-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SOx/Lvo88CYEP0Vo1FVErD8Fo1aCsmyMDdWZ7L8IuIghEj1IgTbkQBuLg0jcwaDF sxMlWe/D2gIA6kvWOIqiQw== 0000950148-97-000365.txt : 19970222 0000950148-97-000365.hdr.sgml : 19970222 ACCESSION NUMBER: 0000950148-97-000365 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04281 FILM NUMBER: 97532385 BUSINESS ADDRESS: STREET 1: 6601 S. BERMUDA RD. CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 702-270-6700 MAIL ADDRESS: STREET 1: 4380 BOULDER HIGHWAY CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 10-Q 1 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-4281 ALLIANCE GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0104066 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6601 S. BERMUDA RD. LAS VEGAS, NEVADA 89119 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER: (702) 270-7600 ---------- 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 The number of shares of Common Stock, $0.10 par value, outstanding as of February 4, 1997 according to the records of the registrant's registrar and transfer agent was 31,832,807. ================================================================================ 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 I N D E X
PART I. FINANCIAL INFORMATION PAGE Item 1. Unaudited Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1996 3 Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 1995 and 1996 4 Unaudited Condensed Consolidated Statements of Operations for the six months ended December 31, 1995 and 1996 5 Unaudited Condensed Consolidated Statements of Stockholder's Equity for the six months ended December 31, 1996 6 Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1995 and 1996 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 37 Item 6. Exhibits and reports on Form 8-K 37 SIGNATURES 38
2 3 PART 1 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In 000's, except share data)
June 30, Dec. 31, 1996 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 48,057 $ 29,401 Accounts and notes receivable, net of allowance for doubtful accounts of $17,727 and $23,098 93,502 101,051 Inventories, net 41,656 40,196 Other current assets 8,354 6,597 --------- --------- Total current assets 191,569 177,245 --------- --------- Leased equipment, net 482 3,743 Long-term notes receivable, net of allowance for doubtful accounts of $1,770 and $1,781 14,184 14,026 Property, plant and equipment, net of accumulated depreciation of $30,144 and $35,921 77,602 75,889 Excess of costs over net assets of acquired businesses, net of accumulated amortization of $422 and $1,150 60,292 60,590 Intangible assets, net of accumulated amortization of $5,216 and $7,495 20,247 18,231 Other assets, net 11,128 12,694 --------- --------- Total assets $ 375,504 $ 362,418 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,240 $ 13,694 Accrued liabilities 38,543 39,677 Current maturities of long-term debt and lines of credit 25,777 14,482 --------- --------- Total current liabilities 80,560 67,853 --------- --------- Senior secured notes, net of unamortized discount of $3,071 and $2,928 150,929 151,072 Other long-term debt, less current maturities 14,638 13,051 Other liabilities 6,831 6,851 --------- --------- Total liabilities 252,958 238,827 --------- --------- Minority interest 1,148 1,193 Series B Special Stock, $.10 par value, $100 liquidation value; 684,551 shares and 699,491 issued and outstanding, net of discount 51,552 53,761 Commitments and contingencies Stockholders' equity: Common Stock, $.10 par value; 175,000,000 shares authorized; 31,763,000 shares and 31,835,000 issued and outstanding 3,176 3,184 Series E Special Stock, $100 liquidation value; 113,160 and 116,872 shares issued and outstanding 11,316 11,687 Additional paid-in capital 139,031 138,987 Cumulative translation adjustment (287) (1,201) Accumulated deficit (83,390) (84,020) --------- --------- Total stockholders' equity 69,846 68,637 --------- --------- Total liabilities and stockholders' equity $ 375,504 $ 362,418 ========= =========
See notes to unaudited condensed consolidated financial statements. 3 4 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except share data)
Three Months Ended December 31, 1995 1996 --------- --------- Revenues: Gaming equipment and systems sales $ 3 $ 42,273 Wall machine and amusement game sales --- 42,293 Gaming machine operations 26,325 31,692 Casino operations 11,359 12,445 --------- --------- 37,687 128,703 --------- --------- Costs and expenses: Cost of gaming equipment and systems sales 1 26,483 Cost of wall machine and amusement game sales --- 20,317 Cost of gaming machine operations 20,148 23,644 Cost of casino operations 5,397 5,583 Selling, general and administrative 7,010 28,113 Provision for doubtful receivables 11 4,734 Depreciation and amortization 2,419 5,920 Direct merger costs 4,760 --- --------- --------- 39,746 114,794 --------- --------- Operating income (loss) (2,059) 13,909 Other income (expense): Interest income 392 471 Interest expense (2,081) (5,628) Royalty fees (928) (1,125) Minority interest in income (132) (285) Other, net 53 53 --------- --------- Income (loss) before income taxes (4,755) 7,395 Income tax provision 1,258 3,250 --------- --------- Net income (loss) (6,013) 4,145 Special Stock dividends including repurchase premium --- 3,094 --------- --------- Net income (loss) applicable to common shares $ (6,013) $ 1,051 ========= ========= Net income (loss) per common share $ (0.50) $ 0.03 ========= ========= Weighted average common shares outstanding 12,103 31,834 ========= =========
See notes to unaudited condensed consolidated financial statements. 4 5 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In 000's, except share data)
Six Months Ended December 31, 1995 1996 --------- --------- Revenues: Gaming equipment and systems sales $ 6 $ 77,175 Wall machine and amusement game sales --- 68,700 Gaming machine operations 52,621 60,582 Casino operations 23,602 25,158 --------- --------- 76,229 231,615 --------- --------- Costs and expenses: Cost of gaming equipment and systems sales 1 48,290 Cost of wall machine and amusement game sales --- 35,421 Cost of gaming machine operations 40,361 45,539 Cost of casino operations 11,313 10,958 Selling, general and administrative 13,703 50,393 Provision for doubtful receivables 32 6,309 Depreciation and amortization 4,906 11,141 Unusual items --- 700 Direct merger costs 9,437 --- --------- --------- 79,753 208,751 --------- --------- Operating income (loss) (3,524) 22,864 Other income (expense): Interest income 818 1,034 Interest expense (4,288) (11,879) Royalty fees (1,908) (2,276) Minority interest in income (276) (426) Other, net 535 52 --------- --------- Income (loss) before income taxes (8,643) 9,369 Income tax provision 788 4,588 --------- --------- Net income (loss) (9,431) 4,781 Special Stock dividends including repurchase premium --- 5,991 --------- --------- Net loss applicable to common shares $ (9,431) $ (1,210) ========= ========= Net loss per common share $ (.79) $ (.04) ========= ========= Weighted average common shares outstanding 11,879 31,802 ========= =========
See notes to unaudited condensed consolidated financial statements. 5 6 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended December 31, 1996 (In 000's)
Retained Total Series E Additional Earnings Cumulative Stock- Common Stock Special Stock Paid-in (Accum. Translation holders' Shares Dollars Shares Dollars Capital Deficit) Adjustment Equity ------ ------- ------ ------- ------- -------- ----------- ------ Balances at June 30, 1996 31,763 $3,176 113 $11,316 $139,031 $(83,390) $(287) $69,846 Net income - - - - - 4,7 - 4,781 Shares issued upon exercise of options 75 8 - - 115 - - 123 Adjustments to merger consideration (3) - - - (12) - - (12) Special Stock dividends - - 4 371 - (5,411) - (5,040 Special Stock repurchase premium - - - - (580) - - (580) Other - - - - 433 - - 433 Foreign currency translation adjustment - - - - - - - (914) ------ ------ --- ------- -------- -------- ------- ------- Balances at December 31, 1996 31,835 $3,184 117 $11,687 $138,987 $(84,020) $(1,201) $68,637 ====== ====== === ======= ======== ======== ======= =======
See notes to unaudited condensed consolidated financial statements. 6 7 ALLIANCE GAMING CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In 000's)
Six Months Ended December 31, 1995 1996 -------- -------- Cash flows from operating activities: Net income (loss) $(9,431) $ 4,781 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,906 11,141 Amortization of debt discounts 118 654 Writedown of other assets 201 1,153 Loss on sale of assets 240 275 Provision for losses on receivables 32 6,309 Other 655 (1,625) Net change in operating assets and liabilities: Accounts and notes receivable 256 (13,521) Inventories 12 (5,036) Other current assets 1,618 898 Accounts payable 537 (2,546) Accrued liabilities 1,630 1,274 -------- -------- Net cash provided by operating activities 774 3,757 Cash flows from investing activities: Additions to property, plant and equipment (5,004) (6,055) Proceeds from disposal of property and equipment 2,218 2,791 Proceeds from sales of securities available for sale 8,015 --- Other (2,599) (1,534) -------- -------- Net cash provided by (used in) investing activities 2,630 (4,798) Cash flows from financing activities: Proceeds from long-term debt, net of expenses 682 41 Reduction of long-term debt (2,091) (4,853) Net change in lines of credit --- (9,564) Repurchase of Series B Special Stock --- (3,307) Issuance of common stock upon exercise of stock options --- 123 ------ -------- Net cash used in financing activities (1,409) (17,560) Effect of exchange rate changes on cash --- (55) Cash and cash equivalents: Increase (decrease) for period 1,995 (18,656) Balance, beginning of period 13,734 48,057 -------- -------- Balance, end of period $ 15,729 $ 29,401 ======== ========
See notes to unaudited condensed consolidated financial statements. 7 8 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation ("Alliance or the "Company") for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results which may be expected for any other interim period or for the year as a whole. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's annual report on Form 10-K for the year ended June 30, 1996. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheet at June 30, 1996 was derived from audited consolidated financial statements, but does not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to prior period financial statements to conform with current period presentation. On June 18, 1996, the Company completed the acquisition of all the outstanding shares of Bally Gaming International, Inc. ("BGII") (the "Merger"). The consideration paid consisted of approximately $77,243,000 in cash, $2,957,000 in the Company's common stock and $36,571,000 in the Company's Series B Special Stock, totaling $11.84 per share for the 9,855,500 shares of BGII outstanding (excluding the 1,000,000 shares beneficially owned by the Company prior to the Merger). The acquisition has been accounted for as a purchase and the results of operations of BGII have been included in the consolidated financial statements since June 18, 1996. The purchase price was allocated based on estimated fair values at the date of the acquisition. During the one year period following the Merger, the Company will make adjustments to the estimated fair values assigned to the assets acquired and liabilities assumed from BGII based on appraisals and other information received, which will result in changes to the excess of purchase price over the fair value of BGII assets acquired and liabilities assumed. The excess of purchase price over the BGII assets acquired is being amortized on a straight-line basis over 40 years and has been adjusted during the quarter ended December 31, 1996 for changes in fair values assigned to certain assets and liabilities. 2. SUPPLEMENTAL CASH FLOW INFORMATION The following supplemental information is related to the condensed consolidated statements of cash flows. In the three months ended December 31, 1995 and 1996, the Company recorded the following significant non-cash items: During the six months ended December 31, 1996, the Company reclassified approximately $1,461,000 from other assets to equipment as gaming machines were manufactured and placed into service on the Nevada route, reclassified approximately $1,436,000 to property, plant and equipment from excess costs over net assets of acquired business based on recent appraisals received for certain German properties and reclassified approximately $6,496,000 from inventory to leased equipment. In addition, the Company recorded non-cash dividends for its Series E and Series B Special Stock in the amount of $5,411,000. During the six months ended December 31, 1995, the Company reclassified approximately $1,170,000 from other assets to equipment as gaming machines were manufactured and placed into service on the Nevada route. In addition, the Company recorded a non-cash unrealized loss on securities available for sale in the amount of $752,000 recorded in the stockholders equity section, net of tax. 8 9 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 3. LONG-TERM DEBT AND LINES OF CREDIT Long-term debt at June 30, 1996 and December 31, 1996 consists of the following:
June 30, Dec. 31, 1996 1996 -------- -------- (in 000's) 12 7/8% Senior Secured Notes due 2003, net of unamortized discount of $3,071,000 and $2,928,000 $150,929 $151,072 Bally Wulff revolving lines of credit 13,664 11,029 Hospitality Franchise Systems note payable, secured by the assets of the Rainbow Casino 7,864 7,228 Bally Gaming and Systems revolving line of credit 7,525 596 7.5% Convertible subordinated debentures due 2003, unsecured 1,642 1,642 Subordinated note payable to stockholder, net of discount 2,268 --- Other, secured by related equipment 7,452 7,038 -------- -------- 191,344 178,605 Less current maturities 25,777 14,482 -------- -------- Long-term debt, less current maturities $165,567 $164,123 ======== ========
In June 1996, the Company completed a public offering of $154,000,000 aggregate principal amount of its 12 7/8% Senior Secured Notes due 2003 (the "Senior Secured Notes") as part of the financing of the BGII Merger. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 30 and December 30 of each year, commencing December 30, 1996. The Senior Secured Notes will mature on June 30, 2003. The Senior Secured Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 30, 2000 at the redemption prices of 104.292% for the twelve months beginning June 30, 2000, 102.146% for the twelve months beginning June 30, 2001 and 100% thereafter, plus accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of a change of control as defined in the indenture, the Company is required to make an offer to repurchase the Senior Secured Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The Senior Secured Notes are secured by an exclusive pledge of the equity interests directly or indirectly held by the Company in its subsidiaries, except for the equity interests in BGII and its subsidiaries, but including the equity interest in Alliance Holding Company ("Holding"), which was formed to hold the equity interests of BGII and its subsidiaries. The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several senior basis by each present and future subsidiary, as defined, of the Company, other than (i) the partially-owned entities through which the Company's Mississippi casino and Louisiana gaming machine operations are conducted and (ii) specified entities through which the Company's German operations are conducted. The indenture for the Company's Senior Secured Notes contains various covenants including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. In June 1996, in response to a solicitation from the Company, holders of $83,358,000 aggregate principal amount of its 7.5% Convertible Subordinated Debentures ("Convertible Debentures") elected to exchange their Convertible Debentures for new debentures that converted at the time of the Merger into shares of the Company's common stock ($72,042,000 principal amount) and shares of the Company's Series E Special 9 10 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 Stock ($11,316,000 principal amount). At December 31, 1996, $1,642,000 of Convertible Debentures remained outstanding. During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan $7,750,000 to the Company's majority controlled subsidiary Rainbow Casino Vicksburg Partnership, L.P. ("RCVP") in connection with the construction of the Rainbow Casino. The loan amount was subsequently increased to $10,000,000. The note bears interest at 7.5% per annum and requires monthly payments of principal and interest over a 24-month period. In exchange for funding this loan, HFS is also entitled to receive in perpetuity a monthly royalty fee based on the casino's gaming revenues of 12% on the first $40.0 million, 11% on the next $10.0 million, and 10% thereafter. The accompanying unaudited consolidated statement of operations for the six months ended December 31, 1995 and 1996 include approximately $1,908,000 and $2,276,000 of such royalties, respectively. In March 1992, Alfred H. Wilms, director and principal stockholder (and then Chairman of the Board of Directors and Chief Executive Officer) of the Company, committed to provide or cause others to provide a $6,500,000 five year loan to Video Services, Inc. ("VSI"), the Company's controlled subsidiary, which loan was funded in full and was secured by a subordinated interest in all of VSI's present and future personal property. All scheduled principal and interest payments were made until September 1996 when the Company paid off the remaining principal and accrued interest balance totaling $2,826,000. During March 1993, the Bally Wulff entities obtained two bank lines of credit originally for the purpose of financing the acquisition of assets acquired from an independent distributor which has subsequently been utilized for general working capital purposes. The agreements provide for borrowings of DM16,000,000 (approximately $10,381,000 at December 31, 1996 exchange rates) and DM1,250,000 (approximately $811,000 at December 31, 1996), respectively. The DM1,250,000 line of credit was originally DM5,000,000 and has been, and will continue to be, reduced by DM250,000 principal amount per quarter, and expires on March 31, 1998. Borrowings under this line of credit bear interest at 6.95%. The working capital revolving credit line of DM16,000,000 bears interest at a rate tied to an international borrowing rate plus 1% (4.46% at December 31, 1996) and is due on demand. These lines are collateralized by a pledge of the assets acquired. Approximately $454,000 was outstanding under these lines at December 31, 1996. In May 1993, the Bally Wulff entities obtained a DM16,300,000 (approximately $10,575,000 at December 31, 1996) revolving line of credit for general working capital purposes. This agreement bears interest at a rate tied to an international borrowing rate plus 1% (4.46% at December 31, 1996 exchange rates) and is due on demand. This line is collateralized by the receivables of the Bally Wulff entities. Approximately $10,575,000 was outstanding under this line at December 31, 1996. During the quarter ended December 31, 1996, Bally Wulff refinanced an existing mortgage note to bring the borrowing under the same financial institution that provides the lines of credit discussed above. In accordance with the covenants for the Senior Secured Notes, the refinanced mortgage note bears approximately the same interest rate and has a stated maturity which is not shorter than its original maturity date. In March 1993, BGII's domestic subsidiary, Bally Gaming, Inc., obtained a bank revolving line of credit which, as amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the credit agreement) inventory and accounts receivable with a maximum borrowing capacity of $15,000,000. Borrowings under this agreement, which expires March 31, 1997, bear interest at 1.5% above the bank's prime rate (9.75% at December 31, 1996). The Company must pay an annual facility fee of one-half of one percent of the maximum borrowing capacity and a monthly unused line fee of one-quarter of one percent of the difference between the maximum borrowing capacity and the average daily outstanding balance during any month. This line of credit is collateralized by property, plant and equipment and the 10 11 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 eligible inventory and accounts receivable. The agreement and subsequent amendments also contain certain financial and other restrictive covenants, including the maintenance by Bally Gaming, Inc. of specified levels of minimum net working capital, working capital ratio, tangible net worth, net worth ratio, and minimum net income after taxes, all as defined in the credit agreement. Eligible borrowing capacity under this agreement at December 31, 1996 was $15,000,000. Approximately $596,000 was outstanding under this line at December 31, 1996. In January 1997, the Company received a commitment letter for a new working capital based line of credit which will provide for borrowings based on a percentage of Bally Gaming, Inc.'s eligible accounts receivable and inventory with a maximum borrowing capacity of $30,000,000, subject to the $40,000,000 maximum worldwide revolving credit limitation in the Company's indenture for the Senior Secured Notes. This line of credit would be collateralized by accounts receivable and inventory and will have no financial covenants other than a requirement to maintain minimum net worth. As currently contemplated, the Company will close on this new facility on March 31, 1997 upon expiration of the Company's existing line of credit. 4. SERIES B SPECIAL STOCK During the quarter ended December 31, 1996, the Company purchased on the open market 17,500 shares of its Series B Special Stock for $1,654,000 which represented a premium of $343,000 over the carrying value. For the six months ended December 31, 1996, the Company purchased on the open market 36,500 shares of its Series B Special Stock for $3,307,000 which represented a premium of $580,000 over the carrying value. The premium paid is reflected in the consolidated statement of stockholder's equity as a charge against additional paid-in capital, and is also deducted in computing net income applicable to common shareholders. 5. INCOME TAXES The Company's effective tax rate for the three and six month periods ended December 31, 1996 differs from the statutory rate of 35% due to higher tax rates applicable to earnings of Bally Wulff, combined with the fact that earnings at the Company's domestic subsidiaries cannot be fully offset by the utilization of net operating loss carryforwards. The Company's effective tax rate for the three and six month periods ended December 31, 1995 differs from the statutory rate of 35% due to the book tax benefit related to the change in the unrealized gains and losses in the investments and securities available for sale, and the fact that net operating losses incurred during the period were fully reserved. 6. LEGAL PROCEEDINGS LITIGATION RELATING TO THE BGII MERGER. On or about June 19, 1995, three purported class actions were filed in the Chancery Court of Delaware by BGII stockholders against BGII and its directors (the "Fiorella, Cignetti and Neuman Actions") in connection with the then-proposed merger of BGII with WMS ("WMS Merger"). Also on or about June 19, 1995, a purported class action was filed in the Delaware Court of Chancery by a BGII stockholder against BGII and its directors and the Company (the "Strougo Action") in connection with the tender offer and consent solicitation made by the Company (subsequently superseded by the execution of the Agreement and Plan of Merger in October 1995 between the Company and BGII). On or about July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman and Strougo Actions (collectively, the "Stockholder Plaintiffs") filed with the 11 12 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 Court a motion to consolidate the four actions. On or about July 27, 1995, certain of the Stockholder Plaintiffs filed an amended complaint that adopted certain allegations concerning self-dealing by BGII directors in connection with the merger agreement entered into with WMS (the "WMS Agreement"); added a claim relating to BGII's alleged failure to hold an annual meeting as required; and added WMS as defendant. The amended complaint also alleged that BGII intended, in violation of Delaware law, to sell Bally Wulff without first seeking stockholder approval of the sale. The action sought an order enjoining defendants from proceeding with, consummating or closing the WMS merger or rescinding it if it closed; preventing the sale of Bally Wulff without prior stockholder approval; declaring invalid BGII's agreement to pay WMS a fee if the WMS Agreement is terminated by BGII in certain circumstances; compelling an auction of BGII and the provision of due diligence to the Company; scheduling an immediate meeting of BGII stockholders; and awarding compensatory damages. The Company believes these claims to be without merit and intends to vigorously defend these actions. On October 23, 1995, WMS instituted a suit in New York State Court against BGII for BGII's failure to pay $4.8 million upon termination of the WMS Agreement. Management intends to vigorously defend this action. On November 22, 1995, BGII answered the complaint and brought counterclaims against WMS alleging that WMS repudiated and breached the WMS Agreement by, among other things, failing to act in good faith toward the consummation of the WMS Merger, advising BGII that it would not perform as agreed but would impose new conditions on the WMS Merger, acting in excess of its authority and undermining the ability of BGII to perform the WMS Agreement. On February 8, 1996 WMS moved for summary judgment. On April 2, 1996, BGII opposed WMS's motion and cross-moved for summary judgment. On September 14, 1995, a stockholders' class and derivative action was commenced by Richard Iannone, a stockholder of the Company, against the Company, the members of its current Board of Directors and certain of its former directors in Federal District Court in Nevada asserting, among other matters, that the Company has wasted corporate assets in its efforts to acquire BGII and that the Company had made false and misleading statements and omissions in connection with the Company's then extant tender offer to purchase the shares of BGII. On December 12, 1996, the court dismissed the action in its entirety on the defendants' motion, ruling that the plantiff's sole federal cause of action failed to state a claim for relief. Following the ruling, in January 1997 the plaintiff agreed to waive his rights of appeal and to refrain from further litigation against the defendants, in exchange for the defendants' agreement not to seek an award of costs or the imposition of sanctions against the plaintiff or his counsel. OTHER 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"). The plaintiffs filed suit against BGII and approximately 45 other defendants (each a "defendant," and collectively the "defendants"). Each defendant is involved in the gaming business as either a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people to play their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants' actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of one billion dollars, and are asking that any damage awards be trebled under applicable Federal law. Management believes the plaintiffs' lawsuit to be without merit. The Company intends to vigorously pursue all legal defenses available to it. 12 13 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 The Company has been named as a defendant in an action brought by Canpartners Investments IV and Cerberus Partners, which is currently pending in federal district court for the Southern District of New York. The Company entered into certain loan commitment letters with the plaintiffs in August 1995, contemplating that the plaintiffs would lend approximately $30.0 million to partially fund the Company's then pending hostile tender offer for BGII. The Company entered into a friendly Merger Agreement with BGII in October 1995 and did not use funds provided by the plaintiffs when effecting its acquisition of BGII in June 1996.The plaintiffs have asserted claims based upon the Company's alleged breach of loan commitment, and seek damages on various theories, ranging from $2.2 million (breach of contract and fraudulent concealment) to in excess of $12.0 million (breach of duty of good faith and fair dealing). The Company believes that it has strong defenses to all of the claims and intends to defend the action vigorously. While the ultimate outcome of the matters described above is not presently determinable, management does not expect that the outcome will have a material adverse effect on the Company's results of operations, financial position or cash flows. The Company and its subsidiaries are also involved from time to time in various claims and legal actions arising in the ordinary course of business. Management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. 7. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS The following unaudited consolidating financial statements are presented in columnar presentation as follows: the parent company and its wholly-owned "Guaranteeing Subsidiaries", its "Pledging Subsidiaries" consisting of VSI, Rainbow Casino Vicksburg L.P. and its non-pledging and non-guaranteeing subsidiary, Alliance Automaten GmbH & Co KG (the subsidiary that holds the Company's German interests). The "Pledging Subsidiaries" are shown separately because all of the Company's interest in these entities is pledged as collateral for the Senior Secured Notes. The unaudited note to consolidating financial statements should be read in conjunction with these unaudited consolidating financial statements. 13 14 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS June 30, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------------ ----- ------------ ASSETS Current assets: Cash and cash equivalents $ 37,008 $ 8,684 $ 2,365 $ $ 48,057 Accounts and notes receivable, net 39,326 35 55,439 (1,298) 93,502 Inventories, net 24,073 12 17,571 41,656 Other current assets 6,283 552 1,519 8,354 --------- --------- --------- --------- --------- Total current assets 106,690 9,283 76,894 (1,298) 191,569 --------- --------- --------- --------- --------- Leased equipment, net 482 482 Long-term notes receivable, net 97,227 1,773 (84,816) 14,184 Property, plant and equipment, net 39,225 26,937 11,440 77,602 Excess of costs over net assets of acquired businesses, net 36,890 23,402 60,292 Intangible assets, net 19,826 420 1 20,247 Investment in subsidiaries 331,552 (331,552) Other assets, net 17,794 2,682 (6,447) (2,901) 11,128 --------- --------- --------- --------- --------- $ 649,204 $ 39,322 $ 107,545 $(420,567) $ 375,504 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,408 $ 213 $ 4,226 $ (2,607) $ 16,240 Accrued liabilities 29,641 3,969 6,234 (1,301) 38,543 Current maturities of long-term debt 8,200 3,913 13,664 25,777 --------- --------- --------- --------- --------- Total current liabilities 52,249 8,095 24,124 (3,908) 80,560 --------- --------- --------- --------- --------- Senior Secured Notes due 2003, net 150,929 150,929 Other long-term debt, less current maturities 83,042 12,984 3,007 (84,395) 14,638 Other liabilities 7,344 (513) 6,831 --------- --------- --------- --------- --------- Total liabilities 293,564 21,079 27,131 (88,816) 252,958 --------- --------- --------- --------- --------- Minority interest 1,148 1,148 Series B Special Stock 51,552 51,552 Commitments and contingencies Stockholders' equity: Common Stock 3,655 2 17,811 (18,292) 3,176 Series E Special Stock 11,316 11,316 Additional paid-in capital 322,091 7,861 62,512 (253,433) 139,031 Cumulative translation adjustment (299) (275) 287 (287) Retained earnings (accumulated deficit) (33,823) 10,380 366 (60,313) (83,390) --------- --------- --------- --------- --------- Total stockholders' equity 302,940 18,243 80,414 (331,751) 69,846 --------- --------- --------- --------- --------- $ 649,204 $ 39,322 $ 107,545 $(420,567) $ 375,504 ========= ========= ========= ========= =========
See accompanying unaudited note. 14 15 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS December 31, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------------ ----- ------------ ASSETS Current assets: Cash and cash equivalents $ 12,735 $ 10,021 $ 6,645 $ $ 29,401 Accounts and notes receivable, net 41,807 31 60,369 (1,156) 101,051 Inventories, net 22,499 15 18,840 (1,158) 40,196 Other current assets 5,092 349 1,156 6,597 --------- --------- --------- --------- --------- Total current assets 82,133 10,416 87,010 (2,314) 177,245 --------- --------- --------- --------- --------- Leased equipment, net 3,743 3,743 Long-term notes receivable, net 95,729 2,677 (84,380) 14,026 Property, plant and equipment, net 40,265 26,793 8,831 75,889 Excess of costs over net assets of acquired businesses, net 37,513 23,312 (235) 60,590 Intangible assets, net 17,901 329 1 18,231 Investment in subsidiaries 365,121 (365,121) Other assets, net 16,383 2,363 (6,137) 85 12,694 --------- --------- --------- --------- --------- $ 655,045 $ 39,901 $ 119,437 $(451,965) $ 362,418 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,977 $ 471 $ 2,177 $ 69 $ 13,694 Accrued liabilities 20,600 3,839 15,604 (366) 39,677 Current maturities of long term-debt 1,209 3,020 11,029 (776) 14,482 --------- --------- --------- --------- --------- Total current liabilities 32,786 7,330 28,810 (1,073) 67,853 --------- --------- --------- --------- --------- Senior Secured Notes due 2003, net 151,072 151,072 Other long-term debt, less current maturities 82,717 10,602 3,732 (84,000) 13,051 Other liabilities 7,289 35 (473) 6,851 --------- --------- --------- --------- --------- Total liabilities 273,864 17,932 32,577 (85,546) 238,827 --------- --------- --------- --------- --------- Minority interest 1,193 1,193 Series B Special Stock 53,761 53,761 Commitments and contingencies Stockholders' equity: Common Stock 3,663 1 17,811 (18,291) 3,184 Series E Special Stock 11,687 11,687 Additional paid-in capital 321,573 7,861 62,512 (252,959) 138,987 Cumulative translation adjustment (1,169) (1,236) 1,204 (1,201) Retained earnings (Accumulated deficit) (9,527) 14,107 7,773 (96,373) (84,020) --------- --------- --------- --------- --------- Total stockholders' equity 326,227 21,969 86,860 (366,419) 68,637 --------- --------- --------- --------- --------- $ 655,045 $ 39,901 $ 119,437 $(451,965) $ 362,418 ========= ========= ========= ========= =========
See accompanying unaudited note. 15 16 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended December 31, 1995 (In 000's)
Alliance Gaming Parent and Corporation Guaranteeing Pledging Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ Revenues: Gaming machine operations $ 22,411 $ 4,047 $ (133) $ 26,325 Casino and tavern operations 4,005 7,956 (602) 11,359 Gaming equipment sales 3 3 -------- -------- -------- -------- 26,419 12,003 (735) 37,687 -------- -------- -------- -------- Costs and expenses: Cost of gaming machine operations 17,720 2,561 (133) 20,148 Cost of casino and tavern operations 2,562 2,904 (69) 5,397 Cost of gaming equipment sales 1 1 Selling, general and administrative 4,659 2,789 (438) 7,010 Provision for doubtful receivables 11 11 Depreciation and amortization 1,874 545 2,419 Direct merger costs 4,760 4,760 -------- -------- -------- -------- 31,576 8,810 (640) 39,746 -------- -------- -------- -------- Operating income (loss) (5,157) 3,193 (95) (2,059) Loss from consolidated subsidiaries (2,354) 2,354 Other income (expense): Interest income 428 89 (125) 392 Interest expense (1,738) (468) 125 (2,081) Royalty fees (928) (928) Minority interest in income (132) (132) Other, net 71 117 (135) 53 -------- -------- -------- -------- Income (loss) before income taxes (8,750) 1,871 2,124 (4,755) Income tax provision (benefit) 1,190 298 (230) 1,258 -------- -------- -------- -------- Net income (loss) $ (9,940) $ 1,573 $ 2,354 $ (6,013) ======== ======== ======== ========
See accompanying unaudited note. 16 17 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended December 31, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------------ ----- ------------ Revenues: Gaming equipment and systems sales $ 41,255 $ $ 2,664 $ (1,646) $ 42,273 Wall machine and amusement game sales 42,309 (16) 42,293 Gaming machine operations 27,179 4,513 31,692 Casino operations 2,931 9,514 12,445 --------- --------- --------- --------- --------- 71,365 14,027 44,973 (1,662) 128,703 --------- --------- --------- --------- --------- Costs and expenses: Cost of gaming equipment and systems sales 25,178 2,121 (816) 26,483 Cost of wall machines and amusement game sales 20,317 20,317 Cost of gaming machine operations 20,735 2,909 23,644 Cost of casino operations 1,896 3,687 5,583 Selling, general and administrative 16,116 2,983 9,072 (58) 28,113 Provision for doubtful receivables 2,297 2,437 4,734 Depreciation and amortization 3,343 584 1,993 5,920 --------- --------- --------- --------- --------- 69,565 10,163 35,940 (874) 114,794 --------- --------- --------- --------- --------- Operating income 1,800 3,864 9,033 (788) 13,909 Earnings from consolidated subsidiaries 15,865 (15,865) Other income (expense): Interest income 3,237 80 (2,846) 471 Interest expense (8,021) (303) (150) 2,846 (5,628) Royalty fees (1,125) (1,125) Minority interest in income (285) (285) Other, net 92 (22) (17) 53 --------- --------- --------- --------- --------- Income (loss) before income taxes 12,688 2,494 8,883 (16,670) 7,395 Income tax provision (benefit) (115) 241 3,124 3,250 --------- --------- --------- --------- --------- Net income (loss) 12,803 2,253 5,759 (16,670) 4,145 Special Stock dividends (3,094) (3,094) --------- --------- --------- --------- --------- Net income (loss) applicable to common shares $ 9,709 $ 2,253 $ 5,759 $ (16,670) $ 1,051 ========= ========= ========= ========= =========
See accompanying unaudited note. 17 18 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 1995 (In 000's)
Alliance Gaming Parent and Corporation Guaranteeing Pledging Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ Revenues: Gaming machine operations $ 45,127 $ 7,831 $ (337) $ 52,621 Casino and tavern operations 8,629 16,259 (1,286) 23,602 Gaming equipment sales 6 6 -------- -------- -------- -------- 53,762 24,090 (1,623) 76,229 -------- -------- -------- -------- Costs and expenses: Cost of gaming machine operations 35,753 4,945 (337) 40,361 Cost of casino and tavern operations 5,513 5,979 (179) 11,313 Cost of gaming equipment sales 1 1 Selling, general and administrative 9,425 5,215 (937) 13,703 Provision for doubtful receivables 10 22 32 Depreciation and amortization 3,833 1,073 4,906 Direct merger costs 9,437 9,437 -------- -------- -------- -------- 63,972 17,234 (1,453) 79,753 -------- -------- -------- -------- Operating income (loss) (10,210) 6,856 (170) (3,524) Loss from consolidated subsidiaries (3,873) 3,873 Other income (expense): Interest income 907 149 (238) 818 Interest expense (3,496) (1,030) 238 (4,288) Royalty fees (1,908) (1,908) Minority interest in income (276) (276) Other, net 422 429 (316) 535 -------- -------- -------- -------- Income (loss) before income taxes (16,250) 4,220 3,387 (8,643) Income tax provision (benefit) 655 619 (486) 788 -------- -------- -------- -------- Net income (loss) $(16,905) $ 3,601 $ 3,873 $ (9,431) ======== ======== ======== ========
See accompanying unaudited note. 18 19 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended December 31, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------------ ----- ------------ Revenues: Gaming equipment and systems sales $ 74,889 $ $ 5,665 $ (3,379) $ 77,175 Wall machine and amusement game sales 68,736 (36) 68,700 Gaming machine operations 51,749 8,833 60,582 Casino operations 6,047 19,111 25,158 --------- --------- --------- --------- --------- 132,685 27,944 74,401 (3,415) 231,615 --------- --------- --------- --------- --------- Costs and expenses: Cost of gaming equipment and systems sales 46,264 4,550 (2,524) 48,290 Cost of wall machines and amusement game sales 35,421 35,421 Cost of gaming machine operations 39,853 5,686 45,539 Cost of casino operations 3,783 7,175 10,958 Selling, general and administrative 28,308 5,798 16,407 (120) 50,393 Provision for doubtful receivables 3,477 2,832 6,309 Depreciation and amortization 6,593 1,140 3,408 11,141 Unusual items 700 700 --------- --------- --------- --------- --------- 128,978 19,799 62,618 (2,644) 208,751 --------- --------- --------- --------- --------- Operating income 3,707 8,145 11,783 (771) 22,864 Earnings from consolidated subsidiaries 25,431 (25,431) Other income (expense): Interest income 6,921 170 (6,057) 1,034 Interest expense (16,413) (1,168) (355) 6,057 (11,879) Royalty fees (2,276) (2,276) Minority interest in income (426) (426) Other, net (43) 130 (35) 52 --------- --------- --------- --------- --------- Income (loss) before income taxes 19,177 5,001 11,428 (26,237) 9,369 Income tax provision (benefit) (421) 752 4,257 4,588 --------- --------- --------- --------- --------- Net income (loss) 19,598 4,249 7,171 (26,237) 4,781 Special Stock dividends (5,991) (5,991) --------- --------- --------- --------- --------- Net income (loss) applicable to common shares $ 13,607 $ 4,249 $ 7,171 $ (26,237) $ (1,210) ========= ========= ========= ========= =========
See accompanying unaudited note. 19 20 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1995 (In 000's)
Alliance Gaming Parent and Corporation Guaranteeing Pledging Adjust- and Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ----- ------------ Cash flows from operating activities: Net cash provided by (used in) operating activities (5,555) 5,540 789 774 -------- -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (3,454) (1,550) (5,004) Proceeds from disposal of property and equipment 2,089 129 2,218 Net sale of securities available for sale 8,015 8,015 Other (2,599) (2,599) -------- -------- -------- -------- Net cash provided by (used in) investing activities 4,051 (1,421) 2,630 -------- -------- -------- -------- Cash flows from financing activities: Proceeds from long-term debt, net of expenses 533 1,288 (1,139) 682 Reduction of long-term debt (121) (2,320) 350 (2,091) -------- -------- -------- -------- Net cash provided by (used in) financing activities 412 (1,032) (789) (1,409) -------- -------- -------- -------- Cash and cash equivalents: Increase (decrease) for period (1,092) 3,087 1,995 Balance, beginning of period 8,235 5,499 13,734 -------- -------- -------- -------- Balance, end of period $ 7,143 $ 8,586 $ -- $ 15,729 ======== ======== ======== ========
See accompanying unaudited note. 20 21 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1996 (In 000's)
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------------ ------ ------------ Cash flows from operating activities: Net cash provided by (used in) operating activities (8,780) 6,024 6,132 381 3,757 -------- -------- -------- -------- -------- Cash flows from investing activities: Additions to property, plant and equipment (3,498) (905) (1,652) (6,055) Proceeds from disposal of property and equipment 39 4 2,748 2,791 Other (1,534) (1,534) -------- -------- -------- -------- -------- Net cash used in investing activities (4,993) (901) 1,096 (4,798) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from long-term debt 41 41 Reduction of long-term debt (428) (3,786) (258) (381) (4,853) Net change in lines of credit (6,929) (2,635) (9,564) Repurchase of Series B Special Stock (3,307) (3,307) Issuance of common stock upon exercise of stock options 123 123 -------- -------- -------- -------- -------- Net cash used in financing activities (10,500) (3,786) (2,893) (381) (17,560) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash (55) (55) Cash and cash equivalents: Increase (decrease) for period (24,273) 1,337 4,280 (18,656) Balance, beginning of period 37,008 8,684 2,365 48,057 -------- -------- -------- -------- -------- Balance, end of period $ 12,735 $ 10,021 $ 6,645 $ -- $ 29,401 ======== ======== ======== ======== ========
See accompanying unaudited note. 21 22 ALLIANCE GAMING CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DEBT AND LINES OF CREDIT Long-term debt and lines of credit at December 31, 1996, consist of the following (in 000's):
Alliance Non-Pledging Gaming Parent and Non- Corporation Guaranteeing Pledging Guaranteeing Adjust- and Subsidiaries Subsidiaries Subsidiaries ments Subsidiaries ------------ ------------ ------------ ----- ------------ 12 7/8% Senior Secured notes due 2003, net of unamortized discount $ 151,072 $ $ $ $ 151,072 Hospitality Franchise Systems note payable 7,228 7,228 Bally Wulff revolving line of credit 11,029 11,029 Bally Gaming and Systems line of credit 596 596 7.5% Convertible subordinated debentures due 2003 1,642 1,642 Intercompany note payable 80,292 (80,292) Other 1,396 6,394 3,732 (4,484) 7,038 --------- --------- --------- --------- --------- 234,998 13,622 14,761 (84,776) 178,605 Less current maturities 1,209 3,020 11,029 (776) 14,482 --------- --------- --------- --------- --------- Long-term debt, less current maturities $ 233,789 $ 10,602 $ 3,732 $ (84,000) $ 164,123 ========= ========= ========= ========= =========
22 23 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES On June 18, 1996, the Company completed the acquisition of all the outstanding shares of BGII. The consideration paid consisted of $77,243,000 in cash, $2,957,000 in the Company's common stock and $36,571,000 in the Company's Series B Special Stock and totaled $11.84 per share for the 9,855,500 shares outstanding (excluding the 1,000,000 shares beneficially owned by the Company prior to the Merger). The Company incurred direct merger costs of approximately $4,760,000 and $0 during the three months ended December 31, 1995, and 1996, respectively and $9,437,000 and $0 during the six months ended December 31, 1995, and 1996, respectively. Such costs include legal, accounting, transaction financing fees, public and investor relations and printing costs and related costs. At December 31, 1996, the Company had $29,401,000 in cash and cash equivalents and $25,142,000 in availability on existing revolving lines of credit (representing a paydown in the lines of credit since June 30, 1996 of $9,564,000). In addition the Company had working capital of approximately $109,392,000, a decrease of approximately $1,617,000 from June 30, 1996. Consolidated cash and cash equivalents at December 31, 1996 includes approximately $9,000,000 of cash which is utilized in gaming operations which is held in vaults, cages or change banks. The following table presents an analysis of the consolidated working capital at June 30, 1996 and December 31, 1996 and the components of the changes from the prior period:
June 30, Dec. 31, Total 1996 1996 Change -------- -------- -------- (In $000's) Cash and Cash Equivalents $ 48,057 $ 29,401 $(18,656) Accounts and Notes Receivable, net 93,502 101,051 7,549 Inventories, net 41,656 40,196 (1,460) Other Current Assets, net 8,354 6,597 (1,757) -------- -------- -------- Total Current Assets 191,569 177,245 (14,324) Accounts Payable 16,240 13,694 2,546 Accrued Liabilities 38,543 39,677 (1,134) Current Maturities of Long Term Debt 25,777 14,482 11,295 -------- -------- -------- Total Current Liabilities 80,560 67,853 12,707 -------- -------- -------- Net Working Capital $111,009 $109,392 $ (1,617) ======== ======== ========
The following are the significant changes in the components of the Company's working capital during the six months ended December 31, 1996: Cash and Cash Equivalents The net change in cash and cash equivalents resulted from earnings before interest, taxes, depreciation and amortization, offset by: cash used for capital expenditures, cash used for principal reductions of the revolving lines of credit borrowings associated with Bally Gaming and Systems of $6,929,000 and Bally Wulff of $2,635,000, to fully pay a loan associated with VSI in the amount of $2,826,000, and payments made for accrued direct merger costs, accrued compensation, and the 23 24 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 accrued distribution payable to the limited partner in the Rainbow Casino Vicksburg Partnership, L.P., and $3,307,000 of cash used to purchase shares of Series B Special Stock. The Company also made its first semi-annual interest payment on the Senior Secured Notes on December 30, 1996. Other Current Assets and Liabilities During the six months ended December 31, 1996, the Company's accounts and notes receiveables increased in an amount proportionate to the increase in sales activities and were impacted by the financing terms to customers, particularly in the emerging markets. Inventories decreased primarily due to increased sales and by the non-cash impact of the movement of the dollar versus the deutchmark. Combined accounts payable and accrued liabilities decreased over the prior year period due to the payments made for accrued direct merger costs, accrued compensation, and the accrued distribution payable to the limited partner in the Rainbow Casino Vicksburg Partnership, L.P. Current Maturities of Long Term Debt During the six months ended December 31, 1996, current maturities of long term debt were reduced primarily due to the principal reductions of revolving line of credit borrowings associated with Bally Gaming and Systems and Bally Wulff, and to a lesser extent, the payment of a subordinated loan associated with VSI, partially offset by the reclassification to current maturities of long-term debt of certain debt instruments which now have maturities less than one year. Cash Flow and Other Information Cash provided by operating activities for the six months ended December 31, 1996 increased approximately $2,983,000 from amounts reported for the same period in 1995. Significant changes in operating assets and liabilities in the 1996 period from the 1995 period were caused by (1) net income of $4,781,000 compared to a net loss of $9,431,000 in the prior year period, (2) an increase in net current and long-term accounts and notes receivable of $13,777,000 due to increased sales activity and greater customer financing on current period sales especially at Bally Wulff, (3) an increase in inventories of $5,048,000 primarily related to increased production activity, (4) a decrease of $3,083,000 in accounts payable and (5) a decrease of $356,000 in accrued liabilities and other payables. Significant non-cash items added to net income in the computation of cash flows from operating activities for the six months ended December 31, 1996 include $11,141,000 of depreciation and amortization representing an increase of $6,235,000 over the prior year period and a provision for doubtful receivables of $6,309,000 representing an increase of $6,277,000 over the prior year period. Cash flows used in investing activities for the six months ended December 31, 1996 increased by $7,428,000 from the same period in 1995. The increase is primarily the result of the net sale of securities available for sale during the prior period totaling $8,015,000 compared to $0 in the current period and increased capital expenditures of $1,051,000. Cash flows used in financing activities for the six months ended December 31, 1996 increased $16,151,000 from the same period in 1995. The increase was primarily the result of cash used for principal reductions of long term debt and reduction of revolving line of credit borrowings in the amount of $9,500,000, payment of the remaining principal and accrued interest balance of the loan associated with VSI totaling $2,826,000 and the repurchase for $3,307,000 of 36,500 shares of the Company's Series B Special Stock. 24 25 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 In the prospectus for the Senior Secured Notes and Series B Special Stock issued to finance the Merger, the Company had presented adjusted operating cash flow for the combined companies which consists of the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA"), net of casino royalty and minority interest and adjusted to exclude direct merger costs and unusual items and, in periods prior to the Merger, as further adjusted to include BGII's results for the entire period and to assume cost savings synergies resulting from the Merger and to adjust business development expenses to an assumed annual amount of $3,000,000. The Company experienced an increase in adjusted operating cash flow from $9,880,000 in the three months ended December 31, 1995 to $18,419,000 in the three months ended December 31, 1996. In addition, the Company experienced a significant increase in adjusted operating cash flow from $19,129,000 in the six months ended December 31, 1995 to $32,202,000 in the six months ended December 31, 1996, Each of the Company's four business units contributed to these improvements. The following is summary of EBITDA, as adjusted by business unit reconciled to adjusted operating cash flows:
Three Months Ended December 31, Six Months Ended December 31, 1995(a) 1996(a) 1995(a) 1996(a) -------- -------- -------- -------- (In $000's) EBITDA by Business Unit: Bally Gaming and Systems $ 3,625 $ 6,328 $ 6,035 $ 11,771 Bally Wulff 2,498 10,841 5,657 14,911 Gaming Machine Operations 4,069 4,958 8,052(b) 9,722(b) Casino Operations 2,267 2,875 5,043(b) 6,154(b) Corporate Administrative Expenses and Other (3,991) (6,583) (8,658) (10,556) Direct Merger Costs (6,486) --- (11,437) --- Unusual Items (1,800) --- (3,329) (700) -------- -------- -------- -------- EBITDA, as adjusted 182 18,419 1,363 31,302 Adjustments: Direct Merger Costs 6,486 --- 11,437 --- Unusual Items or Non-recurring Charges 2,100 --- 4,029 900 Development Expense (138) --- (200)(c) --- Synergy Cost Savings 1,250 --- 2,500 (d) --- -------- -------- -------- -------- Adjusted Operating Cash Flows $ 9,880 $ 18,419 $ 19,129 $ 32,202 ======== ======== ======== ========
- ---------- (a) Includes the consolidated results of the Company (including BGII) for the three and six month periods ended December 31, 1996 and the combined historical results of the Company and BGII for the three and six month periods ended December 31, 1995. (b) Minority interest and, for Casino Operations, casino royalty have been offset against business unit EBITDA. (c) Adjusts business development expense for the three and six months ended December 31, 1995 to an assumed annual amount of $3,000,000. Actual business development expenses for the three and six month periods ended December 31, 1996 was $518,000 and $1,056,000, respectively, and is included in corporate administrative expenses. (d) Adjusts for estimated synergy cost savings including elimination of certain duplicative costs, such as facility, legal, accounting, and compensation. The Company believes that the above analysis of adjusted operating cash flows is a useful adjunct to net income, cash flow and other GAAP measurements. However, this information should not be construed as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to GAAP-defined cash flows generated by operating, investing and financing activities as an indicator of cash flows or a measure of liquidity. 25 26 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 During March 1993, Bally Wulff obtained two bank revolving lines of credit that currently provide for borrowings up to DM 17,250,000 (approximately $11,192,000 at December 31, 1996 exchange rates) of which approximately $454,000 had been borrowed at December 31, 1996. In May 1993, Bally Wulff obtained a working capital line of credit that provides for borrowings up to DM 16,300,000 (approximately $10,575,000 at December 31, 1996 exchange rates) all of which had been borrowed at December 31, 1996. Bally Gaming, Inc., BGII's domestic subsidiary, obtained a bank revolving line of credit in March 1993 which, as amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the credit agreement) inventory and accounts receivable with a maximum borrowing capacity of $15,000,000 with the expiration date of March 31, 1997. At December 31, 1996 Bally Gaming, Inc.'s eligible borrowing capacity under this agreement was approximately $15,000,000 of which $596,000 was outstanding. Through bank credit agreements at Bally Wulff and Bally Gaming, Inc., the Company has unused lines of credit of approximately $25,142,000 at December 31, 1996. In January 1997, the Company received a commitment letter for a new working capital based line of credit which will provide for borrowings based on a percentage of Bally Gaming, Inc.'s eligible accounts receivable and inventory with a maximum borrowing capacity of $30,000,000, subject to the $40,000,000 maximum worldwide revolving credit limitation in the Company's indenture for the Senior Secured Notes. This line of credit would be collateralized by accounts receivable and inventory and will have no financial covenants other than maintenance of minimum net worth. As currently contemplated, the Company will close on this new facility on March 31, 1997 upon expiration of the Company's existing line of credit. The indenture for the Company's Senior Secured Notes contains various covenants including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Company does not have any material capital expenditure commitments at December 31, 1996. The Company anticipates that cash flow from operations and borrowings available under existing lines of credit will be sufficient to fund its cash needs for at least the next twelve months. Management believes that customer financing terms have become an increasingly important competitive factor for the Bally Gaming and Systems business unit. Competitive conditions sometimes require Bally Gaming and Systems to grant extended payment terms on gaming machines systems and other gaming equipment. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of a default may be less than the amount financed. In conjunction with sales by Bally Gaming and Systems, with recourse to the Company, of certain trade receivables to third parties, the Company had guaranteed amounts due from various customers of approximately $12,850,000 at December 31, 1996. The Company has reserved approximately $8,400,000 at December 31, 1996 for all of its sales of receivables with recourse to the Company. It is possible that one or more customers whose obligation has been guaranteed by Bally Gaming and Systems may be unable to make payments as such amounts become due. In such event, Bally Gaming and Systems may become responsible for repayment of at least a portion of such amounts over the term of the receivables. In general, under the terms of these contracts, the Company may be responsible for monthly payments of the outstanding obligations. Accordingly, the Company will have greater exposure to the financial condition of its customers in emerging markets than has historically been the case in established markets like Nevada and Atlantic City. In August 1996, the Company received demand notices from the holder of notes related to one customer's trade receivables for which payments were in arrears from December 1995 and in December 1996, the holder of the notes filed suit against the Company to seek payment from the Company. The lawsuit is for approximately $3,600,000. In order to be competitive in meeting customer demand for financing of gaming equipment in emerging markets, the Company plans to continue to evaluate the need to involve third-party finance companies or secure additional financing, although there is no assurance that such additional financing will be obtained. Bally Wulff provides customer financing for approximately 20% of its sales, and management expects this practice temporarily to increase during the latter half of fiscal 1997. 26 27 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 In March 1992, Alfred H. Wilms, director and principal stockholder (and then Chairman of the Board of Directors and Chief Executive Officer) of the Company, committed to provide or cause others to provide a $6,500,000 five-year loan to VSI, the Company's controlled subsidiary, which loan was funded in full and was secured by a subordinated interest in all of VSI's present and future personal property. All scheduled principal and interest payments were made until September 1996 when the remaining principal and accrued interest thereon totaling $2,826,000 was paid. RESULTS OF OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996 General The company operates through four business units: (i) Bally Gaming and Systems, (ii) Bally Wulff (consisting of the manufacture and distribution of wall-mounted gaming machines and distribution of other recreational and amusement machines), (iii) gaming machine operations and (iv) casino operations. The results of operations of the BGII business units have been consolidated since June 18, 1996. However, to enhance comparability to prior periods, the following discussion presents the results of the operations of the BGII business units for the three months ended December 31, 1995 which was prior to the Merger and therefore such results are not included in the accompanying consolidated financial statements. The following tables set forth the combined revenues and operating income (loss) for the four business units for the three months ended December 31, 1995 and 1996:
1995 1996 -------- -------- (In 000's) REVENUES: Bally Gaming and Systems $ 32,460 $ 42,273 Bally Wulff 27,845 42,293 Gaming Machine Operations 26,328 31,692 Casino Operations 11,359 12,445 -------- -------- TOTAL REVENUES $ 97,992 $128,703 ======== ========
1995 1996 -------- -------- (In 000's) OPERATING INCOME (LOSS) (a): Bally Gaming and Systems 3,164 4,955 Bally Wulff 793 8,858 Gaming Machine Operations 2,504(a) 3,187(a) Casino Operations 1,812(a) 2,383(a) Corporate and Other (4,745) (6,885) -------- -------- SUBTOTAL 3,528 12,498 Direct merger costs (6,486) --- Unusual items (1,800) --- -------- -------- TOTAL OPERATING INCOME (LOSS) (a): $ (4,758) $ 12,498 ======== ========
(a) Net of minority interest and, for Casino Operations, net of casino royalty. 27 28 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 BALLY GAMING AND SYSTEMS For the quarter ended December 31, 1996, Bally Gaming and Systems reported revenues of $42.3 million, an increase of 30%, compared to revenues of $32.5 million in the prior year quarter. Bally Gaming reported unit sales of approximately 5,500 new gaming machines, an increase of 38%, compared to unit sales of approximately 4,000 in the prior year quarter. The volume improvement resulted primarily from a general increase in replacement demand from existing casinos and a greater number of new casino openings in the 1996 quarter. By market segment, Bally Gaming's unit sales for the quarter consisted of approximately 2,900 units to the Nevada and Atlantic City markets, 1,900 units to international markets and 700 units to riverboats, Native American and other domestic markets. Bally Gaming reported revenues from the sale of new gaming machines of $30.4 million, an increase of 57%, compared to $19.3 million in the prior year quarter due to higher unit volume and higher average selling prices. Bally Systems reported relatively flat revenues of $7.6 million compared to the prior year quarter. Bally Systems revenues for the period included revenues from new installations at New York-New York and Casino Niagara as well as partial shipment to both the Harrah's Riverboat and Players Island Casino in St. Louis. For the quarter ended December 31, 1996, gross profit margins improved to 37.3% from 36.5% in the prior year quarter. The gross margin improvement resulted primarily from the favorable impact of greater production volume in the Company's manufacturing facility, partially offset by the effect of higher international sales which traditionally have lower profit margins. Bally Gaming and Systems reported operating income of $5.0 million, an increase of 57%, compared to operating income of $3.2 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned revenue and gross margin increases, partially offset by an increase in selling, general and administrative expenses and an increased provision for doubtful receivables, including amounts related to a customer in Turkey, where the government recently forced the closure of casinos. BALLY WULFF For the quarter ended December 31, 1996, Bally Wulff reported revenues of $42.3 million, an increase of 52%, compared to revenues of $27.8 million in the prior year quarter. The revenue improvement resulted primarily from a 265% increase in new wall machine units sold. Management estimates that the majority of the revenue improvement was based on attaining increased market share and the balance of the increase resulted from a change in German regulations effective January 1, 1997, requiring all wall machines to have internal meters to track play. In addition, Bally Wulff enhanced its leasing program whereby new wall machines are leased to customers pursuant to operating leases which provide a stream of revenues and cash flow over the life of the leases which range from six months to three years. For the 1996 quarter, Bally Wulff leased approximately 2,200 new wall machines compared to 200 new wall machines in the prior year quarter. Revenues from amusement game sales were unfavorably impacted as operators weighted their mix of capital expenditures toward new wall machines. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar reduced revenues by $3.2 million during the 1996 quarter. For the quarter ended December 31, 1996, gross profit margin improved to 52.0% from 34.4% in the prior year quarter. The gross margin improvement resulted primarily from the favorable impact of greater production volume in Bally Wulff's production facility. Bally Wulff reported operating income of $8.9 million, an increase of 1,017%, compared to $0.8 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned revenue and gross margin increases, partially offset by a higher provision for doubtful receivables as well as an increase in selling, general and administrative expenses due primarily to increased marketing costs. 28 29 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 GAMING MACHINE OPERATIONS For the quarter ended December 31, 1996, the gaming machine operations business unit reported revenues of $31.7 million, an increase of 20%, compared to revenues of $26.3 million in the prior year quarter. Louisiana revenues increased 11% as net win per gaming machine per day increased 5% to $67.19 from $63.95 in the prior year quarter. Nevada revenues increased 22% as net win per gaming machine per day increased 13% to $51.99 from $46.11 in the prior year quarter, while the average number of gaming machines increased to 5,660 from 5,283 in the prior year quarter. The improvement in net win per gaming machine per day in Nevada resulted primarily from the continuing favorable impact of Gamblers Bonus, a cardless slot player's club and player tracking system launched in December 1995. The increase in the average number of gaming machines in Nevada reflects the addition of approximately 150 gaming machines in Northern Nevada operated by Bally Gaming prior to the Merger and the continued roll-out of the Gamblers Bonus machines. Gamblers Bonus is currently installed in 99 locations representing 1,191 machines in Southern Nevada. In mid-December the Company began to provide this product in Northern Nevada. For the quarter ended December 31, 1996, cost of revenues increased 17% to $23.6 million compared to $20.1 million in the prior year quarter. As a percentage of revenues, cost of revenues improved to 74.6% from 76.5% in the prior year quarter. Louisiana cost of revenues, increased 14% and, as a percentage of revenues, increased slightly to 64.5% from 62.9% in the prior year quarter primarily due to an increase in gaming taxes and license fees. Nevada cost of revenues increased 18% but, as a percentage of revenues, improved to 76.3% from 78.9% in the prior year quarter primarily due to higher revenues while costs associated with new and renewed contracts remained relatively flat. The gaming machine operations business unit reported operating income, net of minority interest, of $3.2 million, an increase of 28% compared to operating income of $2.5 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned increase in revenues and relatively stable operating costs as a percentage of revenues, partially offset by an increased provision for doubtful receivables for the Nevada operation and an increase in selling, general and administrative expenses principally for greater advertising costs for the Louisiana operation. On November 5, 1996 voters in Louisiana approved a proposition to allow video poker to continue in six of the seven parishes in which the Company operates at the Fairgrounds racetrack and within the associated off-track betting locations in the greater New Orleans area. In the one parish in which the Company operates where video poker was voted down, the Company will be allowed to continue to conduct business through June 30, 1999. The two off-track betting locations in this parish accounted for 13% of the VSI revenues and less than $0.4 million of EBITDA for the year ended June 30, 1996. Voters also approved video poker in three parishes in the New Orleans area where the Company currently does not operate, creating potential expansion opportunities. CASINO OPERATIONS For the quarter ended December 31, 1996, the casino operations business unit reported revenues of $12.4 million, an increase of 19%, compared to revenues of $10.5 million in the prior year quarter excluding revenues from casinos and taverns subsequently closed. This increase is due to a 22% increase at the Rainbow Casino and a 9% increase at the Plantation Casino. The improvement at the Rainbow Casino was attributable to the continuing impact of its direct marketing campaigns and a higher average market share than in the prior year quarter. Revenues from the Plantation Casino improved as revenues in the prior year quarter had been negatively impacted by an internal remodeling project. For the quarter ended December 31, 1996, the cost of revenues for casino operations increased 18% to $5.6 million compared to $4.7 million in the prior year quarter but, as a percentage of revenues, remained virtually the same compared to the prior year quarter as costs increased proportionately with higher revenues. 29 30 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 For the quarter ended December 31, 1996, the casino operations business unit reported operating income, net of casino royalty and minority interest, of $2.4 million, an increase of 33%, compared to operating income of $1.8 million in the prior year quarter. The operating income improvement resulted from the aforementioned increase in revenues and stable operating costs as a percentage of revenues, partially offset by a slight increase in selling, general and administrative costs. REVENUES AND EXPENSES FOR CLOSED CASINOS AND TAVERNS During the year ended June 30, 1996, the Company disposed of or terminated operations at several small casinos and taverns as these operations were not deemed to be compatible with the Company's long-term growth strategy. The Company does not believe these businesses constitute a disposal of a segment of a business, as defined in APB Opinion 30, and therefore the results of operations from these businesses are included in the applicable revenue and expense captions in the consolidated statements of operations. No revenues or expenses were reported for these properties in the quarter ended December 31, 1996. For the quarter ended December 31, 1995, revenues for these properties are included in casino operations revenues and totaled $0.9 million. The related costs of revenues are included in cost of casino operations and totaled $0.6 million. The related selling, general and administrative expenses are included in selling, general and administrative expenses and totaled $0.4 million. CONSOLIDATED As previously discussed, the Company acquired BGII on June 18, 1996. Therefore the consolidated results of operations for the three months ended December 31, 1996 include the results of operations of BGII while the consolidated results for the three months ended December 31, 1995 do not include BGII's results. The discussion below does not include results for BGII in the 1995 quarter. Total revenues for the quarter ended December 31, 1996, were $128.7 million, an increase of 241% compared to revenues of $37.7 million in the prior year quarter. This increase is due to including $84.6 million of revenues from BGII in the 1996 quarter as well as the aforementioned increases in revenues at both the gaming machine operations and casino operations business units. Cost of revenues for the quarter ended December 31, 1996, were $76.0 million, an increase of 199% compared to $25.5 million in the prior year quarter due to the inclusion of $46.8 million of BGII cost of revenues in the 1996 quarter as well as the aforementioned increases in cost of revenues at both the gaming machine operations and casino operations business units. Cost of revenues as a percentage of total revenues improved to 59.1% from 67.5% in the prior year quarter due to the aforementioned improvement at the gaming machine operations and a stable cost percentage at the casino operations business units as well as the impact of the inclusion of the BGII business units. Corporate administrative expenses for the quarter ended December 31, 1996, were $6.6 million, an increase of 203% compared to corporate administrative costs of $2.2 million in the prior year quarter. This increase is due to inclusion of BGII corporate administrative expenses and higher legal and professional fees in the 1996 quarter, partially offset by cost savings such as elimination of certain duplicative costs. Corporate administrative expenses include salaries and wages, related taxes and benefits, rent, professional fees and other expenses associated with maintaining the corporate office and providing centralized corporate services for the Company. Exclusive of the corporate administrative expenses noted above, selling, general and administrative expenses for the quarter ended December 31, 1996, were $21.5 million, an increase of 336% compared to selling general and administrative costs of $4.9 million in the prior year quarter. This increase is due to the inclusion of $16.4 million of BGII selling, general and 30 31 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 administrative expenses in the 1996 quarter and the aforementioned increase at both the gaming machine operations and casino operations business units partially offset by the decrease in expenses as the result of the aforementioned disposed or terminated operations at several small casinos and taverns. Provisions for bad debt for the quarter ended December 31, 1996, increased $4.7 million from the prior fiscal year quarter. The increase was due to the impact of including BGII's operations in the 1996 quarter and the aforementioned increase of the provision for the Bally Wulff and the gaming machine operations business units. Depreciation and amortization for the quarter ended December 31, 1996 was $5.9 million, an increase of 145% compared to depreciation and amortization of $2.4 million in the prior year quarter. This increase is due to the inclusion of BGII depreciation and amortization in the 1996 quarter, higher depreciation and amortization in the gaming machine operations business unit and the impact of amortizing goodwill and other intangibles acquired in the BGII Merger. During the quarter ended December 31, 1995, the Company expensed direct merger costs related to the pursuit of BGII totaling $4.8 million. Such costs included legal, accounting, financial advisory, printer, SEC filing fees and other related expenses. NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the quarter ended December 31, 1996, increased to $5.2 million, an increase of 205% compared to the net interest expense of $1.7 million in the prior year quarter. The increase is primarily due to interest on the Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June 1996, partially offset by lower interest expense on the Company's 7 1/2% Convertible Debentures due 2003, substantially all of which were converted into equity as part of the financing of the BGII merger. The Company recorded an income tax provision of $3.2 million in the quarter ended December 31, 1996, compared to a provision of $1.3 million in the prior fiscal year quarter. The current quarter provision is primarily due to income taxes related to Bally Wulff. The current year's quarter effective tax rate is 44% which resulted from taxable income currently being generated in Germany which has a higher effective rate than in the U.S. Changes in the Company's organization structure for the German operations, which became effective for German tax purposes January 1, 1997, should reduce the Company's effective tax rate on world-wide earnings in future periods. SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 General To enhance the comparability to prior periods, the following discussion includes the results of the operations of BGII for the six months ended December 31, 1995 which was prior to the Merger and therefore such results are not included in the accompanying unaudited consolidated financial statements. 31 32 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 The following tables set forth the combined revenues and operating income (loss) for the four business units for the six months ended December 31, 1995 and 1996:
1995 1996 -------- -------- (In 000's) REVENUES: Bally Gaming and Systems $ 60,178 $ 77,175 Bally Wulff 51,599 68,700 Gaming Machine Operations 52,627 60,582 Casino Operations 23,601 25,158 -------- -------- TOTAL REVENUES $188,005 $231,615 ======== ========
1995 1996 -------- -------- (In 000's) OPERATING INCOME (LOSS) (a): Bally Gaming and Systems $ 5,039 $ 9,050 Bally Wulff 2,381 11,522 Gaming Machine Operations 4,911(a) 6,243(a) Casino Operations 4,146(a) 5,193(a) Corporate and Other (10,410) (11,146) -------- -------- SUBTOTAL 6,067 20,862 Direct merger costs (11,437) --- Unusual items (3,329) (700) -------- -------- TOTAL OPERATING INCOME (LOSS) (a): $ (8,699) $ 20,162 ======== ========
(a) Net of minority interest and, for Casino Operations, net of casino royalty. BALLY GAMING AND SYSTEMS For the six months ended December 31, 1996, Bally Gaming and Systems reported revenues of $77.2 million, an increase of 28%, compared to revenues of $60.2 million in the prior year period. Bally Gaming reported unit sales of approximately 10,400 new gaming machines, an increase of 38% compared to unit sales of approximately 7,500 in the prior year period. The volume improvement resulted primarily from sales to Casino Niagara in Niagara Falls, Canada where Bally Gaming placed approximately 1,500 new gaming machines, representing 50% of the casino floor, as well as a general increase in replacement demand from existing casinos and a greater number of new casino openings in the six months ended December 31, 1996. By market segment, Bally Gaming's unit sales for the period consisted of approximately 4,600 units to the Nevada and Atlantic City markets, 4,400 units to international markets and 1,400 units to riverboats, Native American and other domestic markets. Bally Gaming reported revenues from the sale of new gaming machines of $54.7 million, an increase of 43%, compared to $38.1 million in the prior year quarter due to higher unit volume and higher average selling prices. Bally Systems reported revenues of $12.8 million, an increase of 33%, compared to revenues of $9.6 million in the prior year period. Bally Systems revenue improvement resulted primarily from increased shipments to new installations such as New-York-New York, Casino Niagara and Casino Rama, and partial shipments to both the Harrah's Riverboat and Players Island Casino in St. Louis. For the six months ended December 31, 1996, gross profit margins improved to 37.4% from 35.8% in the prior year period. The gross margin improvement resulted primarily from the favorable impact of greater production volume in the Company's 32 33 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 manufacturing facility, partially offset by the effect of higher international sales which traditionally have lower profit margins. Bally Gaming and Systems reported operating income of $9.0 million, an increase of 80%, compared to operating income of $5.0 million in the prior year period. The operating income improvement resulted primarily from the aforementioned revenue and gross margin increases, partially offset by greater selling, general and administrative expenses and an increased provision for doubtful receivables including amounts related to a customer in Turkey, where the government recently forced the closure of casinos. BALLY WULFF For the six months ended December 31, 1996, Bally Wulff reported revenues of $68.7 million, an increase of 33%, compared to revenues of $51.6 million in the prior year period. The revenue improvement resulted primarily from a 143% increase in new wall machine units sold as Bally Wulff expanded its market share and demand increased as a result of a change in German regulations effective January 1, 1997, requiring all wall machines to have internal meters to track play. In addition, Bally Wulff enhanced its leasing program whereby new wall machines are leased to customers pursuant to operating leases which provide a stream of revenues and cash flows over the term of the leases which range from six months to three years. For the six months ended December 31, 1996, Bally Wulff leased approximately 2,500 new wall machines compared to 500 new wall machines in the prior year quarter. Revenues from amusement game sales were unfavorably impacted as operators weighted their mix of capital expenditures toward new wall machines. The currency translation impact of the fluctuation of the German mark versus the U.S. dollar reduced revenues by $5.2 million during the 1996 period. For the six months ended December 31, 1996, gross profit margin improved to 48.4% from 37.1% in the prior year quarter. The gross margin improvement resulted primarily from the favorable impact of greater production volume in Bally Wulff's production facility. Bally Wulff reported operating income of $11.5 million, an increase of 384%, compared to $2.4 million in the prior year period. The operating income improvement resulted primarily from the aforementioned revenue and gross margin increases, partially offset by an increased provision for doubtful receivables as well as higher selling, general and administrative expenses due to increased marketing costs. GAMING MACHINE OPERATIONS For the six months ended December 31, 1996, the gaming machine operations business unit reported revenues of $60.6 million, an increase of 15%, compared to revenues of $52.6 million in the prior year period. Louisiana revenues increased 13% as net win per gaming machine per day increased 9% to $67.59 from $61.98 in the prior year period, partially offset by a decline in the average number of gaming machines to 671 from 685 in the prior year period. Nevada revenues increased 15% as net win per gaming machine per day increased 9% to $50.70 from $46.50 in the prior year period, while the average number of gaming machines increased to 5,606 from 5,277 in the prior year period. The improvement in net win per gaming machine per day in Nevada resulted primarily from the continuing favorable impact of Gamblers Bonus, a cardless slot player's club and player tracking system launched in December 1995. The increase in the average number of gaming machines in Nevada reflects the addition of approximately 150 gaming machines in Northern Nevada operated by Bally Gaming prior to the Merger and the continued roll-out of the Gamblers Bonus machines. For the six months ended December 31, 1996, cost of revenues increased 13% to $45.5 million compared to $40.3 million in the prior year period. As a percentage of revenues, cost of revenues improved to 75.2% from 76.6% in the prior year period. Louisiana cost of revenues, increased 17% and, as a percentage of revenues increased slightly to 64.4% from 62.3% in the prior year quarter primarily due to the new location which opened in October 1995 and an increase in gaming taxes and license fees. Nevada cost of revenues increased 12% but, as a percentage of revenues, improved to 77.0% from 79.1% in the prior year period primarily due to higher revenues while costs associated with new and renewed contracts remained 33 34 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 relatively flat. The gaming machine operations business unit reported operating income, net of minority interest, of $6.2 million, an increase of 27% compared to operating income of $4.9 million in the prior year quarter. The operating income improvement resulted primarily from the aforementioned increase in revenues, and an improvement in operating costs as a percentage of revenues, partially offset by an increase in selling, general and administrative expenses, primarily greater marketing costs at the Louisiana operations and an increased provision for doubtful receivables for the Nevada operations. CASINO OPERATIONS For the six months ended December 31, 1996, the casino operations business unit reported revenues of $25.2 million, an increase of 17%, compared to revenues of $21.5 million in the prior year period excluding revenues from casinos and taverns subsequently closed. This increase is due to a 20% increase at the Rainbow Casino and a 9% increase at the Plantation Casino. The improvement at the Rainbow Casino was attributable to the continuing impact of its direct marketing campaigns and a higher average market share than in the prior year period. Revenues from the Plantation Casino improved as revenues in the prior year quarter had been negatively impacted by an internal remodeling project. For the six months ended December 31, 1996, the cost of revenues for casino operations increased 13% to $11.0 million compared to $9.7 million in the prior year period but, as a percentage of revenues, improved to 43.6% from 45.2% in the prior year quarter due to higher revenues with relatively stable costs. For the six months ended December 31, 1996, the casino operations business unit reported operating income, net of casino royalty and minority interest, of $5.2 million, an increase of 25%, compared to operating income of $4.1 million in the prior year period. The operating income improvement resulted from the aforementioned increase in revenues and an improvement in operating costs as a percentage of revenues, partially offset by an increase in selling, general and administrative expenses due to higher advertising and promotional costs at the Rainbow Casino operations. REVENUES AND EXPENSES FOR CLOSED CASINOS AND TAVERNS During the year ended June 30, 1996, the Company disposed of or terminated operations at several small casinos and taverns as these operations were not deemed to be compatible with the Company's long-term growth strategy. No revenues or expenses were reported for these properties in the six months ended December 31, 1996. For the six months ended December 31, 1995, revenues for these properties are included in casino operations revenues and totaled $2.1 million. The related costs of revenues are included in casino operations cost of revenues and totaled $1.7 million. The related selling, general and administrative expenses are included in selling, general and administrative expenses and totaled $0.7 million. CONSOLIDATED As previously discussed, the Company acquired BGII on June 18, 1996. Therefore the consolidated results of operations for the six months ended December 31, 1996 include the results of operations of BGII while the consolidated results for the six months ended December 31, 1995 do not include BGII's results. The discussion below does not include results for BGII in the 1995 period. Total revenues for the six months ended December 31, 1996, were $231.6 million, an increase of 204% compared to revenues of $76.2 million in the prior year period. This increase is due to including $145.9 million of revenues from BGII in the 1996 period as well as the aforementioned increases in revenues at both the gaming machine operations and casino operations business units. 34 35 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 Cost of revenues for the six months ended December 31, 1996, were $140.2 million, an increase of 172% compared to $51.7 million in the prior year period due to the inclusion of $83.7 million of BGII cost of revenues in the 1996 period as well as the aforementioned increases in cost of revenues at both the gaming machine operations and casino operations business units. Cost of revenues as a percentage of total revenues improved to 60.5% from 67.8% in the prior year quarter due to the aforementioned improvements at both the gaming machine operations and casino operations business units as well as the impact of the inclusion of the BGII business units. Corporate administrative expenses for the six months ended December 31, 1996, were $10.6 million, an increase of 147% compared to corporate administrative costs of $4.3 million in the prior year period. This increase is due to inclusion of BGII corporate administrative expenses and higher legal and professional fees in the 1996 period, partially offset by synergy cost savings such as elimination of certain duplicative costs. Corporate administrative expenses include salaries and wages, related taxes and benefits, rent, professional fees and other expenses associated with maintaining the corporate office and providing centralized corporate services for the Company. Exclusive of the corporate administrative expenses noted above, selling, general and administrative expenses for the six months ended December 31, 1996, were $39.8 million, an increase of 321% compared to selling general and administrative costs of $9.5 million in the prior year quarter. This increase is due to the inclusion of $29.7 million of BGII selling, general and administrative expenses in the 1996 period and the aforementioned increase at both the gaming machine operations and casino operations business units partially offset by the decrease in expenses as the result of the aforementioned disposed or terminated operations at several small casinos and taverns. Provisions for bad debt for the six months ended December 31, 1996, increased $6.3 million from the prior fiscal year period. The increase was due to the impact of including BGII's operations in the 1996 period and the aforementioned increase of the provision for the Bally Gaming and Systems, Bally Wulff and gaming machine operations business units. Depreciation and amortization for the six months ended December 31, 1996 was $11.1 million, an increase of 127% compared to depreciation and amortization of $4.9 million in the prior year period. This increase is due to the inclusion of BGII depreciation and amortization in the 1996 quarter, higher depreciation and amortization in the gaming machine operations business unit and the impact of amortizing goodwill and other intangibles acquired in the BGII Merger. During the six months ended December 31, 1996, the Company incurred unusual charges of $0.7 million related primarily to separation costs of Alliance personnel subsequent to the Merger. During the six months ended December 31, 1995, the Company expensed direct merger costs related to the pursuit of BGII totaling $9.4 million. Such costs included legal, accounting, financial advisory, printer, SEC filing fees and other related expenses. NET INTEREST EXPENSE AND INCOME TAXES Net interest expense in the six months ended December 31, 1996, increased to $10.8 million, an increase of 209% compared to the net interest expense of $3.5 million in the prior year period. The increase is primarily due to interest on the Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June 1996, partially offset by lower interest expense on the Company's 7 1/2% Convertible Debentures due 2003, substantially all of which were converted into equity as part of the financing of the Merger. The Company recorded an income tax provision of $4.6 million in the six months ended December 31, 1996 compared to a provision of $0.8 million in the prior fiscal year period. The current fiscal year provision is primarily due to income taxes related to Bally Wulff. 35 36 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 * * * * * The information contained in this Form 10-Q may contain forward-looking statements that involve risks and uncertainties, including, but not limited to, the impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources, product development and commercialization risks, costs associated with the integration and administration of acquired operations, capacity and supply constraints or difficulties, the results of financing efforts and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. 36 EX-10.71 2 EXHIBIT 10.71 1 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 EXHIBIT 10.71 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of March 31, 1995 by and between Alliance Gaming Corporation, a Nevada corporation (the "Company"), and David D. Johnson, an individual (the "Executive"). R E C I T A L S : A. The Company considers it important and in its best interest and the best interest of its stockholders to foster the employment of key management personnel, and desires to retain the services of the Executive, on the terms and subject to the conditions provided in this Agreement. B. The Executive desires to accept employment by the Company and to render services to the Company, on the terms and subject to the conditions provided in this Agreement. A G R E E M E N T : The parties hereto agree as follows: I. Employment. The Company hereby agrees to employ and retain the Executive, and the Executive agrees to be employed and retained by the Company, to render services to the Company for the period, at the rate of compensation and upon the other terms and conditions set forth in this Agreement. I. Term. The term of the Executive's employment under this Agreement (the "Term") shall commence on the date hereof and shall continue through and including March 31, 1998, unless earlier terminated as provided in this Agreement (the date of any termination of this Agreement or the expiration of the Term, as provided herein, the "Termination Date"). I. Position and Duties. (a) Position. The Executive shall serve as Senior Vice President and General Counsel of the Company. During his employment hereunder, the Executive shall report directly to the Chief Executive Officer and the board of directors of the Company (the "Board"). (b) Duties. During the Term, the Executive shall have and exercise the full power and authority of a Senior Vice President and General Counsel of the Company and 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 from time to time by the Chief Executive Officer or the Board. 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 which reflects credit upon the Company. It is contemplated that the Executive shall render services to the Company from the Company's principal place of business; however, 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 the parties acknowledge and agree that the Executive may be required to travel extensively during the Term in fulfilling his duties hereunder. I. Compensation and Reimbursement of Expenses. (1) Salary. For purposes of this Agreement, each consecutive 12-month period during the Term ending on each March 31st during the Term shall be referred to as an "Employment Year." For services rendered by the Executive under this Agreement, the Company shall pay to the Executive as compensation during each Employment Year during the Term, a base salary (the "Base Salary") at an annual rate of $200,000 per year (prorated for any partial Employment Years). Increases in the Base Salary shall be considered by the Board no less frequently than annually, commencing at the end of the first Employment Year hereunder and will be based upon criteria applicable to other senior executives of the Company; it being understood, however, that the award of any such increase shall be in the sole discretion of the Board (with the Executive not voting on such determination). The Base Salary shall be payable in equal bi-weekly installments, commencing with the end of the pay period which next follows the commencement of the Term, and shall be subject to customary payroll deductions (i.e., for social security, federal, state and local taxes and other amounts customarily withheld from the salaries of employees of the Company). (b) Bonus. The Executive shall be eligible to receive from the Company, within 120 days of the end of each Employment Year, a cash bonus in respect of such Employment Year (the "Annual Bonus"), which shall be based upon all relevant criteria, including without limitation, (i) the performance of the Company during such Employment Year based upon customary financial and other criteria, such as but not limited to, return on the Company's consolidated stockholders' equity and total capital (i.e., stockholders' equity and total debt), performance of the Company's Common Stock, par value $.10 per share (the "Common Stock"), and the Company's absolute and relative amounts of consolidated cash flow, operating income and net income, and the comparison of such results with the Company's budgets and projections therefor, and (ii) the performance of the Executive in rendering services to the Company. It is contemplated but not certain that the Annual Bonus shall be between 50% and 100% of the Base Salary for each applicable Employment Year; it being understood, however, that the Company shall not be obligated to pay to the Executive any Annual Bonus and the payment, if any, and amount thereof shall be solely within the discretion of the Company. It is also contemplated that the Compensation Committee of the Board shall formulate specific criteria and performance targets for the determination of the Executive's Annual Bonus, if any. The Annual Bonus shall be subject to customary payroll deductions (i.e., for social security, federal, state and local taxes and other amounts customarily withheld from the salaries of employees of the Company). (c) Options. The Company and Executive acknowledge and agree that, as a consequence of Executive's initial employment arrangement with the Company, he is entitled to receive and has been granted Executive options (issued pursuant to the Company's 1991 Incentive Stock Option Plan and/or the proposed 1996 Incentive Stock Option Plan (the "Plans")) to acquire 200,000 shares of Common Stock of the Company (the "Employment Options"). For any such options to be issued under the proposed 1996 Incentive Stock Option Plan, Executive will be granted, under a plan subject to the approval of the Board of Directors but not of stockholders, stock appreciations rights entitling Executive to receive a cash payment equal to the appreciation in price of Alliance Common Stock from the date of grant to the date of exercise, in the event that the Company's stockholders do not approve the 1996 Incentive Stock Option Plan. The Employment Options shall have an 3 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 exercise price of $3.4375 per share and shall vest and become exercisable at the end of each Employment Year as follows: 4 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 March 31, 1996 - 66,667 shares March 31, 1997 - 66,666 shares March 31, 1998 - 66,666 shares Notwithstanding any provision to the contrary in the Plans, and without regard to Executive's continued employment by the Company, all vested Employment Options shall be exercisable and not expire until August 29, 2001. (d) Reimbursement of Expenses. Consistent with established policies 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 without limitation, travel, hotel and similar expenses, incurred by the Executive from time to time in performing his obligations under this Agreement. I. Benefits. (1) Benefit Plans. The payments provided in Section 4 above are in addition to any benefits to which the Executive may be, or may become, entitled under any of the Company's employee benefit plans or programs for which key executives are or shall become eligible, including without limitation, retirement, life, health and disability benefits. In addition, the Executive shall be eligible to receive during the Term benefits and emoluments which are consistent with the benefits and emoluments provided to all senior officers or executives of the Company. (1) Vacation. The Executive shall be entitled to three weeks annual paid vacation time. The Executive's entitlement to such vacation time for each Employment Year shall vest and accrue on the first day of each such Employment Year. In the event any of such vacation days are not used by the Executive in any Employment Year, the Executive shall have the right to accumulate and carry forward such number of days from year to year as shall be consistent with the Company's policy therefor for senior executives, as in effect from time to time. The Executive shall also be entitled to reasonable periods of sick leave with compensation and all paid holidays given by the Company to its senior executive officers. (1) Club Membership. During the Employment Term, the Company shall pay the cost of membership for the Executive and his family in Canyon Gate Country Club, including the $15,000 balance of the Executive's membership initiation fee as of the commencement of the Employment Term, plus monthly dues and other expenses of such membership. Upon the termination of Executive's employment with the Company, for any reason, the Executive shall have the right, but not the obligation, within a period of six (6) months following the effective date of such termination, to purchase the Company's interest in the Canyon Gate Country Club membership acquired pursuant to this section for $15,000, which is the amount paid by the Company for the balance of the Executive's membership initiation fee to Canyon Gate Country Club, with no interest thereon. The Company shall have no right to reimbursement for any monthly dues or other expenses paid by the Company during the Employment Term. If the Executive elects not to exercise the right to purchase the Company's interest as set forth in this section, the Company shall be deemed to be the owner of the country club membership, the Executive shall have no further rights thereto, and the Company shall be responsible for all fees, dues, and other expenses of the membership from and after the termination of Executive's employment with the Company. The 5 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 Company shall indemnify and hold the Executive harmless from any such fees, dues and other expenses if the Executive elects not to exercise the right to purchase the Company's interest as set forth in this section. (1) No Reduction. There shall be no material reduction or diminution of the benefits provided in this Section 5 during the Term unless (i) the Executive shall have provided his consent to such reduction or diminution, (ii) an equitable arrangement (embodied in an ongoing substitute or alternative benefit or plan) has been made with respect to such benefit or plan or (iii) such reduction is part of a program of across-the-board benefit reductions similarly affecting the senior executive officers of the Company. I. Benefits Payable Upon Disability. (1) Disability Benefits. During any period of Disability (as defined below) occurring during the Term, the Company shall continue to pay to the Executive the Base Salary as provided herein and continue to extend to him the benefits described in Sections 4 and 5 hereof; it being understood that if disability benefits are provided under any disability insurance or similar policy maintained by the Company (or maintained by the Executive, the cost of which is reimbursed or paid by the Company), payments under such policy shall be considered as payments by the Company and shall offset any Base Salary payable to the Executive under this Agreement. As used in this Agreement, "Disability" shall mean the inability of the Executive to render services to the Company, as provided herein, as a result of physical or mental infirmity or disability. (1) Services During Disability. During the Term, notwithstanding any Disability, the Executive shall, to the extent that he is physically and mentally able to do so, furnish information, assistance and services to the Company, and, upon the reasonable request in writing on behalf of the Company, from time to time, he shall make himself available to the Company to undertake reasonable assignments and fulfill his duties hereunder, consistent with his current position with the Company and his physical and mental health. I. Termination. This Agreement shall be terminated in accordance with the provisions of this Section 7, in which case the provision of Section 8 below shall be applicable. (a) Upon Expiration of the Term. This Agreement shall terminate in accordance with Section 2 above. (b) By The Company. In addition to the provisions of Section 7(a) above, this Agreement is subject to earlier termination by the Company, as follows: (i) Death of Executive. If the Executive dies, this Agreement shall terminate, the Termination Date being the date of the Executive's death. (ii) Disability. If the Executive has been absent from service to the Company, as required in this Agreement, for a period of 90 days or more as a result of Disability during any consecutive 180-day period during the Term, the Company shall have the right to terminate this Agreement, the Termination Date being 15 days after notice thereof is provided to the Executive. 6 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 (iii) Termination by Company for Cause. The Company shall have the right to terminate the Executive's employment under this Agreement for Cause (as defined below), such termination to be effective immediately upon notice thereof from the Company to the Executive. For purposes of this Agreement, "Cause" shall mean the Executive's (A) conviction of any misdemeanor involving moral turpitude, or any felony, (B) misappropriation or embezzlement from the Company, (C) denial or rejection of any gaming license or permit or commission of any act which could reasonably be expected to result in such denial or rejection, (D) any breach during the Term of Sections 10 or 11 below or (E) the persistent failure or refusal after notice to comply with the Executive's duties or obligations hereunder. (iv) Termination by the Company Without Cause. The Company shall have the right to terminate the Executive's employment hereunder for any other reason not set forth in clauses (i), (ii) or (iii) of this Section 7(b), the Termination Date being 15 days after notice from the Company to the Executive. (c) By The Executive. In addition to the provisions of Section 7(a) above, this Agreement is subject to earlier termination by the Executive, as follows: (i) Termination by the Executive for Just Cause. The Executive shall have the right to terminate his employment under this Agreement upon the occurrence of a material breach of this Agreement by the Company, which the parties agree shall be limited to (A) a reduction by the Company in the Base Salary below the minimum Base Salary specified in Section 4(a) above or the failure of the Company to pay to the Executive any portion of the Base Salary within 30 days of the time that any such amount is due and payable hereunder or (B) the assignment to the Executive of duties and responsibilities that are materially inconsistent with those of a Senior Vice President and General Counsel of the Company, in each case, in the cases of clauses (A) and (B), which has not been cured by the Company after 30 days' written notice from the Executive to the Company; provided, that in the case of three such material breaches (and notice thereof), the Executive shall thereafter have the right to terminate this Agreement immediately upon notice to the Company in the case of a subsequent material breach. In the event that the Executive elects to terminate this Agreement as a result of the events described in clauses (A) or (B) above, the Executive shall exercise such right within 10 days after the lapsing of the 30-day period referred to above in this clause (i) (assuming that the Company shall have failed to cure such material breach within such period), or, as applicable, within 10 days of any additional material breach giving rise to an immediate right of termination; thereafter, such right to terminate shall no longer be exercisable. The Termination Date shall be a date specified by the Executive, which shall be between 30 and 45 days after the date of such default notice by the Executive. (ii) Termination by the Executive Following a Change in Control. In the event that a Change In Control (as defined below) shall occur at any time during the Term, the Executive shall have a one-time right, to be exercised by providing written notice thereof to the Company within 90 days of the consummation of the transaction in which a Change In Control occurs, to terminate this Agreement, with the Termination Date being a date specified by the Executive in such notice of termination, which day shall be between 15 and 45 days following such notice. If the Executive shall provide such notice in a timely manner, his right to terminate this Agreement under this Section 7(c)(ii) shall expire and be of no further force and effect. The Executive's rights under this Section 7(c)(ii) shall apply only to the first 7 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 Change In Control which shall occur during the Term period. For purposes of this Agreement, a Change in Control shall mean (A) the consummation of any merger, consolidation or combination with the Company and another entity in which (i) the Company is not the surviving entity and (ii) the stockholders of the Company immediately prior to such transaction do not own a majority of the voting equity securities of the surviving entity immediately after such transaction or members of the Board immediately prior to such transaction do not constitute a majority of the board of directors of the surviving entity immediately following such transaction; (B) any transaction or related transactions whereby any person or group (each within the meaning the Securities Exchange Act of 1934), other than Alfred H. Wilms, Kirkland Investment Corporation, the holder of the Company's debentures outstanding on the date hereof, or any of their respective affiliates, acquires 50% or more of the voting equity securities of the Company or (C) the sale of all or substantially all of the assets of the Company to an unaffiliated entity followed by the liquidation of the Company. (iii) Termination by the Executive Without Just Cause. The Executive shall have the right to terminate the Executive's employment under this Agreement for any other reason not set forth in clauses (i) or (ii) of this Section 7(c), the Termination Date being 15 days after notice thereof from the Executive to the Company. 8. Effect of Termination. The following provisions shall be applicable in the event of the termination of this Agreement as provided in Section 7 above. (a) Expiration of Term. Upon termination of this Agreement as provided in Section 7(a) above, this Agreement shall terminate and be of no further force and effect, except as provided in Sections 11, 12 and 13(b) below, which shall survive such termination, and no additional payments, liabilities or obligations shall be due and owing from either party to the other. (b) Death. Upon the termination of this Agreement as provided in Section 7(b)(i) above, the Company shall pay to the Executive's estate (i) an amount equal to the sum of (A) the Base Salary which would otherwise be payable for the 6 months following the Termination Date (but not earlier than any recovery of insurance proceeds in respect thereof, as provided below), and (B) any Annual Bonus for the Employment Year in which the Termination Date occurs that the Board determines would otherwise have been payable had the Executive not died, which Annual Bonus shall be reduced by prorating it through the Termination Date, payable, in the case of this clause (B), at the time such payment would otherwise be due and payable hereunder, and (ii) expense reimbursement amounts accrued through the Termination Date, at the time such payment would otherwise be due and payable thereunder, and neither party shall have any further liability or obligation to the other, except as provided in Section 12 below, which shall survive the Termination Date. Notwithstanding the provisions of clause (i) above, the Company shall have the right to provide for either or both of the payments described therein by purchasing life insurance on the Executive's life itself or reimbursing to the Executive the cost of the premiums in respect of such life insurance which shall be purchased directly by the Executive; in the event that either or both of such insurance coverages is obtained, such payments shall be made solely from such insurance coverages and not from the Company and shall constitute the Executive's estate's or heirs' sole remedy in respect of such payments. 8 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 An amount equal to 50% of any unvested Employment Options as of the Termination Date shall vest and become exercisable by virtue of any termination under Section 7(b)(i) and, notwithstanding the provisions of the Company's Stock Option Plan pursuant to which the Employment Options may have been granted, the Executive's estate shall have a period of two years from the Termination Date to exercise the Employment Options. (c) Disability. Upon the termination of this Agreement as provided in Section 7(b)(ii) above, the Company shall pay to the Executive (i) an amount equal to the Base Salary which would otherwise be payable for the 6 months following the Termination Date (but not earlier than any recovery of insurance proceeds in respect thereof, as provided below, (ii) any Annual Bonus for the Employment Year in which the Termination Date occurs that the Board determines would otherwise have been payable had the Executive not become Disabled, which Annual Bonus shall be reduced by prorating it through the Termination Date, in each case, payable at the times such payments would otherwise be due and payable hereunder; provided, in the case of clauses (i) and (ii) above, that the Executive continues to comply with his covenants in Sections 10 (during the Term had such termination under Section 7(b)(ii) above not occurred) and 11 below, as provided therein, and (iii) expense reimbursement amounts accrued through the Termination Date, at the time such payment would otherwise be due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein. Notwithstanding the provisions of clauses (i) and (ii) above, the Company shall have the right to provide for either or both of such payments by either purchasing disability insurance itself in respect of the Executive or reimbursing to the Executive the cost of the premiums in respect of such disability insurance which shall be purchased directly by the Executive; in the event that either or both of such insurance coverages is obtained, such payments shall be made solely from such insurance coverages and not from the Company and shall constitute the Executive's sole remedy in respect of such payments. An amount equal to 50% of any unvested Employment Options as of the Termination Date shall vest and become exercisable by virtue of any termination under Section 7(b)(ii) and, notwithstanding the provisions of the Company's Stock Option Plan pursuant to which the Employment Options may have been granted, the Executive shall have a period of two years from the Termination Date to exercise such options. (d) Termination by the Company For Cause. Upon the termination of this Agreement as provided in Section 7(b)(iii) above, the Company shall pay to the Executive (i) the accrued and unpaid Base Salary, if any, through the Termination Date and (ii) expense reimbursement amounts accrued through the Termination Date, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein. No unvested Employment Options shall vest or become exercisable by virtue of any termination under Section 7(b)(iii) and any and all rights thereto then possessed by the Executive shall be terminated and of no further force and effect. (e) Termination by the Company Without Cause. Upon termination of this Agreement as provided in Section 7(b)(iv) above, the Company shall pay to the Executive (i) the Base Salary which 9 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 would otherwise be payable hereunder for a period of twelve (12) months (provided, that if the Executive commences full-time employment with another entity within the applicable period described in clauses (1) or (2) above, then, in each such case, from and after the commencement of such other employment, (x) if the aggregate compensation payable to the Executive in respect of such other employment which exceeds the Base Salary, no additional compensation shall be payable to the Executive under this clause (i) and (y) if the aggregate compensation payable to Executive in respect of such other employment is at a rate which is less than the Base Salary, the Company shall be obligated to pay the Executive (for the applicable period described in clauses (1) or (2) above) the difference between the Base Salary and the such other compensation); provided, that the Executive continues to comply with the covenants in Section 11 below, as provided therein, and (ii) expense reimbursement amounts accrued through the Termination Date, in each case, in the case of clauses (i) and (ii) above, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein; it being understood that the covenants in Section 10 below shall be of no further force and effect following the Termination Date. Any unvested Employment Options otherwise provided in this agreement to vest and become exercisable within the 364 day period following the Termination Date shall vest and become exercisable by virtue of any termination under Section 7(b)(iv). (f) Termination by the Executive for Just Cause. Upon termination of this Agreement as provided in Section 7(c)(i) above, the Company shall pay to the Executive (i) the Base Compensation which would otherwise be payable hereunder for a period of twelve months (provided, that if the Executive commences full-time employment with another entity within the applicable period described in clauses (1) or (2) above, then in each such case, from and after the date of commencement of such other employment, (x) if the aggregate compensation payable to the Executive in respect of such other employment is at a rate which exceeds the Base Salary, no additional compensation shall be payable to the Executive under this clause (i) and (y) if the aggregate compensation payable to the Executive in respect of such other employment is at a rate which is less than the Base Salary, the Company shall be obligated to pay to the Executive (for the applicable period described in clauses (1) or (2) above) the difference between the Base Salary and such other compensation); provided, that the Executive continues to comply with the covenants in Section 11 below, as provided therein; and (ii) expense reimbursement amounts accrued through the Termination Date, in each case, in the case of clauses (i) and (ii) above, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein; it being understood that the covenants in Section 10 below shall be of no further force and effect following the Termination Date. Any unvested Employment Options otherwise provided in this Agreement to vest and become exercisable within the 364 day period following the Termination Date shall vest and become exercisable by virtue of any termination under Section 7(c)(i) above. (g) Termination by the Executive Following a Change in Control. Upon termination of this Agreement as provided in Section 7(c)(ii) above, the Company shall pay to Executive (i) the Base Salary which would otherwise be payable hereunder for a period of twelve (12) months (provided, that if the Executive commences full-time employment with another entity within the applicable period described in clauses (1) or (2) above, then in each such case, from and after the date of commencement of such other 10 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 employment, (x) if the aggregate compensation payable to the Executive in respect of such other employment is at a rate which exceeds the Base Salary, no additional compensation shall be payable to the Executive under this clause (i) and (y) if the aggregate compensation payable to the Executive in respect of such other employment is at a rate which is less than the Base Salary, the Company shall be obligated to pay to the Executive (for the applicable period described in clauses (1) or (2) above) the difference between the Base Salary and such other compensation); provided, that the Executive continues to comply with the covenants in Section 11 below, as provided therein; and (ii) expense reimbursement amounts accrued through the Termination Date, in each case, in the case of clauses (i) and (ii) above, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein; it being understood that the covenants in Section 11 below shall be of no further force and effect following the Termination Date. Any unvested Employee Options otherwise provided in this Agreement to vest and become exercisable within the 364 day period following the Termination Date shall vest and become exercisable on the Termination Date by virtue of any termination under Section 7(c)(ii). (h) Termination by the Executive Without Just Cause. Upon the termination of this Agreement as provided in Section 7(c)(iii) above, the Company shall pay to the Executive (i) the accrued and unpaid Base Salary, if any, through the Termination Date, and (ii) expense reimbursement amounts accrued through the Termination Date and at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein. No unvested Employment Options shall vest or become exercisable by virtue of any termination under Section 7(c)(iii) and any and all rights thereto then possessed by the Executive shall be terminated and of no further force and effect. 9. Federal Income Tax and Other Withholdings. The Company shall withhold from any benefits payable pursuant to this Agreement such Federal, State, City or other taxes and other amounts as may be required to be withheld pursuant to any applicable law or governmental regulations or ruling and shall timely pay over to the appropriate governmental or other authorities the amount withheld, together with any additional amounts required to be paid by the Company in respect thereof. 10. Non-Competition. The Executive covenants and agrees that he will not at any time during his employment with the Company, directly or indirectly, whether as employee, owner, partner, agent, director, officer, consultant, advisor, stockholder (except as the beneficial owner of not more than 5% 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 his own account or for the benefit of any person or entity, establish, engage or be connected with or in any manner any person or entity which is at the time engaged in a business which is then in competition with the business of the Company (or any of its subsidiaries or affiliates). 11. Confidential Information and Non-Disparagement. (a) In accordance with NRS 600A.010 et seq. (the so-called Uniform Trade Secrets Act), the Executive shall hold in a fiduciary capacity for 11 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 the benefit of the Company and its stockholders all secret, confidential or proprietary information, knowledge or data relating to the Company (and any of its subsidiaries or affiliates), which shall have been obtained by the Executive during or by reason of his employment by the Company. During and after the end of the Term, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to any person or entity other than the Company (or such applicable subsidiaries or affiliates) and those designated by them which 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 or other persons or entities engaged in business with the Company from time to time. (b) Each of the parties agrees that from and after any termination or expiration of the Term, 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) necessary (i) in any judicial or arbitral action to enforce the provisions of this Agreement or (ii) in connection with any judicial or administrative proceeding to the extent required by applicable law. 12. Indemnification and Liability Insurance. (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 during the Term, in each case, except to the extent of the Executive's negligence or willful misconduct. (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 and/or officer of the Company (or any subsidiary of the Company) during the Term in accordance with its customary practices as in effect from time to time during the Term. The parties acknowledge and agree that such policy may cover other officers and directors of the Company in addition to the Executive. 13. General Provisions. (a) Assignment. Neither this Agreement nor any right or interest hereunder shall be assignable by the Executive or the Company without the prior written consent of the other; provided, that (i) in the event of the Executive's Death during the Term, the Executive's estate and his heirs, executors, administrators, legatees and distributees shall have the rights and obligations set forth herein, as provided herein, 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 shall continue to be bound by the provisions hereof binding upon the Company. 12 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 (b) Material Inducements. The provisions of Sections 10 and 11 above are material inducements to the Company entering into and performing this Agreement; accordingly, in the event of any breach of the provisions of Sections 10 or 11(a) 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 hereunder, (ii) all Employment 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 Incentive Warrants and Employment Options. (c) Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the Executive and the Company and their respective heirs, executors, administrators, legatees and distributees, successors and permitted assigns. (d) Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (e) Severability. If, for any reason, any provision of this Agreement is determined to be invalid or unenforceable, such invalidity or lack of enforceability shall not affect any other provision of this Agreement not so determined to be invalid or unenforceable, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect, irrespective of such invalid or unenforceable provision. (f) Effect of Prior Agreements. This Agreement contains the entire understanding between the parties hereto respecting the Executive's employment by the Company, and supersedes any prior employment agreement between the Company and the Executive. (g) Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered, if sent by telecopy or by hand, (ii) one business day after sending, if sent by reputable overnight courier service, such as Federal Express, or (iii) three business days after being mailed, if sent by United States certified or registered mail, return receipt requested, postage prepaid. Notices shall be sent by one of the methods described above; provided, that any notice sent by telecopy shall also be sent by any other method permitted above. Notices shall be sent, if to the Executive, to 8924 Echo Ridge Drive, Las Vegas, Nevada 89117; and if to the Company, to Alliance Gaming Corporation, 4380 Boulder Highway, Las Vegas, Nevada 89121, directed to the attention of the Board with copies to the Chairman and the Assistant Secretary of the Company; or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (h) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (i) Arbitration. In the event of a dispute or controversy arising under or in connection with this Agreement (except, at the option of the Company, Sections 10 and 11 above, which may be adjudicated in a federal or state court sitting in Las Vegas, Nevada), the Executive shall give the Company or the Company shall 13 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 give the Executive, as applicable, a written demand for relief. If the dispute or controversy is not resolved, it shall be settled exclusively by arbitration, conducted in Las Vegas, Nevada, in accordance with the rules of the American Arbitration Association (or if such association does not then conduct business in such city, another arbitral panel reasonably satisfactory to each party) then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction over the parties hereto. (j) Indulgences, Etc. 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. (k) Headings. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (l) Governing Law. This Agreement has been executed and delivered in the State of Nevada, and its validity, interpretation, performance, and enforcement shall be governed by the laws of such State, without regard to principles of conflicts of laws. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has signed this Agreement, all as of the date first set forth above. Alliance Gaming Corporation By: /s/ Steve Greathouse -------------------------------- Name: Steve Greathouse Title: Chairman, President and Chief Executive Officer /s/ David D. Johnson ------------------------------------ David D. Johnson EX-10.72 3 EXHIBIT 10.72 1 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 EXHIBIT 10.72 EMPLOYMENT AGREEMENT SUPPLEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of the 29th day of August 1996 (the "Effective Date") by and between ALLIANCE GAMING CORPORATION, a Nevada corporation (the "Company"), and JOEL KIRSCHBAUM (the "Grantee"). R E C I T A L S : 1. On September 23, 1991, the Board of Directors of Company (the "Board") adopted the United Gaming, Inc. 1991 Long-Term Incentive Plan (the "1991 Plan"). On January , 1997, the Board adopted the Alliance Gaming Corporation 1996 Long-Term Incentive Plan (the "1996 Plan"; together with the 1991 Plan, the "Plans"). The Board shall present the 1996 Plan to the stockholders of the Company for their approval at the next regularly-scheduled annual meeting of stockholders of the Company after the date hereof, together with the Board's and the Company's management's recommendation that the stockholders of the Company approve the 1996 Plan. 2. The Company and the Grantee are parties to an Agreement dated March 20, 1995 (the "Original Agreement") pursuant to which the Company has engaged the Grantee as a director and to provide certain services to the Company in consideration of the compensation provided for therein. In connection with the Original Agreement, the Company has granted to the Grantee (i) the option to acquire up to 374,000 shares of its Common Stock, par value $.10 per share (the "Common Stock"), under the 1991 Plan (the "1991 Options"), and (ii) the option to acquire up to 176,000 shares of Common Stock under the 1996 Plan (the "1996 Options"; together with the 1991 Options, the "Options"), pursuant to the Option Agreements in the forms attached hereto as Exhibits 1 and 2, respectively (such agreements, the "1991 Option Agreement" and the "1996 Option Agreement", respectively"). A true and correct copy of the 1991 Plan is attached as Exhibit A to the 1991 Option Agreement and a true and correct copy of the 1996 Plan is attached as Exhibit A to the 1996 Option Agreement. 3. The Board hereby confirms that the Grantee shall be considered, for all purposes relating to the Plans and the option grants thereunder, a "regular full-time employee" of the Company; however, if, for any reason whatsoever, the Grantee is not deemed to be a "regular full-time employee" under the Plans, then, in such event, the Board conclusively designates the Grantee to be a "paid consultant" under the Plans. A G R E E M E N T : NOW, THEREFORE, the parties hereto agree as follows: 1. Certain Covenants. The Company agrees to the covenants and undertakings set froth in the Recitals above. In the event that the 1996 Plan is approved by the stockholders of the Company as described above, or is otherwise approved in a timely manner to permit or confirm the grant of the 1996 Options in accordance with applicable law, the 1996 Options shall be treated as Incentive Stock Options under Section 422 of the Code to the maximum extent permitted by applicable law, and the portion of the 1996 Options, if any, that does not qualify as Incentive Stock Options shall be treated as Nonstatutory Stock Options under the 1996 Plan. 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 2. Certain Supplement to the Original Agreement. The Original Agreement is supplemented as follows: The parties acknowledge that the Company has agreed to pay to the Grantee a bonus (the "Contingent Bonus") under Section 4(b) of the Original Agreement in the aggregate amount of $300,000. The Contingent Bonus or portions thereof (as set forth below) shall be paid by the Company to the Grantee within five business days of the attainment of each of the following goals whenever such goals are attained at any point in the future; it being understood that payment in respect of attainment of one or more such goals shall not be conditioned upon attainment of any other goal: 1. the date of the completion of the existing assignment to engage a replacement chief executive officer of the Company, i.e., the date of commencement of employment of such person: 1/3 of such amount (i.e., $100,000); 2. the date upon which the average closing price of a share of the Common Stock, on its principal exchange or listing agency, for any five consecutive day period shall have equaled or exceeded $5.00: 1/3 of such amount (i.e., $100,000); 3. the date upon which a new or revised bank credit agreement or senior lending facility in an amount equal to or greater than $10,000,000 is entered into by the Company and/or any of its direct or indirect subsidiaries: 1/6 of such amount (i.e., $50,000); and 4. the date upon which equity analysts who are employed by any four brokerage, investment banking, commercial banking or similar firm shall have initiated coverage of the Company's equity securities: 1/6 of such amount ($50,000). The attainment of one or more of such goals and the payment of any portion of the Contingent Bonus shall in no way affect the determination by the Company or the Board of the appropriate bonus for the Grantee for the fiscal year ended June 30, 1997 or any subsequent fiscal year of the Company. 1. Notices. All notices, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, by facsimile transmission, by reputable overnight courier, such as Federal Express, or otherwise actually delivered, in the case of the Grantee, to the last address of the Grantee appearing on the books of the Company (with a copy to 25 Grace Court, Brooklyn, New York 11201), and, in the case of the Company, to: Alliance Gaming Corporation 6601 South Bermuda Road Las Vegas, Nevada 89119 Attention: General Counsel or to such other address or addresses as the Grantee or the Company shall hereafter have specified in writing. Any such notice, demand or other communication hereunder shall be deemed to have been duly given on the date actually delivered. 3 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 1. Modification of Agreement; Etc. This Agreement may be modified, amended, suspended or terminated, and any terms, covenants, representations or conditions may be waived, but only by a written instrument executed by each of the parties hereto. This Agreement shall not be transferred or assigned by either party hereto without the prior written consent of the other party; provided that (a) this Agreement shall be binding upon any successor to the Company (by merger or otherwise) or any successor to all or substantially all of the Company's business or assets and (b) the benefits afforded hereby to the Grantee shall be available to the Grantee's estate (or his heirs or legal representatives), to the same extent available to the Grantee hereunder, in the event of the Grantee's death during the duration of the this Agreement. 2. Severability. Should any provision of this Agreement be held by a court to be unenforceable or invalid for any reason whatsoever, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 3. Governing Law. This Agreement has been executed in the State of Nevada and all matters pertinent thereto shall be governed by the laws of the State of Nevada. 4. Arbitration. Any controversy between the parties hereto, including the construction or application of any of the terms, covenants or conditions of this Agreement, shall on written request of one party served on the other be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Such arbitration shall be conducted, at the option of the initiating party, in Las Vegas, Nevada or New York, New York. The cost of such arbitration shall be borne by the losing party or in such proportions as the arbitrator(s) shall decide. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. 5. Counterparts. This Agreement may be executed in one or more counterparts and, when such counterparts have been executed by each of the parties hereto, said counterparts shall constitute a single and valid agreement although each of the signatory parties have executed separate counterparts hereof. 6. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 4 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Alliance Gaming Corporation By: /s/ David D. Johnson -------------------------------- Name: David D. Johnson Title: Senior Vice-President, Secretary, and General Counsel /s/ Joel Kirschbaum ----------------------------------- Joel Kirschbaum EX-10.73 4 EXHIBIT 10.73 1 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 EXHIBIT 10.73 EMPLOYMENT AGREEMENT SUPPLEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of the 29th day of August 1996 (the "Effective Date") by and between ALLIANCE GAMING CORPORATION, a Nevada corporation (the "Company"), and ANTHONY L. DICESARE (the "Grantee"). R E C I T A L S : A. On September 23, 1991, the Board of Directors of Company (the "Board") adopted the United Gaming, Inc. 1991 Long-Term Incentive Plan (the "1991 Plan"). On January , 1997, the Board adopted the Alliance Gaming Corporation 1996 Long-Term Incentive Plan (the "1996 Plan"; together with the 1991 Plan, the "Plans"). The Board shall present the 1996 Plan to the stockholders of the Company for their approval at the next regularly-scheduled annual meeting of stockholders of the Company after the date hereof, together with the Board's and the Company's management's recommendation that the stockholders of the Company approve the 1996 Plan. B. The Company and the Grantee are parties to an Agreement dated March __, 1995 (the "Original Agreement") pursuant to which the Company has engaged the Grantee as a director and to provide certain services to the Company in consideration of the compensation provided for therein. In connection with the Original Agreement, the Company has granted to the Grantee (i) the option to acquire up to 255,000 shares of its Common Stock, par value $.10 per share (the "Common Stock"), under the 1991 Plan (the "1991 Options"), and (ii) the option to acquire up to 120,000 shares of Common Stock under the 1996 Plan (the "1996 Options"; together with the 1991 Options, the "Options"), pursuant to the Option Agreements in the forms attached hereto as Exhibits 1 and 2, respectively (such agreements, the "1991 Option Agreement" and the "1996 Option Agreement", respectively"). A true and correct copy of the 1991 Plan is attached as Exhibit A to the 1991 Option Agreement and a true and correct copy of the 1996 Plan is attached as Exhibit A to the 1996 Option Agreement. C. The Board hereby confirms that the Grantee shall be considered, for all purposes relating to the Plans and the option grants thereunder, a "regular full-time employee" of the Company; however, if, for any reason whatsoever, the Grantee is not deemed to be a "regular full-time employee" under the Plans, then, in such event, the Board conclusively designates the Grantee to be a "paid consultant" under the Plans. A G R E E M E N T : NOW, THEREFORE, the parties hereto agree as follows: 1. Certain Covenants. The Company agrees to the covenants and undertakings set froth in the Recitals above. In the event that the 1996 Plan is approved by the stockholders of the Company as described above, or is otherwise approved in a timely manner to permit or confirm the grant of the 1996 Options in accordance with applicable law, the 1996 Options shall be treated as Incentive Stock Options under Section 422 of the Code to the maximum extent permitted by applicable law, and the portion of the 1996 Options, if any, that does not qualify as Incentive Stock Options shall be treated as Nonstatutory Stock Options under the 1996 Plan. 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 2. Certain Supplement to the Original Agreement. The Original Agreement is supplemented as follows: The parties acknowledge that the Company has agreed to pay to the Grantee a bonus (the "Contingent Bonus") under Section 4(b) of the Original Agreement in the aggregate amount of $150,000. The Contingent Bonus or portions thereof (as set forth below) shall be paid by the Company to the Grantee within five business days of the attainment of each of the following goals whenever such goals are attained at any point in the future; it being understood that payment in respect of attainment of one or more such goals shall not be conditioned upon attainment of any other goal: a. the date of the completion of the existing assignment to engage a replacement chief executive officer of the Company, i.e., the date of commencement of employment of such person: 1/3 of such amount (i.e., $50,000); b. the date upon which the average closing price of a share of the Common Stock, on its principal exchange or listing agency, for any five consecutive day period shall have equaled or exceeded $5.00: 1/3 of such amount (i.e., $50,000); c. the date upon which a new or revised bank credit agreement or senior lending facility in an amount equal to or greater than $10,000,000 is entered into by the Company and/or any of its direct or indirect subsidiaries: 1/6 of such amount (i.e., $25,000); and d. the date upon which the last of four equity analysts who are employed by brokerage, investment banking, commercial banking or similar firms shall have initiated coverage of the Company's equity securities, irrespective of whether any or all of such coverage has been subsequently discontinued: 1/6 of such amount ($25,000). The attainment of one or more of such goals and the payment of any portion of the Contingent Bonus shall in no way affect the determination by the Company or the Board of the appropriate bonus for the Grantee for the fiscal year ended June 30, 1997 or any subsequent fiscal year of the Company. 3. Notices. All notices, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, by facsimile transmission, by reputable overnight courier, such as Federal Express, or otherwise actually delivered, in the case of the Grantee, to the last address of the Grantee appearing on the books of the Company (with a copy to 1336 St. Joseph Circle, Las Vegas, Nevada 89104), and, in the case of the Company, to: Alliance Gaming Corporation 6601 South Bermuda Road Las Vegas, Nevada 89119 Attention: General Counsel or to such other address or addresses as the Grantee or the Company shall hereafter have specified in writing. Any such notice, demand or other communication hereunder shall be deemed to have been duly given on the date actually delivered. 3 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 4. Modification of Agreement; Etc. This Agreement may be modified, amended, suspended or terminated, and any terms, covenants, representations or conditions may be waived, but only by a written instrument executed by each of the parties hereto. This Agreement shall not be transferred or assigned by either party hereto without the prior written consent of the other party; provided that (a) this Agreement shall be binding upon any successor to the Company (by merger or otherwise) or any successor to all or substantially all of the Company's business or assets and (b) the benefits afforded hereby to the Grantee shall be available to the Grantee's estate (or his heirs or legal representatives), to the same extent available to the Grantee hereunder, in the event of the Grantee's death during the duration of the this Agreement. 5. Severability. Should any provision of this Agreement be held by a court to be unenforceable or invalid for any reason whatsoever, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 6. Governing Law. This Agreement has been executed in the State of Nevada and all matters pertinent thereto shall be governed by the laws of the State of Nevada. 7. Arbitration. Any controversy between the parties hereto, including the construction or application of any of the terms, covenants or conditions of this Agreement, shall on written request of one party served on the other be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Such arbitration shall be conducted, at the option of the initiating party, in Las Vegas, Nevada or New York, New York. The cost of such arbitration shall be borne by the losing party or in such proportions as the arbitrator(s) shall decide. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. 8. Counterparts. This Agreement may be executed in one or more counterparts and, when such counterparts have been executed by each of the parties hereto, said counterparts shall constitute a single and valid agreement although each of the signatory parties have executed separate counterparts hereof. 9. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Alliance Gaming Corporation By: /s/ David D. Johnson -------------------------------- Name: David D. Johnson Title: Senior Vice-President, Secretary, and General Counsel 4 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 /s/ Anthony L. DiCesare ------------------------------- Anthony L. DiCesare EX-10.74 5 EXHIBIT 10.74 1 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 EXIBIT 10.74 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 24, 1996, by and between ALLIANCE GAMING CORPORATION, a Nevada corporation (the "Company"), and SCOTT D. SCHWEINFURTH, an individual (the "Executive"). R E C I T A L S : A. The Company considers it important and in its best interest and the best interest of its stockholders to foster the employment of key management personnel, and desires to retain the services of the Executive, on the terms and subject to the conditions provided in this Agreement. B. The Executive desires to accept employment by the Company and to render services to the Company, on the terms and subject to the conditions provided in this Agreement. A G R E E M E N T : The parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ and retain the Executive, and the Executive agrees to be employed and retained by the Company, to render services to the Company for the period, at the rate of compensation and upon the other 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 the date hereof and shall continue through and including June 30, 1999, unless earlier terminated as provided in this Agreement (the date of any termination of this Agreement or the expiration of the Term, as provided herein, the "Termination Date"). 3. Position and Duties. The Executive shall serve as the Senior Vice President, Chief Financial Officer and Treasurer of the Company. During his employment hereunder, it is the intent of the parties that the Executive shall report to the executive primarily responsible for day-to-day decision-making for the Company, which executive may be titled as the Chief Executive Officer ("CEO") or the Chief Operating Officer ("COO") of the Company. The Executive shall report to such executive and the Board of Directors of the Company (the "Board"). During the Term, the Executive shall have the full power, authority and responsibility of the Senior Vice President, Chief Financial Officer and Treasurer of the Company. During the Term, 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 Chief Executive Officer or the Board. 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 which reflects credit upon 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 during the Term in fulfilling his duties hereunder. 2 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 4. Compensation and Reimbursement of Expenses. (a) Salary. For purposes of this Agreement, each consecutive 12-month period ending on each June 30 during the Term shall be referred to as an "Employment Year." For services rendered by the Executive under this Agreement, the Company shall pay to the Executive as compensation during each Employment Year during the Term, a base salary (the "Base Salary") at an annual rate of $235,000.00 per year (prorated for any partial Employment Years). Increases in the Base Salary shall be considered by the Company no less frequently than annually, commencing at the end of the first Employment Year hereunder and will be based upon criteria applicable to other senior executives of the Company; it being understood, however, that the award of any such increase shall be in the sole discretion of the Company. The Base Salary shall be payable in equal bi-weekly installments, commencing with the end of the pay period which next follows the commencement of the Term, and shall be subject to customary payroll deductions (i.e., for social security, federal, state and local taxes and other amounts customarily withheld from the salaries of employees of the Company). (b) Bonus. For the period from January 1, 1996, through December 31, 1996, the Executive shall be eligible to receive from the Company, on or before March 31, 1997, a cash bonus in respect of such period of time (the "Cash Bonus"). The Executive shall be eligible to receive from the Company, within 120 days of the end of each Employment Year, a cash bonus in respect of such Employment Year (the "Annual Bonus") (provided, however, that the Annual Bonus for the Employment Year ending June 30, 1997, shall be prorated and cover only the period from January 1, 1997, through June 30, 1997, and not the period covered by the Cash Bonus). The Cash Bonus and the Annual Bonus shall be based upon all relevant criteria, including without limitation, (i) the performance of the Company during such Employment Year (or portion thereof as to the Employment Year through June 30, 1997) based upon customary financial and other criteria such as but not limited to, return on the Company's consolidated stockholders' equity and total capital (i.e., stockholders' equity and total debt), performance of the Company's Common Stock, par value $.10 per share (the "Common Stock"), and the Company's absolute and relative amounts of consolidated cash flow, operating income and net income, and the comparison of such results with the Company's budgets and projections therefor, and (ii) the performance of the Executive in rendering services to the Company. It is contemplated but not certain that the Annual Bonus shall be between 30% and 50% of the Base Salary for each applicable Employment Year; it being understood, however, that the Company shall not be obligated to pay to the Executive any Annual Bonus and the payment, if any, and amount thereof shall be solely within the discretion of the Company. It is also contemplated that the Compensation Committee of the Board shall formulate specific criteria and performance targets for the determination of the Executive's Annual Bonus, if any. The Annual Bonus shall be subject to customary payroll deductions (i.e., for social security, federal, state and local taxes and other amounts customarily withheld from the salaries of employees of the Company). (c) Options. The Company and Executive acknowledge and agree that, as a consequence of Executive's initial employment arrangement with the Company, he is entitled to receive Executive options (to be issued pursuant to the Company's 1991 Incentive Stock Option Plan and/or the proposed 1996 Incentive Stock Option Plan (the "Plans")) to acquire 120,000 shares of Common Stock of the Company, 60,000 of which were granted on August 29, 1996 (the "August Options"), and 60,000 of which were granted on October 3, 1996 (the "October Options"). For any such options to be issued under the proposed 1996 Incentive Stock Option Plan, Executive will be granted, under a plan subject to the approval of the Board of Directors but not of stockholders, stock appreciation rights entitling Executive to receive a cash payment equal to the appreciation in price of 3 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 Alliance Common Stock from the date of grant to the date of exercise, in the event that the Company's stockholders do not approve the 1996 Incentive Stock Option Plan. The August Options, the October Options, any stock appreciation rights granted in lieu of any such options in the event that the Company's stockholders do not approve the 1996 Incentive Stock Option Plan and any other options which may be granted to the Executive during the Term hereof are collectively referred to herein as the "Employment Options". Of this total number, Employment Options to acquire 15,000 shares under the August Options and Employment Options to acquire 15,000 shares under the October Options have vested and become exercisable as of the dates the August Options and the October Options were granted. The Company shall issue to the Executive additional Employment Options to acquire another 45,000 shares of common stock of the Company under the August Options and another 45,000 shares of common stock of the Company under the October Options, for a total of 60,000 Employment Options under the August Options and 60,000 shares under the October Options (Employment Options for 15,000 shares under the August Options and 15,000 shares under the October Options, as stated above, have already vested and become exercisable). The Employment Options shall have an exercise price of $3.4375 per share and vest and become exercisable as follows: August 29, 1997 - 15,000 shares under the August Options; October 3, 1997 - 15,000 shares under the October Options; August 29, 1998 - 15,000 shares under the August Options; October 3, 1998 - 15,000 shares under the October Options; June 30, 1999 - 15,000 shares under the August Options; June 30, 1999 - 15,000 shares under the October Options. Prior to each such applicable date, such Employment Options shall not be vested or exercisable, save for the Employment Options for 15,000 shares under the August Options and 15,000 shares under the October Options which, as stated above, have already vested and become exercisable by Executive. (d) Reimbursement of Expenses. Consistent with established policies 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 without limitation, travel, hotel and similar expenses, incurred by the Executive from time to time in performing his obligations under this Agreement. 5. Benefits. "Employee Benefits" shall mean those benefits under employee benefit plans or programs, or company policies, described in Sections 5(a), (b) and (c), below, but shall not mean the salary, bonus, options and reimbursement of expenses set forth in Section 4, above. (a) Benefit Plans. The payments provided in Section 4 above are in addition to any Employee Benefits to which the Executive may be, or may become, entitled under any of the Company's employee benefit plans or programs for which key executives are or shall become eligible, including without limitation, retirement, life, health and disability benefits. In addition, the Executive shall be eligible to receive, during the Term, Employee Benefits which are consistent with the Employee Benefits provided to all senior officers or executives of the Company. (b) Vacation. The Executive shall be entitled to annual paid vacation time, for three weeks 4 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 per year during the Term hereof in accord with the Company's policy, accruing at the beginning of each Employment Year and prorated for any partial Employment Year. In the event any of such vacation days are not used by the Executive in any Employment Year, the Executive shall have the right to accumulate and carry forward such number of days from year to year as shall be consistent with the Company's policy therefor for senior executives, as in effect from time to time. The Executive shall also be entitled to reasonable periods of sick leave with compensation and all paid holidays given by the Company to its senior executive officers. (c) No Reduction. There shall be no material reduction or diminution of the benefits provided in this Section 5 during the Term unless (i) the Executive shall have provided his consent to such reduction or diminution, (ii) an equitable arrangement (embodied in an ongoing substitute or alternative benefit or plan) has been made with respect to such benefit or plan or (iii) such reduction is part of a program of across-the-board benefit reductions similarly affecting the senior executive officers of the Company. 6. Benefits Payable Upon Disability. (a) Disability Benefits. During any period of Disability (as defined below) occurring during the Term, the Company shall continue to pay to the Executive the Base Salary as provided herein and continue to extend to him the benefits described in Sections 4 and 5 hereof; it being understood that if disability benefits are provided under any disability insurance or similar policy maintained by the Company (or maintained by the Executive, the cost of which is reimbursed or paid by the Company), payments under such policy shall be considered as payments by the Company and shall offset any Base Salary payable to the Executive under this Agreement. As used in this Agreement, "Disability" shall mean the inability of the Executive to render services to the Company, as provided herein, as a result of physical or mental infirmity or disability. (b) Services During Disability. During the Term, notwithstanding any Disability, the Executive shall, to the extent that he is physically and mentally able to do so, furnish information, assistance and services to the Company, and, upon the reasonable request in writing on behalf of the Company from time to time, he shall make himself available to the Company to undertake reasonable assignments and fulfill his duties hereunder, consistent with his current position with the Company and his physical and mental health. 7. Termination. This Agreement shall be terminated in accordance with the provisions of this Section 7, in which case the provisions of Section 8 below shall be applicable. (a) Upon Expiration of the Term. This Agreement shall terminate in accordance with Section 2 above. (b) By The Company. In addition to the provisions of Section 7(a) above, this Agreement is subject to earlier termination by the Company, as follows: (i) Death of Executive. If the Executive dies, this Agreement shall terminate, the Termination Date being the date of the Executive's death. (ii) Disability. If the Executive has been absent from service to the Company, as required in this Agreement, for a period of 90 days or more as a result of Disability during any 5 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 consecutive 180-day period during the Term, the Company shall have the right to terminate this Agreement, the Termination Date being 15 days after notice thereof is provided to the Executive. (iii) Termination by Company for Cause. The Company shall have the right to terminate the Executive's employment under this Agreement for Cause (as defined below), such termination to be effective immediately upon notice thereof from the Company to the Executive. For purposes of this Agreement, "Cause" shall mean the Executive's (A) conviction of any misdemeanor involving moral turpitude, or any felony, (B) misappropriation or embezzlement from the Company, (C) denial or rejection of any gaming license or permit or commission of any act which could reasonably be expected to result in such denial or rejection, (D) any breach during the Term of Sections 10 or 11 below or (E) the persistent failure or refusal after notice to comply with the Executive's duties or obligations hereunder. (iv) Termination by the Company Without Cause. The Company shall have the right to terminate the Executive's employment hereunder for any other reason not set forth in clauses (i), (ii) or (iii) of this Section 7(b), the Termination Date being 15 days after notice from the Company to the Executive. (c) By The Executive. In addition to the provisions of Section 7(a) above, this Agreement is subject to earlier termination by the Executive, as follows: (i) Termination by the Executive for Just Cause. The Executive shall have the right to terminate his employment under this Agreement upon the occurrence of a material breach of this Agreement by the Company, which the parties agree shall be limited to (A) a reduction by the Company in the Base Salary below the minimum Base Salary specified in Section 4(a) above or the failure of the Company to pay to the Executive any portion of the Base Salary within 30 days of the time that any such amount is due and payable hereunder or (B) the assignment to the Executive of duties and responsibilities that are materially inconsistent with those of the Senior Vice President, Chief Financial Officer and Treasurer of the Company, in each case of clauses (A) and (B) which has not been cured by the Company after 30 days' written notice from the Executive to the Company; provided, that in the case of three such material breaches (and notice thereof), the Executive shall thereafter have the right to terminate this Agreement immediately upon notice to the Company in the case of a subsequent material breach. In the event that the Executive elects to terminate this Agreement as a result of the events described in clauses (A) or (B) above, the Executive shall exercise such right within 10 days after the lapsing of the 30-day period referred to above in this clause (i) (assuming that the Company shall have failed to cure such material breach within such period), or, as applicable, within 10 days of any additional material breach giving rise to an immediate right of termination; thereafter, such right to terminate shall no longer be exercisable. The Termination Date shall be a date specified by the Executive, which shall be between 30 and 45 days after the date of the default notice by the Executive giving rise to a right of termination. (ii) Termination by the Executive Without Just Cause. The Executive shall have the right to terminate the Executive's employment under this Agreement for any other reason not set forth in clause (i) of this Section 7(c), the Termination Date being 15 days after notice thereof from the Executive to the Company. 6 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 8. Effect of Termination. The following provisions shall be applicable in the event of the termination of this Agreement as provided in Section 7 above. (a) Expiration of Term. Upon termination of this Agreement as provided in Section 7(a) above, this Agreement shall terminate and be of no further force and effect, except as provided in Sections 11, 12 and 13(b) below, which shall survive such termination, and no additional payments, liabilities or obligations shall be due and owing from either party to the other. (b) Death. Upon the termination of this Agreement as provided in Section 7(b)(i) above, the Company shall pay to the Executive's estate (i) an amount equal to the sum of (A) the Base Salary then in effect which would otherwise be payable for the six months following the Termination Date (but not earlier than any recovery of insurance proceeds (if any) in respect thereof, as provided below), and (B) any Annual Bonus for the Employment Year in which the Termination Date occurs that the Company determines would otherwise have been payable had the Executive not died, which Annual Bonus shall be reduced by prorating it through the Termination Date, payable, in each case, at the time such payment would otherwise be due and payable hereunder, and (ii) expense reimbursement amounts accrued through the Termination Date, at the time such payment would otherwise be due and payable thereunder, and neither party shall have any further liability or obligation to the other, except as provided in Section 12 below, which shall survive the Termination Date. Notwithstanding the provisions of clause (i) above, the Company shall have the right to provide for either or both of the payments described therein by purchasing life insurance on the Executive's life itself or reimbursing to the Executive the cost of the premiums in respect of such life insurance which shall be purchased directly by the Executive; in the event that either or both of such insurance coverages is obtained, such payments shall be made solely from such insurance coverages and not from the Company and shall constitute the Executive's estate's or heirs' sole remedy in respect of such payments. An amount equal to 50% of any unvested Employment Options as of the Termination Date shall vest and become exercisable by virtue of any termination under Section 7(b)(i) and, notwithstanding the provisions of the Company's Stock Option Plan pursuant to which the Employment Options may have been granted, the Executive's estate shall have a period of two years from the Termination Date to exercise the Employment Options. (c) Disability. Upon the termination of this Agreement as provided in Section 7(b)(ii) above, the Company shall pay to the Executive the sum of (i) an amount equal to the Base Salary then in effect which would otherwise be payable for the six months following the Termination Date (but not earlier than any recovery of insurance proceeds in respect thereof, as provided below), and (ii) any Annual Bonus for the Employment Year in which the Termination Date occurs that the Board determines would otherwise have been payable had the Executive not become Disabled, which Annual Bonus shall be reduced by prorating it through the Termination Date, in each case, payable at the times such payments would otherwise be due and payable hereunder; provided, in the case of clauses (i) and (ii) above, that the Executive continues to comply with his covenants in Sections 10 (during the Term had such termination under Section 7(b)(ii) above not occurred) and 11 below, as provided therein, and (iii) expense reimbursement amounts accrued through the Termination Date, at the time such payment would otherwise be due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 10, 11, 12 and 13(b) below shall survive 7 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 the Termination Date, to the extent provided therein, with the provisions of Section 10 surviving only until such time as the Term would have otherwise expired if not for a termination under Section 7(b)(ii). Notwithstanding the provisions of clauses (i) and (ii) above, the Company shall have the right to provide for either or both of such payments by either purchasing disability insurance itself in respect of the Executive or reimbursing to the Executive the cost of the premiums in respect of such disability insurance which shall be purchased directly by the Executive; in the event that either or both of such insurance coverages is obtained, such payments shall be made solely from such insurance coverages and not from the Company and shall constitute the Executive's sole remedy in respect of such payments. An amount equal to 50% of any unvested Employment Options as of the Termination Date shall vest and become exercisable by virtue of any termination under Section 7(b)(ii) and, notwithstanding the provisions of the Company's Stock Option Plan pursuant to which the Employment Options may have been granted, the Executive shall have a period of two years from the Termination Date to exercise such options. (d) Termination by the Company For Cause. Upon the termination of this Agreement as provided in Section 7(b)(iii) above, the Company shall pay to the Executive (i) the accrued and unpaid Base Salary then in effect, if any, through the Termination Date and (ii) expense reimbursement amounts accrued through the Termination Date, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 10, 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein, with the provisions of Section 10 surviving for the shorter of (A) 12 months from the Termination Date and (B) the remainder of the Term had such termination not occurred. No unvested Employment Options shall vest or become exercisable by virtue of any termination under Section 7(b)(iii) and any and all rights thereto then possessed by the Executive shall be terminated and of no further force and effect. (e) Termination by the Company Without Cause. Upon termination of this Agreement as provided in Section 7(b)(iv) above, the Company shall pay to the Executive the sum of (i) the greater of (1) the Base Salary then in effect which would otherwise be payable hereunder for a period of twelve (12) months, or (2) the base compensation which the Executive would have received upon termination as of that date under his employment agreement with Bally Gaming International, Inc. (the "BGII Employment Agreement"), in effect prior to the date of this Employment Agreement, for the period such base compensation would have been payable under the BGII Employment Agreement; provided, that the Executive continues to comply with the covenants in Section 11 below, as provided therein, and (ii) expense reimbursement amounts accrued through the Termination Date; in each case of clauses (i) and (ii) above, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 10, 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein, with the provisions of such Section 10 surviving for 12 months from the Termination Date. During such period that the provisions of Section 10 are in effect, the Executive shall continue to be eligible to receive the benefits provided in Section 5 above. Any unvested Employment Options otherwise provided in this Agreement to vest or become exercisable within the 364-day period following the Termination Date shall vest and become exercisable on the Termination Date by virtue of any termination under Section 7(b)(iv) above. (f) Termination by the Executive for Just Cause. Upon termination of this Agreement as provided in Section 7(c)(i) above, the Company shall pay to the Executive the sum of (i) the greater of (1) the Base 8 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 Salary then in effect which would otherwise be payable hereunder for a period of twelve (12) months, or (2) the base compensation which the Executive would have received upon termination as of that date under his employment agreement with Bally Gaming International, Inc. (the "BGII Employment Agreement"), in effect prior to the date of this Employment Agreement, for the period such base compensation would have been payable under the BGII Employment Agreement; provided, that the Executive continues to comply with the covenants in Section 11 below, as provided therein, and (ii) expense reimbursement amounts accrued through the Termination Date, in each case of clauses (i) and (ii) above, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein; it being understood that the covenants in Section 10 below shall be of no further force and effect following the Termination Date. During the period that the provisions of Section 10 are in effect, the Executive shall continue to be eligible to receive the benefits provided in Section 5 above. Any unvested Employment Options otherwise provided in this Agreement to vest and become exercisable within the 364-day period following the Termination Date shall vest and become exercisable on the Termination Date by virtue of any termination under Section 7(c)(i) above. (g) Termination by the Executive Without Just Cause. Upon the termination of this Agreement as provided in Section 7(c)(ii) above, the Company shall pay to the Executive (i) the accrued and unpaid Base Salary then in effect, if any, through the Termination Date, and (ii) expense reimbursement amounts accrued through the Termination Date, at the time such payments are otherwise due and payable thereunder, and neither party shall have any further liability or obligation to the other, except that the provisions of Sections 10, 11, 12 and 13(b) below shall survive the Termination Date, to the extent provided therein. During such period that the provisions of Section 10 are in effect, the Executive shall continue to be eligible to receive the benefits provided in Section 5 above. No unvested Employment Options shall vest or become exercisable by virtue of any termination under Section 7(c)(ii) and any and all rights thereto then possessed by the Executive shall be terminated and of no further force and effect. 9. Federal Income Tax and Other Withholdings. The Company shall withhold from any benefits payable pursuant to this Agreement such Federal, State, City or other taxes and other amounts as may be required to be withheld pursuant to any applicable law or governmental regulations or ruling and shall timely pay over to the appropriate governmental or other authorities the amount withheld, together with any additional amounts required to be paid by the Company in respect thereof. 10. Non-Competition. The Executive covenants and agrees that he will not at any time during the term and, to the extent provided for in the applicable subsections of Section 8 above, for a period of 12 months thereafter as provided in such subsections of Section 8 above, directly or indirectly, whether as employee, owner, partner, agent, director, officer, consultant, advisor, stockholder (except as the beneficial owner of not more than 5% 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 his own account or for the benefit of any person or entity, establish, engage or be connected with or in any manner any person or entity which is at the time engaged in a business which (on the Termination Date) is then in competition with the business of the Company or any of its subsidiaries or affiliates. 11. Confidential Information and Non-Disparagement. (a) In accordance with NRS 9 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 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 or proprietary information, knowledge or data relating to the Company (and any of its subsidiaries or affiliates), which shall have been obtained by the Executive during or by reason of his employment by the Company. During and after the Termination Date, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to any person or entity other than the Company (or such applicable subsidiaries or affiliates) and those designated by them which 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 or other persons or entities engaged in business with the Company from time to time. (b) Each of the parties agrees that from and after any Termination Date or expiration of the Term, 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) necessary (i) in any judicial or arbitral action to enforce the provisions of this Agreement or (ii) in connection with any judicial or administrative proceeding to the extent required by applicable law. 12. Indemnification and Liability Insurance. (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 during the Term, in each case, except to the extent of the Executive's negligence or willful misconduct. (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 and/or officer of the Company (or any subsidiary of the Company) during the Term in accordance with its customary practices as in effect from time to time during the Term. The parties acknowledge and agree that such policy may cover other officers and directors of the Company in addition to the Executive. 13. General Provisions. a) Assignment. Neither this Agreement nor any right or interest hereunder shall be assignable by the Executive or the Company without the prior written consent of the other; provided, that (i) in the event of the Executive's Death during the Term, the Executive's estate and his heirs, executors, administrators, legatees and distributees shall have the rights and obligations set forth herein, as provided herein, 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 shall continue to be bound by the provisions hereof binding upon the Company. b) Material Inducements. The provisions of Sections 10 and 11 above are material 10 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 inducements to the Company entering into and performing this Agreement; accordingly, in the event of any breach of the provisions of Sections 10 or 11(a) 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 hereunder, (ii) all Incentive Warrants and Employment 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 Incentive Warrants and Employment Options (from and after the Termination Date). c) Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the Executive and the Company and their respective heirs, executors, administrators, legatees and distributees, successors and permitted assigns. d) Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. e) Severability. If, for any reason, any provision of this Agreement is determined to be invalid or unenforceable, such invalidity or lack of enforceability shall not affect any other provision of this Agreement not so determined to be invalid or unenforceable, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect, irrespective of such invalid or unenforceable provision. f) Effect of Prior Agreements. This Agreement contains the entire understanding between the parties hereto respecting the Executive's employment by the Company, and supersedes any prior employment agreement between the Company and the Executive. g) Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when delivered, if sent by telecopy or by hand, (ii) one business day after sending, if sent by reputable overnight courier service, such as Federal Express, or (iii) three business days after being mailed, if sent by United States certified or registered mail, return receipt requested, postage prepaid. Notices shall be sent by one of the methods described above; provided, that any notice sent by telecopy shall also be sent by any other method permitted above. Notices shall be sent, if to the Executive, to 1604 Bayonne Drive, Las Vegas, Nevada 89134 and if to the Company, to Alliance Gaming Corporation, 6601 S. Bermuda Road, Las Vegas, Nevada 89119, directed to the attention of the Board with copies to the Chief Executive Officer and the General Counsel of the Company; or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. h) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. (i) Arbitration. In the event of a dispute or controversy arising under or in connection with this Agreement (except, at the option of the Company, Sections 10 and 11 above, which may be adjudicated in a federal or state court sitting in Las Vegas, Nevada), the Executive shall give the Company or the Company shall 11 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 give the Executive, as applicable, a written demand for relief. If the dispute or controversy is not resolved, it shall be settled exclusively by arbitration, conducted in Las Vegas, Nevada, in accordance with the rules of the American Arbitration Association (or if the such association does not then conduct business in such city, another arbitral panel reasonably satisfactory to each party) then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction over the parties hereto. (j) Indulgences, Etc. 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. (k) Headings. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (l) Governing Law. This Agreement has been executed and delivered in the State of Nevada, and its validity, interpretation, performance, and enforcement shall be governed by the laws of such State, without regard to principles of conflicts of laws. 12 ALLIANCE GAMING CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has signed this Agreement, all as of the date first set forth above. ALLIANCE GAMING CORPORATION By: /s/ Steve Greathouse -------------------------------- Steve Greathouse President, Chairman of the Board and Chief Executive Officer By: /s/ Scott D. Schweinfurth -------------------------------- Scott D. Schweinfurth EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information excerpted from Form 10-Q for the quarter ended 12/31/96. 1,000 6-MOS JUN-30-1997 DEC-31-1996 29,401 0 124,149 23,098 40,196 177,245 115,553 35,921 362,418 67,853 0 0 11,687 3,184 53,766 362,418 145,875 231,615 83,711 140,208 68,543 0 11,879 9,369 4,588 (1,210) 0 0 0 (1,210) (0.04) 0
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