $3.1 million for the years ended June 30, 1999, 2000 and 2001, 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.

Gaming Operations. 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 games which are either linked on a wide-area progressive system, or are non-linked niche games, which are gaming machines that have secondary bonus features. 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. Bally’s Gaming Operations generated recurring revenues of approximately $1.5 million, $20.8 million and $28.4 million for the fiscal years ended June 30, 1999, 2000 and 2001, respectively.

The Company received regulatory approval from the Nevada Gaming Control Board of its wide-area progressive jackpot system named “Thrillions™” 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. Separate wide-area progressives are being operated by the Company in Nevada, Mississippi and Native American lands, and by a separate third-party trust arrangement in Atlantic City.

The following was the installed base of wide-area progressive games:

                         
            Units Outstanding
    Date   As of June 30,
    Introduced   2000   2001
   
 
 
Betty Boop
    3/99       960       1,035  
Blondie
    3/01             420  
Millionaire 777’s
    6/01             225  
 
           
     
 
 
            960       1,680  
 
           
     
 

The Company has introduced a series of non-linked secondary bonus games. These games have been marketed under names such as Roll the Dice ®, Bell Ringer ®, Love Meter ™, 99 Bottle of Beer™, and Let’s Make a Deal ™, all of which are approved in most major gaming markets. The Company believes that games with such secondary bonus features will continue to gain floor space in casinos. The Thrillions system has been designed to allow casinos to use their own branding for the product. Currently, Park Place Entertainment utilizes the Thrillions system as a platform for their own network of linked games for their properties in Nevada and Mississippi markets, for which they pay a daily fee per game. The Company also earns recurring revenues from gaming devices deployed at three horse racing facilities under an agreement with the Delaware State Lottery Commission. As of June 30, 2001, the Company had an installed base of daily fee games totaling 1,500 units.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 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 $13.9 million, $12.6 million and $11.0 million during the years ended June 30, 1999, 2000 and 2001, respectively. The decrease in research and development spending in the year ended June 30, 2001, is a result of the comparison to the prior fiscal years which included incremental development costs related to the launch of the wide-area progressive system.

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 in excess of 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.

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 jurisdictions, 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 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 has 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 continues to be in regulatory field test in New Jersey and Nevada. The Company installed its second form of cashless, SDS Ticketing, into the following markets: California, New Mexico, Arizona, Minnesota and Connecticut during the fiscal year ended June 30, 2001. The Company continues to focus attention on the development of other cashless capabilities that will give casino operators the option of allowing their slot players to move club account funds to the gaming machine as well as deposit back to the club account.

Sales and Marketing. Bally Gaming and Systems uses a direct sales force and, to a lesser extent, an independent distributor network to distribute its products. Bally Gaming and Systems’ North America sales staff consists of approximately 25 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, generated approximately 80%, 75% and 70% of new unit machine sales for the years ended June 30, 1999, 2000 and 2001, 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 7%, 7% and 19% of new gaming machine unit sales for the years ended June 30, 1999, 2000 and 2001, respectively. GmbH generated approximately 13%, 18% and 11% of new gaming machine unit sales for the years ended June 30, 1999, 2000 and 2001, respectively.

As of June 30, 2001, the Company had over 147,000 game monitoring units installed in 145 locations, of which approximately 98% are in the United States. Substantially all System’s revenues are generate by its direct sales force.

For the year ended June 30, 2001, approximately 93% of the Company’s slot and video gaming machine sales were on terms of 90 days or less. Approximately 7% 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 8% 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 year ended June 30, 2001, the ten largest

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

customers accounted for approximately 42% of the Bally Gaming and Systems’ new unit sales, with the largest single customer accounting for 9% of new units sales.

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 release. For the year ended June 30, 2001, the ten largest computerized monitoring system customers (which include certain multi-site casino operators that have corporate agreements) accounted for approximately 76% of game monitoring unit sales revenues. Due to the high initial costs of installing a computerized monitoring system, customers for such systems generally have tended not to change suppliers once they have installed such a system.

Future growth 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, 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.

In March 2000, the Company entered into an agreement with Multimedia Games, Inc. to supply gaming devices for use in Class III and other markets. The agreement was amended in April 2000 to include Class II markets.

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 to 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, Aristocrat, 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 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

companies may enter the gaming machine business and several of these companies offer or plan to offer second feature bonus games. Besides Bally Gaming, 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, Acres Gaming, and companies marketing systems under the brand names of Aristocrat and Grips. Competition is keen in this market due to the number of providers and the limited number of casinos and jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all key factors in determining a provider’s success in selling its system. Management believes the future success of its operations will be determined by its ability to bring new and innovative products to the market while maintaining its base of loyal existing customers.

Wall Machines and Amusement Games

Industry Overview

Management believes 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.

In August 2001, the regulators approved a change to the play parameters for wall machines, reducing the time per play cycle from 15 seconds to 12 seconds, an improvement of 25%. The 12-second games will be offered beginning January 1, 2002, and conversion kits for existing 15-second games will also be sold. This change was petitioned by the arcade operators who believe that the improved speed of play will attract players to wall machines and away from other types of non-gaming amusement games.

Wall machine sales into the arcade market account for approximately 30% of the total wall machine sales in Germany. As of June 30, 2001, a number of arcades (approximately 8%) 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 22%, 21% and 30% for the years ended June 30, 1999, 2000 and 2001, 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 play costs up to 40 pfennigs (approximately $0.17 at the exchange rate of $1.00=DM 2.29 prevailing as of June 30, 2001, which rate is used hereinafter) to play, although the player may deposit larger amounts to provide continuous play but not to increase

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

payoffs. German regulations limit the maximum payout to ten times the player’s stake (DM 4.00 or approximately $2.29 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 $6,760). Although there were initially strong sales of this product in fiscal year 1999, consumer demand for product was not long-lived, and sales slowed substantially in fiscal year 2000, and virtually no sales of this product were made 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:

                         
    Percentage of Revenues
Product Line   Years ended June 30,
 
    1999   2000   2001
   
 
 
Sale of wall machines manufactured by Bally Wulff
    43 %     40 %     42 %
Leasing of wall machines manufactured by Bally Wulff
    10       14       12  
Entertainment and amusement machines and third party wall machines distributed
    25       42       42  
Other (primarily used machines, parts and service)
    22       4       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 $3.2 million, $2.7 million and $2.5 million during the years ended June 30, 1999, 2000 and 2001, respectively.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 4% 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 3,600 to DM 7,500 (approximately $1,600 to $3,300). Due to price competition among the three largest manufacturers, selling prices have declined since 1997. Management believes that such declines in prices have reached bottom, and are expected to improve in the future. For the year ended June 30, 2001 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 6% 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 2001. Leasing machines to customers accounted for 10%, 14% and 12% of total revenues for the years ended June 30, 1999, 2000 and 2001, 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 has maintained their relationship with Bally Wulff for over five years. For the year ended June 30, 2001, Bally Wulff’s top ten customers accounted for approximately 10% of Bally Wulff’s revenues, while no single customer accounted for more than 2% of Bally Wulff’s revenues.

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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 June 2001, the Company voluntarily terminated an agreement previously entered into to sell its Nevada-based route operations. The Company paid a breakup fee and related costs and expenses totaling $6.5 million. Additionally, as part of the refinancing of its senior bank debt in June 2001, the Company repaid certain operating leases for gaming equipment used in the Nevada route operation, totaling approximately $13.0 million. The effect of the repayment of the operating leases will be to, on a prospective basis, reduce rental expense by $6.5 million and increase depreciation expense by $4.0 million, annually.

The Company’s Nevada route operations involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other electronic gaming machines in local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores operated by third parties (“local establishments”). The Company’s route operations target Nevada residents who generally frequent local establishments close to their homes.

The following table sets forth certain historical data concerning the Company’s Nevada route operations:

                         
    Years ended June 30,
   
    1999   2000   2001
   
 
 
Average number of gaming machines operated
    7,300       7,856       8,083  
Average number of locations
    680       687       703  
Average win per day per gaming machine
  $ 57.20     $ 63.10     $ 67.75  

At June 30, 2001, the Company operated approximately 8,150 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 200 and 470 gaming machines to the Nevada route during the years ended June 30, 1999 and 2000, respectively, and no such takeovers occurred in the fiscal year 2001.

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 operator’s 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 88%, 84%, and 80% of revenues and 76%, 74%, and 77% of installed machines, respectively, in the Company’s Nevada route operations for the years ended June 30 1999, 2000 and 2001. At June 30, 2001, the weighted average remaining term of the Company’s revenue sharing arrangements was approximately 2.8 years. Space lease arrangements accounted for approximately 12%, 16%, and 20% of revenues and 24%, 26%, and 23% of installed machines, respectively, in the Company’s Nevada route operations for the years ended June 30, 1999, 2000 and 2001. At June 30, 2001, the weighted average remaining term of the Company’s space leases was 2.9 years.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 2001, the Company had the Gamblers Bonus installed in over 3,900 gaming machines at approximately 377 locations or 47% 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.

Customers. The Company has a diversified customer base with no one customer accounting for more than 3% of the Company’s revenues generated from Nevada route operations during the year ended June 30, 2001, although approximately 8% of such revenues were generated through an affiliated group of such customers. The affiliated group consists of eight partnerships each having one individual partner who is common to all such partnerships. For the year ended June 30, 2001, the ten largest customers accounted for approximately 16% of the Nevada route operations revenues.

Assembly Operations. In years prior to 1988, the Company’s route operations manufactured its own gaming machines for use in its Nevada route operations. These machines represent approximately 38% of the gaming machines currently used in the Nevada route operations at June 30, 2001. 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, 2001, approximately 34% 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, 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 2001, the Company had approximately 670 video poker machines in Louisiana.

Under the Louisiana gaming laws and regulations, the majority stockholder of any entity operating video poker machines in Louisiana must be a domiciled resident of the State of Louisiana. As a result, the Company owns 49% of the common stock of VSI and three prominent members of the Louisiana business and legal community owns 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.

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. The Company continues to investigate the addition of new locations under its current contract with the Fair Grounds in areas where competitive factors are favorable. Under the Louisiana Act, racetracks and OTBs are permitted to install an unlimited number of video poker machines while truckstops and taverns may install only limited numbers of such machines.

Competition. The racetrack and OTB locations where the Company operates video poker machines compete with 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 33,000-square foot casino, with 955 gaming devices and 19 table games as well as a 250-seat restaurant/buffet and 20,000-square foot conference center. The facility also includes the 89-room Rainbow Hotel, which is owned and operated by a third party. Rainbow Casino is marketed as a “locals” casino and draws its

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

customers principally from within a 75-mile radius of Vicksburg. The Vicksburg casino market generated approximately $229 million in gaming revenue in the twelve months ended June 30, 2001.

The Company is the general partner of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”) the limited partnership that operates the Rainbow Casino. The limited partner, Rainbow Corporation, an independent third party 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, 2001 operated approximately 500 gaming devices, 7 table games, and live 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 primarily 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 success of marketing programs. Many of Rail City Casino’s competitors include large casino-hotels that offer more amenities, as well as smaller casinos and taverns that appeal to local area residents.

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 may be developed. Both of these projects will be contingent on several factors including regulatory approval and financing.

Patents, Copyrights and Trade Secrets

Bally Gaming, Inc., is the copyright owner (or has licenses to use) game 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 and its subsidiaries have 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, Inc., is obligated under several patent agreements to pay royalties ranging from approximately $25 to $250 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 $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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 1999, 2000, and 2001 was $1.9 million, $3.4 million, and $3.5 million, respectively.

Employees and Labor Relations

As of June 30, 2001, the Company and its subsidiaries employed approximately 2,400 persons, including approximately 1,330 persons in Nevada, 60 persons in Louisiana, 560 persons in Mississippi, 50 persons in various other states and 400 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 businesses. A change in the make-up of the Company’s board of directors and management would require the various gaming authorities to examine the qualifications of the new board and management.

Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the “Nevada Act”) and (ii) various local ordinances and regulations. The Company’s gaming, manufacturing, distributing and slot route operations (herein collectively referred to as “gaming machine operations”) are subject to the licensing and regulatory control of the Nevada State Gaming Control Board (the “Nevada Board”), the Nevada 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 manufacture or distribute gaming devices or

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 systems meet 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 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 licensing, the 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 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,

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FORM 10-K

Year Ended June 30, 2001

(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.

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 acquires 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 the Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as a part of the approval process relating to the transaction.

The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees and Registered Corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse affects of these business practices on Nevada’s gaming industry and to promote Nevada’s policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make exceptional repurchases of voting securities above the current market price (commonly called “ greenmail”) and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation’s board of directors in response to a tender offer made directly to the Registered Corporation’s stockholders for the purpose of acquiring control of the Registered Corporation.

License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Licensees’ 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

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FORM 10-K

Year Ended June 30, 2001

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, have 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, 2004. Annual fees must be paid on or before July 1 in each year regardless of the license expiration date.

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.

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.

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FORM 10-K

Year Ended June 30, 2001

Bally Gaming has an application pending to renew its license as a manufacturer of devices under the Louisiana Gaming Law. In the past, a manufacturer would have to obtain a separate permit to do business with video poker, riverboat and land based casino licensees. However, recent changes have been enacted to Louisiana’s Gaming Law to allow manufacturers to apply for and obtain one permit to be able to conduct business in the different gaming venues.

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 9 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.

The Company, RCVP, Bally Gaming, Inc., 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 and a wide-area progressive operator license to operate its progressive slot system. Such licenses are issued by the Mississippi Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 and its wide-area progressive operator 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 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, distributor, and wide-area progressive 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 on 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 that 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 the Rainbow Casino 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”). The Company is a holding company of BGI, as that term is defined by the Casino Control Act, and thus is a qualifier in connection with BGI’s CSI license and has been approved as such by the New Jersey Commission. BGI has filed for renewal of its CSI license. The New Jersey Division of Gaming Enforcement, as part of its normal duties in conjunction with the license renewal process, is conducting its investigation of BGI, the Company, and its qualifiers.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

In considering whether to renew a CSI license, the New Jersey Commission requires 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 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. After receiving governmental licensing approval for a machine, 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 10 times the maximum stake of DM 0.40, or DM 4.00 (approximately $1.74), per game, require a minimum payout percentage, detail where the machines may be installed, how many may be installed and by whom, which games are prohibited, the technical requirements of the machines and technical review and approval. Operators must comply with regulations that specify how many machines may operate within defined square foot areas (15 square meters per machine, with a maximum of ten machines per location). In taverns, restaurants, hotels and certain other establishments, no more than two gaming machines are permitted.

The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs the zoning classification of land and the type and density of development within the various zoning classifications. Effective January 27, 1990, the Baunutzungsverordnung was amended to restrict the development of larger gaming halls to core commercial areas, limit the permissibility of smaller gaming halls in various types of mixed use zones and to ban gaming halls in most types of residential and all types of industrial use areas. Prior to the amendment, gaming halls, regardless of size, were generally allowed in core, business, mixed and industrial zones. In addition, on a case-by-case basis, each local zoning agency is authorized to exclude certain types of otherwise permissible uses, including gaming halls.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 $262).

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 not yet issued the final assessment from their quadrennial audits covering the period 1992 to 1995.

With the switch to the Euro as the sole currency of wall machines, the maximum payout will change from DM 4.0 to Euro 2.0, which given the current conversion rate, results in a slightly lower effective payout. To compensate for this slight decrease, certain new regulations set to take effect March 1, 2002 will reduce the duration of each play on wall machines from 15 seconds to 12 seconds, thus increasing the number of potential plays per hour by 25%. Conversion kits for 15-second games will be allowed to be marketed, however, the Company believes many arcade operators may elect to purchase new wall machines as part of the Euro-conversion. In order to facilitate the transition of these new regulations, regulators will allow machines whose four year life would otherwise expire between October 2001 and February 2002 to continue to be operated until February 28, 2002.

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, and other foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or conduct business.

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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 2001, all of which are fully utilized unless otherwise noted (in 000’s):

                         
                    Annual
            Building   Rental
Location   Use   Square Feet   Payments

 
 
 
Las Vegas, NV   Nevada route operations     18,500     $ 231  
Las Vegas, NV   Research and development offices     20,000       300  
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     5,000       43  
Westchester, IL   Sales offices     4,900       26  
Dania, FL   Sales offices     3,400       7  
Temecula, CA   Sales offices     2,000       18  
Elko, NV   Sales office and route operations     4,200       9  
Atlantic City, NJ   Administrative offices     750       10  
San Juan, P R   Sales offices     1,000       12  
Las Vegas, NV   Warehousing     86,300       423  
Las Vegas, NV   Warehousing     1,500       52  
Berlin, Germany   Administrative offices and manufacturing     115,500       439  
Hannover, Germany   Administrative offices and warehousing     20,100       168  
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 (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       65  
Metairie, LA   OTB operation     5,500       59  
LaPlace, LA   OTB operation     2,250       105  
Sparks, NV   Warehousing     3,600       23  


(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, 2001, 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     33,000  
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     -  

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Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

(a)  These facilities are mortgaged collateral for the Company’s Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

In addition, the Company leases 21 bar and tavern properties that have been subleased to other operators in connection with its Nevada route operations. The properties range in size from approximately 1,750 square feet to 7,700 square feet. The remaining terms of the leases range from 6 months to 10 years with monthly payments ranging from approximately $2,500 to $16,400.

In addition to the principal facilities, the Company has 18 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.

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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Common Stock is traded on the Nasdaq 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. The prices shown below have been adjusted to reflect the two-for-one stock split effective August 21, 2001 for shareholders of record on July 31, 2001. 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, 2000
 
1st Quarter
  $ 4.06     $ 1.84  
 
2nd Quarter
    4.40       1.22  
 
3rd Quarter
    2.15       1.09  
 
4th Quarter
    1.28       0.75  
Fiscal Year Ended June 30, 2001
 
1st Quarter
  $ 1.94     $ 0.84  
 
2nd Quarter
    5.50       1.74  
 
3rd Quarter
    9.69       4.19  
 
4th Quarter
    19.89       9.08  

As of September 1, 2001 the Company had approximately 1,320 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 loan 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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,
     
      1997   1998   1999   2000   2001
     
 
 
 
 
              (In 000's, except per share amounts)        
Statements of Operations Data
                                       
Revenues:
                                       
 
Gaming equipment and systems
  $ 134,734     $ 109,597     $ 127,810     $ 135,180     $ 160,890  
 
Wall machines and amusement games
    131,934       98,611       90,834       68,952       72,228  
 
Route operations
    127,028       148,507       175,854       202,480       221,505  
 
Casino operations
    51,450       60,657       60,691       68,053       73,499  
 
   
     
     
     
     
 
 
    445,146       417,372       455,189       474,665       528,122  
 
   
     
     
     
     
 
Costs and expenses:
                                       
 
Cost of gaming equipment and systems
    84,496       61,684       69,721       75,508       77,423  
 
Cost of wall machines and amusement games
    68,426       54,241       54,035       43,301       39,243  
 
Cost of route operations
    95,716       114,645       137,692       161,062       178,103  
 
Cost of casino operations
    22,269       25,930       27,011       27,933       32,541  
 
Selling, general and administrative
    99,520       86,318       101,113       101,740       98,635  
 
Research and development
    9,954       15,778       17,190       15,318       13,576  
 
Depreciation and amortization
    22,606       22,838       23,104       26,788       27,745  
 
Unusual items
    700       (325 )           2,164       6,489  
 
   
     
     
     
     
 
 
    403,687       381,109       429,866       453,814       473,755  
 
   
     
     
     
     
 
Operating income
    41,459       36,263       25,323       20,851       54,367  
Other income (expense)
 
Interest expense, net
    (22,006 )     (27,787 )     (30,836 )     (33,654 )     (33,764 )
 
Rainbow royalty
    (4,722 )     (587 )                  
 
Rainbow Royalty Buyout (1)
          (19,000 )                  
 
Minority interest and other
    (1,092 )     (2,002 )     (2,053 )     (2,155 )     (2,165 )
 
Other, net
    139       1,025       (431 )     924       (181 )
 
   
     
     
     
     
 
Income (loss) before income taxes
    13,778       (12,088 )     (7,997 )     (14,034 )     18,257  
Income tax provision
    (7,993 )     (3,185 )     (830 )     (1,001 )     (611 )
 
   
     
     
     
     
 
Income (loss) before extraordinary item
    5,785       (15,273 )     (8,827 )     (15,035 )     17,646  
Extraordinary loss without tax benefit
          (42,033 )                 (3,164 )
 
   
     
     
     
     
 
Net income (loss)
    5,785       (57,306 )     (8,827 )     (15,035 )     14,482  
Special stock dividends
    (11,264 )     (3,551 )     (1,697 )            
Premium on repurchase/redemption of Series B Special Stock
    (710 )     (16,553 )                  
 
   
     
     
     
     
 
Net income (loss) applicable to common shares
  $ (6,189 )   $ (77,410 )   $ (10,524 )   $ (15,035 )   $ 14,482  
 
   
     
     
     
     
 
Basic earnings (loss) per share (2)
  $ (0.34 )   $ (4.24 )   $ (0.55 )   $ (0.74 )   $ 0.70  
 
   
     
     
     
     
 
Diluted earnings (loss) per share (2)
  $ (0.34 )   $ (4.24 )   $ (0.55 )   $ (0.74 )   $ 0.69  
 
   
     
     
     
     
 

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

ITEM 6. SELECTED FINANCIAL DATA (Continued)

                                         
    Fiscal Years Ended June 30,
   
    1997   1998   1999   2000   2001
   
 
 
 
 
            (In 000's, except per share amounts)        
Balance Sheet Data
                                       
Cash and cash equivalents and securities available for sale
  $ 28,924     $ 23,487     $ 16,930     $ 34,044     $ 54,845  
Working capital
    110,795       119,480       108,661       115,979       112,669  
Total assets
    352,016       366,837       356,307       351,287       380,197  
Total long term debt, including current maturities
    173,839       325,953       318,706       345,059       340,100  
Total stockholders’ equity (deficiency)
    53,555       (23,748 )     (30,408 )     (50,795 )     (39,205 )


(1)   Represents royalty fee related to the HFS financing at the Rainbow Casino. The Company repurchased this royalty obligation from HFS on August 12, 1997.
(2)   The earnings per share amounts have been restated to reflect the two-for-one stock split effective August 21, 2001.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

As of June 30, 2001, the Company had $54.8 million in cash and cash equivalents, and $25.0 million in unborrowed availability on its new revolving credit facility. In addition the Company had net working capital of approximately $112.7 million, a decrease of approximately $3.3 million from June 30, 2000, which is explained in the working capital section below. Consolidated cash and cash equivalents at June 30, 2001 includes approximately $20.8 million of cash which is utilized in Casino and Route Operations which is held in vaults, cages or change banks.

In June 2001, the Company completed a refinancing of its senior bank credit facility which now consists of $190.0 million term loan and a $25.0 million revolving credit facility (which can be increased by $15.0 million at the Company’s discretion any time until December 31, 2002). Proceeds from the term loan were used to repay the Company’s existing bank term loans and credit facility, totaling $166.0 million, repay certain gaming equipment operating leases totaling $13.0 million, and to pay transaction fees and expenses. The new term loan has a 1% per year mandatory principal amortization, with a 5.5 year maturity. The revolving credit facility commitment decreases ratably over the 5 year term of the commitment. There is no borrowing base collateral requirement for the revolving credit facility. As of June 30, 2001, there were no borrowings outstanding on the revolving credit facility. The new bank loan contains certain financial and operational covenants, however there are no borrowing base requirements. As of June 30, 2001, the Company is in compliance with all covenants. In conjunction with the refinancing, the Company recorded a extraordinary charge of $3.2 million to write off the balance of deferred financial costs, related to the repaid term loans

Management believes that cash flows from operating activities, cash and cash equivalents held and the up to $40.0 million revolving credit facility commitment will provide the Company with sufficient capital resources and liquidity. At June 30, 2001, the Company had no material commitments for capital expenditures.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Working Capital

The following table presents the components of consolidated working capital at June 30, 2000 and 2001:

                           
      Balance at June 30,        
     
       
      2000   2001   Change
     
 
 
Cash, cash equivalents, and short term investments
  $ 34,044     $ 54,845     $ 20,801  
Accounts and notes receivable, net
    82,444       79,369       (3,075 )
Inventories, net
    32,019       35,082       3,063  
Other current assets
    11,198       10,814       (384 )
 
     
     
     
 
 
Total current assets
    159,705       180,110       20,405  
Accounts payable
    10,367       19,531       9,164  
Accrued liabilities
    32,323       46,978       14,655  
Current maturities of long-term debt
    1,036       932       (104 )
 
     
     
     
 
Total current liabilities
    43,726       67,441       23,715  
 
     
     
     
 
Net working capital
  $ 115,979     $ 112,669     $ (3,310 )
 
     
     
     
 

The primary fluctuations contributing to the decrease in working capital were: (i) an increase in accounts payable resulting from timing of payments, (ii) an increase in accrued liabilities resulting from timing of payments relating to the refinancing, (iii) a net decrease in accounts receivable resulting from cash collections and decreases 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, 2001, cash provided from operating activities totaled $56.9 million, an increase of $59.8 million compared to the cash flows from operations in the prior years. This improvement is directly attributable to the overall improved profitability of the Company, and $24.1 million provided by the active management of working capital.

During the year ended June 30, 2001, the Company used $27.8 million of cash in investing activities resulting primarily from $11.7 million in capital expenditures, $13.0 million used to purchase assets formerly under operating leases, $1.2 million of payments made in acquiring gaming rights for route locations, and $2.1 million of payments made to acquire other long term assets.

During the year ended June 30, 2001, prior to the refinancing, cash was used to paydown the revolving credit facility ($23.3 million), and was also used for payments on other long term debt ($2.8 million). The refinancing transaction provided $190.0 million, proceeds from which were used to repay the existing Term Loans and revolving Credit Facility ($166.0 million), and to pay transaction fees and expenses.

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.

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Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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. Regulations regarding the transition to the Euro currency are not yet finalized in the area of wall machines. It is currently believed that conversion kits will be allowed for games in the wall machine that currently accept only deutschmark. The Company also intends to pre-sell Euro denominated wall machines, which will be available for shipment and installation in the days immediately after the first of the calendar year.

Results of Operations

The following table presents the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) and operating income by business unit:

                           
      Years ended June 30,
     
      1999   2000   2001
     
 
 
EBITDA by business unit:
                       
Bally Gaming and Systems
  $ 9,799     $ 12,385     $ 36,066  
Wall Machines and Amusement Games
    10,150       3,583       10,459  
Route Operations
    24,860       24,503       24,786  
Casino Operations
    21,672       25,954       27,558  
Corporate expenses
    (18,054 )     (14,688 )     (10,268 )
 
   
     
     
 
 
EBITDA before unusual items
    48,427       51,737       88,601  
Unusual items
          (4,098 )     (6,489 )
 
   
     
     
 
 
Total EBITDA
  $ 48,427     $ 47,639     $ 82,112  
 
   
     
     
 
Operating income (loss) by business unit:
                       
Bally Gaming and Systems
  $ 5,779     $ (693 )   $ 27,039  
Wall Machines and Amusement Games
    5,334       (4,219 )     4,904  
Route Operations
    14,586       15,162       15,482  
Casino Operations
    19,348       23,805       25,258  
Corporate expenses/unusual items
    (19,724 )     (13,204 )     (18,316 )
 
   
     
     
 
 
Total Operating Income
  $ 25,323     $ 20,851     $ 54,367  
 
   
     
     
 

The Company believes that the analysis of EBITDA is a useful adjunct to net income, cash flow and other GAAP measurements. However, this information should not be construed as an alternative to net income (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.

2001 Compared with 2000

Bally Gaming and Systems

For the year ended June 30, 2001, the Bally Gaming and Systems business unit reported revenues of $160.9 million, an increase of 19% compared to revenues of $135.2 million in the prior year. Gaming Products sales totaled $86.6 million, an increase of 16% compared to $74.9 million in the prior year. New unit sales totaled 10,500 units, a 20% increase compared to 8,700 in the prior year period. The average new unit selling price increased 7% from the prior year to $6,700. By market segment, unit sales for the current year consisted of approximately 1,590 units to the Nevada and Atlantic City markets, 1,440 units to Canada, 1,000 units to international markets, 1,980 units in

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

California and 4,490 units to other Native American, riverboats and other domestic markets. Bally Systems reported revenues of $45.9 million compared to $40.2 million in the prior year. Systems reported shipments of 32,700 SDS units, a 7% decrease compared to 35,300 units in the prior year. This decrease was primarily a result of comparisons to the record year 2000, which included certain Y2K related replacements as well as several larger sales as a result of mergers and acquisitions which took place in the casino operator market, which activity declined in fiscal year 2001. Gaming Operations reported revenues of $28.4 million, an increase of 41% compared to the prior year. The increased revenues were driven by an increase in the installed base of recurring revenue units, which total approximately 3,200 units as of June 30, 2001, compared to approximately 2,700 units at June 30, 2000, and an increase in the revenue per unit as a result of the increased number of higher revenue wide-area progressive games deployed compared to the lower revenue daily-fee games.

For the year ended June 30, 2001, the overall gross margin percentage for Bally Gaming and Systems improved to 52% compared to 46% in the prior year. The improvement was due primarily to a change in product mix to higher margin gaming machines and greater revenues from higher margin recurring revenue machines.

Bally Gaming and Systems reported operating income of $27.0 million, compared to an operating loss of $(0.7) million in the prior year. The increase in operating income resulted primarily from increases in revenues and improved margins, as well as the reduced overhead cost structure. Research and development costs totaled $11.0 million, a decrease of 13% compared to the prior year. The reduction in research and development costs results from the comparison to the prior year, which included incremental costs related to the development of the wide-area progressive network.

Wall Machines and Amusement Games

For the year ended June 30, 2001, Wall Machines and Amusement Games reported revenues of $72.2 million, an increase of 5% compared to revenues of $68.9 million in the prior year. The increase in revenues resulted primarily from a 46% increase in the number of new wall machine units sold, a 34% increase in the selling price of new wall machines, excluding those sold in the prior year as part of a new single-site progressive jackpot system, and a 29% increase in the number of leased wall machines. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar decreased revenues by $6.9 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, 2001, a total of 6,400 machines were deployed in the leasing program compared to 5,500 at June 30, 2000, an increase of 15%.

For the year ended June 30, 2001, gross profit margin increased to 46% from 37% in the prior year. The gross margin increase resulted primarily from an increase in the number of units sold which impacted the fixed cost absorption rate, as well as improvements in the average new unit selling price, offset by lower margins on the sale of used wall machines and amusement games. Wall Machines and Amusement Games reported operating income of $4.9 million, compared to operating loss of ($4.2) million in the prior year period.

Route Operations

For the year ended June 30, 2001, the Route Operations business unit reported total revenues of approximately $221.5 million, an increase of 9% compared to revenues of $202.5 million in the prior year. Revenues from the Nevada route operations increased to approximately $205.1 million or 12% over the prior year. This improvement was attributable to an increase in the average net win per gaming machine per day of 7% to $67.74 from $63.30 in the prior year and a 4% increase in the weighted average number of gaming machines during the current year to 8,000 units as compared to 7,800 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, 2001, the Gamblers’ Bonus product was installed in over 3,860 gaming machines at approximately 377 locations statewide or 47% of the installed base of gaming machines.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Revenues from route operations in Louisiana totaled $16.4 million, a decrease of 15% compared to the prior year. This decrease was primarily the result of a decline in the net win per gaming machine per day of 14% to $66.53 from $77.50 in the prior year and the average number of machines remained constant at 680, resulting from the loss of two locations due to parish gaming referendums. These declines are reflective of the competitive market resulting from the significant increase in the number of truck stop casinos in the metro New Orleans area.

For the year ended June 30, 2001, cost of revenues for Route Operations totaled as a percentage of revenues, increased to 81% from 80% 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. As part of recently completed refinancing the company repaid all of the gaming equipment leases, which prospectively will eliminate approximately $5.8 million of yearly game rental cost and increase depreciation by approximately $4.0 million per year.

For the fiscal year ended June 30, 2001, the Route Operations business unit reported operating income of $15.5 million, an increase of 2% compared to operating income of $15.2 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, 2001, the Casino Operations business unit reported revenues of $73.5 million, an increase of 8% compared to revenues of $68.1 million in the prior year. This improvement is due to an 8% increase in revenues at the Rainbow Casino and a 9% increase in revenues at the Rail City Casino. The improvement at the Rainbow Casino was attributable to a 9% increase in the average number of gaming machines, and by a 2% increase in the net win per day to $151, 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 8% to $84 from $78 in the prior year and a 2% increase in the average number of gaming machines.

For the year ended June 30, 2001, the cost of revenues for Casino Operations as a percentage of revenues, improved to 44% compared to 41% 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 fiscal year ended June 30, 2001, the Company recorded the following unusual or extraordinary items:

     Unusual charge of $6.5 million for costs and expenses incurred to terminate the agreement to sell the Nevada Route Operations.
 
     Non-cash extraordinary charge of $3.2 million to write off the balance of deferred financing costs as a result of the refinancing of the Company’s $230 million bank debt.

During the fiscal 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Consolidated

Total revenues for the year ended June 30, 2001, were approximately $528.1 million, an increase of 11% compared to revenues of $474.7 million in the prior year. Each of the Company’s business units reported year over year growth in revenues. Cost of revenues as a percentage of total revenues decreased to 62% from 64% in the prior year period.

Selling, general and administrative expenses for the year ended June 30, 2001 were approximately $98.6 million, a decrease of 3% compared to costs of $101.7 million in the prior year. This decrease was due to the decreases in expenses at all of the business units, except Casino Operations costs.

Research and development costs for the year ended June 30, 2001 were approximately $13.6 million, a decrease of 11% compared to costs of $15.3 million in the prior year, which is discussed above.

Depreciation and amortization for the year ended June 30, 2001 were approximately $27.7 million, a 4% increase compared to $26.8 million in the prior fiscal year. The increase was driven by the larger base of assets in the Bally Gaming Operations division.

Interest Income and Expense and Income Taxes

Interest expense (net of interest income) for the year ended June 30, 2001, totaled $33.8 million, and compared to the net interest expense of $33.7 million in the prior year. The slight increase is a result of slightly higher interest rates offset by an increase in interest income and lower average debt balances outstanding. During the fiscal year 2001, the Company paid down its previously existing revolving credit facility by approximately $23.0 million and reduced other long term debt by $2.8 million. On June 22, 2001, the Company refinanced its senior bank debt by entering into a new $190 million term loan facility and a $25 million revolving credit facility. Proceeds from the new loan were used to repay the existing bank loans ($166 million), repay certain operating leases ($13 million) and pay transaction fees and expenses.

The Company recorded an income tax provision of $0.6 million in the year ended June 30, 2001, compared to a provision of $1.0 million in the prior year. The decrease in the current year provision is due primarily to income tax refund of $0.6 million offset by state income taxes. At June 30, 2001, the Company had net operating income carry forwards for federal income tax purposes of approximately $101 million which are available to offset future federal taxable income, if any, expiring in the years 2008 through 2021. At June 30, 2001 the Company had foreign tax credit carry forwards of approximately $6.6 million and alternative minimum tax credit (AMT) carry forwards of approximately $0.9 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.

2000 Compared with 1999

Bally Gaming and Systems

For the year ended June 30, 2000, the Bally Gaming and Systems business unit reported revenues of $135.2 million, an increase of 6% compared to revenues of $127.8 million in the prior year. Gaming Product sales totaled $74.9 million, a decrease of 21% compared to $94.9 million in the prior year. New unit sales totaled 8,700 units, a 30% decrease compared to 12,300 in the prior year period. The average new unit selling price increased 10% from the prior year to $6,300. By market segment, unit sales for the current year consisted of approximately 1,370 units to the Nevada and Atlantic City markets, 840 units to Canada, 2,870 units to international markets, and 4,460 units to riverboats, Native American and other domestic markets. Bally Systems reported revenues of $40.2 million compared to $31.4 million in the prior year. 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, and to a lesser extent units sold

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

related to Y2K upgrades. Gaming Operations reported revenues of $20.1 million, an increase of 286% compared to revenues of $1.5 million in the prior year. At year-end, the Gaming operations division had an installed base of approximately 2,300 units earning recurring revenues, compared to approximately 1,200 units at June 30, 1999.

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 loss of ($0.7) million, compared to operating income of $5.8 million in the prior year. The decrease in operating income resulted primarily from the high level of fixed overhead costs, higher depreciation expenses due to the continued roll out of progressive gaming devices, higher provision for uncollectible receivables and unusual charges for the costs incurred to close certain unprofitable sales offices and writedowns of inventory. 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 an 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 of ($4.2) 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 $68.1 million, an increase of 12% compared to revenues of $60.7 million in the prior year. This improvement is due to a 9% increase in revenues 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.

Consolidated

Total revenues for the year ended June 30, 2000 were approximately $474.7 million, an increase of 4% compared to revenues of $455.2 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 $101.7 million, an increase of 1% compared to costs of $101.1 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

Interest expense (net of interest income) in the year ended June 30, 2000, totalled $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 Company’s previous bank credit agreement, coupled with a higher average amount of debt outstanding during the year and higher interest rates.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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, 2001, the aggregate outstanding principal amount of the Company’s long-term indebtedness including current maturities was $340.1 million. The Company also has available up to $40.0 million in unborrowed commitment under its revolving credit facility.

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.

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 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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., and Mikohn Gaming Corporation. Competition is keen in this market due to the number of providers and the limited number of casinos and the jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all main factors in determining a provider’s success in selling its system. 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 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 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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 continues to deploy 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 Company’s participation in any such markets, or jurisdictions currently permitting gaming will continue to do so in the future.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 2001, Bally Gaming and Systems has $12.4 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.

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 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 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 2000 and 2001, 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 analysis, the Company defines risk of loss as the hypothetical impact on earnings, of changes in the market interest rates or currency exchange rates.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

The results of the sensitivity analysis at June 30, 2001, are as follows:

Interest Rate Risk:

The Company had total debt as of June 30, 2001 of $340.1 million, of which $190.0 million are Term Loans with interest rates tied to LIBOR. These Term Loans are broken into individual loans with varying terms from one to six months. The interest rate for each loan is set on the borrowing date and is effective for the term outstanding. If the LIBOR rates were to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would decrease or increase by approximately $1.9 million on a pre-tax basis.

Foreign Currency Exchange Rate Risk:

The Company’s German subsidiaries utilize the German deutschemark as their functional currency, which will be converted to the Euro during fiscal year 2002. If the German deutschemark declined 10% against the U.S. dollar, there would be a corresponding increase in earnings reported in the consolidated group, of approximately $0.2 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 $4.4 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. QUANTITATIVE 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”) and engaged Arthur Andersen LLP. 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 statement of operations, stockholder’s equity (deficiency) and cash flows for the one year period ending 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.

Effective June 1, 2000, the Company engaged the firm of Arthur Andersen LLP as independent accountants for the Company’s fiscal year ending June 30, 2000, to replace KPMG. The Company’s Board of Directors approved the

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 2000 and 2001   F-3
    Consolidated Statements of Operations for the Years Ended June 30, 1999, 2000 and 2001   F-4
    Consolidated Statements of Stockholders’ Equity (Deficiency) for the Years Ended June 30, 1999, 2000 and 2001   F-5
    Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 2000 and 2001   F-6
    Notes to Consolidated Financial Statements   F-7
2.   Consolidated Supplemental Schedules:    
    Not applicable.    
3.   Exhibits:    
     
Exhibit    
Number   Description

 
2.1   Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and BGII, dated as of October 18, 1995, as amended and restated (incorporated herein by reference to Annex I to the prospectus included in Alliance’s Form S-4, Registration Number 333-02799)
2.2   Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and exhibits thereto (incorporated herein by reference to Alliance’s Form 8-K dated October 29, 1993)
2.3   Consolidation Agreement, dated March 29, 1995 among United Gaming Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel and John A. Barrett, Jr. (incorporated herein by reference to Alliance’s Form 8-K dated March 29, 1995)
3.1   Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to Alliance’s Form S-2, Registration Number 33-72990)
3.2   Revised and Amended By-Laws of the Registrant (incorporated herein by reference to Alliance’s Form 10-Q for the quarter ended December 31, 1997.)
3.3   Certificate of Designations, Preferences, and Relative, Participating, Optional and Other Special Rights of Special Stock and Qualifications, Limitations and Restrictions of 11 1/2% Non-Voting, Pay-in-Kind Special Stock, Series E (incorporated herein by reference to Exhibit 9(c)(5) to Amendment No. 1 to Alliance’s Form S-4 dated May 9, 1996)

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

     
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   Loan Agreement among Alliance Gaming Corporation, Bally Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Bank of America, N.A. (Administrative Agent), dated June 22, 2001 (incorporated herein by reference)
4.3   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)
4.4   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)
4.5   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)
4.6   Form of Right Certificate (attached as Exhibit B to the Rights Agreement) (incorporated herein by reference to Form 8-A dated March 10, 1998)
4.7   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)
10.1   Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated herein by reference to the Company’s Form S-8 filed August 12, 1997 Registration Number 333-34077).*
10.2   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)
10.3   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)
10.4   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).*
10.5   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)
10.6   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)

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Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

     
Exhibit    
Number   Description

 
10.7   Amendment to Stockholders Agreement dated as of October 20, 1994 (incorporated herein by reference to Alliance’s Form S-8 Registration Number 33-45811 and Registration Number 33-75308)
10.8   Selling Stockholder Letter Agreement dated as of March 20, 1995 (incorporated herein by reference to Alliance’s Form S-3 Registration Number 33-58233)
10.9   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)
10.10   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)
10.11   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)
10.12   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)
10.13   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)
10.14   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)
10.15   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)
10.16   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)
10.17   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)
10.18   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)
10.19   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)
10.20   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)

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

     
Exhibit    
Number   Description

 
10.21   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)
10.22   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)
10.23   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)
10.24   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 December 31, 1996).*
10.25   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 December 31, 1996).*
10.26   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).*
10.27   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).*
10.28   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)
10.29   Amendment Number 1 to the agreement between the Company and Kirkland Investment Corporation dated July 1, 1997 (incorporated by reference to the Company’s Annual Report on Form 10-K dated June 30, 1997)
10.30   Amended and Restated Employment Agreement, effective April 24, 2001, between the Company and Robert L. Miodunski (incorporated herein by reference)
10.31   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)
10.32   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)
10.33   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)
21   Subsidiaries of the Registrant.
23.1   Consent of Arthur Andersen LLP
23.2   Consent of KPMG LLP


*   Management contract or compensatory plan or arrangement.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

ITEM 14 (continued).

(b)    Reports on Form 8-K:
 
     On June 25, 2001, the Company filed a report on Form 8-K disclosing the completion of the $230 million refinancing of the Company’s senior bank debt.
 
(c)    See Item 14(a)(3) above.
 
(d)    See Item 14(a)(2) above.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 2001

By /s/ Robert L. Miodunski
 
 
 
  Robert L. Miodunski,
Director, President and Chief
Executive Officer
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

         
Name   Title   Date

 
 
/s/ Robert L. Miodunski
Robert L. Miodunski
  Director, President and Chief Executive Officer (Principal Executive Officer)   September 27, 2001
 
/s/ Robert L. Saxton
Robert L. Saxton
  Sr. Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)   September 27, 2001
 
/s/ Jacques Andre

Jacques Andre
  Director   September 27, 2001
 
/s/ Anthony DiCesare

Anthony DiCesare
  Director   September 27, 2001
 
/s/ Joel Kirschbaum

Joel Kirschbaum
  Director   September 27, 2001
 
/s/ David Robbins

David Robbins
  Director and Chairman of the Board   September 27, 2001
 
/s/ Morton Topfer

Morton Topfer
  Director   September 27, 2001
 
/s/ Kevin Verner

Kevin Verner
  Director   September 27, 2001

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Table of Contents

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Alliance Gaming Corporation:

We have audited the accompanying consolidated balance sheets of Alliance Gaming Corporation and Subsidiaries as of June 30, 2000 and 2001 and the related consolidated statements of operations, stockholders’ deficiency and cash flows for the years then ended. 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, 2000 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Las Vegas, Nevada
August 15, 2001

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Table of Contents

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders
Alliance Gaming Corporation:

We have audited the accompanying consolidated statements of operations, stockholders’ equity (deficiency) and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 results of operations and cash flows of Alliance Gaming Corporation and Subsidiaries for the year ended June 30, 1999, in conformity with accounting principles generally accepted in the United States of America.

  KPMG LLP

Phoenix, Arizona
August 11, 1999

F-2


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In 000’s except share amounts)

ASSETS

                         
            June 30,   June 30,
            2000   2001
           
 
Current assets
                   
 
Cash and cash equivalents
  $ 32,044     $ 54,845      
 
Short-term investments
    2,000        
 
Accounts and notes receivable, net of allowance for doubtful accounts of $19,255 and $15,991
    82,444       79,369  
 
Inventories, net of reserves of $6,660 and $6,593
    32,019       35,082  
 
Other current assets
    11,198       10,814  
 
   
     
 
       
Total current assets
    159,705       180,110  
 
   
     
 
Long-term notes receivable, net of allowance for doubtful accounts of $953 and $10
    4,043       1,433          
Leased gaming equipment, net of accumulated depreciation of $10,713 and $14,986
    16,959       22,677  
Property, plant and equipment, net of accumulated depreciation and amortization of $60,028 and $74,245
    76,823       88,412  
Excess of costs over net assets of acquired businesses, net of accumulated amortization of $6,420 and $7,433
    54,994       49,514  
Intangible assets, net of accumulated amortization of $20,609 and $20,693
    21,850       22,212  
Deferred tax assets, net of valuation allowance of $64,245 and $66,829
    12,174       11,944  
Other assets, net of reserves of $1,813 and $1,826
    4,739       3,895  
 
   
     
 
 
  $ 351,287     $ 380,197  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
               
 
Accounts payable
  $ 10,367     $ 19,531  
 
Accrued liabilities
    32,323       46,978  
 
Current maturities of long term debt
    1,036       932  
 
   
     
 
       
Total current liabilities
    43,726       67,441  
 
   
     
 
Long term debt, net
    344,023       339,168  
Other liabilities
    12,972       11,493  
 
   
     
 
       
Total liabilities
    400,721       418,102  
 
   
     
 
Minority interest
    1,361       1,300  
Commitments and contingencies Stockholders’ deficiency:
               
 
Special Stock, 10,000,000 shares authorized:
               
     
Series E, $100 liquidation value; 46,242 shares and 120 shares issued and outstanding
    4,624       12  
 
Common Stock, $.10 par value; 100,000,000 shares authorized, 10,335,000 and 21,776,000 shares issued
    1,034       2,178  
 
Treasury stock, at cost, 83,000 shares and 256,000 shares
    (508 )     (501 )
 
Additional paid-in capital
    141,130       147,828  
 
Accumulated other comprehensive losses
    (21,790 )     (27,919 )
 
Accumulated deficit
    (175,285 )     (160,803 )
 
   
     
 
       
Total stockholders’ deficiency
    (50,795 )     (39,205 )
 
   
     
 
 
  $ 351,287     $ 380,197  
 
   
     
 

See accompanying notes to consolidated financial statements.

F-3


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share amounts)

                                 
            Years Ended June 30,
           
            1999   2000   2001
           
 
 
Revenues:
                       
   
Gaming equipment and systems
  $ 127,810     $ 135,180     $ 160,890  
   
Wall machines and amusement games
    90,834       68,952       72,228  
   
Route operations
    175,854       202,480       221,505  
   
Casino operations
    60,691       68,053       73,499  
 
   
     
     
 
 
    455,189       474,665       528,122  
 
   
     
     
 
Costs and expenses:
                       
 
Cost of gaming equipment and systems
    69,721       75,508       77,423  
 
Cost of wall machines and amusement games
    54,035       43,301       39,243  
 
Cost of route operations
    137,692       161,062       178,103  
 
Cost of casino operations
    27,011       27,933       32,541  
 
Selling, general and administrative
    101,113       101,740       98,635  
 
Research and development costs
    17,190       15,318       13,576  
 
Depreciation and amortization
    23,104       26,788       27,745  
 
Unusual items, net
          2,164       6,489  
 
   
     
     
 
 
    429,866       453,814       473,755  
 
   
     
     
 
Operating income
    25,323       20,851       54,367  
Other income (expense):
                       
   
Interest income
    549       465       1,043  
   
Interest expense
    (31,385 )     (34,119 )     (34,807 )
   
Minority interest
    (2,053 )     (2,155 )     (2,165 )
   
Other, net
    (431 )     924       (181 )
 
   
     
     
 
Income (loss) before income taxes
    (7,997 )     (14,034 )     18,257  
Income tax provision
    (830 )     (1,001 )     (611 )
 
   
     
     
 
Net income (loss) before extraordinary item
    (8,827 )     (15,035 )     17,646  
Extraordinary item
                (3,164 )
 
   
     
     
 
Net income (loss)
    (8,827 )     (15,035 )     14,482  
Special Stock dividends
    (1,697 )            
 
   
     
     
 
Net income (loss) applicable to common shares
  $ (10,524 )   $ (15,035 )   $ 14,482  
 
   
     
     
 
Basic earnings (loss) per share:
                       
 
Income (loss) before extraordinary item
  $ (0.55 )   $ (0.74 )   $ 0.85  
 
Extraordinary loss
                (0.15 )
 
   
     
     
 
     
Net income (loss)
  $ (0.55 )   $ (0.74 )   $ 0.70  
 
   
     
     
 
Diluted earnings (loss) per share:
                       
 
Income (loss) before extraordinary item
  $ (0.55 )   $ (0.74 )   $ 0.84  
 
Extraordinary loss
                (0.15 )
 
   
     
     
 
     
Net income (loss)
  $ (0.55 )   $ (0.74 )   $ 0.69  
 
   
     
     
 
Weighted average common shares outstanding
    19,330       20,442       20,618  
 
   
     
     
 
Weighted average common and common share equivalents outstanding
    19,330       20,442       21,114  
 
   
     
     
 

See accompanying notes to consolidated financial statements.

F-4


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

                                                                   
(In 000's)
                                              Accumulated                
      Common Stock                   Additional   Other           Total
     
  Series E   Treasury   Paid-in   Comprehensive   Accum.   Stockholders'
      Shares   Dollars   Special Stock   Stock   Capital   Income   Deficit   Deficiency
     
 
 
 
 
 
 
 
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 )
Foreign currency translation adjustment
                                  (2,040 )           (2,040 )
 
                                                           
 
 
Total comprehensive loss
                                                            (10,867 )
1-for-3.5 reverse 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 )
 
   
                                                         
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 )
Foreign currency translation adjustment
                                  (5,804 )           (5,804 )
 
                                                           
 
 
Total comprehensive loss
                                                            (20,839 )
 
                                                           
 
Treasury shares issued upon exercise of options
                      14       (4 )                 10  
Issuance of Special Stock
                442                               442  
Common shares issued upon conversion of Special Stock
    544       55       (11,198 )           11,143                    
 
   
     
     
     
     
     
     
     
 
Balances at June 30, 2000
    10,335       1,034       4,624       (508 )     141,130       (21,790 )     (175,285 )     (50,795 )
 
   
     
     
     
     
     
     
     
 
Net income
                                        14,482       14,482  
Foreign currency translation adjustment
                                  (6,129 )           (6,129 )
 
                                                           
 
 
Total comprehensive income
                                                            8,353    
 
                                                           
 
Repurchases of common stock for treasury
                      (436 )                       (436 )
Shares issued upon exercise of options
    329       33             443       3,197                   3,673  
Common shares issued upon conversion of Special Stock
    224       22       (4,612 )           4,590                    
2-for-1 stock split
    10,888       1,089                   (1,089 )                  
 
   
     
     
     
     
     
     
     
 
Balances at June 30, 2001
    21,776     $ 2,178     $ 12     $ (501 )   $ 147,828     $ (27,919 )   $ (160,803 )   $ (39,205 )
 
   
     
     
     
     
     
     
     
 

See accompanying notes to consolidated financial statements.

F-5


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000's)

                                 
           
            Years Ended June 30,
           
            1999   2000   2001
           
 
 
Cash flows from operating activities:
                       
   
Net income (loss)
  $ (8,827 )   $ (15,035 )   $ 14,482  
     
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                       
       
Depreciation and amortization
    23,104       26,788       27,745  
       
Amortization of debt discounts
    52       52       154  
       
Extraordinary item
                3,164  
       
Write down of other assets
    828       411       117  
       
(Gain) loss on sale of assets
    225       (4,158 )     808  
       
Provision for losses on receivables
    3,174       7,927       3,825  
       
Other
    (1,171 )     351       1,860  
 
Change in operating assets and liabilities, net of effects of businesses acquired:
                       
       
Accounts and notes receivable
    (1,553 )     130       (2,791 )
       
Inventories
    (13,649 )     (3,445 )     (19,986 )
       
Other current assets
    (429 )     (1,911 )     2,239  
       
Accounts payable
    6,940       (6,870 )     9,376  
       
Accrued liabilities
    (139 )     (7,199 )     15,859  
 
   
     
     
 
       
Net cash provided by (used in) operating activities
    8,555       (2,959 )     56,852  
 
   
     
     
 
Cash flows from investing activities:
                       
 
Additions to property, plant and equipment
    (11,755 )     (13,012 )     (11,702 )
 
Acquisition of assets formerly under operating leases
                (13,040 )
 
Proceeds from disposal of assets
    356       4,316       258  
 
Proceeds from sale/leaseback transactions
    5,240       3,169        
 
Additions to other long-term assets
    (5,943 )     (4,305 )     (3,297 )
 
   
     
     
 
       
Net cash used in investing activities
    (12,102 )     (9,832 )     (27,781 )
 
   
     
     
 
Cash flows from financing activities:
                       
 
Capitalized debt issuance costs
                (6,969 )
 
Proceeds from issuance of long-term debt
                190,000  
 
Payoff of debt from refinancing
                (166,058 )
 
Reduction of long-term debt
    (5,089 )     (6,467 )     (2,811 )
 
Net change in revolving credit facility
    (2,077 )     34,661       (23,303 )
 
Purchase of common stock for treasury
    (522 )           (436 )
 
Proceeds from exercise of stock options and warrants
    4,778       10       3,673  
 
   
     
     
 
       
Net cash provided by (used in) financing activities
    (2,910 )     28,204       (5,904 )
 
   
     
     
 
   
Effect of exchange rate changes on cash
    (100 )     (299 )     (366 )
 
   
     
     
 
   
Cash and cash equivalents:
                       
       
Increase (decrease) for year
    (6,557 )     15,114       22,801  
       
Balance, beginning of year
    23,487       16,930       32,044  
 
   
     
     
 
       
Balance, end of year
  $ 16,930     $ 32,044     $ 54,845  
 
   
     
     
 

See accompanying notes to consolidated financial statements.

F-6


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 1999, 2000 and 2001

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 $22.0 million and $20.8 million at June 30, 2000 and 2001, respectively, 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 totaled approximately $1.3 million and $2.1 million at June 30, 2000 and 2001, respectively.
 
     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 (in 000’s):

                   
      2000   2001
     
 
Raw materials
  $ 14,143     $ 15,222  
Work-in-process
    948       1,774  
Finished goods
    16,928       18,086  
 
   
     
 
 
Total inventories
  $ 32,019     $ 35,082  
 
   
     
 

     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, 28-40 years; gaming equipment, 4-7 years; furniture, fixtures and equipment, 3-7 years; and leasehold improvements, 5-10 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


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Property, plant and equipment consists of the following (in 000’s):

                   
      2000   2001
     
 
Land and land improvements
  $ 21,310     $ 21,569  
Buildings and leasehold improvements
    32,338       39,392  
Gaming equipment
    62,947       72,284  
Furniture, fixtures and equipment
    20,256       29,412  
Less accumulated depreciation and amortization
    (60,028 )     (74,245 )
 
   
     
 
 
Total property, plant and equipment, net
  $ 76,823     $ 88,412  
 
   
     
 

     Excess of costs over fair value of 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 28 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 (in 000’s):

                   
      2000   2001
     
 
Payroll and related costs
  $ 9,912     $ 11,830  
Interest
    7,111       6,452  
Professional and consulting fees
    1,399       1,460  
Sales, use, withholding and income taxes
    1,619       1,230  
Deferred revenues
    327       5,303  
Jackpot liabilities
    2,011       1,927  
Other
    9,944       18,776  
 
   
     
 
 
Total accrued liabilities
  $ 32,323     $ 46,978  
 
   
     
 

     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.

F-8


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 recognized at the time products are shipped and title has passed to the customer.
 
     Revenue from sales of computerized monitoring systems is recognized in accordance with the AICPA’s Statement of Position 97-2 (SOP 97-2) “Software Revenue Recognition”. In accordance with the provisions of SOP 97-2, the contracts for the sales of computerized monitoring units are considered to have “multiple elements” because they include hardware, software, installation supervision, training and post-contract customer support. Accordingly, revenues from the sale of systems is deferred and begins to be recognized at the point when the system is deemed to be functionally operational, and the residual method is used to recognize revenue for the remaining elements as they are delivered, each having vendor specific objective evidence of relatives sales values. Post-contract customer support revenues are recognized over the period of the support agreement (generally one year).
 
     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.
 
     The Company has adopted the provisions of Staff Accountant Bulletin No. 101 issued on October 1, 2000, by the Securities and Exchange Commission, which had no material impact on the reported results of the Company.
 
     Promotional allowances
 
     During fiscal year 2001, the Company adopted EITF Issue 00-22, “Accounting for ‘Points’ and certain other Time-Based or Volume-Based Sales Incentive Offers, and Other Offers For Free Products or Service to be Delivered in the Future.” EITF 00-22 requires that sales incentives be recorded as a reduction of revenue rather than as an operating expense. Accordingly, prior year revenues and expenses have been restated to conform with EITF 00-22, although it had no impact on the net income of the Company.
 
     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, 2001, the Company recorded the following unusual item:

          Costs and expenses incurred to terminate the agreement to sell the Nevada Route Operations totaling $6.5 million.

F-9


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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.
 
     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.
 
     Stock split
 
     Effective August 21, 2001, the Company recorded a 2-for-1 stock split in the form of a stock dividend. All share and per share information presented in the Consolidated Financial Statements and notes thereto have been presented to reflect this stock split.
 
     Earnings (loss) per share calculations
 
     The following computation of basic and diluted loss per share from continuing operations, extraordinary loss and income (loss) applicable to common shares as adjusted for the stock split, are as follows (in 000’s except per share amounts):

                                 
            Fiscal Years ended June 30,
           
            1999   2000   2001
           
 
 
Income (loss) before extraordinary item
  $ (8,827 )   $ (15,035 )   $ 17,646  
Extraordinary loss
                (3,164 )
 
   
     
     
 
     
Net income (loss)
    (8,827 )     (15,035 )     14,482  
Special Stock dividends
    (1,697 )            
 
   
     
     
 
 
Income (loss) applicable to common shares
  $ (10,524 )   $ (15,035 )   $ 14,482  
 
   
     
     
 
Weighted average common shares outstanding
    19,330       20,442       20,618  
Effect of dilutive securities
                496  
 
   
     
     
 
Weighted average common and dilutive shares outstanding
    19,330       20,442       21,114  
 
   
     
     
 
Income (loss) per basic share:
                       
       
Income (loss) before extraordinary item
  $ (0.55 )   $ (0.74 )   $ 0.85  
       
Extraordinary item
                (0.15 )
 
   
     
     
 
Basic EPS
  $ (0.55 )   $ (0.74 )   $ 0.70  
 
   
     
     
 
Income (loss) per diluted share:
                       
       
Income (loss) before extraordinary item
  $ (0.55 )   $ (0.74 )   $ 0.84  
       
Extraordinary item
                (0.15 )
 
   
     
     
 
Diluted EPS
  $ (0.55 )   $ (0.74 )   $ 0.69  
 
   
     
     
 

F-10


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following securities were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods presented (in 000’s):

                         
    Fiscal Years ended June 30,
   
    1999   2000   2001
   
 
 
Stock options
    2,966       3,246       1,366  
Warrants
    4,588       1,858       1,429  
Series E Special stock
    1,494       450        
 
   
     
     
 
 
    9,048       5,554       2,795  
 
   
     
     
 

       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, 2000 and 2001 for the Company’s financial instruments approximate fair value.
 
       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.

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 6% to 11% 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 2001 to August 2009.
 
     The following table represents, at June 30, 2001, scheduled collections of accounts and notes receivable (net of allowances for doubtful accounts) by fiscal year (in 000’s):

                                                 
Years ending June 30,

2002   2003   2004   2005   2006   Thereafter   Total

 
 
 
 
 
 
$78,668
  $ 1,619     $ 191     $ 126     $ 90     $ 108     $ 80,802  

   
     
     
     
     
     
 

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    DEBT, REVOLVING CREDIT FACILITY AND REFINANCING TRANSACTION
 
     Long-term debt and lines of credit at June 30, 2000 and 2001 consisted of the following (in 000’s):

                   
      2000   2001
     
 
10 % Senior Subordinated Notes due 2007, net of unamortized discount of $649 and $495
  $ 149,351     $ 149,505  
Term Loan facility
    132,206       190,000  
Revolving credit facility
    62,360        
Other, secured by related equipment
    1,142       595  
 
   
     
 
 
    345,059       340,100  
Less current maturities
    1,036       932  
 
   
     
 
 
Long-term debt, less current maturities
  $ 344,023     $ 339,168  
 
   
     
 

     On June 22, 2001, the Company completed a senior bank debt refinancing transaction (the “Refinancing”) whereby the Company entered into a $190 million term loan facility and a $25 million revolving credit facility (which can be increased by $15 million at the Company’s discretion until December 31, 2002). Proceeds from the new term loan were used to repay the existing bank term loans and credit facility, totaling $166.0 million, repay certain gaming equipment operating leases totaling $13.0 million, and to pay transaction fees and expenses. The term loan has an interest rate of LIBOR plus 3.75% (or 7.6% as of June 30, 2001), has a 1% per year mandatory principal amortization, and a 5.5 year maturity. The revolving credit facility commitment decreases ratably over its 5 year commitment. As of June 30, 2001, there were no borrowings outstanding on the revolving credit facility. The new bank loan contains certain customary financial and operational covenants.
 
     As a result of the Refinancing described above, the Company recorded an extraordinary loss of $3.2 million for the write off of certain deferred financing costs.
 
     The bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity which holds the Company’s interest in its Louisiana and Mississippi operations, 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. As of June 30, 2001 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

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     payments and on dividend and payment restrictions on subsidiaries. The Senior Subordinated Notes may not be redeemed for the first five years. Upon the occurrence of a Change of Control (as defined), the holders of the Senior Subordinated Notes will have the right to require the Company to purchase their notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase.
 
     Maturities of long-term debt, for each of the five fiscal years ending subsequent to June 30, 2001 are as follows (in 000’s):

                                                 
Years ending June 30,

2002   2003   2004   2005   2006   Thereafter   Total

 
 
 
 
 
 
$932
  $ 2,026     $ 1,912     $ 1,900     $ 183,825     $ 149,505     $ 340,100  

   
     
     
     
     
     
 

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 issued 113,160 shares of Series E Special Stock to certain holders of the Company’s 71/2% Convertible Subordinated Debentures who elected to receive such stock in lieu of receiving common stock. 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 111/2%, 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 1,538,000 shares of common stock (on a post split basis). The Series E Special Stock is convertible into common stock at a conversion price of $10.29 per share (equivalent to a conversion rate of approximately 9.71829 shares of common stock per share of Series E Special Stock), subject to adjustment under certain circumstances, and has a $100 liquidation preference per share. During the fiscal year ended June 30, 2001, approximately 46,122 shares of Series E Special Stock were converted into approximately 448,214 shares of common stock (on a post split basis).
 
     Stock Option Plans
 
     In 1992, the Company created the 1991 Long Term Incentive Plan (the “1991 Plan”) that, as amended, provides for the issuance of up to 1,714,000 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 1,714,000 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.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Transactions involving stock options are summarized as follows (as adjusted for the 2-for-1 stock split effective August 21, 2001):

                   
      Options Outstanding
     
              Weighted-Average
      Shares   Exercise Price
     
 
Balance, June 30, 1998
    3,105,028     $ 6.60  
 
Granted
    457,828       3.84  
 
Exercised
    (27,192 )     7.88  
 
Canceled
    (569,888 )     6.15  
 
   
         
Balance, June 30, 1999
    2,965,776       6.25  
 
Granted
    973,956       1.13  
 
Exercised
    (4,666 )     1.13  
 
Canceled
    (680,032 )     1.35  
 
   
         
Balance, June 30, 2000
    3,255,034       5.02  
 
Granted
    466,286       5.28  
 
Exercised
    (775,296 )     4.74  
 
Canceled
    (496,848 )     6.49  
 
   
         
Balance, June 30, 2001
    2,449,176     $ 4.86  
 
   
         
Exercisable at June 30, 2001
    2,146,710     $ 4.77  
 
   
         

     At June 30, 2001, the range of exercise prices, on a post-split basis, for options outstanding was $0.94 to $18.29. The weighted average remaining contractual life, by range of exercise price, for options outstanding and exercisable at June 30, 2001 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

 
 
 
 
$0.94 - $2.00
    8.64       622,058       8.63       601,580  
$2.01 - $2.50
    9.11       209,334       8.80       82,000  
$2.51 - $5.00
    8.21       244,630       7.99       174,786  
$5.01 - $7.50
    4.84       1,207,146       4.84       1,206,002  
 
over $7.50
    9.23       166,008       9.19       82,342  
 
           
             
 
   
         All
    6.80       2,449,176       6.44       2,146,710  
 
           
             
 

     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 $10.5 million (or $0.55 per share) to $12.4 million (or $0.65 per share) on a pro forma basis for the year ended June 30, 1999 and from a loss of $15.0 million (or $0.74 per share) to $17.8 million (or $0.88 per share) on a pro forma basis for the year ended June 30, 2000 and decreased from net income of $14.5 million (or $0.70 per share) to $13.3 million (or $0.63 per share) on a pro forma basis for the year ended June 30, 2001. The pro forma net income (loss) reflects only options granted since 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the options’

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 1999, 2000 and 2001 was $2.74, $1.55 and $2.57 respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1999, 2000 and 2001: expected dividend yield of 0%, risk free interest rates ranging from 3.9% to 6.0%, a volatility factor of .62, .74, and .82 for 1999, 2000 and 2001, respectively, and expected lives varying from 3 to 10 years.
 
     Warrants
 
     Upon the completion of the BGII acquisition in 1996 the Company issued warrants to Gaming Systems Advisors, L.P. (“GSA”) to purchase up to 1,428,572 shares of common stock at $2.63 per share, however the warrants become exercisable in one-third tranches only after the market price of the Common Stock reaches $19.25, $22.75 and $26.25, respectively, for 30 consecutive trading days. These warrants expire on June 18, 2002.
 
     In 1996, in conjunction with certain financing transactions, the Company issued warrants to certain third parties for the purchase of up to 142,858 shares of Common Stock at a price which was subject to future adjustments, and which ultimately was set at $4.26 per share and which expire on August 31, 2002.
 
     Share Repurchase Plan
 
     In January 1999 the Company’s Board of Directors approved a share repurchase plan for up to 2.3 million (post-split) 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. During the fiscal years ended June 30, 1999, 2000 and 2001, the Company repurchased 170,600, 0, and 208,000 shares of common stock (post-split).
 
     Shares Reserved
 
     At June 30, 2001, 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
    2,652,000  
Shares underlying all warrants outstanding
    1,571,000  
Shares underlying Series E Special Stock outstanding
    1,000  
 
   
 
 
Total
    4,224,000  
 
   
 

     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.

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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, 1999, 2000 and 2001 are as follows (in 000’s):

                             
        1999   2000   2001
       
 
 
 
Current tax expense (benefit):
                       
   
U. S. Federal
  $     $     $ (588 )
   
Foreign
    64       280       (8 )
   
State
    510       527       705  
 
   
     
     
 
 
    574       807       109  
 
   
     
     
 
 
Deferred tax expense (benefit):
                       
   
U. S. Federal
                (416 )
   
Foreign
    256       194       918  
   
State
                 
 
   
     
     
 
 
    256       194       502  
 
   
     
     
 
Total provision for income taxes
  $ 830     $ 1,001     $ 611  
 
   
     
     
 

     A reconciliation of the Company’s income tax provision as compared to the tax provision (benefit) calculated by applying the statutory federal tax rate (35%) to the income (loss) before income taxes for the years ended June 30, 1999, 2000 and 2001 are as follows (in 000’s):

                         
    1999   2000   2001
   
 
 
Computed expected income tax expense (benefit) at 35%
  $ (2,799 )   $ (4,911 )   $ 5,283  
Permanent differences
    (1,677 )     (1,874 )     (7,338 )
Change in valuation allowance
    (591 )     1,895       2,584  
State income taxes, net of federal benefit
    332       343       458  
Expired foreign tax credits
    3,607             -  
Other, net
    1,958       5,548       (376 )
 
   
     
     
 
 
  $ 830     $ 1,001     $ 611  
 
   
     
     
 

     The major components of the deferred tax assets and liabilities as of June 30, 2000 and 2001 are presented below (in 000’s):

                   
      2000   2001
     
 
Deferred tax assets:
               
 
Net operating loss carry forwards
  $ 30,281     $ 35,235  
 
Foreign tax credit carry forwards
    6,639       6,639  
 
Inventory obsolescence reserves
    2,742       2,788  
 
Bad debt reserves
    6,299       5,281  
 
Accruals not currently deductible for tax purposes
    3,852       2,792  
 
Refinancing costs being amortized for tax purposes
    8,582       6,480  
 
Intangibles
    9,141       10,326  
 
Other
    8,883       9,232  
 
   
     
 
Total gross deferred tax assets
    76,419       78,773  
Less: Valuation allowance
    64,245       66,829  
 
   
     
 
Deferred tax assets
  $ 12,174     $ 11,944  
 
   
     
 
Deferred tax liabilities:
               
 
Property and equipment, due principally to depreciation differences
  $ 3,162     $ 3,142  
 
Other
    7,154       6,038  
 
   
     
 
Total gross deferred tax liabilities (a)
    10,316       9,180  
 
   
     
 
Net deferred tax assets
  $ 1,858     $ 2,764  
 
   
     
 

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     (a) Included in the other non-current liabilities in the accompanying consolidated balance sheets.
 
     Management has considered certain tax planning strategies as permitted by Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes”. Management has determined that tax benefits associated with recorded deferred tax assets, net of valuation allowance, are more likely than not realizable through future taxable income and future reversals of existing taxable temporary differences.
 
     At June 30, 2001, the Company had net operating loss carry forwards for federal income tax purposes of approximately $101 million which are available to offset future federal taxable income, if any, expiring in the years 2008 through 2021. At June 30, 2001 the Company had foreign tax credit carry forwards of approximately $6.6 million and alternative minimum tax credit (AMT) carry forwards of approximately $0.9 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, 1999, 2000 and 2001 (in 000’s):

                         
    1999   2000   2001
   
 
 
Reclassify inventory to property, plant and equipment and leased gaming equipment
  $ 9,613     $ 16,174     $ 15,466  
Dividends for Series E and Series B Special Stock
    1,697       442        
Translation rate adjustment
    1,940       5,505       5,763  
Reclassify other assets to property, plant and equipment
    444       242       526  
Reclassify receivables to other assets
    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 Special Stock to Common Stock
          11,198       4,612  

     Payments for interest expense in fiscal years, 1999, 2000 and 2001 were approximately $31.6 million, $34.0 million and $35.4 million, respectively. Payments for income taxes, net of refunds received, in fiscal years 1999, 2000 and 2001 were approximately $3.3 million, $0.5 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 $250 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, 1999, 2000 and 2001 was $1.0 million for each year. Total royalty expense for the Company for the years ended June 30, 1999, 2000 and 2001 was $1.9 million, $3.4 million and $3.5 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.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Company leases office space, equipment, warehouse and repair facilities, Route Operation locations, casino and other locations under non-cancelable operating leases. Certain Route Operation location leases provide only for contingent rentals based upon a percentage of gaming revenue and are cancelable at any time by either party. Future minimum rentals under non-cancelable operating leases at June 30, 2001 are (in 000’s):

                                                           
      Years ended June 30,
     
      2002   2003   2004   2005   2006   Thereafter   Total
     
 
 
 
 
 
 
Minimum rentals
  $ 19,183     $ 15,600     $ 12,278     $ 10,881     $ 10,019     $ 22,312     $ 90,273  
Total sublease income
    (1,843 )     (1,854 )     (1,629 )     (1,208 )     (736 )     (1,994 )     (9,264 )
 
   
     
     
     
     
     
     
 
 
Net minimum rentals
  $ 17,340     $ 13,746     $ 10,649     $ 9,673     $ 9,283     $ 20,318     $ 81,009  
 
   
     
     
     
     
     
     
 

     Operating lease rental expense, including contingent lease rentals, for years ended June 30, 1999, 2000 and 2001 was as follows (in 000’s):

                         
    1999   2000   2001
   
 
 
Minimum rentals
  $ 17,147     $ 27,322     $ 31,664  
Contingent rentals
    105,568       120,877       130,542  
 
   
     
     
 
 
    122,715       148,199       162,206  
Sublease rental income
    (1,574 )     (1,416 )     (1,667 )
 
   
     
     
 
 
  $ 121,141     $ 146,783     $ 160,539  
 
   
     
     
 

     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 not yet issued the final assessment from their quadrennial audits.
 
     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’ 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 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 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.
 
     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.
 
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.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     At June 30, 2001 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
    0.7 %     36.3 %     %     %     37.0 %
Other international jurisdictions
    15.3                         15.3  
Nevada
    10.0       0.7       8.7       0.3       19.7  
Others individually less than 5%
    27.3                   0.7       28.0  
 
   
     
     
     
     
 
 
    53.3 %     37.0 %     8.7 %     1.0 %     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 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,
     
      1999   2000   2001
     
 
 
Revenues:
                       
 
Gaming Equipment and Systems
  $ 127,810     $ 135,180     $ 160,890  
 
Wall Machines and Amusement Games
    90,834       68,952       72,228  
 
Route Operations
    175,854       202,480       221,505  
 
Casino Operations
    60,691       68,053       73,499  
 
   
     
     
 
Total revenues
  $ 455,189     $ 474,665     $ 528,122  
 
   
     
     
 
 
Intersegment revenues:
                       
 
Gaming Equipment and Systems
  $ 751     $ 19,914     $ 8,226  
 
Wall Machines and Amusement Games
    413       232       59  
 
Route Operations
                 
 
Casino Operations
                 
 
   
     
     
 
Total intersegment revenues
  $ 1,164     $ 20,146     $ 8,285  
 
   
     
     
 
Operating income (loss):
                       
 
Gaming Equipment and Systems
  $ 5,779     $ (693 )   $ 27,039  
 
Wall Machines and Amusement Games
    5,334       (4,219 )     4,904  
 
Route Operations
    14,586       15,162       15,482  
 
Casino Operations
    19,348       23,805       25,258  
 
Corporate/other
    (19,724 )     (13,204 )     (18,316 )
 
   
     
     
 
Total operating income
  $ 25,323     $ 20,851     $ 54,367  
 
   
     
     
 

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           
      Years Ended June 30,
     
      1999   2000   2001
     
 
 
Identifiable assets:
                     
 
Gaming Equipment and Systems
  $ 153,183     $ 145,051     $ 153,961  
 
Wall Machines and Amusement Games
    87,620       76,235       66,043  
 
Route Operations
    62,487       62,946       74,415  
 
Casino Operations
    44,592       48,043       47,737  
 
Corporate/other
    8,425       19,012       38,041  
 
     
     
     
 
Total identifiable assets
  $ 356,307     $ 351,287     $ 380,197  
 
     
     
     
 
Capital expenditures:
                       
 
Gaming Equipment and Systems
  $ 2,587     $ 3,226     $ 2,696  
 
Wall Machines and Amusement Games
    1,129       515       480  
 
Route Operations
    5,476       3,993       5,592  
 
Casino Operations
    2,414       5,112       2,904  
 
Corporate/other
    149       166       30  
 
     
     
     
 
Total capital expenditures
  $ 11,755     $ 13,012     $ 11,702  
 
     
     
     
 
Depreciation and amortization:
                       
 
Gaming Equipment and Systems
  $ 4,020     $ 7,862     $ 8,835  
 
Wall Machines and Amusement Games
    4,816       5,776       5,555  
 
Route Operations
    10,274       9,341       9,496  
 
Casino Operations
    2,324       2,149       2,300  
 
Corporate/other
    1,670       1,660       1,559  
 
     
     
     
 
Total depreciation and amortization
  $ 23,104     $ 26,788     $ 27,745  
 
     
     
     
 

     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 (in 000’s):

                           
      Years Ended June 30,
     
      1999   2000   2001
     
 
 
Revenues:
                       
 
United States
  $ 347,348     $ 384,788     $ 441,944  
 
Germany
    100,939       79,330       79,110  
 
Other foreign
    6,902       10,547       7,068  
 
   
     
     
 
Total revenues
  $ 455,189     $ 474,665     $ 528,122  
 
   
     
     
 
Operating income (loss):
                       
 
United States
  $ 22,329     $ 32,561     $ 46,974  
 
Germany
    3,451       (4,994 )     5,080  
 
Other foreign
    (457 )     (6,716 )     2,313  
 
   
     
     
 
Total operating income
  $ 25,323     $ 20,851     $ 54,367  
 
   
     
     
 

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           
      Years Ended June 30,
     
      1999   2000   2001
     
 
 
Identifiable assets:
                       
 
United States
  $ 248,470     $ 255,454     $ 298,251  
 
Germany
    103,687       91,800       77,234  
 
Other foreign
    4,150       4,033       4,712  
 
   
     
     
 
Total identifiable assets
  $ 356,307     $ 351,287     $ 380,197  
 
   
     
     
 
Capital expenditures:
                       
 
United States
  $ 10,314     $ 12,348     $ 11,213  
 
Germany
    1,141       521       483  
 
Other foreign
    300       143       6  
 
   
     
     
 
Total capital expenditures
  $ 11,755     $ 13,012     $ 11,702  
 
   
     
     
 
Depreciation and amortization:
                       
 
United States
  $ 17,437     $ 19,818     $ 22,047  
 
Germany
    4,998       5,924       5,681  
 
Other Foreign
    669       1,046       17  
 
   
     
     
 
Total depreciation and amortization
  $ 23,104     $ 26,788     $ 27,745  
 
   
     
     
 

10.    INTERIM FINANCIAL INFORMATION (Unaudited)
 
     Following is the unaudited quarterly results of the Company for the years ended June 30, 2000 and 2001 (adjusted for the August 21, 2001 two-for-one stock split). This information is not covered by the Report of Independent Public Accountants (in 000’s, except per share data).

                                       
          Quarter
         
          First   Second   Third   Fourth
         
 
 
 
   
2000
                               
Revenues
  $ 116,427     $ 113,693     $ 116,651     $ 127,894  
Operating income
    8,397       2,445       1,056       8,953  
Net income (loss)
    445       (7,176 )     (9,090 )     786  
Basic income (loss) per share
  $ 0.02     $ (0.35 )   $ (0.45 )   $ 0.04  
Diluted income (loss) per share
  $ 0.02     $ (0.35 )   $ (0.45 )   $ 0.04  
     
2001
                               
Revenues
  $ 119,115     $ 130,339     $ 138,469     $ 140,199  
Operating income
    13,131       15,158       16,142       9,936  
Net income (loss)
    3,365       5,509       6,820       (1,212 )
Basic income (loss) per share
  $ 0.17     $ 0.27     $ 0.33     $ (0.06 )
Diluted income (loss) per share
  $ 0.16     $ 0.26     $ 0.32     $ (0.05 )

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.    NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, “Business Combinations” (FASB No. 141) and No. 142, “Goodwill and Other Intangible Assets” (FASB No. 142).
 
     FASB No. 141 establishes accounting and reporting standards for business combinations and the related issues of allocations of purchase price to assets and liabilities acquired. The Company does not expect that the implementation of FASB No. 141 to have a material impact on the financial condition or results of operations of the Company.
 
     FASB No. 142 revises the existing accounting standards for both goodwill and intangible assets. Pursuant to the early adoption rules, the Company intends to adopt the provisions of FASB No. 142 effective July 1, 2001. Accordingly, the Company has six months from the adoption date to perform certain impairment tests for the goodwill recorded for each of its reporting units, and has until June 30, 2002 to measure an impairment loss, if any. Pursuant to the transition rules, any impairment charge recognized as a result of the initial assessment would be recognized as a change in accounting principle. Pursuant to FASB No. 142, amortization of existing goodwill will cease as of July 1, 2001, however the Company will continue to perform tests of potential impairment of goodwill on an annual basis. The Company does not currently believe that the initial impairment test will result in an impairment charge, although there can be no assurance that such a charge will not result form the analysis yet to be performed. Goodwill amortization expense totaled approximately $1.4 million for the year ended June 30, 2001.
 
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 August 1997. 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.

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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   Elimina-   and
            Subsidiaries   Subsidiaries   tions   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, net
    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, net
    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.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
June 30, 2001
(In 000’s)
ASSETS

                                         
                                    Alliance
                                    Gaming
            Parent and   Non-           Corporation
            Guaranteeing   Guaranteeing   Elimina-   and
            Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 
 
Current assets:
                               
 
Cash and cash equivalents
  $ 41,502     $ 13,343     $     $ 54,845  
 
Accounts and notes receivable, net
    58,769       37,769       (17,169 )     79,369  
 
Inventories, net
    24,555       10,527             35,082  
 
Other current assets
    8,178       2,636             10,814  
 
   
     
     
     
 
     
Total current assets
    133,004       64,275       (17,169 )     180,110  
 
   
     
     
     
 
Long-term notes receivable, net
    53,162       433       (52,162 )     1,433  
Leased equipment, net
    16,374       6,303             22,677  
Property, plant and equipment, net
    54,399       34,013             88,412  
Excess of costs over net assets of acquired businesses, net
    35,547       13,967             49,514  
Intangible assets, net
    22,096       116             22,212  
Investments in subsidiaries
    84,228             (84,228 )      
Deferred tax assets, net
    10,137       1,807             11,944  
Other assets, net
    10,167       (6,638 )     366       3,895  
 
   
     
     
     
 
 
  $ 419,114       114,276     $ (153,193 )   $ 380,197  
 
   
     
     
     
 
       
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
       
Current liabilities:
                               
 
Accounts payable
  $ 17,118     $ 2,413     $     $ 19,531  
 
Accrued liabilities
    37,648       9,999       (669 )     46,978  
 
Current maturities of long-term debt
    488       16,955       (16,511 )     932  
 
   
     
     
     
 
     
Total current liabilities
    55,254       29,367       (17,180 )     67,441  
 
   
     
     
     
 
Long term debt, net
    391,032       132       (51,996 )     339,168  
Other liabilities
    10,733       760             11,493  
 
   
     
     
     
 
     
Total liabilities
    457,019       30,259       (69,176 )     418,102  
 
   
     
     
     
 
Minority interest
    1,300                   1,300  
Commitments and contingencies
                               
Stockholders’ equity (deficiency):
                               
 
Series E Special Stock
    12                   12  
 
Common Stock
    2,178       17,832       (17,832 )     2,178  
 
Treasury stock
    (501 )                 (501 )
 
Additional paid-in capital
    147,828       7,862       (7,862 )     147,828  
 
Accumulated other comprehensive loss
    (27,919 )     (27,939 )     27,939       (27,919 )
 
Retained earnings (accumulated deficit)
    (160,803 )     86,262       (86,262 )     (160,803 )
 
   
     
     
     
 
   
Total stockholders’ equity (deficiency)
    (39,205 )     84,017       (84,017 )     (39,205 )
 
   
     
     
     
 
 
  $ 419,114     $ 114,276     $ (153,193 )   $ 380,197  
 
   
     
     
     
 

See accompanying unaudited notes.

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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   Elimina-   and
      Subsidiaries   Subsidiaries   tions   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
    14,311       46,380             60,691  
 
   
     
     
     
 
 
    292,504       171,657       (8,972 )     455,189  
 
   
     
     
     
 
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
    76,741       41,895       (333 )     118,303  
 
Depreciation and amortization
    14,996       8,108             23,104  
 
   
     
     
     
 
 
    291,551       147,287       (8,972 )     429,866  
 
   
     
     
     
 
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-25


Table of Contents

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   Elimina-   and
      Subsidiaries   Subsidiaries   tions   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
    17,410       50,643             68,053  
 
   
     
     
     
 
 
    332,915       159,927       (18,177 )     474,665  
 
   
     
     
     
 
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
    63,810       38,100       (170 )     101,740  
 
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  
 
   
     
     
     
 
 
    324,467       147,524       (18,177 )     453,814  
 
   
     
     
     
 
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-26


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Year ended June 30, 2001
(In 000’s)

                                   
                              Alliance
                              Gaming
      Parent and   Non-           Corporation
      Guaranteeing   Guaranteeing   Elimina-   and
      Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
Revenues:
                               
 
Gaming equipment and systems
  $ 154,919     $ 13,950     $ (7,979 )     160,890  
 
Wall machines and amusement games
          72,228             72,228  
 
Route operations
    205,105       16,400             221,505  
 
Casino operations
    18,950       54,549             73,499  
 
   
     
     
     
 
 
    378,974       157,127       (7,979 )     528,122  
 
   
     
     
     
 
Costs and expenses:
                               
 
Cost of gaming equipment and systems
    76,212       9,190       (7,979 )     77,423  
 
Cost of wall machines and amusement games
          39,243             39,243  
 
Cost of route operations
    167,518       10,585             178,103  
 
Cost of casino operations
    10,671       21,870             32,541  
 
Selling, general and administrative
    63,479       35,156             98,635  
 
Research and development
    11,028       2,548             13,576  
 
Depreciation and amortization
    19,809       7,936             27,745  
 
Unusual items, net
    6,489                   6,489  
 
   
     
     
     
 
 
    355,206       126,528       (7,979 )     473,755  
 
   
     
     
     
 
Operating income
    23,768       30,599             54,367  
Earnings in consolidated subsidiaries
    32,466             (32,466 )      
Other income (expense):
                               
 
Interest income
    794       693       (444 )     1,043  
 
Interest expense
    (33,187 )     (2,064 )     444       (34,807 )
 
Rainbow royalty
    6,590       (6,590 )            
 
Minority interest
    (2,165 )                 (2,165 )
 
Other, net
    (11,933 )     11,752             (181 )
 
   
     
     
     
 
Income before income taxes
    16,333       34,390       (32,466 )     18,257  
Income tax (provision) benefit
    1,313       (1,924 )           (611 )
 
   
     
     
     
 
Net income before extraordinary item
    17,646       32,466       (32,466 )     17,646  
Extraordinary loss, without tax benefit
    (3,164 )                 (3,164 )
 
   
     
     
     
 
Net income applicable to common shares
  $ 14,482     $ 32,466     $ (32,466 )   $ 14,482  
 
   
     
     
     
 

See accompanying unaudited notes.

F-27


Table of Contents

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   Elimina-   and
            Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 
 
Cash flows from operating activities:
                               
 
Net income (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 assets
    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-28


Table of Contents

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   Elimina-   and
            Subsidiaries   Subsidiaries   tions   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:
                               
 
Increase 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-29


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

                                         
                                    Alliance
                                    Gaming
            Parent and   Non-           Corporation
            Guaranteeing   Guaranteeing   Elimina-   and
            Subsidiaries   Subsidiaries   tions   Subsidiaries
           
 
 
 
Cash flows from operating activities:
                               
   
Net income (loss)
  $ 14,482     $ 32,466     $ (32,466 )   $ 14,482  
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                               
     
Depreciation and amortization
    19,809       7,936             27,745  
     
Amortization of debt discounts
    154                   154  
     
Write down of other assets
    117                   117  
     
Extraordinary item
    3,164                   3,164  
     
(Gain) loss on sale of assets
    948       (140 )           808  
     
Provision for losses on receivables
    2,387       1,438             3,825  
     
Other
    784       944       132       1,860  
   
Net change in operating assets and liabilities:
                               
     
Accounts and notes receivable
    2,029       (5,370 )     550       (2,791 )
     
Inventories
    (17,785 )     (2,201 )           (19,986 )
     
Other current assets
    653       1,586             2,239  
     
Intercompany accounts
    (13,654 )     (14,671 )     28,325        
     
Accounts payable
    8,886       490             9,376  
     
Accrued liabilities
    16,951       (1,550 )     458       15,859  
 
   
     
     
     
 
       
Net cash provided by (used in) operating activities
    38,925       20,928       (3,001 )     56,852  
Cash flows from investing activities:
                               
 
Additions to property, plant and equipment
    (8,602 )     (3,100 )           (11,702 )
 
Acquisition of assets formerly under operating leases
    (13,040 )                 (13,040 )
 
Proceeds from disposal of assets
    258                   258  
 
Proceeds from sale/leaseback transaction
                       
 
Additions to long-term assets
    (3,297 )                 (3,297 )
 
   
     
     
     
 
     
Net cash used in investing activities
    (24,681 )     (3,100 )           (27,781 )
 
   
     
     
     
 
Cash flows from financing activities:
                               
 
Capitalized debt issuance costs
    (6,969 )                 (6,969 )
 
Proceeds from issuance of long-term debt
    190,000                   190,000  
 
Payoff debt from refinancing
    (166,058 )                 (166,058 )
 
Reduction of long-term debt
    (2,344 )     (3,468 )     3,001       (2,811 )
 
Net change in credit lines
    (23,179 )     (124 )           (23,303 )
 
Purchase of common stock for treasury
    (436 )                 (436 )
 
Proceeds from exercise of stock options and warrants
    3,673                   3,673  
 
Dividends received (paid)
    13,042       (13,042 )            
 
   
     
     
     
 
     
Net cash provided by (used in) financing activities
    7,729       (16,634 )     3,001       (5,904 )
 
   
     
     
     
 
Effect of exchange rate changes on cash
          (366 )           (366 )
Cash and cash equivalents:
                               
 
Increase for period
    21,973       828             22,801  
 
Balance, beginning of period
    19,528       12,516             32,044  
 
   
     
     
     
 
 
Balance, end of period
  $ 41,501     $ 13,344     $     $ 54,845  
 
   
     
     
     
 

See accompanying unaudited notes.

F-30


Table of Contents

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2000 and 2001

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, 2001 consist of the following (in 000’s):

                                 
                            Alliance
                            Gaming
    Parent and   Non-           Corporation
    Guaranteeing   Guaranteeing   Elimina-   and
    Subsidiaries   Subsidiaries   tions   Subsidiaries
   
 
 
 
10% Senior Subordinated Notes due 2007, net of unamortized discount
  $ 149,505     $     $     $ 149,505  
Term Loan Facility
    190,000                       190,000  
Revolving Credit Facility
                       
Intercompany notes payable
    161,996       16,511       (178,507 )      
Other
    20       575             595  
 
   
     
     
     
 
 
    501,521       17,086       (178,507 )     340,100  
Less current maturities
    489       16,954       (16,511 )     932  
 
   
     
     
     
 
Long-term debt, less current maturities
  $ 501,032     $ 132     $ (161,996 )   $ 339,168  
 
   
     
     
     
 

Long-term debt and lines of credit at June 30, 2000 consist of the following (in 000’s):

                                   
                              Alliance
                              Gaming
      Parent and   Non-           Corporation
      Guaranteeing   Guaranteeing   Elimina-   and
      Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
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-31


Table of Contents

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, 2000 are as follows (in 000’s):

                                   
                              Alliance
                              Gaming
      Parent and   Non-           Corporation
      Guaranteeing   Guaranteeing   Elimina-   and
      Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
Deferred tax assets:
                               
 
Net operating loss carry forwards
  $ 30,281     $     $     $ 30,281  
 
Foreign tax credit carry forwards
    6,639                   6,639  
 
Inventory obsolescence reserves
    2,243       499             2,742  
 
Bad debt reserves
    3,861       2,438             6,299  
 
Accruals not currently deductible for tax purposes
    3,827       25             3,852  
 
Refinancing costs being amortized for tax purposes
    8,582                   8,582  
 
Intangibles
    9,143       (2 )           9,141  
 
Other
    1,624       7,259             8,883  
 
   
     
     
     
 
Total gross deferred tax assets
    66,200       10,219               76,419  
Less: Valuation allowance
    (56,912 )     (7,333 )           (64,245 )
 
   
     
     
     
 
Deferred tax assets
  $ 9,288     $ 2,886     $     $ 12,174  
 
   
     
     
     
 
Deferred tax liabilities:
                               
 
Property and equipment, principally due to depreciation differences
  $ 3,219     $ (57 )   $     $ 3,162  
 
Other
    6,706       448             7,154  
 
   
     
     
     
 
Total gross deferred tax liabilities
    9,925       391             10,316  
 
   
     
     
     
 
Net deferred tax assets (liabilities)
  $ (637 )   $ 2,495     $     $ 1,858  
 
   
     
     
     
 

F-32


Table of Contents

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, 2001 are as follows (in 000’s):

                                   
                              Alliance
                              Gaming
      Parent and   Non-           Corporation
      Guaranteeing   Guaranteeing   Elimina-   and
      Subsidiaries   Subsidiaries   tions   Subsidiaries
     
 
 
 
Deferred tax assets:
                               
 
Net operating loss carry forwards
  $ 35,235     $     $     $ 35,235  
 
Foreign tax credit carry forwards
    6,639                   6,639  
 
Inventory obsolescence reserves
    2,322       466             2,788  
 
Bad debt reserves
    2,843       2,438             5,281  
 
Accruals not currently deductible for tax purposes
    2,774       18             2,792  
 
Refinancing costs being amortized for tax purposes
    6,480                     6,480          
 
Intangibles
    10,324       2             10,326  
 
Other
    2,349       6,883             9,232  
 
   
     
     
     
 
Total gross deferred tax assets
    68,966       9,807               78,773          
Less: Valuation allowance
    (58,829 )     (8,000 )           (66,829 )
 
   
     
     
     
 
Deferred tax assets
  $ 10,137     $ 1,807     $     $ 11,944  
 
   
     
     
     
 
Deferred tax liabilities:
                               
 
Property and equipment, principally due to depreciation differences
  $ 3,142     $     $     $ 3,142  
 
Other
    5,708       330             6,038  
 
   
     
     
     
 
Total gross deferred tax liabilities
    8,850       330             9,180  
 
   
     
     
     
 
Net deferred tax assets
  $ 1,287     $ 1,477     $     $ 2,764  
 
   
     
     
     
 

F-33


Table of Contents

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, 1999, 2000 and 2001 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, 2001
  $ 20,208     $ 9,411     $ 13,618     $ 16,001  
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  
Inventory valuation allowance:
                               
Year ended June 30, 2001
  $ 6,660     $ 9,133     $ 9,200     $ 6,593  
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  
Other assets valuation reserve:
                               
Year ended June 30, 2001
  $ 1,813     $ 38     $ 25     $ 1,826  
Year ended June 30, 2000
    3,468             1,655       1,813  
Year ended June 30, 1999
    3,488             20       3,468  

F-34 EX-4.2 3 v75843ex4-2.txt EXHIBIT 4.2 1 EXHIBIT 4.2 LOAN AGREEMENT Dated as of June 22, 2001 among ALLIANCE GAMING CORPORATION, as Domestic Borrower, BALLY WULFF AUTOMATEN GMBH and BALLY WULFF VERTRIEBS GMBH collectively, as German Borrowers The Lenders herein named and BANK OF AMERICA, N.A. as Administrative Agent BANC OF AMERICA SECURITIES LLC, Sole Lead Arranger and Sole Book Manager 2 TABLE OF CONTENTS
Page Article 1 DEFINITIONS AND ACCOUNTING TERMS ....................................................1 1.1 Defined Terms ..........................................................1 1.2 Use of Defined Terms...................................................29 1.3 Accounting Terms - Fiscal Periods .....................................29 1.4 Rounding ..............................................................29 1.5 Exhibits and Schedules ................................................30 1.6 Miscellaneous Terms ...................................................30 1.7 Exchange Rate Conventions .............................................30 Article 2 LOANS AND LETTERS OF CREDIT ........................................................31 2.1 Loans-General .........................................................31 2.2 Base Rate Loans........................................................33 2.3 Eurocurrency Rate Loans ...............................................33 2.4 Letters of Credit .....................................................34 2.5 Swing Line ............................................................37 2.6 Voluntary Reduction of Revolving Commitment or German Commitment ......39 2.7 Mandatory Reductions of the Commitments ...............................39 2.8 Optional Increases to the Revolving Commitment ........................40 2.9 Administrative Agent's Right to Assume Funds Available for Advances ...41 2.10 Senior Indebtedness ...................................................41 2.11 Collateral ............................................................42 2.12 Participation in the German Commitment Loans ..........................42 2.13 Marking the German Commitment Loans to Market .........................42 Article 3 PAYMENTS AND FEES ..................................................................43 3.1 Principal and Interest ................................................43 3.2 Lead Arranger's Fees ..................................................44 3.3 Commitment Fees........................................................44 3.4 German Commitment Fronting Fees .......................................45 3.5 Letter of Credit Fees .................................................45 3.6 Administrative Fees ...................................................45 3.7 Increased Commitment Costs ............................................45 3.8 Eurocurrency Costs and Related Matters ................................46 3.9 Default Rate ..........................................................49 3.10 Computation of Interest and Fees ......................................49 3.11 Non-Business Days .....................................................50 3.12 Manner and Treatment of Payments ......................................50 3.13 Funding Sources........................................................51 3.14 Failure to Charge Not Subsequent Waiver ...............................51 3.15 Administrative Agent's Right to Assume Payments Will be Made by the Borrowers..............................................................51 3.16 Fee Determination Detail ..............................................51 3.17 Survivability .........................................................51 3.18 Currency Conversion ...................................................52
-i- 3 Article 4 REPRESENTATIONS AND WARRANTIES .....................................................53 4.1 Existence and Qualification; Power; Compliance With Laws ..............53 4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations ................................................53 4.3 No Governmental Approvals Required - Consents to Pledge ...............54 4.4 Subsidiaries ..........................................................54 4.5 Financial Statements ..................................................54 4.6 No Other Liabilities; No Material Adverse Changes .....................55 4.7 Title to Property .....................................................55 4.8 Real Property .........................................................55 4.9 Intangible Assets .....................................................55 4.10 Public Utility Holding Company Act ....................................55 4.11 Litigation ............................................................55 4.12 Binding Obligations ...................................................56 4.13 No Default ............................................................56 4.14 ERISA .................................................................56 4.15 Regulations T, U and X; Investment Company Act ........................56 4.16 Disclosure ............................................................56 4.17 Tax Liability .........................................................57 4.18 Projections ...........................................................57 4.19 Hazardous Materials ...................................................57 Article 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) ..........58 5.1 Payment of Taxes and Other Potential Liens ............................58 5.2 Preservation of Existence .............................................58 5.3 Maintenance of Properties .............................................58 5.4 Maintenance of Insurance ..............................................58 5.5 Compliance With Laws ..................................................58 5.6 Inspection Rights .....................................................59 5.7 Keeping of Records and Books of Account ...............................59 5.8 Compliance With Agreements ............................................59 5.9 Use of Proceed ........................................................59 5.10 New Significant Subsidiaries ..........................................59 5.11 Hazardous Materials Laws ..............................................60 5.12 Approvals of Pledge of Significant Subsidiary Shares ..................60 Article 6 NEGATIVE COVENANTS .................................................................61 6.1 Payment of Subordinated Obligations ...................................61 6.2 Disposition of Property ...............................................61 6.3 Mergers ...............................................................62 6.4 Hostile Acquisitions ..................................................62 6.5 Distributions .........................................................62 6.6 ERISA .................................................................62 6.7 Change in Nature of Business ..........................................63
-ii- 4 6.8 Liens and Negative Pledges ............................................63 6.9 Indebtedness and Contingent Obligations ...............................64 6.10 Transactions with Affiliates ..........................................65 6.11 Capital Expenditures ..................................................65 6.12 Investments and Acquisitions ..........................................65 6.13 Senior Leverage Ratio .................................................67 6.14 Total Leverage Ratio ..................................................67 6.15 Fixed Charge Coverage Ratio ...........................................67 6.16 Minimum EBITDA ........................................................68 Article 7 INFORMATION AND REPORTING REQUIREMENTS .............................................69 7.1 Financial and Business Information ....................................69 7.2 Compliance Certificates ...............................................71 Article 8 CONDITIONS .......................................................................72 8.1 Initial Advances on the Closing Date ..................................72 8.2 Any Increasing Advance ................................................74 Article 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT ...............................75 9.1 Events of Default .....................................................75 9.2 Remedies Upon Event of Default ........................................77 Article 10 THE ADMINISTRATIVE AGENT ...........................................................79 10.1 Appointment and Authorization .........................................79 10.2 Administrative Agent and Affiliates ...................................79 10.3 Proportionate Interest in any Collateral ..............................79 10.4 Lenders' Credit Decisions .............................................79 10.5 Action by Administrative Agent ........................................80 10.6 Liability of Administrative Agent .....................................81 10.7 Indemnification .......................................................82 10.8 Successor Administrative Agent ........................................83 10.9 German Commitment .....................................................83 10.10 No Obligations of Borrowers ...........................................83 Article 11 MISCELLANEOUS ......................................................................84 11.1 Cumulative Remedies; No Waiver ........................................84 11.2 Amendments; Consents ..................................................84 11.3 Costs, Expenses and Taxes .............................................85 11.4 Nature of Lenders' Obligations ........................................86 11.5 Survival of Representations and Warranties ............................86 11.6 Notices ...............................................................86 11.7 Execution of Loan Documents ...........................................87 11.8 Binding Effect; Assignment ............................................87 11.9 Right of Setoff .......................................................90
-iii- 5 11.10 Sharing of Setoffs ....................................................90 11.11 Indemnity by the Borrowers ............................................91 11.12 Nonliability of the Lenders ...........................................91 11.13 No Third Parties Benefitted ...........................................92 11.14 Confidentiality .......................................................92 11.15 Further Assurances ....................................................93 11.16 Integration ...........................................................93 11.17 Governing Law .........................................................93 11.18 Severability of Provisions ............................................93 11.19 Headings ..............................................................93 11.20 Time of the Essence ...................................................94 11.21 Foreign Lenders and Participants ......................................94 11.22 Hazardous Material Indemnity ..........................................94 11.23 Gaming Boards .........................................................95 11.24 Nevada Gaming Collateral ..............................................95 11.25 Construction of the Pledge Agreements .................................95 11.26 Specific Provisions Regarding German Borrowers ........................95 11.27 Consent to Jurisdiction; Choice of Forum ..............................96 11.28 Waiver of Right to Trial by Jury ......................................96 11.29 Purported Oral Amendments .............................................97
Exhibits A Assignment Agreement B Compliance Certificate C German Note D Pricing Certificate E Request for Letter of Credit F Request for Loan G Request for Continuation or Conversion H Revolving Note I Term Note Schedules 1.1 Refinanced Leases 1.2 German Security Documents 4.3 Governmental Approvals 4.4 Subsidiaries 4.7 Existing Liens, Negative Pledges and Rights of Others 4.8 Real Property 4.9 Intangible Assets 4.11 Material Litigation 4.19 Environmental Matters 5.12 Governmental Approvals to Licensee Pledges 6.9 Existing Indebtedness and Contingent Obligations 6.12 Existing Investments -iv- 6 LOAN AGREEMENT Dated as of June 22, 2001 This Loan Agreement ("Agreement") is entered into by and among Alliance Gaming Corporation, a Nevada corporation ("Domestic Borrower"), Bally Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (the "German Borrowers"), each of which is a company organized under the laws of the Federal Republic of Germany and a wholly-owned Subsidiary of the Domestic Borrower, each lender whose name is set forth on the signature pages of this Agreement and each lender which may hereafter become a party to this Agreement pursuant to Section 11.8, and Bank of America, N.A., as Administrative Agent. While not a party hereto, Banc of America Securities LLC has served as Lead Arranger and Sole Book Manager for the credit facilities described herein. RECITALS A. The Borrowers have requested the provision of certain credit facilities pursuant to this Agreement. B. The Borrowers are engaged in integrated operations that require financing on a basis permitting the availability of credit from time to time to each Borrower as required for the continued successful operation of each of them separately and their integrated operations collectively. Each Borrower expects to derive benefit, directly or indirectly, from such availability because the successful operation of each Borrower is dependent on the continued successful performance of the functions of the integrated group. C. The credit facilities provided to the Domestic Borrower are separate and distinct from the credit facilities provided to the German Borrowers. D. The handling of the separate credit facilities made available to the Domestic Borrower and the German Borrowers in a single Loan Agreement is solely as an accommodation to Borrowers and at the request of the Borrowers, and no Creditor shall incur liability to the Borrowers or any other Person as a result thereof. In consideration of the foregoing and of the mutual covenants and agreements herein contained, Borrowers, the Administrative Agent, the Issuing Lender and the Lenders, covenant and agree as follows: Article 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below: "Acquisition" means any transaction, or any series of related transactions, by which the Domestic Borrower or its Subsidiaries directly or indirectly (i) acquire any going business or all or substantially all of the assets of any Person, or any division thereof, whether through purchase of assets, merger or otherwise, or (ii) acquire (in one transaction or as the most recent transaction in a series of related transactions) control of at least a majority in ordinary voting -1- 7 power of the securities of a corporation which have ordinary voting power for the election of directors, or (iii) acquire control of a 50% or more ownership interest in any partnership, joint venture, limited liability company or any other Person. "Administrative Agent" means Bank of America, when acting in its capacity as the Administrative Agent under any of the Loan Documents, or any successor Administrative Agent. "Administrative Agent's Office" means the Administrative Agent's address as set forth on the signature pages of this Agreement, or such other address as the Administrative Agent hereafter may designate by written notice to Borrowers and the Lenders. "Advance" means (a) any advance made or to be made by any Lender to the Domestic Borrower under the Domestic Commitments, and (b) any Advance made by Bank of America, Frankfurt to the German Borrower under the German Commitment, in each case as provided in Article 2, and includes each Base Rate Advance, Eurocurrency Rate Advance and Swing Line Advance. "Affiliate" means, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (and the correlative terms, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise); provided that, in any event, any Person that owns, directly or indirectly, 10% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation that has more than 100 record holders of such securities, or 10% or more of the partnership or other ownership interests of any other Person that has more than 100 record holders of such interests, will be presumed (subject to rebuttal by a preponderance of the evidence) to control such corporation, partnership or other Person. With respect to any Lender, the term "Affiliate" shall be deemed to include (a) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by such Lender or an Affiliate of such Lender, and (b) in the case of any Lender that is a fund that invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such Lender. "Aggregate Effective Amount" means, as of any date of determination and with respect to all Letters of Credit then outstanding, the sum of (a) the aggregate undrawn amount of all such Letters of Credit then outstanding plus (b) the aggregate amounts paid by the Issuing Lender under such Letters of Credit not then reimbursed to the Issuing Lender by the Domestic Borrower pursuant to Section 2.4(d) and not the subject of Advances made pursuant to Section 2.4(e). "Agreement" means this Loan Agreement, as it may from time to time be supplemented, modified, amended, restated or extended. -2- 8 "Assignment Agreement" means an Assignment Agreement substantially in the form of Exhibit A. "Average Senior Debt" means, as of each date of determination, the arithmetic average of the Senior Debt as of that date and as of the last day of the two immediately preceding calendar months, provided that, in computing Average Senior Debt, (a) that portion of the Senior Debt which has been permanently repaid as of the date of determination using the proceeds of any Disposition of any Person or assets involving a consideration in excess of $5,000,000 shall be excluded, and (ii) any Senior Debt existing on the date of determination which is attributable to the acquisition of any Person or assets during the relevant period for a consideration which is in excess of $5,000,000 shall be deemed to have been outstanding on each such date. "Average Total Debt" means, as of each date of determination, the arithmetic average of the Total Debt as of that date and as of the last day of the two immediately preceding calendar months, provided that, in computing Average Total Debt, (a) that portion of the Total Debt which has been permanently repaid as of the date of determination using the proceeds of any Disposition of any Person or assets involving a consideration in excess of $5,000,000 shall be excluded, and (ii) any Total Debt existing on the date of determination which is attributable to the acquisition of any Person or assets during the relevant period for a consideration which is in excess of $5,000,000 shall be deemed to have been outstanding on each such date. "Bally Gaming Domestic Facilities Guaranty" means the guaranty of the Obligations under the Domestic Commitments executed by Bally Gaming, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Bally Gaming German Facility Guaranty" means the guaranty of the Obligations under the German Commitment executed by Bally Gaming, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Bally Gaming Patent Assignment" means the Bally Gaming Patent Assignment executed by Bally Gaming, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Bally Gaming Security Agreement" means the Bally Gaming Security Agreement executed by Bally Gaming, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Bally Gaming Trademark Assignment" means the Bally Gaming Trademark Assignment executed by Bally Gaming, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Bank of America" means Bank of America, N.A., its successors and assigns. "Bank of America, Frankfurt" means Bank of America, N.A., Frankfurt Branch, its successors and assigns. -3- 9 "Base Rate" means, as of any date of determination, the rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the higher of (a) the Prime Rate in effect on such date and (b) the Federal Funds Rate in effect on such date plus 1/2 of 1% (50 basis points). "Base Rate Advance" means an Advance made hereunder and specified to be a Base Rate Advance in accordance with Article 2. "Base Rate Loan" means a Loan made hereunder and specified to be a Base Rate Loan in accordance with Article 2. "Borrowers" means, collectively, the Domestic Borrower and the German Borrowers. At such times, if any, as the German Commitment has been terminated and the obligations thereunder repaid, the term "Borrowers" shall mean the Domestic Borrower only. "Business Day" means any Monday, Tuesday, Wednesday, Thursday or Friday, other than a day on which banks are authorized or required to be closed in California, Nevada or New York (or, in the context of any Obligation arising under the German Commitment, a day on which banks are generally closed in the Federal Republic of Germany). "Capital Expenditure" means any expenditure for or related to fixed assets or purchased intangibles that is treated as a capital expenditure under Generally Accepted Accounting Principles, including any amount which is required to be treated as an asset subject to a Capital Lease Obligation. "Capital Lease Obligations" means all monetary obligations of a Person under any leasing or similar arrangement which, in accordance with Generally Accepted Accounting Principles, is classified as a capital lease. "Cash" means, when used in connection with any Person, all monetary and non-monetary items owned by that Person that are treated as cash in accordance with Generally Accepted Accounting Principles. "Cash Equivalents" means, when used in connection with any Person, that Person's Investments in: (a) Government Securities due within one year after the date of the making of the Investment; (b) readily marketable direct obligations of any State of the United States of America or any political subdivision of any such State or any public agency or instrumentality thereof given on the date of such Investment a credit rating of at least Aa by Moody's or AA by S&P in each case due within one year from the making of the Investment; (c) certificates of deposit issued by, bank deposits in, eurodollar deposits through, bankers' acceptances of, and repurchase agreements covering Government Securities executed by any Lender or by any bank incorporated under the Laws of the United States of America, any State thereof or the District of Columbia and having on the date of such Investment combined capital, surplus and undivided profits of at least $250,000,000, or total -4- 10 assets of at least $5,000,000,000, in each case due within one year after the date of the making of the Investment; (d) certificates of deposit issued by, bank deposits in, eurodollar deposits through, bankers' acceptances of, and repurchase agreements covering Government Securities executed by any branch or office located in the United States of America of a bank incorporated under the Laws of any jurisdiction outside the United States of America having on the date of such Investment combined capital, surplus and undivided profits of at least $500,000,000, or total assets of at least $15,000,000,000, in each case due within one year after the date of the making of the Investment; (e) repurchase agreements covering Government Securities executed by a broker or dealer registered under Section 15(b) of the Securities Exchange Act of 1934, as amended, having on the date of the Investment capital of at least $50,000,000, due within 90 days after the date of the making of the Investment; provided that the maker of the Investment receives written confirmation of the transfer to it of record ownership of the Government Securities on the books of a "primary dealer" in such Government Securities or on the books of such registered broker or dealer, as soon as practicable after the making of the Investment; (f) readily marketable commercial paper or other debt securities issued by corporations doing business in and incorporated under the Laws of the United States of America or any State thereof or of any corporation that is the holding company for a bank described in clause (c) or (d) above given on the date of such Investment a credit rating of at least P-1 by Moody's or A-1 by S&P, in each case due within one year after the date of the making of the Investment; (g) "money market preferred stock" issued by a corporation incorporated under the Laws of the United States of America or any State thereof (i) given on the date of such Investment a credit rating of at least Aa by Moody's and AA by S&P, in each case having an investment period not exceeding 50 days or (ii) to the extent that investors therein have the benefit of a standby letter of credit issued by a Lender or a bank described in clauses (c) or (d) above; (h) a readily redeemable "money market mutual fund" sponsored by a bank described in clause (c) or (d) hereof, or a registered broker or dealer described in clause (e) hereof, that has and maintains an investment policy limiting its investments primarily to instruments of the types described in clauses (a) through (g) hereof and given on the date of such Investment a credit rating of at least Aa by Moody's and AA by S&P; (i) corporate notes or bonds having an original term to maturity of not more than one year issued by a corporation incorporated under the Laws of the United States of America or any State thereof, or a participation interest therein; provided that any commercial paper issued by such corporation is given on the date of such Investment a credit rating of at least Aa by Moody's and AA by S&P; and (j) in the case of the German Borrowers, investments of a similar credit quality, liquidity and tenor made in securities issued by institutions and governmental agencies within the European Union. -5- 11 "Change in Control" means, (a) any transaction or series of related transactions in which any Unrelated Person or two or more Unrelated Persons acting in concert acquire beneficial ownership (within the meaning of Rule 13d-3(a)(1) under the Securities Exchange Act of 1934, as amended), directly or indirectly, of 25% or more of the outstanding common stock of the Domestic Borrower, or (b) during any period of 24 consecutive months, individuals who at the beginning of such period constituted the board of directors of the Domestic Borrower (together with any new or replacement directors whose election by the board of directors, or whose nomination for election, was approved by a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for reelection was previously so approved) cease for any reason to constitute a majority of the directors then in office. "Closing Date" means the time and Business Day on which the conditions set forth in Section 8.1 are satisfied or waived. "Code" means the Internal Revenue Code of 1986, as amended or replaced and as in effect from time to time. "Collateral" means, collectively, all of the collateral subject to the Liens, or intended to be subject to the Liens, created by the Collateral Documents. "Collateral Documents" means, collectively, the Domestic Borrower Security Agreement, the Domestic Subsidiaries Security Agreement, the Domestic Facilities Pledge Agreement, the German Facility Pledge Agreement, the Deeds of Trust, the Patent Assignment, the Bally Gaming Patent Assignment, the Trademark Assignment, the Bally Gaming Trademark Assignment, the German Security Documents and any other pledge agreement, hypothecation agreement, security agreement, assignment, deed of trust, mortgage or other instrument, document or agreement executed by the Domestic Borrower, the German Borrowers or any of their Subsidiaries to secure the Obligations. "Commitment Fee Rate" means, (a) for the Initial Pricing Period, 0.50%, and (b) for each subsequent Pricing Period, the applicable percentage set forth below opposite the Revolver Pricing Level for that Pricing Period:
Revolver Pricing Level Commitment Fee Rate ---------------------- ------------------- I 0.375% II 0.50% III 0.50% IV 0.50% V 0.50%
"Commitments" means, collectively, the Domestic Commitments and the German Commitment. -6- 12 "Compliance Certificate" means a certificate substantially in the form of Exhibit B, properly completed and signed by a Senior Officer of the Domestic Borrower. "Contingent Obligation" means, as to any Person, any (a) guarantee by that Person of Indebtedness of, or other obligation performable by, any other Person or (b) assurance given by that Person to an obligee of any other Person with respect to the performance of an obligation by, or the financial condition of, such other Person, whether direct, indirect or contingent, including any purchase or repurchase agreement covering such obligation or any collateral security therefor, any agreement to provide funds (by means of loans, capital contributions or otherwise) to such other Person, any agreement to support the solvency or level of any balance sheet item of such other Person or any "keep-well" or other arrangement of whatever nature given for the purpose of assuring or holding harmless such obligee against loss with respect to any obligation of such other Person; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or guaranteed rentals payable in connection with the placement of gaming machines by the Domestic Borrower or its Subsidiaries in the ordinary course of their respective businesses. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation (unless the Contingent Obligation is limited by its terms to a lesser amount, in which case to the extent of such amount) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the Person in good faith. "Contractual Obligation" means, as to any Person, any provision of any outstanding security issued by that Person or of any material agreement, instrument or undertaking to which that Person is a party or by which it or any of its Property is bound. "Creditors" means, collectively, the Administrative Agent, the Issuing Lender, Bank of America, Frankfurt, the Swing Line Lender, each Lender and, where the context requires, any one or more of them. "Debtor Relief Laws" means the Bankruptcy Code of the United States of America, as amended from time to time, and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws from time to time in effect affecting the rights of creditors generally, including without limitation the applicable insolvency laws of the Federal Republic of Germany. "Deeds of Trust" means, collectively (a) the Deed of Trust, Assignment of Rents and Security Agreement executed by Bally Gaming, Inc. on the date hereof with respect to the Headquarters Property to secure its obligations under the Bally Gaming Domestic Facilities Guaranty and the Bally Gaming German Facility Guaranty, and (b) the Deed of Trust, Assignment of Rents and Security Agreement executed by Plantation Investments, Inc. on the date hereof with respect to the Rail City Casino to secure its obligations under the Plantation Domestic Facilities Guaranty and the Plantation German Facility Guaranty. "Default" means any event specified in Section 9.1 that, with the giving of any applicable notice or passage of time specified in Section 9.1, or both, would be an Event of Default. "Default Rate" means the interest rate prescribed in Section 3.9. -7- 13 "Designated Eurocurrency Market" means, with respect to any Eurocurrency Rate Loan, (a) the London Eurocurrency Market, or (b) if prime banks in the London Eurocurrency Market are at the relevant time not accepting deposits of the relevant currency or if the Administrative Agent determines in good faith that the London Eurocurrency Market does not represent at the relevant time the effective pricing to the Lenders for deposits of such currency in the London Eurocurrency Market, such other Eurocurrency Market as may from time to time be selected by the Administrative Agent with the approval of the Domestic Borrower and the Requisite Lenders. "Disposition" means the voluntary sale, transfer or other disposition (including any sale and leaseback), in one transaction or a series of related transactions, of any asset of the Domestic Borrower or any of its Subsidiaries having a value in excess of $1,000,000 other than the voluntary sale, transfer or other disposition of (a) Cash, Cash Equivalents, inventory or other assets sold, leased or otherwise disposed of in the ordinary course of business of the Domestic Borrower or any of its Subsidiaries, (b) equipment sold or otherwise disposed of where replacement equipment has theretofore been acquired, or thereafter within 180 days is acquired, by the Domestic Borrower or any of its Subsidiaries, or (c) Property to the Domestic Borrower or any of its Subsidiaries. "Distribution" means, with respect to any shares of capital stock or any warrant or option to purchase an equity security or other equity security issued by a Person, (a) the retirement, redemption, purchase or other acquisition for Cash or for Property (other than capital stock, or any warrants or options to purchase an equity security or other security of such Person) by such Person of any such security, (b) the declaration or payment by such Person of any dividend or distribution in Cash or in Property (other than capital stock, or any warrants or options to purchase an equity security or other security of such Person) on or with respect to any such security, and (c) any Investment by such Person in the holder of 5% or more of any such security if a purpose of such Investment is to avoid characterization of the transaction as a Distribution. "Dollar Equivalent" means, as of each date of determination and with respect to an amount denominated in any currency other than Dollars, the amount of Dollars which could be purchased with the other currency at the spot rate of exchange as quoted by the Administrative Agent as of 8:00 a.m. (California local time) on any Eurocurrency Business Day for purchase on such date. "Dollars" or "$" means United States dollars. "Domestic Borrower" means Alliance Gaming Corporation, a Nevada corporation, its successors and permitted assigns. "Domestic Borrower Security Agreement" means the Domestic Borrower Security Agreement executed on the date hereof by the Domestic Borrower to secure its Obligations, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Domestic Commitments" means, collectively, the Revolving Commitment and the Term Commitment. -8- 14 "Domestic Facilities Guaranty" means the guaranty of the Obligations under the Domestic Commitments executed by the Domestic Significant Subsidiaries (other than, Bally Gaming, Inc., Plantation Investments, Inc. and the Excluded Subsidiaries) on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Domestic Facilities Pledge Agreement" means the Domestic Facilities Pledge Agreement to be executed by the Domestic Borrower and each of its Domestic Significant Subsidiaries, pursuant to which they shall grant security interests in (a) 100% of the stock and other equity securities of the Domestic Significant Subsidiaries, and (b) 100% of the Rainbow Partnership Interests to secure (i) the Obligations under the Revolving Commitment and the Term Commitment, in the case of the Domestic Borrower, and (ii) the Domestic Facilities Guaranty, as to each Domestic Significant Subsidiary, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Domestic Funding Account" means an account to be maintained by the Domestic Borrower with Bank of America, as from time to time designated by Domestic Borrower by written notification to the Administrative Agent to which Loans made under the Domestic Commitments will be credited pursuant to Section 2.1(d). "Domestic Significant Subsidiary" means each Significant Subsidiary which is formed under the Laws of the United States of America or any political subdivision thereof. "Domestic Subsidiaries Security Agreement" means the Domestic Subsidiaries Security Agreement executed on the date hereof by each Domestic Significant Subsidiary other than the Excluded Subsidiaries to secure its Guaranty of the Domestic Commitments, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "EBITDA" means, for any fiscal period, the sum of (a) Net Income for that period, plus (b) any extraordinary loss reflected in such Net Income, minus (c) any extraordinary gain reflected in such Net Income, plus (d) Interest Charges of the Domestic Borrower and its Subsidiaries for that period to the extent deducted in arriving at Net Income, plus (e) the aggregate amount of federal, state, local, and foreign taxes on or measured by income of the Domestic Borrower and its Subsidiaries for that period (whether or not payable during that period) to the extent deducted in arriving at Net Income, plus (f) depreciation, amortization and all other non-cash expenses for that period, plus (g) any non-recurring charges reflected in such Net Income to the extent that the same are not in excess of $5,000,000 during that period, provided that in determining EBITDA, (i) the results of operations of any Person or assets which have been the subject of a Disposition involving a consideration in excess of $5,000,000 during the relevant period shall be excluded, and (ii) the results of operations of any Person or assets acquired by the Domestic Borrower and its Subsidiaries during the relevant period for a consideration which is in excess of $5,000,000 shall be annualized on a straight line - basis from the date of such acquisition and included. "Eligible Assignee" means (a) with respect to any Lender, another Lender, (b) with respect to any Lender, any Affiliate of that Lender which (A) has a net worth of $200,000,000 or more, (B) is engaged in the business of lending money and extending credit under credit facilities substantially similar to those extended under this Agreement or making, purchasing, -9- 15 holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and (C) is operationally and procedurally able to meet the obligations of a Lender hereunder to the same degree as a commercial bank, (c) any commercial bank having a combined capital and surplus of $100,000,000 or more, (d) any (i) savings bank, savings and loan association or similar financial institution or (ii) insurance company engaged in the business of writing insurance which, in either case (A) has a net worth of $200,000,000 or more, (B) is engaged in the business of lending money and extending credit under credit facilities substantially similar to those extended under this Agreement and (C) is operationally and procedurally able to meet the obligations of a Lender hereunder to the same degree as a commercial bank and (e) any other financial institution including a mutual fund or other fund) having total assets of $250,000,000 or more which meets the requirements set forth in subclauses (B) and (C) of clause (b) above; provided that each Eligible Assignee must either (a) be organized under the Laws of the United States of America, any State thereof or the District of Columbia or (b) be organized under the Laws of the Cayman Islands or any country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of such a country, and (i) act hereunder through a branch, agency or funding office located in the United States of America and (ii) be exempt from withholding of tax on interest and deliver the documents related thereto pursuant to Section 11.21, provide further, no assignment shall be made to any Person if such assignment would result in a violation of any Gaming Laws or otherwise require the consent or approval of any Gaming Board. "ERISA" means the Employee Retirement Income Security Act of 1974, and any regulations issued pursuant thereto, as amended or replaced and as in effect from time to time. "ERISA Affiliate" means, with respect to any Person, any other Person (or any trade or business, whether or not incorporated) that is under common control with that Person within the meaning of Section 414 of the Code. "Euro" means the currency of the European Economic and Monetary Union. "Euro Equivalent" means, as of each date of determination and with respect to an amount denominated in any currency other than the Euro, the amount of Euros which could be purchased with the other currency at the spot rate of exchange as quoted by the Administrative Agent as of 11:00 a..m. (Frankfurt am Main, Germany, local time) on the date two Eurocurrency Business Days prior to the date of any determination thereof for purchase on such date. "Euro Reserve" means, as of each date of determination, the amount which is 5% of the Dollar Equivalent of the amount of Euros then outstanding under the German Commitment. "Eurocurrency Business Day" means any Business Day on which dealings in Dollar deposits are conducted by and among banks in the Designated Eurocurrency Market. "Eurocurrency Lending Office" means, as to each Lender, its office or branch so designated by written notice to the Domestic Borrower and the Administrative Agent as its Eurocurrency Lending Office. If no Eurocurrency Lending Office is designated by a Lender, its Eurocurrency Lending Office shall be its office at its address for purposes of notices hereunder. -10- 16 "Eurocurrency Market" means a regular established market located outside the United States of America by and among banks for the solicitation, offer and acceptance of deposits in such banks denominated in the relevant currency. "Eurocurrency Obligations" means eurocurrency liabilities, as defined in Regulation D or any comparable regulation of any Governmental Agency having jurisdiction over any Lender. "Eurocurrency Rate" means, with respect to any Eurocurrency Rate Loan, the interest rate per annum (rounded, if necessary, upward to the next 1/100 of 1% at which deposits denominated in the relevant currency are offered by Bank of America to prime banks in the Designated Eurocurrency Market at or about 11:00 a.m. local time in the Designated Eurocurrency Market, two Eurocurrency Business Days before the first day of the applicable Interest Period in an aggregate amount approximately equal to the amount of the Advance made by Bank of America with respect to such Eurocurrency Rate Loan and for a period of time comparable to the number of days in the applicable Interest Period. "Eurocurrency Rate Advance" means an Advance made hereunder and specified to be a Eurocurrency Rate Advance in accordance with Article 2. "Eurocurrency Rate Loan" means a Loan made hereunder and specified to be a Eurocurrency Rate Loan in accordance with Article 2. "Event of Default" means as provided in Section 9.1. "Excluded Subsidiaries" means, collectively, Video Services, Inc., a Louisiana corporation, Video Distributing Services, Inc., a Louisiana corporation, Southern Video Services, Inc., a Louisiana corporation and Rainbow Casino Vicksburg Partnership, L.P. (d/b/a/ Rainbow Casino), a Mississippi limited partnership, in each case unless and until any such Subsidiary becomes a Wholly-Owned Subsidiary. "Existing Credit Agreement" means the obligations of the Domestic Borrower, the German Borrowers and their respective Subsidiaries under the Credit Agreement dated as of August 8, 1997, among the Domestic Borrower, the German Borrowers, the lenders described therein, and Credit Suisse First Boston, as Administrative Agent and each of the security agreements, guaranties, pledge agreements and other instruments, documents and agreements in connection therewith. "Existing Senior Subordinated Notes" means Borrower's $150,000,000 10% Senior Subordinated Notes due 2007 issued pursuant to the Indenture, dated as of August 8, 1997, among Borrower and United States Trust Company of New York, as Trustee, as amended as of the Closing Date. "Federal Funds Rate" means, as of any date of determination, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Board (including any such successor, "H.15(519)") for such date opposite the caption "Federal Funds (Effective)". If for any relevant date such rate is not yet published in H.15(519), the rate for such date will be the rate set forth in the daily statistical release designated as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any -11- 17 successor publication, published by the Federal Reserve Bank of New York (including any such successor, the "Composite 3:30 p.m. Quotation") for such date under the caption "Federal Funds Effective Rate". If on any relevant date the appropriate rate for such date is not yet published in either H.15(519) or the Composite 3:30 p.m. Quotations, the rate for such date will be the arithmetic mean of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that date by each of three leading brokers of Federal funds transactions in New York City selected by the Administrative Agent. For purposes of this Agreement, any change in the Base Rate due to a change in the Federal Funds Rate shall be effective as of the opening of business on the effective date of such change. "Fiscal Quarter" means each fiscal quarter of the Domestic Borrower consisting of the three calendar month periods ending on each March 31, June 30, September 30 and December 31. "Fiscal Year" means the fiscal year of the Domestic Borrower consisting of the twelve month period ending on each June 30. "Fixed Charge Coverage Ratio" means, as of the last day of each Fiscal Quarter, the ratio of (a) EBITDA for the four Fiscal Quarter period ending on such date to (b) Fixed Charges for the same period. "Fixed Charges" means, as of any date, the sum of (a) the consolidated Interest Charges of the Domestic Borrower and its Subsidiaries paid in cash during the twelve month period ending on that date, plus (b) all payments of principal scheduled to be made by the Domestic Borrower and its Subsidiaries to lenders in connection with borrowed money or Capital Lease Obligations during the twelve month period FOLLOWING that date, plus (c) all Maintenance Capital Expenditures made by the Domestic Borrower and its Subsidiaries during the twelve month period ending on that date, plus (d) all taxes paid in Cash by the Domestic Borrower and its Subsidiaries during the twelve month period ending on that date, us (e) all Distributions made by the Domestic Borrower and its Subsidiaries during the twelve month period ending on that date (other than Distributions to one another and to shareholders and partners in the Excluded Subsidiaries in the ordinary course of business to the extent that such Distributions have been deducted in arriving at Net Income), provided that the Fixed Charges shall be adjusted to include, on a pro forma basis, the financial results of any new Subsidiary (or operating assets) acquired by the Domestic Borrower and its Subsidiaries during the twelve month period ending on that date for a consideration in excess of $5,000,000, and to exclude, on a pro forma basis, the financial results of any Subsidiary (or operating assets) sold, transferred or otherwise disposed of by the Domestic Borrower and its Subsidiaries for a consideration in excess of $5,000,000 during the twelve month period ending on that date. "Foreign Significant Subsidiary" means each Significant Subsidiary of the Domestic Borrower other than a Domestic Significant Subsidiary. "Gaming Board" means, collectively, (a) the Nevada Gaming Commission, (b) the Nevada State Gaming Control Board, (b) the Mississippi Gaming Commission, (c) the Mississippi State Tax Commission, (d) the Missouri Gaming Commission, (e) the Louisiana Gaming Control Board, (f) the Governmental Agencies of the Federal Republic of Germany having jurisdiction over the gaming activities of the German Borrowers, and (g) any other Governmental Agency that holds regulatory, licensing or permit authority over gambling, -12- 18 gaming, lottery or casino activities conducted by the Domestic Borrower or any Subsidiary of the Domestic Borrower within its jurisdiction. "Gaming Laws" means, collectively, The Nevada Gaming Control Act, The Louisiana Draw Poker Devices Control Law, the Mississippi Gaming Control Act, Missouri laws relating to licensed gaming activities, excursion gambling boats and suppliers of gaming equipment and slot machines set forth in Chapter 313 of the Revised Statutes of Missouri, in each case together with the rules and regulations thereunder, and the applicable gaming legislation, rules and regulations of the Federal Republic of Germany all Laws pursuant to which any Gaming Board possesses regulatory, licensing or permit authority over gambling, gaming, lottery or casino activities conducted by the Borrowers and their Subsidiaries within its jurisdiction. "Generally Accepted Accounting Principles" means, as of any date of determination, accounting principles (a) set forth as generally accepted in then currently effective Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) set forth as generally accepted in then currently effective Statements of the Financial Accounting Standards Board or (c) that are then approved by such other entity as may be approved by a significant segment of the accounting profession in the United States of America. The term "consistently applied," as used in connection therewith, means that the accounting principles applied are consistent in all material respects with those applied at prior dates or for prior periods. "German Commitment" means the commitment by Bank of America, Frankfurt to make Loans to the German Borrower in Euros in an aggregate principal amount, subject to any decrease in the amount thereof pursuant to Sections 2.6 and 2.7, not to exceed a Dollar Equivalent of $25,000,000. Each Lender which has a Pro Rata Share of the Revolving Commitment has purchased a participation in the German Commitment which is equal (on a percentage basis) to its Pro Rata Share of the Revolving Commitment. "German Commitment Loan" means a Loan under the German Commitment. "German Facility Guaranty" means the Guaranty of the Obligations under the German Commitment executed by the Domestic Borrower and each of the Domestic Significant Subsidiaries of the Domestic Borrower (other than the Bally Gaming, Inc., Plantation Investments, Inc. and the Excluded Subsidiaries) on the date hereof, as the same may from time to time be supplemented, modified, amended, extended or supplanted. "German Facility Pledge Agreement" means the German Facility Pledge Agreement to be executed by the Domestic Borrower and each of its Domestic Significant Subsidiaries, pursuant to which they shall grant security interests in (a) 100% of the stock and other equity securities of the Domestic Significant Subsidiaries, and (b) 100% of the Rainbow Partnership Interests to secure the German Facility Guaranty, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "German Funding Account" means an account established at the office of Bank of America, N.A. in Frankfurt am Main, Germany. -13- 19 "German Holdings" means Alliance Automaten GmbH & Co. KG, which is the owner of 100% of the capital stock of each of the German Borrowers, its successors and permitted assigns. "German Note" means the promissory note made by the German Borrowers in favor of Bank of America, Frankfurt evidencing Loans under the German Commitment, substantially in the form of Exhibit C, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or supplanted, in which each Lender having a Pro Rata Share in the Revolving Commitment has acquired a risk participation pursuant to Section 2.12. "German Security Documents" means the documents described on Schedule 1.2, either as originally executed or as they may from time to time be supplemented, modified, amended, restated or extended, together with such other documents that may from time to time be executed by Foreign Significant Subsidiaries pursuant to the terms of Section 5.10 of this Agreement. "Government Securities" means readily marketable (a) direct full faith and credit obligations of the United States of America or obligations guaranteed by the full faith and credit of the United States of America and (b) obligations of an agency or instrumentality of, or corporation owned, controlled or sponsored by, the United States of America that are generally considered in the securities industry to be implicit obligations of the United States of America. "Governmental Agency" means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body or (c) any court or administrative tribunal of competent jurisdiction. "Guaranties" means, collectively, the Domestic Facilities Guaranty, the Bally Gaming Domestic Facilities Guaranty, the Plantation Domestic Facilities Guaranty, the German Facility Guaranty, the Bally Gaming German Facility Guaranty and the Plantation German Facility Guaranty. "Hazardous Materials" means substances defined as "hazardous substances" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., or as "hazardous", "toxic" or "pollutant" substances or as "solid waste" pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or as "friable asbestos" pursuant to the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., in each case as such Laws are amended from time to time. "Hazardous Materials Laws" means all Laws governing the treatment, transportation or disposal of Hazardous Materials applicable to any of the Real Property. "Headquarters Property" means the real property located at 6601 South Bermuda Road, Las Vegas, Nevada, 89119 more particularly described in Schedule 4.8 and the improvements located thereon. "Increased Commitment" has the meaning set forth for that term in Section 2.8. -14- 20 "Indebtedness" means, as to any Person (without duplication), (a) indebtedness of such Person for borrowed money or for the deferred purchase price of Property (excluding trade and other accounts payable in the ordinary course of business in accordance with ordinary trade terms), including any Contingent Obligation for any such indebtedness, (b) indebtedness of such Person of the nature described in clause (a) that is non-recourse to the credit of such Person but is secured by assets of such Person, not to exceed the value of such assets, (c) the principal portion of the Capital Lease Obligations of such Person, (d) indebtedness of such Person arising under bankers' acceptance facilities or under facilities for the discount of accounts receivable of such Person, (e) any direct or contingent obligations of such Person under letters of credit issued for the account of such Person, (f) the present value of obligations with respect to any synthetic lease, financing lease or similar arrangement, to the extent that the same is secured by a Lien on any asset of such Person, and (g) any net obligations of such Person under Swap Agreements. "Initial Pricing Period" means the period from the Closing Date to and including August 31, 2001. "Intangible Assets" means assets that are considered intangible assets under Generally Accepted Accounting Principles, including customer lists, goodwill, computer software, copyrights, mask works, trade names, trademarks and patents. "Interest Charges" means, for any Person, for any fiscal period, the consolidated net interest expense of that Person during that period determined in accordance Generally Accepted Accounting Principles. "Interest Differential" means, with respect to any prepayment of a Eurocurrency Rate Loan on a day other than the last day of the applicable Interest Period and with respect to any failure to borrow a Eurocurrency Rate Loan on the date or in the amount specified in any Request for Loan, the positive difference, if any, between (a) the Eurocurrency Rate payable (or, with respect to a failure to borrow, the Eurocurrency Rate which would have been payable) with respect to the Eurocurrency Rate Loan minus (b) the Eurocurrency Rate on, or as near as practicable to, the date of the prepayment or failure to borrow for a Eurocurrency Rate Loan with an Interest Period commencing on such date and ending on the last day of the Interest Period of the Eurocurrency Rate Loan so prepaid or which would have been borrowed on such date. "Interest Period" means, as to each Eurocurrency Rate Loan, the period commencing on the date specified by the Domestic Borrower pursuant to Section 2.1 (d) and ending one week, one month, two months, three months or six months thereafter (or, with the written consent of all of the affected Lenders, any other period), as specified by the Domestic Borrower in the applicable Request for Loan; provided that: (a) The first day of any Interest Period shall be a Eurocurrency Business Day; (b) Any Interest Period that would otherwise end on a day that is not a Eurocurrency Business Day shall be extended to the next succeeding Eurocurrency Business Day unless such Eurocurrency Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurocurrency Business Day; -15- 21 (c) The Domestic Borrower may not specify an Interest Period for any Term Loan that extends beyond any Quarterly Payment Date unless the aggregate principal amount of Term Loans that are Base Rate Loans or Eurocurrency Rate Loans having Interest Periods ending after such Quarterly Payment Date will not thereby exceed the principal amount of the Term Loans that will be outstanding (after giving effect to any reduction thereto scheduled to be made on that Quarterly Payment Date pursuant to Section 2.7(c)); (d) The Domestic Borrower may not specify an Interest Period for any Revolving Loan that extends beyond any Quarterly Payment Date unless the sum of (i) the aggregate principal amount of the Eurocurrency Rate Loans under the Revolving Commitment having Interest Periods ending after such Quarterly Payment Date plus (ii) the aggregate maximum amount available for drawing under Letters of Credit for which the expiry date is after such Quarterly Payment Date, plus the amount of any Loans under the German Commitment having Interest Periods ending after that Quarterly Payment Date, will not thereby exceed the Revolving Commitment (after giving effect to any reduction thereto scheduled to be made on that Quarterly Payment Date pursuant to Section 2.7(d)); (e) The German Borrowers may not specify an Interest Period for any Loan under the German Commitment that extends beyond any Quarterly Payment Date unless the sum of (i) the Dollar Equivalent of the aggregate principal amount of the Eurocurrency Rate Loans under the German Commitment having Interest Periods ending after such Quarterly Payment Date plus the Dollar Equivalent of the Euro Reserve, will not thereby exceed the German Commitment (after giving effect to any reduction thereto scheduled to be made on that Quarterly Payment Date pursuant to Section 2.7(b)); (f) No Interest Period shall extend beyond the Revolver Maturity Date, in the case of a Revolving Loan or a German Commitment Loan, or the Term Maturity Date, in the case of a Term Loan. "Investment" means, when used in connection with any Person, any investment by or of that Person, whether by means of purchase or other acquisition of stock or other securities of any other Person or by means of a loan, advance creating a debt, capital contribution, guaranty or other debt or equity participation or interest in any other Person, including any partnership and joint venture interests of such Person, but excluding any Acquisition. The amount of any Investment shall be the amount actually invested (minus any return of capital with respect to such Investment which has actually been received in Cash or Cash Equivalents or has been converted into Cash or Cash Equivalents), without adjustment for subsequent increases or decreases in the value of such Investment. "Issuing Lender" means Bank of America, N.A. "Laws" means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, regulations, ordinances, codes and administrative or judicial precedents. "Lead Arranger" means Banc of America Securities LLC. "Lender" means each lender whose name is set forth in the signature pages of this Agreement and each lender which may hereafter become a party to this Agreement pursuant to -16- 22 Section 11.8, together with Bank of America, Frankfurt (as the sole lender under the German Commitment). "Letter of Credit" means any Letter of Credit issued by the Issuing Lender under the Revolving Commitment pursuant to Section 2.4, either as originally issued or as the same may be supplemented, modified, amended, renewed, extended or supplanted. "Letter of Credit Fee" means, for each Pricing Period, the per annum rate which is equal to the Revolver Eurocurrency Margin for that Pricing Period. "License Revocation" means the revocation, failure to renew or suspension of, or the appointment of a receiver, supervisor or similar official with respect to, any casino, gambling or gaming license issued by any Gaming Board covering any casino or gaming facility of the Domestic Borrower or any of its Subsidiaries. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security interest, encumbrance, lien or charge of any kind, whether voluntarily incurred or arising by operation of Law or otherwise, affecting any Property, including any agreement to grant any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature of a security interest, and/or the filing of or agreement to give any financing statement (other than a precautionary financing statement with respect to a lease that is not in the nature of a security interest and pre-filing of any financing statements associated with a financing under which Liens will be granted only concurrently with the refinancing of the Obligations in their entirety) under the Uniform Commercial Code or comparable Law of any jurisdiction with respect to any Property. "Loan" means any Revolving Loan, German Commitment Loan or Term Loan, each of which may also be a Base Rate Loan or a Eurocurrency Rate Loan. "Loan Documents" means, collectively, this Agreement, the Notes, the Swing Line Documents, the Collateral Documents, the German Security Documents, the Guaranties, each Request for Loan, each Request for Letter of Credit, each Compliance Certificate, each Pricing Certificate, each Swap Agreement entered into with any Lender and any other agreements of any type or nature hereafter executed and delivered by the Domestic Borrower or any of its Subsidiaries to the Administrative Agent or to any Lender in any way relating to or in furtherance of this Agreement, in each case either as originally executed or as the same may from time to time be supplemented, modified, amended, restated, extended or supplanted. "Maintenance Capital Expenditure" means a Capital Expenditure for the maintenance, repair, restoration or refurbishment of tangible Property of the Domestic Borrower or its Subsidiaries, but excluding any Capital Expenditure which adds to or further improves any such Property. "Margin Stock" means "margin stock" as such term is defined in Regulation U. "Material Adverse Effect" means any set of circumstances or events which (a) has or could reasonably be expected to have a material adverse effect upon the validity or enforceability of any Loan Document, (b) is or could reasonably be expected to be material and adverse to the business or condition (financial or otherwise) or prospects of the Domestic -17- 23 Borrower and its Subsidiaries, taken as a whole and with a view to the totality of circumstances then existing with respect to the Domestic Borrower and its Subsidiaries, or (c) materially impairs or could reasonably be expected to materially impair the ability of the Domestic Borrower or and its Subsidiaries (taken as a whole) to perform the Obligations under the Revolving Commitment, the Term Commitment or the German Facility Guaranty. Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA to which the Domestic Borrower or any of its ERISA Affiliates contribute or are obligated to contribute. "Negative Pledge" means a Contractual Obligation that contains a covenant binding on the Domestic Borrower or any of its Subsidiaries that prohibits Liens on any of its or their Property in favor of the Administrative Agent or the creditors under any successor or replacement senior credit facility, other than (a) any such covenant contained in a Contractual Obligation granting a Lien permitted under Section 6.8 or pursuant to which the Domestic Borrower or its Subsidiaries acquire a right to use or occupy Property, in each case to the extent that such covenant which affects only the Property that is the subject of such permitted Lien or which is so acquired and (b) any such covenant that does not apply to Liens securing the Obligations and to any indebtedness which is used, directly or indirectly, to refinance the Obligations. "Net Cash Proceeds" means, with respect to any sale, transfer or other disposition of assets of the Domestic Borrower and its United States domestic Subsidiaries, the cash proceeds received by the Domestic Borrower or by any Subsidiary of the Domestic Borrower upon such sale, transfer or other disposition minus (a) the actual expenses of such sale paid or payable by the Domestic Borrower or by any Subsidiary of the Domestic Borrower in connection with such sale, transfer or other disposition, and minus (b) an amount equal to the taxes paid or payable in cash by the Domestic Borrower with respect to such sale, transfer or other disposition. "Net Income" means, for any period, the consolidated net income of the Domestic Borrower and its Subsidiaries from continuing operations for that period, determined in accordance with Generally Accepted Accounting Principles, consistently applied. "Note" means, collectively, the Revolving Notes, the Term Notes and the German Note. "Obligations" means all present and future obligations of every kind or nature of the Domestic Borrower, the German Borrowers or their respective Subsidiaries at any time and from time to time owed to the Administrative Agent, the Issuing Lender, the Swing Line Lender, Bank of America, Frankfurt or the Lenders or any one or more of them, under any one or more of the Loan Documents, whether due or to become due, matured or unmatured, liquidated or unliquidated, or contingent or noncontingent, including obligations of performance as well as obligations of payment, and including interest that accrues after the commencement of any proceeding under any Debtor Relief Law by or against the Domestic Borrower, the German Borrowers or any of their respective Subsidiaries, whether or not allowed as a claim in such proceeding. -18- 24 "Opinions" means the favorable written legal opinions of Gibson Dunn & Crutcher LLP, special counsel to the Domestic Borrower and its Subsidiaries, Jones Vargas special Nevada local counsel to the Domestic Borrower and its Subsidiaries, and Freshfields Bruckhaus Deringer, special German counsel to the German Borrowers and their German Affiliates. "Outstanding Obligations" means, as of each date of determination, and giving effect to the making of any such credit accommodations requested on that date, the sum of (i) the aggregate principal amount of the outstanding Loans, plus (ii) the Swing Line Outstandings, plus (iii) the Aggregate Effective Amount of all outstanding Letters of Credit. "Party" means any Person other than the Administrative Agent, the Issuing Lender, the Swing Line Lender and the Lenders, which now or hereafter is a party to any of the Loan Documents. "Patent Assignment" means the Patent Assignment executed by United Coin Machine Co., Bally Gaming International, Inc. and Domestic Borrower on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, which is subject to Title IV of ERISA and is maintained by the Domestic Borrower or any of its Subsidiaries or to which the Domestic Borrower or any of its Subsidiaries contributes or has an obligation to contribute. "Permitted Encumbrances" means: (a) inchoate Liens incident to construction on or maintenance of real property; or Liens incident to construction on or maintenance of real property now or hereafter filed of record for which adequate reserves have been set aside in accordance with Generally Accepted Accounting Principles (or deposits made pursuant to applicable Law) and which are being contested in good faith by appropriate proceedings and have not proceeded to judgment, provided that, by reason of nonpayment of the obligations secured by such Liens, no such real property is subject to a material risk of loss or forfeiture; (b) Liens for taxes and assessments which are not yet delinquent; or Liens for taxes and assessments for which adequate reserves have been set aside in accordance with Generally Accepted Accounting Principles and are being contested in good faith by appropriate proceedings and have not proceeded to judgment, provided that, by reason of nonpayment of the obligations secured by such Liens, no Property is subject to a material risk of loss or forfeiture; (c) minor defects and irregularities in title to any real property which in the aggregate do not materially impair the fair market value or use of the real property for the purposes for which it is or may reasonably be expected to be held; (d) easements, exceptions, reservations, or other agreements for the purpose of pipelines, conduits, cables, wire communication lines, power lines and substations, streets, trails, walkways, drainage, irrigation, water, and sewerage purposes, dikes, canals, ditches, the removal of oil, gas, coal, or other minerals, and other like purposes affecting real -19- 25 property, facilities, or equipment which in the aggregate do not materially burden or impair the fair market value or use of such real property for the purposes for which it is or may reasonably be expected to be held; (e) easements, exceptions, reservations, or other agreements for the purpose of facilitating the joint or common use of real property in or adjacent to a shopping center or similar project affecting real property which in the aggregate do not materially burden or impair the fair market value or use of such real property for the purposes for which it is or may reasonably be expected to be held; (f) rights reserved to or vested in any Governmental Agency to control or regulate, or obligations or duties to any Governmental Agency with respect to, the use of any real property; (g) present or future zoning laws and ordinances or other laws and ordinances restricting the occupancy, use, or enjoyment of real property; (h) statutory or common law Liens, other than those described in clauses (a) or (b) above, arising in the ordinary course of business with respect to obligations which are not delinquent or are being contested in good faith, provided that, if delinquent, adequate reserves have been set aside in accordance with Generally Accepted Accounting Principles with respect thereto and, by reason of nonpayment, no real property is subject to a material risk of loss or forfeiture; (i) covenants, conditions, and restrictions affecting the use of real property which in the aggregate do not materially impair the fair market value or use of the real property for the purposes for which it is or may reasonably be expected to be held; (j) rights of tenants under leases and rental agreements covering real property entered into in the ordinary course of business of the Person owning such real property; (k) Liens consisting of pledges or deposits to secure obligations under workers' compensation laws, mandatory unemployment insurance or similar legislation, including Liens of judgments thereunder which are not currently dischargeable; (l) Liens consisting of pledges or deposits of Property to secure performance in connection with operating leases made in the ordinary course of business to which the Domestic Borrower or a Subsidiary of the Domestic Borrower is a party as lessee, provided the aggregate value of all such pledges and deposits in connection with any such lease does not at any time exceed 20% of the annual fixed rentals payable under such lease; and (m) Liens in favor of Governmental Agencies on the assets of the Borrowers and their Subsidiaries imposed by applicable Gaming Laws to the extent required in connection with the operation of lotteries in various jurisdictions. "Permitted Right of Others" means a Right of Others consisting of (a) an interest (other than a legal or equitable co-ownership interest, an option or right to acquire a legal or equitable co-ownership interest and any interest of a ground lessor under a ground lease), that does not -20- 26 materially impair the value or use of Property for the purposes for which it is or may reasonably be expected to be held, (b) an option or right to acquire a Lien that would be a Permitted Encumbrance, (c) the subordination of a lease or sublease in favor of a financing entity, (d) a lease, rental or similar agreement covering Property entered into in the ordinary course of business and (e) a license, or similar right, of or to Intangible Assets granted in the ordinary course of business. "Person" means any individual or entity, including a trustee, corporation, limited liability company, general partnership, limited partnership, joint stock company, trust, estate, unincorporated organization, business association, firm, joint venture, Governmental Agency, or other entity. "Plantation Domestic Facilities Guaranty" means the guaranty of the Obligations under the Domestic Commitments executed by Plantation Investments, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Plantation German Facility Guaranty" means the guaranty of the Obligations under the German Commitment executed by Plantation Investments, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Plantation Security Agreement" means the Plantation Security Agreement executed by Plantation Investments, Inc., on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. "Pricing Certificate" means each Pricing Certificate delivered to the Administrative Agent in accordance with Section 7.1(c), substantially in the form of Exhibit D, properly completed and signed by a Senior Officer of the Domestic Borrower. "Pricing Period" means, the Initial Pricing Period and each subsequent period of three calendar months which commences on the first day of each March, June, September and December. "Prime Rate" means the rate of interest publicly announced from time to time by Bank of America as its Prime Rate. The Prime Rate is set by Bank of America based on various factors, including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. Bank of America may price loans to its customers at, above, or below the Prime Rate. Any change in the Prime Rate shall take effect at the opening of business on the day specified in the public announcement of a change in Bank of America's Prime Rate. "Pro Rata Share" means, as to each of the Commitments and Loans and with respect to each Lender, the percentage of the Loans (and of any the Letters of Credit and the Swing Line Advances) held by that Lender (or by an SPC (as defined in Section 11.8(f)) for which that Lender is the Granting Lender) with respect to each Commitment, or if no Commitment is outstanding, the principal amount of all Loans made pursuant to the expired Commitment, provided that as to the German Commitment, the term "Pro Rata Share" shall refer to the -21- 27 participation interests created in the German Commitment Loans pursuant to Section 2.12 except to the extent the participating Lender is then in default under Section 2.12. "Projections" means the financial projections for the Domestic Borrower and its Subsidiaries prepared on behalf of the Domestic Borrower and heretofore distributed to the Lenders. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Quarterly Payment Date" means the last Business Day of each calendar quarter following the date hereof. "Rainbow Partnership Interests" means those partnership interests in Rainbow Casino Vicksburg Partnership, L.P. which are at any time owned, directly or indirectly, by the Domestic Borrower. "Real Property" means, as of any date of determination, all real Property then or theretofore owned, leased or occupied by the Domestic Borrower or any of its Subsidiaries. "Refinanced Leases" means each of the Leases described on Schedule 1.1. "Regulations D, T, U and X" means Regulations D, T, U and X, as at any time amended, of the Board of Governors of the Federal Reserve System, or any other regulations in substance substituted therefor. "Request for Conversion or Continuation" means a written request for a the conversion or continuation of Loan substantially in the form of Exhibit G, signed by a Responsible Official of the Domestic Borrower or the German Borrowers on their behalf, and properly completed to provide all information required to be included therein. "Request for Letter of Credit" means a written request for a Letter of Credit substantially in the form of Exhibit E, signed by a Responsible Official of the Domestic Borrower on its behalf (and by any Subsidiary of the Domestic Borrower which is designated by the Domestic Borrower as the account party with respect to the related Letter of Credit), and properly completed to provide all information required to be included therein. "Request for Loan" means a written request for a Loan substantially in the form of Exhibit F, signed by a Responsible Official of the Domestic Borrower or the German Borrowers on their behalf, and properly completed to provide all information required to be included therein. "Requirement of Law" means, as to any Person, the articles or certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any Law, or judgment, award, decree, writ or determination of a Governmental Agency, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. -22- 28 "Requisite Lenders" means (a) as of any date of determination if the Commitments are then in effect, Lenders having Pro Rata Shares of the Revolving Commitment and the Term Commitment which are, in the aggregate, 51% or more of the Pro Rata Shares of the aggregate Revolving Commitment and Term Commitment then in effect, and (b) as of any date of determination if any of the Commitments have then been terminated and there are then any Obligations outstanding, Lenders or other Creditors holding 51% or more of all the Outstanding Obligations (including the Obligations under the German Commitment). "Responsible Official" means (a) when used with reference to a Person other than an individual, any officer or manager of such Person, general partner of such Person, officer of a corporate or limited liability company general partner of such Person, officer of a corporate or limited liability company general partner of a partnership that is a general partner of such Person, or any other responsible official thereof duly acting on behalf thereof, and (b) when used with reference to a Person who is an individual, such Person. The Lenders shall be entitled to conclusively rely upon any document or certificate that is signed or executed by a Responsible Official of the Domestic Borrower or any of its Subsidiaries as having been authorized by all necessary corporate, limited liability company, partnership and/or other action on the part of the Domestic Borrower or such Subsidiary. "Revolver Base Rate Margin" means (a) for the Initial Pricing Period, 2.50%, and (b) for each subsequent Pricing Period, the applicable percentage set forth below opposite the Revolver Pricing Level for that Pricing Period:
Revolver Pricing Level Revolver Base Rate Margin ---------------------- ------------------------- I 1.50% II 1.75% III 2.00% IV 2.25% V 2.50%
"Revolver Eurocurrency Margin" means (a) for the Initial Pricing Period, 3.50%, and (b) for each subsequent Pricing Period, the applicable percentage set forth below opposite the Revolver Pricing Level for that Pricing Period:
Revolver Pricing Level Revolver Eurocurrency Margin ---------------------- ---------------------------- I 2.50% II 2.75% III 3.00% IV 3.25% V 3.50%
-23- 29 "Revolver Maturity Date" means June 30, 2006. "Revolver Pricing Level" means, for each Pricing Period, the level set forth below opposite the Total Leverage Ratio as of the last day of the Fiscal Quarter ending two months prior to the commencement of that Pricing Period:
Revolver Pricing Level Total Leverage Ratio ---------------------- -------------------- I Less than 2.50:1.00 II Greater than or equal to 2.50:1.00, but less than 3.00:1.00 III Greater than or equal to 3.00:1.00, but less than 3.50:1.00 IV Greater than or equal to 3.50:1.00, but less than 4.00:1.00 V Greater than or equal to 4.00:1.00
The Revolver Pricing Level shall change as of the first day of each Pricing Period on the basis of the then most recently delivered Compliance Certificate. In the event that the Domestic Borrower fails to deliver a Compliance Certificate on a timely basis, the Revolver Pricing Level shall increase to Pricing Level V until such time as the Domestic Borrower delivers a Compliance Certificate. "Revolver Reduction Amount" means, as to each Quarterly Payment Date, the amount set forth below opposite that Quarterly Payment Date:
Quarterly Payment Dates Revolver Reduction Amount ----------------------- ------------------------- September 30, 2001 though and $0 including December 31, 2002 March 31, 2003 and June 30, 2003 $667,500 September 30, 2003 through and $1,000,000 including June 30, 2004 September 30, 2004 through and $1,332,500 including June 30, 2005 September 30, 2005 through and $2,000,000 including March 31, 2006
provided that, in the event that the Commitment is hereafter increased in the manner contemplated by Section 2.8, then the Revolver Reduction Amount for each then remaining Quarterly Payment Date shall be increased in the same proportion that (a) the Increased Commitment bears to (b) the Commitment prior to the effective date of such increase. -24- 30 "Revolving Commitment" means the commitment by Lenders having Pro Rata Shares thereof to make Revolving Loans to the Domestic Borrower in an aggregate principal amount, subject to any decrease in the amount thereof pursuant to Sections 2.6 and 2.7, not to exceed $25,000,000, provided that the amount thereof may be increased pursuant to Section 2.8. "Revolving Loan" means any Advance or group of Advances made by the Lenders at any one time under the Revolving Commitment pursuant to Article 2. "Revolving Notes" means, collectively, each of the promissory notes made by the Domestic Borrower to a Lender evidencing Loans under the Revolving Commitment, substantially in the form of Exhibit H, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or supplanted. "Revolving Usage" means as of each date of determination, the sum of (a) the aggregate principal Indebtedness then outstanding under the Revolving Notes, plus (b) the Dollar Equivalent of the aggregate principal Indebtedness then outstanding under the German Commitment plus (c) Swing Line Outstandings plus (d) the Aggregate Effective Amount of all outstanding Letters of Credit. "Right of Others" means, as to any Property in which a Person has an interest, any legal or equitable right, title or interest (other than a Lien) held by any other Person in that Property, and any option or right held by any other Person to acquire any such right, title or interest in that Property, including any option or right to acquire a Lien; provided, however, that (a) any covenant restricting the use or disposition of Property of such Person contained in any Contractual Obligation of such Person and (b) any provision contained in a contract creating a right of payment or performance in favor of a Person that conditions, limits, restricts, diminishes, transfers or terminates such right, shall not be deemed to constitute a Right of Others. "Senior Debt" means, as of each date of determination, Total Debt as of that date minus the aggregate principal amount of the Subordinated Obligations as of that date. "Senior Leverage Ratio" means, as of the last day of each Fiscal Quarter, the ratio of (a) Average Senior Debt as of that date to (b) EBITDA for the four Fiscal Quarter period ending on that date. "Senior Officer" means the (a) chief executive officer or manager, (b) president, (c) executive vice president, (d) senior vice president, (e) chief financial officer, (f) treasurer, (g) assistant treasurer, (h) secretary, or (i) assistant secretary of the Domestic Borrower or any of its Subsidiaries. "Significant Subsidiaries" means each Subsidiary which either as of the Closing Date or any subsequent date has (a) a consolidated tangible net worth which is in excess of $500,000, (b) consolidated net income during any fiscal year of that Subsidiary which is in excess of $250,000, or (c) consolidated revenues which are in excess of $500,000. No Person which is at any time a Significant Subsidiary shall cease to be a Significant Subsidiary by reason of its failure to achieve any one of the financial benchmarks described above. -25- 31 "Special Eurocurrency Circumstance" means the application or adoption after the date hereof of any Law or interpretation, or any change therein or thereof, or any change in the interpretation or administration thereof by any Governmental Agency, central bank or comparable authority charged with the interpretation or administration thereof, or change in the manner of compliance by any Lender or its Eurocurrency Lending Office with any request or directive (whether or not having the force of Law) of any such Governmental Agency, central bank or comparable authority, or the existence or occurrence of circumstances affecting the Designated Eurocurrency Market generally that are beyond the reasonable control of the Lenders. "Subordinated Obligations" means (a) the Existing Senior Subordinated Notes, and (b) any other unsecured Indebtedness of the Domestic Borrower (but not Indebtedness of any Subsidiary of the Domestic Borrower), the incurrence of which is approved by the Requisite Lenders, and which, in any event: (i) does not require amortization prior to the first anniversary of the Term Maturity Date; (ii) is governed by agreements which contain representations, warranties, covenants, defaults and other provisions which are approved by the Requisite Lenders in writing and in any event less restrictive upon and onerous to, the Domestic Borrower and its Subsidiaries than the provisions of the Loan Documents; and (iii) is subordinated in right of payment to the Obligations pursuant to subordination provisions which are acceptable to the Requisite Lenders in the exercise of their sole discretion. "Subsidiary" means, as of any date of determination and with respect to any Person, any other Person the accounts of which should in accordance with Generally Accepted Accounting Principles be consolidated with those of the first Person for financial accounting purposes. Each reference to the "Domestic Borrower and its Subsidiaries" or to the "Domestic Borrower or its Subsidiaries" shall be deemed to include without limitation the German Borrowers. "Swap Agreement" means a written agreement between the Domestic Borrower and one or more financial institutions providing for "swap", "cap", "collar" or other interest rate protection with respect to any Indebtedness. "Swing Line" means the revolving line of credit established by the Swing Line Lender in favor of the Domestic Borrower pursuant to Section 2.5. "Swing Line Advance" means an Advance made under the Swing Line. "Swing Line Documents" means the promissory note and any other documents executed by the Domestic Borrower in favor of the Swing Line Lender in connection with the Swing Line, either as originally executed or as it may from time to time be supplemented, modified, amended, restated or extended. -26- 32 "Swing Line Lender" means Bank of America, acting through its Nevada Commercial Banking Division. "Swing Line Loans" means loans made by the Swing Line Lender to the Domestic Borrower pursuant to Section 2.5. "Swing Line Outstandings" means, as of any date of determination, the aggregate principal Indebtedness of the Domestic Borrower on all Swing Line Loans then outstanding. "S&P" means Standard & Poor's Ratings Group (a division of McGraw Hill, Inc.). "Term Base Rate Margin" means the applicable percentage set forth below opposite the Term Pricing Level then in effect:
Term Pricing Level Term Base Rate Margin ------------------ --------------------- I 2.75% II 3.00%
"Term Commitment" means the commitment by Lenders having Pro Rata Shares of thereof to make a loan to the Domestic Borrower on the Closing Date in the amount of $190,000,000, and to refinance the outstanding balance thereof from time to time in accordance with the terms hereof by new Loans. "Term Eurocurrency Margin" means the applicable percentage set forth below opposite the Term Pricing Level then in effect:
Term Pricing Level Term Eurocurrency Margrin ------------------ ------------------------- I 3.75% II 4.00%
"Term Loan" means any Advance or group of Advances made by the Lenders at any one time under the Term Commitment pursuant to Article 2. "Term Maturity Date" means December 31, 2006. "Term Notes" means, collectively, each of the promissory notes made by the Domestic Borrower to a Lender evidencing Loans under the Term Commitment, substantially in the form of Exhibit I, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or supplanted. -27- 33 "Term Pricing Level" means, at any time, the level set forth below opposite the senior secured debt rating of the Domestic Borrower at such time:
Term Pricing Level Senior Secured Debt Ratings ------------------ --------------------------- I Both a Moody's rating of B1 or above and an S&P rating of B+ or above II Either a Moody's rating of less than B1 or an S&P rating of less than B+
The Term Pricing Level shall change as of the first day of a change in either the Moody's or S&P senior secured debt rating for the Domestic Borrower. "Title Policies" means the policies of title insurance issued by First American Title Company of Nevada with respect to the Deeds of Trust and delivered to the Administrative Agent pursuant to Section 8.1. "Total Debt" means, as of any date of determination, the sum (without duplication) of (a) the outstanding principal Indebtedness of the Domestic Borrower and its Subsidiaries for borrowed money (including debt securities issued by the Domestic Borrower or any of its Subsidiaries) on that date, plus (b) the aggregate amount of the principal portion of all Capital Lease Obligations of the Domestic Borrower and its Subsidiaries on that date, plus (c) all obligations in respect of letters of credit or other similar instruments for which the Domestic Borrower or any of its Subsidiaries are account parties or are otherwise obligated, plus (d) without duplication the aggregate amount of all Contingent Obligations and other similar contingent obligations of the Domestic Borrower and its Subsidiaries with respect to any of the foregoing, and plus (e) any other obligations of the Domestic Borrower or any of its Subsidiaries to the extent that the same are secured by a Lien on any of the assets of the Domestic Borrower or its Subsidiaries. "Total Leverage Ratio" means, as of the last day of each Fiscal Quarter, the ratio of (a) Average Total Debt, to (b) EBITDA for the four Fiscal Quarter period ending on that date. "to the best knowledge of" means, when modifying a representation, warranty or other statement of any Person, that the fact or situation described therein is known by the Person (or, in the case of a Person other than a natural Person, known by a Responsible Official of that Person) making the representation, warranty or other statement, or with the exercise of reasonable due diligence under the circumstances (in accordance with the standard of what a reasonable Person in similar circumstances would have done) would have been known by the Person (or, in the case of a Person other than a natural Person, would have been known by a Responsible Official of that Person). "Trademark Assignment" means the Trademark Assignment executed by United Coin Machine Co., Bally Gaming International, Inc. and Domestic Borrower on the date hereof, either as originally executed or as the same may from time to time be supplemented, modified, amended, extended or supplanted. -28- 34 "type", when used with respect to any Loan or Advance, means the designation of whether such Loan or Advance is a Base Rate Loan or Advance, or a Eurocurrency Rate Loan or Advance. "Unrelated Person" means any Person other than (i) an employee stock ownership plan or other employee benefit plan covering the employees of the Domestic Borrower and its Subsidiaries or (ii) an Affiliate of any Person or group of related Persons which as of the date of this Agreement is the beneficial owner of 25% or more (in the aggregate) of the outstanding common stock of the Domestic Borrower. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. Notwithstanding anything to the contrary contained above, a foreign Subsidiary of the Domestic Borrower shall be deemed to be a Wholly-Owned Subsidiary of the Domestic Borrower if both (x) it would satisfy the requirements of the definition contained above with respect to the Domestic Borrower if the percentages "100%" contained above were changed to "99%" and (y) the reduction to 99% as contemplated by preceding clause (x) is necessary because director's qualifying shares, ownership of shares by foreign nationals, or other ownership requirements apply under applicable law (or is necessary to obtain applicable approvals required by law) to the respective such Foreign Subsidiary. 1.2 Use of Defined Terms. Any defined term used in the plural shall refer to all members of the relevant class, and any defined term used in the singular shall refer to any one or more of the members of the relevant class. 1.3 Accounting Terms - Fiscal Periods. All accounting terms not specifically defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, Generally Accepted Accounting Principles applied on a consistent basis, except as otherwise specifically prescribed herein. In the event that Generally Accepted Accounting Principles or the Domestic Borrower's Fiscal Year or Fiscal Quarters change during the term of this Agreement such that the covenants contained in Sections 6.13 through 6.17 would then be calculated for different periods, in a different manner or with different components, (a) the Domestic Borrower and the Lenders agree to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating the Domestic Borrower's financial condition to substantially the same criteria as were effective prior to such change in Fiscal Year, Fiscal Quarters or in Generally Accepted Accounting Principles and (b) the Domestic Borrower shall be deemed to be in compliance with the covenants contained in the aforesaid Sections if and to the extent that the Domestic Borrower would have been in compliance therewith for the pre-existing fiscal periods and under Generally Accepted Accounting Principles as in effect immediately prior to such change, but shall have the obligation to deliver each of the materials described in Article 7 to the Creditors, on the dates therein specified, with financial data presented for its pre-existing fiscal periods and in a manner which conforms with Generally Accepted Accounting Principles as in effect immediately prior to such change. 1.4 Rounding. Any financial ratios required to be maintained by the Domestic Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is -29- 35 expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in this Agreement. 1.5 Exhibits and Schedules. All Exhibits and Schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. A matter disclosed on any Schedule shall be deemed disclosed on all Schedules. 1.6 Miscellaneous Terms. In the Loan Documents, the term "or" is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the term "may" is permissive. Masculine terms also apply to females; feminine terms also apply to males. The term "including" is by way of example and not limitation. 1.7 Exchange Rate Conventions. Each of the definitions, representations, warranties, covenants, Defaults and Events of Default set forth in this Agreement and the other Loan Documents has been made with reference to Dollars. Except to the extent expressly set forth herein and in the other Loan Documents, the Creditors assume no currency rate fluctuation risk; all such risk being allocated to the Borrowers. The Dollar amounts set forth in the representations, warranties, covenants, Defaults and Events of Default have been calculated solely with reference to Dollars, and to the extent that any relevant amount under any representation, warranty, covenant (other than the covenants set forth in Section 6.11 through 6.17 and the related definitions set forth in this Section) or Default or Event of Default is payable in any other currency, as of each date of determination, the Dollar Equivalent of any amount denominated in such other currency shall be used. -30- 36 Article 2 LOANS AND LETTERS OF CREDIT 2.1 Loans-General. (a) Subject to the terms and conditions set forth in this Agreement, at any time and from time to time from the Closing Date through the Business Day immediately prior to the Revolver Maturity Date, each Lender shall, pro rata according to that Lender's Pro Rata Share of the then applicable Revolving Commitment, make Advances to the Domestic Borrower in Dollars under the Revolving Commitment in such amounts as the Domestic Borrower may request that do not exceed in the aggregate at any one time outstanding that Lender's Pro Rata Share of the Revolving Commitment; provided that, giving effect to the requested Loan, the Revolving Usage plus the then applicable Euro Reserve shall not exceed the then applicable Revolving Commitment. Subject to the limitations set forth herein, the Advances by each Lender under its Pro Rata Share of the Revolving Commitment may be prepaid without premium or penalty, and amounts that are prepaid may, subject to the conditions set forth herein, be reborrowed. (b) Subject to the terms and conditions set forth in this Agreement, on the Closing Date, each Lender shall make a Term Loan to the Domestic Borrower in Dollars under the Term Commitment in the full amount of such Lender's Pro Rata Share of the Term Commitment. The Term Loan shall be evidenced by the Term Notes. Amounts repaid under the Term Commitment may not be reborrowed, but may be refinanced with the proceeds of new Term Loans. (c) Subject to the terms and conditions set forth in this Agreement, at any time and from time to time from the Closing Date through the Business Day immediately prior to the Revolver Maturity Date, Bank of America, Frankfurt shall make Advances in Euros to the German Borrowers under the German Commitment in such amounts as the German Borrowers may request that do not exceed the German Commitment; provided that, giving effect to the making of each requested Loan, (i) giving effect to the requested Loan, the Dollar Equivalent of the outstanding Loans under the German Commitment plus the then applicable Euro Reserve shall not exceed the German Commitment, (ii) the Revolving Usage plus the then applicable Euro Reserve shall not exceed the then applicable Revolving Commitment, and (iii) Bank of America, Frankfurt shall be excused from funding the Pro Rata Share of each Loan under the German Commitment which is attributable to the participation of any Lender which is then in default under the Section 2.12 (but without prejudice to the rights of the German Borrowers to proceed against the defaulting Lender for any violation of Section 2.12). Each Lender which has a Pro Rata Share in the Revolving Commitment shall participate in each Loan under the German Commitment in accordance with its Pro Rata Share of the German Commitment pursuant to the terms of Section 2.12. Subject to the limitations set forth herein, the Loans under the German Commitment may be prepaid without premium or penalty, and amounts that are prepaid may, subject to the conditions set forth herein, be reborrowed. (d) Subject to the next sentence, each Loan shall be made pursuant to a Request for Loan which shall specify the requested (i) date of such Loan, (ii) Commitment under which the Loan is to be made, (iii) type of Loan, (iv) amount of such Loan, (v) in the case of a Eurocurrency Rate Loan, the Interest Period for such Loan, and (vi) in the case of each -31- 37 Loan under the Revolving Commitment or the German Commitment, the amount of the Revolving Usage and the Euro Reserve. Unless the Administrative Agent, in its sole and absolute discretion, has notified the Borrowers to the contrary, a Loan may be requested by telephone by a Responsible Official of the relevant Borrower, in which case the relevant Borrower shall confirm such request by promptly delivering a Request for Loan in person or by telecopier conforming to the preceding sentence to the Administrative Agent. The Administrative Agent shall incur no liability whatsoever hereunder in acting upon any telephonic request purportedly made by a Responsible Official of the relevant Borrower, and each Borrower hereby agrees to indemnify each Creditor from any loss, cost, expense or liability as a result of so acting. (e) So long as no Default or Event of Default has occurred and is continuing, each Borrower shall have the option at any time (i) to convert all or any part of its outstanding Base Rate Loans which are in integral multiples of $500,000 and which are not less than $2,500,000 into Eurocurrency Rate Loans or (ii) upon the expiration of any Interest Period applicable to Eurocurrency Rate Loans, to continue all or any portion of such Loans equal to $2,500,000 and integral multiples of $500,000 (or, in the case of Loans under the German Commitment, 100,000 Euros) in excess of that amount as Eurocurrency Rate Loans or to convert such Loans into Base Rate Loans. (f) The appropriate Borrowers shall deliver to the Administrative Agent notice of any such conversion or continuation, substantially in the form of Exhibit D (each a "Notice of Conversion/Continuation"), no later than 8:00 A.M. (California local time) (A) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan), (B) at least three Eurocurrency Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurocurrency Rate Loan under the Term Commitment or the Revolving Commitment), and (C) at least four Eurocurrency Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurocurrency Rate Loan under the German Commitment). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day in the case of Base Rate Loans and a Eurocurrency Business Day in the case of conversion to or continuation of Eurocurrency Rate Loans), (ii) the amount and type of the Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurocurrency Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurocurrency Rate Loan, that no Default or Event of Default has occurred and is continuing. (g) Promptly following receipt of a Request for Loan, the Administrative Agent shall notify each Lender by telephone or telecopier of the date and type of the Loan, any applicable Interest Period, and that Lender's Pro Rata Share of the Loan. Not later than 11:00 a.m., California local time, on the date specified for any Loan under the Revolving Commitment or the Term Commitment (which must be a Business Day), each Lender shall make its Pro Rata Share thereof available to the Administrative Agent in immediately available funds at the Administrative Agent's Office. Upon satisfaction or waiver of the applicable conditions set forth in Article 8, all Advances shall be credited on that date in immediately available funds to the relevant Domestic Funding Account (or, in the case of Loans under the German Commitment, Bank of America, Frankfurt shall make such Loans to the German Funding Account). -32- 38 (h) Unless the Requisite Lenders otherwise consent, each Loan shall be in an integral multiple of $500,000 which is not less than $2,500,000, except that Loans under the German Commitment shall be integral multiples of 100,000 Euros. (i) The Advances made by each Lender under the Revolving Commitment, the Term Commitment and the German Commitment shall be evidenced by that Lender's Revolving Note, Term Note and German Note, respectively. (j) A Request for Loan shall be irrevocable upon the Administrative Agent's first notification thereof. (k) If no Request for Loan (or telephonic request for Loan referred to in the second sentence of Section 2.1(d), if applicable) has been made within the requisite notice periods set forth in Section 2.2 or 2.3 prior to the end of the Interest Period for any Eurocurrency Rate Loan, then on the last day of such Interest Period, such Eurocurrency Rate Loan shall be automatically converted into a Base Rate Loan in the same amount. (1) If a Loan is to be made on the same date that another Loan under the same Commitment is due and payable, the relevant Borrower or the Lenders (as the case may be) shall upon the request of the Administrative Agent make available to the Administrative Agent the net amount of funds (giving effect to both such Loans) and the effect for purposes of this Agreement shall be the same as if separate transfers of funds had been made with respect to each such Loan. 2.2 Base Rate Loans. (a) Each request by the Domestic Borrower for a Base Rate Loan shall be made pursuant to a Request for Loan (or telephonic or other request for loan referred to in the second sentence of Section 2.1(d), if applicable) received by the Administrative Agent, at the Administrative Agent's Office, not later than 8:00 a.m. California local time, on the date (which must be a Business Day) of the requested Base Rate Loan. (b) Each request by the German Borrowers for a Base Rate Loan shall be made pursuant to a Request for Loan (or telephonic or other request for loan referred to in the second sentence of Section 2.1(d), if applicable) received by the Administrative Agent (with a copy to Bank of America, Frankfurt's designated officer), not later than 8:00 a.m., California local time, on the Business Day prior to the date (which must be a Business Day) of the requested Base Rate Loan. The Administrative Agent shall confirm to Bank of America, Frankfurt, that the requested Loan is available under the German Commitment with the Administrative Agent, that the applicable conditions thereto have been met, and Bank of America, Frankfurt shall fund the requested Loan directly to the German Funding Account. All Loans shall constitute Base Rate Loans unless properly designated as Eurocurrency Rate Loans pursuant to Section 2.3. 2.3 Eurocurrency Rate Loans. (a) Each request by the Domestic Borrower for a Eurocurrency Rate Loan shall be made pursuant to a Request for Loan (or telephonic or other request for Loan referred -33- 39 to in the second sentence of Section 2.1(d), if applicable) received by the Administrative Agent, at the Administrative Agent's Office, not later than 8:00 a.m., California local time, at least three Eurocurrency Business Days before the first day of the applicable Interest Period. (b) Each request by the German Borrowers for a Eurocurrency Rate Loan shall be made pursuant to a Request for Loan (or telephonic or other request for Loan referred to in the second sentence of Section 2.1(d), if applicable) received by the Administrative Agent, at the Administrative Agent's Office (with a copy to Bank of America, Frankfurt), not later than 8:00 a.m., California local time, at least four Eurocurrency Business Days before the first day of the applicable Interest Period. The Administrative Agent shall confirm to Bank of America, Frankfurt, that the requested Loan is available under the German Commitment, that the applicable conditions thereto have been met, and Bank of America, Frankfurt shall fund the requested Loan directly to the German Funding Account. (c) On the date which is two Eurocurrency Business Days before the first day of the applicable Interest Period, the Administrative Agent shall confirm its determination of the applicable Eurocurrency Rate (which determination shall be conclusive in the absence of manifest error) and promptly shall give notice of the same to the relevant Borrower and the Lenders by telephone or telecopier. (d) Unless the Administrative Agent and the Requisite Lenders otherwise consent, no more than fifteen Eurocurrency Rate Loans shall be outstanding at any one time. (e) No Eurocurrency Rate Loan may be requested during the continuation of a Default or Event of Default. (f) Nothing contained herein shall require any Lender to fund any Eurocurrency Rate Advance in the Designated Eurocurrency Market. 2.4 Letters of Credit. (a) Subject to the terms and conditions hereof, at any time and from time to time from the Closing Date through the Business Day immediately prior to the Revolver Maturity Date, the Issuing Lender shall issue such Letters of Credit under the Revolving Commitment as the Domestic Borrower may request by a Request for Letter of Credit; provided that (i) giving effect to all such Letters of Credit, the Revolving Usage plus the Euro Reserve shall not exceed the then Revolving Commitment, and (ii) the Aggregate Effective Amount of all outstanding Letters of Credit shall not exceed $15,000,000. Each Letter of Credit shall be in a form acceptable to the Issuing Lender. Unless all the Lenders otherwise consent, no Letter of Credit shall have a term which exceeds one year or extends beyond the Revolver Maturity Date. (b) Each Request for a Letter of Credit shall be submitted to the Issuing Lender, with a copy to the Administrative Agent, at least five Business Days prior to the date upon which the related Letter of Credit is proposed to be issued. The Administrative Agent shall promptly notify the Issuing Lender whether such Request for Letter of Credit, and the issuance of a Letter of Credit pursuant thereto, conforms to the requirements of this Agreement. Upon issuance of a Letter of Credit, the Issuing Lender shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify the Lenders, of the amount and terms thereof. -34- 40 (c) Upon the issuance of a Letter of Credit, each Lender which owns a Pro Rata Share of the Revolving Commitment shall be deemed to have purchased at par a pro rata participation in such Letter of Credit from the Issuing Lender in an amount equal to that Lender's Pro Rata Share of the Revolving Commitment. Without limiting the scope and nature of each Lender's participation in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed by the Domestic Borrower for any payment required to be made by the Issuing Lender under any Letter of Credit, each Lender shall, pro rata according to its Pro Rata Share of the Revolving Commitment, pay the purchase price for such participation to the Issuing Lender through the Administrative Agent promptly upon demand therefor. The obligation of each Lender to so pay the participation purchase price to the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default or any other occurrence or event. Any such payment of the purchase price shall not relieve or otherwise impair the obligation of the Domestic Borrower to reimburse the Issuing Lender for the amount of any payment made by the Issuing Lender under any Letter of Credit together with interest as hereinafter provided. (d) The Domestic Borrower shall pay to the Issuing Lender through the Administrative Agent an amount equal to any payment made by the Issuing Lender with respect to each Letter of Credit upon demand made by the Issuing Lender therefor, together with interest on such amount from the date of any payment made by the Issuing Lender at the Default Rate (unless the Domestic Borrower has made arrangements for the making of a Loan in the amount of such payment on the date thereof or had otherwise arranged for the timely reimbursement of such payment). The principal amount of any such payment shall be used to reimburse the Issuing Lender for the payment made by it under the Letter of Credit and, to the extent that the Lenders have not reimbursed the Issuing Lender pursuant to Section 2.4(c), the interest amount of any such payment shall be for the account of the Issuing Lender. Each Lender that has paid the participation purchase price to the Issuing Lender pursuant to Section 2.4(c) shall thereupon acquire a pro rata participation, to the extent of such payment, in the claim of the Issuing Lender against the Domestic Borrower for reimbursement of principal and interest under this Section 2.4(d) and shall share, in accordance with that pro rata participation, in any principal payment made by the Domestic Borrower with respect to such claim and in any interest payment made by the Domestic Borrower (but only with respect to periods subsequent to the date such Lender paid the participation purchase price to the Issuing Lender) with respect to such claim. (e) Subject to Article 8, the Domestic Borrower may request, pursuant to a Request for Loan, that Advances be made pursuant to Section 2.1(a) to provide funds for the payment required by Section 2.4(d). The proceeds of such Advances shall be paid directly to the Issuing Lender to reimburse it for the payment made by it under the Letter of Credit. (f) If the Domestic Borrower fails to make the payment required by Section 2.4(d) on a timely basis then, in lieu of the payment of the participation purchase price to the Issuing Lender under Section 2.4(c), the Issuing Lender may (but is not required to), without notice to or the consent of the Domestic Borrower, instruct the Administrative Agent to cause Advances to be made by the Lenders under their Pro Rata Shares of the Revolving Commitment in an aggregate amount equal to the amount paid by the Issuing Lender with respect to that Letter of Credit and, for this purpose, the conditions precedent set forth in -35- 41 Article 8 shall not apply. The proceeds of such Advances shall be paid directly to the Issuing Lender to reimburse it for the payment made by it under the Letter of Credit. (g) The issuance of any supplement, modification, amendment, renewal, or extension to or of any Letter of Credit shall be treated in all respects the same as the issuance of a new Letter of Credit, provided that no new issuance fees shall be assessed except to the extent that the tenor or amount of the related Letter of Credit are thereby increased. (h) The obligation of the Domestic Borrower to pay to the Issuing Lender the amount of any payment made by the Issuing Lender under any Letter of Credit shall be absolute, unconditional, and irrevocable, subject only to performance by the Issuing Lender of its obligations to the Domestic Borrower under Uniform Commercial Code Sections 5108 and 5109. Without limiting the foregoing, the obligations of the Domestic Borrower to the Issuing Lender shall not be affected by any of the following circumstances: (i) any lack of validity or enforceability of the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (ii) any amendment or waiver of or any consent to departure from the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto, with the consent of the Domestic Borrower; (iii) the existence of any claim, setoff, defense, or other rights which the Domestic Borrower may have at any time against the Issuing Lender, the Administrative Agent or any Lender, any beneficiary of the Letter of Credit (or any persons or entities for whom any such beneficiary may be acting) or any other Person, whether in connection with the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto, or any unrelated transactions; (iv) any demand, statement, or any other document presented under the Letter of Credit proving to be forged, fraudulent or invalid or any statement therein being untrue or inaccurate in any respect whatsoever so long as any such document appeared to comply with the terms of the Letter of Credit; (v) payment by the Issuing Lender in good faith under the Letter of Credit against presentation of a draft or any accompanying document which does not strictly comply with the terms of the Letter of Credit; (vi) the existence, character, quality, quantity, condition, packing, value or delivery of any Property purported to be represented by documents presented in connection with any Letter of Credit or any difference between any such Property and the character, quality, quantity, condition, or value of such Property as described in such documents; (vii) the time, place, manner, order or contents of shipments or deliveries of Property as described in documents presented in connection with any Letter of Credit or the existence, nature and extent of any insurance relative thereto; -36- 42 (viii) the solvency or financial responsibility of any party issuing any documents in connection with a Letter of Credit; (ix) any failure or delay in notice of shipments or arrival of any Property; (x) any error in the transmission of any message relating to a Letter of Credit not caused by the Issuing Lender, or any delay or interruption in any such message; (xi) any error, neglect or default of any correspondent of the Issuing Lender in connection with a Letter of Credit; (xii) any consequence arising from acts of God, war, insurrection, civil unrest, disturbances, labor disputes, emergency conditions or other causes beyond the control of the Issuing Lender; (xiii) so long as the Issuing Lender in good faith determines that the contract or document appears to comply with the terms of the Letter of Credit, the form, accuracy, genuineness or legal effect of any contract or document referred to in any document submitted to the Issuing Lender in connection with a Letter of Credit; and (xiv) where the Issuing Lender has acted in good faith and observed general banking usage, any other circumstances whatsoever. (i) The Issuing Lender shall be entitled to the protection accorded to the Administrative Agent pursuant to Article 10, mutatis mutandis. (j) The Uniform Customs and Practice for Documentary Credits, as published in its most current version by the International Chamber of Commerce, shall be deemed a part of this Section and shall apply to all Letters of Credit to the extent not inconsistent with applicable Law. 2.5 Swing Line. Subject to the terms and conditions set forth herein, from the Closing Date through the day prior to the Revolver Maturity Date, the Swing Line Lender shall make Swing Line Loans to the Domestic Borrower in such amounts as the Domestic Borrower may request which do not result in the Revolving Usage plus the Euro Reserve being in excess of the then effective Revolving Commitment, provided that (i) after giving effect to each Swing Line Loan, the Swing Line Outstandings shall not exceed $5,000,000 and (ii) without the consent of all of the Lenders, no Swing Line Loan may be made during the continuation of an Event of Default. The Domestic Borrower may borrow, repay and reborrow under this Section. Unless notified to the contrary by the Swing Line Lender, borrowings under the Swing Line may be made in amounts which are integral multiples of $100,000 upon telephonic request by a Responsible Official of the Domestic Borrower made to the Administrative Agent not later than 1:00 p.m., California local time, on the Business Day of the requested borrowing (which telephonic request shall be promptly confirmed in writing by telecopier), provided that if the requested Swing Line Loan is to be credited to an account which is not with the Swing Line Lender, the request must be submitted by 11:30 a.m., California local time. Promptly after receipt of such a request for borrowing, the Administrative Agent shall provide telephonic verification to -37- 43 the Swing Line Lender that, after giving effect to such request, the Revolving Usage plus the Euro Reserve will not exceed the Revolving Commitment. Unless notified to the contrary by the Swing Line Lender, each repayment of a Swing Line Loan shall be in an amount which is an integral multiple of $100,000. If the Domestic Borrower instructs the Swing Line Lender to debit its demand deposit account at the Swing Line Lender in the amount of any payment with respect to a Swing Line Loan, or the Swing Line Lender otherwise receives repayment, after 3:00 p.m., California local time, on a Business Day, such payment shall be deemed received on the next Business Day. The Swing Line Lender shall promptly notify the Administrative Agent of the Swing Line Outstandings each time there is a change therein under the Swing Line. (a) Swing Line Loans shall bear interest at a fluctuating rate per annum equal to the Base Rate plus the Revolver Base Rate Margin (unless the Default Rate is then applicable under Section 3.9). Interest shall be payable on such dates, not more frequent than monthly, as may be specified by the Swing Line Lender and in any event on the Revolver Maturity Date. The Swing Line Lender shall be responsible for invoicing the Domestic Borrower for such interest. Interest payable on Swing Line Loans is solely for the account of the Swing Line Lender (subject to clause (d) below). (b) The Swing Line Loans shall be payable within five Business Days after demand made by the Swing Line Lender and in any event on the Revolver Maturity Date or any earlier date when all other Obligations are due. (c) Upon the making of a Swing Line Loan in accordance with Section 2.5(a), each Lender shall be deemed to have purchased from the Swing Line Lender a participation therein in an amount equal to that Lender's Pro Rata Share times the amount of the Swing Line Loan. Upon demand made by the Swing Line Lender through the Administrative Agent, each Lender shall, according to its Pro Rata Share, promptly provide to the Swing Line Lender its purchase price therefor in an amount equal to its participation therein. The obligation of each Lender to so provide its purchase price to the Swing Line Lender shall be absolute and unconditional (subject only to the making of a demand upon that Lender by the Swing Line Lender) and shall not be affected by the occurrence of a Default or Event of Default; provided that no Lender shall be obligated to purchase its Pro Rata Share of (i) Swing Line Loans to the extent that Swing Line Outstandings are in excess of $5,000,000 or to the extent that the sum of the Revolving Usage plus the Euro Reserve exceeds the Revolving Commitment (as in effect on the date of the making of the related Swing Line Loan) and (ii) any Swing Line Loan made (absent the consent of all of the Lenders) during the continuation of an Event of Default. Each Lender that has provided the purchase price due for its participation in Swing Line Loans to the Swing Line Lender shall thereupon acquire a pro rata participation, to the extent of such payment, in the claim of the Swing Line Lender against the Domestic Borrower for principal and interest and shall share, in accordance with that pro rata participation, in any principal payment made by the Domestic Borrower with respect to such claim and in any interest payment made by the Domestic Borrower (but only with respect to periods subsequent to the date such Lender paid the Swing Line Lender its purchase price) with respect to such claim. (d) Upon any demand for payment of the Swing Line Outstandings by the Swing Line Lender (unless the Domestic Borrower has made other arrangements acceptable to the Swing Line Lender to reduce the Swing Line Outstandings to $0), the Domestic Borrower shall request a Loan pursuant to Section 2.1 (a) sufficient to repay all Swing Line Outstandings -38- 44 (and, for this purpose, Section 2.1 (g) shall not apply). In each case, the Administrative Agent shall automatically provide the respective Advances made by each Lender to the Swing Line Lender (which the Swing Line Lender shall then apply to the Swing Line Outstandings). In the event that the Domestic Borrower fails to request a Loan within the time specified by Section 2.2 on any such date, the Administrative Agent may, but is not required to, without notice to or the consent of the Domestic Borrower, cause Advances to be made by the Lenders under the Revolving Commitment in amounts which are sufficient to reduce the Swing Line Outstandings as required above. The conditions precedent set forth in Article 8 shall not apply to Advances to be made by the Lenders pursuant to the three preceding sentences. The proceeds of such Advances shall be paid directly to the Swing Line Lender for application to the Swing Line Outstandings. 2.6 Voluntary Reduction of Revolving Commitment or German Commitment. The Borrowers shall have the right, at any time and from time to time, without penalty or charge, effective following at least five Business Days' prior written notice by a Responsible Official of the relevant Borrowers to the Administrative Agent, voluntarily to reduce, permanently and irrevocably, in aggregate principal amounts in an integral multiple of $1,000,000 but not less than $5,000,000, or to terminate, all or a portion of the then undisbursed portion of the Revolving Commitment or the German Commitment; provided that the Revolving Commitment may not be so reduced below an amount equal to the sum of (i) the aggregate principal amount outstanding under the Revolving Notes, plus (ii) the aggregate principal amount available for borrowing under the German Commitment (denominated in Dollars), plus (iii) the Aggregate Effective Amount of all outstanding Letters of Credit plus (iv) the Swing Line Outstandings, in each case as of the effective date of the reduction in the Revolving Commitment. Any voluntary reduction of the Revolving Commitment by the Domestic Borrower under this Section shall have no effect upon the requirement of mandatory reductions thereof in accordance with Section 2.7. The Administrative Agent shall promptly notify the Lenders of any reduction or termination of the Commitments under this Section. 2.7 Mandatory Reductions of the Commitments. (a) The Revolving Commitment and the Term Commitment shall each concurrently automatically and permanently and ratably reduce: (i) on the date of a Disposition made pursuant to Section 6.2(b) in an amount equal to 50% of the Net Cash Proceeds of such Disposition; (ii) on the date of a Disposition made pursuant to Section 6.2(c) in an amount equal to 100% of the first $10,000,000 of the Net Cash Proceeds of such Disposition and 60% of the Net Cash Proceeds of such Disposition in excess of $15,000,000; (iii) 180 days following the date upon which the Domestic Borrower or any of its Subsidiaries receive the proceeds of any other Disposition (including by way of any Disposition resulting from any casualty insurance or the proceeds of any eminent domain, condemnation or similar taking), in an amount equal to 100% of the Net Cash Proceeds thereof unless during that period the Domestic Borrower or such Subsidiary has reinvested such Net Cash Proceeds fixed or capital assets performing the same or a similar function; -39- 45 (iv) on the date following the Closing Date upon which the Domestic Borrower or its Subsidiaries receive the proceeds of the issuance of any Indebtedness of the types contemplated by Section 6.9(g), in an amount equal to the net proceeds to the Domestic Borrower and its Subsidiaries of such Indebtedness; and (v) on the date upon which the Domestic Borrower or any of its Subsidiaries receive the proceeds of the issuance of any equity securities following the Closing Date, in an amount equal to 50% of the Net Cash Proceeds thereof. (b) The German Commitment shall automatically and permanently be terminated on the date upon which any Disposition of the type contemplated by Section 6.2(b) occurs (but the Revolving Commitment shall not be reduced as a result thereof). (c) The German Commitment shall automatically and permanently be reduced upon any date upon which the amount of the German Commitment would otherwise be in excess of the Revolving Commitment. (d) The Term Commitment shall automatically and permanently reduce on the date of each payment required by Section 3.1(d)(ii) in the amount of such payment. (e) The Revolving Commitment shall automatically and permanently reduce on each Quarterly Payment Date in the related Revolver Reduction Amount. (f) The obligations of Borrower to pay proceeds from Dispositions as set forth in Section 2.7(a) continue so long as any Loans remaining outstanding. 2.8 Optional Increases to the Revolving Commitment. (a) Following the Closing Date, the Domestic Borrower may from time to time through December 31, 2002, propose to increase the aggregate amount of the Revolving Commitment in accordance with this Section. The aggregate principal amount of the increases to the Revolving Commitment made pursuant to this Section (the amount of any such increase, the "Increased Revolving Commitment"), shall not exceed $15,000,000. The Domestic Borrower shall provide at least 30 days' notice to the Administrative Agent (which shall promptly provide a copy of such notice to the Lenders) of any requested Increased Revolving Commitment. Each Lender shall have the right (but not the obligation), for a period of 30 days following receipt of such notice, to elect by notice to the Domestic Borrower and the Administrative Agent to participate in the Increased Revolving Commitment to the extent of its Pro Rata Share of the Revolving Commitment. No Lender which fails to respond shall be deemed to have elected to increase its Pro Rata Share of the Revolving Commitment in response to a notice by the Domestic Borrower under this Section. (b) If any Lender party to this Agreement elects not to increase its Pro Rata Share of the Revolving Commitment pursuant to subsection (a) of this Section, the Domestic Borrower may designate one or more other lenders which qualify as Eligible Assignees (which may be, but need not be, existing Lenders) which at the time agrees to (i) in the case of any such designated Lender that is an existing Lender, increase its Pro Rata Share of the Revolving Commitment and (ii) in the case of any other such lender (an "Additional Lender"), become a party to this Agreement. The sum of the increases in the Pro Rata Shares of the Revolving -40- 46 Commitment of the existing Lenders pursuant to this subsection (b) plus the new commitments of the Additional Lenders shall not in the aggregate exceed the unsubscribed amount of the Increased Revolving Commitment. (c) An increase in the aggregate amount of the Revolving Commitment pursuant to this Section shall become effective upon the receipt by the Administrative Agent of an agreement in form and substance satisfactory to the Administrative Agent signed by the Domestic Borrower, by each Additional Lender and by each other Lender whose Pro Rata Share of the Revolving Commitment is to be increased, setting forth the new Pro Rata Shares of the Revolving Commitment of such Lenders and setting forth the agreement of each Additional Lender to become a party to this Agreement and to be bound by all the terms and provisions hereof, together with such evidence of appropriate corporate authorization on the part of the Domestic Borrower with respect to the Increased Revolving Commitment, amendments to any Loan Documents requested by the Administrative Agent in relation to the Increased Revolving Commitment (which amendments the Administrative Agent is hereby authorized to execute on behalf of the Creditors) and such opinions of counsel for the Domestic Borrower with respect to the Increased Revolving Commitments, title endorsements and other assurances as the Administrative Agent may reasonably request. (d) No increase in the Revolving Commitment shall result in an increase in the amount of the German Commitment. 2.9 Administrative Agent's Right to Assume Funds Available for Advances. Unless the Administrative Agent shall have been notified by any Lender no later than 10:00 a.m. on the Business Day of the proposed funding by the Administrative Agent of any Loan that such Lender does not intend to make available to the Administrative Agent such Lender's portion of the total amount of such Loan, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on the date of the Loan and the Administrative Agent may, in reliance upon such assumption, make available to the relevant Borrower the corresponding amount. If the Administrative Agent has made funds available to the Borrowers based on such assumption and such corresponding amount is not in fact made available to the Administrative Agent by such Lender, the Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent promptly shall notify the relevant Borrower who shall pay such corresponding amount to the Administrative Agent. The Administrative Agent also shall be entitled to recover from such Lender interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrowers to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to the daily Federal Funds Rate. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Pro Rata Shares Commitments. 2.10 Senior Indebtedness. The Obligations shall be and hereby are designated by the Borrowers as "Senior Indebtedness" and "Designated Senior Indebtedness" with respect to all Indebtedness and other obligations of the Domestic Borrower and its Subsidiaries (to the effect that the Obligations shall be afforded all rights afforded to the most senior class of creditors thereunder) which are subordinated in any manner or to any extent to any other Indebtedness and other obligations of any Borrower or its Subsidiaries. -41- 47 2.11 Collateral. The Obligations shall be secured by a first priority (subject to Liens permitted by Section 6.8) perfected Lien on the Collateral pursuant to the Collateral Documents. 2.12 Participation in the German Commitment Loans. Upon the making of each German Commitment Loan, each Lender which owns a Pro Rata Share of the Revolving Commitment shall be deemed to have purchased at par a pro rata participation in that German Commitment Loan from Bank of America, Frankfurt in an amount equal to that Lender's Pro Rata Share of the Revolving Commitment. Without limiting the scope and nature of each Lender's participation in the German Commitment Loans, to the extent that any payment with respect to the German Commitment Loans is not made to Bank of America, Frankfurt when due, each Lender shall, pro rata according to its Pro Rata Share of the Revolving Commitment, pay the purchase price for such participation to Bank of America, Frankfurt through the Administrative Agent promptly upon demand therefor, and the German Borrowers shall have the same right to proceed against any defaulting Lender as if that Lender were a direct lender to the German Borrowers. The obligation of each Lender to so pay the participation purchase price to Bank of America, Frankfurt shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default or any other occurrence or event. Any such payment of the purchase price shall not relieve or otherwise impair the obligation of the German Borrowers to make the related payment to Bank of America, Frankfurt together with interest as hereinafter provided. 2.13 Marking the German Commitment Loans to Market. The Administrative Agent shall mark the outstanding German Commitment Loans to market (using the Dollar Equivalent of such Loans) concurrently with the making of each new Loan under the Revolving Commitment and the German Commitment and may mark such Loans to market on a more frequent basis (but shall not be obligated to do so unless it is informed by a party hereto that the making of a particular Loan would otherwise be prohibited by the terms hereof or that the Dollar Equivalent of the outstanding Obligations has, by reason of a fluctuation in the Euro, become greater than the limits expressed herein). -42- 48 Article 3 PAYMENTS AND FEES 3.1 Principal and Interest. (a) Interest shall be payable on the outstanding daily unpaid principal amount of each Advance from the date thereof until payment in full is made and shall accrue and be payable at the rates set forth or provided for herein before and after any Default or Event of Default, before and after maturity, before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law, with interest on overdue interest at the Default Rate to the fullest extent permitted by applicable Laws. (b) Interest accrued on Base Rate Loans shall be due and payable on each Quarterly Payment Date. Except as otherwise provided in Section 3.9, the unpaid principal amount of each Base Rate Loan shall bear interest at a fluctuating rate per annum (a) in the case of each Term Loan, equal to the Base Rate plus the applicable Term Base Rate Margin, and (b) in the case of each Revolving Loan equal to the Base Rate plus the applicable Revolver Base Rate Margin. Each change in the interest rate under this Section 3.1 (b) due to a change in the Base Rate shall take effect simultaneously with the corresponding change in the Base Rate. (c) Interest accrued on each Eurocurrency Rate Loan which is for a term of three months or less shall be due and payable on the last day of the related Interest Period. Interest accrued on each other Eurocurrency Rate Loan shall be due and payable on the date which is three months after the date such Eurocurrency Rate Loan was made (and, in the event that all of the Lenders have approved an Interest Period of longer than six months, every three months thereafter through the last day of the Interest Period) and on the last day of the related Interest Period. Except as otherwise provided in Section 3.9, the unpaid principal amount of any Eurocurrency Rate Loan shall bear interest at a rate per annum (a) in the case of each Term Loan, equal to the Eurocurrency Rate for that Eurocurrency Rate Loan plus the applicable Term Eurocurrency Margin, and (b) in the case of each Revolving Loan equal to the Eurocurrency Rate for that Eurocurrency Rate Loan plus the applicable Revolver Eurocurrency Margin. (d) If not sooner paid, the principal Indebtedness evidenced by the Notes shall be payable as follows, and without set off, counterclaim or reduction of any kind: (i) the amount, if any, by which the Revolving Usage plus the Euro Reserve at any time exceeds the then applicable Revolving Commitment (as reduced from time to time pursuant to Sections 2.6 or 2.7), shall be payable immediately; (ii) The principal Indebtedness evidenced by the Term Notes shall be payable on each Quarterly Payment Date, commencing June 30, 2002, in the amount of $475,000; (iii) The principal Indebtedness evidenced by the German Note shall be payable on the date of any Disposition of the Bally Wulff division pursuant to Section 6.2(b); -43- 49 (iv) The principal Indebtedness evidenced by the German Note shall be payable on any date upon which the Dollar Equivalent of the outstanding German Commitment Loans is at any time in excess of 95% of the German Commitment; (v) the principal Indebtedness evidenced by the Revolving Notes shall in any event be payable on the Revolver Maturity Date; (vi) the principal Indebtedness evidenced by the German Note shall in any event be payable on the Revolver Maturity Date; and (vii) the principal Indebtedness evidenced by the Term Notes shall in any event be payable on the Term Maturity Date. (e) The Notes may, at any time and from time to time, voluntarily be paid or prepaid in whole or in part without premium or penalty, except that (i) with respect to any voluntary prepayment under this Section 3.1 (e) any partial prepayment shall be not less than $2,500,000, or in integral multiples of $500,000 which are in excess of $2,500,000, except that partial prepayments of the Loans under the German Commitment shall be in integral multiples of 100,000 Euros, (ii) the Administrative Agent shall have received written notice of any prepayment by 9:00 a.m., California local time, on the Business Day prior to the date of prepayment (which must be a Business Day) in the case of a Base Rate Loan, and, in the case of a Eurocurrency Rate Loan, three Eurocurrency Business Days (or in the case of Loans under the German Commitment, four Eurocurrency Business Days) before the date of prepayment, which notice shall identify the date and amount of the prepayment and the Loan(s) being prepaid, (iii) each prepayment of principal on any Eurocurrency Rate Loan shall be accompanied by payment of interest accrued to the date of payment on the amount of principal paid and (iv) any payment or prepayment of all or any part of any Eurocurrency Rate Loan on a day other than the last day of the applicable Interest Period shall be subject to Section 3.8(e). Promptly following receipt of a notice of prepayment under clause (ii) above, the Administrative Agent shall notify each Lender by telephone or telecopier (and if by telephone, promptly confirmed by telecopier) of the date and amount thereof. (f) Each payment of principal by the Domestic Borrower hereunder shall be applied ratably to the Advances made to the Domestic Borrower which are then due and payable, provided that if the Obligations are then accelerated or have deemed to have been accelerated, each payment of principal hereunder shall be applied ratably to the outstanding Advances. 3.2 Lead Arranger's Fees. On the date hereof, the Domestic Borrower shall pay to Lead Arranger through the Administrative Agent certain fees in the amount heretofore agreed upon by letter agreement between the Domestic Borrower and the Lead Arranger. These fees are for the services of the Lead Arranger in arranging the credit facilities under this Agreement and are fully earned when paid and are nonrefundable. 3.3 Commitment Fees. From the date hereof, the Domestic Borrower shall pay to the Administrative Agent, for the ratable accounts of the Lenders pro rata according to their Pro Rata Shares of the Revolving Commitment, a commitment fee equal to the Commitment Fee Rate in effect -44- 50 from time to time times the actual daily amount by which the Revolving Commitment exceeds the Revolving Usage (other than the Swing Line Outstandings). The commitment fee shall be payable quarterly in arrears on each Quarterly Payment Date, on the Revolver Maturity Date and upon the date of any partial reduction or termination of the Revolving Commitment pursuant to Sections 2.6 or 2.7. 3.4 German Commitment Fronting Fees. From the date hereof, the German Borrowers shall pay to Bank of America, Frankfurt, for its own account, a fronting fee equal to 25 basis points times the outstanding principal balance of the Loans outstanding under the German Commitment from time to time. Bank of America, Frankfurt shall provide advices directly to the German Borrowers of the amount thereof due from time to time. The fronting fee shall be payable quarterly in arrears on each Quarterly Payment Date, on the Revolver Maturity Date and upon the date of any partial reduction or termination of the German Commitment pursuant to Sections 2.6 or 2.7. 3.5 Letter of Credit Fees. Concurrently with the issuance of each Letter of Credit, the Domestic Borrower shall pay a letter of credit issuance fee to the Issuing Bank, for the sole account of the Issuing Bank, in an amount set forth in a letter agreement between the Domestic Borrower and the Issuing Bank. Each letter of credit issuance fee is nonrefundable. On each Quarterly Payment Date and on the Revolver Maturity Date, the Domestic Borrower shall also pay to the Administrative Agent in arrears, for the ratable account of the Lenders in accordance with their Pro Rata Share, letter of credit fees in an amount equal to the Letter of Credit Fee per annum times the actual daily Aggregate Effective Amount of all Letters of Credit for the period from the Closing Date or the most recent Quarterly Payment Date. All letter of credit fees shall also be non-refundable. 3.6 Administrative Fees. On the date hereof and annually thereafter, the Domestic Borrower shall pay to the Administrative Agent an administrative fee in such amounts as heretofore agreed upon by letter agreement between the Domestic Borrower and Bank of America and the Lead Arranger. The Domestic Borrower and the German Borrower may make their own arrangements concerning any allocation of a portion of the administrative fee which is attributable to the German Commitments to the German Borrowers. The administrative fee is for the services to be performed by the Administrative Agent in acting as Administrative Agent and is fully earned on the date paid. The administrative fee paid to the Administrative Agent is solely for its own account and is nonrefundable. 3.7 Increased Commitment Costs. If any Lender shall determine in good faith that the introduction after the date hereof of any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein or any change in the interpretation or administration thereof by any central bank or other Governmental Agency charged with the interpretation or administration thereof, or change in the manner of compliance by such Lender (or its Eurocurrency Lending Office) or any corporation controlling the Lender, with any request, guideline or directive regarding capital adequacy (whether or not having the force of Law) of any such central bank or other authority, affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's desired return on capital) determines in good faith that the amount of such capital is increased, or the rate of return on capital is reduced, as a consequence of its obligations under this Agreement, then, within ten Business Days after demand of such Lender, the Borrowers shall pay to such Lender, from time to time as specified in good faith by such Lender, additional amounts sufficient to compensate such Lender in light of such circumstances, to the extent reasonably allocable to such obligations under this Agreement. Notwithstanding the foregoing, the Borrowers shall not be required to reimburse any Lender for any increased costs, reductions or payments under this Section arising prior to 90 days preceding the date of any claim or -45- 51 demand by that Lender for compensation under this Section except to the extent the applicable law or regulation is imposed retroactively and the demand or claim is made within 90 days of the effect (in which case such claim or demand shall be submitted within 90 days of the date upon which such Lender becomes aware or should reasonably be aware of such law or regulation). Each Lender's determination of such amounts shall be conclusive in the absence of manifest error. Any request for compensation by a Lender under this Section shall set forth the basis upon which it has been determined that such an amount is due from the Borrowers, a calculation of the amount due, and a certification that the corresponding costs or diminished rate of return on capital have been incurred or sustained by the Lender. 3.8 Eurocurrency Costs and Related Matters. (a) In the event that any Governmental Agency imposes on any Lender any reserve or comparable requirement (including any emergency, supplemental or other reserve) with respect to the Eurocurrency Obligations of that Lender, the relevant Borrowers shall pay that Lender within 5 Business Days after demand all amounts necessary to compensate such Lender (determined as though such Lender's Eurocurrency Lending Office had funded 100% of its Eurocurrency Rate Advance in the Designated Eurocurrency Market) in respect of the imposition of such reserve requirements. The Lender's determination of such amount shall be conclusive in the absence of manifest error. (b) If, after the date hereof, the existence or occurrence of any Special Eurocurrency Circumstance: (1) shall subject any Lender or its Eurocurrency Lending Office to any tax, duty or other charge or cost with respect to any Eurocurrency Rate Advance, any of its Notes evidencing Eurocurrency Rate Advances or its obligation to make Eurocurrency Rate Advances, or shall change the basis of taxation of payments to any Lender attributable to the principal of or interest on any Eurocurrency Rate Advance or any other amounts due under this Agreement in respect of any Eurocurrency Rate Advance, any of its Notes evidencing Eurocurrency Rate Advances or its obligation to make Eurocurrency Rate Advances, excluding (i) taxes imposed on or measured in whole or in part by its overall net income, gross income or gross receipts, (ii) franchise taxes imposed by (A) any jurisdiction (or political subdivision thereof) in which it is organized or maintains its principal office or Eurocurrency Lending Office or (B) any jurisdiction (or political subdivision thereof) in which it is "doing business," and (iii) any withholding taxes or other taxes based on gross income imposed by the United States of America for any period with respect to which it has failed to provide the Borrowers with the appropriate form or forms required by Section 11.21, to the extent such forms are then required by applicable Laws to avoid withholding tax payments; (2) shall impose, modify or deem applicable any reserve not applicable or deemed applicable on the date hereof (including any reserve imposed by the Board of Governors of the Federal Reserve System, special deposit, capital or similar requirements against assets of, deposits with or for the account of, or credit extended by, any Lender or its Eurocurrency Lending Office); or (3) shall impose on any Lender or its Eurocurrency Lending Office or the Designated Eurocurrency Market any other condition affecting any -46- 52 Eurocurrency Rate Advance, any of its Notes evidencing Eurocurrency Rate Advances, its obligation to make Eurocurrency Rate Advances or this Agreement, or shall otherwise affect any of the same; and the result of any of the foregoing, as determined in good faith by such Lender, increases the cost to such Lender or its Eurocurrency Lending Office of making or maintaining any Eurocurrency Rate Advance or in respect of any Eurocurrency Rate Advance, any of its Notes evidencing Eurocurrency Rate Advances or its obligation to make Eurocurrency Rate Advances or reduces the amount of any sum received or receivable by such Lender or its Eurocurrency Lending Office with respect to any Eurocurrency Rate Advance, any of its Notes evidencing Eurocurrency Rate Advances or its obligation to make Eurocurrency Rate Advances (assuming such Lender's Eurocurrency Lending Office had funded 100% of its Eurocurrency Rate Advance in the Designated Eurocurrency Market), then, within five Business Days after demand by such Lender (with a copy to the Administrative Agent), the Borrowers shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction (determined as though such Lender's Eurocurrency Lending Office had funded 100% of its Eurocurrency Rate Advance in the Designated Eurocurrency Market). A statement of any Lender claiming compensation under this subsection and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. Notwithstanding the foregoing, the Borrowers shall not be required to reimburse any Lender for any increased costs, reductions or payments under this clause (b) arising prior to 90 days preceding the date of any claim or demand by that Lender for compensation under this clause (b) except to the extent the circumstances giving rise thereto result in retroactive imposition of the related costs and the demand or claim is made within 90 days of the effect (in which case such claim or demand shall be submitted within 90 days of the date upon which such Lender becomes aware or should reasonably be aware of such effect). (c) If, after the date hereof, the existence or occurrence of any Special Eurocurrency Circumstance shall, in the good faith opinion of any Lender, make it unlawful or impossible for such Lender or its Eurocurrency Lending Office to make, maintain or fund its portion of any Eurocurrency Rate Advance or materially restrict the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the Designated Eurocurrency Market, or to determine or charge interest rates based upon the Eurocurrency Rate, and such Lender shall so notify the Administrative Agent, then such Lender's obligation to make Eurocurrency Rate Advances shall be suspended for the duration of such illegality or impossibility and the Administrative Agent forthwith shall give notice thereof to the other Lenders and the Borrowers. Upon receipt of such notice, the outstanding principal amount of such Lender's Eurocurrency Rate Advances, together with accrued interest thereon, automatically shall be converted to Base Rate Advances on either (1) the last day of the Interest Period(s) applicable to such Eurocurrency Rate Advances if such Lender may lawfully continue to maintain and fund such Eurocurrency Rate Advances to such day(s) or (2) immediately if such Lender may not lawfully continue to fund and maintain such Eurocurrency Rate Advances to such day(s), provided that in such event the conversion shall not be subject to payment of a prepayment fee under clause (e) of this Section. Each Lender agrees to endeavor promptly to notify the Borrowers of any event of which it has actual knowledge, occurring after the date hereof, which will cause that Lender to notify the Administrative Agent under this Section, and agrees to designate a different Eurocurrency Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially -47- 53 disadvantageous to such Lender. In the event that any Lender is unable, for the reasons set forth above, to make, maintain or fund its portion of any Eurocurrency Rate Loan or Advance, such Lender shall fund such amount as a Base Rate Advance for the same period of time, and such amount shall be treated in all respects as a Base Rate Advance. Any Lender whose obligation to make Eurocurrency Rate Advances has been suspended under this Section shall promptly notify the Administrative Agent and the Borrowers of the cessation of the Special Eurocurrency Circumstance which gave rise to such suspension. (d) If, with respect to any proposed Eurocurrency Rate Loan: (1) the Administrative Agent reasonably determines that, by reason of circumstances affecting the Designated Eurocurrency Market generally that are beyond the reasonable control of the Lenders, deposits in Dollars (in the applicable amounts) are not being offered to any Lender in the Designated Eurocurrency Market for the applicable Interest Period; or (2) the Requisite Lenders advise the Administrative Agent that the Eurocurrency Rate as determined by the Administrative Agent (i) does not represent the effective pricing to such Lenders for deposits in Dollars in the Designated Eurocurrency Market in the relevant amount for the applicable Interest Period, or (ii) will not adequately and fairly reflect the cost to such Lenders of making the applicable Eurocurrency Rate Advances; then the Administrative Agent forthwith shall give notice thereof to the relevant Borrower and the Lenders, whereupon until the Administrative Agent notifies that Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of the Lenders to make any future Eurocurrency Rate Advances to that Borrower shall be suspended. (e) Upon payment or prepayment of any Eurocurrency Rate Advance (other than as the result of a conversion required under clause (c) of this Section) on a day other than the last day in the applicable Interest Period (whether voluntarily, involuntarily, by reason of acceleration, or otherwise), or upon the failure of any Borrower (for a reason other than the failure of a Lender to make an Advance) to borrow on the date or in the amount specified for a Eurocurrency Rate Advance in any Request for Loan, or upon the failure of that Borrower to prepay a Eurocurrency Rate Loan or Advance on the date specified in a notice of prepayment delivered to the Administrative Agent pursuant to Section 3.1(e), the relevant Borrower shall pay to the appropriate Lender within ten Business Days after demand a prepayment fee, failure to borrow fee or failure to prepay fee, as the case may be (determined as though 100% of that Lender's Eurocurrency Rate Advance had been funded in the Designated Eurocurrency Market), equal to the sum of: (1) the principal amount of the Eurocurrency Rate Advance prepaid or not borrowed or prepaid, as the case may be, times [the number of days from and including the date of prepayment or failure to borrow or prepay, as applicable, to but excluding the last day in the applicable Interest Period], divided by 360, times the applicable Interest Differential (provided that the product of the foregoing formula must be a positive number); plus -48- 54 (2) all out-of-pocket expenses incurred by the Lender reasonably attributable to such payment, prepayment or failure to borrow. Each Lender's determination of the amount of any prepayment fee, failure to borrow fee or failure to prepay fee payable under this Section shall be conclusive in the absence of manifest error. (f) Each Lender agrees to endeavor promptly to notify the Borrowers of any event of which it has actual knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to clause (a) or clause (b) of this Section, and agrees to designate a different Eurocurrency Lending Office if such designation will avoid the need for or reduce the amount of such compensation and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender. Any request for compensation by a Lender under this Section shall set forth the basis upon which it has been determined that such an amount is due from the Borrowers, a calculation of the amount due, and a certification that the corresponding costs have been incurred by the Lender. (g) If any Lender claims compensation or is excused from making or continuing Eurocurrency Rate Loans or Advances under this Section, the Borrowers may at any time, upon at least 4 Eurocurrency Business Days' prior notice to the Administrative Agent and such Lender and upon payment in full of the amounts provided for in this Section through the date of such payment plus any prepayment fee (subject to clause (c) of this Section) required by clause (e) of this Section, pay in full the affected Eurocurrency Rate Advances of such Lender or request that such Eurocurrency Rate Advances be converted to Base Rate Advances. 3.9 Default Rate. If any installment of principal or interest or any fee or cost or other amount payable under any Loan Document to the Administrative Agent or any Lender is not paid when due, or at the option of the Requisite Lenders upon the occurrence and during the continuance of any Event of Default, the outstanding Loans, and any such delinquent fees, costs or other amounts, shall thereafter bear interest at a rate which is 2% per annum in excess of the otherwise applicable rate, and the outstanding Letters of Credit shall thereafter accrue fees at a rate which is 2% per annum in excess of the otherwise applicable fees, in each case to the fullest extent permitted by applicable Laws. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be compounded monthly, on the last day of each calendar month, to the fullest extent permitted by applicable Laws. 3.10 Computation of Interest and Fees. Computation of interest on Base Rate Loans shall be calculated on the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed; computation of interest on Eurocurrency Rate Loans and all fees under this Agreement shall be calculated on the basis of a year of 360 days and the actual number of days elapsed. The Borrowers acknowledge that such latter calculation method will result in a higher yield to the Lenders than a method based on a year of 365 or 366 days. Interest shall accrue on each Loan for the day on which the Loan is made; interest shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid. Any Loan that is repaid on the same day on which it is made shall bear interest for one day. Notwithstanding anything in this Agreement to the contrary, interest in excess of the maximum amount permitted by applicable Laws shall not accrue or be payable hereunder or under the Notes, and any amount paid as interest hereunder or under the Notes which would otherwise be in excess of such maximum permitted amount shall instead be treated as a payment of principal. -49- 55 3.11 Non-Business Days. If any payment to be made by the Borrowers or any other Party under any Loan Document shall come due on a day other than a Business Day, payment shall instead be considered due on the next succeeding Business Day and the extension of time shall be reflected in computing interest and fees. 3.12 Manner and Treatment of Payments. (a) Each payment hereunder (except payments pursuant to Sections 3.7, 3.8, 11.3, 11.11 and 11.22) or on the Notes or under any other Loan Document shall be made to the Administrative Agent, at the Administrative Agent's Office, for the account of each of the Lenders or the Administrative Agent, as the case may be, in immediately available funds (by wire transfer, debit of an account with the Administrative Agent or by other means acceptable to the Administrative Agent) not later than 11:00 a.m. other than payments with respect to Swing Line Loans, which must be paid directly to the Swing Line Lender and received by 3:00 p.m.), California local time, on the day of payment (which must be a Business Day). All payments received after such time, on any Business Day, shall be deemed received on the next succeeding Business Day. The amount of all payments received by the Administrative Agent for the account of each Lender shall be immediately paid by the Administrative Agent to the applicable Lender in immediately available funds and, if such payment was received by the Administrative Agent by 11:00 a.m., California local time, on a Business Day and not so made available to the account of a Lender on that Business Day, the Administrative Agent shall reimburse that Lender for the cost to such Lender of funding the amount of such payment at the Federal Funds Rate. All payments shall be made in lawful money of the United States of America except that payments in respect of the German Commitment Loans shall be made in Euros. (b) Each payment or prepayment on account of any Loan shall be applied pro rata according to the outstanding Advances made by each Lender comprising such Loan. (c) Each Lender shall use its best efforts to keep a record (which may be in tangible or electronic or other intangible form) of Advances made by it and payments received by it with respect to each of its Notes and, subject to Section 10.6(g), such record shall, as against the Borrowers, be presumptive evidence of the amounts owing. Notwithstanding the foregoing sentence, the failure by any Lender to keep such a record shall not affect the Borrowers' obligation to pay the Obligations. (d) Each payment of any amount payable by the Borrowers or any other Party under this Agreement or any other Loan Document shall be made free and clear of, and without reduction by reason of, any taxes, assessments or other charges imposed by any Governmental Agency, central bank or comparable authority, excluding (i) taxes imposed on or measured in whole or in part by overall net income, gross income or gross receipts, (ii) franchise taxes imposed on any Lender by (A) any jurisdiction (or political subdivision thereof) in which it is organized or maintains its principal office or Eurocurrency Lending Office or (B) any jurisdiction (or political subdivision thereof) in which it is "doing business", (iii) any withholding taxes or other taxes based on gross income imposed by the United States of America that are not attributable to any change in any Law or the interpretation or administration of any Law by any Governmental Agency and (iv) any withholding tax or other taxes based on gross income imposed by the United States of America for any period with -50- 56 respect to which it has failed to provide the Borrowers with the appropriate form or forms required by Section 11.21 (all such non-excluded taxes, assessments or other charges being hereinafter referred to as "Taxes"). To the extent that the Borrowers or any other Party is obligated by applicable Laws to make any deduction or withholding on account of Taxes from any amount payable to any Lender under this Agreement, they shall (i) make such deduction or withholding and pay the same to the relevant Governmental Agency and (ii) pay such additional amount to that Lender as is necessary to result in that Lender's receiving a net after-Tax amount equal to the amount to which that Lender would have been entitled under this Agreement absent such deduction or withholding. If and when receipt of such payment results in an excess payment or credit to that Lender on account of such Taxes, that Lender shall promptly refund such excess to the Borrowers or the relevant Party. 3.13 Funding Sources. Nothing in this Agreement shall be deemed to obligate any Lender to obtain the funds for any Loan or Advance in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan or Advance in any particular place or manner. 3.14 Failure to Charge Not Subsequent Waiver. Any decision by the Administrative Agent or any Lender not to require payment of any interest (including interest at the Default Rate), fee, cost or other amount payable under any Loan Document, or to calculate any amount payable by a particular method, on any occasion shall in no way limit or be deemed a waiver of the Administrative Agent's or such Lender's right to require full payment of any interest (including interest at the Default Rate), fee, cost or other amount payable under any Loan Document, or to calculate an amount payable by another method that is not inconsistent with this Agreement, on any other or subsequent occasion. 3.15 Administrative Agent's Right to Assume Payments Will be Made by the Borrowers. Unless the Administrative Agent shall have been notified by the Borrowers prior to the date on which any payment to be made by the Borrowers hereunder is due that the Borrowers do not intend to remit such payment, the Administrative Agent may, in its discretion, assume that the relevant Borrower has remitted such payment when so due and the Administrative Agent may, in its discretion and in reliance upon such assumption, make available to each Lender on such payment date an amount equal to such Lender's share of such assumed payment. If the relevant Borrower has not in fact remitted such payment to the Administrative Agent, each Lender shall forthwith on demand repay to the Administrative Agent the amount of such assumed payment made available to such Lender, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender to the date such amount is repaid to the Administrative Agent at the Federal Funds Rate. 3.16 Fee Determination Detail. The Administrative Agent and any Lender shall provide reasonable detail to the Borrowers regarding the manner in which the amount of any payment to the Creditors, or that Lender, under Article 3 has been determined, concurrently with demand for such payment. 3.17 Survivability. All of the Borrowers' obligations under Sections 3.7 and 3.8 shall survive for ninety days following the date on which the last occurs: (a) the Commitments are terminated, (b) all Obligations are fully paid, and (c) all Letters of Credit have expired or have been cash collateralized in a manner which is acceptable to the Administrative Agent and the Issuing Lender. -51- 57 3.18 Currency Conversion. (a) All Obligations of the Domestic Borrower to the Creditors shall be paid to the Creditors in Dollars. All Obligations of the German Borrowers to the Creditors shall be paid to the Creditors in Euros. The Borrowers' obligations hereunder and under the other Loan Documents to make payments in either such currency (the "Obligation Currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any other currency, except to the extent that such tender or recovery results in the effective receipt by the Creditors of the full amount expressed to be payable to the Creditors under this Agreement or the other Loan Documents. If for the purpose of obtaining or enforcing judgment against any Borrower in any court or in any jurisdiction, it becomes necessary to convert into or from any currency other than the Obligation Currency (such other currency being hereinafter referred to as the "Judgment Currency") an amount due in the Obligation Currency, the conversion shall be made, at the Euro Equivalent or the Dollar Equivalent thereof, as the case may be, and, in the case of other currencies, the rate of exchange (as quoted by the Administrative Agent or if the Administrative Agent does not quote a rate of exchange on such currency, by a known dealer in such currency designated by the Administrative Agent) determined, in each case, as of the day immediately preceding the day on which the judgment is given (such Business Day being hereinafter referred to as the "Judgment Currency Conversion Date"). (b) If there is a change in the rate of exchange prevailing between the Judgment Currency Conversion Date and the date of actual payment of the amount due, the Borrowers covenant and agree to pay, or cause to be paid, such additional amounts, if any (but in any event not a lesser amount) as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the rate of exchange prevailing on the date of payment, will produce the amount of the Obligation Currency which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial award at the rate or exchange prevailing on the Judgment Currency Conversion Date. (c) For purposes of determining the Euro Equivalent or the Dollar Equivalent or any other rate of exchange for this Section, such amounts shall include any premium and costs payable in connection with the purchase of the Obligation Currency. -52- 58 Article 4 REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to the Lenders that: 4.1 Existence and Qualification; Power; Compliance With Laws. The Domestic Borrower is a corporation duly incorporated, validly existing and in good standing under the Laws of Nevada. Each of the German Borrowers are each companies duly formed, validly existing and in good standing under the Laws of the Federal Republic of Germany. Each of the Subsidiaries of the Domestic Borrowers is duly formed, validly existing and in good standing under the Laws of its state or jurisdiction of formation. Each of the Borrowers and each of their respective Subsidiaries are duly qualified or registered to transact business and are in good standing in each other jurisdiction in which the conduct of their business or the ownership or leasing of their Properties makes such qualification or registration necessary, except where the failure so to qualify or register and to be in good standing would not constitute a Material Adverse Effect. The Borrowers and each of their respective Subsidiaries have all requisite corporate or other organizational power and authority to conduct their business, to own and lease their Properties and to execute and deliver each Loan Document to which each is a Party and to perform the Obligations. All outstanding shares of the capital stock of the Domestic Borrower are duly authorized, validly issued, fully paid and non-assessable, and no holder thereof has any enforceable right of rescission under any applicable state or federal securities Laws. Each Borrower is in compliance with all Requirements of Law applicable to its business as at present conducted, has obtained all authorizations, consents, approvals, orders, licenses and permits from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business as at present conducted, except where the failure so to comply, file, register, qualify or obtain exemptions does not constitute a Material Adverse Effect. 4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations. The execution, delivery and performance by each Borrower and each Significant Subsidiary of the Loan Documents to which it is a Party have been duly authorized by all necessary corporate or other organizational action, and do not and will not: (a) Require any consent or approval not heretofore obtained of any member, partner, director, stockholder, security holder or creditor of such Party; (b) Violate or conflict with any provision of such Party's charter, articles of incorporation, operating agreement or bylaws, as applicable; (c) Result in or require the creation or imposition of any Lien or Right of Others upon or with respect to any Property now owned or leased or hereafter acquired by such Party; (d) Violate any Requirement of Law applicable to such Party, subject to obtaining the authorizations from, or filings with, the Governmental Agencies described in Schedule 4.3; (e) Result in a breach of or constitute a default under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any -53- 59 other Contractual Obligation to which such Party is a party or by which such Party or any of its Property is bound or affected; and neither the Borrowers nor any Significant Subsidiary is in violation of, or default under, any Requirement of Law or Contractual Obligation, or any indenture, loan or credit agreement described in Section 4.2(e), in any respect that constitutes a Material Adverse Effect. 4.3 No Governmental Approvals Required - Consents to Pledge. Except as set forth in Schedule 4.3 or previously obtained or made, no authorization, consent, approval, order, license or permit from, or filing, registration or qualification with, any Governmental Agency is or will be required to authorize or permit under applicable Laws the execution, delivery and performance by the Domestic Borrower, the German Borrowers and their respective Subsidiaries of the Loan Documents to which it is a Party. Except as set forth in Schedule 4.3, all authorizations from, or filings with, any Governmental Agency described in Schedule 4.3 will be accomplished as of the Closing Date. As to the items set forth on Schedule 5.12, the Borrowers represent and warrant that they have filed all applications and petitions necessary to obtain the authorizations, consents and approvals described therein (except to the extent that the same require the filing of this Agreement, in which case the same shall be accomplished within 10 days following the execution hereof). 4.4 Subsidiaries. (a) Schedule 4.4 hereto correctly sets forth the names, form of legal entity, number of shares of capital stock issued and outstanding, number of shares owned by the Domestic Borrower or a Subsidiary of the Domestic Borrower (specifying such owner) and jurisdictions of organization of all Subsidiaries of the Domestic Borrower. Except as described in Schedule 4.4 (and Investments and Acquisitions made after the date hereof and permitted hereby), the Domestic Borrower does not own any capital stock, equity interest or debt security which is convertible, or exchangeable, for capital stock or equity interests in any Person. Unless otherwise indicated in Schedule 4.4, all of the outstanding shares of capital stock, or all of the units of equity interest, as the case may be, of each Subsidiary are owned of record and beneficially by the Domestic Borrower, there are no outstanding options, warrants or other rights to purchase capital stock of any such Subsidiary, and all such shares or equity interests so owned are duly authorized, validly issued, fully paid and non-assessable, and were issued in compliance with all applicable state and federal securities and other Laws, and are free and clear of all Liens and Rights of Others, except for Permitted Encumbrances and Permitted Rights of Others. (b) Each Subsidiary of the Domestic Borrower is in compliance with all Requirements of Law applicable to its business and has obtained all authorizations, consents, approvals, orders, licenses, and permits from, and each such Subsidiary has accomplished all filings, registrations, and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business, except where the failure to be in such compliance, obtain such authorizations, consents, approvals, orders, licenses, and permits, accomplish such filings, registrations, and qualifications, or obtain such exemptions, does not constitute a Material Adverse Effect. 4.5 Financial Statements. The Domestic Borrower has furnished to the Lenders (a) the audited consolidated and consolidating financial statements of the Domestic Borrower and its Subsidiaries for the Fiscal Year ended June 30, 2000 and (b) the unaudited consolidated and -54- 60 consolidating financial statements of each of the Domestic Borrower and its Subsidiaries for the Fiscal Quarter ended March 31, 2001, and (c) the unaudited consolidated and consolidating financial statements of German Holdings and its Subsidiaries for the Fiscal Quarter ended March 31, 2001. The financial statements described above fairly present in all material respects the financial condition, results of operations and changes in financial position of the Domestic Borrower and its Subsidiaries or their German Borrowers and their Subsidiaries, as the case may be, as of such dates and for such periods in conformity with Generally Accepted Accounting Principles, consistently applied. 4.6 No Other Liabilities; No Material Adverse Changes. As of the Closing Date, the Domestic Borrower and its Subsidiaries do not have any material liability or material contingent liability required under Generally Accepted Accounting Principles to be reflected or disclosed and not reflected or disclosed in the financial statements described in Section 4.5(b), other than liabilities and contingent liabilities arising in the ordinary course of business since the date of such financial statements. As of the Closing Date, no circumstance or event has occurred that constitutes a Material Adverse Effect as to the Domestic Borrower and its Subsidiaries since June 30, 2000. As of any date subsequent to the Closing Date, no circumstance or event has occurred that constitutes a Material Adverse Effect since the Closing Date. 4.7 Title to Property. The Domestic Borrower and its Subsidiaries have rights in the Property reflected in the financial statements described in Section 4.5(b), other than immaterial items of Property and Property subsequently sold or disposed of in the ordinary course of business, free and clear of all Liens and Rights of Others, other than Permitted Encumbrances, Permitted Rights of Others and Liens or Rights of Others described in Schedule 4.7 or permitted by Section 6.8. 4.8 Real Property. Schedule 4.8 sets forth as of the Closing Date a summary description of all real property owned and real property leasehold estates held by the Domestic Borrower and its Subsidiaries, which summary is accurate and complete in all material respects except for real property acquired or leased after the Closing Date after notice to the Administrative Agent. 4.9 Intangible Assets. The Domestic Borrower and its Subsidiaries own, or possess the right to use to the extent necessary in their businesses, all material trademarks, trade names, copyrights, patents, patent rights, computer software, licenses and other Intangible Assets that are used in the conduct of their businesses, and no such Intangible Asset, to the actual best knowledge of the Domestic Borrower, conflicts with the valid trademark, trade name, copyright, mask work, patent, patent right or Intangible Asset of any other Person to the extent that such conflict constitutes a Material Adverse Effect. Schedule 4.9 sets forth all material patents, trademarks, trade names, trade styles, copyrights and mask works owned by the Domestic Borrower and its Subsidiaries. 4.10 Public Utility Holding Company Act. Neither the Domestic Borrower nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.11 Litigation. Except for (a) any matter fully covered as to subject matter and amount (subject to applicable deductibles and retentions) by insurance as to which the insurance carrier has been notified and has not asserted lack of subject matter coverage or reserved its right to do so, (b) any matter, or series of related matters, involving a claim against the Domestic Borrower or any of its Subsidiaries of less than $2,500,000, (c) matters of an administrative nature not involving a claim or charge against the Domestic Borrower or any of its Subsidiaries and (d) matters set forth in -55- 61 Schedule 4.11, there are no actions, suits, proceedings or investigations pending as to which the Domestic Borrower or any of its Subsidiaries have been served or have received notice or, to the best knowledge of the Domestic Borrower, threatened against or affecting the Domestic Borrower or any of its Subsidiaries or any Property of any of them before any Governmental Agency which may reasonably be expected to have a Material Adverse Effect. 4.12 Binding Obligations. Each of the Loan Documents to which the Domestic Borrower or any of its Subsidiaries is a Party will, when executed and delivered by such Party, constitute the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms, except as enforcement may be limited by Debtor Relief Laws, Gaming Laws or equitable principles relating to the granting of specific performance and other equitable remedies as a matter of judicial discretion. 4.13 No Default. No event has occurred and is continuing that is a Default or Event of Default. 4.14 ERISA. (a) With respect to each Pension Plan: (i) such Pension Plan complies in all material respects with ERISA and any other applicable Laws to the extent that noncompliance could reasonably be expected to have a Material Adverse Effect; (ii) such Pension Plan has not incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA) that could reasonably be expected to have a Material Adverse Effect; (iii) no "reportable event" (as defined in Section 4043 of ERISA) has occurred that could reasonably be expected to have a Material Adverse Effect; and (iv) neither the Domestic Borrower nor any of its Subsidiaries has engaged in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code) that could reasonably be expected to have a Material Adverse Effect. (b) Neither the Domestic Borrower nor any of its Subsidiaries has incurred or expects to incur any withdrawal liability to any Multiemployer Plan that could reasonably be expected to have a Material Adverse Effect. 4.15 Regulations T, U and X; Investment Company Act. No part of the proceeds of any Loan hereunder will be used to purchase or carry, or to extend credit to others for the purpose of purchasing or carrying, any Margin Stock in violation of Regulations T, U and X. Neither the Domestic Borrower nor any of its Subsidiaries is or is required to be registered as an "investment company" under the Investment Company Act of 1940. 4.16 Disclosure. Taken as a whole, the written statements made by Senior Officers of the Domestic Borrower, the German Borrowers and their respective Subsidiaries to the Administrative Agent and to the Lenders in connection with this Agreement, and in connection with the Loans, do not contain as of the date thereof, any untrue statement of a material fact or omitted a -56- 62 material fact necessary to make the statement made not misleading in light of all the circumstances existing at the date the statement was made. 4.17 Tax Liability. The Domestic Borrower and its Subsidiaries have filed all tax returns which are required to be filed, and have paid, or made provision for the payment of, all taxes with respect to the periods, Property or transactions covered by said returns, or pursuant to any assessment received by the Domestic Borrower or its Subsidiaries, except (a) such taxes, if any, as are being contested in good faith by appropriate proceedings and as to which adequate reserves have been established and maintained and (b) immaterial taxes so long as no material Property of the Domestic Borrower or any of its Subsidiaries is in jeopardy of being seized, levied upon or forfeited. 4.18 Projections. As of the Closing Date, the assumptions set forth in the Projections are reasonable and consistent with each other and with all facts known to the Domestic Borrower and its Subsidiaries, and the Projections are reasonably based on such assumptions. Nothing in this Section shall be construed as a representation or covenant that the Projections in fact will be achieved. The Creditors acknowledge that the Projections are forward-looking statements and that actual financial results for the Domestic Borrower and its Subsidiaries could differ materially from those set forth in the Projections. 4.19 Hazardous Materials. Except as described in Schedule 4.19, (a) neither the Domestic Borrower nor any of its Subsidiaries at any time has disposed of, discharged, released or threatened the release of any Hazardous Materials on, from or under the Real Property in violation of any Hazardous Materials Law that would individually or in the aggregate constitute a Material Adverse Effect, (b) to the actual best knowledge of the Domestic Borrower, no condition exists that violates any Hazardous Material Law affecting any Real Property except for such violations that would not individually or in the aggregate have a Material Adverse Effect, (c) no Real Property or any portion thereof is or has been utilized by the Domestic Borrower or any of its Subsidiaries as a site for the manufacture of any Hazardous Materials and (d) to the extent that any Hazardous Materials are used, generated or stored by the Domestic Borrower or any of its Subsidiaries on any Real Property, or transported to or from such Real Property by the Domestic Borrower or any of its Subsidiaries, such use, generation, storage and transportation are in compliance in all material respects with all Hazardous Materials Laws. -57- 63 Article 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) So long as any Advance remains unpaid, or any Letter of Credit remains outstanding or any other Obligation remains unpaid, or any portion of the Commitments remains in force, Borrowers shall, and shall cause each of their respective Subsidiaries to, unless the Administrative Agent (with the written approval of the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders)) otherwise consents: 5.1 Payment of Taxes and Other Potential Liens. Pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon any of them, upon their respective Property or any part thereof and upon their respective income or profits or any part thereof, except that the Domestic Borrower and its Subsidiaries shall not be required to pay or cause to be paid (a) any tax, assessment, charge or levy that is not yet past due, or is being contested in good faith by appropriate proceedings so long as the relevant entity has established and maintains adequate reserves for the payment of the same or (b) any immaterial tax so long as no material Property of the Domestic Borrower or any of its Subsidiaries is in jeopardy of being seized, levied upon or forfeited. 5.2 Preservation of Existence. Except for transactions permitted by Sections 6.2 and 6.3, preserve and maintain their respective existences in the jurisdiction of their formation and all material authorizations, rights, franchises, privileges, consents, approvals, orders, licenses, permits, or registrations from any Governmental Agency that are necessary for the transaction of their respective business except where the failure to so preserve and maintain the existence of any Subsidiary of the Domestic Borrower and such authorizations, rights, franchises, privileges, consents, approvals, orders, licenses, permits, or registrations would not constitute a Material Adverse Effect; and qualify and remain qualified to transact business in each jurisdiction in which such qualification is necessary in view of their respective business or the ownership or leasing of their respective Properties except where the failure to so qualify or remain qualified would not constitute a Material Adverse Effect. 5.3 Maintenance of Properties. Maintain, preserve and protect all of their respective Properties in good order and condition, subject to wear and tear in the ordinary course of business, and not permit any waste of their respective Properties, except that neither (a) the failure to maintain, preserve and protect a particular item of Property that is not of significant value, either intrinsically or to the operations of the Domestic Borrower and its Subsidiaries, taken as a whole, nor (b) any Disposition permitted by Section 6.2, shall constitute a violation of this covenant. 5.4 Maintenance of Insurance. Maintain liability, casualty and other insurance (subject to customary deductibles and retentions) with responsible insurance companies in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets in the general areas in which the Domestic Borrower and its Subsidiaries operate, and in any event coverages which are not materially less than those maintained as of the Closing Date. 5.5 Compliance With Laws. Comply, within the time period, if any, given for such compliance by the relevant Governmental Agency with enforcement authority, with all Requirements of Law noncompliance with which constitutes a Material Adverse Effect, except that the Domestic Borrower and its Subsidiaries need not comply with a Requirement of Law then being contested by any of them in good faith by appropriate proceedings. -58- 64 5.6 Inspection Rights. Upon reasonable notice, at any time during regular business hours and as often as reasonably requested (but not so as to materially interfere with the business of the Domestic Borrower or any of its Subsidiaries) permit the Administrative Agent or any Lender, or any authorized employee, agent or representative thereof, to examine, audit and make copies and abstracts from the records and books of account of, and to visit and inspect the Properties of, the Domestic Borrower and its Subsidiaries and to discuss the affairs, finances and accounts of the Domestic Borrower and its Subsidiaries with any of their officers, managers, key employees or accountants and, upon request, furnish promptly to the Administrative Agent or any Lender true copies of all financial information made available to the board of directors or audit committee of the board of directors of the Domestic Borrower. 5.7 Keeping of Records and Books of Account. Keep adequate records and books of account reflecting all financial transactions in conformity with Generally Accepted Accounting Principles, consistently applied, and in material conformity with all applicable requirements of any Governmental Agency having regulatory jurisdiction over the Domestic Borrower or any of its Subsidiaries. 5.8 Compliance With Agreements. Promptly and fully comply with all Contractual Obligations under all material agreements, indentures, leases and/or instruments to which any one or more of them is a party, whether such material agreements, indentures, leases or instruments are with a Lender or another Person, except for any such Contractual Obligations (a) the performance of which would cause a Default or (b) then being contested by any of them in good faith by appropriate proceedings or if the failure to comply with such agreements, indentures, leases or instruments does not constitute a Material Adverse Effect. 5.9 Use of Proceeds. Use the proceeds of Loans (a) on the Closing Date, to repay the obligations under and terminate the Existing Credit Agreement and the Refinanced Leases, and (b) for capital expenditures, to provide working capital and for other general corporate purposes of the Domestic Borrower and its Subsidiaries including the Acquisitions and Investments permitted or described herein. 5.10 New Significant Subsidiaries. Cause each Person, other than any Excluded Subsidiary, (a) that hereafter becomes a Domestic Significant Subsidiary of the Domestic Borrower to execute and deliver, concurrently with its formation, acquisition or otherwise becoming a Domestic Significant Subsidiary, joinders to the Domestic Facilities Guaranty, the Domestic Subsidiaries Security Agreement and the German Facility Guaranty, together with such other instruments, documents and agreements, including financing statements, as the Administrative Agent may require to grant and perfect Liens in substantially all of its Property to secure its obligations under such guarantees, and (b) that hereafter becomes a Foreign Significant Subsidiary, to execute and deliver, concurrently with its formation, acquisition or otherwise becoming a Foreign Significant Subsidiary, a guarantee of the German Note and additional German Security Documents together with such other instruments, documents and agreements, including financing statements, as the Administrative Agent may require to grant and perfect Liens in substantially all of its Property to secure its obligations under its guarantee of the German Note. In addition thereto, the Borrowers shall cause (A) 100% of the capital stock of each such Person which is a Domestic Significant Subsidiary to be pledged to the Administrative Agent pursuant to the Domestic Facilities Pledge Agreement, (B) 100% of the capital stock of each such Person which is a Foreign Significant Subsidiary to be pledged to the Administrative Agent pursuant to the German Facility Pledge Agreement and 65% of the capital stock of each such Person which is a -59- 65 Foreign Significant Subsidiary to be pledged to the Administrative Agent pursuant to the Domestic Facilities Pledge Agreement, together with any other Collateral Documents requested by the Administrative Agent. 5.11 Hazardous Materials Laws. Keep and maintain all Real Property and each portion thereof in compliance in all material respects with all applicable Hazardous Materials Laws and promptly notify the Administrative Agent in writing (attaching a copy of any pertinent written material) of (a) any and all material enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened in writing by a Governmental Agency pursuant to any applicable Hazardous Materials Laws, (b) any and all material claims made or threatened in writing by any Person against the Domestic Borrower or its Subsidiaries relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials and (c) discovery by any Senior Officer of the Domestic Borrower of any material occurrence or condition on Property adjoining or in the vicinity of such Real Property that could reasonably be expected to cause such Real Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of such Real Property under any applicable Hazardous Materials Laws. 5.12 Approvals of Pledge of Significant Subsidiary Shares. Diligently pursue by appropriate proceedings and in all events shall obtain on or before October 31, 2001, all Gaming Board and other Governmental Agency approvals required for the Domestic Borrower and its Subsidiaries to pledge its shares of gaming licensees described in Schedule 5.12 to the Administrative Agent to secure the Obligations pursuant to the Domestic Facilities Pledge Agreement and the German Facility Pledge Agreement. -60- 66 Article 6 NEGATIVE COVENANTS So long as any Advance remains unpaid, or any Letter of Credit remains outstanding or any other Obligation remains unpaid, or any portion of the Commitments remain in force, the Borrowers shall not, and shall not permit any of their respective Subsidiaries to, unless the Administrative Agent (with the written approval of the Requisite Lenders or, if required by Section 11.2, of any other group of the Lenders) otherwise consents: 6.1 Payment of Subordinated Obligations. Prepay any principal including sinking fund payments) or any other amount with respect to any Subordinated Obligation, or purchase or redeem (or offer to purchase or redeem) any Subordinated Obligation prior to the scheduled maturity date thereof, or deposit any monies, securities or other Property with any trustee or other Person to provide assurance that the principal or any portion thereof of any Subordinated Obligation will be paid when due or otherwise to provide for the defeasance of any Subordinated Obligation provided that so long as no Default or Event of Default then exists or would result therefrom, the Domestic Borrower may make payments of scheduled interest on any Subordinated Obligations in accordance with the terms thereof. 6.2 Disposition of Property. Make any Disposition of its Property, whether now owned or hereafter acquired, other than Dispositions of the types described below made when no Default or Event of Default exists or would result therefrom: (a) Dispositions of obsolete or worn-out Property, tools or equipment no longer used or useful in its business or Real Property no longer used or useful in its business; (b) Dispositions of the stock or assets of the Bally Wulff division (including without limitation the capital stock or assets of the German Borrowers), provide that the Loans under the German Commitment are concurrently repaid in full and the German Commitment is terminated (but without any requirement of reduction of the Domestic Commitments); (c) Dispositions consisting of any sale and leaseback of the Headquarters Property, provided that (i) a portion of the proceeds of such sale is applied to prepay the Loans as set forth in Section 2.7 and (ii) the related sale transaction is on a non-recourse basis to the Domestic Borrower and its Subsidiaries (other than as to conventional representations, warranties and indemnities regarding the condition thereof) and the residual liability of the Domestic Borrower and its Subsidiaries is limited to rental obligations with respect to the Headquarters Property; (d) so long as no Event of Default has occurred and is continuing or would result therefrom, the Domestic Borrower and its Subsidiaries may sell equipment and other assets, to the extent not otherwise permitted under any other clause of this Section 6.2, at the fair market value thereof (as determined in good faith by management of the Domestic Borrower), provided that the aggregate consideration (valued as described above) for all sales pursuant to this clause (d) shall not exceed $5,000,000 in any Fiscal Year of the Domestic Borrower; -61- 67 (e) the Domestic Borrower and its Subsidiaries may, in the ordinary course of business, license, as licensor or licensee, patents, trademarks, copyrights, mask works and know-how to third Persons and to one another; and (f) liquidations and dissolutions of Subsidiaries permitted by Section 5.2 (including, without limitation, the transfer of the assets of Bally Gaming Missouri, Inc., to Bally Gaming, Inc., in compliance with all Gaming Laws and the requirements of all Gaming Boards). 6.3 Mergers. Merge or consolidate with or into any Person, except (a) mergers and consolidations of a Wholly-Owned Subsidiary of the Domestic Borrower into the Domestic Borrower or another Wholly-Owned Subsidiary of the Domestic Borrower, and (b) mergers with any Person in connection with Acquisitions permitted under Section 6.12 so long as the Domestic Borrower and its Subsidiaries execute such amendments to the Loan Documents as may be reasonably requested by the Administrative Agent to reflect such change. 6.4 Hostile Acquisitions. Directly or indirectly use the proceeds of any Loan in connection with the acquisition of part or all of a voting interest of five percent or more in any corporation or other business entity if such acquisition is opposed by the board of directors or management of such corporation or business entity. 6.5 Distributions. Make any Distribution, whether from capital, income or otherwise, and whether in Cash or other Property, except: (a) Distributions by a Subsidiary of the Domestic Borrower to the Domestic Borrower or to a Wholly-Owned Significant Subsidiary and by the Excluded Subsidiaries to their other stakeholders in the ordinary course of business and consistent with past practices; (b) so long as no Default or Event of Default has occurred and is continuing or would result therefrom, Distributions by the Domestic Borrower to repurchase outstanding shares of its common stock (or options to purchase such common stock) following the death, disability or termination of employment of employees of the Domestic Borrower or any of its Subsidiaries, provided that the aggregate amount of Distributions made by the Domestic Borrower pursuant to this clause (b) shall not exceed $1,000,000 in any Fiscal Year of the Domestic Borrower; and (c) so long as no Default or Event of Default has occurred and is continuing or would result therefrom, Distributions by the Domestic Borrower to repurchase other outstanding shares of its common stock (or options to purchase such common stock), provide that the aggregate amount of Distributions made by the Domestic Borrower pursuant to this clause (c) shall not exceed $5,000,000 in any Fiscal Year. 6.6 ERISA. At any time, permit any Pension Plan to (i) engage in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code), (ii) fail to comply with ERISA or any other applicable Laws, (iii) incur any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), or (iv) terminate in any manner, which, with respect to each event listed above, could reasonably be expected to result in a Material Adverse Effect, or (v) withdraw, completely or partially, from any Multiemployer Plan if to do so could reasonably be expected to result in a Material Adverse Effect. -62- 68 6.7 Change in Nature of Business. Make any material change in the nature of the business of the Domestic Borrower and its Subsidiaries, taken as a whole. 6.8 Liens and Negative Pledges. Create, incur, assume or suffer to exist any Lien or Negative Pledge of any nature upon or with respect to any of its Properties, or engage in any sale and leaseback transaction with respect to any of its Properties, whether now owned or hereafter acquired, except: (a) Permitted Encumbrances; (b) Liens and Negative Pledges under the Loan Documents; (c) Liens and Negative Pledges existing on the Closing Date and disclosed in Schedule 4.7 and any renewals/extensions or amendments thereof, provided that the obligations secured or benefitted thereby are not increased; (d) Liens and related Negative Pledges on Property acquired by the Domestic Borrower or any of its Subsidiaries following the Closing Date securing Indebtedness permitted under Section 6.9(e) and which and are not created in contemplation of the acquisitions described in that Section; (e) Liens securing Indebtedness permitted by Section 6.9(d) on and limited to the capital assets acquired, constructed or financed with the proceeds of such Indebtedness or with the proceeds of any Indebtedness directly or indirectly refinanced by such Indebtedness, and related Negative Pledges with respect to such assets, provided that the scope of such Liens and Negative Pledges are not increased and the obligations secured or benefitted thereby are not increased; (f) any Negative Pledge created by an agreement or instrument entered into by the Domestic Borrower or any of its Subsidiaries in the ordinary course of its business which consists of a restriction on the assignability, transfer or hypothecation of such agreement or instrument; (g) Liens created by operation of applicable Gaming Laws or imposed by contract with the relevant Gaming Board; (h) Liens securing the Indebtedness and contingent obligations described in Section 6.9(h) that are equal, ratable and pari passu with the Liens securing the Obligations, it being understood that the Administrative Agent may enter into intercreditor agreements with the creditors holding such Indebtedness and contingent obligations; (i) judgment Liens securing judgments which do not result in an Event of Default; (j) Liens on Cash Equivalents or Investments securing liabilities for jackpots payable for progressive games in a manner consistent with industry practice and applicable Gaming Laws; -63- 69 (k) Liens securing Indebtedness incurred in connection with a mortgage financing of the Headquarters Property so long as such Liens extend solely to the real property that composes the Headquarters Property and related Negative Pledges with respect thereto; (l) licenses, leases, sublicenses or subleases granted to other Persons in the ordinary course of business and not materially interfering with the conduct of the business of the Domestic Borrower and its Subsidiaries, taken as a whole; and (m) any extension, renewal or replacement of the foregoing provided that the scope of the Property so encumbered and the related obligations are not increased. 6.9 Indebtedness and Contingent Obligations. Create, incur or assume any Indebtedness or Contingent Obligation except: (a) Indebtedness and Contingent Obligations existing on the Closing Date and disclosed in Schedule 6.9, and refinancings, renewals, extensions or amendments thereto by the same obligors that do not increase the amount thereof, (b) Indebtedness and Contingent Obligations under the Loan Documents; (c) Indebtedness and Contingent Obligations owed to the Domestic Borrower or a Wholly-Owned Subsidiary of the Domestic Borrower; (d) Indebtedness consisting of Capital Lease Obligations, or otherwise incurred to finance the purchase or construction of capital assets (which shall be deemed to be so incurred if the Indebtedness is incurred at or within 90 days before or after the purchase or commencement of construction of the capital asset), or to refinance any such Indebtedness, provided that the aggregate principal amount of such Indebtedness outstanding at any time does not exceed $10,000,000; (e) Indebtedness owing by Persons, or secured by Property, acquired by the Domestic Borrower or any of its Subsidiaries following the Closing Date that is in existence at the time of such acquisition and is not created in contemplation of such acquisition, provided that the aggregate outstanding principal amount of any such Indebtedness shall not exceed $10,000,000 at any time; (f) Indebtedness consisting of one or more Swap Agreements entered into in the ordinary course of business with respect to outstanding Indebtedness or existing currency exchange risk; provided, that the aggregate notional amount of Indebtedness covered by all Swap Agreements shall not exceed the aggregate amount of the Commitments; (g) The Existing Senior Subordinated Notes and other Subordinated Obligations incurred when no Default or Event of Default exists, together with Contingent Obligations with respect thereto incurred by Subsidiaries which have also entered into the Domestic Facilities Guaranty and the German Facilities Guaranty; (h) Indebtedness in an aggregate principal amount not to exceed $50,000,000 and related contingent obligations consisting of guarantees by those Subsidiaries of the Domestic Borrower which have also guaranteed the Obligations; provided, that both the -64- 70 Revolving Commitment and German Commitment have been terminated and the Obligations thereunder paid in full; (i) Contingent Obligations in support of the obligations of the Domestic Borrower or a Wholly-Owned Subsidiary of the Domestic Borrower; (j) certificates of deposit, bonds and other surety obligations required to be maintained in accordance with applicable Gaming Laws or in accordance with industry practice; (k) Indebtedness and Contingent Obligations with respect to performance bonds, surety bonds, appeal bonds or customs bonds required in the ordinary course of business or in connection with the enforcement of right or claims of the Domestic Borrower or any of its Subsidiaries; (l) Indebtedness constituting intercompany loans and advances to the extent permitted by Section 6.12; (m) Indebtedness incurred in connection with a mortgage financing of the Headquarters Property; and (n) other Indebtedness of a type not described in clauses (a) through (m) above in an aggregate principal amount not to exceed $10,000,000 at any time. 6.10 Transactions with Affiliates. Except as set forth on Schedule 6.10, enter into any transaction of any kind with any Affiliate of the Domestic Borrower other than (a) salary, bonus, employee stock option and other compensation arrangements with directors, officers or managers in the ordinary course of business, (b) transactions that are fully disclosed to the board of directors of the Domestic Borrower and expressly authorized by a resolution of the board of directors of the Domestic Borrower which is approved by a majority of the directors not having an interest in the transaction, (c) transactions between or among the Domestic Borrower and its Subsidiaries, and (d) transactions on overall terms at least as favorable to the Domestic Borrower or its Subsidiaries as would be the case in an arm's-length transaction between unrelated parties of equal bargaining power. 6.11 Capital Expenditures. Make, or become legally obligated to make, any Capital Expenditure except: (a) Maintenance Capital Expenditures in an aggregate amount not to exceed $10,000,000 in any Fiscal Year; and (b) other Capital Expenditures in an aggregate amount not to exceed $20,000,000 in any Fiscal Year. 6.12 Investments and Acquisitions. Make any Acquisition or enter into any agreement to make any Acquisition, or suffer to exist any Investment, other than: (a) Investments in existence on the Closing Date and disclosed on Schedule 6.12; -65- 71 (b) Investments consisting of Cash Equivalents; (c) Investments consisting of advances to officers, managers, directors and employees of the Domestic Borrower and the Subsidiaries for travel, entertainment, relocation and analogous ordinary business purposes; (d) Investments (i) in the Domestic Borrower or in Wholly-Owned Subsidiaries of the Domestic Borrower, (ii) to purchase equity interests in Rainbow Casino Vickburg Partnership, L.P., or (iii) in any other Excluded Subsidiaries if the effect thereof would be to make such Excluded Subsidiaries Wholly-Owned Subsidiaries; (e) Investments consisting of or evidencing the extension of credit to customers or suppliers of the Domestic Borrower and its Subsidiaries in the ordinary course of business and any Investments received in satisfaction or partial satisfaction thereof, (f) Investments received in connection with the settlement of a bona fide dispute with another Person; (g) Investments representing all or a portion of the sales price of Property sold or services provided to another Person in the ordinary course of business; (h) Investments consisting of Contingent Obligations permitted by Section 6.9; (i) Investments in Swap Agreements with respect to the Obligations and other floating rate Indebtedness of the Domestic Borrower and its Subsidiaries; (j) Acquisitions made when no Default or Event of Default exists of Persons engaged primarily in the same or similar lines of business as the Domestic Borrower and its existing Subsidiaries (and existing Investments of such Persons whether or not primarily related to such business) or of assets used in such businesses, provided that (i) the consideration paid (net of Cash and Cash Equivalents acquired) by the Domestic Borrower and its Subsidiaries for such Acquisitions consists solely of the capital stock of the Domestic Borrower or Cash and other Property having an aggregate value not in excess of $20,000,000 (of which not more than $15,000,000 shall be Cash or other Property other than the capital stock of the Domestic Borrower) during the term of this Agreement; and (ii) giving pro forma effect to the making of such Acquisition as of the last day of the then most recently ended Fiscal Quarter, the Domestic Borrower is in pro forma compliance with Sections 6.13 through 6.17; (k) so long as no Event of Default has occurred and is continuing or would result therefrom, Investments by the Domestic Borrower in one or more joint ventures for the development of gaming equipment in an aggregate amount not to exceed $10,000,000; (l) Investments by the Domestic Borrower or its Wholly-Owned Subsidiaries to establish new Wholly-Owned Subsidiaries which are Significant Subsidiaries, executes the documents required by Section 5.10; -66- 72 (m) Investments consisting of non-ordinary course advances to officers, managers, directors, and employees of the Domestic Borrower and the Subsidiaries in an aggregate amount outstanding at any one time not to exceed $1,000,000; and (n) other Investments of a type not described in clauses (a) through (m) above in an aggregate amount not to exceed $10,000,000. Notwithstanding the foregoing provisions of this Section 6.12, the Domestic Borrower and its United States domestic Subsidiaries shall not make any new Investment in any Subsidiary organized under the Laws of any jurisdiction which is outside of the United States at any time when, giving effect thereto, more than 20% of Net Income for the then most recent period of four consecutive Fiscal Quarters for which a Compliance Certificate has been delivered resulted from the operations of such Subsidiaries. 6.13 Senior Leverage Ratio. Permit the Senior Leverage Ratio as of the last day of any Fiscal Quarter ending during a period set forth in the matrix below, to be greater than the ratio set forth opposite that period:
Fiscal Quarters Ended Maximum Senior Leverage Ratio --------------------- ----------------------------- Closing Date through June 30, 2001 2.65:1.00 September 30, 2001 through June 30, 2002 2.50:1.00 September 30, 2002 through March 31, 2004 2.25:1.00 June 30, 2004 and thereafter 2.00:1.00.
6.14 Total Leverage Ratio. Permit the Total Leverage Ratio as of the last day of any Fiscal Quarter ending during a period set forth in the matrix below, to be greater than the ratio set forth opposite that period:
Fiscal Quarters Ended Maximum Total Leverage Ratio --------------------- ---------------------------- Closing Date through September 30, 2001 4.50:1.00 December 31, 2001 through September 30, 2003 4.25:1.00 December 31, 2003 and March 31, 2004 4.00:1.00 June 30, 2004 through December 31, 2004 3.75:1.00 March 31, 2005 and June 30, 2005 3.50:1.00 September 30, 2005 and thereafter 3.25:1.00.
6.15 Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio, as of the last day of any Fiscal Quarter, to be less than 1.50:1.00. -67- 73 6.16 Minimum EBITDA. Permit EBITDA, for any Fiscal Quarter, to be less than $75,000,000, provided that this requirement shall be adjusted (i) to subtract an amount equal to the results of operations of any Person or assets which are the subject of a Disposition involving a consideration in excess of $5,000,000 following the Closing Date, in each case for the last period of four consecutive Fiscal Quarters prior to the Disposition thereof, and (ii) to add an amount equal to the results of operations of any Person or assets acquired by the Domestic Borrower and its Subsidiaries following the Closing Date for a consideration which is in excess of $5,000,000, in each case for the first four Fiscal Quarter period ending following their acquisition thereof. -68- 74 Article 7 INFORMATION AND REPORTING REQUIREMENTS 7.1 Financial and Business Information. So long as any Advance remains unpaid, or any Letter of Credit remains outstanding or any other Obligation remains unpaid, or any portion of the Commitments remains in force, the Domestic Borrower shall, unless the Administrative Agent (with the written approval of the Requisite Lenders) otherwise consents, at the Domestic Borrower's sole expense, deliver to the Administrative Agent for distribution by it to the Lenders, a sufficient number of copies for all of the Lenders of the following: (a) As soon as practicable, and in any event within 45 days after the end of each Fiscal Quarter (other than the fourth Fiscal Quarter in any Fiscal Year), the consolidated and consolidating balance sheet of the Domestic Borrower and its Subsidiaries as at the end of such Fiscal Quarter and the consolidated and consolidating statement of operations for such Fiscal Quarter, and its statement of cash flows for the portion of the Fiscal Year ended with such Fiscal Quarter, all in reasonable detail, and with comparisons to the combined results of operations, on a pro forma basis for the same Fiscal Quarter in the prior year and setting forth on a combined and combining basis the results of operations of the Bally Wulff division of the Domestic Borrower. Such financial statements shall be certified by a Senior Officer of the Domestic Borrower as fairly presenting the financial condition, results of operations and cash flows of the Domestic Borrower and its Subsidiaries in accordance with Generally Accepted Accounting Principles (other than footnote disclosures), consistently applied, as at such date and for such periods, subject only to normal year-end accruals and audit adjustments; (b) As soon as practicable, and in any event within ninety days after the end of each Fiscal Year, (i) the consolidated and consolidating balance sheet of the Domestic Borrower and its Subsidiaries as at the end of such Fiscal Year and the consolidated and consolidating statements of operations, shareholders' equity and cash flows, in each case of the Domestic Borrower and its Subsidiaries for such Fiscal Year, in each case as at the end of and for the Fiscal Year, all in reasonable detail. Such financial statements shall be prepared in accordance with Generally Accepted Accounting Principles, consistently applied, and such consolidated balance sheet and consolidated statements shall be accompanied by a report of one of the five largest public accounting firms in the United States of America or other independent public accountants of recognized standing selected by the Domestic Borrower and reasonably satisfactory to the Requisite Lenders, which report shall be prepared in accordance with generally accepted auditing standards as at such date, and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any other qualification or exception determined by the Requisite Lenders in their good faith business judgment to be adverse to the interests of the Lenders. Such accountants' report shall be accompanied by a certificate stating that, in making the examination pursuant to generally accepted auditing standards necessary for the certification of such financial statements and such report, such accountants have obtained no knowledge of any Default under Sections 6.13 through 6.17 or, if, in the opinion of such accountants, any such Default shall exist, stating the nature of such Default, and stating that such accountants have reviewed the Domestic Borrower's financial calculations as at the end of such Fiscal Year (which shall accompany such certificate) under Sections 6.13 through 6.17, have read such Sections (including the definitions of all defined terms used therein) and that nothing has come to the attention of such accountants in the course -69- 75 of such examination that would cause them to believe that the same were not calculated by the Domestic Borrower in the manner prescribed by this Agreement; (c) As soon as practicable, and in any event not later than 45 days following the end of the Fiscal Quarter ending on each June 30, a completed Pricing Certificate setting forth the Total Leverage Ratio as of the last day of the that Fiscal Quarter; (d) As soon as practicable, and in any event within 45 days after the commencement of each Fiscal Year, a budget and projection by Fiscal Quarter for that Fiscal Year and by Fiscal Year for the next two succeeding Fiscal Years, including for the first such Fiscal Year, projected consolidated balance sheets, statements of operations and statements of cash flow and, for the second and third such Fiscal Years, projected consolidated condensed balance sheets and statements of operations and cash flows, of the Domestic Borrower and its Subsidiaries, all in reasonable detail; (e) Promptly after request by the Administrative Agent or any Lender, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Domestic Borrower by independent accountants in connection with the accounts or books of the Domestic Borrower or any of its Subsidiaries, or any audit of any of them; (f) Promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Domestic Borrower, and copies of all annual, regular, periodic and special reports and registration statements which the Domestic Borrower may file or be required to file with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and not otherwise required to be delivered to the Lenders pursuant to other provisions of this Section; (g) Promptly after request by the Administrative Agent or any Lender, copies of the Nevada "Regulation 6.090 Report" and "6-A Report"; (h) Promptly after request by the Administrative Agent or any Lender, copies of any other report or other document that was filed by the Domestic Borrower or any of its Subsidiaries with any Governmental Agency (other than routine applications and reports filed by the Domestic Borrower and its Subsidiaries with any Gaming Board); (i) As soon as practicable, and in any event within 10 Business Days after a Senior Officer of the Domestic Borrower becomes aware of the occurrence of any material (i) "reportable event" (as such term is defined in Section 4043 of ERISA) or (ii) "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) in connection with any Pension Plan or any trust created thereunder, telephonic notice specifying the nature thereof, and, no more than five Business Days after such telephonic notice, written notice again specifying the nature thereof and specifying what action the Domestic Borrower or any of its Subsidiaries is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto; (j) As soon as practicable, and in any event within 2 Business Days after a Senior Officer of the Domestic Borrower becomes aware of the existence of any condition or -70- 76 event which constitutes a Default or Event of Default, telephonic notice specifying the nature and period of existence thereof, and, no more than 2 Business Days after such telephonic notice, written notice again specifying the nature and period of existence thereof and specifying what action the Borrowers or their Subsidiaries are taking or propose to take with respect thereto; (k) Promptly upon a Senior Officer of a Borrower becoming aware that (i) any Person has commenced a legal proceeding with respect to a claim against the Domestic Borrower or any of its Subsidiaries that is $2,500,000 or more in excess of the amount thereof that is fully covered by insurance, (ii) any creditor or lessor under a written credit agreement or material lease has asserted a default thereunder on the part of the Domestic Borrower or any of its Subsidiaries, (iii) any Person has commenced a legal proceeding with respect to a claim against the Domestic Borrower or any of its Subsidiaries under a contract that is not a credit agreement or material lease in excess of $2,500,000 or which otherwise may reasonably be expected to result in a Material Adverse Effect, (iv) any labor union has notified the Domestic Borrower of its intent to strike the Domestic Borrower or any of its Subsidiaries on a date certain and such strike would involve more than 100 employees of the Borrowers or their Subsidiaries, (v) any Gaming Board has indicated its intent to consider or act upon a License Revocation or a fine or penalty of $500,000 or more with respect to the Domestic Borrower or any of its Subsidiaries, or (vi) any Governmental Agency has notified the Domestic Borrower of the commencement of any material action, suit, proceeding or investigation against the Domestic Borrower or any of its Subsidiaries by such Governmental Agency, including any action, suit, proceeding or investigation relating to any Hazardous Materials Laws, a written notice describing the pertinent facts relating thereto and what action the Borrowers or their Subsidiaries are taking or propose to take with respect thereto; (l) Promptly and in any event within five Business Days following the occurrence of any Change in Control, notice thereof, and (m) Such other data and information as from time to time may be reasonably requested by the Administrative Agent, any Lender (through the Administrative Agent) or the Requisite Lenders. 7.2 Compliance Certificates. So long as any Advance remains unpaid, or any Letter of Credit remains outstanding or any other Obligation remains unpaid or unperformed, or any portion of the Commitments remains outstanding, the Domestic Borrower shall, at its sole expense, deliver to the Administrative Agent for distribution by it to the Lenders concurrently with the financial statements required pursuant to Sections 7.1 (a) and 7.1(b), Compliance Certificates signed by a Senior Officer of the Domestic Borrower. -71- 77 Article 8 CONDITIONS 8.1 Initial Advances on the Closing Date. The obligation of each Lender to make the initial Advance to be made by it on the Closing Date, is subject to the following conditions precedent, each of which shall be satisfied prior to the making of the initial Advances (unless all of the Lenders, in their sole and absolute discretion, shall agree otherwise): (a) The Administrative Agent shall have received all of the following, each of which shall be originals unless otherwise specified, each properly executed by a Responsible Official of each party thereto, each dated as of the Closing Date (unless otherwise specified or unless the Administrative Agent otherwise agrees) and each in form and substance reasonably satisfactory to the Administrative Agent and its legal counsel: (1) executed counterparts of this Agreement, sufficient in number for distribution to the Administrative Agent, the Lenders and the Domestic Borrower; (2) a Note executed by the Domestic Borrower in favor of each Lender, each in a principal amount equal to that Lender's Pro Rata Share; (3) with respect to each Borrower and each Significant Subsidiary, such documentation as the Administrative Agent may reasonably require to establish the due incorporation or other organization, valid existence and good standing of the Borrowers and the Significant Subsidiaries, their qualification to engage in business in each material jurisdiction in which they are engaged in business or required to be so qualified, their authority to execute, deliver and perform any Loan Documents to which they are a Party, the identity, authority and capacity of each Responsible Official thereof authorized to act on their behalf, including (if applicable) certified copies of articles of incorporation or organization and amendments thereto, bylaws or operating agreements and amendments thereto, certificates of good standing and/or qualification to engage in business, tax clearance certificates, certificates of corporate or other organizational resolutions, incumbency certificates, Certificates of Responsible Officials, and the like; (4) the Swing Line Documents; (5) the Domestic Facilities Guaranty executed by each Domestic Significant Subsidiary other than the Excluded Subsidiaries; (6) the Bally Gaming Domestic Facilities Guaranty, the Plantation Domestic Facilities Guaranty, the Bally Gaming German Facility Guaranty and the Plantation German Facility Guaranty; (7) the German Facility Guaranty executed by the Domestic Borrower and each Significant Subsidiary other than the Excluded Subsidiaries; (8) the German Security Documents, executed by German Holdings, the German Borrowers and each Significant Subsidiary thereof, -72- 78 (9) the Collateral Documents executed by the parties thereto except that the Domestic Facilities Pledge Agreement and the German Facility Pledge Agreement shall not include the stock of Bally Gaming Missouri, Inc., until the expiration of all notice periods and the obtaining of appropriate consents under applicable Gaming Laws; (10) the Title Policies; (11) Stock certificates evidencing 100% of the issued and outstanding shares of each Domestic Significant Subsidiary, together with stock powers duly endorsed in blank, except as contemplated by Section 5.12; (12) evidence that each such Foreign Significant Subsidiary has annotated its share registry or otherwise taken action acceptable to the Administrative Agent to evidence the Administrative Agent's security interest in the shares thereof, (13) a certificate of insurance issued by the Domestic Borrower's insurance carrier or agent with respect to the insurance required to be maintained pursuant to Section 5.4; (14) the Opinions; (15) a Request for Loan in compliance with Article 2 (or in the appropriate case, a Request for Letter of Credit in compliance with Article 2); (16) the letter agreement described in Sections 3.2 and 3.5; (17) such assurances as the Administrative Agent deems appropriate that the relevant Gaming Boards have approved the transactions contemplated by the Loan Documents to the extent that such approval is required by applicable Gaming Laws, except as contemplated by Section 5.12; (18) a Certificate signed by a Senior Officer of the Domestic Borrower certifying that the conditions specified in Sections 8.1 (d) and 8.1 (e) have been satisfied; (19) a Certificate signed by a Senior Officer of the Domestic Borrower certifying that the attached copy of the Indenture governing the Existing Senior Subordinated Notes is true, correct and complete; and (20) such other assurances, certificates, documents, consents or opinions as the Administrative Agent reasonably may require. (b) The fees payable on the Closing Date pursuant to Sections 3.2 and 3.6 shall have been paid. -73- 79 (c) The reasonable costs and expenses of the Administrative Agent in connection with the preparation of the Loan Documents payable pursuant to Section 11.3, and invoiced to the Domestic Borrower prior to the Closing Date, shall have been paid. (d) The representations and warranties of the Domestic Borrower contained in Article 4 shall be true and correct. (e) the Domestic Borrower and all other Parties shall be in compliance with all the terms and provisions of the Loan Documents, and giving effect to the initial Advance, no Default or Event of Default shall have occurred and be continuing. (f) the Refinanced Leases shall be concurrently terminated, the Obligations of the Domestic Borrower and its Subsidiaries thereunder repaid in full, and all Liens securing the same shall be concurrently released. 8.2 Any Increasing Advance. The obligation of each Lender to make any Advance which results in an increase in the aggregate outstanding principal amount of the Obligations, and the obligation of the Issuing Lender to issue a Letter of Credit, is subject to the following conditions precedent (unless the Requisite Lenders, in their sole and absolute discretion, shall agree otherwise): (a) except (i) for representations and warranties which expressly speak as of a particular date or are no longer true and correct as a result of a change which is permitted by this Agreement or (ii) as disclosed by the Domestic Borrower and approved in writing by the Requisite Lenders, the representations and warranties contained in Article 4 other than Sections 4.4(a), 4.6 (first sentence), 4.11, and 4.18) shall be true and correct on and as of the date of the Advance as though made on that date; (b) other than matters described in Schedule 4.11 or not required as of the Closing Date to be therein described, there shall not be then pending or threatened any action, suit, proceeding or investigation against or affecting the Domestic Borrower or any of its Subsidiaries or any Property of any of them before any Governmental Agency that constitutes a Material Adverse Effect; (c) the Administrative Agent shall have timely received a Request for Loan in compliance with Article 2 (or telephonic or other request for Loan referred to in the second sentence of Section 2.1(d), if applicable) or the Issuing Lender shall have received a Request for Letter of Credit, as the case may be, in compliance with Article 2; and (d) the Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent, such other assurances, certificates, documents or consents related to the foregoing as the Administrative Agent or Requisite Lenders reasonably may require. -74- 80 Article 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT 9.1 Events of Default. The existence or occurrence of any one or more of the following events, whatever the reason therefor and under any circumstances whatsoever, shall constitute an Event of Default: (a) any Borrower fails to pay any principal on any of the Notes, or any portion thereof, on the date when due; or (b) any Borrower fails to pay any interest on any of the Notes, or any fees under Article 3, or any portion thereof, within 2 Business Days after the date when due; or fails to pay any other fee or amount payable to the Lenders under any Loan Document, or any portion thereof, within five Business Days after demand therefor; or (c) any Borrower fails to comply with any of the covenants contained in Article 6, other than the covenants contained in Sections 6.6, 6.7, or 6.10; or (d) any Borrower fails to comply with Section 7.10) in any respect that is materially adverse to the interests of the Lenders; or (e) any Borrower, any of their Subsidiaries or any other Party fails to perform or observe any other covenant or agreement (not specified in clause (a), (b), (c), or (d) above) contained in any Loan Document on its part to be performed or observed within 25 Business Days after the giving of notice by the Administrative Agent on behalf of the Requisite Lenders of such Default; or (f) Any representation or warranty of the Borrowers or any of their Subsidiaries or any other Party made in any Loan Document, or in any certificate or other writing delivered by any Borrower or such Subsidiary or Party pursuant to any Loan Document, proves to have been incorrect when made or reaffirmed; or (g) any Borrower or any of their Subsidiaries (i) fails to pay the principal, or any principal installment, of any present or future Indebtedness of $5,000,000 or more, or any guaranty of present or future Indebtedness of $5,000,000 or more, on its part to be paid, when due (or within any stated grace period), whether at the stated maturity, upon acceleration, by reason of required prepayment or otherwise or (ii) fails to perform or observe any other term, covenant or agreement on its part to be performed or observed, or suffers any event of default to occur, in connection with any present or future Indebtedness of $5,000,000 or more, or of any guaranty of present or future Indebtedness of $5,000,000 or more, if as a result of such failure or sufferance any holder or holders thereof (or an agent or trustee on its or their behalf) has the right to declare such Indebtedness due before the date on which it otherwise would become due or the right to require the Domestic Borrower or any of its Subsidiaries to redeem or purchase, or offer to redeem or purchase, all or any portion of such Indebtedness; or (h) Any event occurs which gives the holder or holders of any Subordinated Obligation (or an agent or trustee on its or their behalf) the right to declare such Subordinated Obligation due before the date on which it otherwise would become due, or the -75- 81 right to require the issuer thereof to redeem or purchase, or offer to redeem or purchase, all or any portion of any Subordinated Obligation; or the trustee for, or any holder of, a Subordinated Obligation breaches any subordination provision applicable to such Subordinated Obligation; or (i) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement or action (or omission to act) of the Administrative Agent or any of the Lenders or satisfaction in full of all the Obligations ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect which, in any such event in the reasonable opinion of the Requisite Lenders, is materially adverse to the interests of the Lenders; or any Party thereto denies in writing that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind same; or (j) A final judgment against any Borrower or any of their Subsidiaries is entered for the payment of money in excess of $2,500,000 and, absent procurement of a stay of execution, such judgment remains unsatisfied for 30 days after the date of entry of judgment, or in any event later than five days prior to the date of any proposed sale thereunder; or any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the Property of any such Person and is not released, vacated or fully bonded within 30 days after its issue or levy; or (k) any Borrower or any of their Subsidiaries institutes or consents to the institution of any proceeding under a Debtor Relief Law relating to it or to all or any material part of its Property, or is unable or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its Property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for ninety days; or any proceeding under a Debtor Relief Law relating to any such Person or to all or any part of its Property is instituted without the consent of that Person and continues undismissed or unstayed for ninety days; or (l) The occurrence of an Event of Default (as such term is or may hereafter be specifically defined in any other Loan Document) under any other Loan Document; or (m) A final judgment is entered by a court of competent jurisdiction that any Subordinated Obligation is not subordinated in accordance with its terms to the Obligations; or (n) Any Pension Plan maintained by a Borrower or any of its Subsidiaries is determined to have a material "accumulated funding deficiency" as that term is defined in Section 302 of ERISA and the result is a Material Adverse Effect or the Domestic Borrower or any of its ERISA Affiliates incurs any withdrawal liability in respect of any Multiemployer Plan which is in an amount in excess of $5,000,000 which withdrawal liability is not paid or otherwise satisfied within 30 days; or -76- 82 (o) The occurrence of a License Revocation affecting the main operating licenses of any of United Coin Machine Co., Plantation Investments, Inc. (d/b/a Rail City Casino), Rainbow Casino Vicksburg Partnership LP (d/b/a Rainbow Casino), or (to the extent any such licenses exist) the German Borrowers, that continues for three consecutive days; or (p) a Change in Control occurs. 9.2 Remedies Upon Event of Default. Without limiting any other rights or remedies of the Creditors provided for elsewhere in this Agreement, or the other Loan Documents, or by applicable Law, or in equity, or otherwise: (a) Upon the occurrence and during the continuance of any Event of Default other than an Event of Default described in Section 9.1 (k) with respect to any Borrower or any Significant Subsidiary: (1) the Commitments to make Advances, the obligation of the Issuing Lender to issue Letters of Credit, the obligation of the Swing Line Lender to make Swing Line Loans and all other obligations of the Creditors and all rights of the Borrowers and any other Parties under the Loan Documents shall be suspended without notice to or demand upon the Borrowers which are expressly waived by the Borrowers, except that all of the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders) may waive an Event of Default or, without waiving, determine, upon terms and conditions satisfactory to the Lenders or Requisite Lenders, as the case may be, to reinstate the Commitments and such other obligations and rights and make Advances, and cause the Issuing Lender to issue further Letters of Credit which waiver or determination shall apply equally to, and shall be binding upon, all the Lenders; (2) the Issuing Lender may, with the approval of the Administrative Agent on behalf of the Requisite Lenders, demand immediate payment by the Borrowers of an amount equal to the aggregate amount of all outstanding Letters of Credit to be held by the Issuing Lender in an interest-bearing cash collateral account as collateral hereunder; and (3) the Requisite Lenders may request the Administrative Agent to, and the Administrative Agent thereupon shall, terminate the Commitments and/or declare all or any part of the unpaid principal of all Notes, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by the Borrowers. (b) Upon the occurrence and during the continuance of any Event of Default described in Section 9.1 (k) with respect to any Borrower or any of their Significant Subsidiaries: (1) the Commitments to make Advances, the obligation of the Issuing Lender to issue Letters of Credit, the obligation of the Swing Line Lender to make Swing Line Loans and all other obligations of the Creditors and all rights of the Borrower and any other Parties under the Loan Documents shall terminate without -77- 83 notice to or demand upon the Borrowers, which are expressly waived by the Borrowers, except that all of the Lenders may waive the Event of Default or, without waiving, determine, upon terms and conditions satisfactory to all the Lenders, to reinstate the Commitments and such other obligations and rights and make further Advances and to cause the Issuing Lender to issue further Letters of Credit, which determination shall apply equally to, and shall be binding upon, all the Lenders; (2) an amount equal to the aggregate amount of all outstanding Letters of Credit shall be immediately due and payable to the Issuing Lender without notice to or demand upon the Borrowers, which are expressly waived by the Borrowers, to be held by the Issuing Lender in an interest-bearing cash collateral account as collateral hereunder; and (3) the unpaid principal of all Notes, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents shall be forthwith due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by the Borrowers. (c) Upon the occurrence, and during the continuance, of any Event of Default, the Creditors, or any of them, without notice to except as expressly provided for in any Loan Document) or demand upon the Borrowers, which are expressly waived by the Borrowers (except as to notices expressly provided for in any Loan Document), may proceed (but only with the consent of the Requisite Lenders) to protect, exercise and enforce their rights and remedies under the Loan Documents against the Borrowers and any other Party and such other rights and remedies as are provided by Law or equity. (d) The order and manner in which the Creditors' rights and remedies are to be exercised shall be determined by the Requisite Lenders in their sole discretion, and all payments received by the Creditors, or any of them, shall be applied first to the costs and expenses (including reasonable attorneys' fees and disbursements and the reasonably allocated costs of attorneys employed by any of the Creditors) of the Creditors, and thereafter paid pro rata to the Lenders in the same proportions that the aggregate Obligations owed to each Lender under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all the Lenders, without priority or preference among the Lenders. Regardless of how each Lender may treat payments for the purpose of its own accounting, for the purpose of computing the Obligations hereunder and under the Notes, payments shall be applied first, to the costs and expenses of the Creditors, as set forth above, second, to the payment of accrued and unpaid interest due under any Loan Documents to and including the date of such application (ratably, and without duplication, according to the accrued and unpaid interest due under each of the Loan Documents), and third, to the payment of all other amounts (including principal and fees) then owing to the Creditors under the Loan Documents. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of the Lenders hereunder or thereunder or at Law or in equity. -78- 84 Article 10 THE ADMINISTRATIVE AGENT 10.1 Appointment and Authorization. Subject to Section 10.8, each Lender hereby irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Administrative Agent by the terms thereof or are reasonably incidental, as determined by the Administrative Agent, thereto, including, without limitation, complying with Gaming Laws. This appointment and authorization is intended solely for the purpose of facilitating the servicing of the Loans and does not constitute appointment of the Administrative Agent as trustee for any Lender or as representative of any Lender for any other purpose and, except as specifically set forth in the Loan Documents to the contrary, the Administrative Agent shall take such action and exercise such powers only in an administrative and ministerial capacity. 10.2 Administrative Agent and Affiliates. Bank of America (and each successor Administrative Agent) has the same rights and powers under the Loan Documents as any other Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders" includes Bank of America in its individual capacity. Bank of America (and each successor Administrative Agent) and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with the Borrowers, any Subsidiary thereof, or any Affiliate of the Borrowers, as if it were not the Administrative Agent and without any duty to account therefor to the Lenders. Bank of America (and each successor Administrative Agent) need not account to any other Lender for any monies received by it for reimbursement of its costs and expenses as Administrative Agent hereunder, or for any monies received by it in its capacity as a Lender hereunder. The Administrative Agent shall not be deemed to hold a fiduciary or other special relationship with any Lender and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Administrative Agent. 10.3 Proportionate Interest in any Collateral. The Administrative Agent, on behalf of all the Lenders, shall hold in accordance with the Loan Documents all items of any collateral or interests therein received or held by the Administrative Agent. Subject to the Administrative Agent's and the Lenders' rights to reimbursement for their costs and expenses hereunder (including reasonable attorneys' fees and disbursements and other professional services and the reasonably allocated costs of attorneys employed by the Administrative Agent or a Lender) and subject to the application of payments in accordance with Section 9.2(d), each Lender shall have an interest in the Lenders' interest in any collateral or interests therein in the same proportions that the aggregate Obligations owed such Lender under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all the Lenders, without priority or preference among the Lenders, except that Obligations owed to any Lender under a Swap Agreement shall be secured on a pari passu basis with all other Obligations up to an amount equal to the Administrative Agent's then customary credit risk factor for Swap Agreements times the notional amount of Indebtedness covered by such Swap Agreement and shall be secured on a subordinate basis as to amounts in excess of such amount. 10.4 Lenders' Credit Decisions. Each Lender agrees that it has, independently and without reliance upon the Administrative Agent, any other Creditor or the directors, officers, agents, employees or attorneys thereof, and instead in reliance upon information supplied to it by or on behalf of the Borrowers and their Subsidiaries and upon such other information as it has deemed appropriate, made its own independent credit analysis and decision to enter into this Agreement. Each Lender also -79- 85 agrees that it shall, independently and without reliance upon the Administrative Agent, any other Creditor or the directors, officers, agents, employees or attorneys thereof, continue to make its own independent credit analyses and decisions in acting or not acting under the Loan Documents. 10.5 Action by Administrative Agent. (a) Absent actual knowledge of the Administrative Agent of the existence of a Default, the Administrative Agent may assume that no Default has occurred and is continuing, unless the Administrative Agent has received notice from the Borrowers stating the nature of the Default or has received notice from a Lender stating the nature of the Default and that such Lender considers the Default to have occurred and to be continuing. (b) The Administrative Agent has only those obligations under the Loan Documents as are expressly set forth therein. (c) Except for any obligation expressly set forth in the Loan Documents and as long as the Administrative Agent may assume that no Event of Default has occurred and is continuing, the Administrative Agent may, but shall not be required to, exercise its discretion to act or not act, except that the Administrative Agent shall be required to act or not act upon the instructions of the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders) and those instructions shall be binding upon the Administrative Agent and all the Lenders, provided that the Administrative Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law or could result, in the judgment of the Administrative Agent, in a material risk of liability to the Administrative Agent. (d) If the Administrative Agent has received a notice specified in clause (a), the Administrative Agent shall immediately give notice thereof to the Lenders and shall act or not act upon the instructions of the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders), provided that the Administrative Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law or could result, in the judgment of the Administrative Agent, in a material risk of liability to the Administrative Agent, and except that if the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders) fail, for five Business Days after the receipt of notice from the Administrative Agent, to instruct the Administrative Agent, then the Administrative Agent, in its sole discretion, may act or not act as it deems advisable for the protection of the interests of the Lenders. (e) The Administrative Agent shall have no liability to any Lender for acting, or not acting, as instructed by the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders), notwithstanding any other provision hereof. (f) The Administrative Agent is authorized on behalf of all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral or the Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral granted pursuant to the Collateral Documents. (g) The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by the Administrative Agent -80- 86 upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other Obligations payable under this Agreement and under any other Loan Document; (ii) constituting Property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting Property in which the Borrowers or any of their Subsidiaries owned no interest at the time the Lien was granted or at any time thereafter; (iv) constituting Property leased to the Borrowers or any of their Subsidiaries under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrowers or such Subsidiary to be, renewed or extended; (v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the Indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Requisite Lenders (or, if required by Section 11.2, another group of the Lenders). Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the Administrative Agent's authority to release particular types or items of Collateral pursuant to this Section 10.5(g). (h) Each Lender agrees with and in favor of each other (which agreement shall not be for the benefit of the Borrowers or any of their Subsidiaries) that the Obligations are not and shall not be secured by any real property collateral now or hereafter acquired by such Lender unless all of the Lenders otherwise agree. 10.6 Liability of Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, agents, employees or attorneys shall be liable for any action taken or not taken by them under or in connection with the Loan Documents, except for their own gross negligence or willful misconduct. Without limitation on the foregoing, the Administrative Agent and its directors, officers, agents, employees and attorneys: (a) May treat the payee of any Note as the holder thereof until the Administrative Agent receives notice of the assignment or transfer thereof, in form satisfactory to the Administrative Agent, signed by the payee, and may treat each Lender as the owner of that Lender's interest in the Obligations for all purposes of this Agreement until the Administrative Agent receives notice of the assignment or transfer thereof, in form satisfactory to the Administrative Agent, signed by that Lender; (b) May consult with legal counsel (including in-house legal counsel), accountants (including in-house accountants) and other professionals or experts selected by it, or with legal counsel, accountants or other professionals or experts for the Borrowers and their Subsidiaries or the Lenders, and shall not be liable for any action taken or not taken by it in good faith in accordance with any advice of such legal counsel, accountants or other professionals or experts; (c) Shall not be responsible to any Lender for any statement, warranty or representation made in any of the Loan Documents or in any notice, certificate, report, request or other statement (written or oral) given or made in connection with any of the Loan Documents; (d) Shall have no duty to ask or inquire as to the performance or observance by the Borrowers or theirs Subsidiaries of any of the terms, conditions or covenants of any of the Loan Documents or to inspect any collateral or the Property, books or records of the Borrowers or their Subsidiaries; -81- 87 (e) Will not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, effectiveness, sufficiency or value of any Loan Document, any other instrument or writing furnished pursuant thereto or in connection therewith, or any collateral; (f) Will not incur any liability by acting or not acting in reliance upon any Loan Document, notice, consent, certificate, statement, request or other instrument or writing believed in good faith by it to be genuine and signed or sent by the proper party or parties; and (g) Will not incur any liability for any arithmetical error in computing any amount paid or payable by the Borrowers or any Subsidiary or Affiliate thereof or paid or payable to or received or receivable from any Lender under any Loan Document, including, principal, interest, commitment fees, Advances and other amounts; provided that, promptly upon discovery of such an error in computation, the Administrative Agent, the Lenders and (to the extent applicable) the Borrowers and/or their Subsidiaries or Affiliates shall make such adjustments as are necessary to correct such error and to restore the parties to the position that they would have occupied had the error not occurred. 10.7 Indemnification. Each Lender shall, ratably in accordance with its Pro Rata Share (if the Commitments are then in effect) or in accordance with its portion of the aggregate Indebtedness then evidenced by the Notes, including its risk participation in any Swing Line Obligations, Letters of Credit or German Commitment Loans (if the Commitments have then been terminated), indemnify and hold the Administrative Agent and its directors, officers, agents, employees and attorneys harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, attorneys' fees and disbursements and allocated costs of attorneys employed by the Administrative Agent) that may be imposed on, incurred by or asserted against it or them in such capacity in any way relating to or arising out of the Loan Documents (other than losses incurred by reason of the failure of the Borrowers to pay the Indebtedness represented by the Notes) or any action taken or not taken by it as Administrative Agent thereunder, except such as result from its own gross negligence or willful misconduct. Without limitation on the foregoing, each Lender shall reimburse the Administrative Agent upon demand for that Lender's Pro Rata Share of any out-of-pocket cost or expense incurred by the Administrative Agent in connection with the negotiation, preparation, execution, delivery, amendment, waiver, restructuring, reorganization (including a bankruptcy reorganization), enforcement or attempted enforcement of the Loan Documents, to the extent that the Borrowers or any other Party is required by Section 11.3 to pay that cost or expense but fails to do so upon demand. Nothing in this Section shall entitle the Administrative Agent to recover any amount from the Lenders if and to the extent that such amount has theretofore been recovered from the Borrowers or any other Party. To the extent that the Administrative Agent is later reimbursed such cost or expense by the Borrowers or any other Party, it shall return the amounts paid to it by the Lenders in respect of such cost or expense. Without limiting the generality of the foregoing, if the Internal Revenue Service or any other Governmental Agency of the United States, the Federal Republic of Germany or other jurisdiction asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax or otherwise, including penalties and interest, and including any taxes -82- 88 imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section, together with all costs and expenses (including attorneys fees and expenses and the allocated fees and expenses of any internal counsel to the Administrative Agent). 10.8 Successor Administrative Agent. The Administrative Agent may, and at the request of the Requisite Lenders shall, resign as Administrative Agent upon 30 days' notice to the Lenders and the Borrowers. If the Administrative Agent shall resign as Administrative Agent under this Agreement, the Requisite Lenders shall appoint from among the Lenders a successor Administrative Agent for the Lenders, which successor Administrative Agent shall be approved by the Borrowers (and such approval shall not be unreasonably withheld or delayed). If no successor Administrative Agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint a successor Administrative Agent from among the Lenders. Upon the acceptance of its appointment as successor Administrative Agent hereunder, such successor Administrative Agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term "Administrative Agent" shall mean such successor Administrative Agent and the retiring Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article 10, and Sections 11.3, 11.11 and 11.22, shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If (a) the Administrative Agent has not been paid its agency fees under Section 3.5 or has not been reimbursed for any expense reimbursable to it under Section 11.3, in either case for a period of at least one year and (b) no successor Administrative Agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Requisite Lenders appoint a successor Administrative Agent as provided for above. 10.9 German Commitment. In order to facilitate the making of Loans under the German Commitment, the Administrative Agent and each Lender hereby designate Bank of America, Frankfurt as their representative and agent for the making of such Loans, and each Lender having a Pro Rata Share of the Revolving Commitment severally agrees to participate in each such Loan in accordance with the terms of Section 2.12. Bank of America, Frankfurt's appointment is intended to be administrative and ministerial in nature, and (in its capacity as lender under the German Commitment), Bank of America, Frankfurt shall be treated as the agent and representative of the Administrative Agent and shall be entitled to the indemnifications and other protections afforded hereby to the Administrative Agent, mutatis mutandis. 10.10 No Obligations of Borrowers. Nothing contained in this Article 10 shall be deemed to impose upon the Borrowers any obligation in respect of the due and punctual performance by the Administrative Agent of its obligations to the Lenders under any provision of this Agreement, and the Borrowers shall have no liability to the Administrative Agent or any of the Lenders in respect of any failure by the Administrative Agent or any Lender to perform any of its obligations to the Creditors under this Agreement. -83- 89 Article 11 MISCELLANEOUS 11.1 Cumulative Remedies; No Waiver. The rights, powers, privileges and remedies of the Creditors provided herein or in any Note or other Loan Document are cumulative and not exclusive of any right, power, privilege or remedy provided by Law or equity. No failure or delay on the part of the Administrative Agent or any Lender in exercising any right, power, privilege or remedy may be, or may be deemed to be, a waiver thereof, nor may any single or partial exercise of any right, power, privilege or remedy preclude any other or further exercise of the same or any other right, power, privilege or remedy. The terms and conditions of Article 8 hereof are inserted for the sole benefit of the Creditors; the same may be waived in whole or in part, with or without terms or conditions, in respect of any Loan or Letter of Credit without prejudicing the Administrative Agent's or the Lenders' rights to assert them in whole or in part in respect of any other Loan. 11.2 Amendments; Consents. (a) No amendment, modification, supplement, extension, termination (except as permitted by Section 2.6) or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, and no consent to any departure by the Borrowers or any other Party therefrom, may in any event be effective unless in writing signed by the Administrative Agent with the written approval of Requisite Lenders under each of the Domestic Commitments (and, in the case of any amendment, modification or supplement of or to any Loan Document to which any of the Borrowers or any of their Subsidiaries is a Party, signed by each such Party, and, in the case of any amendment, modification or supplement to Article 10, signed by the Administrative Agent), and then only in the specific instance and for the specific purpose given. (b) Notwithstanding any other provision of this Section, no amendment, modification, supplement, termination, waiver or consent may be effective to: (i) extend the Term Maturity Date or the date of upon which any amortization of the Term Loans is scheduled to occur pursuant to Section 3.1(d) without the written consent of each of the Lenders having Pro Rata Shares of that Term Loan; (ii) extend the Revolver Maturity Date or the date upon which any reduction to the Revolving Commitment or the German Commitment is scheduled to occur pursuant to Section 3.1(d) without the written consent of each of the Lenders having Pro Rata Shares of the Revolving Commitment; (iii) increase the Pro Rata Share of a Lender in any Commitment without the written consent of that Lender; (iv) without the written consent of each affected Lender, postpone the date upon which any other payment of money is due to such Lender, or reduce the rate of interest or the amount of any commitment fee payable to that Lender, or any other fee or amount payable to that Lender under the Loan Documents or to waive an -84- 90 Event of Default consisting of the failure of any Borrower to pay when due principal, interest or any commitment fee; (v) release from the Guaranties any Subsidiaries having aggregate total assets in excess of $1,000,000 except to the extent that such Subsidiaries are the subject of any Disposition permitted hereby, or to release any assets from the Liens of the Collateral Documents having a value in excess of $1,000,000 (other than in accordance with the terms of the Loan Documents), without the written consent of all Lenders; (vi) amend or waive Article 8, Section 6.4 or this Section without the written consent of all Lenders; (vii) amend any provision of this Agreement that expressly requires the consent or approval of all the Lenders, all of the Lenders having Pro Rata Shares of the Revolving Commitment, or all of the Lenders having Pro Rata Shares of the Term Commitment without the written consent of all Lenders; (viii) amend the definition of Requisite Lenders, without the written consent of all Lenders; or (ix) waive or amend Section 2.7(a), while the Commitments are in effect, without the consent of Lenders holding 51% or more of the Pro Rata Shares of the Revolving Commitment and Lenders holding 51% or more of the Pro Rata Shares of the Term Commitment. Any amendment, modification, supplement, termination, waiver or consent pursuant to this Section shall apply equally to, and shall be binding upon, all the Lenders and the Administrative Agent. 11.3 Costs, Expenses and Taxes. The Borrowers shall pay, within five Business Days after demand, accompanied by an invoice therefor, the reasonable costs and expenses of the Administrative Agent and the Lead Arranger in connection with the negotiation, preparation, syndication, administration, execution and delivery of the Loan Documents and any amendment thereto or waiver thereof. The Borrowers shall also pay on demand, accompanied by an invoice therefor, the reasonable costs and expenses of the Creditors after any Event of Default in connection with the amendment, restructuring, reorganization (including a bankruptcy reorganization) and enforcement or attempted enforcement of the Loan Documents, and any matter related thereto. The foregoing costs and expenses shall include filing fees, recording fees, title insurance fees, appraisal fees, search fees, and other out-of-pocket expenses and the reasonable fees and out-of-pocket expenses of any legal counsel (including reasonably allocated costs of legal counsel employed by the Administrative Agent, the Lead Arranger or any Lender), independent public accountants and other outside experts retained by the Administrative Agent, the Lead Arranger or any Lender, whether or not such costs and expenses are incurred or suffered by the Administrative Agent, the Lead Arranger or any Lender in connection with or during the course of any bankruptcy or insolvency proceedings of the Domestic Borrower, the German Borrowers, or any Subsidiary thereof. Such costs and expenses shall also include, in the case of any amendment or waiver of any Loan Document, the administrative costs of the Administrative Agent reasonably attributable thereto. The Borrowers shall pay any and all documentary and other taxes, excluding (i) taxes imposed on or measured in whole or in part by overall net income, gross income or gross receipts and franchise taxes imposed on any Lender by (A) any jurisdiction (or political -85- 91 subdivision thereof) in which it is organized or maintains its principal office or Eurocurrency Lending Office or (B) any jurisdiction (or political subdivision thereof) in which it is "doing business", (ii) any withholding taxes or other taxes based on gross income imposed by the United States of America that are not attributable to any change in any Law or the interpretation or administration of any Law by any Governmental Agency and (iii) any withholding tax or other taxes based on gross income imposed by the United States of America for any period with respect to which it has failed to provide the Domestic Borrower with the appropriate form or forms required by Section 11.21, to the extent such forms are then required by applicable Laws, and all costs, expenses, fees and charges payable or determined to be payable in connection with the filing or recording of this Agreement, any other Loan Document or any other instrument or writing to be delivered hereunder or thereunder, or in connection with any transaction pursuant hereto or thereto, and shall reimburse, hold harmless and indemnify on the terms set forth in 11.11 the Creditors from and against any and all loss, liability or legal or other expense with respect to or resulting from any delay in paying or failure to pay any such tax, cost, expense, fee or charge or that any of them may suffer or incur by reason of the failure of any Party to perform any of its Obligations. Any amount payable to the Administrative Agent or any Lender under this Section shall bear interest from the second Business Day following the date of demand for payment at the Default Rate. 11.4 Nature of Lenders' Obligations. The obligations of the Lenders hereunder are several and not joint or joint and several. Nothing contained in this Agreement or any other Loan Document and no action taken by the Creditors or any of them pursuant hereto or thereto may, or may be deemed to, make the Lenders a partnership, an association, a joint venture or other entity, either among themselves or with the Borrowers or any Affiliate of the Borrowers. Each Lender's obligation to make any Advance pursuant hereto is several and not joint or joint and several, and in the case of the initial Advance only is conditioned upon the performance by all other Lenders of their obligations to make initial Advances. A default by any Lender will not increase the Pro Rata Share of the Commitments of any other Lender. Any Lender not in default may, if it desires, assume in such proportion as the nondefaulting Lenders agree the obligations of any Lender in default, but is not obligated to do so. 11.5 Survival of Representations and Warranties. All representations and warranties contained herein or in any other Loan Document, or in any certificate or other writing delivered by or on behalf of any one or more of the Parties to any Loan Document, will survive the making of the Loans hereunder and the execution and delivery of the Notes, and have been or will be relied upon by the Administrative Agent and each Lender, notwithstanding any investigation made by the Administrative Agent or any Lender or on their behalf. 11.6 Notices. Except as otherwise expressly provided in the Loan Documents, all notices, requests, demands, directions and other communications provided for hereunder or under any other Loan Document must be in writing and must be mailed, telecopied, dispatched by commercial courier or delivered to the appropriate party at the address set forth on the signature pages of this Agreement or other applicable Loan Document or, as to any party to any Loan Document, at any other address as may be designated by it in a written notice sent to all other parties to such Loan Document in accordance with this Section. Except as otherwise expressly provided in any Loan Document, if any notice, request, demand, direction or other communication required or permitted by any Loan Document is given by mail it will be effective on the earlier of receipt or the fourth Business Day after deposit in the United States mail with first class or airmail postage prepaid; if given by telecopier, when sent; if dispatched by commercial courier, on the scheduled delivery date; or if given by personal delivery, when delivered. -86- 92 11.7 Execution of Loan Documents. Unless the Administrative Agent otherwise specifies with respect to any Loan Document, (a) this Agreement and any other Loan Document may be executed in any number of counterparts and any party hereto or thereto may execute any counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts of this Agreement or any other Loan Document, as the case may be, when taken together will be deemed to be but one and the same instrument and (b) execution of any such counterpart may be evidenced by a telecopier transmission of the signature of such party followed by prompt transmission of an original signature. The execution of this Agreement or any other Loan Document by any party hereto or thereto will not become effective until counterparts hereof or thereof, as the case may be, have been executed by all the parties hereto or thereto. 11.8 Binding Effect; Assignment. (a) This Agreement and the other Loan Documents will be binding upon and inure to the benefit of the Borrowers, the Creditors, and their respective successors and assigns, except that the Borrowers may not assign their rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Lenders. Each Lender represents that it is not acquiring its Note with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (subject to any requirement that disposition of such Note must be within the control of such Lender). Any Lender may at any time pledge or grant a security interest in its Notes or any other instrument evidencing its rights as a Lender under this Agreement to a Federal Reserve Bank or a trustee of such Lender for the benefit of such Lender's creditors, but no such pledge or grant of a security interest shall release that Lender from its obligations hereunder or grant to such Federal Reserve Bank or trustee the rights of a Lender hereunder absent foreclosure of such pledge or security interest. (b) From time to time, each Lender may assign to one or more Eligible Assignees all or any portion of its Pro Rata Share, provided that (i) such Eligible Assignee, if not then a Lender or an Affiliate of the assigning Lender, shall be approved by each of the Administrative Agent and (if no Default has occurred and no Event of Default then exists) the Domestic Borrower (none of which approvals shall be unreasonably withheld or delayed), (ii) such assignment shall be evidenced by an Assignment Agreement, a copy of which shall be furnished to the Administrative Agent as hereinbelow provided, (iii) except in the case of an assignment to an Affiliate of the assigning Lender, to another Lender or of the entire remaining Commitments of the assigning Lender, the assignment shall not assign a Pro Rata Share of the Commitments that is less than $500,000, (iv) the effective date of any such assignment shall be as specified in the Assignment Agreement, but not earlier than the date which is five Business Days after the date the Administrative Agent has received the Assignment Agreement, (v) shall be of a constant and non-varying percentage of the Pro Rata Share of the assigning Lender, and (vi) each Person which accepts an assignment of a Pro Rata Share of the Revolving Commitment shall be deemed to have purchased, in accordance with Section 2.12, the equivalent Pro Rata Share of the German Commitment. Upon the effective date of such Assignment Agreement, the Eligible Assignee named therein shall be a Lender for all purposes of this Agreement, with the Pro Rata Share set forth therein and, to the extent of such Pro Rata Share, the assigning Lender shall be released from its further obligations under this Agreement. The Borrowers agree that they shall execute and deliver (against delivery by the assigning Lender of its Note) to such assignee Lender, a Note evidencing that assignee Lender's Pro Rata -87- 93 Share, and to the assigning Lender, a Note evidencing the remaining balance Pro Rata Share retained by the assigning Lender. (c) By executing and delivering a Assignment Agreement, the Eligible Assignee thereunder acknowledges and agrees that: (i) other than the representation and warranty that it is the legal and beneficial owner of the Pro Rata Share being assigned thereby free and clear of any adverse claim, the assigning Lender has made no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness or sufficiency of this Agreement or any other Loan Document; (ii) the assigning Lender has made no representation or warranty and assumes no responsibility with respect to the financial condition of the Domestic Borrower or its Subsidiaries or the performance by the Borrowers and their Subsidiaries of the Obligations; (iii) it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 7.1 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment Agreement; (iv) it will, independently and without reliance upon the Administrative Agent or any Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) it appoints and authorizes the Administrative Agent to take such action and to exercise such powers under this Agreement as are delegated to the Administrative Agent by this Agreement; and (vi) it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at the Administrative Agent's Office a copy of each Assignment Agreement delivered to it and a register (the "Register") of the names and address of each of the Lenders and the Pro Rata Share held by each Lender, giving effect to each Assignment Agreement. The Register shall be available during normal business hours for inspection upon reasonable prior notice to the Administrative Agent. After receipt of a completed Assignment Agreement executed by any Lender and an Eligible Assignee, and receipt of an assignment fee of $3,500 from such Lender or Eligible Assignee, the Administrative Agent shall make a record thereof in the Register and the same shall become effective; provided, however, that no assignment fee shall be payable with respect to an assignment to another Lender or an Affiliate of such assigning Lender or if the Administrative Agent waives payment of such assignment fee. The Borrowers and the Creditors shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the Pro Rata Share listed therein for all purposes hereof, and no assignment or transfer of any such Pro Rata Share shall be effective, in each case unless and until a Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by the Administrative Agent and recorded in the Register as provided above. Prior to such recordation, all amounts owed with respect to the applicable Pro Rata Share shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Pro Rata Share. (e) Each Lender may from time to time grant participations to one or more banks or other financial institutions (including another Lender) in a portion of its Pro Rata Share of any one or more of the Commitments; provided, however, that (i) such Lender's -88- 94 obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other financial institutions shall not be a Lender hereunder for any purpose except, if the participation agreement so provides, for the purposes of Sections 3.7, 3.8, 11.11 and 11.22 but only to the extent that the cost of such benefits to the Borrowers does not exceed the cost which the Borrowers would have incurred in respect of such Lender absent the participation, (iv) the Borrowers and the other Creditors shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, (v) the participation interest shall be expressed as a percentage of the granting Lender's Pro Rata Share as it then exists and shall not restrict an increase in the Commitments, or in the granting Lender's Pro Rata Share thereof, so long as the amount of the participation interest is not affected thereby, and (vi) the consent of the holder of such participation interest shall not be required for amendments or waivers of provisions of the Loan Documents other than those described in Section 11.2(b), (c) and (d). (f) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Domestic Borrower, the option to provide all or any part of any Loan or Advance that such Granting Lender would otherwise be obligated to make pursuant to Sections 2.1, 2.2, 2.3 or 2.5, provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPC, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof, (iii) the rights of any such SPC shall be derivative of the rights of the Granting Lender, and each SPC shall be subject to all of the restrictions upon the Granting Lender herein contained, and (iv) no assignment shall be made to any Person if such assignment would result in a violation of any Gaming Laws or otherwise require the consent or approval of or notice to any Gaming Board. Each SPC shall be conclusively presumed to have made arrangements with its Granting Lender for the exercise of voting and other rights hereunder in a manner which is acceptable to the SPC, and the other Creditors, the Borrowers and each other Party shall be entitled to rely upon and deal solely with the Granting Lender with respect to Loans and Advances made by or through its SPC. The making of a Loan by an SPC hereunder shall utilize the relevant Commitment of the Granting Lender to the same extent, and as if, such Loan were made by the Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the related Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof, provided that the Granting Lender for each SPC hereby agrees to indemnify, save, and hold harmless each other party hereto for any loss, cost, damage and expense arising out of their inability to institute any such proceeding against its SPC. In addition, notwithstanding anything to the contrary contained in this Section 11.8, any SPC may (i) with notice to, but without the prior written consent of, the Borrowers or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Lender or to any financial institutions providing liquidity and/or -89- 95 credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans (but nothing contained herein shall be construed in derogation of the obligation of the Granting Lender to make Loans hereunder), provided that neither the consent of the SPC or of any such assignee shall be required for amendments or waivers of provisions of the Loan Documents except for those amendments or waivers for which the consent of participants is required under Section 11.8(e)(vi), and (ii) disclose on a confidential basis (in the same manner described in Section 11.14) any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. (g) Each Lender which hereafter acquires any Pro Rata Share (or any additional Pro Rata Share) of the Revolving Commitment by means of the execution of an Assignment Agreement shall be deemed to have a risk participation in the German Commitment Loans in accordance with its Pro Rata Share of the Revolving Commitment pursuant to Section 2.12. 11.9 Right of Setoff. If an Event of Default has occurred and is continuing, the Administrative Agent or any Lender (but in each case only with the consent of the Requisite Lenders) may exercise its rights under Article 9 of the Uniform Commercial Code and other applicable Laws and, to the extent permitted by applicable Laws, apply any funds in any deposit account maintained with it by any Borrower and any of its Property in its possession against the Obligations. 11.10 Sharing of Setoffs. Each Lender severally agrees that if it, through the exercise of any right of setoff, banker's lien or counterclaim against the Borrowers or otherwise, receives payment of the Obligations held by it that is ratably more than any other Lender, through any means, receives in payment of the Obligations held by that Lender, then, subject to applicable Laws: (a) the Lender exercising the right of setoff, banker's lien or counterclaim or otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Lender a participation in the Obligations held by the other Lender and shall pay to the other Lender a purchase price in an amount so that the share of the Obligations held by each Lender after the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment; and (b) such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of the Lenders share any payment obtained in respect of the Obligations ratably in accordance with each Lender's share of the Obligations immediately prior to, and without taking into account, the payment; provided that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Lender by the relevant Borrower or any Person claiming through or succeeding to the rights of that Borrower, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Lender that purchases a participation in the Obligations pursuant to this Section shall from and after the purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Lender were the original owner of the Obligations purchased. Each Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim with respect to the participation as fully as if the Lender were the original owner of the Obligation purchased. -90- 96 11.11 Indemnity by the Borrowers. Each Borrower jointly and severally agrees to indemnify, save and hold harmless the Administrative Agent, the Lead Arranger and each Lender and their Affiliates, directors, officers, agents, attorneys and employees (collectively the "Indemnitees") from and against: (a) any and all claims, demands, actions or causes of action (except a claim, demand, action, or cause of action for any amount excluded from the definition of "Taxes" in Section 3.11(d)) if the claim, demand, action or cause of action arises out of or relates to any act or omission (or alleged act or omission) of the German Borrowers, Domestic Borrower, their Subsidiaries or any of their officers, directors or stockholders relating to the Commitments, the use or contemplated use of proceeds of any Loan, or the relationship of the Domestic Borrower, the German Borrowers and the Indemnitees under this Agreement; (b) any administrative or investigative proceeding by any Governmental Agency arising out of or related to a claim, demand, action or cause of action described in clause (a) above; and (c) any and all liabilities, losses, costs or expenses including reasonable attorneys' fees and the reasonably allocated costs of attorneys employed by any Indemnitee and disbursements of such attorneys and other professional services) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action or cause of action; provided that no Indemnitee shall be entitled to indemnification under this Section for any loss caused by its own gross negligence or willful misconduct or for any loss asserted against it by another Indemnitee. If any claim, demand, action or cause of action is asserted against any Indemnitee, such Indemnitee shall promptly notify the Borrowers, but the failure to so promptly notify the Borrowers shall not affect their obligations under this Section unless such failure materially prejudices the Borrowers' right to participate in the contest of such claim, demand, action or cause of action, as hereinafter provided. Such Indemnitee may (and shall, if requested by the Borrowers in writing) contest the validity, applicability and amount of such claim, demand, action or cause of action and shall permit the Borrowers to participate in such contest. Any Indemnitee that proposes to settle or compromise any claim or proceeding for which the any Borrower may be liable for payment of indemnity hereunder shall give the Borrowers written notice of the terms of such proposed settlement or compromise reasonably in advance of settling or compromising such claim or proceeding and shall obtain the Borrowers' prior consent (which shall not be unreasonably withheld or delayed). In connection with any claim, demand, action or cause of action covered by this Section against more than one Indemnitee, all such Indemnitees shall be represented by the same legal counsel (which may be a law firm engaged by the Indemnitees or attorneys employed by an Indemnitee or a combination of the foregoing) selected by the Indemnitees and reasonably acceptable to the Borrowers; provided, that if such legal counsel determines in good faith that representing all such Indemnitees would or could result in a conflict of interest under Laws or ethical principles applicable to such legal counsel or that a defense or counterclaim is available to an Indemnitee that is not available to all such Indemnitees, then to the extent reasonably necessary to avoid such a conflict of interest or to permit unqualified assertion of such a defense or counterclaim, each Indemnitee shall be entitled to separate representation by legal counsel selected by that Indemnitee and reasonably acceptable to the Borrowers, with all such legal counsel using reasonable efforts to avoid unnecessary duplication of effort by counsel for all Indemnitees; and further provided that the Administrative Agent (as an Indemnitee) shall at all times be entitled to representation by separate legal counsel (which may be a law firm or attorneys employed by the Administrative Agent or a combination of the foregoing). The obligations of the Borrowers to the Indemnitees under this Section shall survive the expiration or termination of this Agreement, the repayment of all Loans, the expiration or termination of all Letters of Credit and the payment and performance of all other Obligations owed to the Lenders. 11.12 Nonliability of the Lenders. Each Borrower acknowledges and agrees that: (a) Any inspections of any Property of the Borrowers and their Subsidiaries made by or through the Creditors are for purposes of administration of the Loans -91- 97 and Letters of Credit only and the Borrowers and their Affiliates are not entitled to rely upon the same (whether or not such inspections are at the expense of the Borrowers or their Subsidiaries); (b) By accepting or approving anything required to be observed, performed, fulfilled or given to the Creditors pursuant to the Loan Documents, neither the Administrative Agent nor the Lenders shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by the Creditors; (c) The relationship between the Borrowers and the Creditors is, and shall at all times remain, solely that of borrowers and lenders; neither the Administrative Agent nor the Lenders shall under any circumstance be construed to be partners or joint venturers of the Borrowers or their Affiliates; neither the Administrative Agent nor the Lenders shall under any circumstance be deemed to be in a relationship of confidence or trust or a fiduciary or other "special" relationship with the Borrowers or their Affiliates, or to owe any fiduciary duty to the Domestic Borrower or its Affiliates; neither the Administrative Agent nor the Lenders undertake or assume any responsibility or duty to the Borrowers or their Affiliates to select, review, inspect, supervise, pass judgment upon or inform the Domestic Borrower or its Affiliates of any matter in connection with their Property or the operations of the Domestic Borrower or its Affiliates; the Domestic Borrower and its Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by the Creditors in connection with such matters is solely for the protection of the Creditors and neither the Domestic Borrower nor any other Person is entitled to rely thereon; and (d) The Creditors shall not be responsible or liable to any Person for any loss, damage, liability or claim of any kind relating to injury or death to Persons or damage to Property caused by the actions, inaction or negligence of the Borrowers and/or their Affiliates and the Borrowers hereby indemnify and hold the Creditors harmless on the terms set forth in Section 11.11 from any such loss, damage, liability or claim. 11.13 No Third Parties Benefitted. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of the Borrowers and the Creditors in connection with the Loans, and is made for the sole benefit of the Borrowers, the Creditors, and the Creditors' successors and assigns. Except as provided in Sections 11.8 and 11.11, no other Person shall have any rights of any nature hereunder or by reason hereof. 11.14 Confidentiality. Each Lender agrees to hold any confidential information that it may receive from the Borrowers pursuant to this Agreement in confidence, except for disclosure: (a) to other Lenders and Affiliates of such Lender, provided that each such Affiliate receiving such information shall be bound by the provisions of this Section 11.14 as if it were a Lender hereunder, and shall execute in favor of the Borrowers such documentation with respect thereto as the Domestic Borrower shall request in writing; (b) to legal counsel and accountants for the Domestic Borrower or any Lender; (c) to other professional advisors to the Domestic Borrower or any Lender, provided that the recipient has accepted such information subject to a confidentiality agreement substantially similar to this Section; (d) to regulatory officials having jurisdiction over that Lender; (e) to any Gaming Board having regulatory jurisdiction over the Borrowers or their Subsidiaries, provided that each Lender -92- 98 agrees to use its best efforts to notify the Domestic Borrower of any such disclosure unless prohibited by applicable Laws; (f) as required by Law or legal process or in connection with any legal proceeding to which that Lender and the Domestic Borrower or any of its Subsidiaries are adverse parties; (g) to another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of that Lender's interests hereunder or a participation interest in its Note, provided that the recipient has accepted such information subject to a confidentiality agreement substantially similar to this Section; and (h) to any direct or indirect contractual counterparty in swap agreements or such contractual counterparty's professional advisor (so long as such contractual counterparty or professional advisor to such contractual counterparty agrees to be bound by the provisions of this Section). For purposes of the foregoing, "confidential information" shall mean any information respecting the Borrowers or their Subsidiaries reasonably considered by the Domestic Borrower to be confidential, other than (i) information previously filed with any Governmental Agency and available to the public, (ii) information previously published in any public medium from a source other than, directly or indirectly, that Lender, and (iii) information previously disclosed by the Borrowers or their Subsidiaries to any Person not associated with the Domestic Borrower without a confidentiality agreement or obligation substantially similar to this Section. Nothing in this Section shall be construed to create or give rise to any fiduciary duty on the part of the Creditors to the Domestic Borrower or any other Party. 11.15 Further Assurances. The Borrowers and their Subsidiaries shall, at their expense and without expense to the Lenders or the Administrative Agent, do, execute and deliver such further acts and documents as the Requisite Lenders or the Administrative Agent from time to time reasonably require for the assuring and confirming unto the Lenders or the Administrative Agent of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document. 11.16 Integration. This Agreement, together with the other Loan Documents and the letter agreements referred to in Sections 3.2, 3.4 and 3.5, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of the Creditors in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 11.17 Governing Law. Except to the extent otherwise provided therein, each Loan Document shall be governed by, and construed and enforced in accordance with, the local Laws of California. 11.18 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable or invalid as to any party or in any jurisdiction shall, as to that party or jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions or the operation, enforceability or validity of that provision as to any other party or in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 11.19 Headings. Article and Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. -93- 99 11.20 Time of the Essence. Time is of the essence of the Loan Documents. 11.21 Foreign Lenders and Participants. Each Lender that is incorporated or otherwise organized under the Laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia shall deliver to the Domestic Borrower (with a copy to the Administrative Agent), within 20 days after the Closing Date (or after accepting an assignment or receiving a participation interest herein pursuant to Section 11.8, if applicable) two duly completed copies, signed by a Responsible Official, of either Form W-8 or W-8 BEN of the United States Internal Revenue Service or such other evidence including, if reasonably necessary, Form W-9) satisfactory to the Domestic Borrower and the Administrative Agent that no withholding under the federal income tax laws is required with respect to such Lender. Thereafter and from time to time, each such Lender shall upon request by the Domestic Borrower (a) promptly submit to the Domestic Borrower (with a copy to the Administrative Agent), such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to the Domestic Borrower and the Administrative Agent of any available exemption from, United States withholding taxes in respect of all payments to be made to such Lender by the Domestic Borrower pursuant to this Agreement and (b) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Eurocurrency Lending Office, if any) to avoid any requirement of applicable Laws that the Domestic Borrower make any deduction or withholding for taxes from amounts payable to such Lender. In the event that the Domestic Borrower or the Administrative Agent become aware that a participation has been granted pursuant to Section 11.8(e) to a financial institution that is incorporated or otherwise organized under the Laws of a jurisdiction other than the United States of America, any State thereof or the District of Columbia, then, upon request made by the Domestic Borrower or the Administrative Agent to the Lender which granted such participation, such Lender shall cause such participant financial institution to deliver the same documents and information to the Domestic Borrower and the Administrative Agent as would be required under this Section if such financial institution were a Lender. 11.22 Hazardous Material Indemnity. Each Borrower hereby agrees to indemnify, hold harmless and defend (by counsel reasonably satisfactory to the Administrative Agent) the Administrative Agent and each of the Lenders (and any successor to a Lender) and their respective directors, officers, employees and agents from and against any and all claims, losses, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial action requirements, enforcement actions of any kind, and all costs and expenses incurred in connection therewith including reasonable attorneys' fees and the reasonably allocated costs of attorneys employed by the Administrative Agent or any Lender, and expenses to the extent that the defense of any such action has not been assumed by the Borrowers), arising directly or indirectly out of (i) the presence on, in, under or about any Real Property of any Hazardous Materials, or any releases or discharges of any Hazardous Materials on, under or from any Real Property and (ii) any activity carried on or undertaken on or off any Real Property by the Domestic Borrower its Subsidiaries or any of their predecessors in title, whether prior to or during the term of this Agreement, and whether by the Borrowers, their Subsidiaries or any predecessor in title or any employees, agents, contractors or subcontractors of the Domestic Borrower, its Subsidiaries or any predecessor in title, or any third persons at any time occupying or present on any Real Property other than a Lender or a representative of a Lender), in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Materials at any time located or present on, in, under or about -94- 100 any Real Property. The foregoing indemnity shall further apply to any residual contamination on, in, under or about any Real Property, or affecting any natural resources, and to any contamination of any Property or natural resources arising in connection with the generation, use, handling, storage, transport or disposal of any such Hazardous Materials, and irrespective of whether any of such activities were or will be undertaken in accordance with applicable Laws, but the foregoing indemnity shall not apply to Hazardous Materials on any Real Property, the presence of which is caused by the Creditors. Each Borrower hereby acknowledges and agrees that, notwithstanding any other provision of this Agreement or any of the other Loan Documents to the contrary, the obligations of the Domestic Borrower under this Section (and under Sections 4.19 and 5.11) shall be unlimited corporate obligations of the Borrowers and shall not be secured by any deed of trust or mortgage on any Real Property. Any obligation or liability of the Borrowers to any Indemnitee under this Section shall survive the expiration or termination of this Agreement, the repayment of all Loans, the expiration or termination of all Letters of Credit and the payment and performance of all other Obligations owed to the Lenders. 11.23 Gaming Boards. The Administrative Agent and each of the Lenders agree to cooperate with all Gaming Boards in connection with the administration of their regulatory jurisdiction over the Borrowers and their Subsidiaries, including the provision of such documents or other information as may be requested by any such Gaming Board relating the Administrative Agent or the Lenders to the Borrowers and their Subsidiaries or to the Loan Documents. 11.24 Nevada Gaming Collateral. Subject to the release of any Collateral as contemplated by any of the Loan Documents, the Administrative Agent shall (or through one or more of its agents, sub-agents or sub-collateral agents shall), to the extent required by Nevada Gaming Regulations, retain possession of all pledged securities delivered to it consisting of capital stock of any Nevada gaming licensee or registered intermediary company within the State of Nevada at a location designated and approved by the applicable Gaming Board. 11.25 Construction of the Pledge Agreements. To the extent that Liens on any Collateral thereunder are granted to the Administrative Agent under both the Domestic Facilities Pledge Agreement and the German Facility Pledge Agreement, the Liens created by the Domestic Facilities Pledge Agreement and the German Facility Pledge Agreement are hereby agreed to be equal, ratable and pari passu Liens to the extent of the Liens granted under such Agreements. Notwithstanding the pledge to the Administrative Agent of 100% of the capital stock of any Person which is a Foreign Significant Subsidiary to secure the Obligations under the German Commitment, the Creditors disclaim any security interest with respect to more than 65% of the capital stock of any Foreign Significant Subsidiary to the extent that the same secures the Obligations under the Revolving Commitment or the Term Commitment. Without limiting the generality of the preceding sentence, notwithstanding any other provision of the Loan Documents to the contrary, the Domestic Pledge Agreement shall not be construed to have granted a Lien in more than 65% of the equity securities of any Subsidiary of the Domestic Borrower which is organized under the Laws of any jurisdiction other than the United States and its political subdivisions. 11.26 Specific Provisions Regarding German Borrowers. It is agreed and acknowledged by the parties hereto that the German Borrowers regularly and customarily use the management services (including, inter alia, financial management and cash management services) of German Holdings and shall have the authority to give any notice of borrowing or any other notice or communication hereunder on behalf of, and with legally binding effect on, each of the German Borrowers. -95- 101 11.27 CONSENT TO JURISDICTION; CHOICE OF FORUM. (a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF (X) IN THE CASE OF ANY OBLIGATIONS ARISING OUT OF THE REVOLVING COMMITMENT OR THE TERM COMMITMENT, IN THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA, OR (Y) IN THE CASE OF THE GERMAN COMMITMENT, IN SUCH COURTS OR IN COURTS IN AND FOR FRANKFURT, AM MAIN GERMANY, IN THE FEDERAL REPUBLIC OF GERMANY AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. EACH BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK PERSONAL JURISDICTION OVER SUCH BORROWER, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS BROUGHT IN ANY OF THE AFOREMENTIONED COURTS, THAT SUCH COURTS LACK PERSONAL JURISDICTION OVER SUCH BORROWER. TO THE EXTENT PERMITTED BY LAW, EACH BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH BORROWER AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. EACH BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT, ANY LENDER OR THE HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY BORROWER IN ANY OTHER JURISDICTION. (b) EACH BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 11.28 Waiver of Right to Trial by Jury. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF -96- 102 THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 11.29 Purported Oral Amendments. EACH BORROWER EXPRESSLY ACKNOWLEDGES THAT THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY ONLY BE AMENDED OR MODIFIED, OR THE PROVISIONS HEREOF OR THEREOF WAIVED OR SUPPLEMENTED, BY AN INSTRUMENT IN WRITING THAT COMPLIES WITH SECTION 11.2. EACH BORROWER AGREES THAT IT WILL NOT RELY ON ANY COURSE OF DEALING, COURSE OF PERFORMANCE, OR ORAL OR WRITTEN STATEMENTS BY ANY REPRESENTATIVE OF THE ADMINISTRATIVE AGENT OR ANY BANK THAT DOES NOT COMPLY WITH SECTION 11.2 TO EFFECT AN AMENDMENT, MODIFICATION, WAIVER OR SUPPLEMENT TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -97- 103 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ALLIANCE GAMING CORPORATION, a Nevada corporation By: --------------------------------------------- Robert L. Miodunski Executive Officer Address for Notices: Alliance Gaming Corporation 6601 South Bermuda Road Las Vegas, Nevada 89119 Attn: Chief Financial Officer Telecopier: (702) 896-7700 Telephone: (702) 896-7990 BALLY WULFF AUTOMATEN GMBH By: --------------------------------------------- Axel Pawlas Managing Director Address for Notices: Bally Wulff Automaten GmbH Maybachufer 48-51 12045 Berlin, Germany Attn: Managing Director Telecopier: 49-30-62002200 Telephone: 49-30-620020 BALLY WULFF VERTRIEBS GMBH By: --------------------------------------------- Axel Pawlas Managing Director Address for Notices: Bally Wulff Vertriebs GmbH Sokelantstrasse 35 30165 Hannover, Germany Attn: Managing Director Telecopier: 49-511-3585345 Telephone: 49-511-358530 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-1 104 BANK OF AMERICA, N.A., as Administrative Agent By: ------------------------------------------------ Janice Hammond, Vice President Address: Bank of America, N.A. Agency Management Services 555 South Flower Street, 11th Floor Los Angeles, California 90017 Attn: Janice Hammond, Vice President Telecopier: (213) 228-2299 Telephone: (213) 228-9861 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-2 105 BANK OF AMERICA, N.A., as a Lender By: --------------------------------------------- Scott Faber, Managing Director Address: Bank of America, N.A. CA9-706-11-01 555 South Flower Street, 11th Floor Los Angeles, California 90071 Attn: Scott Faber, Managing Director Telecopier: (213) 228-3145 Telephone: (213) 228-2768 With a copy to: Bank of America, N.A. 555 South Flower Street (LA-5777) Los Angeles, California 90071 Attn: William S. Newby, Managing Director Telecopier: (213) 228-3145 Telephone: (213) 228-2438 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-3 106 FRANKLIN FLOATING RATE MASTER SERIES By: --------------------------------------- Title: ------------------------------------ Address for notices: Franklin Floating Rate Master Series 777 Mariners Island Boulevard, 3rd Floor San Mateo, CA 94404 Attn.: David Ardini Telephone: (650) 525-7473 Telecopy: (650) 312-3346 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-4 107 FRANKLIN FLOATING RATE DAILY ACCESS FUND By: --------------------------------------- Title: ------------------------------------ Address for notices: Franklin Floating Rate Daily Access Fund 777 Mariners Island Boulevard, 3rd Floor San Mateo, CA 94404 Attn.: David Ardini Telephone: (650) 525-7473 Telecopy: (650) 312-3346 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-5 108 [[[Intentionally Omitted]]] [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-6 109 PILGRIM SENIOR INCOME FUND By: ING PILGRIM INVESTMENTS, LLC as its Investment Manager By: --------------------------------------- Title: ------------------------------------ Address for notices: Pilgrim Senior Income Fund 7337 East Doubletree Ranch Road Scottsdale, AZ 85258-2034 Attn.: Cindy Ecker Telephone: (480) 477-2227 Telecopy: (480) 477-2077 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-7 110 PILGRIM PRIME RATE TRUST By: ING PILGRIM INVESTMENTS, LLC as its Investment Manager By: --------------------------------------- Title: ------------------------------------ Address for notices: Pilgrim Prime Rate Trust 7337 East Doubletree Ranch Road Scottsdale, AZ 85258-2034 Attn.: Cindy Ecker Telephone: (480) 477-2227 Telecopy: (480) 477-2077 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-8 111 THE TRAVELERS INSURANCE COMPANY By: --------------------------------------- Title: ------------------------------------ Address for notices: The Travelers Insurance Company One Tower Square Hartford, CT 06183-2030 Attn.: M.J. McInerny--Citigroup Investments Telephone: (860) 954-5145 Telecopy: (860) 954-5243 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-9 112 TRAVELERS CORPORATE LOAN FUND INC. By: Travelers Asset Management International Company LLC By: --------------------------------------- Title: ------------------------------------ Address for notices: Travelers Corporate Loan Fund Inc. One Tower Square Hartford, CT 06183-2030 Attn.: M.J. McInerny--Citigroup Investments Telephone: (860) 954-5145 Telecopy: (860) 954-5243 [ALLIANCE GAMING CORPORATION] [LOAN AGREEMENT SIGNATURE PAGE] S-10
EX-10.30 4 v75843ex10-30.txt EXHIBIT 10.30 1 Exhibit 10.30 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT dated and effective as of April 24, 2001, by and between ALLIANCE GAMING CORPORATION, a Nevada corporation, 6601 South Bermuda Road, Las Vegas, Nevada 89119 (the "Company"), and ROBERT L. MIODUNSKI (the "Executive"). The parties agree as follows: 1. EMPLOYMENT. The Company employs the Executive, and the Executive accepts employment by the Company, on the terms and conditions set forth in this Agreement. 2. TERM. The term of the Executive's employment under this Agreement (the "Term") shall commence on execution of this Agreement and, unless terminated earlier pursuant to this Agreement, shall expire on December 31, 2004. 3. POSITION AND DUTIES. The Executive shall serve as Chief Executive Officer and Chief Operating Officer of the Company and/or as the senior-most officer of the Company, President of Bally Gaming, Inc., and President of United Coin Machine Co., and shall report to the Board of Directors. The Executive shall perform the duties contemplated by such title and such other duties, consistent with his experience and abilities, as may be assigned to the Executive by the Board of Directors. The Executive shall devote his full time and efforts to the business and affairs of the Company, use his best efforts to further the interests of the Company, and at all times conduct himself in a manner that reflects credit on the Company. It is contemplated that the Executive shall render services to the Company from the Company's principal place of business; however, the parties acknowledge and agree that the Executive may be required to travel extensively in fulfilling his duties hereunder. 4. COMPENSATION. (a) Salary. The Company shall pay the Executive a base salary of $400,000 a year in installments on the regularly recurring paydays in accordance with the Company's practice. Increases in the base salary shall be considered by the Company at least annually, beginning with the completion of the first year of employment and will be based on criteria applicable to other senior executives of the Company, provided, however, that the award of any such increase shall be at the sole discretion of the Company. (b) Bonuses. The Executive shall be eligible to receive a cash bonus from the Company each year. It is contemplated but not certain that such annual bonus shall be between 50% and 100% of Executive's base salary, based upon performance of the Company; it being understood, however, that the Company shall not be obligated to pay any bonus, and the payment, if any, and amount and timing of any such bonus shall be solely within the discretion of the Company and may be based on any criteria the Company deems relevant. (c) Reimbursement of expenses. In accordance with established policies and procedures of the Company as in effect from time to time, the Company shall pay to or reimburse the Executive for all reasonable and actual out-of-pocket expenses including but not limited to travel, hotel, and similar expenses, incurred by the Executive from time to time in performing his obligations under this Agreement. (d) Vacation. The Executive shall be entitled to annual paid vacation time, prorated for any partial employment year, consistent with the Company's policy applicable to its senior executives. The Executive also may accumulate and carry forward unused vacation days from year to year consistent with Company policy. The Executive shall also be entitled to reasonable periods of sick leave with compensation and all paid holidays given by the Company to its senior executive officers. (e) Other benefits. The Executive shall be entitled to other employment benefits, including but not limited to life insurance, medical and hospitalization, disability, and retirement benefits, consistent with the benefits provided to other senior executives of the Company. Page 1 of 8 2 (f) No Reduction. There shall be no material reduction or diminution of the benefits provided in this section during the term of this Agreement unless (i) the Executive consents, (ii) an equitable arrangement (embodied in a substitute or alternative benefit or plan) is made with respect to such benefit or plan, or (iii) the reduction is part of a program of across-the-board benefit reductions similarly affecting the senior executive officers of the Company. (g) Notice of Nonrenewal. No later than 180 days before the scheduled expiration date set forth in paragraph 2, the Company shall notify Executive whether or not the Company wishes to renew this Agreement for an additional term after its expiration. If the Company notifies Executive that it does not wish to renew this Agreement after its expiration, the Company shall also notify Executive whether it intends to enforce the restrictive covenants of paragraph 6(a)(2) after the expiration of the Agreement pursuant to paragraph 6(a) and, if so, for how long it will so enforce the covenants. 5. TERMINATION. (a) Disability. If the Executive, because of illness or incapacity, fails to discharge his duties under this Agreement for six or more consecutive months or for noncontinuous periods aggregating to twenty-two weeks in any twelve-month period, the Company may terminate this Agreement on thirty days' notice, whereupon the obligations of the Company and the rights of the Executive under this Agreement shall terminate, except that: (1) The Company shall pay the Executive's salary on a pro-rata basis through the date of termination, offset by any benefits payable to the Executive under any disability insurance policy paid for by the Company; and (2) One-half of any unvested Options shall vest and become exercisable by the Executive's estate for two years after the date of the Executive's death; and (3) The Executive shall have the right, at the Executive's expense, to the assignment of any and all insurance policies or health protection plans in accordance with the terms and conditions of those plans. (b) Death. In the event of the Executive's death, this Agreement shall terminate as of the date of his death, in which case the obligations of the Company and the rights of the Executive under this Agreement shall terminate except that: (1) The Company shall continue to pay the Executive's salary for six months after the date of death, offset by any benefits payable to the Executive or the Executive's estate under any life insurance policy paid for by the Company; and (2) The Company shall reimburse the Executive's estate for all expenses incurred and reimbursable under section 4(c); and (3) One-half of any unvested Options shall vest and become exercisable by the Executive's estate for two years after the date of the Executive's death. (c) Termination by Company for Cause. (1) The Company may terminate this Agreement for cause at any time immediately on notice to the Executive, in which case the Company's obligations and the Executive's rights under this Agreement shall terminate. For purposes of this provision, the term "cause" includes, but is not limited to: (A) The Executive's insubordination, fraud, disloyalty, dishonesty, willful misconduct, or gross negligence in the performance of the Executive's duties under this Agreement, including willful failure to perform such duties as may properly be assigned to the Executive under this Agreement. (B) The Executive's material breach of any provision of this Agreement. Page 2 of 8 3 (C) The Executive's failure to qualify (or having so qualified being thereafter disqualified) under any suitability or licensing requirement of any jurisdiction or regulatory authority to which the Executive may be subject by reason of his position with the Company and its affiliates or subsidiaries. (D) The Executive's commission of a crime against the Company or violation of any law, order, rule, or regulation pertaining to the Company's business. (E) The Executive's inability (other than because of death or disability under Sections 5(a) and 5(b)) to perform the job functions and responsibilities assigned in accordance with standards established, whether or not in writing, from time to time by the Company, in its sole discretion. (F) The Company obtains from any source information with respect to the Executive or this Agreement that would, in the opinion of the Company, jeopardize the gaming licenses, permits, or status of the Company or any of its subsidiaries or affiliates with any gaming commission, board, or similar regulatory or law enforcement authority. (2) Any termination by the Company for cause shall not be in limitation of any other right or remedy the Company may have under this Agreement or otherwise. (d) Termination by Company without cause. The Company may terminate this Agreement at any time without cause (as defined in paragraph 5(c)(1)), whereupon the Company's obligations and the Executive's rights under this Agreement shall terminate, except that the Company shall continue to pay the Executive's salary and furnish the benefits described in paragraph 4(e) for twelve months after the date of termination, offset by any compensation and benefits received by the Executive from other employment during that period. (e) Termination by Executive with cause. If the Executive resigns with cause, the Company's obligations and the Executive's rights under this Agreement shall terminate, except that the Company shall continue to pay the Executive's salary and furnish the benefits described in paragraph 4(e) for twelve months after the date of termination, offset by any compensation and benefits received by the Executive from other employment during that period. As used in this provision, "cause" is limited to the Company's failure to cure either of the following within thirty days after demand by the Executive: (i) the Company's failure to pay any portion of the base salary within thirty days after it is due, and (ii) the assignment to the Executive of duties materially inconsistent with the duties and position set forth in this Agreement. (f) Termination by Executive without cause. If the Executive resigns without cause (as defined in paragraph 5(e)), this Agreement shall terminate as of the date of his resignation, and the Company's obligations and the Executive's rights under this Agreement shall terminate. (g) Survival of restrictive covenants. Notwithstanding the expiration or termination of this Agreement for any reason, the Executive's covenants in Section 6 and his obligations under that section shall survive the termination of this Agreement as set forth in that section. 6. RESTRICTIVE COVENANTS. (a) Covenant not to compete. (1) During the term of this Agreement and for twelve months after its termination for any reason (other than its expiration at the end of its term pursuant to paragraph 6(a)(2), except as otherwise provided in paragraph 2), the Executive will not, directly or indirectly, whether as employee, owner, partner, agent, employee, officer, consultant, advisor, stockholder (except as the beneficial owner of not more than 5 percent of the outstanding shares of a corporation, any of the capital stock of which is listed on any national or regional securities exchange or quoted in the daily listing of over-the-counter market securities and, in each case, in which the Executive does not undertake any management or operational or advisory role) or in any other capacity, for the Executive's own account or for the benefit of any person or entity, establish, engage, or be connected with any person or entity that is at the time engaged in a business then in competition with the business of the Company (which, for purposes of this paragraph, shall include any of the Company's subsidiaries or affiliates) in any area Page 3 of 8 4 where the Company is doing business at the time of termination. The Company and the Executive acknowledge and agree that the Company's market is unlimited geographically and that the scope and duration of the covenant in this paragraph are reasonable and fair; however, if a court of competent jurisdiction determines that this covenant is overbroad or unenforceable in any respect, the Company and the Executive acknowledge and agree that the covenant shall be enforced to the greatest extent any such court deems appropriate, and such court may modify this covenant to that extent. (2) At the expiration of this Agreement at the end of its term under paragraph 2, the Company may, in its sole and absolute discretion, continue to pay the Executive the base salary set forth in paragraph 4(a) and the other benefits set forth in paragraph 4(e), in which case, and for so long as the Company continues to do so (and provided the Company has complied with the notice requirement of paragraph 4(g)), the Executive shall be bound by the covenant set forth in paragraph 6(a)(4). (b) Covenant not to solicit customers, employees, or consultants. Executive shall not, directly or indirectly, during the term of this Agreement and for twelve months after its expiration or termination for any reason, (i) solicit the trade or patronage of any of the customers or prospective customers of the Company (which, for purposes of this paragraph, shall include any of the Company's subsidiaries or affiliates) or of anyone who has heretofore traded or dealt with the Company, regardless of the location of such customers or prospective customers of the Company with respect to any technologies, services, products, trade secrets, or other matters in which the Company is active, or (ii) aid or endeavor to solicit or induce any other employee or consultant of the Company to leave the Company to accept employment of any kind with any other person or entity. (c) Confidential Information and Non-Disparagement. (1) In accordance with NRS 600A.010 et seq. (the so-called Uniform Trade Secrets Act), the Executive shall hold in a fiduciary capacity for the benefit of the Company and its stockholders all secret, confidential, and proprietary information, knowledge, and data relating to the Company (and any of its subsidiaries or affiliates), obtained by the Executive during or by reason of the Executive's employment by the Company. During the term of this Agreement and after its expiration or termination for any reason, the Executive shall not, without the prior written consent of the Company or except as may be required by law, communicate or divulge any such information, knowledge, or data to any person or entity other than the Company (or as applicable its subsidiaries or affiliates) and those designated by them that would result in any misappropriation under and as defined in such Act, except that, while employed by the Company, in furtherance of the business and for the benefit of the Company, the Executive may provide confidential information as appropriate to attorneys, accountants, financial institutions, and other persons or entities engaged in business with the Company from time to time. (2) Each of the Executive and the Company agrees that during the Term and for a period of three years following any applicable termination date, neither shall, publicly or privately, disparage or make any statements (written or oral) that could impugn the integrity, acumen (business or otherwise), ethics or business practices, of the other, except, in each case, to the extent (but solely to the extent) (i) necessary in any judicial or arbitral action to enforce the provisions of this Agreement or (ii) in connection with any judicial, regulatory or administrative proceeding to the extent required by applicable laws. For purposes of this Section 6(c)(2), references to the Company include its officers, directors, employees, consultants and shareholders (which are reasonably known as such to the Executive) on the date hereof and hereafter. (d) Standstill. During the term of this Agreement and for twelve months after its expiration or termination for any reason, the Executive shall not, singly or with any other person, directly or indirectly: (1) Propose, enter into, agree to enter into, or encourage any other person to propose, enter into, or agree to enter into (i) any form of business combination, acquisition, or other transaction relating to the Company or any of its subsidiaries or affiliates, or (ii) any form of restructuring, recapitalization, or similar transaction with respect to the Company or any of its subsidiaries or affiliates; or (2) Acquire, or offer, propose, or agree to acquire, by tender offer, purchase, or otherwise, any voting securities of the Company or of its subsidiaries or affiliates, except through the exercise of options or warrants beneficially owned as of the date of this Agreement; or Page 4 of 8 5 (3) Make or in any way participate in any solicitation of proxies or written consents with respect to voting securities of the Company or any of its affiliates or subsidiaries (it being understood that the mere execution of a proxy or written consent for his own securities beneficially owned shall not be treated as constituting participation in such a solicitation); or (4) Become a participant in any election contest with respect to the Company or a nominee to or member of its board of directors or the board of directors of any affiliate or subsidiary of the Company or any of its affiliates or subsidiaries; or (5) Seek to influence any person with respect to the voting or disposition of any voting securities of the Company or any of its affiliates or subsidiaries; or (6) Demand a copy of the list of stockholders or other books and records of the Company or any of its subsidiaries or affiliates; or (7) Participate in or encourage the formation of any partnership, syndicate, or other group that owns or seeks or offers to acquire beneficial ownership of any voting securities of the Company or any of its affiliates or subsidiaries or that seeks to affect control of the Company or any of its affiliates or subsidiaries or for the purpose of circumventing any provision of this Agreement; or (8) Propose or support any director or slate of directors for nomination, appointment, or election to the board of directors of the Company or any of its affiliates or subsidiaries (it being understood that the mere execution of a proxy or written shareholder consent for his own securities beneficially owned shall not be treated as constituting such support); or (9) Otherwise act to seek or to offer to control or influence, in any manner, the management, the board of directors, or the policies of the Company or any of its affiliates or subsidiaries; or (10) Seek to amend or change this provision. (e) The Executive acknowledges that the Company will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if the Executive breaches any of his obligations under this section. Accordingly, the Executive agrees that the Company will be entitled, at the Company's option, to injunctive relief without the necessity of posting a bond against any breach or prospective breach by the Executive of the Executive's obligations under this section in any federal or state court of competent jurisdiction sitting in the State of Nevada, in addition to monetary damages and any other remedies available at law or in equity. The Executive hereby submits to the jurisdiction of such courts for the purposes of any actions or proceedings instituted by the Company to obtain such injunctive relief, and agrees that process may be served on the Executive by registered mail, addressed to the last address of the Executive known to the Company, or in any other manner authorized by law. (f) Material Inducements. The restrictive covenants and other provisions in this section are material inducements to the Company entering into and performing this Agreement. Accordingly, in the event of any breach of the provisions of this section by the Executive, in addition to all other remedies at law or in equity possessed by the Company, (i) the Company shall have the right to terminate and not pay any amounts payable to the Executive under this Agreement, (ii) all Options that are unexercised shall be immediately forfeited and returned to the Company, and (iii) the Executive shall immediately account to the Company and return to the Company an amount in cash equal to all profits or benefits obtained or realized by the Executive by virtue of the ownership or disposition of the Options. (g) For a period of two (2) years after the closing date of any transaction in which the Company shall have sold, whether by merger, stock purchase, asset purchase or other acquisition, all or substantially all of the stock or assets of United Coin Machine Co., or the remaining term of the non-competition provisions of paragraph 6(a), whichever is shorter, the Executive shall not, directly or indirectly, whether as employee, owner, partner, agent, officer, consultant, advisor, stockholder (except as the beneficial owner of not more than 5 percent of the outstanding shares of a corporation, any of the capital stock of which is listed on any national or regional securities exchange or quoted in the daily listing of over-the-counter market securities and, in each case, in which the Executive does not undertake any management or operational or advisory role) or in any other capacity, for the Executive's own account or for the benefit of any person or entity, be connected with United Coin Machine Co., any Page 5 of 8 6 successor company or any person or entity that acquires United Coin Machine Co., nor any other person or entity that is engaged in a business then in competition with United Coin Machine Co. in any area where United Coin Machine Co. is doing business during the time set forth above. 7. INDEMNIFICATION AND LIABILITY INSURANCE. If the Executive is or during the term of this Agreement becomes a director of or holds a corporate office with the Company: (a) Indemnification. The Company shall indemnify and hold the Executive harmless, to the fullest extent legally permitted by Section 78.751 of the Nevada Corporation Code (as amended and in effect from time to time) against any and all expenses, liabilities, and losses (including without limitation, reasonable attorneys' fees and disbursements of counsel reasonably satisfactory to the Company), incurred or suffered by him in connection with his service as a director or officer of the Company under this Agreement, in each case, except to the extent of the Executive's intentional misconduct, fraud, or knowing violation of law. (b) Insurance. The Company shall maintain, for the benefit of the Executive, a directors' and officers' liability insurance policy insuring the Executive's service as a director or officer or both of the Company (or any affiliate or subsidiary of the Company) during the term of this Agreement in accordance with its customary practices as in effect from time to time. The parties acknowledge and agree that the policy may cover other officers and directors of the Company in addition to the Executive. 8. LICENSES AND APPROVALS. This Agreement is contingent on any necessary approvals and licenses from any regulatory authorities having jurisdiction over the parties or the subject matter of this Agreement. Each party shall promptly apply to the appropriate regulatory authorities for any licenses and approvals necessary for that party to perform under this Agreement, shall diligently pursue its applications and pay all associated costs and fees, and shall otherwise cooperate with any requests, inquiries, or investigations of any regulatory authorities or law enforcement agencies in connection with the Company, its affiliates, or this Agreement. If any license or approval necessary for either party to perform under this Agreement is denied, suspended, or revoked, this Agreement shall be void, provided, however, that if the denial, suspension, or revocation affects performance of the Agreement in part only, the parties may be mutual agreement continue to perform under this Agreement to the extent it is unaffected by the denial, suspension, or revocation. 9. COMPLIANCE PROGRAM. The parties acknowledge that Alliance Gaming Corporation, as a company that operates and as the parent of companies that operate under privileged licenses in a highly regulated industry, maintains a compliance program to protect and preserve the name, reputation, integrity, and good will of Alliance and its subsidiaries and affiliates through a thorough review and determination of the integrity and fitness, both initially and thereafter, of any person or company that performs work for those companies or with which those companies are otherwise associated, and to monitor compliance with the requirements established by gaming regulatory authorities in various jurisdictions around the world. This Agreement and the association of the Company and its affiliates with the Executive are contingent on the continued approval of Alliance and its compliance committee under the Alliance compliance program. The parties shall cooperate with Alliance and its compliance committee as reasonably requested by Alliance or the committee and shall provide the committee with such information as it may request. If Alliance, acting on the recommendation of the committee, withdraws its approval of this Agreement or one or more of the other parties, then this Agreement shall be void and neither party shall have any rights thereunder. 10. GENERAL PROVISIONS. (a) Arbitration. Any controversy or claim arising out of or relating to this Agreement or its breach (except, at the option of the Company, a controversy or claim arising out of or relating to section 6, which the Company may choose to be adjudicated in a federal or state court sitting in Las Vegas, Nevada), shall be settled by arbitration in Las Vegas, Nevada, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment on the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. If any arbitration or other legal or equitable action or proceeding is instituted to enforce any provisions of this Agreement, the prevailing party shall be entitled to recover as costs such amounts as the court or arbitrator may judge to be reasonable, including costs and attorneys' fees. Page 6 of 8 7 (b) Further assurances. Each party shall execute all documents and take all other actions necessary to effect the provisions and purposes of this Agreement. (c) Entire agreement. This Agreement contains the entire agreement between the parties and supersedes all other oral and written agreements previously entered into by the parties concerning the same subject matter, including but not limited to the Amended and Restated Executive Employment Agreement dated November 4, 1999. (d) Modification, rescission, and assignment. This Agreement may be modified or rescinded only with the written consent of both parties. Neither this Agreement nor any right or interest under this Agreement shall be assignable by either party without the written consent of the other, provided, that (i) if the Executive dies during the term of this Agreement, the Executive's estate and his heirs, executors, administrators, legatees, and distributees shall have the rights and obligations as provided in this Agreement, and (ii) nothing contained in this Agreement shall limit or restrict the Company's ability to merge or consolidate or effect any similar transaction with any other entity, irrespective of whether the Company is the surviving entity (including a split up, spin off, or similar type transaction), provided that one or more of such surviving entities continues to be bound by the provisions of this Agreement now binding on the Company. (e) Controlling law; severability. Nevada law shall govern this Agreement and its interpretation. If any provision is unenforceable for any reason, it shall be deemed stricken from the Agreement but shall not otherwise affect the intention of the parties or the remaining provisions of the Agreement. (f) Binding effect. This Agreement shall bind and inure to the benefit of each of the parties and their respective heirs, successors, administrators, executors, and assigns. (g) No third party benefits. This Agreement is for the benefit of the parties and their permitted successors and assigns. The parties intend neither to confer any benefit hereunder on any person, firm, or corporation other than the parties hereto, nor that any such third party shall have any rights under this Agreement. (h) Indulgence. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power, or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege, nor shall any waiver of any right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power, or privilege with respect to any other occurrence. (i) Notices. All notices required by this Agreement must be in writing and must be delivered, mailed, or telecopied to the addresses given above or such other addresses as the parties may designate in writing. (j) Counterparts; facsimiles. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which, taken together, shall constitute one and the same instrument. This Agreement may be executed and delivered by exchange of facsimile copies showing the signatures of the parties, and those signatures need not be affixed to the same copy. The facsimile copies so signed will constitute originally signed copies of the same consent requiring no further execution. (k) Captions; construction; drafting ambiguities. The captions in this Agreement are for convenience only and shall not be used in interpreting it. In interpreting this Agreement any change in gender or number shall be made as appropriate to fit the context. Each party has reviewed and revised this Agreement with independent counsel or has had the opportunity to do so. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or of any amendments or exhibits to this Agreement. 11. CONDITION PRECEDENT. This Agreement is subject to approval by the Company's board of directors and shall be of no force and effect until that approval is given and is evidenced by a written resolution of the board. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first set forth above. Page 7 of 8 8 "COMPANY" "EXECUTIVE" Alliance Gaming Corporation /s/ ROBERT L. MIODUNSKI ------------------------------------- By: /s/ MARK LERNER Robert L. Miodunski ------------------------------ Mark Lerner, General Counsel Page 8 of 8 EX-21 5 v75843ex21.htm EXHIBIT 21 ex21

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.

          Foreign Gaming Ventures, 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

        (a)    There is a limited minority interest holder. For further information see Item 1 – “Business – Casino Operations”.

  EX-23.1 6 v75843ex23-1.htm EXHIBIT 23.1 ex23-1

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Alliance Gaming Corporation

As independent public accountants, we hereby consent to the incorporation by reference of our report dated August 15, 2001 included in the Annual Report on Form 10-K, into Alliance Gaming Corporation's Company’s previously filed Registration Statements (Nos. 33-75308, 33-45810, and 333-34077) on Form S-8.

Arthur Andersen LLP

Las Vegas, Nevada
September 24, 2001

  EX-23.2 7 v75843ex23-2.htm EXHIBIT 23.2 ex23-2

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. 33-75308, 33-45810, and 333-34077) on Form S-8 of Alliance Gaming Corporation of our report dated August 11, 1999, relating to the consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the year ended June 30, 1999, which report appears in the June 30, 2001 annual report on Form 10-K of Alliance Gaming Corporation.

  KPMG LLP

Phoenix, Arizona
September 25, 2001