Document/Exhibit Description Pages Size
1: 10-K Annual Report 90 543K
2: EX-4.1 Instrument Defining the Rights of Security Holders 107 485K
3: EX-4.3 Instrument Defining the Rights of Security Holders 450 1.47M
4: EX-10.70 Material Contract 10 39K
5: EX-10.75 Material Contract 16 71K
6: EX-10.76 Material Contract 17 75K
7: EX-10.77 Material Contract 17 76K
8: EX-10.78 Material Contract 5 21K
9: EX-10.79 Material Contract 3 11K
10: EX-21 Subsidiaries of the Registrant 1 6K
11: EX-23.1 Consent of Experts or Counsel 1 7K
12: EX-27 Financial Data Schedule (Pre-XBRL) 1 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
15% NON-VOTING SENIOR PAY-IN-KIND SPECIAL STOCK, SERIES B, $0.10 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common equity held by non-affiliates of the
registrant was approximately $95,204,000 as of September 2, 1997.
The number of shares of Common Stock, $0.10 par value, outstanding as of
September 2, 1997 according to the records of registrant's registrar and
transfer agent, was 31,854,834.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders will be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year and is incorporated by
reference into Part III of this Form 10-K.
================================================================================
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
PART I
ITEM 1. BUSINESS
INTRODUCTION
Alliance is a diversified, worldwide gaming company that (i) designs and
manufactures gaming machines and computerized monitoring systems for gaming
machines, (ii) owns and manages a significant installed base of gaming machines,
(iii) owns and operates two casinos and (iv) in Germany, is a full-service
supplier of wall-mounted gaming machines and amusement games. Alliance has
achieved a leading market position for each of its business units. Operating
under the name Bally Gaming, the Company is the second largest slot and video
gaming machine manufacturer in North America, with over 86,000 gaming machines
sold during the past five years. Operating under the name Bally Systems, the
Company designs, integrates and sells highly specialized computerized monitoring
systems that provide casinos with networked accounting and security services for
their gaming machines. Systems has a leading position, with over 79,000 game
monitoring units ("GMUs") installed worldwide. The Company also owns, operates
and services an installed base of over 6,600 slot and video gaming machines
which are located mostly in non-casino venues in Nevada and Louisiana ("Route
Operations"). Alliance is the largest route operator in Nevada and the largest
operator of gaming machines at racetracks in Louisiana. Alliance also owns and
operates what management believes is the most profitable riverboat casino in
Vicksburg, Mississippi and a small casino in Sparks, Nevada, which together have
30 table games and 1,100 gaming machines (collectively, "Casino Operations"). In
addition, operating under the Bally Wulff name, the Company believes that it is
now the leading supplier of wall-mounted gaming machines and arcade games in
Germany
The Company was incorporated in Nevada on September 30, 1968 under the name
Advanced Patent Technology. The Company changed its name to Gaming and
Technology, Inc. in 1983, to United Gaming, Inc. in 1988 and to Alliance Gaming
Corporation on December 19, 1994. The Company conducts its gaming operations
through directly and indirectly owned subsidiaries. On June 18, 1996 the Company
acquired Bally Gaming International, Inc. which includes the Gaming Equipment
and Systems and Wall Machines and Amusement Games business units. The term
"Company" as used herein refers to Alliance Gaming Corporation and subsidiaries
unless the context otherwise requires. The Company's principal executive offices
are located at 6601 South Bermuda Road, Las Vegas, Nevada 89119; telephone (702)
270-7600.
BUSINESS UNITS
GAMING EQUIPMENT AND SYSTEMS
Bally Gaming
Overview. The Company's primary markets for its gaming machine products are the
United States, Canada and Europe and Latin America, and, to a lesser extent, the
Far East and the Caribbean. The following table sets forth the percentage of new
unit sales by market segment during the periods indicated:
[Download Table]
NEW UNITS BY MARKET SEGMENT PERCENTAGE OF NEW UNITS SOLD
Years ended Six months Year ended
December 31, ended June 30, June 30,
1994 1995 1996 1997
---- ---- ---- ----
Nevada and Atlantic City 34% 42% 37% 47%
International 21 30 45 40
Riverboats 31 12 11 5
Indian Gaming 13 14 7 7
Other (principally VLTs) 1 2 --- 1
--- --- --- ---
100% 100% 100% 100%
=== === === ===
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ALLIANCE GAMING CORPORATION
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United States Markets. Within the United States, Nevada represents the largest
installed base of gaming machines with an installed base of approximately
180,000 machines as of June 30, 1997. The Company estimates that Atlantic City,
the second largest market, had an installed base of approximately 33,000
machines as of June 30, 1997. Product sales of the Company's casino-style gaming
equipment in these markets are primarily to established casino customers to
either replace existing machines or as part of an expansion or refurbishment of
the casino. Also, because gaming machine revenues have increased at a higher
rate than table game revenues over the past decade, casino operators have
frequently increased floor space dedicated to gaming machines. In addition,
major casino openings in Nevada, expansions of existing casinos and the
proliferation of casinos in emerging markets have created additional floor space
available for new gaming products and are anticipated to further increase
competitive pressures on casino operators to replace existing equipment with new
machines on an accelerated basis.
Riverboat casinos began operating in 1991 and, as of June 30, 1997, riverboat
casinos were operating in Indiana, Iowa, Illinois, Mississippi, Missouri and
Louisiana. The estimated installed base of gaming machines on riverboats is
approximately 82,000 machines as of June 30, 1997.
Casino-style gaming continues to expand on Native American lands. Native
American gaming is regulated under the Indian Gaming Regulatory Act of 1988
which permits specific types of gaming. The Company's machines are placed only
with Native American gaming operators who have negotiated a compact with the
state and received approval by the U.S. Department of the Interior. The Company
has, either directly or through its distributors, sold machines for casinos on
Native American lands in Arizona, Connecticut, Iowa, Michigan, Minnesota,
Mississippi, Montana, New Mexico, North Dakota, South Dakota and Wisconsin.
Compacts have also been approved in Oregon, Colorado and Louisiana, although
Gaming made no deliveries in these jurisdictions. In addition to the approved
states, compacts are under consideration in several states, including Alabama,
California, Maine, Massachusetts, Rhode Island, Texas and Washington. The
installed base of all Native American gaming machines as of June 30, 1997 was
approximately 70,000 units.
In addition, there are currently casinos in Colorado and South Dakota. The
estimated installed base of machines in these markets as of June 30, 1997 was
approximately 15,000 machines.
The continued growth of domestic emerging markets for gaming machines is
contingent upon the public's acceptance of gaming and an ongoing regulatory
approval process by Federal, state and local governmental authorities.
Management cannot predict which new jurisdictions or markets, if any, will
approve the operation of gaming machines, the timing of any such approval or the
level of the Company's participation in any such new markets.
International Markets. In addition to the domestic markets, the gaming industry
is also expanding in international markets. The Company's primary international
markets are Europe, Canada and Latin America, and, to a lesser extent, the Far
East and the Caribbean. The Company has begun, and plans to continue, expansion
into the Australian market, and in 1995, Gaming established an office in Sydney,
Australia. The Company recorded its first sale into the Australia market in the
quarter ended June 30, 1996. One of the Company's indirect subsidiaries, Bally
Gaming International, GmbH ("GmbH") distributes gaming machines, manufactured
primarily by Gaming, through its sales office in Hannover, Germany principally
to customers in Europe and Russia, and through its sales office in Johannesburg,
South Africa, principally to customers on the African continent.
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
The percentage of Gaming's international revenues by geographic area for the
periods indicated are set forth below:
[Download Table]
NEW UNITS BY GEOGRAPHIC AREA PERCENTAGE OF NEW UNITS SOLD
Years ended Six months Year ended
December 31, ended June 30, June 30,
1994 1995 1996 1997
---- ---- ---- ----
Europe 56% 51% 40% 33%
Canada 17 22 31 26
Latin America 20 20 25 39
Far East 4 4 2 2
Other 3 3 2 ---
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Products. Gaming designs, manufactures and distributes a variety of electronic
slot and video gaming machines. Machines are differentiated from one another by
graphic design and theme, cabinet style and size, payout, reel-type design and
minimum/maximum betting amount. Slot machines are normally produced to specific
order, with design and configuration customized to a customer's particular
requirements. Customers may also change from one gaming model to another gaming
model by ordering a "conversion kit" which consists of artwork, reel strips and
a computer chip. Gaming's video gaming machines are designed to (i) simulate
various live card games and keno through a video display and (ii) for Game
Maker(R) gaming machines, offer the player the chance to play up to ten games.
New games and themes are introduced periodically in order to satisfy customer
demand and to compete with product designs introduced by competitors. Gaming
introduced its "ProSeries(tm)" reel-type slot machines during late 1993 and its
multi-game touch screen machine, the Game Maker(R), during late 1994.
The Game Maker(R) can offer up to 10 different video games within one gaming
device. The ten games can be selected by the casino from a game library that has
over 300 games. The games simulate various card games, keno and popular
reel-spinning games. The Game Maker(R) machines contain bill acceptors and many
other features believed to be popular with casinos and their customers. The Game
Maker(R) machines are available in upright, bar top and slant top cabinets.
Revenues from sales of Game Maker(R) machines were approximately $6.7 million
and $27.4 million during the years ended December 31, 1994 and 1995,
respectively, $12.9 million for the six months ended June 30, 1996 and $34.9
million for the year ended June 30, 1997.
The ProSeries(tm) was the result of a comprehensive product development effort
which began in 1991. The development process included extensive testing of the
new products in-house and on casino floors for reliability and player appeal.
Revenues from sales of ProSeries(tm) machines were approximately $86.2 million
and $57.1 million during the years ended December 31, 1994 and 1995
respectively, $38.5 million for the six months ended June 30, 1996 and $66.6
million the year ended June 30, 1997.
Gaming typically offers a 90-day labor and up to a one-year parts warranty for
new gaming machines sold and is actively involved in customer service after the
original installation. Gaming provides several after-sale, value-added services
to its customers including customer education programs, a 24-hour customer
service hot-line, and field service support programs and spare parts programs.
Gaming's historical warranty expense as a percentage of revenues has been less
than 1%.
In addition, Gaming sells and services used gaming machines and sells parts for
existing machines. Gaming often accepts used machines as trade-ins toward the
purchase of new gaming equipment. While a small secondary market exists in the
United States, used machines are typically resold into the international market.
Some used equipment is reconditioned for direct sale, but much is sold in
container lots on an "as is" basis through independent brokers.
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Sales of used equipment were $4.2 million and $9.2 million during the years
ended December 31, 1994 and 1995, respectively, $2.0 million for the six months
ended June 30, 1996 and $5.4 million for the year ended June 30, 1997.
The following table sets forth the percentages of revenues provided by each of
its major product lines for the periods indicated:
[Download Table]
PERCENTAGE OF REVENUES
Years ended Six months Year ended
December 31, ended June 30, June 30,
1994 1995 1996 1997
---- ---- ---- ----
Slot machines 74% 53% 63% 55%
Video gaming machines 16 31 24 30
Other (primarily used machines,
parts and services) 10 16 13 15
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Gaming machines have a mechanical life that can exceed 10 years. However, in the
established markets, Gaming's experience is that casino operators usually
replace gaming machines after three to seven years. The factors which result in
replacement of gaming machines sooner than their mechanical life include
technological advances, development of new games, new sound and visual features
and changing preferences of casino patrons. Casinos typically recoup the
purchase cost of their electronic gaming machines in a few months, which allows
casinos to replace machines with new models that are popular with casino
patrons.
In the past, Gaming had designed, manufactured and distributed video lottery
terminals ("VLT"), which are generally operated by, or under the regulation of,
state or provincial lottery commissions. The VLT business was less than 2% of
revenues during the years ended December 31, 1994 and 1995, and less than 1%
during the six months ended June 30, 1996 and the year ended June 30, 1997.
Product Development. The Company believes that technological enhancements are
the key to meeting the demands of casinos for new gaming machines. Most gaming
machines on casino floors today are driven by technology which was developed
over 20 years ago. The Company believes that accelerating the use of existing
computer technology will give its gaming machines and systems a competitive
advantage in the gaming industry. Total spending on product research and
development by Gaming was $3.5 million, $3.7 million, $1.8 million and $4.0
million during the years ended December 31, 1994 and 1995, the six months ended
June 30, 1996 and the year ended June 30, 1997, respectively.
Gaming develops its products for both the domestic and international market.
Gaming's product development process is divided into two areas, hardware and
software. Major areas of hardware development include cabinet style, electronic
capability, machine handle, coin hopper and bill acceptor. Hardware development
efforts are focused upon player appeal, product reliability and ease of
maintenance. Development cycles for hardware can range from a few days for
simple enhancements to more than a year for new electronics or new mechanical
packages.
The software development process for new games, which includes graphics
development, involves a continuous effort requiring relatively significant human
resource allocations. Creativity in software development is an important element
in product differentiation as the major manufacturers sometimes use similar
hardware technology. Ideas for new models are generated both internally and from
customers. Gaming can design the software and artwork for a new model in as
little as two weeks, excluding regulatory approval. All new or modified hardware
and software is designed to satisfy all applicable testing standards and must
receive the approval of the appropriate gaming regulatory agency based on
substantially satisfying such applicable testing standards before such gaming
product can be offered for play to the public. Most gaming jurisdictions rely
upon and accept the certification of selected independent laboratories that a
gaming product meets the applicable testing standards.
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Regulatory approval for new or modified hardware and software changes takes from
30 days to three months or more. On an annual basis, Gaming expects to introduce
approximately 25 new games to the market. However, no assurance can be made with
respect to the rate of new model introductions or the obtaining of regulatory
approvals in respect thereof.
Sales and Marketing. Gaming uses a direct sales force, an independent
distributor network and GmbH to sell its products. Gaming's sales staff of
approximately 25 people, which operates offices in Nevada, New Jersey,
Mississippi, Illinois, Colorado and Florida, generated approximately 78% of new
machine sales over the calendar years 1994 and 1995 and 81% and 89% of new
machine sales for the six months ended June 30, 1996 and the year ended June 30,
1997, respectively. On a limited basis, Gaming uses distributors for sales to
certain specific markets in the United States as well as certain international
jurisdictions. Gaming's agreements with distributors do not specify minimum
purchases but generally provide that Gaming may terminate such agreements if
certain performance standards are not met. Approximately 8% of new gaming
machine unit sales for the calendar years 1994 and 1995 and 2% and 4% for the
six months ended June 30, 1996 and the year ended June 30, 1997, respectively,
were generated through independent distributors (including foreign
distributors). Approximately 8% of new gaming machine unit sales for the
calendar years 1994 and 1995 and 2% and 7% for the six months ended June 30,
1996 and the year ended June 30, 1997, respectively, were generated through
GmbH.
In addition to offering an expansive product line, Gaming provides customized
services in response to specific casino requests. These services include high
quality silkscreen printing of gaming machine glass, customized game development
and interior design services. Gaming also offers customized design services that
utilize computer aided design and studio software programs. Gaming's design
department can generate a casino floor layout and can create a proposed slot mix
for its customers. In many of the emerging markets, Gaming provides assistance
to customers including the selection of related equipment such as slot stands,
chairs, etc. and a recommended layout of the casino floor as well as a mix of
machine models. Sales to established casinos in Nevada can require completion of
a successful trial period for the machines in the casino.
For the year ended June 30, 1997, approximately 85% of Gaming's slot and video
gaming machine sales were on terms of 90 days or less. Approximately 15% of
Gaming's sales, primarily in certain emerging markets such as riverboat and
Native American gaming casinos, are financed over extended periods as long as 36
months and bear interest at rates ranging from 8% to 14%. International sales
are generally consummated on a cash basis or financed over two years or less. In
addition, in certain situations Gaming has participated in the financing of
other gaming related equipment manufactured by third parties in the emerging
markets. Management believes that financing of customer sales is an important
factor in certain emerging markets.
Customers. The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment as well as the replacement of existing machines
(which have an average replacement cycle of three to seven years). For the year
ended December 31, 1995, the six months ended June 30, 1996 and the year ended
June 30, 1997, Gaming's largest customer accounted for approximately 5%, 8% and
11% respectively of Gaming's revenues, while Gaming's ten largest customers
accounted for approximately 25%, 42% and 45% of Gaming's revenues during such
periods, respectively.
Assembly Operations. Gaming's Las Vegas facility was completed in 1990
specifically for the design, manufacture and distribution of gaming equipment.
The 150,000-square foot facility was designed to meet fluctuating product design
demands and volume requirements, and management believes the facility enables
Gaming to increase production without significant capital expenditures.
Management believes that its assembly operations allow for rapid generation of
different models to fill orders quickly and efficiently. Another major advantage
of the existing plant operation is the system by which machines can be altered
in many ways including the size, type and color of glass, sound and payoff
patterns to produce a "customized" product for each customer. Gaming keeps an
inventory of parts that allow machines to be altered quickly to conform with a
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
particular customer's design/feature request. Gaming produces products for
individual customer orders and therefore finished goods inventories are kept
low. Gaming designs all of the major assemblies that are incorporated into the
final machine configuration.
Competition. The market for gaming machines in North America is dominated by a
single competitor, International Game Technology, Inc. ("IGT"). Management
believes based on industry estimates made by analysts that Bally Gaming has the
second largest market share in North America. There are a number of other well
established, well-financed and well-known companies producing machines that
compete with each of Gaming's lines in each of Gaming's markets. The other major
competitors are Universal Distributing of Nevada, Inc., Video Lottery
Technologies, Inc., Sigma Games, Inc., WMS Industries, Inc. ("WMS"), and in the
international and in some instances domestic marketplaces, companies that market
gaming machines under the brand names of Aristocrat, Atronic, Cirsa, and
Novomatic and Sega Enterprises Ltd. Certain companies have developed niche
products such as Anchor Gaming, Mikohn Gaming Corporation, Casino Data Systems
("CDS"), and Shuffle Master, Inc. In addition, other technology-oriented
companies, such as Silicon Gaming, have entered or may enter the gaming machine
business. Competition among gaming product manufacturers, particularly with
respect to sales of gaming machines into new and emerging markets, is based on
competitive customer pricing and financing terms, appeal to the player, quality
of the product and having an extensive distribution and sales network.
Systems
Markets for Systems. Systems' primary markets for its computerized monitoring
systems are the United States and, to a lesser extent, Canada, New Zealand,
Latin America, Europe and the Caribbean. Markets for Systems within the United
States include traditional land-based casinos predominantly in Nevada and
Atlantic City, New Jersey, Native American casinos and riverboats and dockside
casinos. Domestically, the market for computerized monitoring systems is divided
equally between selling to new installations and to existing customers who are
either expanding their casino floors or are upgrading their hardware to a new
product release. Unlike the United States, where most jurisdictions require the
implementation of systems, there have been few international markets to do so.
Management believes, however, that the international market for such systems is
increasing, and that Systems' sales to such markets will increase accordingly.
Products. Bally Systems designs, integrates, and sells a computerized monitoring
system ("SDS 6000") for slot and video gaming machines which provide casino
operators with on-line real time data relative to a machine's accounting,
security and cash monitoring functions. The SDS 6000 also provides data to, and
receives data from, other third party player tracking computer and software
applications allowing casinos to track their players to establish and compile
individual player profitability and other demographic information. SDS 6000 is
comprised primarily of (1) hardware consisting of microcontroller-based printed
circuit boards which are installed within the slot and video machines as well as
card reader displays and keypads which provide casinos with the ability to track
player gaming activity and to monitor access to slot and video machines by the
casino's employees, (2) application software developed by Systems which provides
access to the slot machine's activity data gathered by the microcontroller
hardware, and (3) third party mini-computers on which the application software
resides. Systems also provides software and hardware support services, including
maintenance, repair and training for purchasers of its monitoring systems.
Product Development. Systems' product development is divided into two areas,
hardware and software. The major areas of hardware development include
microcontroller circuit board design and programming as well as user interface
devices such as card readers, keypads and displays. Hardware development efforts
are focused upon achieving greater functionality, product reliability and ease
of maintenance for the casino operator and achieving greater visual appeal and
ease of use for the slot customer. Development cycles for hardware can vary
between a few months for minor revisions to more than a year for major design
changes or for changes made by various slot manufacturers with which Systems'
product must communicate and be physically integrated. Software development
results in (1) periodic product releases that include new features which extend
and enhance the SDS 6000 product, (2) periodic maintenance releases
7
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
which enable casino operators to correct problems or improve the usability of
the system and (3) documentation needed to install and use the system.
In 1995, the hardware and software groups from Systems, as well as engineers
from Gaming, coordinated efforts to develop a form of cashless wagering that
uses bar-coded coupons which can be read by the bill validators in Gaming's slot
machines which are connected to an SDS 6000 system. Testing and regulatory
approval is being pursued by Bally Systems in anticipation of release to casino
operators. Gaming and Systems development groups continue to direct development
efforts towards other forms of cashless wagering for use on Bally Gaming's slot
machines and the SDS 6000 system.
Systems spent $1.7 million and $1.9 million during the years ended December 31,
1994 and 1995, respectively, and spent $1.1 million during the six months ended
June 30, 1996 and $2.7 million during the year ended June 30, 1997, on product
research and development.
Sales and Marketing. Systems has a direct sales force which produces the
majority of its sales. Gaming's sales force and Gaming's independent distributor
network produce the balance of Systems' sales, primarily in situations where
customers are making gaming machine and computerized monitoring system purchase
decisions at the same time. At June 30, 1997, worldwide, Systems has over 79,000
game monitoring units installed, or in the process of being installed, of which
approximately 69,000 are in the United States. At June 30, 1997, Systems had 79
installed locations. During calendar years 1994 and 1995, Systems' own sales
force has generated approximately 78% of its sales. During the six months ended
June 30, 1996 and the year ended June 30, 1997, Systems' own sales force
generated approximately 93% and 92% of its sales, respectively.
Systems offers its customers the option of signing separate hardware and
software maintenance agreements at the time of sale. These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly hardware and software maintenance fee which
provides essentially for repair and/or replacement of malfunctioning hardware
and software, software version upgrades, and on-call support for software.
Systems offers limited financing terms, normally less than one year, for sales
to new installations. Most sales, however, are invoiced on a net 30 day basis.
Customers. The demand for computerized slot monitoring systems is driven by
regulatory requirements in a given jurisdiction and/or by a casino operator's
competitive need to properly track machine and player activity and establish and
compile individual machine and player profitability and other demographic
information, all of which is of particular importance to casinos in developing
marketing strategies. Systems' revenues are derived approximately equally from
selling to new installations and to existing customers who are either expanding
their casino floors or upgrading their hardware to a new product release. For
the year ended December 31, 1995, the six months ended June 30, 1996 and the
year ended June 30, 1997, Systems' ten largest customers (which include certain
multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92%, 84% and 70% of Systems' revenues, respectively.
Due to the high initial costs of installing a computerized monitoring system,
customers for such systems generally have tended not to change suppliers once
they have installed such a system. Future growth will be based on penetration of
the international markets, further expansion in the established and emerging
markets, as well as continued development efforts by Systems to provide
customers with new and innovative hardware and software product offerings.
Competition. Systems' main competition currently consists of IGT, CDS, and to a
lesser extent Gaming Systems International, Mikohn Gaming Corporation and Acres
Gaming. Competition is keen in this market due to the number of providers and
the limited number of casinos and jurisdictions in which they operate. Pricing,
product feature and function, accuracy, and reliability are all key factors in
determining a provider's success in selling its system. Systems
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
believes the future success of its operations will be determined by its ability
to bring new and innovative products to the market while maintaining its base of
loyal existing customers.
WALL MACHINES AND AMUSEMENT GAMES
Industry Overview
Management believes that the German wall machine market consists of
approximately 220,000 wall machine units. In addition, management believes there
are 50,000 token machine units in Germany. German regulations limit the useful
life of wall machines to a period of four years. As a result, annual market
demand for wall machines in Germany approximates 55,000 units with fluctuations
resulting primarily from economic conditions, and regulatory changes and new
product development. Effective January 1, 1996, a regulatory change took effect
requiring all arcade operators to have at least 15 square meters of space for
each wall machine and a maximum of 10 machines per arcade. Starting in mid-1995,
arcade operators began removing wall machines from their arcades to meet the
requirements of this new regulation. Despite this adverse impact, the demand for
new wall machines was approximately 47,000 units in calendar 1995. All wall
machines manufactured since 1992 have meters that monitor the amount inserted by
players and paid out by the machine. Wall machines without meters were required
to be removed from service by the end of 1996. This led to an increase in demand
for metered wall machines in the quarter ending December 31, 1996 which carried
through the quarter ended March 31, 1997.
Wall machine sales into the arcade market account for approximately 30% of the
total wall machine sales in Germany. A significant number of arcades
(approximately 10%) are owned by the two largest competitors, Gauselmann AG and
NSM AG. Generally these competitors do not purchase wall machines from Bally
Wulff for their arcades. Management believes Bally Wulff's share of the German
wall machine market was approximately 25% for each of the last three years ended
December 31, 1996, and was 33% for the year ended June 30, 1997. The German
legislative authorities regulate and monitor the wall machine industry on an
ongoing basis to ensure conformance with certain manufacturing standards and the
fairness of each machine to users. Legislation presently affecting the wall
machine industry relates to prescribed licensing procedures, the use,
installation and operation of wall machines and the taxation of wall machines.
Operations of Bally Wulff
Products. Bally Wulff's manufacturing operations were founded in Berlin in 1950
and sold to BGII's former parent company in 1972. Bally Wulff produces and
distributes a variety of models of wall machines, under the trade name "Bally
Wulff" for operation in arcades, hotels, restaurants and taverns primarily in
Germany. These wall machines are coin-operated, armless gaming devices similar
to slot machines that award winnings for matching numbers or symbols on three to
five wheels or drums and differ primarily in appearance, graphic design, theme,
pay-table and customer appeal. Each game costs up to 40 pfennigs (approximately
$0.23 at the exchange rate of $1.00=DM 1.75 prevailing as of June 30, 1997,
which rate is used hereinafter) to play, although the player may deposit larger
amounts to provide continuous play but not to increase payoffs. German
regulations limit the maximum payout to ten times the player's stake (DM 4.00 or
approximately $2.30 per game). Current models of wall machines provide the
player the opportunity to win 100 special games on one play, which increases the
potential amount that can be won on the minimum coin drop. German regulations
require a minimum payback of 60% for wall machines, although many machines are
generally programmed to pay back at somewhat higher rates to encourage play.
Bally Wulff has also manufactured token machines for operation in arcades,
hotels, restaurants and taverns in Germany and may continue to do so in the
future on a selective basis.
In addition to manufacturing wall machines, Bally Wulff distributes wall
machines and other recreational and amusement coin-operated machines
manufactured by third parties to provide a more extensive line of products to
its
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
customers. These machines include pool tables, dart games, pinball machines,
jukeboxes and arcade games, and are distributed primarily for use in arcades,
restaurants, hotels and taverns.
The following table sets forth the percentage of Bally Wulff's revenues by
product line for the periods indicated:
[Download Table]
PERCENTAGE OF REVENUES
Years ended Six months Year ended
December 31, ended June 30, June 30,
1994 1995 1996 1997
---- ---- ---- ----
Wall machines manufactured by Wulff 48% 39% 42% 52%
Recreational and amusement machines and
third party wall machines distributed 21 23 22 25
Other (primarily used machines,
parts and service) 31 38 36 23
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Product Development. Management believes that Bally Wulff's wall machines are
viewed as premium products because of their quality, dependability, ease of
service and proven ability to attract players and generate revenue. Bally Wulff
designs its machines to appeal to each of the three categories of participants
in the distribution process: Bally Wulff's sales representatives and independent
distributors, the owner/operators of the machines, and the players. The sales
representatives and distributors require machines with broad appeal that are
easy to demonstrate and sell. The owner/operators desire reasonably priced
machines that are easy to collect from and service and that are proven revenue
generators. The players prefer entertaining machines that are simple to play and
have unique features.
Bally Wulff's management has formed design teams which are responsible for
generating ideas for creative new machines. These teams are comprised of
representatives of each department involved in the production and distribution
of machines, such as art design, engineering, manufacturing, marketing and
sales. The design teams meet for three days each calendar quarter at a site away
from Bally Wulff's headquarters. The teams analyze machines currently being
marketed by Bally Wulff and its competitors to assess their strengths and
weaknesses and then suggest ideas for new machines. These ideas are reviewed to
determine which machines should be produced on a trial basis. Bally Wulff
typically pursues 15 to 20 projects at any given time, and approximately 12 to
15 machines are submitted for licensing each year. These new machines are built
in limited quantities and then test marketed for three to six months. Generally,
less than one-half of the new machines tested are put into full scale
production. Management believes this process of generating new ideas and then
turning only a limited number of the ideas into machines which will reach the
mass market is responsible for the high quality of Bally Wulff's machines and
their continued acceptance and success in the marketplace. Because the machines
have a reputation for quality, Bally Wulff is often able to produce and market a
particular model for up to two years, which management believes, based upon its
experience in the relevant marketplace and feedback from customers, exceeds the
industry average.
During the years ended December 31, 1994 and 1995, the six months ended June 30,
1996 and the year ended June 30, 1997, Bally Wulff spent approximately $3.5
million, $3.6 million, $1.8 million and $3.3 million, respectively, on product
research and development.
Sales and Marketing. Bally Wulff sells approximately 83% of its products through
its own sales force of 56 people located in its 23 regional sales offices.
Independent German distributors account for approximately 17% of sales.
Approximately 98% of Wulff's sales of new wall machines are in the German
market. The sales offices are operated as independent profit centers and are
assigned geographic areas for which they are responsible for sales, servicing
the machines and assisting in collecting customers' accounts receivable
balances.
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Bally Wulff devotes substantial time, money and effort to marketing and
promoting its products. Bally Wulff takes an active part in the annual Amusement
Game Fair which is traditionally held each January in Frankfurt, Germany, at
which Bally Wulff introduces new products. The next Amusement Game Fair will be
held in November 1998 rather than January 1998.
The wall machines manufactured and sold by Bally Wulff generally sell for prices
ranging from DM 5,700 to DM 7,700 (approximately $3,300 to $4,400). A majority
of machines distributed by Bally Wulff are paid for in full within 90 days after
the sale. Remaining sales of machines are financed by Bally Wulff generally over
a 12-month period, with interest rates of up to 12%. For this reason, Bally
Wulff establishes an internal credit rating and credit limit for each customer.
Under Bally Wulff's conditions of sale, title to a machine is retained by Bally
Wulff until the machine has been paid for in full. In addition, Bally Wulff
demands security. Currently, Bally Wulff provides customer financing for
approximately 10% of its sales, and management expects this practice to increase
during the latter half of 1997. Leasing machines to customers accounted for 6%
of total revenues for the year ended June 30, 1997 compared to 2%, 3% and 4%
during the years ended December 31, 1994, and 1995 and the six months ended June
30, 1996, respectively. The leasing market is the fastest growing revenue
segment and the management expects a substantial increase for the months ahead.
In approximately 75% of its sales, Bally Wulff accepts wall machines and/or
other recreational and amusement equipment as trade-ins toward the purchase of
new machines. To the extent possible, the used machines are then resold.
Customers. Each of Bally Wulff's top ten customers in 1997 has maintained its
relationship with Bally Wulff for over three years. For the year ended June 30,
1997, no single customer accounted for more than 3% of Bally Wulff's revenues,
while Bally Wulff's top ten largest customers accounted for approximately 12% of
Bally Wulff's revenues. For the year ended December 31, 1995 and the six months
ended June 30, 1996, Bally Wulff's top ten customers accounted for approximately
10% and 15% of Bally Wulff's revenues, respectively, while no single customer
accounted for more than 3% and 6% of Bally Wulff's revenues for such periods,
respectively.
Bally Wulff's customer base for wall machines may be divided into two categories
which differ based on the preferences of their clientele. Operators who place
wall machines in arcades are generally interested in purchasing the newest
products in the hopes that an innovation will result in a high level of public
demand to play the new "hot" product. Street location operators serving hotels,
restaurants and taverns, on the other hand, are generally more inclined to
purchase lower-priced existing models with proven earnings records to provide as
an amenity to customers.
Assembly Operations. Bally Wulff's manufacturing process is primarily an
assembly operation. Its manufacturing facility consists of a four-story,
100,000-square foot building in Berlin, Germany. Bally Wulff purchases its key
raw materials, sub-assemblies and fabricated parts from a variety of suppliers,
and most parts are purchased from multiple suppliers. While there exist no
formal long-term contract commitments to any single supplier, Bally Wulff has
placed certain standing orders with suppliers to help assure the availability of
specific quantities on an as-needed basis. These orders are cancelable by Bally
Wulff at any time without penalty. Most of the component parts are standard on
all models of all Bally Wulff's wall machines, which promotes easy conversion
from the production of one model to another in response to customer demand.
Except in connection with certain promotions, Bally Wulff generally maintains
low inventory levels of assembly parts, and the amount of work-in-process is
generally less than the number of machines sold in one week.
Because of its manufacturing structure, Bally Wulff is capable of substantially
increasing its wall machine output without significant capital expenditures.
Bally Wulff continues to improve its manufacturing efficiency and productivity
through the use of computer-aided design systems, automated production equipment
and devotion of substantial resources to product quality control.
Competition. Germany's wall machine manufacturing industry is dominated by Bally
Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management
believes these three entities collectively account for more than 90% of
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
the entire market. Bally Wulff competes with many companies in the distribution
of coin-operated amusement games, some of which are larger and have greater
resources than Bally Wulff. Bally Wulff's two major competitors own and operate
a significant number of arcades, which may give them a competitive advantage
arising from a built-in market for their games and the ability to test market
new games in their own arcades. Further, increased foreign competition in
Germany may have an adverse impact on the Company's future wall machine
revenues. Management believes that the primary competitive factors in the wall
machine coin-operated amusement game market are the quality and depth of the
product line, price and customer service which includes the ability to fill
orders quickly and efficiently.
ROUTE OPERATIONS
Nevada Operations
Overview. The Company's Nevada route operations involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other electronic gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties ("local establishments"). The
Company's route operations target local residents who generally frequent local
establishments close to their homes.
The following table sets forth certain historical data concerning the Company's
Nevada Route Operations for the years ended June 30:
[Download Table]
1995 1996 1997
---- ---- ----
Average number of gaming machines 5,260 5,290 5,660
owned
Average number of locations 514 524 562
Average win per day per gaming machine $47.70 $48.60 $52.40
In July 1997 the Company added to its Nevada route through the addition of
contracts with the Scolari's supermarket chain, the Westronics route, and
several smaller locations, which added a total of approximately 650 games,
bringing the total games on the Nevada route to over 6,300 for the first time.
The Company enters into long-term agreements with local establishments through
either space leases or revenue-sharing arrangements. Under revenue sharing
arrangements, most common with taverns, restaurants and convenience stores, the
Company does not pay rent, but rather receives a percentage of the revenues from
the gaming machines. Under revenue sharing arrangements, both the owner of the
local establishment and the Company must have a gaming license. Under space
lease arrangements, most common with supermarkets and drug stores, the Company
pays a fixed rental to the owner of the local establishment and the Company
receives all of the revenues derived from the gaming machines. Under space lease
arrangements, only the Company (and not the establishment owner) is required to
hold a gaming license. Most of the local establishments serviced by the Company
are restricted by law to operating no more than 15 gaming machines.
Revenue-sharing arrangements accounted for approximately 86%, 85%, and 85% of
revenues and 78%, 77%, and 77% of installed machines, respectively, in the
Company's Nevada route operations for the years ended June 30, 1995, 1996, and
1997. At June 30, 1997, the weighted average remaining term of the Company's
revenue sharing arrangements was approximately 3.4 years. Space lease
arrangements accounted for approximately 14%, 15%, and 15% of revenues and 22%,
23%, and 23% of installed machines, respectively, in the Company's Nevada route
operations for the years ended June 30, 1995, 1996, and 1997. At June 30, 1997,
the weighted average remaining term of the Company's space leases was 2.7 years.
The Company has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
The Company has emphasized return on investment rather than increasing market
share in renewing or entering into new contracts and has undertaken a systematic
review process to
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
adjust its contract mix to emphasize higher margin contracts and, where
permissible, canceling or not renewing unprofitable contracts.
Sales and Marketing. As the largest route operator in Nevada, the Company
believes that it is able to differentiate itself from its competitors through a
full-service operation providing its customers marketing assistance and
promotional allowances and using its advanced design capabilities to provide
electronic gaming machines with features customized to customers' needs. The
Company has developed and is currently implementing a new system called
"Gamblers Bonus". Gamblers Bonus is designed as a cardless slot players' club
and player tracking system, which allows multiple local establishments to be
linked together into a distributed gaming environment. Through this technology,
the Company is able to provide its players and customers with many of the same
gaming choices otherwise available only in a larger scale casino environment
such as multi-location progressive jackpots, bigger jackpot payouts and
traditional players' club enhancements. Additionally, the Company is offering a
series of new and unique games available only to members of the Gamblers Bonus.
Since launching Gamblers Bonus, the gaming machines linked to Gamblers Bonus
have experienced an increase in net win per day per machine. As of June 30,
1997, the Company had the Gamblers Bonus system installed in 130 locations
representing approximately 1,500 gaming machines. The Company believes Gamblers
Bonus will continue to improve both the revenues and operating efficiencies of
its Nevada route operations and has the potential to create additional
opportunities in the Route Operations segment of the gaming industry.
Additionally, the Company has been updating its installed base of gaming
machines with bill-acceptor equipped electronic gaming machines which are also
expected to improve revenues and operating efficiencies.
Customers. The Company believes it has a diversified customer base with no one
customer accounting for more than 10% and 6% of the Company's revenues generated
from Nevada route operations during the years ended June 30, 1996 and 1997,
although approximately 14% and 13% of such revenues were generated through an
affiliated group of such customers for such periods, respectively. The
affiliated group consists of eight partnerships each having one individual
partner who is common to all such partnerships. For the years ended June 30,
1996 and 1997, the ten largest customers accounted for approximately 26% and 23%
of Nevada route operations revenues, respectively.
Assembly Operations. In previous years, the Company manufactured electronic
gaming machines for use in the Nevada route operations. The Company manufactured
approximately 73% of the electronic gaming machines currently used in the Nevada
route operations. The Company is currently using a third party to perform
assembly operations of the electronic gaming machines used in the Nevada route
operations. The Company will soon combine this operation with Gaming's assembly
operation.
Competition. The Company is subject to substantial direct competition for its
revenue-sharing and space lease locations from several large route operators and
numerous small operators, located principally in Las Vegas, Reno and the
surrounding areas. The Company and Jackpot Enterprises, Inc. are the dominant
route operators in Nevada. The principal method of competition for route
operators includes the economic terms of the revenue sharing or space lease
arrangement, the services provided and the reputation of the route operator.
Price competition is intense and until 1997 had reduced the Company's gross
margin on such operations as the percentage of the gaming machine revenues
retained by local establishment owners had increased.
Louisiana Operations
Overview. On the basis of its Nevada route operations expertise, in March 1992
the Company obtained a contract to operate video poker gaming machines in the
greater New Orleans, Louisiana area through a subsidiary, Video Services, Inc.
("VSI"). The Company entered into an operating agreement which runs through May
2002 (with a five-year renewal option under certain conditions) with Fair
Grounds Corporation, Jefferson Downs Corporation and Finish Line Management
Corporation (collectively, "Fair Grounds") for the Company to be the exclusive
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
operator of video poker machines at the only racetrack and ten associated
off-track betting parlors (OTB's) in the greater New Orleans area. The Company
operates the game rooms where the video poker machines are located, for each of
the eleven facilities owned by Fair Grounds, for which it receives a percentage
of the revenue generated by the machines. As of June 30, 1997 the Company had
approximately 700 video poker machines in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder of any
entity operating video poker machines in Louisiana must be a domiciled resident
of the State of Louisiana. As a result, the Company owns 49% of the capital
stock of VSI and three prominent members of the Louisiana business and legal
community own the remaining 51%. The Company, however, owns all the voting stock
of VSI and the majority of its officers and directors are Company employees. The
Company has a 71% interest in dividends of VSI in the event dividends are
declared. The Company also formed two other Louisiana subsidiaries, Southern
Video Services, Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI").
Both SVS and VDSI are structured in a manner similar to VSI except that the
Company is entitled to receive 60% of any SVS dividends. Under the terms of its
contract with Fair Grounds, the Company must conduct any additional video poker
operations in Louisiana other than gaming at racetracks or OTB parlors through
SVS. To date, SVS and VDSI have not engaged in business in Louisiana.
The Company is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of video poker gaming in Louisiana and, therefore, the
Company does not manufacture its own video poker machines for use in Louisiana.
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
OTB's in the greater New Orleans area. In addition, voters approved video poker
in three parishes in the greater New Orleans area where the Company currently
does not operate. 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 OTB's in this parish accounted for $2.2
million of revenues and approximately 10% of operating income for VSI during the
year ended June 30, 1997.
Sales and Marketing. VSI has developed an extensive marketing program under the
names "The Players Room" and "Rockin' Horse Lounge" which are designed to
attract primarily local residents to its facilities. Media placement has focused
on newspaper and radio advertising with promotions including a player's club,
direct mailings and offerings of a wide range of prizes.
The Company intends to selectively expand its operations in the greater New
Orleans area by increasing the number of video poker machines in certain of its
existing locations as demand warrants, as well as investigating the addition of
new locations under its current contract with the Fair Grounds in areas where
competitive factors are favorable. Under the Louisiana Act, racetracks and OTBs
are permitted to install an unlimited number of video poker machines while
truckstops and taverns may install only limited numbers of such machines.
Competition. The Company is subject to extensive competition for contracts to
operate video poker machines and the Company's racetrack and OTB parlors compete
with various riverboats and truckstops and locations with liquor licenses
throughout the New Orleans area. Each truckstop is permitted to operate up to 50
video poker machines and each tavern is permitted to operate up to three video
poker machines. Louisiana has riverboat gaming statewide and four riverboats are
currently operating in Orleans Parish. Riverboats are permitted to have live
table games and an unlimited number of gaming machines, including slot machines.
Louisiana has also authorized one land-based casino, permitted to include live
table games and an unlimited number of gaming machines in New Orleans, which
opened in May 1995; however, its operator filed for bankruptcy reorganization
and ceased operations in November 1995. At present it is not known whether the
land-based casino will reopen following reorganization.
CASINO OPERATIONS
Overview.
14
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Rainbow Casino. On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. The project includes the Rainbow
Casino, which is a 24,000-square foot casino owned and operated by the Company
which as of June 30, 1997, operated approximately 700 gaming machines and 21
table games as well as a 245-seat restaurant. The facility also includes an
89-room Days Inn hotel and a 10-acre indoor and outdoor entertainment complex
called Funtricity Entertainment Park, which was developed by a subsidiary of Six
Flags Corporation. Both the hotel and entertainment park, which were
substantially completed in late May 1995, are owned and operated by third
parties. The property is the only destination of its kind in Mississippi
containing a casino/hotel/family entertainment complex. Rainbow Casino draws its
customers principally from within a 75-mile radius of Vicksburg. The Vicksburg
casino market generated approximately $185.0 million in gaming revenue in the
twelve months ended June 30, 1997.
The Company is the general partner of the partnership ("RCVP") that owns the
Rainbow Casino. Pursuant to transactions consummated in March 1995, Rainbow
Casino Corporation, the former owner of 55% of the Rainbow Casino, is now a
limited partner entitled to receive 10% of the net available cash flows after
debt service and other items, as defined (which amount increases to 20% of such
amount when revenues exceed $35.0 million but only on such incremental amount),
for a period of 15 years, such period being subject to one year extensions for
each year in which a minimum payment of $50,000 is not made. The Company holds
the remaining economic interest in the partnership. As part of the refinancing
completed in August 1997, the Company purchased the HFS and NGM notes and
repurchased the casino royalty from HFS.
Rail City Casino. In April 1990, the Company purchased, for an aggregate
purchase price of $9.5 million, substantially all of the assets of the Rail City
Casino (formerly the Plantation Station Casino) located near the border of the
cities of Reno and Sparks in northern Nevada. Rail City is a 20,000 square-foot
casino which as of June 30, 1997 operated approximately 400 gaming machines, 9
table games, including blackjack, craps, roulette and poker, and keno. In
addition, Rail City Casino includes a 300-seat restaurant and offers a race and
sports book which is leased to an independent race and sports book operator.
Rail City Casino is convenient to both Reno and Sparks and caters to the local
market.
Sales and Marketing. The Company's casinos target the mid-level gaming customers
inthe market. The Company promotes its casinos primarily through special
promotional events and by providing quality food at reasonable prices.
Competition. Gaming of all types is available throughout Nevada and Mississippi
in numerous locations, including many locations which may compete directly or
indirectly with the Company's casino operations. The operation of casinos is a
highly competitive business. The principal competitive factors in the industry
include the quality and location of the facility, the nature and quality of the
amenities and customer services offered and the implementation and success of
marketing programs. Many of Rail City Casino's competitors include large
casino-hotels which offer more amenities and may be perceived to have more
favorable locations than the Company. The Rainbow Casino is the fourth gaming
facility to open in Vicksburg and as such faces substantial direct competition
for gaming customers in the region. In August 1997 it was announced the Lady
Luck Gaming Corporation and Horseshoe Gaming, LLC formed a joint venture to
develop a project that would include a dockside casino, hotel and related
amenities. The project is contingent on several factors including regulatory
approval and financing.
PATENTS, COPYRIGHTS AND TRADE SECRETS
Gaming has copyrighted both the source code and the video presentation of its
games and registered many of these copyrights with the U.S. Copyright Office
under the Copyright Act of 1976. Game version upgrades and new games are
currently in the process of United States patent and copyright registration.
Such copyrights expire at various dates from September 2056 to October 2065. In
addition, some of the games have Federal and/or state
15
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
trademarks registered with the U.S. Patent and Trademark Office. Some of the
games (either currently used or reserved for future development) also are
covered by patents filed with the U.S. Patent and Trademark Office. Such patents
expire at various dates from May 2008 to March 2012.
Gaming Equipment and Systems are obligated under several patent agreements to
pay royalties ranging from approximately $50 to $200 per game depending on the
components in the gaming machines. Additionally, based on an amendment to the
trademark licensing agreement between the Company and Bally Entertainment
Corporation ("BEC") dated May 10, 1996, Gaming is obligated to pay a royalty on
new machines sold of $35 per machine beginning on June 18, 1996 with a minimum
annual royalty payment of $1.0 million for the initial five-year term of the
amended agreement, which is subject to annual renewals by the Company
thereafter. Royalty expense for Gaming for the years ended December 31, 1994 and
1995, the six months ended June 30, 1996 and the year ended June 30, 1997 was
$2.9 million, $3.0 million, $1.1 million and $3.0 million, respectively.
In connection with a settlement agreement entered between BEC, Bally Gaming,
Inc., BGI Enterprises, BGII and IGT on December 16, 1992, BGII sold its interest
in the Casino Interlink Multiple Location Progressive System (the "Progressive
System") to IGT. The Company reserved certain rights in the sale, including the
rights to continue to market the Progressive System (i) within Europe, (ii) for
use in single locations and (iii) worldwide in lottery applications. The
prohibition on sales or distribution of the Progressive System expires on
December 16, 1997. This agreement is binding on all successors and assigns of
the Company.
The Company has registered the trademark "CEI" and its design and the logos of
United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and
Trademark Office.
EMPLOYEES AND LABOR RELATIONS
As of June 30, 1997, the Company employed approximately 1,200 persons in the
State of Nevada, VSI employed 70 persons in the State of Louisiana, RCVP
employed 450 persons in the State of Mississippi, the Company employed
approximately 40 persons in various other states and Bally Wulff employed 450
persons in Germany. None of such employees is covered by a collective bargaining
agreement. Bally Wulff's employees, however, are covered by German regulations
which apply industry-wide and are developed, to some extent, through
negotiations between representatives of the metal working industry employers and
the trade union representing the employees. These regulations are in the nature
of collective bargaining agreements and cover the general terms and conditions
of such items as wages, vacations and work hours. The regulations codify what
are considered the common standards of employment in the German metal working
industry. The Company believes its relationships with its employees are
satisfactory.
GAMING REGULATIONS AND LICENSING
General. The manufacture and distribution of gaming machines and the operation
of gaming facilities are subject to extensive Federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates and into which the Company may expand its gaming
operations vary in their technical requirements and are subject to amendment
from time to time, virtually all of these jurisdictions require licenses,
permits, documentation of qualification, including evidence of financial
stability, and other forms of approval for companies engaged in the manufacture
and distribution of gaming machines and the operation of gaming facilities, as
well as for the officers, directors, major stockholders and key personnel of
such companies.
Any person which acquires a controlling interest in the Company would have to
meet the requirements of all governmental bodies which regulate the Company's
gaming business. A change in the make-up of the Company's Board of Directors and
management would require the various Gaming Authorities to examine the
qualifications of the new board and management.
16
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Nevada. The ownership and operation of casino gaming facilities in Nevada are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (the "Nevada Act") and (ii) various local ordinances and regulations.
The Company's gaming, manufacturing, distributing and slot route operations
(herein referred to as "gaming machine operations") are subject to the licensing
and regulatory control of the Nevada State Gaming Control Board (the "Nevada
Board"), the Nevada Gaming Commission (the "Nevada Commission"), the County
Liquor and Gaming Licensing Board (the "Clark County Board") and various other
county and city regulatory agencies, all of which are collectively referred to
as the "Nevada Gaming Authorities".
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things; (i) the prevention of unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time in any
capacity; (ii) the strict regulation of all persons, locations, practices,
associations and activities related to the operation of licensed gaming
establishments and the manufacture and distribution of gaming machines, cashless
wagering systems and associated equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective control over the financial practices of licensees,
including establishment of minimum procedures for internal fiscal affairs and
the safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities; (v)
the prevention of cheating and fraudulent practices; and (vi) providing a source
of state and local revenues through taxation and licensing fees. Change in such
laws, regulations and procedures could have an adverse effect on the
gaming-related operations conducted by the Company.
The Company is registered with the Nevada Commission as a publicly traded
corporation (a "Registered Corporation"). The Company's direct and indirect
subsidiaries which conduct gaming operations at various locations, conduct
gaming machine operations and manufacture and distribute gaming devices
(collectively, the "Nevada Subsidiaries") are required to be licensed by the
Nevada Gaming Authorities. The licenses held by the Nevada Subsidiaries require
the periodic payments of fees, or fees and taxes, and are not transferable. The
Company, through registered intermediary companies (individually, an
"Intermediary Company" and collectively, the "Intermediary Companies"), has been
found suitable to own the stock of the Nevada Subsidiaries, each of which is a
corporate licensee (individually, a "Corporate Licensee" and collectively, the
"Corporate Licensees") under the terms of the Nevada Act. As a Registered
Corporation, the Company is required periodically to submit detailed financial
and operating reports to the Nevada Commission and furnish any other information
which the Nevada Commission may require. No person may become a stockholder of,
or receive any percentage of the profits from the Corporate Licensees without
first obtaining licenses and approvals from the Nevada Gaming Authorities. The
Company, the Intermediary Companies and the Corporate Licensees have obtained
from the Nevada Gaming Authorities the various registrations, findings of
suitability, approvals, permits and licenses required in order to engage in
gaming activities, gaming machine operations, and in the manufacture and
distribution of gaming devices for use or play in Nevada or for distribution
outside of Nevada.
All gaming machines and cashless wagering systems that are manufactured, sold or
distributed for use or play in Nevada, or for distribution outside of Nevada,
must be manufactured by licensed manufacturers and distributed or sold by
licensed distributors. All gaming machines manufactured for use or play in
Nevada must be approved by the Nevada Commission before distribution or exposure
for play. The approval process for gaming machines and cashless wagering systems
includes rigorous testing by the Nevada Board, a field trial and a determination
as to whether the gaming machines or cashless wagering system meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment (as defined in the Nevada Act) must be
administratively approved by the Chairman of the Nevada Board before it is
distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, the Intermediary
Companies or the Corporate Licensees in order to determine whether such
individual is suitable or should be licensed as a business associate of a gaming
licensee. Officers, directors and key employees of the Company and the
Intermediary Companies who are actively and directly
17
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
involved in the licensed activities of the Corporate Licensees may be required
to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Intermediary Companies or the Corporate
Licensees, the companies involved would have to sever all relationships with
such person. In addition, the Nevada Commission may require the Company, the
Intermediary Companies or the Corporate Licensees to terminate the employment of
any person who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.
The Company and the Corporate Licensees that hold nonrestricted licenses are
required to submit detailed financial and operating reports to the Nevada
Commission. A nonrestricted license is a license for an operation consisting of
16 or more slot machines, or a license for any number of slot machines together
with any other game, gaming device, race book or sports pool at one
establishment. Substantially all material loans, leases, sales of securities and
similar financing transactions by the Corporate Licensees that hold a
nonrestricted license must be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by a Corporate Licensee,
the licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, the Company, the Intermediary Companies, the Corporate Licensees and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission. Further,
a supervisor could be appointed by the Nevada Commission to operate any
nonrestricted gaming establishment operated by a Corporate Licensee and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for reasonable rental of the casino) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of the gaming licenses of the
Corporate Licensees or the appointment of a supervisor could (and revocation of
any gaming license would) materially adversely affect the gaming-related
operations of the Company.
The Gaming Authorities may, at their discretion, require the holder of any
security of the Company, such as the Notes or the New Notes, to file
applications, be investigated, and be found suitable to own such security of the
Company if the Nevada Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of any class of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of any class of a Registered Corporation's voting securities apply to the
Nevada Commission for a finding of suitability within 30 days after the Chairman
of the Nevada Board mails the written notice requiring such filing. In the event
that there is a default in the payment of dividends for six consecutive dividend
payment dates for the Company's 11 1/2% Non-Voting Junior Convertible
Pay-in-Kind Special Stock, Series E (the "Series E Preferred Stock"), it will
qualify as a voting security under the terms of the Nevada Act and will be
considered as a separate class of voting securities for purposes of determining
beneficial ownership. Under certain circumstances, an "institutional investor",
as defined in the Nevada Act, which acquires more than 10%, but not more than
15%, of a class of a Registered Corporation's voting securities may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were
18
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
acquired and are held in the ordinary course of business as an institutional
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of the board of directors of the
Registered Corporation, any change in the corporate charter, bylaws, management,
policies or operations of the Registered Corporation, or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company, the Intermediary Companies or the Corporate
Licensees, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities, including, if necessary, the
immediate purchase of said voting securities for cash at fair market value.
Additionally, the Clark County Board has taken the position that it has the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may in its discretion require the holder of any debt
securities of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security if the Nevada Commission has reason
to believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. If the Nevada Commission determines that a
person is unsuitable to own such security, then pursuant to the Nevada Act, the
Registered Corporation can be sanctioned, including the loss of its approvals,
if, without the prior approval of the Nevada Commission, it (i) pays the
unsuitable person any dividend, interest or any distribution whatsoever, (ii)
recognizes any voting right by such unsuitable person in connection with such
securities, (iii) pays the unsuitable person renumeration in any form, or (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to impose a requirement that a Registered Corporation's stock certificates
bear a legend indicating that the securities are subject to the Nevada Act. The
Nevada Commission has imposed this requirement on the Company.
The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. In
addition, (i) a Corporate Licensee may not guarantee a security issued by a
Registered Corporation pursuant to a public offering without the prior approval
of the Nevada Commission; and (ii) restrictions on the transfer of an equity
security issued by a
19
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Corporate Licensee or Intermediary Company and agreements not to encumber such
securities (collectively, "Stock Restrictions") are ineffective without the
prior approval of the Nevada Commission. The Nevada Commission has also imposed
a requirement on the Company that it must receive the prior administrative
approval of the Nevada Board Chairman for any offer for the sale of an equity
security in a private transaction.
Changes in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission on a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control to be investigated and licensed as a
part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse affects of these business practices on
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada, and to the counties
and cities in which the Licensees' respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either (i) a
percentage of the gross revenues received, (ii) the number of gaming devices
operated, or (iii) the number of games operated. A casino entertainment tax is
also paid by casino operations where entertainment is furnished in connection
with the selling of food or refreshments. The Corporate Licensees that hold a
license as an operator of a gaming device route or a manufacturer's or
distributor's license also pay certain fees to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be
registered, or under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of its participation in such foreign gaming. The revolving fund
is subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operations who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee is subject to licensing, control and regulation by applicable
regulatory agencies. All licenses are revocable and are not transferable. The
agencies
20
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
involved have full power to limit, condition, suspend or revoke any such
license, and any such disciplinary action could (and revocation would) have a
material adverse affect upon the operations of the Corporate Licensees.
Louisiana. The manufacture, distribution, servicing and operation of video draw
poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw
Poker Devices Control Law and the Rules and Regulations promulgated thereunder
(the "Louisiana Act"). Until May 1, 1996 licensing and regulatory control was
maintained by the Video Gaming Division of the Gaming Enforcement Section of the
Office of State Police within the Department of Public Safety and Corrections
(the "Division"). The Louisiana legislature passed a bill which created a single
gaming control board for the regulation of gaming in Louisiana. This Board is
called the Louisiana Gaming Control Board (the "Louisiana Board") which oversees
all licensing for all forms of legalized gaming in Louisiana (including gaming
on Native American lands). The Division will continue to perform investigatory
functions for the Louisiana Board. The laws and regulations of Louisiana are
based upon a primary consideration of maintaining the health, welfare and safety
of the general public and upon a policy which is concerned with protecting the
video gaming industry from elements of organized crime, illegal gambling
activities and other harmful elements as well as protecting the public from
illegal and unscrupulous gaming to ensure the fair play of devices.
Each of the indirect operating subsidiaries for the Company's gaming operations
in Louisiana, VSI and SVS, has been granted a license as a device owner by the
Division. The other indirect subsidiary of the Company, VDSI, has been granted a
license as a distributor by the Division. These gaming subsidiaries are
Louisiana Licensees (the "Louisiana Licensees") under the terms of the Louisiana
Act. The licenses held by the Louisiana Licensees expire at midnight on June 30
of each year and must be renewed annually through payment of fees. All license
fees must be paid on or before May 15 in each year licenses are renewable.
The Louisiana Board may deny, impose a condition on or suspend or revoke a
license, renewal or application for a license for violations of any rules and
regulations of the Louisiana Board or any violations of the Louisiana Act. In
addition, fines for violations of gaming laws or regulations may be levied
against the Louisiana Licensees and the persons involved for each violation of
the gaming laws. The issuance, condition, denial, suspension or revocation is
deemed a pure and absolute privilege and is at the discretion of the Louisiana
Board in accordance with the provisions of the Louisiana Act. A license is not
property or a protected interest under the constitution of either the United
States or the State of Louisiana.
The Division has the authority to conduct overt and covert investigations of any
person involved directly or indirectly in the video gaming industry in
Louisiana. These investigations have extended to information regarding a
prospective licensee's and his or her spouse's immediate family and relatives
and their affiliations with certain organizations or other business entities.
The investigation may also extend to any person who has or controls more than a
5% ownership, income or profits interest in an applicant for or holder of a
license or who is a key employee, or who has the ability to exercise significant
influence over the licensee. All persons or entities investigated must meet all
suitability requirements and qualifications for a licensee. The Louisiana Board
may deny an application for licensing for any cause which it may deem
reasonable. The applicant for licensing must pay a filing fee which also covers
the cost of the investigation.
In order for a corporation to be licensed as an operator or distributor of video
poker gaming devices by the Louisiana Board, a majority of the stock of the
corporation must be owned by persons who have been domiciled in Louisiana for a
period of at least two years prior to the date of the application.
In addition to licensure as a manufacturer of devices under the Louisiana Act,
Gaming has been licensed as a manufacturer under the Louisiana Riverboat
Economic Development and Gaming Control Act (the "Louisiana Riverboat Act").
Gaming's application for a permanent manufacturer's license as it relates to the
land-based casino in New Orleans was pending before the Louisiana Economic
Development and Gaming Corporation ("LEDGC") at the time the operator of the
land-based casino filed for bankruptcy reorganization and ceased operations,
resulting in the termination of funding for and effective closure of the LEDGC
regulatory operations. The authority and duties
21
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
of LEDGC regarding licensing and regulation of the land-based casino will now
fall within the jurisdiction of the Louisiana Board. The Louisiana Board has
recently promulgated regulations governing its operation and the Company has
been in contact with representatives of the Louisiana Board to coordinate the
submission of all materials required for the Louisiana Board to issue the
Company such licenses, permits or approvals as may be required.
Mississippi. The manufacture and distribution of gaming and associated equipment
and the ownership and operation of casino facilities in Mississippi are subject
to extensive state and local regulation, primarily the licensing and regulatory
control of the Mississippi Gaming Commission (the "Mississippi Commission") and
the Mississippi State Tax Commission.
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Commission has adopted regulations which are also similar in
many respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and making periodic reports to the Mississippi Commission; (iv) prevent cheating
and fraudulent practices; (v) provide a source of state and local revenues
through taxation and licensing fees; and (vi) ensure that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are
subject to amendment and interpretation by the Mississippi Commission. Changes
in Mississippi law or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and could have an adverse effect on the
Company and the Company's Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the 14 counties that either border the Gulf Coast or the Mississippi River but
only if the voters in such counties have not voted to prohibit gaming in that
county. As of July 1997, dockside gaming was permissible in nine of the 14
eligible counties in the state and gaming operations had commenced in Adams,
Hancock, Harrison, Tunica, Warren and Washington counties. Under Mississippi
law, gaming vessels must be located on the Mississippi River or on navigable
waters in eligible counties along the Mississippi River, or in the waters of the
State of Mississippi lying south of the state in eligible counties along the
Mississippi Gulf Coast. Litigation is pending with respect to the expansion of
eligible gaming sites in which a landowner and a license applicant have appealed
a finding of suitability by the Mississippi Commission of a site on the Big
Black River in Warren County near Interstate 20 between Jackson and Vicksburg,
Mississippi, where the Rainbow Casino, operated by RCVP, is located. The law
permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis
and does not restrict the percentage of space which may be utilized for gaming.
There are no limitations on the number of gaming licenses which may be issued in
Mississippi.
The Company, RCVP, Gaming and their affiliates are subject to the licensing and
regulatory control of the Mississippi Commission. The Company is registered
under the Mississippi Act as a publicly traded holding company of RCVP and
Gaming is required to periodically submit detailed financial and operating
reports to the Mississippi Commission and furnish any other information which
the Mississippi Commission may require. If the Company is unable to continue to
satisfy the registration requirements of the Mississippi Act, the Company and
its affiliates cannot own or operate gaming facilities or continue to act as a
manufacturer and distributor in Mississippi. RCVP must maintain a gaming license
from the Mississippi Commission to operate a casino in Mississippi and Gaming
must maintain a manufacturer and distributor license from the Mississippi
Commission to manufacture and distribute gaming products. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations.
22
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Gaming and manufacturer and distributor licenses are not transferable, are
issued for a two-year period and must be renewed periodically thereafter. RCVP
was granted a renewal of its gaming license by the Mississippi Commission in
1996 and such license must be renewed in June 1998. Gaming was granted a renewal
of its manufacturer and distributor license in April 1997 and such license must
be renewed in April 1999. No person may become a stockholder of, or receive any
percentage of profits from, a licensed subsidiary of a holding company without
first obtaining licenses and approvals from the Mississippi Commission. The
Company and its affiliates have obtained such approvals from the Mississippi
Commission.
Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's licensed subsidiaries must be found
suitable or be licensed by the Mississippi Commission. The Company believes it
has obtained, applied for, or is in the process of, applying for all necessary
findings of suitability with respect to such persons affiliated with the
Company, RCVP or Gaming, although the Mississippi Commission, in its discretion,
may require additional persons to file applications for findings of suitability.
In addition, any person having a material relationship or involvement with the
Company may be required to be found suitable, in which case those persons must
pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a finding of suitability for any cause
that it deems reasonable. Changes in certain licensed positions must be reported
to the Mississippi Commission. In addition to its authority to deny an
application for a findings of suitability, the Mississippi Commission has
jurisdiction to disapprove a change in a licensed position. The Mississippi
Commission has the power to require the Company and its registered or licensed
subsidiaries to suspend or dismiss officers, directors and other key employees
or sever relationships with other persons who refuse to file appropriate
applications or whom the authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
must refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors or knowingly violated the Mississippi Act or for any other
reasonable cause.
At any time, the Mississippi Commission has the power to investigate and require
the finding of suitability of any record or beneficial stockholder of the
Company. Mississippi law requires any person who acquires more than 5% of the
common stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the Securities and Exchange Commission, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a public
company's common stock. However, the Mississippi Commission has adopted a policy
that permits certain institutional investors to own beneficially up to 10% of a
registered public company's common stock without a finding of suitability. If a
stockholder who must be found suitable is a corporation, partnership or trust,
it must submit detailed business and financial information including a list of
beneficial owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. Management believes that compliance by the
Company with the licensing procedures and regulatory requirements of the
Mississippi Commission will not affect the marketability of the Company's
securities. Any person found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the securities of the Company beyond such time as
the Mississippi Commission prescribes may be guilty of a misdemeanor. The
Company is subject to disciplinary action if, after receiving notice that a
person is unsuitable to be a stockholder or to have any other relationship with
the Company or its licensed subsidiaries, the Company: (i) pays the unsuitable
person any dividend or other distribution upon the voting securities of the
Company; (ii) recognizes the exercise, directly or indirectly, of any voting
rights conferred by
23
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
securities held by the unsuitable person; (iii) pays the unsuitable person any
remuneration in any form for services rendered or otherwise, except in certain
limited and specific circumstances; or (iv) fails to pursue all lawful efforts
to require the unsuitable person to divest himself of the securities, including,
if necessary, the immediate purchase of the securities for cash at a fair market
value.
The Company may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any debt securities. In addition, under
the Mississippi Act, the Mississippi Commission may in its discretion (i)
require holders of debt securities of registered corporations to file
applications, (ii) investigate such holders and (iii) require such holders to be
found suitable to own such debt securities. Although the Mississippi Commission
generally does not require the individual holders of obligations such as notes
to be investigated and found suitable, the Mississippi Commission retains the
discretion to do so for any reason, including but not limited to a default, or
where the holder of the debt instrument exercises a material influence over the
gaming operations of the entity in question. Any holder of debt securities
required to apply for a finding of suitability must pay all investigative fees
and costs of the Mississippi Commission in connection with such an
investigation.
RCVP and Gaming must maintain in Mississippi a current ledger with respect to
the ownership of their equity securities and the Company must maintain a current
list of stockholders in the principal office of RCVP which must reflect the
record ownership of each outstanding share of any equity issued by the Company.
The ledger and stockholder lists must be available for inspection by the
Mississippi Commission at any time. If any securities of the Company are held in
trust by an agent or by a nominee, the record holder may be required to disclose
the identity of the beneficial owner to the Mississippi Commission. A failure to
make such disclosure may be grounds for finding the record holder unsuitable.
The Company must also render maximum assistance in determining the identify of
the beneficial owner.
The Mississippi Act requires that the certificates representing securities of a
registered publicly traded corporation bear a legend to the general effect that
such securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi Commission
an exemption from this legend requirement. The Mississippi Commission has the
power to impose additional restrictions on the holders of the Company's
securities at any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a licensed gaming subsidiary must be reported to or approved by
the Mississippi Commission. A licensed gaming subsidiary may not make a public
offering of its securities, but may pledge or mortgage casino facilities if it
obtains the prior approval of the Mississippi Commission. The Company may not
make a public offering of its securities without the prior approval of the
Mississippi Commission if any part of the proceeds of the offering is to be used
to finance the construction, acquisition or operation of gaming facilities in
Mississippi or to retire or extend obligations incurred for one or more such
purposes. Such approval, if given, does not constitute a recommendation or
approval of the investment merits of the securities subject to the offering.
Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover cannot occur
without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors, and
other persons having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates;
24
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
(ii) preserve the beneficial aspects of conducting business in the corporate
form; and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Mississippi Commission before the Company may make exceptional repurchases of
voting securities above the current market price of its common stock (commonly
called "greenmail") or before a corporate acquisition opposed by management may
be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if the Company adopts a plan or
recapitalization proposed by its Board of Directors opposing a tender offer made
directly to the stockholders for the purpose of acquiring control of the
Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Company has previously
obtained a waiver of foreign gaming approval from the Mississippi Commission for
operations in Nevada and will be required to obtain the approval or a waiver of
such approval from the Mississippi Commission prior to engaging in any
additional future gaming operations outside of Mississippi.
If the Mississippi Commission decides that a licensed gaming subsidiary violated
a gaming law or regulation, the Mississippi Commission could limit, condition,
suspend or revoke the license of the subsidiary. In addition, the licensed
subsidiary, the Company and the persons involved could be subject to substantial
fines for each separate violation. Because of such a violation, the Mississippi
Commission could attempt to appoint a supervisor to operate the casino
facilities. Limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could (and revocation of any gaming license would)
materially adversely affect the Company's and RCVP's gaming operations and/or
Gaming's manufacturer and distributor operations.
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the countries and
cities in which a licensed gaming subsidiary's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less payouts to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against the Company's Mississippi income
tax liability for the year paid. The gross revenue fee imposed by the City of
Vicksburg, Mississippi, where RCVP's casino operations are located, equals
approximately 4% of gaming receipts.
The Mississippi Commission has adopted a regulation requiring as a condition of
licensure or license renewal that a gaming establishment's plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities which will amount to at least 25% of the casino cost.
Management of the Company believes it is in compliance with this requirement.
The sale of alcoholic beverages by the Rainbow Casino operated by RCVP is
subject to the licensing, control and regulation by both the City of Vicksburg
and the Alcoholic Beverage Control Division (the "ABC") of the Mississippi State
Tax Commission. The Rainbow Casino area has been designated as a special resort
area, which allows the Rainbow Casino to serve alcoholic beverages on a 24-hour
basis. The ABC has the full power to limit, condition, suspend or revoke any
license for the serving of alcoholic beverages or to place such a licensee on
probation with or without conditions. Any such disciplinary action could (and
revocation would) have a material adverse effect upon the Rainbow Casino's
operations. Certain officers and managers of the Rainbow Casino must be
investigated by the ABC in connection with its liquor permits, and changes in
certain positions must be approved by the ABC.
25
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
New Jersey. Gaming has previously been licensed by the New Jersey Commission as
a gaming-related casino service industry ("CSI") in accordance with the New
Jersey Casino Control Act (the "Casino Control Act"). Due to the change of
ownership of Gaming as a result of the Acquisition, Gaming's CSI license was
invalidated. Prior to the change of ownership of Gaming and in anticipation of
same, the Company submitted an application for CSI licensure. The New Jersey
Commission deemed the application complete and, as a result, since the
Acquisition the Company's operations in New Jersey continue uninterrupted
pursuant to transactional waivers which have been granted, and which the Company
believes should continue to be granted, by the New Jersey Commission on a
six-month blanket basis for parts and service and on a sale-by-sale basis for
all other products pending final action on the Company's application for CSI
licensure.
In considering the qualifications of an applicant for a CSI license, the New
Jersey Commission may require that the officers, directors, key personnel,
financial sources and stockholders (in particular those with holdings in excess
of 5%) of the applicant and its holding and intermediary companies demonstrate
their qualifications. In this regard, such persons and entities may be
investigated and may be required to make certain regulatory filings and to
disclose and/or to provide consents to disclose personal and financial data. The
costs associated with such investigation are typically borne by the applicant.
Federal Registration. The operating subsidiaries of the Company that are
involved in gaming activities are required to file annually with the Attorney
General of the United States in connection with the sale, distribution or
operation of gaming machines. All currently required filings have been made.
The U.S. Congress has created the National Gambling Impact and Policy Commission
to conduct a comprehensive study of all matters relating to the economic and
social impact of gaming in the United States. The enabling legislation provides
that, not later than two years after the enactment of such legislation, the
commission would be required to issue a report containing its findings and
conclusions, together with recommendations for legislation and administrative
actions. Any such recommendations, if enacted into law, could adversely affect
the gaming industry and have a material adverse effect on the Company's
business, financial condition or results of operations.
From time to time, certain legislators have proposed the imposition of a federal
tax on gross gaming revenues. No specific proposals for the imposition of such a
federal tax are currently pending. However, no assurance can be given that such
a tax will not be imposed in the future. Any such tax could have a material
adverse effect on the Company's business, financial condition or results of
operations.
Germany. German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently affecting the
wall machine industry relates to prescribed licensing procedures, the use,
installation and operation of machines and the taxation of same.
Wall machine manufacturers are dependent upon the successful introduction of new
products each year and currently are required to receive prior government
approval for each new product introduction. Manufacturers are required to apply
for licenses through an agency of the German federal Ministry of Economics. Such
agency maintains a policy of accepting only two licensing applications from an
individual applicant at any given time. Bally Wulff, through affiliates and
subsidiaries, is in a position to file up to six concurrent applications. After
receiving a prototype of a machine for which the applicant seeks government
licensing approval, the federal agency deliberates for periods that range from
approximately 6 to 24 months. If that product is approved, the wall machine
manufacturer is permitted to reproduce the sample machine initially submitted
for government approval. Every wall machine carries with it a small license card
that permits the machine to be operated for up to four years from the initial
date of sale, after which it may not be used in Germany. In Germany, wall
machines sold via the secondary market may be operated by a new owner but only
for the residual time remaining on each machine's four-year life. In addition to
licensing requirements for manufacturers, any person or entity which intends to
operate a licensed wall machine must apply to local regulatory authorities for a
license, which will not be granted by the authorities if
26
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
facts justify the assumption that the applicant does not possess the requisite
reliability. In this proceeding, the applicant must furnish a police certificate
of conduct.
German legislation prohibits the public play of wall machines by individuals
under age 18. Voluntary agreements among manufacturers and certain amusement
game trade associations, among other things, restrict wall machine advertising
and the ability of a player to play more than two machines at once, require all
machines to carry visible warning notices and provide that every wall machine is
automatically switched off for three minutes after one hour of continuous play.
The Spielverordnung (gaming ordinance) specifically governs wall machines. These
regulations limit game payouts to DM 4.00 (approximately $2.29) per game,
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations which stipulate how many machines may operate within
defined square foot areas (15 square meters per machine, with a maximum of ten
machines per location). The Spielverordnung was modified in 1985 to achieve a
significant reduction of gaming machines. Gaming halls which through December
19, 1985 had more gaming machines than permitted under the revised regulations
had a transition period through December 31, 1995 to comply with the revised
regulations. Such facilities were allowed to keep the number of wall machines
used in operations in 1985 until December 31, 1990. During the period January 1,
1991 to December 31, 1995 they were entitled to two-thirds of such total number,
but had to be in compliance with the new limits by January 1, 1996. In taverns,
restaurants, hotels and certain other establishments, no more than two gaming
machines are permitted.
The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs
the zoning classification of land and the type and density of development within
the various zoning classifications. Effective January 27, 1990, the
Baunutzungsverordnung was amended essentially to restrict the development of
larger gaming halls to core commercial areas, limit the permissibility of
smaller gaming halls in various types of mixed use zones and to ban gaming halls
in most types of residential and all types of industrial use areas. Prior to
such amendment, gaming halls, regardless of size, were generally allowed in
core, business, mixed and industrial zones. In addition, on a case by case
basis, each local zoning agency is authorized to exclude certain types of
otherwise permissible uses, including gaming halls.
Subject to certain exceptions, V.A.T. of 15% is generally assessed on the sale
or supply of any goods and services in Germany. Since the total amount paid for
particular goods or services is considered to be the gross price in calculating
such tax, the actual rate is 13.04%. The basis for taxation is the cash
remaining in the machines. The rule requiring a minimum payout percentage is
applied to the amount remaining in the cash box net of such V.A.T. Depending on
the municipality in which a machine is located, operators may also have to pay a
monthly leisure tax on each machine of up to DM 600 (approximately $344). The
German tax court recently let stand a regulation that permits local
municipalities to impose additional taxes on gaming machine operators.
The business conducted by Bally Wulff had benefited from the Berlin Promotion
Act, a special tax statute which was intended to support the economy of West
Berlin in various ways. With the reunification of Germany, the need for benefits
provided by the law is perceived to have decreased. Consequently, the German
government enacted amendments to the Berlin Promotion Act which phased out, over
a number of years, most of the tax benefits and incentives provided by the law.
This phase out is now complete.
During fiscal 1996, Bally Wulff increased the amount of tax reserves by $1.0
million (to a total reserve of $1.4 million) as a result of developments in an
ongoing quadrennial audit of Wulff's tax returns for the years 1988 through
1991. The German tax authorities have proposed preliminary adjustments which
range from $1.4 million (which has been accrued) to $5.0 million.
27
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Additional Jurisdictions. The Company, in the ordinary course of its business,
routinely considers business opportunities to expand its gaming operations into
additional jurisdictions. Although the laws and regulations of the various
jurisdictions in which the Company operates or into which the Company may expand
its gaming operations vary in their technical requirements and are subject to
amendment from time to time, virtually all of those jurisdictions require
licenses, permits, documentation of qualification, including evidence of
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such companies.
The Company and its key personnel have obtained, or applied for, all government
licenses, registrations, findings of suitability, permits and approvals
necessary for the manufacture and distribution, and operation where permitted,
of their gaming machines in the jurisdictions in which the Company currently
does business. The Company and the holders of its securities may be subject to
the provisions of the gaming laws of each jurisdiction where the Company or its
subsidiaries are licensed and/or conduct business, including, without
limitation, the States of Arizona, Colorado, Connecticut, Illinois, Indiana,
Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada,
New Jersey, New Mexico, South Dakota, Wisconsin, and the local regulatory
authority within each such state as well as Australian, Canadian and other
foreign gaming jurisdictions in which BGII and its subsidiaries are licensed or
conduct business. As a result of the consummation of the Acquisition, the
Company and its officers and directors have been required to apply for any
government licenses, permits and approvals necessary or required by each of
these jurisdictions.
Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensure, findings of qualification or other
approvals. ln some cases this process may require the holder or prospective
holder to disclose and/or provide consents to disclose personal and financial
data in connection with necessary investigations, the costs of which are
typically borne by the applicant. The investigatory and approval process can
take three to six months to complete under normal circumstances.
28
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
ITEM 2. PROPERTIES
The following table sets forth information regarding the Company's leased
properties (exclusive of space leases in connection with its gaming device
routes) as of June 30, 1997, all of which are fully utilized unless otherwise
noted:
[Download Table]
ANNUAL
BUILDING RENTAL
LOCATION USE SQUARE FEET PAYMENTS
-------- --- ----------- --------
(IN 000S)
Las Vegas, Nv. Partially subleased 72,000 $ 515
Las Vegas, Nv. Route Operations building 18,500 180
Las Vegas, Nv. Advanced Product Development Group 3,600 43
New York, N.Y. Administrative offices 4,400 158
Sparks, Nv. Administrative offices and 38,000 275
warehousing
Sparks, Nv. Sales offices and warehousing 11,000 114
Absecon, N.J. Sales offices and warehousing 15,800 90
Biloxi, Ms. Sales offices 6,400 24
Golden, Co. Sales offices 1,500 16
Rosemont, Il. Sales offices 4,900 34
Dania, Fl. Sales offices 3,400 36
Elko, Nv. Sales office and route operations 4,200 36
Laughlin, Nv. Sales offices 600 10
Atlantic City, N.J. Administrative offices 750 10
San Juan, Puerto Rico Sales offices 1,000 12
Sidney, Australia Sales offices 700 36
Johannesburg, So. Sales offices 2,000 20
Africa
Las Vegas, Nv. Warehousing 103,500 390
Berlin, Germany Administrative offices and
manufacturing 98,000 535
Hannover, Germany Administrative offices and
warehousing 32,000 240
Reno/Sparks, Nv. Route operations 12,100 76
Carson City, Nv. Route operations 2,500 8
Winnemucca, Nv. Route operations 1,200 4
Las Vegas, Nv. Route location 8,000 444
Las Vegas, Nv. (1) Ground Lease --- 327
Sparks, Nv. (2) Ground Lease --- 5
Vicksburg, MS Administrative offices 2,700 19
Vicksburg, MS Administrative offices 1,200 9
New Orleans, La. Administrative offices & route 6,000 57
operations
Covington, La. OTB Operation 2,500 36
Metairie, La. OTB Operation 11,000 54
New Orleans, La. OTB Operation 5,100 25
(1) Lease consists of ground lease for parking at the Trolley Stop.
(2) Lease consists of long-term land lease for parking at the Plantation.
29
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
The following table sets forth information regarding properties owned by the
Company as of June 30, 1997, all of which are fully utilized unless otherwise
noted:
[Download Table]
BUILDING
LOCATION USE SQUARE FEET (1)
-------- --- ---------------
(IN 000S)
Las Vegas, Nv. Administrative offices and
manufacturing (a) 150,000
Reno/Sparks, Nv. Casino (a) 35,000
Vicksburg, Ms. Casino 24,000
Vicksburg, Ms. Administrative offices 3,200
Vicksburg, Ms. Vacant- Land ---
Las Vegas, Nv. Tavern/Land 5,000
North Las Vegas, Nv. Parking ---
Atlantic City, N.J. Subleased office space 7,000
(a) These facilities are collateral for the New Credit Facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - - Liquidity and Capital Resources".
In addition, the Company leases 21 properties that have been subleased in
connection with its Route Operations. The properties range in size from
approximately 1,750 square feet to 7,700 square feet. The remaining terms of the
leases range from one to 13 years with monthly payments ranging from
approximately $1,700 to $10,500.
In addition to the principal facilities, the Company has 21 leased locations and
two owned locations in Germany which are primarily used for sales and service
offices as well as for warehousing purposes. The properties range in size from
approximately 2,800 square feet to 27,000 square feet. The leased locations have
terms of occupancy varying from month-to-month tenancies to five years with
monthly payments ranging from approximately $1,000 to $21,200.
See Note 9 of Notes to Consolidated Financial Statements for information as to
the Company's lease commitments with respect to the foregoing rental properties.
The Company believes its facilities are suitable for its needs and the Company
has no future expansion plans that would make these properties inadequate.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
In an action filed on December 2, 1996, the Company was named as a defendant in
an action brought by Canpartners Investments IV and Cerberus Partners, 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 million to
partially fund the Company's then pending hostile tender offer for BGII. The
Company entered into a merger agreement with BGII in October 1995 and did not
use funds provided by the plaintiffs to fund the acquisition of BGII which was
completed in June 1996. The plaintiffs have asserted claims based upon the loan
commitment letters and failure to pay termination fees in connection with such
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 and has filed a motion to dismiss the compliant. The Company
intends to defend the action vigorously.
On September 25, 1995, BGII was named as a defendant in a class action lawsuit
filed in Federal District Court in Nevada, by Larry Schreirer on behalf of
himself and all others similarly situated. The plaintiffs filed suit against
BGII and approximately 45 other defendants. Each defendant is involved in the
gaming business as either a gaming machine
30
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
manufacturer, distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants have
engaged in a course of fraudulent and misleading conduct intended to induce
people into playing their gaming machines based on a false belief concerning how
those machines actually operate as well as the extent to which there is actually
an opportunity to win on any given play. The plaintiffs allege that the
defendants' actions constitute violations of the Racketeer Influenced and
Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and
unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1.0
billion, and are asking that any damage awards be trebled under applicable
Federal law. Management believes the plaintiffs' lawsuit to be without merit.
The Company intends to vigorously pursue all legal defenses available to it.
In August 1996, the Company received demand notices from a holder of customer
notes receivable which were sold on a recourse basis to a third party for which
payments were in arrears from December 1995. In December 1996 the holder of the
notes filed suit against the Company seeking payment from the Company of
approximately $3.6 million. The Company intends to vigorously pursue all legal
defenses available to it.
The Company is also a party to various lawsuits relating to routine matters
incidental to its business. Management does not believe that the outcome of such
litigation, including the matters above, in the aggregate, will have a material
adverse effect on the Company.
The Company settled its litigation with WMS Industries, Inc. ("WMS") for $4.5
million, which was paid in April 1997. The lawsuit arose out of a dispute
concerning a break-up fee due under the then proposed WMS merger with BGII. This
settlement was treated as an adjustment to goodwill in the accompanying
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 16, 1997, the Company held its annual shareholders meeting at which the
shareholders were asked to vote on two matters: 1) the re-election of Mr.
Anthony DiCesare and Mr. Joel Kirschbaum to the Board of Directors, and 2) the
adoption of the 1996 Long-Term Incentive Plan. Of the 31,838,632 shares of
common stock eligible to vote, 28,925,387 shares were voted for, and 1,214,681
against Mr. DiCesare and 28,923,767 shares for, and 1,216,301 voted against Mr.
Kirschbaum. Of the 21,750,236 votes cast related to the 1996 Plan, 14,673,246
shares voted in favor of the 1996 Plan, 6,976,278 voted against and 100,712
abstained.
31
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"ALLY". The following table sets forth the high and low closing bid price of the
Common Stock as reported by Nasdaq for the periods indicated. These prices
reflect inter-dealer prices, without retail mark-up or mark-down or commissions
and may not necessarily represent actual transactions.
[Download Table]
PRICE RANGE OF
COMMON STOCK
--------------------
High Low
---- ---
FISCAL YEAR ENDED JUNE 30, 1996
1st Quarter $ 6.25 $ 4.56
2nd Quarter 5.63 2.75
3rd Quarter 5.38 3.00
4th Quarter 5.00 2.88
FISCAL YEAR ENDED JUNE 30, 1997
1st Quarter $ 4.00 $ 2.00
2nd Quarter 4.38 3.00
3rd Quarter 4.56 3.38
4th Quarter 4.00 3.07
As of September 11, 1997 the Company had approximately 1,750 holders of record
of its Common Stock.
There is currently no established public trading market for the Company's Series
E Special Stock.
The Company has never declared or paid cash dividends on its Common Stock. The
indenture for the Company's 12 7/8% Notes (substantially all of which were
repurchased subsequent to June 30, 1997), the indenture for the Company's 10%
Senior Subordinated Notes (the "Indenture") and the credit agreement for the
Company's new credit facility, each restrict the Company's ability to pay any
dividends or make any other payment or distribution of any of its Restricted
Subsidiaries' Equity Interests (as defined). The Company intends to follow a
policy of retaining earnings, if any, to finance growth of its business and does
not anticipate paying any cash dividends in the foreseeable future. The
declaration and payment of future dividends on the Common Stock will be at the
sole discretion of the Board of Directors and will depend on the Company's
profitably, ability to pay dividends under the terms of the Indenture and the
Company's financial condition, capital requirements, statutory and contractual
restrictions, future prospects and other factors deemed relevant.
32
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
audited financial statements of the Company. The table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto.
[Enlarge/Download Table]
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------------------------
1993 1994 1995(1) 1996(2) 1997
--------- --------- --------- --------- ---------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA
Revenues:
Gaming equipment and systems $ 99 $ 65 --- $ 10,575 $ 134,734
Wall machines and amusement games --- --- --- 3,356 131,934
Route operations 96,282 102,830 106,854 109,938 127,028
Casino operations 16,710 20,159 25,134 48,509 51,450
--------- --------- --------- --------- ---------
113,091 123,054 131,988 172,378 445,146
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of gaming equipment and systems 49 20 --- 7,213 84,496
Cost of wall machines and amusement games --- --- --- 2,022 68,426
Cost of route operations 72,614 76,332 79,887 84,212 95,716
Cost of casino operations 11,543 14,955 14,231 22,046 22,269
Selling, general and administrative 19,758 22,629 28,249 30,620 100,415
Provision for doubtful receivables 461 705 400 1,020 9,059
Depreciation and amortization 8,718 9,530 9,520 10,988 22,606
Direct acquisition costs (3) --- --- 1,669 55,843 ---
Unusual items --- 6,351 2,293 5,498 700
--------- --------- --------- --------- ---------
113,143 130,522 136,249 219,462 403,687
--------- --------- --------- --------- ---------
Operating income (loss) (52) (7,468) (4,261) (47,084) 41,459
Other income (expense)
Interest income 998 2,084 2,798 1,571 1,620
Interest expense (5,046) (6,830) (8,133) (8,897) (23,626)
Rainbow royalty (4) --- --- (810) (4,070) (4,722)
Minority interest --- (506) (397) (963) (1,092)
Other, net 450 (167) 317 301 139
--------- --------- --------- --------- ---------
Income (loss) before income taxes (3,650) (12,887) (10,486) (59,142) 13,778
Income tax provision --- (241) (265) (755) (7,993)
--------- --------- --------- --------- ---------
Net income (loss) (3,650) (13,128) (10,751) (59,897) 5,785
Special stock dividends, including repurchase premium --- --- --- (362) (11,974)
--------- --------- --------- --------- ---------
Net loss applicable to common shares (3,650) (13,128) (10,751) (60,259) (6,189)
========= ========= ========= ========= =========
Net loss per common share $ (0.38) $ (1.28) $ (0.95) $ (4.64) $ (0.19)
========= ========= ========= ========= =========
OTHER DATA
Operating income (loss) before unusual
items and direct acquisition costs $ (52) $ (1,117) $ (299) $ 14,257 $ 42,159
33
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
[Enlarge/Download Table]
AS OF JUNE 30
---------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ----- ----- ----
(In 000's)
BALANCE SHEET DATA (5)
Cash and cash equivalents and
securities available for sale $9,580 49,574 $37,414 $48,057 28,924
Working capital 7,991 50,926 31,476 111,009 110,795
Total assets 73,768 119,416 126,348 375,504 352,016
Total long term debt,
including current maturities 44,798 90,726 101,397 191,344 173,839
Series B Special Stock --- --- --- 51,552 58,981
Total stockholders' equity 22,665 15,099 9,985 69,846 53,555
(1) The Company acquired the general partnership interest in the Rainbow
Casino Vicksburg Partnership, L.P. (RCVP) on March 29, 1995 and began
consolidating the results or RCVP since that date.
(2) The Company acquired BGII on June 18, 1996. Therefore the results of
operations for the year ended June 30, 1996 include the results of
operations of BGII for the last twelve days of that fiscal year. See
note 2 to the Consolidated Financial Statements.
(3) Includes non-cash accounting loss on debenture conversion of
$30,079,000 in fiscal year 1996 as a result of the conversion of the
Company's Convertible Debentures into equity securities.
(4) Represents royalty fee related to the HFS financing at the Rainbow
Casino. The Company repurchased this royalty obligation from HFS on
August 12, 1997.
(5) See discussion of refinancing transaction completed in August 1997 in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
34
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In August 1997 the Company completed a series of related transactions as
described below ("the Refinancing") which consisted of the private placement of
$150.0 million of Senior Subordinated Notes and the closing of $230.0 million of
bank financing. The bank financing provides for (i) term loans in the aggregate
amount of up to $140.0 million, comprised of a $75.0 million tranche with a
7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with an
8-year term (the "Tranche C Term Loan", and together with the Tranche B Term
Loan, the "Term Loan Facilities") and a $25.0 million tranche with a 7 1/2-year
term (the "Delayed Draw Term Facility"); and (ii) a $90.0 million revolving
credit facility with a 6-year term (the "Revolving Credit Facility").
As part of the Refinancing, the Company used the proceeds of the Senior
Subordinated Note offering, together with borrowings under the Revolving Credit
Facility, the Term Loan Facilities and the Delayed Draw Term Facility and cash
on hand to fund (a) the repurchase at a premium of substantially all of the
Company's 12 7/8% Notes, plus accrued interest to August 8, 1997 totaling $183.7
million, (b) the redemption at liquidation value of all of the Company's Series
B Preferred Stock on September 8, 1997 totaling $77.6 million, (c) the purchase
from HFS Gaming Corporation of the right to receive royalty payments based on
revenues of the Rainbow Casino and the purchase of related debt owed to an HFS
affiliate, National Gaming Mississippi, Inc. on August 12, 1997 totaling $26.3
million and (d) the payment of transaction fees and expenses totaling $16.5
million. At June 30, 1997, based on the terms of the new $90.0 million Revolving
Credit Facility, the Company would have been able to borrow the full amount of
the revolving credit line, of which the Company had initial borrowings of
approximately $14.5 million on August 8, 1997. The borrowing base for the
revolving credit facility consists of eligible receivables and inventory, as
defined in the credit agreement. Additionally, in July 1997 the Company redeemed
the remaining balance of its 7 1/2 Convertible Debentures at a price of 104, or
a total of $1.7 million.
On a pro forma basis for the year ended June 30, 1997, assuming the Refinancing
had occurred on July 1, 1996, the Company would have reported earnings before
interest, taxes, and depreciation and amortization, less casino royalty and
minority interest plus direct acquisition costs and unusual items (EBITDA) of
$63.7 million, net income available to common shares of $6.4 million and net
income per share of $0.16 or a $0.35 improvement over the reported net loss per
share of $0.19. In conjunction with the Refinancing, the Company incurred fees
and expenses totaling approximately $78.4 million, including the premium on the
repurchase of the 12 7/8% Notes of $27.7 million and $16.4 million for the
difference between the carrying value and the liquidation value of the Series B
Preferred Stock, all of which will be recorded in the quarter ended September
30, 1997. On a pro forma basis as of June 30, 1997, in comparison to the actual
year end balances, the Refinancing would have resulted in a decrease in cash and
cash equivalents of $12.8 million, a decrease in net working capital of $13.5
million, an increase in total long-term debt of $128.0 million, but the
elimination of the 12 7/8% Notes and Series B Preferred Stock. On an ongoing
basis the Company will continue to be highly leveraged and will have significant
interest costs, however in the near term the Company will have only limited
principal payments required on its long-term indebtedness.
At June 30, 1997, the Company actually had $28.9 million in cash and cash
equivalents and $24.1 million in availability on its former revolving lines of
credit. In addition the Company had working capital of approximately $110.8
million, a decrease of approximately $0.2 million from June 30, 1996 which is
explained below. Consolidated cash and cash equivalents at June 30, 1997
includes approximately $9.0 million of cash which is utilized in Casino and
Route Operations which is held in vaults, cages or change banks.
Management believes that cash flow from operating activities, cash and cash
equivalents held and the new $90.0 million Revolving Credit Facility will
provide the Company with sufficient capital resources and liquidity. At June 30,
1997, the Company did not have any significant commitments for capital
expenditures.
35
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
The following table presents the components of consolidated working capital at
June 30, 1996 and 1997:
[Download Table]
Balances at June 30,
1996 1997 Change
---- ---- ------
(In $000's)
Cash and Cash Equivalents $ 48,057 $ 28,924 $(19,133)
Accounts and Notes Receivable, net 93,502 87,701 (5,801)
Inventories, net 41,656 37,329 (4,327)
Other Current Assets 8,354 9,627 1,273
-------- -------- --------
Total Current Assets 191,569 163,581 (27,988)
Accounts Payable 16,240 14,270 1,970
Accrued Liabilities 38,543 37,392 1,151
Current Maturities of Long-Term Debt 25,777 1,124 24,653
-------- -------- --------
Total Current Liabilities 80,560 52,786 27,774
-------- -------- --------
Net Working Capital $111,009 $110,795 $ (214)
======== ======== ========
The net change in cash and cash equivalents during the fiscal year ended June
30, 1997 resulted from EBITDA generated, offset by: cash used for capital
expenditures of approximately $13.3 million; cash used for principal payments on
debt including the revolving lines of credit borrowings of approximately $7.5
million in the United States and approximately $4.1 million in Germany and
payment of the VSI loan and other debt totaling approximately $6.8 million; and
payments made for accrued direct acquisition costs, the accrued distribution
payable to the limited partner in the Rainbow Casino Vicksburg Partnership,
L.P., the payment of the Rainbow Royalty and the payment of the WMS litigation
settlement. In addition, approximately $3.9 million of cash was used to purchase
shares of Series B Special Stock during fiscal year 1997. The Company also made
its semi-annual interest payments on the Senior Secured Notes on December 30,
1996 and June 30, 1997 aggregating $20.5 million. During the fiscal year ended
June 30, 1997, current maturities of long term debt were reduced primarily due
to principal payments plus, due to the Refinancing in August 1997, the current
portion of the lines of credit and certain other debt instruments were
reclassified to long-term debt as of June 30, 1997. The primary change to all
other working capital components during fiscal year 1997 were the result of a
decrease in the translation rate between the German mark and the U.S. dollar.
During the year ended June 30, 1997, the Company generated cash flows from
operating activities of $24.1 million, an increase of $23.2 million over the
prior year.
The following table presents the Company's EBITDA. For purposes of comparability
the 1996 amounts are further adjusted to include BGII's results for the entire
year.
[Download Table]
Year Ended June 30,
1996 1997
---- ----
(In $000's)
EBITDA by business unit:
Gaming Equipment and Systems $15,716 $16,671
Wall Machines and Amusement Games 13,376 29,719
Route Operations 16,691 20,200
Casino Operations (a) 11,229 12,630
Corporate expenses (17,300) (19,177)
Minority interest (963) (1,092)
------- -------
EBITDA $38,749 $58,951
======= =======
(a) Presented after deducting Casino Royalty
36
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
The Company believes that the above analysis of EBITDA (which excludes direct
acquisition costs and unusual items) 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.
Customer Financing
Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Gaming Equipment and Systems
and Wall Machine and Amusement Games business units, respectively. Competitive
conditions sometimes require Gaming Equipment and Systems to grant extended
payment terms on gaming machines systems and other gaming equipment, especially
for sales in emerging markets. While these financings are normally
collateralized by such equipment, the resale value of the collateral in the
event of default may be less than the amount financed. In conjunction with sales
by Gaming Equipment 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 $10.5 million at June 30, 1997. The Company
has reserved approximately $8.3 million at June 30, 1997 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 Gaming Equipment and Systems
may be unable to make payments as such amounts become due. In such event, Gaming
Equipment and Systems may become responsible for repayment of at least a portion
of such amounts over the term of the receivables. 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 since 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 $3.6 million. Bally Wulff provides customer financing for
approximately 10% of its sales and also provides lease financing to its
customers. Lease terms are generally for six months, but are also available for
12 and 43 month terms.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
GENERAL
To enhance the comparability for the following discussion of the results of
operations, the operating results for 1996 are presented on a pro forma basis
assuming the BGII acquisition had occurred prior to the start of the 1996 year.
The acquisition of BGII actually occurred on June 18, 1996.
GAMING EQUIPMENT AND SYSTEMS
For the year ended June 30, 1997, Gaming Equipment and Systems reported revenues
of $134.7 million, an increase of 2%, compared to revenues of $132.3 million in
the prior year. Bally Gaming reported shipments of approximately 18,200 new
gaming machines, an increase of 1% compared to shipments of approximately 18,000
in the prior year. The volume improvement resulted primarily from a general
increase in replacement demand from existing casinos offset by a lower number of
new casino openings in the year ended June 30, 1997. By market segment, Bally
Gaming's unit sales for the current year consisted of approximately 8,300 units
to the Nevada and Atlantic City markets, 7,600 units to international markets
and 2,300 units to riverboats, Native American and other domestic markets. Bally
Gaming reported revenues from the sale of new gaming machines of $96.7 million,
an increase of 6%, compared to $91.3 million in the prior year due to higher
unit volume and higher average selling prices of new machines. Bally Systems
reported revenues of $22.3 million, an increase of 22%, compared to revenues of
$18.2 million in the prior year period.
37
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Bally Systems revenue improvement resulted primarily from increased shipments to
new installations such as New York-New York, Casino Niagara, Casino Rama, and
the Harrah's Riverboat and Players Island Casinos in St. Louis.
For the year ended June 30, 1997, gross profit margins improved to 37% from 35%
in the prior year period. The gross margin improvement resulted primarily from a
higher average sales price for new machines and the impact of higher Bally
Systems sales. Gaming Equipment and Systems reported operating income of $10.6
million, a decrease of 23%, compared to operating income of $13.8 million in the
prior year period. The operating income decrease resulted primarily from greater
selling, general and administrative expenses (including higher research and
development costs) and the impact of greater depreciation expense from
amortizing goodwill and other intangibles as a result of the BGII acquisition,
partially offset by the aforementioned revenue and gross margin increases.
WALL MACHINES AND AMUSEMENT GAMES
For the year ended June 30, 1997, Wall Machines and Amusement Games reported
revenues of $131.9 million, an increase of 23%, compared to revenues of $107.1
million in the prior year. The revenue improvement resulted primarily from an
87% increase in new wall machine units sold as Wall Machines and Amusement Games
expanded its market share due to popularity of its product offerings and, to a
lesser extent, 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, Wall Machines and Amusement Games 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 and one half years. For the
year ended June 30, 1997, Wall Machines and Amusement Games leased approximately
4,000 new wall machines, which is a 300% increase from the prior year period.
Revenues were unfavorably impacted by a decrease in amusement game sales 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 $12.2 million during the current year.
For the year ended June 30, 1997, gross profit margin improved to 48% from 39%
in the prior year. The gross margin improvement resulted primarily from the
favorable impact of greater production volume in Wall Machines and Amusement
Games' production facility. Wall Machines and Amusement Games reported operating
income of $23.3 million, an increase of 207%, compared to $7.6 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.
ROUTE OPERATIONS
For the year ended June 30, 1997, the Route Operations business unit reported
total revenues of approximately $127.0 million, an increase of 16%, compared to
revenues of $110.0 million in the prior year. Revenues from Nevada route
operations increased approximately $15.0 million (16%) over the prior year. This
increase was attributable to an increase in the average net win per gaming
machine per day of 8% to $52.40 from $48.60 in the prior year and an increase in
the weighted average number of gaming machines during the current year of 7% to
5,660 units as compared to 5,290 units in the prior year. Gamblers' Bonus, a
cardless club and player tracking system launched in December 1995, had a
favorable impact on the net win per day. As of June 30, 1997, the Gamblers'
Bonus product was installed in approximately 1,500 gaming machines at 130
locations statewide. Revenues from route operations in Louisiana increased $2.0
million (12%) primarily as a result of an improvement in the net win per gaming
machine per day of 8% to $74.10 from $68.50 in the prior year and a 3% increase
in the average number of machines to 700 from 680 in the prior year.
For the year ended June 30, 1997, cost of revenues for Route Operations totaled
$95.7 million, an increase of $11.5 million (14%) compared to the prior year. As
a percentage of revenues, costs of revenues improved to 75.4% from 76.6% in the
prior year. Cost of revenues for Nevada route operations increased 14% as
compared to the prior year, but, as a percent of related revenues, improved to
77.3% from 79.0% in the prior year due primarily to higher revenues
38
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
while costs associated with new and renewed contracts remained relatively flat.
Costs of revenues for route operations in Louisiana increased 13% primarily as a
result of the increase in revenues. As a percent of related revenues, cost of
revenues for route operations in Louisiana increased to 64.2% from 63.3% in the
prior primarily due to a slight increase in the percentage of revenues paid to
the Fairgrounds Racetrack. Cost of route revenues for Route Operations includes
rents under both space lease and revenue sharing arrangements, gaming taxes and
direct labor, including related payroll taxes and benefits.
In the year ended June 30, 1996, Nevada route operations incurred unusual items
totaling $2.1 million. Reserves were increased by $1.4 million for certain parts
inventories which became obsolete and were subsequently disposed of due to the
impact of recent technological changes to gaming devices being deployed as a
result of the new Gambler's Bonus product. In addition an accrual of $0.7
million was established to reserve for the present value of the future lease
payments for one small casino location for which cash flows received under the
participation agreement are currently inadequate to service the building lease
paid by the Company.
For the fiscal year ended June 30, 1997, the Route Operations business unit
reported operating income of $13.1 million, an increase of 41% compared to
operating income of $9.3 million in the prior year. The operating income
improvement resulted from the aforementioned increase in revenues and the
improvement in operating costs as a percentage of revenues and the lack of
unusual items in the current year, partially offset by an increase in selling,
general, and administration expenses, primarily greater marketing costs at both
operations and an increased provision for doubtful receivables for the Nevada
route operations.
CASINO OPERATIONS
For the year ended June 30, 1997, the Casino Operations business unit reported
revenues of $51.5 million, an increase of 13%, compared to revenues of $45.4
million in the prior year excluding revenues from closed casinos and taverns as
described below. This increase is due to a 17% increase at the Rainbow Casino
and a 2% increase at the Rail City 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. Revenues during the
current year at the Rail City Casino were adversely impacted by severe weather
in the Reno area during the third quarter and an internal remodeling project,
which has now been completed.
For the year ended June 30, 1997, the cost of revenues for Casino Operations
increased 13% to $22.3 million compared to $19.8 million in the prior year
excluding cost of revenues from closed casinos and taverns. As a percentage of
revenues, the costs of revenues improved slightly to 43.3% compared to 43.6% in
the prior year. As a percent of related revenues, cost of revenues for the
Rainbow Casino increased to 37.1% from 36.4% in fiscal 1996 primarily due to
increased costs associated with taking over operations at the newly remodeled
restaurant . Cost of revenues for the Rail City, as a percent of related
revenues, improved to 64.1% from 64.7% in the prior year due primarily to higher
revenues while direct costs remained relatively stable. Cost of casino revenues
includes cost of goods sold, gaming taxes, rent and direct labor including
related taxes and benefits.
For the year ended June 30, 1997, the Casino Operations business unit reported
operating income, net of casino royalty, of $10.7 million, an increase of 14%,
compared to operating income of $9.4 million in the prior year. The operating
income improvement resulted from the aforementioned increase in revenues and
reduced operating costs as a percentage of revenues, partially offset by an
increase in selling, general and administrative costs, principally due to
increased marketing efforts at both locations. On August 12, 1997, the Company
purchased from Hospitality Franchise Systems the right to receive royalty
payments based on revenues of the Rainbow Casino. The Rainbow Casino royalty
fees incurred during the fiscal year ended June 30, 1997 totaled $4.7 million.
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 strategy. No revenues or
39
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
expenses were reported for these properties in the fiscal year ended June 30,
1997. For the fiscal year ended June 30, 1996, revenues for these properties are
included in Casino Operations revenues and totaled $3.1 million. The related
costs of revenues are included in cost of Casino Operations and totaled $2.3
million. The related selling, general and administrative expenses totaled $1.1
million.
CONSOLIDATED
The following discussion of the Company's consolidated results of operations for
the year ended June 30, 1997 is presented in comparison to the actual
consolidated results of operations for the prior year which include the results
of operations of the Gaming Equipment and Systems and Wall Machines and
Amusement Games business units for only the last twelve days of the year ended
June 30, 1996.
Total revenues for the year ended June 30, 1997 were approximately $445.1
million, an increase of $272.7 million (158%) over revenues of $172.4 in prior
year. This increase is primarily due to the incremental revenues of $252.7
million from Gaming Equipment and System sales and Wall Machines and Amusement
Games sales, as well as the aforementioned increases in revenues at both the
Route Operations and Casino Operations business units.
Cost of revenues for the year ended June 30, 1997 were approximately $270.9, an
increase of $155.4 million (135%) compared to $115.5 in prior year. This
increase is due to the incremental cost of revenues of $143.7 million and from
Gaming Equipment and System sales and Wall Machines and Amusement Games sales,
as well as the aforementioned increases in cost of revenues at both the Route
Operations and Casino Operations business units.
Selling, general and administrative expenses for the year ended June 30, 1997
were approximately $100.4 million, an increase of $69.8 million (228%) compared
to costs of $30.6 for the prior year. This increase is due to the impact of
including the Gaming Equipment and Systems and the Wall Machines and Amusement
Games business units expenses for the entire year and higher legal and
professional fees in the current year, partially offset by cost savings such as
elimination of certain duplicative costs.
Provision for doubtful receivables for the year ended June 30, 1997 was $9.1
million, an increase of $8.1 million from the prior year. The increase was due
primarily to the impact of including the provisions related to the Gaming
Equipment and Systems and the Wall Machines and Amusement Games business units
for the entire year, as well as the aforementioned increase in the provision at
the Route Operations. Depreciation and amortization for the fiscal year ended
June 30, 1997 was $22.6 million, an increase of 105% compared to depreciation
and amortization of $11.0 million in the prior fiscal year. This increase is due
to the inclusion of Gaming Equipment and Systems and Wall Machine and Amusement
Game depreciation and amortization in the entire fiscal year, higher
depreciation and amortization in the Route Operations business unit and the
impact of amortizing goodwill and other intangibles resulting from the BGII
acquisition.
During the year ended June 30, 1996, the Company expensed direct acquisition
costs related to the acquisition of BGII, totaling $55.8 million. Such costs
included the $30.1 million non-cash, accounting loss on the debenture conversion
portion of the financing for the acquisition, plus legal, accounting, financial
advisory, printer, SEC filing fees and other related expenses.
During the year ended June 30, 1997, the Company incurred $0.7 million in
unusual items related primarily to separation costs of Alliance personnel
subsequent to the BGII acquisition. During the year ended June 30, 1996, the
Company incurred $5.5 million in unusual items including a provision of $3.4
million to fully reserve the net book value of assets that the Company deemed
impaired and the aforementioned unusual items at its Route Operations business
unit of $2.1 million.
40
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
INTEREST INCOME AND EXPENSE AND INCOME TAXES
Net interest expense in the year ended June 30, 1997, increased to $22.0
million, an increase of 201% compared to the net interest expense of $7.3
million in the prior year. The increase is due primarily 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 acquisition.
The Company recorded an income tax provision of $8.0 million in the year ended
June 30, 1997, compared to a provision of $0.8 million in the prior year. The
current year provision is due primarily to income taxes at Wall Machines and
Amusement Games and domestic state income taxes. The effective tax rate is 58%,
which resulted from taxable income currently being generated in Germany, which
has a higher effective rate than in the U.S. At June 30, 1997, the Company has
net operating loss carry forwards for federal income tax purposes of
approximately $21.5 million which are available to offset future federal taxable
income, if any, expiring in the years 2007 through 2011. At June 30, 1997 the
Company has foreign tax credit carry forwards of approximately $11.8 million and
alternative minimum tax credit (AMT) carry forwards of approximately $1.5
million. Foreign tax credits are available to offset future taxes due in the
U.S. on future foreign taxable income and expire between 1998 and 2002 unless
utilized prior to such time. AMT credits are available to be carried forward
indefinitely and may be utilized against regular U.S. corporate tax to the
extent it does not exceed computed AMT calculations. In addition, the Company's
annual limitation with respect to net operating losses is limited pursuant to
Section 382 of the Internal Revenue Code.
1996 COMPARED WITH 1995
General
The following discussion of the results of operations includes only the
Company's two business units that existed prior to the acquisition of BGII on
June 18, 1996. See the "Consolidated" section below for the impact of the BGII
results for the 12 days prior to 1996 year-end.
ROUTE OPERATIONS
Total revenues from Route Operations for the year ended June 30, 1996 were
approximately $109.9 million, an increase of $3.1 million (2.9%) over the prior
year. Revenues from Nevada route operations increased approximately $1.8 million
(2.0%) over the prior year. This increase was attributable to an increase in the
average net win per gaming machine per day from $47.70 in the prior year to
$48.60 in the current year and an increase in the weighted average number of
gaming machines during the current year to 5,290 units as compared to 5,260
units in the prior year. During the year ended June 30, 1996 the Company
received regulatory approval for its Gambler's Bonus product, and began
installation into locations in Southern Nevada. The revenues at locations in
which the Gambler's Bonus product has not been installed experienced a slight
decrease in revenues in comparison to the prior year. Revenues from route
operations in Louisiana increased $1.3 million (8.4%) primarily as a result of
an expansion of operations from the opening of a new OTB parlor in October 1995.
In addition, Louisiana revenues increased as a result of an improvement in the
net win per gaming machine per day from $56.40 in the prior year to $68.50 in
the current year, which resulted from higher revenues earned on a lower average
number of machines. The average number of gaming machines in the Louisiana route
operations decreased from 720 for the prior year to 680 for the current year.
Cost of revenues for Route Operations for the year ended June 30, 1996 totaled
$84.2 million, an increase of $4.3 million (5.4%) over the prior year. Cost of
revenues for Nevada route operations increased $3.5 million (5.4%) as compared
to the prior year and increased slightly as a percent of related revenues due
primarily to increased costs associated with new and renewed contracts. Costs of
revenues for route operations in Louisiana increased $0.8 million (7.6%)
primarily as a result of the increase in revenues. As a percent of related
revenues, cost of revenues for Route
41
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Operations in Louisiana remained relatively constant, at approximately 63.8%.
Cost of route revenues for Route Operations includes rents under both space
lease and revenue sharing arrangements, gaming taxes and direct labor, including
related payroll taxes and benefits.
In the year ended June 30,1996, Nevada route operations incurred unusual items
totaling $2.1 million. Reserves were increased by $1.4 million for certain parts
inventories which became obsolete and were subsequently disposed of due to the
impact of recent technological changes to gaming devices being deployed as a
result of the new Gambler's Bonus product. In addition an accrual of $0.7
million was established to reserve for the present value of the future lease
payments for one small casino location for which cash flows received under the
participation agreement are currently inadequate to service the building lease
paid by the Company.
For the year ended June 30, 1996, the Route Operations business unit reported
operating income of $13.1 million, an increase of 7% compared to operating
income of $12.2 million in the prior year. The operating income improvement
resulted from the aforementioned increase in revenues partially offset by a
slight increase in operating costs as a percentage of revenues. Selling, general
and administrative expenses related to Route Operations for the current year
remained relatively flat from the prior year.
CASINO OPERATIONS
Revenues from Casino Operations for the year ended June 30, 1996 were
approximately $45.4 million (excluding revenues of closed casinos and taverns as
discussed below), an increase of $27.1 million or 149.3% from the prior year.
This increase is due primarily to the impact of the Rainbow Casino in Vicksburg,
Mississippi. Due to a change in Rainbow Casino's ownership structure on March
29, 1995, the Company began consolidating the results of the Rainbow Casino and
thus the prior year included only three months of the Rainbow Casino results of
operations. The current year results reflect twelve months of Rainbow Casino
operations plus the impact of having all of the amenities of the facility in
operation for the full year. Rainbow Casino revenues were $33.9 million for the
current year compared to $7.6 million in the prior year. During the
approximately nine-month period ended March 29, 1995, the Company recorded
royalty income from the Rainbow Casino of $0.9 million, and such royalty was
terminated upon the change in ownership referred to above. Revenues from the
Rail City Casino were relatively flat at $11.5 million, resulting from lower
patronage during the first six months of the current year during which there was
significant road construction near the property offset by increased revenues
from improved casino ambiance after the completion of an internal remodeling
project and a successful series of marketing campaigns to attract local patrons
back to the casino after completion of the nearby road construction.
The cost of revenues for Casino Operations for the year ended June 30, 1996,
including costs of food and beverage revenues, were approximately $19.8 million,
an increase of $9.6 million or 94.6% compared to the prior year. The increase is
primarily due to the aforementioned impact of the Rainbow Casino operations. The
cost of revenues at the Rail City Casino were relatively flat at $7.4 million.
Cost of casino revenues includes cost of goods sold, gaming taxes, rent and
direct labor, including related taxes and benefits.
For the year ended June 30, 1996, the Casino Operations business unit reported
operating income, net of casino royalty, of $9.4 million, an increase of 261%,
compared to operating income of $2.6 million in the prior year. The operating
income improvement resulted from the aforementioned impact of the Rainbow Casino
operations, partially offset by higher selling, general and administrative costs
at the Rail City Casino primarily for the marketing campaigns to attract local
patrons back to the casino after completion of the nearby road construction. The
Rainbow Casino royalty fees incurred during the year ended June 30, 1996 totaled
$4.1 million.
REVENUES AND EXPENSES FOR CLOSED CASINOS AND TAVERNS
During the years ended June 30, 1995 and 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 strategy. Revenues
for these properties are included in casino revenues and totaled $6.1 million
and $3.1 million for the years ended June 30, 1995 and 1996, respectively and
the related costs of revenues are included in casino cost of revenues
42
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
and totaled $4.1 million and $2.3 million for such periods, respectively. The
related selling, general and administrative expenses totaled $1.8 million and
$1.1 million for the years ended June 30, 1995 and 1996, respectively.
CONSOLIDATED
Total revenues for the year ended June 30, 1996 were approximately $172.4
million, an increase of $40.4 million (30.6%) over fiscal year 1995. This
increase is due to Gaming Equipment and Systems and Wall Machines and Amusement
Games revenues of $13.9 million during the post-acquisition period as well as
the aforementioned increases in revenues at both the Route Operations and Casino
Operations business units.
Cost of revenues for the year ended June 30, 1996 increased to $115.5 million
(22.7%) over the prior year due to Gaming Equipment and Systems and Wall
Machines and Amusement Games cost of revenues of $9.2 million during the
post-acquisition period as well as the aforementioned increases in cost of
revenues at both the Route Operations and Casino Operations business units. The
total cost of revenues as a percentage of total revenues, including those of
Gaming Equipment and Systems and Wall Machines and Amusement Games in the
post-acquisition period improved by 4.1% compared to the prior year.
Selling, general and administrative expenses for the year ended June 30, 1996
were approximately $30.6 million, an increase of $2.4 million (8.5%) from the
prior year. After excluding the prior year unusual item of compensation expense
of $1.3 million, the increase was primarily due to Gaming Equipment and Systems
and Wall Machines and Amusement Games selling, general and administrative
expenses of $2.0 million during the post-acquisition period as well as the
aforementioned increases at the Casino Operations business unit.
Provision for doubtful receivables for the year ended June 30, 1996 increased
$0.6 million from the prior year. The increase was due primarily to a $0.4
million provision for specifically identified bad debt accounts in the Company's
Route Operations business unit and the impact of including Gaming Equipment and
Systems and the Wall Machines and Amusement Games business units provisions in
the post-acquisition period of $0.2 million.
During the years ended June 30, 1995 and 1996, the Company expensed direct
acquisition costs of $1.7 million and $55.8 million, respectively. Such costs
for the 1996 year include the $30.1 million non-cash, accounting loss on the
debenture conversion portion of the financing for the BGII acquisition, plus
legal, accounting, financial advisory, printer, SEC filing fees and other
related expenses.
During the year ended June 30, 1996, the Company incurred $5.5 million in
unusual items, including a provision of $3.4 million to fully reserve the net
book value of assets that the Company deemed impaired and the aforementioned
unusual items at its Route Operations business unit of $2.1 million.
INTEREST INCOME AND EXPENSE AND INCOME TAXES
In the year ended June 30, 1996, interest income decreased $1.2 million from the
prior year to $1.6 million, resulting from a decline in the level of cash
invested during the 1996 year. In the 1996 year, interest expense increased $0.8
million from the prior year to $8.9 million. This increase was a result of the
aforementioned impact of consolidating the Rainbow Casino results of operations
for the full twelve months in the 1996 year, plus additional borrowings at the
Rainbow Casino to complete the facility, and, to a lesser extent, the interest
expense associated with the Senior Secured Notes, offset by the reduction in
interest associated with the $83.4 million of the convertible debentures which
converted into equity instruments.
The provision for income taxes in the year ended June 30, 1996 year increased
$0.5 million from the prior year to $0.8 million. This increase was a result of
a provision for alternative minimum tax due to the taxable nature of the
conversion of the Company's old convertible debentures for new convertible
debentures in the exchange offer, increased state income taxes in Louisiana and
the tax effects related to the accounting for unrealized gains and losses on the
BGII stock classified for accounting purposes as available for sale prior to
consummation of the BGII acquisition.
43
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
RISK FACTORS
This Annual Report on Form 10-K and the Company's other filings with the
Securities and Exchange Commission may contain forward-looking statements. Set
forth below are certain important factors that could cause actual results to
differ materially from those in such statements.
HIGH LEVERAGE; ABILITY TO SERVICE DEBT
After the completion of the Refinancing, the Company has a substantially
increased amount of indebtedness. As of June 30, 1997, after giving effect to
the Refinancing, the aggregate outstanding principal amount of the Company's
long-term indebtedness including current maturities would have been $302.6
million, versus long-term indebtedness including current maturities prior to the
Refinancing of $173.8 million. Following the Refinancing, the Company also has
available to it up to $90.0 million in borrowing capacity under the Revolving
Credit Facility, of which $14.5 million was used to repay outstanding
indebtedness under existing credit lines. On a pro forma basis after giving
effect to the Refinancing (assuming the Refinancing occurred June 30, 1996) and
the use of proceeds thereof, the Company's ratio of earnings to fixed charges
(excluding the imputed fixed charges for contingent rental expense related to
revenue-sharing agreements in its Route Operations of approximately $23.0
million annually) would have been 1.4x for the year ended June 30, 1997. On a
pro forma basis, the Company would have had a net capital deficiency at June 30,
1997 of $24.9 million, reflecting a reduction in paid-in capital of $16.4
million for the difference between liquidation value and book value for the
Series B Preferred Stock and a larger accumulated deficit resulting from the
$19.0 million Rainbow Royalty Buyout, the premium on the redemption of the 12
7/8% Notes, write-off of the deferred financing costs and initial discount
related to the 12 7/8% Notes and a portion of the fees and expenses of the
Refinancing.
The new credit facility and the indenture contain a number of significant
covenants that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, enter into
certain acquisitions, repurchase equity interests (as defined) or subordinated
indebtedness, issue or sell equity interests of the Company's subsidiaries (as
defined), engage in mergers or consolidations, or engage in certain transactions
with subsidiaries and affiliates and otherwise restrict corporate activities.
There can be no assurance that such restrictions will not adversely affect the
Company's ability to finance its future operations or capital needs or engage in
other business activities that may be in the interest of the Company. In
addition, the new credit facility also requires the Company to maintain
compliance with certain financial ratios. The ability of the Company to comply
with such ratios may be affected by events beyond the Company's control. A
breach of any of these covenants or the inability of the Company to comply with
the required financial ratios could result in a default under the new credit
facility. In the event of any such default, the lenders under the new credit
facility could elect to declare all borrowings outstanding under the new credit
facility, together with accrued interest and other fees, to be due and payable,
to require the Company to apply all of its available cash to repay such
borrowings or to prevent the Company from making debt service payments on the
Senior Subordinated Notes, any of which would be an event of default under the
Senior Subordinated Notes. If the Company were unable to repay any such
borrowings when due, the lenders could proceed against their collateral. If the
indebtedness under the new credit facility or the Notes were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay such indebtedness in full.
The Company's obligations to make principal and interest payments on outstanding
indebtedness, and to comply with the covenants in the Indenture and the
agreements governing borrowings under the new credit facility, will have several
important effects on its future operations including the following: (i) the
portion of the Company's cash flow from operations which will be dedicated to
the payment of principal and interest on its indebtedness will not be available
for other purposes; (ii) certain of the Company's borrowings are at variable
rates of interest, which could result in higher expense in the event of
increases in interest rates; (iii) the Company may be more vulnerable to
downturns in its business or in the general economy and may be restricted from
making acquisitions, introducing
44
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
new technologies or exploiting business opportunities; and (iv) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, general corporate or other purposes may be impaired.
Additionally, the Company's ability to meet its debt service obligations and to
reduce its total debt will be dependent upon the Company's future performance,
which will be subject to general economic and regulatory conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control.
No assurance can be given that the Company will be able to generate the cash
flow necessary to permit the Company to meet its fixed charges and repayment
obligations. Any inability of the Company to service its fixed charges and
repayment obligations would have a significant adverse effect on the Company.
OPERATING HISTORY--RECENT LOSSES
The Company incurred net losses of $10.8 million and $59.9 million (including
$55.8 million of costs related to the BGII acquisition) for its fiscal years
ended June 30, 1995 and 1996, respectively, and net income of $5.8 million for
the fiscal year ended June 30, 1997. In conjunction with the Refinancing, the
Company incurred fees, expenses and charges totaling approximately $78.4
million, including the premium on the repurchase of the 12 7/8% notes of $27.7
million and $16.4 million for the difference between the carrying value and the
liquidation value of the Series B Preferred Stock, which will be recorded in the
quarter ended September 30, 1997. There can be no assurance that the Company
will be profitable, and that there will not be similar or other unusual or
non-recurring charges, in the future.
COMPETITION
Gaming Equipment and Systems. The market for gaming machines is extremely
competitive, and there are a number of established, well-financed and well-known
companies producing machines that compete with each of Gaming's product lines in
each of Gaming's markets. The domestic market for gaming machines is dominated
by a single competitor, International Game Technology ("IGT"), with a number of
smaller competitors in the field. In addition, certain technology-oriented
companies have recently entered or may enter the gaming machine market.
Management believes that some of these competitors have greater capital
resources than the Company. Competition among gaming machine manufacturers,
particularly with respect to sales of gaming machines into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player and quality of the product, and having an extensive distribution and
sales network. Sales to established casinos in Nevada normally require
completion of a successful trial period for the machines in the casino.
The competition for the computerized monitoring systems designed and sold by
Systems currently consists of IGT, Casino Data Systems and, to a lesser extent,
Acres Gaming, Inc., Gaming Systems International, Inc. and Mikohn Gaming
Corporation. Competition is keen in this market due to the number of providers
and the limited number of casinos and the jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its system. Systems
believes the future success of its operations will be determined by its ability
to bring new and innovative products to the marketplace while at the same time
maintaining the base of loyal existing customers.
Wall Machines and Amusements Games. Germany's wall machine manufacturing
industry is dominated by Bally Wulff and two of its competitors. Management
believes these three entities collectively account for more than 90% of the
entire market for wall machines (which exists almost exclusively in Germany).
Bally Wulff's two major competitors have greater resources than the Company and
own and operate a significant number of arcades, which gives them a competitive
advantage arising from a built-in market for their games and the ability to test
market new games in their own arcades. In addition, wall machines compete for
floor space in arcades with token machines, which are not subject to the strict
German licensing requirements governing wall machines.
45
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Route Operations. The competition for obtaining and renewing route contracts in
Nevada is high and continues to intensify. Such competition has, over time,
reduced the Company's gross profit margins for such operations. In addition,
such competition has required the Company to provide financial incentives to
retain or obtain certain route locations. Such incentives include long-term
lease commitments, guarantees of leases in favor of owners of local
establishments, substantial advance deposits, payments of lease rentals in
advance and loans for buildings and tenant-improvement costs. Although the
Company believes that it now has adequate procedures for evaluating and managing
such risks, historically substantial losses have been incurred in connection
with such transactions reflecting, in part, former management's willingness to
accept higher levels of risk to further its policy of emphasizing market share.
Notwithstanding the change in the Company's business strategy to one emphasizing
profitability rather than market share, the future success of the Company's
Route Operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although the Company has
historically generated sufficient new route contracts to offset the loss of old
route contracts, due to increased competition, the increased sophistication and
bargaining power of customers and possibly other factors not yet known, there
can be no assurance that the Company will be able to obtain new route contracts
or renew or extend its route contracts upon their expiration or termination, or
that, if renewed or extended, the terms will be favorable to the Company. In
Louisiana, the Company's Route Operations at the racetrack and OTBs compete with
various truck stops and locations with liquor licenses throughout the New
Orleans area, as well as riverboat gaming and one land-based casino which may
re-open in New Orleans.
Casino Operations. The operation of casinos is also a highly competitive
business. The principal competitive factors in the industry include the quality
and location of the facility, the nature and quality of the amenities and
customer services offered and the implementation and success of marketing
programs. In Sparks, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market. The Company's
Rainbow Casino in Vicksburg, Mississippi faces intense direct competition from
other gaming facilities serving this market. Competition from casinos in nearby
locations may also be reducing the market area from which Vicksburg casinos draw
most of their patrons. Moreover, additional potential gaming sites remain in and
around Vicksburg and Sparks; some of these sites may be closer to larger
population centers and, if developed, might enjoy a competitive advantage over
the Company's casinos.
PRODUCT DEVELOPMENT
The future success of the Company depends to a large extent upon its ability to
design, manufacture and market technologically sophisticated products that
achieve high levels of player acceptance. The development of a successful new
product or product design by a competitor could adversely affect sales of the
Company's products and force it to respond quickly with its own competing
products. The Company's plans with respect to the introduction of more
sophisticated technology into the electronic gaming machine market are designed
to lead to an increase in market share and profitability for the Company.
However, there is no assurance that any such products will be developed, or that
if developed they will receive necessary regulatory approvals or be commercially
successful.
SALES TO NON-TRADITIONAL GAMING MARKETS
The continued growth of the non-traditional markets outside of Nevada and
Atlantic City for electronic gaming machines is contingent upon the public's
acceptance of these markets and an ongoing regulatory approval process by
Federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the
Company's participation in any such markets or that jurisdictions currently
permitting gaming will continue to do so in the future.
FOREIGN OPERATIONS
46
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
The Company's business in foreign markets is subject to the risks customarily
associated with such activities. These risks include fluctuations in foreign
currency exchange rates and controls, expropriation, nationalization and other
economic, tax and regulatory policies of local governments as well as the laws
and policies of the United States affecting foreign trade and investment. The
Company does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations. In addition, the proposed
conversion of currency in Germany from the Deutschemark to the Euro will require
the Company to redesign new and, possibly, existing Bally Wulff wall machines
and gaming devices to accept such new currencies, the financial impact of which
is uncertain.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon the
continued services of a relatively small group of executive personnel. The loss
or unavailability of one or more of such executive officers or the inability to
attract or retain key employees in the future could have an adverse effect upon
the Company's operations. In December 1996, the Company's President and Chief
Executive Officer stepped down as the Company's strategic direction changed
after the BGII acquisition. In June, 1997, the Company named Morris Goldstein as
its President and Chief Executive Officer.
STRICT REGULATION BY GAMING AUTHORITIES
The manufacture and distribution of gaming machines and the conduct of gaming
operations is subject to extensive Federal, state, local and foreign regulation
by various gaming authorities (each, a "Gaming Authority"). Although the laws
and regulations of the various jurisdictions in which the Company operates vary
in their technical requirements and are subject to amendment from time to time,
virtually all these jurisdictions require licenses, permits, documentation of
the qualification, including evidence of integrity and financial stability, and
other forms of approval for companies engaged in gaming operations and the
manufacture and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such companies. The Company
and its key personnel have obtained, or applied for, all government licenses,
registrations, findings of suitability, permits and approvals necessary for the
manufacture and distribution, and operation where permitted, of its gaming
machines in the jurisdictions in which it currently does business. However,
there can be no assurance that such licenses, registrations, findings of
suitability, permits or approvals will be given or renewed in the future or that
the Company will obtain the licenses necessary to operate in emerging markets.
Gaming was previously licensed by the New Jersey Commission as a gaming-related
casino service industry, which is required by the New Jersey Casino Control Act
in order for the Company to sell gaming devices and systems in New Jersey. Due
to the change of ownership of Gaming as a result of the BGII acquisition,
Gaming's New Jersey license was invalidated. Prior to the change of ownership of
Gaming and in anticipation of same, the Company submitted an application for
casino service industry licensure. The New Jersey Commission deemed the
application complete and, as a result, since the BGII acquisition the Company's
operations in New Jersey have continued uninterrupted pursuant to transactional
waivers which have been granted by the New Jersey Commission on a six-month
blanket basis for parts and service and on a sale-by-sale basis for all other
products pending final action on the Company's license application.
The Company's business is dependent on regulatory requirements. For example,
recurring demand exists for Bally Wulff's products because German regulations
limit the permissible use of wall machines to a period of four years. A change
in applicable regulations could adversely affect the market for the Company's
products and services.
The Company currently has an agreement with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation to be the exclusive
operator of video poker machines at the only racetrack and ten associated OTBs
in the greater New Orleans area. On November 5, 1996 voters in Louisiana
approved a proposition to allow video poker to continue in six of the seven
parishes in which the Company operates off-track betting locations in the
greater New Orleans area. In addition, voters approved video poker in three
parishes in the
47
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
greater New Orleans area where the Company currently does not operate. 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.
For the nine months ended March 31, 1997, the two off-track betting locations in
this parish accounted for $1.7 million of revenues and approximately 11% of
operating income of the Company's Route Operations in Louisiana or approximately
1% of the Company's operating income. These operations also depend on the
financial viability of the racetrack, which is beyond the control of the
Company. See "Business--Gaming Regulations and Licensing".
GAMING TAXES AND VALUE ADDED TAXES
Gaming operators are typically subject to significant taxes and fees in addition
to corporate income taxes, and such taxes and fees are subject to increase at
any time. Any material increase in these taxes or fees, which could occur
prospectively or retroactively, would adversely affect the Company. Sales of
Bally Wulff's products in Germany are generally subject to value added taxes
("V.A.T."). The operations of Bally Wulff had benefitted from a special tax
rebate that was phased out from January 1, 1992 to January 1, 1994. During 1995,
Bally Wulff increased the amount of V.A.T. reserves by $1.0 million as a result
of developments to date in an ongoing quadrennial audit of Bally Wulff's tax
returns for the years 1988 through 1991. The German tax authorities have
proposed preliminary adjustments which range from approximately $1.4 million
(which has been accrued) to approximately $5.0 million. The German Federal
Constitutional Court recently let stand a regulation that permits local
municipalities to impose additional taxes on gaming machine operators. In the
past, the imposition of such taxes by certain municipalities has adversely
affected Bally Wulff's sales. There can be no assurance that municipalities will
not impose new taxes or raise existing taxes in the future.
The Company pays and expects to continue to pay substantial taxes and fees in
Nevada, Louisiana and Mississippi and expects to pay substantial taxes and fees
in any other jurisdiction in which it conducts gaming operations. There can be
no assurance as to future increases in taxation on gaming operations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined), each holder of the
Senior Subordinated Notes may require the Company to repurchase the Senior
Subordinated Notes held by such holder at 101% of the principal amount thereof,
plus accrued interest to the date of repurchase. The new credit facility
prohibits the Company from purchasing any Senior Subordinated Notes, and
provides that the occurrence of certain change of control events with respect to
the Company would constitute a default thereunder. In the event of a change of
control, the Company must offer to repay all borrowings under the new credit
facility or obtain the consent of its lenders under the credit agreement to the
purchase of Senior Subordinated Notes. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing Senior Subordinated Notes. In such case, the Company's failure to
repurchase tendered Senior Subordinated Notes would constitute a default under
the indenture, which, in turn, would constitute a default under the new credit
facility. There can be no assurance that the Company will have the financial
ability to purchase the Senior Subordinated Notes upon the occurrence of a
change of control. There can be no assurance that the Company will be able to
comply with all of its obligations under the new credit facility, the indenture,
and its other indebtedness upon the occurrence of a change of control.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, including the notes thereto,
and supplementary financial information are listed in Part IV, Item 14, of this
Report and included after the signature page beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
48
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.
49
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
[Download Table]
(a) Documents filed as part of this report: PAGE
----
1. Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1996 and 1997 F-2
Consolidated Statements of Operations for the Years Ended
June 30, 1995, 1996 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6
2. Consolidated Supplemental Schedules:
Not applicable.
3. Exhibits:
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and
BGII, dated as of October 18, 1995, as amended and restated
(incorporated herein by reference to Annex I to the prospectus included
in Alliance's Form S-4, Registration Number 333-02799 ).
2.2 Basic Agreement, dated as of October 29, 1993, among United Gaming,
Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh
Seippel, and exhibits thereto (incorporated herein by reference to
Alliance's Form 8-K dated October 29, 1993).
2.4 Consolidation Agreement, dated March 29, 1995 among United Gaming
Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation,
Rainbow Development Corporation and Leigh Seippel and John A. Barrett,
Jr. (incorporated herein by reference to Alliance's Form 8-K dated
March 29, 1995).
3.1 Restated Articles of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3.1 to Alliance's Form
S-2, Registration Number 33-72990).
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ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.2 Revised By-Laws of the Registrant (incorporated herein by reference to
Alliance's Form 10-K for the year ended June 30, 1994.)
3.4 Certificate of Designations, Preferences, and Relative, Participating,
Optional and Other Special Rights of Special Stock and Qualifications,
Limitations and Restrictions of 11 1/2% Non-Voting, Pay-in-Kind Special
Stock, Series E (incorporated herein by reference to Exhibit 9(c)(5) to
Amendment No. 1 to Alliance's Schedule E-4 dated May 9, 1996).
4.1 Form of Indenture among the Company, certain Guarantors referred to
therein and United States Trust Company of New York, as Trustee, in
respect of Alliance's 10% Senior Subordinated Notes due 2007 (including
form of Senior Subordinated Note and Guarantee).
The Registrant agrees to furnish to the Commission upon request copies
of agreements with respect to its other long-term debt.
4.3 Credit Agreement among Alliance Gaming Corporation, Bally Wulff
Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and
Credit Suisse First Boston, dated August 8, 1997.
10.1 Loan and Warrant Agreement dated March 24, 1993 between United Gaming,
Inc., Video Services, Inc. and Alfred H. Wilms (incorporated herein by
reference to Alliance's Form 8-K dated March 31, 1992).
10.4 Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated
herein by reference to Alliance Form S-8 filed August 12, 1997).*
10.5 Letter of Agreement dated June 25, 1993 among United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment
Corporation and as to certain provisions, Alfred H. Wilms, including
Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of
Stockholders Agreement), Exhibit C (Form of Certificate of Designations
of Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of
Warrant Agreement), and Exhibit E (Form of press release) thereto
(incorporated herein by reference to Alliance's Form 8-K dated June 25,
1993).
10.6 Advisory Agreement, dated June 25, 1993 among United Gaming, Inc.,
Gaming Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred
H. Wilms, including Exhibit A (Form of Warrant Agreement) and Exhibit B
(Form of press release) thereto (incorporated herein by reference to
Alliance's Form 8-K dated June 25, 1993).
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ALLIANCE GAMING CORPORATION
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YEAR ENDED JUNE 30, 1997
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.7 United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan
(incorporated herein by reference to Alliance's Form S-8 Registration
Number 33-45811 and Registration Number 33-75308).*
10.8 Gaming and Technology, Inc. 1984 Employee Stock Option Plan
(incorporated herein by reference to Alliance's Form S-8 Registration
Number 2-98777).*
10.9 Agreement, dated as of September 14, 1993, by and among United Gaming,
Inc., Kirkland-Ft. Worth Investments Partners, L.P., Kirkland
Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H.
Wilms (incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.10 Warrant Agreement, dated as of September 21, 1993, by and between
United Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P.
relating to warrants to purchase 2.75 million shares of Common Stock
(incorporated herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.11 Warrant Agreement, dated as of September 21, 1993, by and between
United Gaming, Inc. and Gaming Systems Advisors, L.P. relating to
warrants to purchase 1.25 million shares of Common Stock (incorporated
herein by reference to Alliance's Form 8-K dated September 21, 1993).
10.12 Stockholders Agreement, dated as of September 21, 1993, by and among
United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., and
Alfred H. Wilms (incorporated herein by reference to Alliance's Form
8-K dated September 21, 1993).
10.13 Amendment to Stockholders Agreement dated as of October 20, 1994
(incorporated herein by reference to Alliance's Form S-8 Registration
Number 33-45811 and Registration Number 33-75308).
10.14 Selling Stockholder Letter Agreement dated as of March 20, 1995
(incorporated herein by reference to Alliance's Form S-3 Registration
Number 33-58233).
10.15 Securities Purchase Agreement, dated as of September 21, 1993, by and
among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P.
and Kirkland Investment Corporation (incorporated herein by reference
to Alliance's Form 8-K dated September 21, 1993).
10.19 Management Agreement, dated as of October 29, 1993, among Rainbow
Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation and
Mississippi Ventures, Inc., as manager (incorporated herein by
reference to Alliance's Form 8-K dated October 29, 1993).
10.22 Warrant Agreement, dated as of August 2, 1993, between United Gaming,
Inc. and Alfred H. Wilms (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990).
10.27 Letter Agreement, dated as of February 25, 1994, among United Gaming,
Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh
Seippel (incorporated herein by reference to Alliance's Form 8-K dated
March 15, 1994).
10.28 Letter Agreement, dated as of June 29,1994, among United Gaming, Inc.,
The Rainbow Casino
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FORM 10-K
YEAR ENDED JUNE 30, 1997
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by
HFS Gaming Corporation (incorporated herein by reference to Alliance's
Form 8-K dated August 11, 1994).
10.29 Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc.,
The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel,
consented to by HFS Gaming Corporation (incorporated herein by
reference to Alliance's Form 8-K dated August 11, 1994).
10.30 Second Amendment to Casino Financing Agreement, dated as of August 11,
1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow
Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation,
John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation
(incorporated herein by reference to Alliance's Form 8-K dated August
11, 1994).
10.31 Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P.,
dated as of July 8, 1994 (incorporated herein by reference to
Alliance's Form 8-K dated August 11, 1994).
10.32 Second Amended and Restated Agreement of Limited Partnership, dated
March 29,1995, between United Gaming Rainbow and RCC (incorporated
herein by reference to Alliance's Form 8-K dated March 29, 1995).
10.33 Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow,
Inc. to The Rainbow Casino Corporation (incorporated herein by
reference to Alliance's Form 8-K dated August 11, 1994).
10.34 Pledge Agreement, dated as of July 16, 1994, from United Gaming
Rainbow, Inc. to The Rainbow Casino Corporation (incorporated herein by
reference to Alliance's Form 8-K dated August 11, 1994).
10.36 Escrow Agreement, dated as of August 11, 1994, among United Gaming
Rainbow, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr.,
Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada, together
with Agreement dated February 7, 1995, as amended July 11, 1994 between
Rainbow Casino-Vicksburg Partnership, L.P. and the City of Vicksburg,
Mississippi (incorporated herein by reference to Alliance's Form 8-K
dated August 11, 1994).
10.42 Agreement, dated March 20, 1995, between Alliance and Joel Kirschbaum
(incorporated herein by reference to Alliance's Form S-3 Registration
Number 33-58233).*
10.43 Letter Agreement, dated March 29, 1995, among United Gaming Rainbow,
RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara,
Stevens & Cannada (incorporated herein by reference to Alliance's Form
8-K dated March 29, 1995).
10.44 Class A Note Payable, dated March 29, 1995, issued by RCVP to United
Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
10.45 Class B Note Payable, dated March 29, 1995, issued by RCVP to United
Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
10.46 Class B Note Payable, dated March 29, 1995, issued by RCVP to National
Gaming Mississippi, Inc. (incorporated herein by reference to
Alliance's Form 8-K dated March 29, 1995).
53
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.49 Agreement, dated March 31, 1995 between Anthony DiCesare and Alliance
Gaming Corporation (incorporated by reference to exhibit 10.54 to Form
S-2 registration statement, registration Number 333-02147).*
10.50 Trademark License Agreement, dated November 11, 1991 between Bally
Manufacturing Corporation and Bally Gaming International, Inc.
(incorporated herein by reference to exhibit 10(i)(d) included in
BGII's Annual Report on Form 10-K for the fiscal year ended December
31, 1991).
10.51 Amended and Restated Trademark License Agreement, dated July 8, 1992,
by and between Bally Gaming International, Inc. and Bally Manufacturing
Corporation (incorporated herein by reference to exhibit 10(i)(d)
included in BGII's Registration Statement on Form S-1 No. 33-48347
filed on July 9, 1992).
10.53 Second Amendment to Trademark License Agreement and Settlement
Agreement, dated March 31, 1995, by and between Bally Entertainment
Corporation and Bally Gaming International, Inc. (incorporated herein
by reference to Exhibit I, included in BGII's Current Report on Form
8-K dated April 3, 1995).
10.54 Third Amendment to Trademark License Agreement and Settlement
Agreement, dated May 10, 1996, by and between Bally Entertainment
Corporation, Alliance Gaming Corporation and BGII Acquisition Corp.
(incorporated by reference to exhibit 10.77 to S-2 Registration
Statement No. 333-02147).
10.55 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated
herein by reference to exhibit 10(iii)(a) included in BGII's
Registration Statement No. 33-42227 on Form S-1, effective November 8,
1991).*
10.56 Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming
International, Inc. effective February 6, 1993 (incorporated herein by
reference to exhibit 10(iii)(b) included in BGII's Registration
Statement No. 33-42227 on Form S-1 effective November 1, 1991).*
10.57 Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International,
Inc. (incorporated herein by reference to exhibit 99(e) included in
BGII's Registration Statement No. 33-71154 on Form S-3 filed on
November 1, 1993).*
10.58 Amendment No 3 to 1991 Incentive Plan of Bally Gaming International,
Inc. (incorporated by reference to Annex III of S-4 registration
statement No. 333-01527).*
10.59 1991 Non-Employee Directors' Option Plan of Bally Gaming International,
Inc. (incorporated herein by reference to exhibit 10(iii)(f) included
in BGII's Annual Report on Form 10-K for the fiscal year ended December
31, 1991).*
10.60 Amendment No. 1 to the 1991 Non-Employee Directors' Option Plan of
Bally Gaming International, Inc. (incorporated herein by reference to
exhibit 10(iii)(g) included in BGII's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991).*
10.61 Amendment No. 2 to the 1991 Non-Employee Directors' Option Plan of
Bally Gaming International, Inc. (incorporated by reference to S-4
registration statement No. 333-01527).*
54
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.62 Amendment No. 3 to the 1991 Non-Employee Directors' Option Plan of
Bally Gaming International, Inc. (incorporated by reference to Annex IV
of S-4 registration statement No. 333-01527).*
10.64 Bally Gaming International, Inc. 1994 Stock Option Plan for
Non-employee Directors, as amended (incorporated herein by reference to
exhibit 10(iii)(k) included in BGII's Annual Report on Form 10-K for
the period ended December 31, 1994.)
10.65 Employment Agreements, as amended, between Hans Kloss and each of Bally
Wulff Automaten GmbH and Bally Wulff Vertriebs GmbH (incorporated
herein by reference to exhibit 10(iii)(b) included in BGII's
Registration Statement No. 33-42227 on Form S-1, effective November 3,
1991).*
10.66 Third Amendments, dated June 2, 1993, to Employment Agreements between
Hans Kloss and each of Bally Wulff Automaten GmbH and Bally Wulff
Vertriebs GmbH (incorporated herein by reference to exhibit 99(c)
included in BGII's Registration Statement No. 33-71154 on Form S-3
filed on November 1, 1993).*
10.70 Separation Agreement, dated as of November 5, 1996 between the Company
and Steve Greathouse.*
10.71 Employment Agreement, dated as of March 31, 1995, between the Company
and David D. Johnson (incorporated by reference to the Company
quarterly report on Form 10-Q for March 31, 1997).*
10.72 Employment Agreement Supplement, dated as of August 29, 1996, between
the Company and Joel Kirschbaum (incorporated by reference to the
Company quarterly report on Form 10-Q for March 31, 1997).*
10.73 Employment Agreement Supplement, dated as of August 29, 1996, between
the Company and Anthony DiCesare (incorporated by reference to the
Company quarterly report on Form 10-Q for March 31, 1997).*
10.74 Employment Agreement, dated as of June 24, 1996, between the Company
and Scott D. Schweinfurth (incorporated by reference to the Company
quarterly report on Form 10-Q for March 31, 1997).*
10.75 Employment Agreement, dated as of June 17, 1997 between the Company and
Morris Goldstein .*
10.76 Employment Agreement, dated July 1, 1997 between the Company and Joel
Kirschbaum.*
10.77 Employment Agreement, dated July 1, 1997 between the Company and
Anthony DiCesare .*
10.78 Agreement, between the Company and Kirkland Investment Corporation
dated July 1, 1997 .
10.79 Amendment Number 1 to the agreement between the Company and Kirkland
Investment Corporation dated July 1, 1997 .
21 Subsidiaries of the Registrant.
55
ALLIANCE GAMING CORPORATION
FORM 10-K
YEAR ENDED JUNE 30, 1997
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months ended June
30, 1997.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIANCE GAMING CORPORATION DATED: September 24, 1997
By /s/ MORRIS GOLDSTEIN
-------------------------------------
Morris Goldstein,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
[Enlarge/Download Table]
Name Title Date
---- ----- ----
/s/ MORRIS GOLDSTEIN President and Chief Executive Officer September 24, 1997
-------------------- (Principal Executive Officer)
Morris Goldstein
/s/ SCOTT D. SCHWEINFURTH Sr. Vice President, Treasurer and Chief September 24, 1997
------------------------- Financial Officer (Principal Financial and
Scott D. Schweinfurth Accounting Officer)
/s/ JACQUES ANDRE Director September 24, 1997
-------------------
Jacques Andre
/s/ ANTHONY DICESARE Director September 24, 1997
--------------------
Anthony DiCesare
/s/ MICHAEL HIRSCHFELD Director September 24, 1997
----------------------
Michael Hirschfeld
/s/ JOEL KIRSCHBAUM Director September 24, 1997
--------------------
Joel Kirschbaum
/s/ ALFRED H. WILMS Director September 24, 1997
-------------------
Alfred H. Wilms
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Alliance Gaming Corporation:
We have audited the accompanying consolidated balance sheets of Alliance Gaming
Corporation and Subsidiaries as of June 30, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Gaming
Corporation and Subsidiaries as of June 30, 1996 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 3, 1997
F-1
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's except share amounts)
[Enlarge/Download Table]
ASSETS
June 30, June 30,
1996 1997
--------- ---------
Current assets:
Cash and cash equivalents $ 48,057 $ 28,924
Accounts and notes receivable, net of allowance for doubtful accounts
of $17,727 and $21,929 93,502 87,701
Inventories, net of reserves of $9,484 and $8,856 41,656 37,329
Other current assets 8,354 9,627
--------- ---------
Total current assets 191,569 163,581
--------- ---------
Long-term notes receivable, net of allowance for doubtful accounts
of $1,770 and $1,972 14,184 8,981
Leased equipment, net 3,507 7,902
Property, plant and equipment, net 74,577 74,647
Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $422 and $1,723 60,292 62,098
Intangible assets, net of accumulated amortization of $5,216 and $9,626 20,247 18,231
Deferred tax assets, net of valuation allowance 5,459 11,776
Other assets, net of reserves of $3,679 and $3,502 5,669 4,800
--------- ---------
$ 375,504 $ 352,016
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,240 $ 14,270
Accrued compensation and related costs 7,309 6,974
Other accrued liabilities 31,234 30,418
Current maturities of long term debt 25,777 1,124
--------- ---------
Total current liabilities 80,560 52,786
--------- ---------
Senior Secured Notes, net of unamortized discount of $3,071 and $2,776 150,929 151,224
Other long term debt, less current maturities 14,638 21,491
Deferred tax liabilities 4,731 10,365
Other liabilities 2,100 2,068
--------- ---------
Total liabilities 252,958 237,934
--------- ---------
Minority interest 1,148 1,546
Series B Special Stock, $.10 par value, $100 liquidation value;
684,551 and 754,198 shares issued and outstanding, net of discount 51,552 58,981
Commitments and contingencies
Stockholders' equity:
Special Stock, 10,000,000 shares authorized:
Series E, $100 liquidation value; 113,160 shares and 123,689 shares
issued and outstanding 11,316 12,368
Common Stock, $.10 par value; 175,000,000 shares authorized,
31,763,000 and 31,852,000 shares issued and outstanding 3,176 3,185
Additional paid-in capital 139,031 138,590
Cumulative translation adjustment (287) (11,719)
Accumulated deficit (83,390) (88,869)
--------- ---------
Total stockholders' equity 69,846 53,555
--------- ---------
$ 375,504 $ 352,016
========= =========
See accompanying notes to consolidated financial statements.
F-2
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share amounts)
[Enlarge/Download Table]
Years Ended June 30,
-------------------------------------------
1995 1996 1997
--------- --------- ---------
Revenues:
Gaming equipment and systems $ --- $ 10,575 $ 134,734
Wall machines and amusement games --- 3,356 131,934
Route operations 106,854 109,938 127,028
Casino operations 25,134 48,509 51,450
--------- --------- ---------
131,988 172,378 445,146
--------- --------- ---------
Costs and expenses:
Cost of gaming equipment and systems --- 7,213 84,496
Cost of wall machines and amusement games --- 2,022 68,426
Cost of route operations 79,887 84,212 95,716
Cost of casino operations 14,231 22,046 22,269
Selling, general and administrative 28,249 30,620 100,415
Provision for doubtful receivables 400 1,020 9,059
Depreciation and amortization 9,520 10,988 22,606
Direct acquisition costs 1,669 55,843 ---
Unusual items 2,293 5,498 700
--------- --------- ---------
136,249 219,462 403,687
--------- --------- ---------
Operating income (loss) (4,261) (47,084) 41,459
Other income (expense):
Interest income 2,798 1,571 1,620
Interest expense (8,133) (8,897) (23,626)
Rainbow royalty (810) (4,070) (4,722)
Minority interest (397) (963) (1,092)
Other, net 317 301 139
--------- --------- ---------
Income (loss) before income taxes (10,486) (59,142) 13,788
Income tax provision (265) (755) (7,993)
--------- --------- ---------
Net income (loss) (10,751) (59,897) 5,785
Special Stock dividends, including repurchase premium --- (362) (11,974)
--------- --------- ---------
Net loss applicable to common shares $ (10,751) $ (60,259) $ (6,189)
========= ========= =========
Net loss per common share $ (0.95) $ (4.64) $ (0.19)
========= ========= =========
Weighted average common shares outstanding 11,300 13,000 31,822
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In 000's)
[Enlarge/Download Table]
Initial Series
and Series E Total
Common Stock Special Stock Additional Unrealized Cumulative Stock-
-------------------- -------------------- Paid-in Accum. Loss on Translation holders'
Shares Dollars Shares Dollars Capital Deficit Securities Adjustment Equity
--------- --------- --------- --------- ---------- --------- ---------- ----------- ---------
Balances at June 30, 1994 10,506 $ 1,051 1,333 $ 133 $ 26,716 $ (12,380) $ (421) - $ 15,099
Net loss - - - - - (10,751) - - (10,751)
Shares issued for acquisition 712 71 - - 3,683 - - - 3,754
Compensatory stock issued 250 25 - - 1,288 - - - 1,313
Net change in unrealized loss on
securities available for sale - - - - - - 105 - 105
Shares issued upon exercise of
options 186 18 - - 447 - - - 465
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1995 11,654 1,165 1,333 133 32,134 (23,131) (316) - 9,985
Net loss - - - - - (59,897) - - (59,897)
Shares issued for acquisition and
related financing 2,145 215 7,496 - - - 7,711
Initial Series Special Stock
converted into common stock 1,333 133 (1,333) (133) - - - - -
Conversion of subordinated
debentures 15,136 1,513 113 11,316 95,151 - - - 107,980
Common stock issued in
private placement 1,495 150 - - 4,250 - - - 4,400
Special Stock dividend - - - - - (362) - - (362)
Net change in unrealized loss on
securities available for sale - - - - - - 316 - 316
Foreign currency translation
adjustment - - - - - - - (287) (287)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1996 31,763 3,176 113 11,316 139,031 (83,390) - (287) 69,846
Net income - - - - - 5,785 - - 5,785
Shares issued upon exercise of
options 92 9 - - 281 - - - 290
Adjustments to acquisition
consideration (3) - - - (12) - - - (12)
Special Stock dividends - - 10 1,052 - (11,264) - - (10,212)
Special Stock repurchase premium - - - - (710) - - - (710)
Foreign currency translation
adjustment - - - - - - - (11,432) (11,432)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1997 31,852 $ 3,185 123 $ 12,368 $ 138,590 $ (88,869) $ - $ (11,719) $ 53,555
========= ========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
[Enlarge/Download Table]
Years Ended June 30,
---------------------------------------
1995 1996 1997
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (10,751) $ (59,897) $ 5,785
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 9,520 10,988 22,606
Amortization of debt discounts 297 245 807
Loss on debenture conversion - 30,079 -
Writedown of other assets 2,796 6,095 1,075
Loss on sale of assets - 105 1,233
Provision for doubtful receivables 400 1,020 9,059
Other 1,282 1,544 (651)
Change in operating assets and liabilities, net
of effects of businesses acquired:
Accounts and notes receivable 1,345 (5,934) (4,601)
Inventories (40) 5,844 (6,898)
Other current assets 255 (95) (1,549)
Accounts payable (447) (1,889) (1,970)
Accrued liabilities (2,355) 12,780 (760)
--------- --------- ---------
Net cash provided by operating activities 2,302 885 24,136
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired 2,481 (79,209) -
Additions to property, plant and equipment (8,887) (8,101) (13,257)
Proceeds from disposal of property and equipment 351 2,282 254
Sales (purchases) of securities available for sale (11,086) 13,516 -
Additions to intangible assets (425) (1,097) (6,749)
Additions to other long-term assets (5,427) (3,994) (1,825)
--------- --------- ---------
Net cash used in investing activities (22,993) (76,603) (21,577)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses - 145,420 -
Reduction of long-term debt (3,125) (51,446) (6,774)
Net change in credit lines - - (11,578)
Issuance of Series B Special Stock, net of discount - 15,000 -
Fees paid for conversion of convertible debentures - (3,333) -
Issuance of common stock 465 4,400 -
Repurchase of Series B Special Stock - - (3,879)
Proceeds from exercise of stock options - - 767
--------- --------- ---------
Net cash provided by (used in) financing activities (2,660) 110,041 (21,464)
--------- --------- ---------
Effect of exchange rate changes on cash - - (228)
--------- --------- ---------
Cash and cash equivalents:
Increase (decrease) for year (23,351) 34,323 (19,133)
Balance, beginning of year 37,085 13,734 48,057
--------- --------- ---------
Balance, end of year $ 13,734 $ 48,057 $ 28,924
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Description of business
Alliance Gaming Corporation ("Alliance" or the "Company") is a
diversified, worldwide gaming company that (i) designs and manufactures
gaming machines and computerized monitoring systems for gaming
machines, (ii) owns and manages a significant installed base of gaming
machines, (iii) owns and operates two regional casinos and (iv) in
Germany, is a full-service supplier of wall-mounted gaming machines and
amusement games
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of Alliance Gaming Corporation, and its wholly-owned and partially
owned, controlled subsidiaries. In the case of Video Services, Inc.
("VSI"), the Company owns 100% of the voting stock. The Company is
entitled to receive 71% of dividends declared by VSI, if any, at such
time that dividends are declared. Effective March 29, 1995 the Company
acquired the general partnership interest in a dockside casino in
Vicksburg, Mississippi and accordingly the results of operations of the
Rainbow Casino have been included in the accompanying consolidated
financial statements since that date. Effective June 18, 1996, the
Company acquired Bally Gaming International, Inc. ("BGII"); the results
of operations of BGII have been included in the accompanying
consolidated financial statements since that date. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior year financial statements to
conform with the current year presentation.
Cash and cash equivalents
Cash equivalents consist of highly liquid debt instruments purchased
with an original maturity of three months or less at the date of
purchase and are carried at cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost elements included for work-in-process
and finished goods include raw materials, freight, direct labor and
manufacturing overhead.
Inventories consist of the following at June 30, 1996 and 1997:
[Download Table]
1996 1997
------- -------
(In 000's)
Raw materials $13,339 $ 9,356
Work-in-process 1,264 1,683
Finished goods 27,053 26,290
------- -------
Total $41,656 $37,329
======= =======
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated over
the estimated useful lives or lease terms, if less, using the straight
line method as follows; buildings and improvements, 30-39 years; gaming
equipment, 5-7 years; furniture, fixtures and equipment, 3-10 years;
and leasehold improvements, 5-20 years.
F-6
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated
depreciation of assets retired or otherwise disposed of are eliminated
from the accounts and any resulting gain or loss is credited or charged
to income as appropriate.
Property, plant and equipment consists of the following at June 30,
1996 and 1997:
[Download Table]
1996 1997
-------- --------
(In 000's)
Land $ 20,336 $ 21,610
Buildings and leasehold improvements 29,819 30,027
Gaming equipment 36,895 46,247
Furniture, fixtures and equipment 15,614 16,458
Less accumulated depreciation and amortization (28,087) (39,695)
-------- --------
Property, plant and equipment, net $ 74,577 $ 74,647
======== ========
Excess of costs over net assets of acquired businesses
Excess of costs over net assets of acquired businesses is the excess of
the cost over the fair value of net assets of acquired businesses and
is generally amortized on the straight-line method over a period of 40
years.
Intangible assets
Intangible assets consist primarily of costs associated with the
acquisition of location leases which are capitalized and amortized
using the straight-line method over the terms of the leases, ranging
from one to 24 years, with an average life of approximately 10 years,
and deferred issuance costs for financing which are amortized over the
life of the related financing. The Company continually evaluates
whether events and circumstances have occurred that indicate the
estimated useful life may warrant revision or that the remaining
balance may not be recovered.
Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Impairment recognition
Management evaluates the carrying value of all long-lived assets to
determine recoverability based on an analysis of non-discounted future
cash flows. Based on its most recent analysis, management believes that
no material impairment in the value of long-lived assets exists at June
30, 1997.
Revenue recognition
The Company sells equipment and systems on normal credit terms (90 days
or less), over longer term installments of up to 36 months or more or
through payments from the net winnings of the machines until the
purchase price is paid. Revenue from sales of gaming machines and
amusement games is normally recognized at the time products are shipped
and title has passed to the customer. Revenue from sales of software
included in computerized monitoring systems is recognized at the time
the system is accepted by the customer, which normally coincides with
installation of the equipment. Revenue from sales of hardware included
in computerized monitoring systems is recognized at the time the
product is shipped.
F-7
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In accordance with industry practice, the Company recognizes gaming
revenues as the net win from gaming machine operations, which is the
difference between coins and currency deposited into the machines and
payments to customers and, for other games, the difference between
gaming wins and losses. The Company recognizes total net win from
gaming devices as revenues for route operations which operate under
revenue-sharing arrangements and revenue-sharing payments as a cost of
route operations. The Company monitors its exposure for credit losses
and maintains allowances for anticipated losses.
Unusual items
The Company discloses as a separate component of operating income
(loss), income and expense items that are unusual and infrequently
occurring. During the year ended June 30, 1997 the Company incurred
unusual charges of $0.7 million related primarily to separation costs
of Alliance personnel subsequent to the BGII acquisition.
During the year ended June 30, 1996 the Company incurred unusual
charges for the write off of its investments in projects in Kansas and
one Native American development project, totaling $3.4 million. Also in
fiscal year 1996 the Company incurred unusual charges in its route
operations for reserves for certain parts inventories which became
obsolete due to technological changes to gaming devices being deployed
as a result of the new Gambler's Bonus product, as well as an accrual
to reserve for the present value of the future lease payments for one
small casino location for which cash flows received under the
participation agreement were inadequate to service the building lease
paid by the Company, totaling $2.1 million.
During 1995 the Company incurred unusual items consisting of $1.3
million in compensation expense recognized upon the issuance of 250,000
shares of Common Stock to the Company's then President, Chief Executive
Officer and Chairman of the Board, in connection with his employment
agreement, and $1.0 million related to certain contracts and
termination costs.
Foreign currency translation
The functional currency of the Company's foreign subsidiaries is their
local currency. Assets and liabilities of foreign operations are
translated into U.S. dollars at the rate of exchange at the end of the
period, and the income and expense accounts are translated at the
average rate of exchange for the period. Translation adjustments are
reflected as a separate component of stockholders' equity. Gains and
losses on foreign currency transactions are included in the
accompanying consolidated statements of operations.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the
enactment date. Taxes on income of the Company's foreign subsidiaries
are provided at the tax rates applicable to the tax jurisdictions in
which they are located.
Loss per share of common stock
Loss per share of common stock has been computed by dividing the net
loss applicable to common stockholders by the weighted average number
of shares of common stock outstanding. Fully diluted earnings per share
is not presented because the effect of the common stock equivalents
would be anti-dilutive.
F-8
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The carrying
amounts at June 30, 1997 for the Company's financial instruments
approximate fair value.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" (SFAS No. 128) which establishes standards for
computing and presenting earnings per share ("EPS"), and supersedes APB
Opinion No. 15. The Statement replaces primary EPS with basic EPS and
requires dual presentation of basic and diluted EPS. The Statement is
effective for both interim and annual periods ending after December 15,
1997 and earlier application is not permitted. After adoption, all
prior period EPS data must be restated to conform to SFAS No. 128.
For the years ended June 30, 1995, 1996 and 1997 the basic EPS does
not differ from the reported primary EPS, and diluted EPS would have
been antidilutive for each of these periods.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for the year ending June
30, 1999. Comprehensive income includes items such as foreign currency
translation adjustments which are currently being presented by the
Company as a component of stockholders' equity. This is a disclosure
item only and will have no impact on reported earnings per share.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which establishes standards
for disclosure about operating segments in annual financial statements
and selected information in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and
services, geographic areas and major customers and will supersede SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise."
The new standard becomes effective for years beginning after December
15, 1997. This is a disclosure item only and will have no impact on
reported earnings per share.
2. ACQUISITIONS
On June 18, 1996, the Company completed the acquisition of all the
outstanding shares of BGII. The consideration paid consisted of
approximately $77.2 million in cash, $3.0 million in the Company's
common stock and $36.6 million in the Company's Series B Special Stock
which totaled $11.84 per share for the 9,855,500 shares of BGII
outstanding (excluding the 1,000,000 shares beneficially owned by the
Company). The acquisition has been accounted for as a purchase and the
results of operations of BGII have been included in the consolidated
financial statements beginning on June 18, 1996. The purchase price was
allocated based on estimated fair values at the date of the
acquisition. At June 30, 1997, the excess of purchase price over the
fair value of the net assets acquired was approximately $61.2 million
which is being amortized on a straight-line basis over 40 years. During
fiscal 1997 the Company made certain adjustments aggregating
approximately $6.6 million to the goodwill originally recorded, related
to the settlement of certain pre-acquisition contingencies.
On a pro forma basis for the year ended June 30, 1996 assuming the
acquisition of BGII occurred on July 1, 1995, the Company would have
had revenues of $397.9 million and a net loss applicable to common
shares of $26.5 million (or an $0.83 loss per common share).
The Company incurred direct acquisition costs of $1.7 million and $55.8
million during the fiscal years ended June 30, 1995, and 1996,
respectively. The direct acquisition costs have been presented
separately in the Company's consolidated statements of operations, as
management believes that such presentation provides additional relevant
information. Direct acquisition costs in fiscal year 1996 included the
$30.1 million non-cash accounting loss on the exchange offer component
of the financing for the acquisition plus legal, accounting,
transaction financing fees, public and investor relations, printing
costs and related costs.
F-9
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECEIVABLES
The Gaming Equipment and Systems and Wall Machines and Amusement Games
business units grant certain customers extended payment terms under
contracts of sale. These contracts are generally for terms of one to
three years, with interest at prevailing rates, and are generally
collateralized by the related equipment sold although the value of such
equipment, if repossessed, may be less than the receivable balance
outstanding. See "Concentration of Credit Risk". The Company's Nevada
route operations from time to time make loans to location operators for
build-outs, tenant improvements and initial operating expenses, which
are generally secured by the personal guarantees of the operators and
the locations' assets. The majority of the loans bear interest rates
between 8% to 14%. They are expected to be repaid over a period of time
not to exceed the life of the revenue sharing arrangement and have due
dates ranging from July 1997 to April 2007.
The following table represents, at June 30, 1997, scheduled collections
of accounts and notes receivable (net of allowances for doubtful
accounts) by fiscal year:
[Enlarge/Download Table]
Years ended June 30, (In 000's)
----------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
$ 87,701 $ 5,024 $ 2,001 $ 381 $ 562 $ 1,013 $ 96,682
==============================================================================================
4. REFINANCING TRANSACTION
In August 1997 the Company effected a series of related transactions
(as described below, the "Refinancing"). The Refinancing consisted of
the private placement of $150 million of Senior Subordinated Notes and
the closing of $230 million of bank financing. The bank financing
provides for (i) term loans in the aggregate amount of up to $140.0
million, comprised of a $75.0 million tranche with a 7 1/2-year term
(the "Tranche B Term Loan"), a $40.0 million tranche with an 8-year
term (the "Tranche C Term Loan", and together with the Tranche B Term
Loan, the "Term Loan Facilities") and a $25.0 million tranche with a 7
1/2-year term (the "Delayed Draw Term Facility"); and (ii) a $90.0
million revolving credit facility (the "Revolving Credit Facility")
with a 6 year term. Each of these credit facilities are variable rate
borrowings in accordance with a credit grid. The interest rates at the
highest level of the credit grid and maturity dates are as follows:
[Download Table]
Initial Maturity
Rate Date
------------ ----------------
Tranche B Term Loan LIBOR + 2.75% January 31, 2005
Tranche C Term Loan LIBOR + 3.00% July 31, 2005
Delayed Draw Term Facility LIBOR + 2.75% January 31, 2005
Revolving Credit Facility LIBOR + 2.25% July 31, 2003
As part of the Refinancing, the Company used the proceeds of the
Subordinated Note offering, together with borrowings under the
Revolving Credit Facility, the Term Loan Facilities and the Delayed
Draw Term Facility and cash on hand to fund (a) the repurchase at a
premium of substantially all of the Company's 12 7/8% Notes, plus
accrued interest to August 8, 1997 totaling $183.7 million, (b) the
redemption at liquidation value of all of the Company's Series B
Preferred Stock on September 8, 1997 totaling $77.6 million, (c) the
purchase from HFS Gaming Corporation of the right to receive royalty
payments based on revenues of the Rainbow Casino and the repayment of
related debt owed to an HFS affiliate, National Gaming Mississippi,
Inc. on August 12, 1997 totaling $26.3 million and (d) the payment of
transaction fees and expenses totaling $16.6 million. At June 30, 1997,
based on the terms of the new $90.0 million Revolving Credit Facility,
the Company would have been able to borrow the full amount of the
revolving credit line, of which the Company had initial borrowings of
approximately $14.5 million on August 8, 1997. The borrowing base for
the revolving credit facility includes eligible receivables and
inventory (as defined). Additionally, in July
F-10
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 the Company redeemed the remaining balance of the 7 1/2
Convertible Debentures at a price of 104, or a total of $1.7 million.
In conjunction with the Refinancing, the Company incurred fees,
expenses, and charges totaling approximately $78.4 million, including
the premium on the repurchase of the 12 7/8% notes of $27.7 million and
$16.4 million for the difference between the carrying value and the
liquidation value of the Series B Preferred Stock, which will be
recorded in the quarter ended September 30, 1997. On a pro forma basis
as of June 30, 1997, in comparison to the actual year end balances, the
Refinancing would have resulted in a decrease in cash and cash
equivalents of $12.8 million, a decrease in working capital of $13.5
million, an increase in total long-term debt of $128.0 million, but the
elimination of the 12 7/8% Notes and Series B Preferred Stock.
The Senior Subordinated Notes bear interest at 10%, are due in 2007,
and are general unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt (as defined) of the
Company, including indebtedness under the new credit facility. The
Senior Subordinated Notes will be fully and unconditionally guaranteed
on a joint and several senior subordinated basis by all existing and
future domestic Restricted Subsidiaries (as defined) of the Company,
subject to certain exceptions including the partially-owned entities
through which its Mississippi casino and Louisiana route operations are
conducted. The Subsidiary Guarantees (as defined) are general unsecured
obligations of the Guarantors, ranking subordinate in right of payment
to all Senior Debt of the Guarantors. The Company will be able to
designate other current or future subsidiaries as Unrestricted
Subsidiaries (as defined) under certain circumstances. Unrestricted
Subsidiaries will not be required to issue a Subsidiary Guarantee and
will not be subject to many of the restrictive covenants set forth in
the Indenture pursuant to which the Senior Subordinated Notes were
issued. The Indenture for the Company's Senior Subordinated Notes
contains various covenants, including limitations on incurrence of
additional indebtedness, on restricted payments and on dividend and
payment restrictions on subsidiaries. The Senior Subordinated Notes may
not be redeemed for the first five years. Upon the occurrence of a
Change of Control (as defined), the holders of the Senior Subordinated
Notes will have the right to require the Company to purchase their
Notes at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase.
The new credit facility is guaranteed by each domestic subsidiary of
the U.S. Borrower and German Subsidiaries (both as defined), other than
the entity which holds the Company's interest in its Louisiana
operations and other non-material subsidiaries (as defined), and is
subject to both a U.S. and German Pledge Agreement (both as defined).
The new credit facility contains a number of maintenance covenants and
together with the indenture, both have other significant covenants
that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, enter into certain acquisitions, repurchase equity
interests (as defined) or subordinated indebtedness, issue or sell
equity interests of the Company's subsidiaries (as defined), engage in
mergers or consolidations, or engage in certain transactions with
subsidiaries and affiliates and otherwise restrict corporate
activities. After considering the Refinancing transaction described
above, the resulting maturities of long-term debt, for each of the five
fiscal years ending subsequent to June 30, 1997 are as follows:
[Enlarge/Download Table]
Years ended June 30, (In 000's)
--------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
$1,989 $2,468 $1,974 $1,974 $2,017 $297,944 $308,366
======================================================================================
F-11
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT AND LINES OF CREDIT
As discussed in Note 4, substantially all of the Company's indebtedness
shown below was repaid as part of the Refinancing. Prior to the
Refinancing, long-term debt and lines of credit at June 30, 1996 and
1997 consisted of the following:
[Enlarge/Download Table]
1996 1997
-------- --------
(In 000's)
12 7/8% Senior Secured Notes due 2003, net of
unamortized discount of $3,071,000 and $2,776,000 $150,929 $151,224
7 1/2% Convertible subordinated debentures due 2003, unsecured 1,642 1,642
Hospitality Franchise Systems note payable,
secured by the assets of the Rainbow Casino 7,864 6,569
Subordinated note payable to stockholder 2,268 -
Bally Wulff revolving lines of credit 13,664 9,611
Bally Gaming and Systems revolving line of credit 7,525 -
Other, secured by related equipment 7,452 4,793
-------- --------
191,344 173,839
Less current maturities 25,777 1,124
-------- --------
Long-term debt, less current maturities $165,567 $172,715
======== ========
In connection with the acquisition of BGII, the Company issued $154.0
million aggregate principal amount of 12 7/8% Senior Secured Notes due
2003 (the "12 7/8% Notes") and 15% Non Voting Senior Pay-in-Kind
Special Stock Series B (the "Series B Preferred Stock") with an
original liquidation value of $68.5 million. The 12 7/8% Notes were
secured by pledges of equity interests in certain of the Company's
subsidiaries, and were fully and unconditionally guaranteed on a joint
and several senior basis by each present and future subsidiary, as
defined.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") and its
affiliate, National Gaming Mississippi, Inc. ("NGM"), together agreed
to loan up to $12.0 million to the Company's majority controlled
subsidiary Rainbow Casino Vicksburg Partnership, L.P. ("RCVP"). Of
these loan commitments, RCVP ultimately borrowed $10.0 million and $1.3
million from HFS and NGM respectively. The notes bear interest at 7.5%
and 10%, respectively, and required monthly payments of principal and
interest over an 84-month period. Prior to the Refinancing, HFS was
entitled to receive a monthly royalty fee based on the Rainbow Casino's
gaming revenues of 12% on the first $40.0 million, 11% on the next
$10.0 million, and 10% thereafter.
The Bally Wulff entities held two bank lines of credit which provided
for borrowings of DM16,000,000 and DM750,000 (approximately $9.2
million and $0.4 million, respectively at June 30, 1997). The DM750,000
line of credit amortizes by DM250,000 per quarter and bears interest at
6.95%. The DM16,000,000 credit line bears interest at a rate tied to an
international borrowing rate plus 1% (4.30% at June 30, 1997) and is
due on demand. These lines were fully drawn at June 30, 1997. The Bally
Wulff entities also had a DM16,300,000 (approximately $9.4 million at
June 30, 1997) revolving line of credit for general working capital
purposes which bears interest at a rate tied to an international
borrowing rate plus 1% (4.30% at June 30, 1997) and was due on demand.
No amounts were outstanding under this line at June 30, 1997.
In March 1997, BGII's domestic subsidiary, Bally Gaming, Inc., obtained
a bank revolving line of credit which, as amended, provided 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 $30.0 million. Borrowings under this
agreement bore interest at one and one-half percent above the bank's
prime rate (9.75% at June 30, 1997). Eligible borrowing capacity under
this agreement at June 30, 1997 was $30.0 million and no amounts were
outstanding at June 30, 1997.
In March 1992, Alfred H. Wilms, a director and the Company's largest
stockholder, provided to VSI, a majority-controlled subsidiary of
Alliance, a subordinated loan for $6.5 million (the "VSI Loan"). During
1993 the loan was funded and interest was charged based on the London
Interbank Offered Rate plus 2%.
F-12
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All scheduled principal and interest payments were made until September
1996 when the loan was paid in full.
In July 1997, the Company redeemed the remaining 7 1/2% Convertible
Debentures at a price of 104, or a total of $1.7 million.
6. STOCKHOLDERS' EQUITY, OPTIONS AND WARRANTS
Special Stock
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of special stock ("Special Stock"). To date, there
have been three series of Special Stock issued: the Initial Series, the
Series B and the Series E. Special Stock consists of non-voting stock
where no holder of the Special Stock shall be entitled to vote at any
meeting of stockholders or otherwise, except as may be specifically
provided by law or as approved by the Board of Directors in certain
limited circumstances at the time of the stock issuance. The Special
Stock may be issued from time to time in one or more series, each
series having such designations, preferences and relative,
participating, optional or other special rights, qualifications,
limitations or restrictions as shall be stated and expressed in the
resolution providing for the issuance of Special Stock or any series
thereof adopted by the Board of Directors.
The Board had designated an initial series of Special Stock as
"Non-voting Junior Convertible Special Stock" which consisted of
1,333,333 shares (the "Initial Series") which were sold to Kirkland -
Ft. Worth Investment Partners, L.P. ("Kirkland"), pursuant to a Letter
Agreement dated June 25, 1993, for $5.0 million. The Initial Series had
certain conditions relating to regulatory licensing, which, when met
allowed the holder to convert on a one-for-one basis into shares of
common stock. The licensing condition was met and during fiscal year
1996 Kirkland elected to convert its shares to common stock.
In June 1996, the Company completed an offering of 200,000 shares of
its 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B (the
"Series B Special Stock"). The Series B Special Stock was also issued
as part of the consideration in the BGII acquisition. During fiscal
year 1997 the Company recorded non-cash dividends in the form of
additional shares of Series B Special Stock totaling $10.2 million.
During fiscal year 1997 the Company repurchased a total of 18,000
shares of Series B Special Stock at a premium to their carrying value
of $0.7 million. As discussed in Note 4, on September 8, 1997 the
Company redeemed all of the outstanding shares of Series B Special
Stock at their liquidation price of $100 per share, plus accrued
dividends.
Each share of Series E Special Stock accrues cumulative dividends until
June 18, 1999 at an annual rate of 111/2%, payable quarterly in cash
or, at the Company's option, in additional shares of Series E Special
Stock. The Series E Special Stock is convertible after June 18, 1998
into common stock at a conversion price of $5.88 per share (equivalent
to a conversion rate of approximately 17.004 shares of common stock per
share of Series E Special Stock), subject to adjustment under certain
circumstances, and has a $100 liquidation preference per share. Upon
default in the payment of dividends for six consecutive dividend
payment dates, the number of directors constituting the Board of
Directors of the Company will be increased by two, and the holders of
shares of Series E Special Stock will have the right, voting separately
as a class with the holders of any parity stock, to elect two directors
to the Company's Board of Directors. Such right will exist until all
dividends accumulated on such shares have been paid or set apart for
payment in full. Other than as described above, the holders of shares
of Series E Special Stock have no other voting rights except as
required by law.
Stock Option Plans
In 1984, the Company created an Employee Stock Option Plan (the "1984
Plan") that provides for the issuance of up to 2,000,000 shares of
common stock to Company employees and directors. Generally, options are
granted at the fair market value of the Company's Common Stock at the
date of the grant and are exercisable over ten years.
F-13
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1992, the Company created the 1991 Long Term Incentive Plan (the
"Incentive Plan") that, as amended, provides for the issuance of up to
3,000,000 shares of common stock to Company employees and directors.
Generally, options are granted at the fair market value of the
Company's Common Stock at the date of the grant and are exercisable
over five to ten years.
In April 1997 the Company's shareholders approved the 1996 Long-Term
Incentive Plan (the "1996 Plan") which provides for the issuance of up
to 3,000,000 shares of common stock to Company employees, directors and
designated paid consultants. Generally, options are granted at the fair
value of the Company's common stock at the date of grant and are
exercisable over five to ten years.
Pursuant to the BGII acquisition agreement, the Company assumed BGII's
obligations with respect to each of its outstanding stock options, and
such options became exercisable pursuant to employee election (except
for certain identified former executive officers and directors of BGII)
for a number of shares of Common Stock equal to the number of shares of
BGII common stock subject thereto. Such options must be exercised by
June 18, 1999.
On August 29, 1996, the Board of Directors repriced the exercise price
of previously issued, unexercised options for substantially all current
employees and directors to $3.4375 per share which was the closing
price of the Company's common stock on June 18, 1996. The closing price
of the Company's common stock on August 29, 1996 was $2.50.
Transactions involving stock options are summarized as follows:
Options Outstanding
[Download Table]
Shares Weighted-Average
------ Exercise Price
----------------
Balance, June 30, 1994 1,490,500 $5.60
----------------------
Granted 1,598,334 6.15
Exercised (186,000) 2.38
Canceled (285,000) 6.90
--------- ----
Balance, June 30, 1995 2,617,834 6.00
----------------------
Granted 689,000 3.39
Exercised --------- ----
Canceled (621,000) 5.97
--------- ----
Balance, June 30, 1996 2,685,834 5.53
----------------------
Granted 3,726,319 3.50
Exercised (91,836) 1.65
Canceled (1,704,000) 5.97
----------- ----
Balance, June 30, 1997 4,616,317 $3.84
---------------------- ========= =====
Exercisable at June 30, 1997 3,633,972 $4.02
========= =====
The following options were outstanding as of June 30, 1997:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Avg. Weighted-Avg.
Range of Remaining Outstanding Remaining Outstanding
Exercise Prices Contractual Life Shares Contractual Life Shares
--------------- ---------------- ----------- ---------------- -----------
$2.25 - $3.00 3.47 92,500 3.47 92,500
$3.01 - $4.00 6.12 4,085,483 5.87 3,129,250
$4.01 - $5.00 4.60 30,000 4.60 30,000
over $5.01 1.32 408,334 1.32 382,222
--------- ---------
4,616,317 3,633,972
========= =========
At June 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.25 - $8.375
and 5.64 years, respectively.
F-14
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company accounts for its stock-based employee compensation awards
in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
because the exercise price of the Company's employee stock options
equals or exceeds the market price on date of grant, no compensation
expense is recognized. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under
SFAS No. 123, "Accounting for Stock Based Compensation," the Company's
net loss applicable to common shares would have increased from $60.3
million (or $(4.64) per share) to $61.2 million (or $(4.71) per share)
on a pro forma basis for the year ended June 30, 1996, and from a loss
of $6.2 million (or $(.19) per share) to $8.3 million (or $(.26) per
share) on a pro forma basis for the year ended June 30, 1997. Pro forma
net loss reflects only options granted in 1996 and 1997. Therefore, the
full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the
options' vesting period, generally three years, and compensation cost
for options granted prior to July 1, 1995 is not considered.
The per share weighted-average fair value of stock options granted
during 1996 and 1997 was $5.80 and $1.43, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1996 and 1997: expected dividend yield
of 0%, risk free interest rate of 6.5%, a volatility factor of .79 for
1996 and .51 for 1997, and expected lives varying from 3 to 10 years.
Warrants
At June 30, 1997, Mr. Wilms held warrants to purchase 2,000,000 shares
of Common Stock at $2.50 per share, subject to adjustment that expire
September 1, 1998. These warrants were issued in connection with the
funding of the $6.5 million five year subordinated loan for VSI.
Upon closing of the private placement of the Company's 7 1/2%
Convertible Subordinated Debentures and the $5.0 million equity
investment in the Initial Series by Kirkland-Ft. Worth Investment
Partners, L.P. ("Kirkland") on September 21, 1993, the Company issued
warrants to purchase up to 2,750,000 shares of Common Stock at $1.50
per share to Kirkland which expire September 21, 1999, but under
certain circumstances the expiration date may be extended. These
warrants are exercisable one year after the grant date and in equal
increments only after the market price of the Common Stock reaches $11,
$13 and $15. Under the same terms, the Company issued warrants to
purchase 1,250,000 and 30,000 shares of Common Stock to Gaming Systems
Advisors, L.P. ("GSA") and L.H. Friend, Weinress & Frankson, Inc.
("Friend"), respectively. The Company also issued warrants to purchase
500,000 and 250,000 shares of Common Stock at $8.25 per share to the
initial purchasers of the 7 1/2% Convertible Debentures; Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") and Oppenheimer & Co.,
Inc. ("Oppenheimer"), respectively, each of which expire on September
21, 1999. During the year ended June 30, 1996, in connection with the
commencement of employment with the Company, the then Board Chairman
and then Vice-Chairman each were each granted warrants to purchase
250,000 shares of common stock on the same terms as the Kirkland
warrants described above except that such warrants expire on September
21, 2000. At the completion of the BGII acquisition, GSA was issued an
additional 2,500,000 warrants on the same terms as the original
warrants issued to Kirkland described above. During the financing stage
of the BGII acquisition, Cerberus Partners L.P. and certain affiliates
of Canyon Partners, Inc. were issued warrants to purchase 250,000
shares of Common Stock at $5.00 per share which expire on August 31,
2002. None of the warrants granted to Kirkland, GSA, Friend, and the
now former Board members were exercisable at June 30, 1997.
BGII had issued warrants to purchase 1,200,000 shares of common stock
at a purchase price of $12.50 per share expiring on July 29, 1998 all
of which are currently exercisable. Pursuant to the merger agreement,
the Company has assumed BGII's obligation with respect to each
outstanding warrant, and such warrants will be exercisable for the
merger consideration per share of BGII common stock subject to such
warrants.
F-15
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 1997, shares of the Company's Common Stock were reserved
for future issuance as follows:
[Download Table]
(In 000's)
Shares underlying stock options issued or
issuable under the 1984 Plan 102
Shares underlying stock options issued or
issuable under the 1991 Plan 2,970
Shares underlying stock options issued or
issuable under the 1996 Plan 3,000
Shares underlying all warrants issued 10,125
Shares for former BGII option holders 431
------
Total 16,628
======
7. INCOME TAXES
The components of the Company's income tax expense for the years ended
June 30, 1995, 1996 and 1997 are as follows:
[Download Table]
1995 1996 1997
------- ------- -------
(In 000s)
Current tax expense:
U. S. Federal $ - $ 533 $ 225
Foreign - 172 7,701
State 102 50 750
------- ------- -------
102 755 8,676
------- ------- -------
Deferred tax expense
U. S. Federal 163 - -
Foreign - - (683)
State - - -
------- ------- -------
Total provision for income taxes $ 265 $ 755 $ 7,993
======= ======= =======
A reconciliation of the Company's income tax provision as compared to
the tax provision calculated by applying the statutory federal tax rate
(35%) to the income (loss) before income taxes for the years ended June
30, 1995, 1996 and 1997 are as follows:
[Enlarge/Download Table]
1995 1996 1997
-------- -------- --------
(In 000's)
Computed expected income tax expense (benefit) at 35% $ (3,670) $(20,700) $ 4,826
Change in valuation allowance 3,736 (6,453) 169
Change in estimates, principally due to changes
in estimated tax depreciation and NOL's 1,166 686
State income taxes, net of federal benefit 67 33 488
Tax gain on conversion of debt to equity, net 18,265
Acquisition costs not currently deductible 7,102
Foreign taxes, net of federal benefit - - 1,940
Other, net 132 1,342 (116)
-------- -------- --------
$ 265 $ 755 $ 7,993
======== ======== ========
F-16
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The major components of the deferred tax assets and liabilities as of
June 30, 1996 and 1997 are presented below.
[Download Table]
1996 1997
-------- --------
(In 000's)
Deferred Tax Assets:
Net operating loss carry forwards $ 8,923 $ 7,510
Foreign tax credit carry forwards 11,843 11,843
Inventory obsolescence reserves 3,721 4,048
Bad debt reserves 4,719 6,359
Accruals not currently deductible for tax purposes 2,831 3,581
Reserve for abandoned projects 1,863 1,311
Other 2,087 7,800
-------- --------
Total gross deferred tax assets 35,987 42,452
Less: Valuation allowance (30,528) (30,676)
-------- --------
Deferred tax assets $ 5,459 $ 11,776
======== ========
Deferred Tax Liabilities:
Property and equipment, principally due to
depreciation differences 3,172 3,703
Other 1,559 6,662
-------- --------
Total gross deferred tax liabilities 4,731 10,365
-------- --------
Net deferred tax assets $ 728 $ 1,411
======== ========
Management has considered certain tax planning strategies as permitted
by Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes". Management has determined that tax benefits associated
with recorded deferred tax assets, net of valuation allowance, are more
likely than not realizable through future taxable income and future
reversals of existing taxable temporary differences.
At June 30, 1997, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $21.5 million which are
available to offset future federal taxable income, if any, expiring in
the years 2007 through 2011 and is subject to annual limitations with
respect to net operating losses pursuant to Section 382 of the Internal
Revenue Code of approximately $4.7 million. At June 30, 1997 the
Company has foreign tax credit carry forwards of approximately $11.8
million and alternative minimum tax credit (AMT) carry forwards of
approximately $1.5 million. Foreign tax credits are available to offset
future taxes due in the U.S. on future foreign taxable income and
expire between 1998 and 2002 unless utilized prior to such time. AMT
credits are available to be carried forward indefinitely and may be
utilized against regular U.S. Corporate tax to the extent it does not
exceed computed AMT calculations.
F-17
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the consolidated
statements of cash flows. The Company recorded the following
significant non-cash items for the years ended June 30, 1995, 1996 and
1997:
[Enlarge/Download Table]
1995 1996 1997
------- ------ ------
(In 000s)
Acquisition of the general partnership interest in RCVP:
Property, plant and equipment $23,400 $ $
Long-term debt 13,839
Convertible debentures converted to equity securities 83,358
Common and Series B Special Stock issued in the BGII Acquisition 42,738
BGII common stock purchased in fiscal year
1995 and canceled upon consummation of the BGII Acquisition 10,481
Accrual of contingent payment to RCC 1,000
Dividends for Series E and Series B Special Stock 11,264
Translation rate adjustment 11,204
Valuation adjustments to pre-acquisition contingencies 962
Reclassify inventory to property, plant and equipment 9,642
Reclassify receivables to other assets 1,837
Reclassify other assets to property, plant and equipment 1,074 1,818
Payments for interest expense in fiscal years 1995, 1996 and 1997 were
approximately $5.6 million, $8.0 million and $22.5 million
respectively. Payments for income taxes in fiscal years 1995, 1996 and
1997 were approximately $0.1 million, $0.3 million and $3.5 million
respectively.
9. COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, or other sources are recorded when it
is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated.
The Company is obligated under several patent agreements to pay
royalties ranging from approximately $50 to $200 per game depending on
the components in the gaming machines. Additionally, based on an
amendment to the trademark licensing agreement between BGII and Bally
Entertainment Corporation dated May 10, 1996, the Company is obligated
to pay a royalty on new machines sold or leased after June 18, 1996 of
$35 per machine with a minimum annual royalty payment of $1.0 million
for the initial five-year term of the amended agreement, which is
subject to annual renewals thereafter at the option of the Company.
Royalty expense under this agreement for the year ended June 30, 1997
was $1.0 million.
F-18
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company leases office space, equipment, warehouse and repair
facilities, Route Operation locations, casino and other locations under
non-cancelable operating leases. Certain Route Operation location
leases provide only for contingent rentals based upon a percentage of
gaming revenue and are cancelable at any time by either party. Future
minimum rentals under non-cancelable operating leases at June 30, 1997
are:
[Download Table]
Year Total Net
Ended Minimum Sublease Minimum
June 30, Rentals Income Rentals
------- -------- -------- --------
(In 000's)
1998 $12,658 $1,354 $11,304
1999 10,287 1,263 9,024
2000 7,958 829 7,129
2001 6,344 478 5,866
2002 4,574 446 4,128
Thereafter 42,805 1,755 41,050
-------- ------- --------
$ 84,626 $ 6,125 $ 78,501
======== ======= ========
Operating lease rental expense, including contingent lease rentals, for
years ended June 30 1995, 1996 and 1997 was as follows:
[Download Table]
1995 1996 1997
-------- -------- --------
(In 000's)
Minimum rentals $ 9,704 $ 10,194 $ 15,126
Contingent rentals 58,113 60,525 70,744
-------- -------- --------
67,817 70,719 85,870
Sublease rental income (1,192) (1,487) (1,606)
-------- -------- --------
$ 66,625 $ 69,232 $ 84,264
======== ======== ========
In conjunction with sales by Bally Gaming, Inc., with recourse to the
Company, of certain trade receivables to third parties, the Company has
guaranteed amounts due from three customers of approximately $10.5
million at June 30, 1997. It is possible that one or more of Bally
Gaming, Inc.'s customers whose obligation has been guaranteed may be
unable to make payments as such become due. In such an event, Bally
Gaming, Inc. may become responsible for repayment of at least a portion
of such amounts over the term of the receivables. At June 30, 1997,
amounts due from one customer under three contracts totaling $3.6
million were past due and these amounts and subsequent installments
have not been paid. In general, under the terms of these contracts, the
Company may be responsible for monthly payments of the outstanding
obligations. 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 for approximately $3.6 million. The outcome of this
issue is not anticipated to have a material effect on the financial
position, results of operations or cash flows of the Company. A
provision for doubtful accounts of approximately $8.3 million on all
receivables with recourse is included in the Company's allowance for
doubtful accounts at June 30, 1997.
Through a wholly-owned subsidiary, the Company originally purchased a
45% limited partnership interest in Rainbow Casino Vicksburg
Partnership, L.P. ("RCVP"), a Mississippi limited partnership which
owns the casino, all assets (including the gaming equipment) associated
with the casino and certain adjacent parcels of land. In March 1995,
Alliance increased its ownership position from 45% to 100%. Pursuant to
the transactions consummated in March 1995, Rainbow Casino Corporation
(RCC), the former owner of 55% of the Rainbow Casino, is now entitled
to receive 10% of the net available cash flow after debt service and
other items, as defined (which amount increases to 20% of such amount
when revenues exceed $35.0 million but
F-19
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
only on such incremental amount), for a period of 15 years, such period
being subject to one year extensions for each year in which a minimum
payment of $50,000 is not made. In addition, the agreement required
that, if under defined circumstances the casino achieved earnings of at
least $10.5 million before deducting depreciation, amortization,
royalty and income taxes, then the Company would be obligated to make a
one time payment to certain principals of the original partnership of
$1.0 million which payment was earned in fiscal 1996 and paid in cash
in September 1996.
During fiscal 1996, Bally Wulff increased the amount of tax reserves by
$1.0 million (to a total reserve of $1.4 million) as a result of
developments in an ongoing quadrennial audit of Wulff's tax returns for
the years 1988 through 1991. The German tax authorities have proposed
preliminary adjustments which range from $1.4 million (which has been
accrued) to $5.0 million.
LITIGATION
In the action filed on December 2, 1996, the Company was named as a
defendant in an action brought by Canpartners Investments IV and
Cerberus Partners, 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 merger agreement with BGII in October 1995 and did not
use funds provided by the plaintiffs to fund the acquisition of BGII in
June 1996. The plaintiffs have asserted claims based upon the loan
commitment letters and failure to pay termination fees in connection
with such 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 and has filed a motion to dismiss the complaint. The Company
intends to defend the action vigorously.
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer
on behalf of himself and all others similarly situated. The plaintiffs
filed suit against BGII and approximately 45 other defendants. Each
defendant is involved in the gaming business as either a gaming machine
manufacturer, distributor, or casino operator. The class action lawsuit
arises out of alleged fraudulent marketing and operation of casino
video poker machines and electronic slot machines. The plaintiffs
allege that the defendants' actions constitute violations of the
Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise
to claims of common law fraud and unjust enrichment. The plaintiffs are
seeking monetary damages in excess of $1.0 billion, and are asking that
any damage awards be trebled under applicable Federal law. Management
believes the plaintiffs' lawsuit to be without merit. The Company
intends to vigorously pursue all legal defenses available to it.
In August 1996, the Company received demand notices from a holder of
customer notes receivable which were sold on a recourse basis to a
third party for which payments were in arrears from December 1995. In
December 1996 the holder of the notes filed suit against the Company
seeking payment from the Company of approximately $3.6 million. The
Company intends to vigorously pursue all legal defenses available to
it.
The Company is also a party to various lawsuits relating to routine
matters incidental to its business. Management does not believe that
the outcome of such litigation, including the matters above, in the
aggregate, will have a material adverse effect on the Company.
10. CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts and notes
receivable and customer obligations guaranteed by the Company. Each of
the Company's business units conducts business in and the resulting
receivables are concentrated in specific legalized gaming regions. The
Company also distributes its products through third party
distributors resulting in distributor receivables. At June 30, 1997 net
accounts and notes receivable, including obligations of three
F-20
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customers which are guaranteed by the Company, by region as a
percentage of total net receivables are as follows:
[Enlarge/Download Table]
Wall Machines Gaming
and Amusement Equipment Route Casino
Games and Systems Operations Operations Total
------------- ----------- ---------- ---------- -----
Germany 46.7% % % % 46.7%
Other International jurisdictions 1.4 19.7 21.1
Nevada 12.4 4.2 16.6
Mississippi 3.7 3.7
Atlantic City 2.6 2.6
Others individually less than 5% 9.3 9.3
---- ---- ---- ---- -----
48.1% 47.7% 4.2% % 100.0%
==== ==== ==== ==== =====
Receivables and customer obligations guaranteed by the Company from
emerging market customers contain increased risk factors compared to
receivables at the Bally Wulff entities or other traditional markets
for Bally Gaming, Inc.
11. SEGMENT INFORMATION
The Company has operations based primarily in Germany and the United
States. The German operation's customers are a diverse group of
operators of wall machines and amusement games at arcades, hotels,
restaurants and taverns, primarily in Germany. Gaming Equipment and
Systems' customers are primarily casinos and gaming machine
distributors in the United States and abroad. Receivables of the German
operations and Gaming Equipment and Systems are generally
collateralized by the related equipment. See "Concentration of Credit
Risk".
The table below presents information as to the Company's identifiable
assets at June 30, 1996 and 1997, and revenues, operating income,
capital expenditures and depreciation and amortization by geographic
region for the year ended June 30, 1997. As the operations from BGII
were consolidated for only the last twelve days of the year ended June
30, 1996, the geographic segment information related to the statements
of operations is not material and has not been presented for fiscal
year 1996.
[Download Table]
At June 30,
--------------------------
1996 1997
--------- ---------
(In 000's)
Identifiable assets:
Germany $ 107,545 $ 110,371
United States 267,959 242,450
Eliminations - (805)
--------- ---------
Consolidated $ 375,504 $ 352,016
========= =========
F-21
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[Download Table]
Year ended June 30, 1997
--------------------------------------------------------------
(In 000's)
Operating Capital Depreciation and
Revenues Income (Loss) Expenditures Amortization
--------- ------------- ------------ ----------------
Germany $ 142,961 $ 23,356 $ 2,091 $ 6,579
United States 311,334 19,346 11,166 16,027
Eliminations (9,149) (1,243) - -
--------- --------- --------- ---------
Consolidated $ 445,146 $ 41,459 $ 13,257 $ 22,606
========= ========= ========= =========
12. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Following is the unaudited quarterly results of the Company for the
years ended June 30, 1996 and 1997. This information is not covered by
the Independent Auditors' Report.
[Enlarge/Download Table]
Quarter
------------------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
(In 000's, except per share data)
1996
----
Revenues $ 38,541 $ 37,687 $ 40,568 $ 55,582
Operating loss (1,465) (2,059) (2,348) (41,212)
Net loss (3,418) (6,013) (5,398) (45,068)
Net loss applicable to common shares (3,418) (6,013) (5,398) (45,430)
Loss per share (.29) (.50) (.42) (3.43)
1997
----
Revenues $ 102,912 $ 128,703 $ 101,691 $ 111,840
Operating income 8,956 13,909 8,882 9,712
Net income 635 4,145 561 444
Net income (loss) applicable to common shares (2,261) 1,051 (2,420) (2,559)
Income (loss) per share (.07) .03 (.08) (.08)
13. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to
provide certain financial information regarding guaranteeing and
non-guaranteeing subsidiaries in relation to the Company's Senior
Subordinated Notes which were issued in the Refinancing transaction
completed in August 1997 (see note 4). The financial information
presented includes Alliance Gaming Corporation (the "Parent") and its
wholly-owned guaranteeing subsidiaries (together the "Parent and
Guaranteeing Subsidiaries"), and the non-guaranteeing subsidiaries
Video Services, Inc., United Gaming Rainbow, BGI Australia Pty.
Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH
& Co. KG (the subsidiary that holds the Company's German interests)
(together the "Non-Guaranteeing Subsidiaries"). The notes to
consolidating financial statements should be read in conjunction with
these consolidating financial statements.
F-22
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEETS
June 30, 1996
(In 000's)
ASSETS
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ --------- ------------
Current assets:
Cash and cash equivalents $ 36,954 $ 11,103 $ - $ 48,057
Accounts and notes receivable, net 39,327 55,473 (1,298) 93,502
Inventories, net 23,818 17,838 - 41,656
Other current assets 6,274 2,080 - 8,354
--------- --------- --------- ---------
Total current assets 106,373 86,494 (1,298) 191,569
--------- --------- --------- ---------
Long-term notes receivable, net 97,227 1,773 (84,816) 14,184
Leased equipment, net - 3,507 - 3,507
Property, plant and equipment, net 39,170 35,407 - 74,577
Excess of costs over net assets of acquired
businesses, net 36,890 23,402 - 60,292
Intangible assets, net 19,826 421 - 20,247
Investments in subsidiaries 98,599 - (98,599) -
Deferred tax assets 4,131 1,328 - 5,459
Other assets, net 14,088 (5,521) (2,898) 5,669
--------- --------- --------- ---------
$ 416,304 $ 146,811 $(187,611) $ 375,504
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 14,361 $ 4,439 $ (2,560) $ 16,240
Accrued liabilities 29,635 10,549 (1,641) 38,543
Current maturities of long-term debt 8,200 17,577 - 25,777
--------- --------- --------- ---------
Total current liabilities 52,196 32,565 (4,201) 80,560
--------- --------- --------- ---------
Senior Secured Notes due 2003, net 150,929 - - 150,929
Other long-term debt, less current maturities 83,289 15,647 (84,298) 14,638
Deferred tax liabilities 4,731 - - 4,731
Other liabilities 2,613 - (513) 2,100
--------- --------- --------- ---------
Total liabilities 293,758 48,212 (89,012) 252,958
--------- --------- --------- ---------
Minority interest 1,148 - - 1,148
Series B Special Stock 51,552 - - 51,552
Commitments and contingencies
Stockholders' equity:
Series E Special Stock 11,316 - - 11,316
Common Stock 3,176 17,832 (17,832) 3,176
Additional paid-in-capital 139,031 70,373 (70,373) 139,031
Cumulative translation adjustment (287) (314) 314 (287)
Retained earnings (accumulated deficit) (83,390) 10,708 (10,708) (83,390)
--------- --------- --------- ---------
Total stockholders' equity 69,846 98,599 (98,599) 69,846
--------- --------- --------- ---------
$ 416,304 $ 146,811 $(187,611) $ 375,504
========= ========= ========= =========
See accompanying notes
F-23
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEETS
June 30, 1997
(In 000's)
ASSETS
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ --------- ------------
Current assets:
Cash and cash equivalents $ 16,462 $ 12,462 $ - $ 28,924
Accounts and notes receivable, net 31,799 57,207 (1,305) 87,701
Inventories, net 19,231 18,778 (680) 37,329
Other current assets 6,695 2,932 - 9,627
--------- --------- --------- ---------
Total current assets 74,187 91,379 (1,985) 163,581
--------- --------- --------- ---------
Long-term notes receivable, net 96,271 1,501 (88,791) 8,981
Leased equipment, net - 7,902 - 7,902
Property, plant and equipment, net 41,836 32,811 - 74,647
Excess of costs over net assets of acquired businesses,
net 41,185 21,031 (118) 62,098
Intangible assets, net 17,979 252 - 18,231
Investment in subsidiaries 100,478 - (100,478) -
Deferred tax assets 6,265 5,511 - 11,776
Other assets, net 16,045 (11,269) 24 4,800
--------- --------- --------- ---------
$ 394,246 $ 149,118 $(191,348) $ 352,016
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,936 $ 4,262 $ 72 $ 14,270
Accrued liabilities 21,129 16,727 (464) 37,392
Current maturities of long-term debt 585 1,348 (809) 1,124
--------- --------- --------- ---------
Total current liabilities 31,650 22,337 (1,201) 52,786
--------- --------- --------- ---------
Senior Secured Notes due 2003, net 151,224 - - 151,224
Other long-term debt, less current maturities 87,924 22,676 (89,109) 21,491
Deferred tax liabilities 6,865 3,500 - 10,365
Other liabilities 2,501 - (433) 2,068
--------- --------- --------- ---------
Total liabilities 280,164 48,513 (90,743) 237,934
--------- --------- --------- ---------
Minority interest 1,546 - - 1,546
Series B Special Stock 58,981 - - 58,981
Commitments and contingencies
Stockholders' equity:
Series E Special Stock 12,368 - - 12,368
Common Stock 3,185 17,832 (17,832) 3,185
Additional paid-in capital 138,590 68,699 (68,699) 138,590
Cumulative translation adjustment (11,719) (11,880) 11,880 (11,719)
Retained earnings (accumulated deficit) (88,869) 25,954 (25,954) (88,869)
--------- --------- --------- ---------
Total stockholders' equity 53,555 100,605 (100,605) 53,555
--------- --------- --------- ---------
$ 394,246 $ 149,118 $(191,348) $ 352,016
========= ========= ========= =========
See accompanying notes.
F-24
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1995
(In 000's)
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ --------- ------------
Revenues:
Route operations $ 92,034 $ 14,820 $ --- $ 106,854
Casino operations 20,698 4,436 --- 25,134
--------- --------- --------- ---------
112,732 19,256 --- 131,988
--------- --------- --------- ---------
Costs and expenses:
Cost of route operations 70,649 9,238 --- 79,887
Cost of casino operations 12,047 2,184 --- 14,231
Selling, general and administrative 25,627 2,964 (342) 28,249
Provision for doubtful receivables 387 13 --- 400
Depreciation and amortization 8,175 1,345 --- 9,520
Direct acquisition costs 1,669 --- --- 1,669
Unusual items 2,293 --- --- 2,293
--------- --------- --------- ---------
120,847 15,744 (342) 136,249
--------- --------- --------- ---------
Operating income (loss) (8,115) 3,512 342 (4,261)
Earnings in consolidated subsidiaries 1,208 --- (1,208) ---
Other income (expense):
Interest income 2,786 115 (103) 2,798
Interest expense (7,131) (1,105) 103 (8,133)
Rainbow royalty --- (810) --- (810)
Minority interest (397) --- --- (397)
Other, net 464 195 (342) 317
--------- --------- --------- ---------
Income (loss) before income taxes (11,185) 1,907 (1,208) (10,486)
Income tax benefit (provision) 434 (699) --- (265)
--------- --------- --------- ---------
Net income (loss) $ (10,751) $ 1,208 $ (1,208) $ (10,751)
========= ========= ========= =========
See accompanying notes.
F-25
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1996
(In 000's)
Alliance
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ --------- ------------
Revenues:
Gaming equipment and systems $ 11,700 $ 1,223 $ (2,348) $ 10,575
Wall machines and amusement games --- 3,356 --- 3,356
Route operations 93,037 16,901 --- 109,938
Casino operations 14,747 33,862 (100) 48,509
--------- --------- --------- ---------
119,484 55,342 (2,448) 172,378
--------- --------- --------- ---------
Costs and expenses:
Cost of gaming equipment and systems 8,531 1,030 (2,348) 7,213
Cost of wall machines and amusement games --- 2,022 --- 2,022
Cost of route operations 73,436 10,776 --- 84,212
Cost of casino operations 9,722 12,324 --- 22,046
Selling, general and administrative 18,915 11,797 (92) 30,620
Provision for doubtful receivables 973 47 --- 1,020
Depreciation and amortization 8,746 2,242 --- 10,988
Direct acquisition costs 55,843 --- --- 55,843
Unusual items 5,498 --- --- 5,498
--------- --------- --------- ---------
181,664 40,238 (2,440) 219,462
--------- --------- --------- ---------
Operating income (loss) (62,180) 15,104 (8) (47,084)
Earnings in consolidated subsidiaries 8,378 --- (8,378) ---
Other income (expense):
Interest income 1,654 391 (474) 1,571
Interest expense (7,407) (1,964) 474 (8,897)
Rainbow royalty --- (4,070) --- (4,070)
Minority interest (963) --- --- (963)
Other, net 987 209 (895) 301
--------- --------- --------- ---------
Income (loss) before income taxes (59,531) 9,670 (9,281) (59,142)
Income tax benefit (provision) (366) (1,292) 903 (755)
--------- --------- --------- ---------
Net income (loss) (59,897) 8,378 (8,378) (59,897)
--------- --------- --------- ---------
Special Stock dividends (362) --- --- (362)
--------- --------- --------- ---------
Net loss applicable to common shares $ (60,259) $ 8,378 $ (8,378) $ (60,259)
========= ========= ========= =========
See accompanying notes.
F-26
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1997
(In 000's)
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ ----- ------------
Revenues:
Gaming equipment and systems $ 130,764 $ 11,070 $ (7,100) $ 134,734
Wall machines and amusement games -- 131,954 (20) 131,934
Route operations 108,148 18,880 -- 127,028
Casino operations 11,738 39,712 -- 51,450
--------- --------- --------- ---------
250,650 201,616 (7,120) 445,146
--------- --------- --------- ---------
Costs and expenses:
Cost of gaming equipment and systems 82,673 8,796 (6,973) 84,496
Cost of wall machines and amusement games -- 68,437 (11) 68,426
Cost of route operations 83,592 12,124 -- 95,716
Cost of casino operations 7,528 14,741 -- 22,269
Selling, general and administrative 55,565 44,859 (9) 100,415
Provision for doubtful receivables 5,049 4,010 -- 9,059
Depreciation and amortization 13,390 9,216 -- 22,606
Unusual items 700 -- -- 700
--------- --------- --------- ---------
248,497 162,183 (6,993) 403,687
--------- --------- --------- ---------
Operating income (loss) 2,153 39,433 (127) 41,459
Earnings in consolidated subsidiaries 23,497 -- (23,497) --
Other income (expense):
Interest income 1,635 369 (384) 1,620
Interest expense (21,042) (2,968) 384 (23,626)
Rainbow royalty -- (4,722) -- (4,722)
Minority interest (1,092) -- -- (1,092)
Other, net 135 4 -- 139
--------- --------- --------- ---------
Income (loss) before income taxes 5,286 32,116 (23,624) 13,778
Income tax benefit (provision) 499 (8,492) -- (7,993)
--------- --------- --------- ---------
Net income (loss) 5,785 23,624 (23,624) 5,785
Special Stock dividends (11,974) -- -- (11,974)
--------- --------- --------- ---------
Net loss applicable to common shares $ (6,189) $ 23,624 $ (23,624) $ (6,189)
========= ========= ========= =========
See accompanying notes.
F-27
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1995
(In 000's)
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ ----- ------------
Cash flows from operating activities:
Net income (loss) $(10,751) $ 1,208 $ (1,208) $(10,751)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,175 1,345 -- 9,520
Amortization of debt discounts 62 235 -- 297
Write down of other assets 2,892 (96) -- 2,796
Provision for doubtful receivables 387 13 -- 400
Other 1,282 -- -- 1,282
Change in operating assets and liabilities,
net of effects of business acquired:
Accounts and notes receivable 1,530 66 (251) 1,345
Inventories (40) -- -- (40)
Other current assets 251 4 -- 255
Accounts payable (254) (193) -- (447)
Accrued expenses (2,540) 185 -- (2,355)
Intercompany accounts (3,040) 249 2,791 --
-------- -------- -------- --------
Net cash provided by (used in)
operating activities (2,046) 3,016 1,332 2,302
-------- -------- -------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- 2,481 -- 2,481
Additions to property and equipment (7,643) (1,244) -- (8,887)
Proceeds from disposal of property and equipment 225 126 -- 351
Purchases of securities available for sale (11,086) -- -- (11,086)
Other (5,852) -- -- (5,852)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (24,356) 1,363 -- (22,993)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses -- 1,504 (1,504) --
Reduction of long-term debt (578) (2,719) 172 (3,125)
Issuance of common stock 465 -- -- 465
-------- -------- -------- --------
Net cash used in
financing activities (113) (1,215) (1,332) (2,660)
-------- -------- -------- --------
Cash and cash equivalents:
Increase (decrease) for year (26,515) 3,164 -- (23,351)
Balance, beginning of year 34,750 2,335 -- 37,085
-------- -------- -------- --------
Balance, end of year $ 8,235 $ 5,499 $ -- $ 13,734
======== ======== ======== ========
See accompanying notes.
F-28
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1996
(In 000's)
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ --------- ------------
Cash flows from operating activities:
Net income (loss) $ (59,897) $ 8,378 $ (8,378) $ (59,897)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,746 2,242 - 10,988
Amortization of debt discounts 9 236 - 245
Loss on debenture conversion 30,079 - - 30,079
Write down of other assets 6,117 (22) - 6,095
(Gain) loss on sale of property and equipment (13) 118 - 105
Provision for doubtful receivables 973 47 - 1,020
Other 2,839 (1,295) - 1,544
Change in operating assets and liabilities, net of
effects of business acquired:
Accounts and notes receivable (3,642) (2,389) 97 (5,934)
Inventories 5,754 90 - 5,844
Other current assets (1,508) 1,413 - (95)
Intercompany accounts (7,038) (1,340) 8,378 -
Accounts payable (3,195) 1,403 (97) (1,889)
Accrued liabilities 12,930 (174) 24 12,780
--------- --------- --------- ---------
Net cash provided by (used in) operating activities (7,846) 8,707 24 885
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (79,209) - - (79,209)
Additions to property, plant and equipment (6,290) (1,811) - (8,101)
Proceeds from disposal of property and equipment 2,106 176 - 2,282
Purchases of securities available for sale 13,516 - - 13,516
Other (7,156) 2,065 - (5,091)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (77,033) 430 - (76,603)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net of expenses 144,764 1,301 (645) 145,420
Reduction of long-term debt (47,233) (4,834) 621 (51,446)
Issuance of Special Stock 15,000 - - 15,000
Fees paid for conversion of convertible debentures (3,333) - - (3,333)
Issuance of Common Stock 4,400 - - 4,400
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 113,598 (3,533) (24) 110,041
--------- --------- --------- ---------
Cash and cash equivalents:
Increase for year 28,719 5,604 - 34,323
Balance, beginning of year 8,235 5,499 - 13,734
--------- --------- --------- ---------
Balance, end of year $ 36,954 $ 11,103 $ - $ 48,057
========= ========= ========= =========
See accompanying notes.
F-29
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1997
(In 000's)
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ --------- ------------
Cash flows from operating activities:
Net income (loss) $ 5,785 $ 23,624 $(23,624) $ 5,785
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 13,390 9,216 - 22,606
Amortization of debt discounts 295 512 - 807
Write down of other assets 803 272 - 1,075
Loss on sale of property and equipment 503 730 - 1,233
Provision for doubtful receivables 5,049 4,010 - 9,059
Other 32 (683) - (651)
Change in operating assets and liabilities, net of effects of business
acquired:
Accounts and notes receivable 1,912 (10,495) 3,982 (4,601)
Inventories 4,587 (12,165) 680 (6,898)
Other current assets (287) (1,262) - (1,549)
Intercompany accounts (20,345) 5,673 14,672 -
Accounts payable (4,425) (177) 2,632 (1,970)
Accrued liabilities (8,943) 7,269 914 (760)
-------- -------- -------- --------
Net cash provided by (used in) operating activities (1,644) 26,524 (744) 24,136
-------- -------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (9,198) (4,059) - (13,257)
Proceeds from disposal of property and equipment 78 176 - 254
Other (8,375) (199) - (8,574)
-------- -------- -------- --------
Net cash provided by (used in) investing activities (17,495) (4,082) - (21,577)
-------- -------- -------- --------
Cash flows from financing activities:
Net change in credit lines (7,525) (4,053) (11,578)
Reduction of long-term debt (767) (6,751) 744 (6,774)
Proceeds from exercise of stock options 767 - - 767
Repurchase of Series B Special Stock (3,879) - - (3,879)
Dividends (paid) received 10,051 (10,051) - -
-------- -------- -------- --------
Net cash provided by (used in) financing activities (1,353) (20,855) 744 (21,464)
-------- -------- -------- --------
Effect of exchange rates on cash - (228) (228)
Cash and cash equivalents:
Increase for year (20,492) 1,359 - (19,133)
Balance, beginning of year 36,954 11,103 - 48,057
-------- -------- -------- --------
Balance, end of year $ 16,462 $ 12,462 $ - $ 28,924
======== ======== ======== ========
See accompanying notes.
F-30
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
BASIS OF PRESENTATION
These notes to consolidating financial statements should be read in conjunction
with the consolidated financial statements and notes thereto. Certain
reclassifications have been made to prior years' financial statements to conform
with the current year presentation.
DEBT AND LINES OF CREDIT
Long-term debt and lines of credit at June 30, 1997 consist of the following :
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ ----- ------------
(in 000's)
12 7/8% Senior Secured notes due
2003 net of unamortized discount $ 151,224 $ 151,224
7.5% Convertible subordinated
debentures due 2003, unsecured 1,642 1,642
Hospitality Franchise Systems
note payable 6,569 6,569
Bally Wulff revolving lines of credit 9,611 9,611
Intercompany notes payable 85,815 4,103 (89,918) --
Other 1,052 3,741 4,793
--------- --------- --------- ---------
239,733 24,024 (89,918) 173,839
Less current maturities 585 1,348 (809) 1,124
--------- --------- --------- ---------
Long-term debt, less current
maturities $ 239,148 $ 22,676 $ (89,109) $ 172,715
========= ========= ========= =========
INCOME TAXES
The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 1996 are as follows:
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ ----- ------------
Deferred Tax Assets: (in 000's)
Net operating loss carry forwards $ 8,923 $ $ $ 8,923
Inventory obsolescence reserves 3,070 651 3,721
Bad debt reserves 4,719 4,719
Foreign tax credit carry forwards 11,843 11,843
Reserves for abandoned projects 1,863 1,863
Accruals not currently deductible
for tax purposes 2,831 2,831
Other 918 1,169 2,087
-------- -------- -------- --------
Total gross deferred tax assets 34,167 1,820 35,987
Less: Valuation allowance (30,036) (492) (30,528)
-------- -------- -------- --------
Deferred tax assets $ 4,131 $ 1,328 $ $ 5,459
-------- -------- -------- --------
F-31
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[Download Table]
Deferred Tax Liabilities:
Property and equipment, principally
due to depreciation differences $ 3,172 $ 3,172
Other 1,559 1,559
-------- -------- -------- --------
Total gross deferred tax liabilities 4,731 4,731
-------- -------- --------
Net deferred tax assets (liabilities) $ (600) $ 1,328 $ $ 728
======== ======== ======== ========
The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 1997 are as follows (in 000's):
[Enlarge/Download Table]
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
------------ ------------ ----- ------------
Deferred Tax Assets:
Net operating loss carry forwards $ 7,510 $ $ $ 7,510
Inventory obsolescence reserves 3,400 648 4,048
Bad debt reserves 6,359 6,359
Foreign tax credit carry forwards 11,843 11,843
Reserves for abandoned projects 1,311 1,311
Accruals not currently deductible
for tax purposes 3,581 3,581
Other 2,937 4,863 7,800
-------- -------- -------- --------
Total gross deferred tax assets 36,941 5,511 42,452
Less: Valuation allowance (30,676) (30,676)
-------- -------- -------- --------
Deferred tax assets $ 6,265 $ 5,511 $ -- $ 11,776
-------- -------- -------- --------
Deferred Tax Liabilities:
Property and equipment, principally
due to depreciation differences $ 3,703 $ $ $ 3,703
Other 3,162 3,500 6,662
-------- -------- -------- --------
Total gross deferred tax liabilities 6,865 3,500 -- 10,365
-------- -------- --------
Net deferred tax assets (liabilities) $ (600) $ 2,011 $ -- $ 1,411
======== ======== ======== ========
F-32
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESERVES AND ALLOWANCES
The following tables represent the activity for each of the fiscal years ended
June 30, 1995, 1996 and 1997 for each of the valuation reserve and allowance
accounts (in 000's):
[Download Table]
Balance at Balance at
Beginning of End of
Year Additions Deductions Year
---- --------- ---------- ----
Allowance for doubtful accounts:
Year ended June 30, 1997 $19,497 $ 9,179 $ 4,775 $23,901
Year ended June 30, 1996 1,659 18,995 (a) 1,157 19,497
Year ended June 30, 1995 1,389 1,258 988 1,659
Inventory valuation allowance:
Year ended June 30, 1997 $ 9,484 $ 1,719 $ 2,347 $ 8,856
Year ended June 30, 1996 -- 11,315 (a) 1,831 9,484
Other assets valuation reserve:
Year ended June 30, 1997 $ 3,679 $ 162 $ 339 $ 3,502
Year ended June 30, 1996 631 4,629 1,581 3,679
Year ended June 30, 1995 1,762 213 1,344 631
(a) Includes reserves assigned to BGII receivables and inventory in
purchase accounting of $17.6 million and $9.8 million, respectively.
F-33
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 7/31/05 | | 67 |
| | 1/31/05 | | 67 |
| | 7/31/03 | | 67 |
| | 8/31/02 | | 72 |
| | 9/21/00 | | 72 |
| | 9/21/99 | | 72 |
| | 6/30/99 | | 14 | | 66 | | | 10-K, 10-K/A |
| | 6/18/99 | | 70 | | 71 |
| | 9/1/98 | | 72 |
| | 7/29/98 | | 72 |
| | 6/18/98 | | 70 |
| | 12/16/97 | | 16 |
| | 12/15/97 | | 66 |
| | 9/30/97 | | 35 | | 68 | | | 10-Q |
| Filed on: | | 9/26/97 |
| | 9/24/97 | | 57 |
| | 9/11/97 | | 32 |
| | 9/8/97 | | 35 | | 70 |
| | 9/3/97 | | 58 |
| | 9/2/97 | | 1 |
| | 8/12/97 | | 34 | | 67 |
| | 8/8/97 | | 35 | | 67 |
| | 7/1/97 | | 55 |
| For Period End: | | 6/30/97 | | 1 | | 90 | | | 10-K/A |
| | 6/17/97 | | 55 |
| | 4/16/97 | | 31 |
| | 3/31/97 | | 9 | | 55 | | | 10-Q |
| | 1/1/97 | | 38 |
| | 12/31/96 | | 9 | | | | | 10-Q, 10-Q/A |
| | 12/30/96 | | 36 |
| | 12/2/96 | | 30 | | 77 |
| | 11/5/96 | | 14 | | 55 |
| | 8/29/96 | | 55 | | 71 |
| | 7/1/96 | | 35 |
| | 6/30/96 | | 3 | | 90 | | | 10-K, 10-K/A, NT 10-K/A |
| | 6/24/96 | | 55 |
| | 6/18/96 | | 2 | | 75 | | | 424B4, 8-K |
| | 5/10/96 | | 16 | | 75 | | | POS AM |
| | 5/9/96 | | 51 | | | | | S-4/A, SC 13E4 |
| | 5/1/96 | | 21 |
| | 1/1/96 | | 9 | | 27 |
| | 12/31/95 | | 4 | | 27 | | | 10-Q |
| | 10/18/95 | | 50 |
| | 9/25/95 | | 30 | | 77 |
| | 7/1/95 | | 66 | | 72 |
| | 6/30/95 | | 12 | | 90 | | | 10-K, 10-K/A, 8-K, 8-K/A |
| | 4/3/95 | | 54 |
| | 3/31/95 | | 54 | | 55 | | | 10-Q |
| | 3/29/95 | | 34 | | 63 | | | 8-K, 8-K/A |
| | 3/20/95 | | 52 | | 53 |
| | 2/7/95 | | 53 |
| | 12/31/94 | | 4 | | 55 |
| | 12/19/94 | | 2 |
| | 10/20/94 | | 52 |
| | 8/11/94 | | 53 |
| | 7/16/94 | | 15 | | 53 |
| | 7/11/94 | | 53 |
| | 7/8/94 | | 53 |
| | 6/30/94 | | 51 |
| | 3/15/94 | | 52 |
| | 2/25/94 | | 52 |
| | 1/1/94 | | 48 |
| | 11/1/93 | | 54 | | 55 |
| | 10/29/93 | | 50 | | 52 |
| | 9/21/93 | | 52 | | 72 |
| | 9/14/93 | | 52 |
| | 8/2/93 | | 52 |
| | 6/25/93 | | 51 | | 70 |
| | 6/2/93 | | 55 |
| | 3/24/93 | | 51 |
| | 2/6/93 | | 54 |
| | 12/16/92 | | 16 |
| | 7/9/92 | | 54 |
| | 7/8/92 | | 54 |
| | 3/31/92 | | 51 |
| | 1/1/92 | | 48 |
| List all Filings |
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