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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, 1996
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.)
4380 Boulder Highway
Las Vegas, Nevada 89121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (702) 435-4200
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 voting stock held by non-
affiliates of the registrant was approximately $60,293,000 as of
September 15, 1996.
The number of shares of Common Stock, $0.10 par value,
outstanding as of September 15, 1996 according to the records of
registrant's registrar and transfer agent, was 31,832,410.
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.
PART I
ITEM 1. BUSINESS
Introduction
Alliance Gaming Corporation (the "Company") is a diversified
gaming company. As part of its long-term growth strategy, the
Company acquired Bally Gaming International, Inc. ("BGII"), by
merger (the "Merger") which was consummated on June 18, 1996 and
as a result, BGII became a wholly owned subsidiary of the
Company.
The Company, through Bally Gaming in the United States and Bally
Wulff in Germany, is a leading designer, manufacturer and
distributor of electronic gaming machines. Through Bally Systems,
the Company also designs, assembles and sells computerized
monitoring systems for slot and video gaming machines which
provide casino operators with on-line real time accounting,
security, maintenance and player tracking capabilities. In
addition, the Company is the largest gaming machine operator in
Nevada, where it operates approximately 5300 gaming machines
(primarily video poker and slot machines), and is the exclusive
operator of approximately 700 video poker machines at the only
racetrack and ten associated off-track betting parlors (OTBs) in
the greater New Orleans area. The Company also owns and operates
a small casino in each of Vicksburg, Mississippi and Sparks/Reno,
Nevada.
The Company believes that through the Merger it acquired an
established company with a well-recognized presence in the gaming
industry and a significant base of assets and experience. Bally
Gaming is currently the second largest manufacturer of
casino-style electronic gaming machines in North America and
since 1993 has made significant inroads in recapturing a portion
of its once dominant market share of the late 1970s. Although
Bally Gaming sells gaming machines to most of the major
participants in the United States casino industry, the Company
hopes to continue to increase its penetration in such casinos by
capitalizing on its management's relationships within the gaming
industry to enable the Company to demonstrate the performance
capabilities of its current products. Management believes that
the Merger provides the Company with an avenue for entering a
business historically characterized by effective barriers to
entry in that the BGII assets acquired are difficult to replicate
and require significant time and investment to develop
successfully.
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. The term
"Company" as used herein refers to Alliance Gaming Corporation
and such subsidiaries unless the context otherwise requires. The
Company's principal executive offices are located at 4380 Boulder
Highway, Las Vegas, Nevada 89121; telephone (702) 435-4200. As a
result of the Merger, the Company's principal executive offices
will be relocated to BGII's facility in October 1996 which are
located at 6601 South Bermuda Road, Las Vegas, Nevada 89114;
telephone (702) 896-7700.
Business Strategy
The Company's strategic objective is to build a pre-eminent
gaming entertainment company to capitalize on what management
believes to be gaming's continuing growth within the
entertainment industry. In addition to continuing the development
of the Company's other business units, the Company's strategic
focus will be on the Bally Gaming and Systems business unit. Key
elements of the Company's strategy include:
Capitalize on Current Sales Momentum. Since 1993, Bally Gaming
management has initiated steps to increase its share of gaming
machine sales in traditional markets and capture increased gaming
machine market share in new and emerging jurisdictions. In the
mid-1980s, management's slow response to rapidly evolving
technology, new competitors and changing customer preferences
contributed to a significant reduction in market position.
Beginning in 1993, Bally Gaming began to rebuild its market
position, and has effectively increased its presence in major
casinos in the Las Vegas market, including Caesars Palace and the
MGM Grand. As part of its long-term growth strategy, Bally Gaming
has increased its research and development efforts, focusing on
upgrading its gaming product line, and has increased its sales
and marketing efforts. For example, Bally 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, which have contributed significantly to an increase in unit
sales which have approximately doubled since 1993.
Develop and Market Premier Gaming Entertainment Products
Employing Modern Technology. The Company intends to continue to
develop, market and sell premier gaming entertainment products
and systems that employ available information technology
currently in common use in other segments of the entertainment
industry, but not yet prevalent in the gaming industry. The
Company believes that technological enhancements are the key to
improving the appeal of its games and locations. The Company has
developed and is implementing a next-generation computerized
product called "Gambler's Bonus," a cardless slot players' club
and player tracking system for use in its gaming machine
operations unit which will allow multiple locations to be linked
together into a distributed gaming environment. Management
believes that Gambler's Bonus offers a wider variety of gaming
choices to players than any other gaming machine currently
available for use in route locations. Additionally, the Company,
through a joint effort of Bally Gaming and Bally Systems, is in
the process of developing an innovative form of cashless wagering
that uses bar-coded coupons which can be read by bill validators
in slot machines with the resulting information being transmitted
to a computerized monitoring system, subject to testing and
regulatory approval. The Company is investigating other
opportunities to employ technology in its products.
Enhance Operating Efficiencies and Improve the Quality of the
Company's Products and Services. The Company is taking a number
of steps to improve its operating efficiencies while at the same
time improving the quality of its products and services,
including (i) engineering improvements at Bally Gaming as well as
reducing per unit costs by increasing production throughput and
negotiating decreases in materials costs; (ii) continuing to
improve Bally Wulff's manufacturing efficiency and productivity
through the use of computer-aided design systems, automated
production equipment and devotion of substantial resources to
product quality control in its wall machine operations;
(iii) expanding the installed base of electronic gaming machines
equipped with Gambler's Bonus and updated bill-acceptor devices
throughout its Nevada gaming machine operations, which is
expected to improve the Company's revenues and operating
efficiencies; (iv) initiating improved customer service programs
and increasing employee responsiveness to customers' needs for
after-sale services; and (v) eliminating duplicative executive,
insurance, rent, outside professional services and other
administrative costs. Management will continue to seek cost
reductions and efficiencies.
Enter into Alliances with Technology and Entertainment Companies.
Management's focus on technological developments in gaming
entertainment has created the potential for alliances with other
technology-oriented companies for the purpose of sharing
information or professional services in developing product
concepts. The Company intends to continue to develop or license
technology which can be integrated into various aspects of the
gaming entertainment industry in the future. In addition, the
Company intends to make strategic acquisitions of rights to use
proprietary technology when attractive opportunities arise. There
can be no assurance, however, that any such alliances or
acquisitions will be available to the Company or will result in
sustained beneficial results to the Company.
Business Units
The Company operates through four business units: (i) Bally
Gaming and Systems, (ii) Bally Wulff (consisting of the
manufacture and distribution of wall-mounted gaming machines and
distribution of other recreational and amusement machines),
(iii) gaming machine operations and (iv) casino operations.
Bally Gaming and Systems
Bally Gaming
Overview. The Company's primary markets for its gaming machine
products are the United States, Canada and Europe and, to a
lesser extent, the Far East, Latin America and the Caribbean. The
following table sets forth the percentage of new unit sales by
market segment during the years ended December 31, 1993, 1994 and
1995, and the six months ended June 30, 1996:
New Units by Market Segment Percentage of New Units Sold
Year ended December 31, Six months
ended June 30,
1993 1994 1995 1996
Nevada and Atlantic City 27% 34% 42% 37%
International 27 21 30 45
Riverboats 31 31 12 11
Indian Gaming 12 13 14 7
Other (principally VLTs) 3 1 2 ---
100% 100% 100% 100%
United States Markets. Within the United States, Nevada
represents the largest installed base of gaming machines with an
installed base of approximately 190,000 machines as of June 30,
1996. Atlantic City is the second largest market which management
estimates had an installed base of approximately 30,000 machines
as of June 30, 1996. Bally Gaming product sales in these markets
are primarily to established casino customers to either replace
existing machines or as part of an expansion or refurbishment of
the casino. Also, because gaming machine revenues have increased
at a higher rate than table game revenues over the past decade,
casino operators have frequently increased floor space dedicated
to gaming machines. In addition, major casino openings in Nevada,
expansions of existing casinos and the proliferation of casinos
in emerging markets have created additional floor space available
for new 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,
1996, riverboat casinos were operating in Indiana, Iowa,
Illinois, Mississippi, Missouri and Louisiana. The estimated
installed base of gaming machines on riverboats is approximately
70,000 machines as of June 30, 1996.
Casino-style gaming continues to expand on North American Indian
lands. Indian gaming is regulated under the Indian Gaming
Regulatory Act of 1988 which permits specific types of gaming.
The Company's machines are placed only with Indian gaming
operators who have negotiated a compact with the state and
received approval by the U.S. Department of the Interior. The
Company has, either directly or through its distributors, sold
machines for casinos on Indian lands in Arizona, Connecticut,
Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico,
North Dakota, South Dakota and Wisconsin. Compacts have also been
approved in Oregon, Colorado and Louisiana, although Bally 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
Indian gaming machines as of June 30, 1996 was approximately
60,000 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, 1996 was approximately 15,000 machines.
The continued growth of domestic emerging markets for gaming
machines is contingent upon the public's acceptance of these
markets and an ongoing regulatory approval process by Federal,
state and local governmental authorities. Management cannot
predict which new jurisdictions or markets, if any, will approve
the operation of gaming machines, the timing of any such approval
or the level of 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 and Canada,
and to a lesser extent, the Far East, Latin America and the
Caribbean. The Company has begun, and plans to continue,
expansion into the Australian market, and in 1995, BGII
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 Bally 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.
The percentage of Bally Gaming's international revenues by
geographic area for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996 are set forth below:
New Units by Geographic Area Percentage of New Units Sold
Year ended December 31, Six months ended
June 30,
1993 1994 1995 1996
Europe 69% 56% 51% 40%
Canada 13 17 22 31
Latin America 16 20 20 25
Far East 2 4 4 2
Other --- 3 3 2
100% 100% 100% 100%
Products. Bally 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. Bally Gaming's video gaming machines
are designed to simulate various live card games and keno through
a video display. New games and themes are introduced periodically
in order to satisfy customer demand and to compete with product
designs introduced by competitors. Bally 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. Various games can be selected from a game
library that has over 200 games. The games simulate various card
games, keno and popular reel-spinning games. The Game Maker(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. Based on Bally Gaming's sales of this product to date,
management believes that Bally Gaming is currently more
competitive than in the past in the video gaming device market.
Revenues from sales of Game Maker(r) machines were approximately
$0.1 million, $6.7 million and $27.4 million during the years
ended December 31, 1993, 1994 and 1995, respectively and $12.9
million for the six months ended June 30, 1996.
The ProSeries(tm) was the result of a comprehensive product
development effort which began in 1991. The development process
included extensive testing of the new products in-house and on
casino floors for reliability and player appeal. Based on Bally
Gaming's sales of the ProSeries(tm) products to date, management
believes that the ProSeries(tm) has been the catalyst to allow
Bally Gaming to increase market share in traditional and emerging
markets for gaming machines as the product becomes accepted by
casino customers. Revenues from sales of ProSeries(tm) machines
were approximately $19.3 million, $86.2 million and $57.1 million
during the years ended December 31, 1993, 1994 and 1995,
respectively and $38.5 million for the six months ended June 30,
1996.
Bally 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.
Bally Gaming provides several after-sale, value-added services to
its customers including customer education programs, a 24-hour
customer service hot-line, and field service support programs and
spare parts programs.
In addition, Bally Gaming sells and services used gaming machines
and sells parts for existing machines. Sales of used gaming
machines increased for 1995 as management implemented a policy to
reduce inventory levels. Sales of used equipment were
$2.7 million, $4.2 million and $9.2 million during the years
ended December 31, 1993, 1994 and 1995, respectively and $2.0
million for the six months ended June 30, 1996.
The following table sets forth the percentages of revenues
provided by each of its major product lines during the periods
for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996:
Percentage of Revenues
Year ended December 31, Six months ended
June 30,
1993 1994 1995 1996
Slot machines 67% 74% 53% 63%
Video gaming machines 19 16 31 24
Other (primarily used machines,
parts and services) 14 10 16 13
100% 100% 100% 100%
During the six-months ended June 30, 1996, the Company has
experienced increased international sales which typically have a
higher percentage of slot machines impacting the mix between slot
and video machines for such period.
Bally Gaming machines have a mechanical life that can exceed 10
years. However, in the established markets, Bally 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.
Bally 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" condition through independent brokers.
In the past, Bally 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, 1993, 1994 and 1995
and for the six months ended June 30, 1996. Bally Gaming will
pursue this business only on a selective basis in the future.
Product Development. The Company believes that technological
enhancements are the key to improving the appeal of its
electronic gaming machines. Most gaming machines on casino floors
today are driven by technology which was developed over 20 years
ago. The Company believes that accelerating the use of existing
computer technology will give its gaming machines and systems a
competitive advantage in the gaming industry.
Bally Gaming develops its products for both the domestic and
international market. Bally 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. Bally Gaming can design the
software and artwork for a new model in as little as two weeks,
excluding regulatory approval. All new or modified hardware and
software is designed to satisfy all applicable testing standards
and must receive the approval of the appropriate gaming
regulatory agency based substantially on satisfying such
applicable testing standards before such gaming product can be
offered for play to the public. Most gaming jurisdictions rely
upon and accept the certification of selected independent
laboratories that a gaming product meets the applicable testing
standards.
Regulatory approval for new or modified hardware and software
changes takes from 30 days to three months or more. On an annual
basis, Bally 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.
Bally Gaming spent $3.0 million, $3.5 million, and $3.7 million
during the years ended December 31, 1993, 1994 and 1995,
respectively, and $1.8 million for the six months ended June 30,
1996, on product research and development.
Sales and Marketing. Bally Gaming uses a direct sales force, an
independent distributor network and GmbH to sell its products.
Bally Gaming's sales staff of approximately 20 people, which
operates offices in Nevada, New Jersey, Mississippi, Illinois,
Colorado and Florida, generated approximately 84% of new machine
sales over the past three calendar years and 81% of new machine
sales for the six months ended June 30, 1996. On a limited basis,
Bally Gaming currently uses distributors for sales to certain
specific markets in the United States as well as certain
international jurisdictions. Bally Gaming's agreements with
distributors do not specify minimum purchases but generally
provide that Bally Gaming may terminate such agreements if
certain performance standards are not met. Approximately 8% of
new gaming machine unit sales over the past three calendar years
and 2% for the six months ended June 30, 1996 have been generated
through independent distributors (including foreign
distributors). Approximately 8% of new gaming machine unit sales
over the past three years and 17% for the six months ended June
30, 1996 have been generated through GmbH.
In addition to offering an expansive product line, Bally 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. Bally Gaming also offers customized design
services that utilize computer aided design and studio software
programs. Bally 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, Bally 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.
Approximately 75% of Bally Gaming's slot and video gaming machine
sales are on terms of 90 days or less. Approximately 25% of Bally
Gaming's sales, primarily in certain emerging markets such as
riverboat and Indian gaming casinos, are financed over extended
periods as long as 36 months and bear interest at rates ranging
from 8% to 14%. International sales are generally consummated on
a cash basis or financed over a period of one year or less. In
addition, in certain situations, Bally Gaming has participated in
the financing of other gaming related equipment manufactured by
third parties in the emerging markets. Management believes that
financing of customer sales has become an increasingly important
factor in certain emerging markets.
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 3 - 7 years). For the year ended
December 31, 1995, and the six months ended June 30, 1996, Bally
Gaming's largest customer accounted for approximately 5% and 8%
respectively of Bally Gaming's sales while Bally Gaming's ten
largest customers accounted for approximately 25% and 42% of
Bally Gaming's revenues for the year ended December 31, 1995, and
the six months ended June 30, 1996, respectively.
Assembly Operations. Bally 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 Bally 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. Bally Gaming keeps an inventory of parts that allow
machines to be altered quickly to conform with a particular
customer's design/feature request. Bally 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 domestically and that based on public disclosures by IGT
and Bally Gaming, that Bally Gaming's percentage of the total
units sold by both IGT and Bally Gaming has shown an increasing
trend over the last three calendar years and the six months ended
June 30, 1996. There are a number of other well established,
well-financed and well-known companies producing machines that
compete with each of Bally Gaming's lines in each of Bally
Gaming's markets. The other major competitors are Universal
Distributing of Nevada, Inc., Sigma Games, Inc., WMS Industries,
Inc. ("WMS") and in the international marketplace, companies that
market gaming machines under the brand names of Aristocrat,
Atronic, Cirsa and Novomatic. Certain companies have developed
niche products such as Anchor Gaming, Mikohn Gaming Corporation,
and Casino Data Systems ("CDS"). In addition, certain
technology-oriented companies, including Sega Enterprises Ltd.
and Silicon Gaming, have recently announced their intention to
enter the gaming machine business. Management believes that some
of these competitors have greater capital resources than the
Company. Competition among gaming product manufacturers,
particularly with respect to sales of gaming machines into new
and emerging markets, is based on competitive customer pricing
and financing terms, appeal to the player, quality of the product
and having an extensive distribution and sales network.
The future success of the Company, to a large extent, will be
dependent upon the ability of Bally Gaming to design, manufacture
and market technologically sophisticated products that achieve
high levels of player acceptance. The development of a successful
new product or product design by a competitor could adversely
affect sales of Bally Gaming's products and force Bally Gaming to
try to respond quickly with its own competing products. In
addition, management believes that customer financing terms have
become an increasingly important competitive factor in certain
emerging markets. Competitive conditions sometimes require Bally
Gaming to grant extended payment terms on gaming machines and
other gaming equipment. While these financings are normally
collateralized by such equipment, the resale value of the
collateral in the event of a default may be less than the amount
financed. Accordingly, Bally Gaming will have greater exposure to
the financial condition of its customers in emerging markets than
has historically been the case in established markets like Nevada
and Atlantic City. Also, because certain of Bally Gaming's
competitors have greater financial resources, Bally Gaming will
need to rely on third party financing arrangements in order to
compete in providing competitive financing to customers.
Bally Systems
Markets for Systems. Bally 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 Bally Systems within the United States
include traditional land-based casinos predominantly in Nevada
and Atlantic City, New Jersey, Indian gaming and riverboats.
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
Bally Systems' sales to such markets will increase accordingly.
Products. Bally Systems designs, assembles, and sells a
computerized monitoring system ("SDS 6000") for slot and video
gaming machines which provide casino operators with on-line real
time data relative to a machine's accounting, security, and
maintenance functions. The SDS 6000 also provides data to, and
receives data from, other third party player tracking computer
and software applications allowing casinos to track their players
to establish and compile individual player profitability and
other demographic information. SDS 6000 is comprised primarily of
(1) hardware consisting of microcontroller-based printed circuit
boards which are installed within the slot and video machines as
well as card reader displays and keypads which provide casinos
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 Bally 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. Bally Systems also
provides software and hardware support services, including
maintenance, repair and training for purchasers of its monitoring
systems.
Product Development. Bally 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 Bally
Systems' product must communicate and be physically integrated.
Software development results in (1) periodic product releases
that include new features which extend and enhance the SDS 6000
product, (2) periodic maintenance releases which enable casino
operators to correct problems or improve the usability of the
system and (3) documentation needed to install and use the
system.
In 1995, the hardware and software groups from Bally Systems, as
well as engineers from Bally Gaming, coordinated efforts to
develop a form of cashless wagering that uses bar-coded coupons
which can be read by the bill validators in Bally 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. In 1996, Bally
Gaming and Bally Systems development groups are continuing to
direct development efforts towards other forms of cashless
wagering for use on Bally Gaming's slot machines and the SDS 6000
system.
During the years ended December 31, 1993, 1994 and 1995 and the
six months ended June, 30 1996, Bally Systems spent $1.4 million,
$1.7 million and $1.9 million and $1.1 million, respectively on
product research and development.
Sales and Marketing. Bally Systems has a direct sales force which
produces the majority of its sales. Bally Gaming's sales force
and Bally Gaming's independent distributor network produce the
balance of Bally Systems' sales, primarily in situations where
customers are making gaming machine and computerized monitoring
system purchase decisions at the same time. Worldwide, Bally
Systems has approximately 64,000 game monitoring units
installed, or in the process of being installed, of which
approximately 60,000 are in the United States. At June 30, 1996,
Bally Systems had 59 installed locations compared to 50 at
December 31, 1995. Over the past three years ended December 31,
1995, Bally Systems' own sales force has generated approximately
78% of its sales. During the six months ended June 30, 1996,
Bally Systems' own sales force generated approximately 93% of its
sales.
Bally 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
Bally 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.
Bally Systems offers limited financing terms, normally less than
one year, for sales to new installations. Most sales, however,
are invoiced on a net 30 day basis.
Customers. The demand for computerized slot monitoring systems
is driven either by regulatory requirements in a given
jurisdiction and/or by a casino operator's competitive need to
properly track 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. Bally Systems'
revenues are derived equally from selling to new installations as
well as to existing customers who are either expanding their
casino floors or are upgrading their hardware to a new product
release. For the year ended December 31, 1995 and the six months
ended June 30, 1996, Bally Systems' ten largest customers (which
include certain multi-site casino operators that have corporate
agreements with Bally Systems) accounted for approximately 92%
and 74% of Bally 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 further expansion in the established and
emerging markets as well as continued development efforts by
Bally Systems to provide customers with new and innovative
hardware and software product offerings.
Competition. Although there are numerous companies providing
computerized slot monitoring systems to casino operators, Bally
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 the jurisdictions in which they operate. Pricing, product
feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its
system. Bally Systems 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.
Bally Wulff
Industry Overview
Management believes that the German amusement game industry
consists of approximately 200,000 wall machine units and 50,000
token machine units. German regulations require the replacement
of wall machines after a period of four years. As a result,
annual market demand for wall machines in Germany approximates
50,000 units with fluctuations resulting primarily from economic
conditions and regulatory changes. 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 must be removed
from service by the end of 1996, which management believes should
lead to an increase in demand for new, metered wall machines
beginning as early as the quarter ending December 31, 1996.
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 18%) 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% of the market
for each of the last three years ended December 31, 1995 and the
six months ended June 30, 1996. On an ongoing basis, the German
legislative authorities regulate and monitor the wall machine
industry to ensure certain manufacturing standards and the
fairness of each machine to users. The most significant
legislation presently affecting the wall machine industry relates
to prescribed licensing procedures, the use, installation and
operation of wall machines and the taxation of wall machines.
There have been no recent material legislative changes other than
as described above.
Wall machines have recently experienced competition from token
machines. Token machines, unlike wall machines, are not designed
to award winning players with currency. Instead, a player wins
games or tokens. Therefore, the strict German licensing
requirements governing wall machines are not currently applied to
token machines, although this may change in the future due to
legislative changes or changes in administrative practice.
Management believes that the token machine market has reached its
potential and that sales will decline because token machines are
not subject to the four-year operation limit set by German
regulations.
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 $0.26,
at the exchange rate of $1.00=DM 1.53 prevailing as of June 30,
1996, as also 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 $2.60 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 higher rates to encourage play. Effective January 1,
1997, all wall machines in use must have meters that monitor the
amount inserted by players and paid out by the machine. Bally
Wulff has 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 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 during
the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996:
Percentage of Revenues
Year ended December 31, Six months ended
June 30,
1993 1994 1995 1996
Wall machines manufactured by
Wulff 42% 48% 39% 42%
Recreational and amusement machines
and third party wall machines
distributed 29 21 23 22
Other (primarily used machines,
parts and service 29 31 38 36
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, 1993, 1994 and 1995, and the
six months ended June 30, 1996 Bally Wulff spent approximately
$3.3 million, $3.5 million, and $3.6 million and $1.8 million
respectively, on product research and development.
Sales and Marketing. Bally Wulff sells approximately 94% of its
products through its own sales force of 56 people located in its
23 regional sales offices. Independent German distributors
account for approximately 6% of sales. Approximately 97% of
Wulff's sales of new wall machines are in the German market. The
sales offices are operated as independent profit centers and are
assigned geographic areas for which they are responsible for
sales, servicing the machines and assisting in collecting
customers' accounts receivable balances.
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 held each
January in Frankfurt, Germany, at which Bally Wulff introduces
new products.
The wall machines manufactured and sold by Bally Wulff generally
sell for prices ranging from DM 5,000 to DM 8,000 (approximately
$3,272 to $5,235). 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 20% of its sales, and management
expects this practice to increase during the latter half of 1996.
Renting machines to customers accounted for 4% of total revenues
for the six months ended June 30, 1996 compared to 2%, 2%, and 3%
during the years ended December 1993, 1994, and 1995. The rental
market is the fastest growing revenue segment and the management
expects a substantial increase for the months ahead. In
approximately 60% 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 1996 has
maintained its relationship with Bally Wulff for over three
years. For the year ended December 31, 1995, no single customer
accounted for more than 3% of Bally Wulff's sales, while Bally
Wulff's top ten largest customers accounted for approximately 10%
of Bally Wulff's revenues. For the six month period ended June
30, 1996, Bally Wulff's top ten customers accounted for
approximately 14% of Bally Wulff's sales, one customer accounted
for 6% with no other customer more than 2%.
Bally Wulff's customer base for wall machines may be divided into
two categories which differ based on the preferences of their
clientele. Arcade operators are generally interested in
purchasing the newest products in the hopes that a new innovation
will result in a high level of public demand to play the new
"hot" product. Hotels, restaurants and taverns, on the other
hand, are generally more inclined to purchase lower-priced
existing models with proven earnings records to provide as an
amenity to customers.
Assembly Operations. Bally Wulff's manufacturing process is
primarily an assembly operation. Its manufacturing facility
consists of a four-story, 100,000-square foot building in Berlin,
Germany. Bally Wulff purchases its key raw materials,
sub-assemblies and fabricated parts from a variety of suppliers,
and most parts are purchased from multiple suppliers. While there
exists no formal long-term contract commitments to any single
supplier, Bally Wulff has placed certain standing orders with
suppliers through 1996 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 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.
Gaming Machine Operations
Nevada Operations
Overview. The Company's Nevada gaming machine 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 gaming machine 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 gaming machine operations for the fiscal
years ended June 30:
1994 1995 1996
Average number of
gaming machines owned 5,149 5,253 5,285
Average number of locations 504 514 524
Win per day per gaming machine $46.00 $47.72 $48.57
The Company enters into gaming machine operating 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%,
86%, and 85% of revenues and 80%, 78%, and 77% of installed
machines, respectively, in the Company's Nevada gaming machine
operations in fiscal 1994, 1995, and 1996. At June 30, 1996, the
weighted average remaining term of the Company's revenue sharing
arrangements was approximately 3.6 years. Space lease
arrangements accounted for approximately 14%, 14%, and 15% of
revenues and 20%, 22%, and 23% of installed machines,
respectively, in the Company's Nevada gaming machine operations
in fiscal 1994, 1995, and 1996. At June 30, 1996, the weighted
average remaining term of the Company's space leases was 3.1
years.
The Company has historically been able to renew or replace
revenues from expiring agreements with revenues generated by
renewal or replacement contracts. However, during the past few
years, increased competitive pressures in the gaming machine
operations business have increased the portion of gaming machine
revenues payable to the local establishment, decreasing the
Company's gross margins from these operations. As a result, the
Company has refocused its Nevada gaming machine operations to
emphasize return on investment rather than increasing market
share and has undertaken a systematic review process to adjust
its contract mix to emphasize higher margin contracts and, where
permissible, canceling or not renewing unprofitable contracts.
Sales and Marketing. As the largest gaming machine 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, such as Gambler's Bonus.
The Company has developed and is currently implementing a new
system called "Gambler's Bonus". Gambler's Bonus is designed as a
cardless slot players' club and player tracking system, which
allows multiple 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 currently 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 will offer a series of
new and unique games available only to members of the Gambler's
Bonus players' club. Since launching Gambler's Bonus, the gaming
machines linked to Gambler's Bonus have experienced an increase
in net win per day per machine. As of June 30, 1996, the Company
had the Gambler's Bonus system installed in 61 locations
representing approximately 750 gaming machines. The Company
believes Gambler's Bonus will improve both the revenues and
operating efficiencies of its Nevada gaming machine operations
and has the potential to create additional opportunities in the
gaming machine 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% of the
Company's revenues generated from Nevada gaming machine
operations during fiscal 1996, although approximately 14.3% of
such revenues was generated through an affiliated group of such
customers. The affiliated group consists of seven partnerships
each having one individual partner who is common to all such
partnerships. For the year ended June 30, 1996, the Company's ten
largest customers accounted for approximately 26.3% of the
Company's Nevada gaming machine operations revenues.
Assembly Operations. The Company currently manufactures and
distributes electronic gaming machines in Nevada for use in its
gaming machine operations. The Company manufactured approximately
80% of the electronic gaming machines currently used in its
Nevada gaming machine operations. The manufacturing process
generally involves the assembly of standard components which are
readily available from various sources. The Company is not
dependent upon any one supplier for the material or components
used in its manufacturing operations. The Company will soon
combine this operation with the Bally Gaming assembly operation.
Competition. The Company is subject to substantial direct
competition for its revenue-sharing and space lease locations
from several large gaming machine operators and numerous small
operators, located principally in Las Vegas, Reno and the
surrounding areas. The Company and Jackpot Enterprises, Inc. are
the dominant gaming machine operators in Nevada. The principal
method of competition for gaming machine operators includes the
economic terms of the revenue-sharing or space lease arrangement,
the services provided and the reputation of the gaming machine
operator. Price competition is intense and has reduced the
Company's gross margin on such operations over the past several
years as the percentage of the gaming machine revenues retained
by local establishment owners has increased.
Louisiana Operations
Overview. In March 1992, the Company capitalized on its Nevada
gaming machine operations expertise to obtain a contract to
operate video poker gaming machines in the greater New Orleans,
Louisiana area through its controlled 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 operator of video poker machines at the only
racetrack and ten associated OTB parlors in the greater New
Orleans area. The Company selects, installs, manages and
services video poker machines 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, 1996 the
Company has installed 653 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. In addition, the Company and Fair Grounds
may have certain mutual rights of first refusal to participate in
certain Louisiana riverboat gaming opportunities of the other
party on terms and conditions to be specified.
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.
The Louisiana legislature has recently passed a bill which will
result in an election to be held in November 1996 which will
allow each parish to decide whether to disallow video poker
machines, riverboat casinos and, in Orleans Parish, land-based
casinos. If any parish in which the Company operates elects to
disallow video poker machines, the Company would have to cease
its video poker operations there by June 30, 1999. The Company
cannot predict which parishes will so elect; however, if Orleans
Parish or certain other parishes in which the Company operates so
elect, the cessation of the Company's video poker operations
would have an adverse effect on the operations of the Company.
On December 17, 1993, the Company incurred a fire loss at the
Fairgrounds Race Course in New Orleans where the Company operated
199 gaming machines prior to the fire, 193 of which were
destroyed in the fire. The Company was fully insured for all
equipment, leasehold improvements, other assets and business
income with the exception of immaterial deductibles. From
December 17, 1993 through June 30, 1996, the Company recorded
approximately $815,500 of income from business interruption
insurance proceeds of which $327,000 was recorded in the year
ended June 30, 1996. The Company is discussing settlement of
additional business interruption claims with the insurance
carrier.
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.
If the result of the November vote is favorable, 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
truck stops and locations with liquor licenses throughout the New
Orleans area. Each truck stop 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 several riverboats are 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. The operator has stated its
intention to reopen the land-based casino following
reorganization.
Casino Operations
Rainbow Casino. On July 16, 1994, the Rainbow Casino located in
Vicksburg, Mississippi permanently opened for business. The
project includes the Rainbow Casino, which is a 24,000-square
foot casino owned and operated by the Company which during fiscal
year 1996 operated approximately 588 gaming machines and 27 table
games. 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 operated by third parties. The property is the only
destination of its kind in Mississippi containing a
casino/hotel/family entertainment complex.
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. The 55% general partnership interest in RCVP was
held by Rainbow Casino Corporation ("RCC"), an unaffiliated
Mississippi corporation. Pursuant to a management agreement dated
October 29, 1993, which terminates on December 31, 2010, the
Company through a wholly-owned subsidiary also serves as manager
of the casino. In connection with the completion of the casino
and the acquisition of its original 45% limited partnership
interest, the Company funded a $3,250,000 advance to RCC on the
same terms as RCC's financing from Hospitality Franchise Systems
("HFS") (other than the fact that such advance is subordinate to
payments due to HFS, and the HFS financing is secured). The HFS
financing provided to RCC on August 3, 1993 consisted of a $7.5
million loan secured by a first priority lien on all of the
assets of the project. The terms of the HFS financing provide
that, in connection with the loan and certain marketing services
provided by HFS to RCVP, RCVP will pay to HFS a perpetual royalty
based upon the casino's annual gross gaming revenues of 12% on
the first $40.0 million, 11% on the next $10.0 million, and 10%
thereafter.
On March 29, 1995, the Company consummated certain transactions
whereby the Company acquired from RCC the controlling general
partnership interest in RCVP and increased its partnership
interest. In exchange for the commitments by NGM, a subsidiary of
National Gaming Corporation, and the Company to provide
additional financing (up to a maximum of $2.0 million each) to be
used, among other things for the completion of certain incomplete
elements of the project which survived the opening of the casino
(which RCC was to have been responsible for, but failed to
complete) and for a $0.5 million payment to HFS as a waiver fee,
and a commitment by the Company to fund any additional capital
necessary for the completion, upgrading or working capital of the
project, the following occurred: (i) a subsidiary of the Company
became the general partner and RCC became the limited partner and
(ii) the respective partnership interests were adjusted. Pursuant
to the transactions consummated on March 29, 1995, RCC is now
entitled to receive 10% of the net available cash flows after
debt service and other items, as defined (which amount increases
to 20% of such amount if revenues exceed $35.0 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. Also, the
Company's 5.2% royalty on gross revenues was terminated on the
date it became the general partner. In addition, if during any
continuous 12-month period until December 31, 1999 the casino
achieved earnings from the project of at least $10.5 million
before deducting depreciation, amortization, royalty and income
taxes, then the Company would be obligated to make a one time
payment to certain principals of the original partnership of an
amount aggregating $1.0 million in cash or shares of the
Company's common stock 180 days after the occurrence. The casino
has achieved the required earnings as adjusted in the twelve-
months ended March 31, 1996, and the Company intends to make the
required payment in cash by September 27, 1996. As of June 30,
1996, amounts outstanding under the HFS facility and the related
financings aggregated $7.9 million.
Plantation Station. In April 1990, the Company purchased, for an
aggregate purchase price of $9.5 million, substantially all of
the assets of the Plantation Station casino ("Plantation
Station") located near the border of the cities of Reno and
Sparks in northern Nevada. Plantation Station is a 20,000
square-foot casino which during fiscal year 1996 operated
approximately 447 gaming machines, keno and 10 table games,
including blackjack, craps, roulette and poker. In addition,
Plantation Station includes a 300-seat restaurant and offers a
race and sports book which is leased to an independent race and
sports book operator. Plantation Station is convenient to both
Reno and Sparks and caters to the local market.
Sales and Marketing. The Company's casinos target the
cost-conscious segment of the market. The Company promotes its
casinos primarily through special promotional events and by
providing quality food at reasonable prices.
Competition. Gaming of all types is available throughout Nevada
and Mississippi in numerous locations, including many locations
which may compete directly or indirectly with the Company's
casino operations. Many of these competitors possess
substantially greater financial and other resources than the
Company. Many of such competitors include large casino-hotels
which offer more variety and amenities and may be perceived to
have more favorable locations than the Company. The operation of
casinos is a highly competitive business. The principal
competitive factors in the industry include the quality and
location of the facility, the nature and quality of the amenities
and customer services offered and the implementation and success
of marketing programs. Plantation Station's primary casino
operations focus on the local market rather than the tourist
market. Accordingly, the Company believes that the principal
competition for Plantation Station's operations comes from larger
"locals" casinos. The Rainbow Casino appeals to both locals and
visitors to historic Vicksburg, Mississippi. The Rainbow Casino
is the fourth gaming facility to open in Vicksburg, Mississippi
and as such, faces substantial direct competition for gaming
customers in the region. In addition, a potential gaming site on
the Big Black River has been proposed, which would be located
approximately 15 miles closer to Jackson, Mississippi which is a
primary market for Vicksburg.
Closed Casinos and Taverns
In July 1993, the Company began leasing and operating the casino
at the 326 room Quality Inn located approximately one mile from
the Las Vegas Strip. The casino at Quality Inn contains 156
gaming devices and 3 table games. The Company's lease to operate
this facility expired in July 1995. The Company chose not to
exercise its renewal rights under this lease. The Company
operated under modified lease terms which expired in June 1996.
The Company had leased and operated the Mizpah Hotel and Casino
("Mizpah"), a small casino and hotel in Tonopah, Nevada. The
Mizpah has 56 rooms, two restaurants and 70 gaming devices
catering primarily to local residents and travelers between Reno
and Las Vegas. On December 31, 1995, in accordance with the terms
of the lease, the Company notified the landlord of the Mizpah of
its intention to exercise the termination clause of the lease and
gave the requisite 120 days notice at that time. Consequently,
the lease expired in April 1996, but the Company agreed to
continue operating the Mizpah until June 1996.
From 1990 to 1992, the Company had acquired six taverns in the
Las Vegas area when the owners of the locations defaulted on
their subleases with the Company. The Company operated three of
the locations with a total of 80 gaming devices. In addition,
each of the locations include full-service restaurants. The
other locations were either not currently open for business or
operated by unaffiliated third parties pending the sale of the
properties. Due to continuing operating losses and the
incompatibility of small independent tavern operations with the
Company's overall growth strategy, in fiscal 1994 the Company
elected to dispose of its taverns. Subsequently, the Company
completed an agreement in September 1995 to sell all six tavern
locations to an unaffiliated third party. Pending the obtainment
of the appropriate approvals from Nevada gaming authorities, the
Company agreed to continue to operate the opened taverns until
the buyer could assume the operations. Final approval was granted
to the buyer in January 1996, at which time the Company ceased
operating the taverns.
Patents, Copyrights and Trade Secrets
Bally Gaming and Systems have copyrighted both the source code
and the video presentation of its games and registered many of
these copyrights with the U.S. Copyright Office under the
Copyright Act of 1976. Game version upgrades and new games are
currently in the process of United States patent and copyright
registration. Such copyrights expire at various dates from
September 2056 to October 2065. In addition, some of the games
have Federal and/or state trademarks registered with the U.S.
Patent and Trademark Office. Some of the games (either currently
used or reserved for future development) also are covered by
patents filed with the U.S. Patent and Trademark Office. Such
patents expire at various dates from May 2008 to March 2012.
Bally Gaming 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 BEC dated May 10, 1996, the
Company 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 $1,000,000 for the initial five-year term of
the amended agreement, which is subject to annual renewals by the
Company thereafter. Royalty expense for BGII for the years ended
December 31, 1993, 1994 and 1995, and the six months ended June
30, 1996 was $1.1 million, $2.9 million, $3.0 million and $1.1
million, respectively.
In July 1992, BGII reached an agreement for an exclusive license
until December 31, 2005, subject to extension, of a patent
relating to the use of credit cards in gaming machines and
acquired 1% of the stock of Scotch Twist, Inc., the private
company which granted this license in exchange for the issuance
of 100,001 shares of BGII's common stock and other considerations
totaling $1.7 million. The licensing agreement requires BGII to
commit $1.2 million in research and development costs related to the patent,
plus any costs related to obtaining required regulatory approvals
and licenses. As of June 30, 1996, approximately $1.0 million had
been spent relating to this commitment.
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 sell the Progressive System (i) within
Europe, (ii) for use in single locations, and (iii) worldwide in
lottery applications. 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.
Business Development Activity
The Company has been very active in its business development
activity. While the Company will continue to be active in the
future, it intends to reduce development expenses related to
mergers, acquisitions and joint ventures. The reduction reflects
the elimination of costs that were being incurred prior to the
Company's accomplishment of its strategic plan to acquire a major
electronic gaming machine manufacturing and systems company. To
accomplish this reduction the Company intends to reduce fees paid
to consultants and legal costs related to other transactions the
Company had been pursuing.
Employees and Labor Relations
As of June 30, 1996, the Company employed approximately 1,100
persons in the State of Nevada, VSI employed 70 persons in the
State of Louisiana, RCVP employed 390 persons in the State of
Mississippi, the Company employed approximately 60 persons in
various other states and Bally Wulff employed 440 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. The past conduct
of management, which may be re-examined in conjunction with
hearings in Nevada, New Jersey and Louisiana, would normally not
be a controlling factor in passing upon the suitability of a
successor group when that prior management group would no longer
be in control of the Company. Absent actual approval of the
successor interests controlling the Company after a merger or
other acquisition, there can be no assurances that governmental
authorities would give required approvals to any particular
persons or groups.
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 management operations")
are subject to the licensing and regulatory control of the Nevada
State Gaming Control Board ("Nevada Board"), the Nevada Gaming
Commission ("Nevada Commission"), the County Liquor and Gaming
Licensing Board ("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 ("Registered Corporation"). The
Company's direct and indirect subsidiaries which conduct gaming
operations at various locations, conduct gaming machine
management operations and manufacture and distribute gaming
devices (collectively, "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 has been
found suitable to own the stock of the Nevada Subsidiaries, each
of which is a corporate licensee (individually, "Corporate
Licensee" and collectively, "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 and Corporate Licensees have obtained from the Nevada
Gaming Authorities the various registrations, approvals, permits
and licenses required in order to engage in gaming activities,
gaming machine management operations, and in the manufacture and
distribution of gaming 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 must be
administratively approved by the Chairman of the Nevada Board
before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who
has a material relationship to, or material involvement with, the
Company or the Corporate Licensees in order to determine whether
such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and key
employees of the Company who are actively and directly involved
in the licensed activities of the Corporate Licensees may be
required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an
application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant
for licensing or a finding of suitability must pay all the costs
of the investigation. Changes in licensed positions must be
reported to the Nevada Gaming Authorities 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 or Corporate
Licensees, the companies involved would have to sever all
relationships with such person. In addition, the Nevada
Commission may require the Company or the Corporate Licensees to
terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial
review in Nevada.
The Company and 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 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 Senior Secured
Notes or the Preferred Stock, 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 both the
Company's 15% Non-Voting Senior Pay-in-Kind Special Stock, Series
B and the 11 1/2% Non-Voting Junior Convertible Pay-in-Kind
Special Stock, Series E, each 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 acquired and are held in the ordinary course of
business as an institutional investor and not for the purpose of
causing, directly or indirectly, the election of a majority of
the members of the board of directors of the Registered
Corporation, any change in the Registered Corporation's corporate
charter, bylaws, management, policies or operations of the
Registered Corporation, or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent
with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be
inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by
stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for
informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other
activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The
applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do
so by the Nevada Commission or the Chairman of the Nevada Board
may be found unsuitable. The same restrictions apply to a record
owner if the record owner, after request, fails to identify the
beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the
common stock beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a criminal offense. The
Company is subject to disciplinary action if, after it receives
notice that a person is unsuitable to be a stockholder or to have
any other relationship with the Company or the Corporate
Licensees, the Company (i) pays that person any dividend or
interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities,
including, if necessary, the immediate purchase of said voting
securities for cash at fair market value. Additionally, the
Clark County Board has 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, such as the
Company's Senior Secured Notes, to file applications, be
investigated and be found suitable to own the debt security if
the Nevada Commission has reason to believe that such ownership
would otherwise be inconsistent with the declared policies of the
State of Nevada. If the Nevada Commission determines that a
person is unsuitable to own such security, then pursuant to the
Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if, without the prior
approval of the Nevada Commission, it (i) pays the unsuitable
person any dividend, interest or any distribution whatsoever,
(ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion,
exchange, liquidation or similar transaction.
The Company is required to maintain 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. 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 in a variety
of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as a
part of the approval process relating to the transaction.
The 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 is under common control with such
persons (collectively "Licensees"), and who proposes to become
involved in a gaming venture outside of Nevada, is required to
deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or
decrease in the discretion of the Nevada Commission. Thereafter,
Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also
subject to disciplinary action by the Nevada Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining
to the foreign gaming operation, fail to conduct the foreign
gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in
activities that are harmful to the state of Nevada or its ability
to collect gaming taxes and fees, or employ a person in the
foreign operations who has been denied a license or finding of
suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a
Corporate Licensee is subject to licensing, control and
regulation by applicable regulatory agencies. All licenses are
revocable and are not transferable. The agencies involved have
full power to limit, condition, suspend or revoke any such
license, and any such disciplinary action could (and revocation
would) have a material adverse affect 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 recently licensing and regulatory control was
provided by the Video Gaming Division of the Gaming Enforcement
Section of the Office of State Police within the Department of
Public Safety and Corrections (the "Division"). The Louisiana
legislature recently passed a bill which creates 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 will issue all licensing after May 1,
1996 for all forms of legalized gambling in Louisiana (including
gaming on Indian 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. The Louisiana legislature
recently passed a bill which would allow each parish to decide
whether to disallow video poker devices, riverboat casinos and,
in Orleans Parish, land-based casinos. If any parish in which the
Company operates elects to disallow video poker devices, the
Company would have to cease its video poker operations there by
June 30, 1999. The Company cannot predict which parishes will so
elect; however, if all of the parishes in which the Company
operates so elect, the cessation of the Company's video poker
operations would have an adverse effect on the operations of the Company.
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 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. This investigation may
extend to information regarding a person's immediate family and
relatives and their affiliations with certain organizations or
other business entities. The investigation may also extend to any
person who has or controls more than a 5% ownership, income or
profits interest in an applicant for or holder of a license or
who is a key employee, or who has the ability to exercise
significant influence over the licensee. All persons or entities
investigated 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, Bally Gaming and Systems have been licensed as a
manufacturer under the Louisiana Riverboat Economic Development
and Gaming Control Act (the "Louisiana Riverboat Act"). Bally
Gaming and Systems' 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 an effective closure
of the LEDGC regulatory operations. The authority and duties 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 close 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, distribution, ownership and
operation of gaming machines in Mississippi is subject to
extensive state and local laws and regulations, including the
Mississippi Gaming Control Act (the "Mississippi Act") and the
regulations (the "Mississippi Regulations") promulgated
thereunder. The Mississippi Gaming Commission (the "Mississippi
Commission") oversees licensing and regulatory compliance. Gaming
in Mississippi can be legally conducted only on vessels of a
certain minimum size in navigable waters of the Mississippi River
or in waters of the State of Mississippi which lie adjacent and
to the south (principally in the Gulf of Mexico) of the counties
of Hancock, Harrison and Jackson, and only in counties in
Mississippi in which the registered voters have not voted to
prohibit such activities. The voters in Jackson County, the
southeastern-most county of Mississippi, have voted to prohibit
gaming in that county. However, gaming could be authorized in
Jackson County should the voters fail to disapprove of gaming in
that county in any referendum, which could be held annually. The
underlying policy of the Mississippi Act is to ensure that gaming
operations in Mississippi are conducted (i) honestly and
competitively, (ii) free of criminal and corruptive influences
and (iii) in a manner which protects the rights of the creditors
of gaming operations.
The Mississippi Act requires that a person (including any
corporation or other entity) must be licensed to conduct gaming
activities in Mississippi. A license to own and operate gaming
machines will be issued only for a specified location which has
been approved as a gaming site by the Mississippi Commission. The
Company, through its interest in RCVP, must apply for renewal of
such licenses every two years, which renewal cannot be assured.
Gaming holds a license to manufacture and distribute gaming
machines. The current license at the Rainbow Casino will expire
on June 30, 1998 unless renewed in advance of that date. Alliance
knows of no reason why such license will not be renewed. The
Mississippi Act also requires that each officer or director of a
gaming licensee, or other person who exercises a significant
influence over the licensee, either directly or indirectly, must
be found suitable by the Mississippi Commission. In addition, any
employee of the licensee who is directly involved in gaming must
obtain a work permit from the Mississippi Commission. The
Mississippi Commission will not issue a license or make a finding
of suitability unless it is satisfied, only after an extensive
investigation paid for by the applicant, that the persons
associated with the gaming licensee or applicant for a license
are of good character, honesty and integrity, with no relevant or
material criminal record. In addition, the Mississippi Commission
will not issue a license unless it is satisfied that the licensee
is adequately financed or has a reasonable plan to finance its
proposed operations from acceptable sources, and that persons
associated with the applicant have sufficient business probity,
competence and experience to engage in the proposed gaming
enterprise. The Mississippi Commission may refuse to issue a work
permit to a gaming employee (i) if the employee has committed
larceny, embezzlement or any crime of moral turpitude, or
knowingly violated the Mississippi Act or Mississippi
Regulations, or (ii) for any other reasonable cause. If an
employee is denied a license, the Company must terminate his or
her employment.
The Mississippi Commission has the power to deny, limit,
condition, revoke and suspend any license, finding of suitability
or registration, or fine any person, as it deems reasonable and
in the public interest, subject to any opportunity for a hearing.
The Mississippi Commission may fine any licensee or person who
was found suitable up to $100,000 for each violation of the
Mississippi Act or the Mississippi Regulations, which is the
subject of an initial complaint, and up to $250,000 for each such
violation which is the subject of any subsequent complaint. The
Mississippi Act provides for judicial review of any final
decision of the Mississippi Commission by petition to a
Mississippi Circuit Court, but filing of such petition does not
necessarily stay any action by the Mississippi Commission pending
a decision by the Circuit Court.
Each gaming licensee must pay a license fee to the State of
Mississippi based upon "gaming receipts" (generally defined as
gross receipts less payouts to customers as winnings). The
license fee equals four percent of gaming receipts of $50,000 or
less per month, six percent of gaming receipts over $50,000 and
up to $134,000 per month and eight percent of gaming receipts
over $134,000 per month. The foregoing license fees are allowed
as a credit against any Mississippi State income tax liability
for the year paid. An additional license fee, equal to $100 for
each table game conducted or planned to be conducted on the
gaming premises, is payable to the State annually in advance.
Municipal and county fees may also be assessed and vary from
jurisdiction to jurisdiction. All taxes and fees must be paid
timely in order to retain a gaming license. The Mississippi Act
also imposes certain audit and record keeping laws and
regulations, primarily to ensure compliance with the Mississippi
Act, including compliance with the provisions relating to the
payment of license fees.
Under the Mississippi Regulations, a gaming licensee cannot be
publicly held, although an affiliated corporation, such as the
Company, may be publicly held so long as the Company registers
with and gets the approval of the Mississippi Commission. In
addition, approval of any subsequent public offerings of the
securities of the Company must be obtained from the Mississippi
Commission if any part of the proceeds from that offering are
intended to be used to pay for or reduce debt used to pay for the
construction, acquisition or operation of any gaming facility in
Mississippi.
Under the Mississippi Regulations, a person is prohibited from
acquiring control of a licensee without the prior approval of the
Mississippi Commission. Any person who, directly or indirectly,
or in association with others, acquires beneficial ownership of
more than five percent of a licensee must notify the Mississippi
Commission of this acquisition. The Mississippi Commission may
require that a person be found suitable if that person holds
between a five percent and ten percent ownership position and
must require that a person be found suitable if that person owns
more than ten percent of a licensee. Furthermore, regardless of
the amount of ownership, any person who acquires beneficial
ownership may be required to be found suitable if the Mississippi
Commission has reason to believe that the acquisition of such
ownership would be inconsistent with the declared policy of
Mississippi. Any person who is required to be found suitable must
apply for a finding of suitability from the Mississippi
Commission within 30 days after being requested to do so, and
must deposit with the State Tax Commission a sum of money which
is adequate to pay the anticipated investigatory costs associated
with such finding. Any person who is found not to be suitable by
the Mississippi Commission shall not be permitted to have any
direct or indirect ownership in the licensee. Any person who is
required to apply for a finding of suitability and fails to do
so, or who fails to dispose of his or her interest in the
licensee if found unsuitable, is guilty of a misdemeanor. If a
finding of suitability with respect to any person is not applied
for where required, or if it is denied or revoked by the
Mississippi Commission, the licensee is not permitted to pay such
person for services rendered, or to employ or enter into any
contract with such person.
Dockside casinos may be required to be moved to a "safe harbor"
in the event of a threatened hurricane. The appropriate county
civil defense director will determine when such movement is
required. In general, it is anticipated that casino vessels will
have to be moved in the event of a Class III or more severe
hurricane warning, where there is the possibility of 125 miles
per hour wind speeds. The movement of a casino barge will not
necessarily insure protection against damage or destruction by a
hurricane. Furthermore, the removal of a casino barge will
generally require several days, and as a consequence, the casino
barge will be out of business during that movement, even if no
hurricane strikes the casino site.
Any permanently moored vessel used for casino operations must
meet the fire safety standard of the Mississippi Fire Prevention
Code, the Life Safety Code and the Standards for the Construction
and Fire Protection of Marine Terminals, Piers and Wharfs of the
National Fire Protection Association. Additionally, any
establishment to be constructed for dockside gaming must meet the
Southern Standard Building Code or the local building code, if
such a local building code has been implemented at the casino's
site.
While unpowered and permanently moored vessels do not require
certification by the United States Coast Guard, the Mississippi
Commission has engaged the American Bureau of Shipping, an
independent consulting agency, which will inspect and certify all
casino barges with respect to stability and single compartment
flooding integrity, in accordance with Mississippi Regulations.
The laws and regulations permitting and governing Mississippi
casino gaming were adopted during 1990 and 1991, and the first
casinos opened in August 1992. Consequently, the interpretation
and application of Mississippi law and regulations may evolve
over time, and any such changes may have an adverse effect on
Mississippi licensees.
New Jersey. The Company's subsidiary that conducts Bally Gaming
and Systems' business 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 control of BGII as
a result of the Merger, BGII's license as a CSI was terminated.
The Company has applied for a new CSI license following the
Merger and 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 sale-by-sale basis
pending final action on the Company's CSI license application.
In considering the qualifications of an applicant for a CSI
license, the New Jersey Commission may require that the officers,
directors, key personnel, financial sources and stockholders (in
particular those with holdings in excess of 5%) of the applicant
and its holding and intermediary companies demonstrate their
qualifications. In this regard, such persons and entities may be
investigated and may be required to make certain regulatory
filings and to disclose and/or to provide consents to disclose
personal and financial data. The costs associated with such
investigation are typically borne by the applicant.
Additional Domestic Jurisdictions. The Company, in the ordinary
course of its business, routinely considers business
opportunities to expand its gaming operations into additional
jurisdictions.
Although the laws and regulations of the various jurisdictions in
which the Company operates or into which the Company may expand
its gaming operations vary in their technical requirements and
are subject to amendment from time to time, virtually all of
those jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and
other forms of approval for companies engaged in the manufacture
and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such
companies.
The Company and their key personnel have obtained, or applied
for, all government licenses, registrations, findings of
suitability, permits and approvals necessary for the manufacture
and distribution, and operation where permitted, of their gaming
machines in the jurisdictions in which 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 Merger, the Company and
its officers and directors will be required to apply for any
government licenses, permits and approvals necessary or required
by each of these jurisdictions.
Holders of common stock of an entity licensed to manufacture and
sell gaming machines, and in particular those with holdings in
excess of 5%, should note that local laws and regulations may
affect their rights regarding the purchase of such common stock
and may require such persons or entities to make certain
regulatory filings, or seek licensure, findings of qualification
or other approvals. In some cases this process may require the
holder or prospective holder to disclose and/or provide consents
to disclose personal and financial data in connection with
necessary investigations, the costs of which are typically borne
by the applicant. The investigatory and approval process can take
three to six months to complete under normal circumstances.
On July 24, 1996 Bally Gaming entered into a Consent Agreement
and Order (the "Agreement") with the Arizona Department of Gaming
(the "ADG") to resolve a technical violation of the Tribal
Compact between Arizona and the Kaibab Band of Paiute Indians.
Under the terms of the Agreement, Bally Gaming will be restricted
from selling any new gaming devices to Arizona Indian gaming
operations for a period of one year, until July 24, 1997. Bally
Gaming may continue to provide service to its Arizona customers,
sell upgrades to its products and conduct other routine
transactions under the terms of the Agreement. Bally Gaming
expects no material economic effect arising out of its inability
to sell new gaming machines in Arizona over the next twelve
months.
Federal Registration. The operating subsidiaries of the Company
that are involved in gaming activities are required to file
annually with the Attorney General of the United States in
connection with the sale, distribution or operation of gaming
machines. All currently required filings have been made.
Germany. German legislative authorities regulate and monitor the
wall machine industry so as to ensure certain manufacturing
standards and the fairness of each machine to users. The most
significant legislation presently affecting the wall machine
industry relates to prescribed licensing procedures, the use,
installation and operation of machines and the taxation of same.
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 facts justify the assumption
that the applicant does not possess the requisite reliability. In
this proceeding, the applicant must furnish a police certificate
of conduct.
German legislation prohibits the public play of wall machines by
individuals under age 18. Voluntary agreements among
manufacturers and certain amusement game trade associations,
among other things, restrict wall machine advertising and the
ability of a player to play more than two machines at once,
require all machines to carry visible warning notices and provide
that every wall machine is automatically switched off for three
minutes after one hour of continuous play.
In April 1993, the German government increased the maximum coin
drop per game effective May 7, 1993 from 30 pfennigs
(approximately $0.20) to 40 pfennigs (approximately $0.26)
although 30-pfennig machines are still permitted to be
manufactured and sold.
The Spielverordnung (gaming ordinance) specifically governs wall
machines. These regulations limit game payouts to DM 4.00
(approximately $2.60 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 they 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%. With respect to operators of
gaming machines, prior to January 1, 1994, V.A.T. was to have
been assessed at a rate of 0.1304 times a multiplier of, with
respect to the period from January 1, 1991 through December 31,
1992, 2.0 times the amount remaining in the cash box after
payoffs to players and, with respect to the period from
January 1, 1993 through December 31, 1993, 2.5 times the amount
remaining in the cash box after payouts to players. Commencing
January 1, 1994 the tax rate was changed to 0.1304 times the cash
handled by a machine. During mid-1994, the German government
effected a tax law revision based on a European Court ruling
whereby V.A.T. charged to the operators of wall machines was
significantly reduced. In accordance with the ruling, for all
cases arising on or after, or that were pending on, July 5, 1994,
the basis for taxation has been the cash remaining in the
machines. The rule requiring a minimum payout percentage is
applied to the amount remaining in the cash box net of such
V.A.T. Depending on the municipality in which a machine is
located, operators may also have to pay a monthly leisure tax on
each machine of up to DM 600 (approximately $390).
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 has enacted amendments to the Berlin Promotion Act
which are designed to phase out, over a number of years, most of
the tax benefits and incentives provided by the law. These tax
benefits and incentives have been changed in five ways: (i) the
V.A.T. rebates of up to 10% to enterprises located in West Berlin
for sales to German customers outside West Berlin were eliminated
by January 1, 1994, which began with an initial 30% decrease on
January 1, 1992, and continued with further decreases of 20% on
July 1, 1992, 25% on January 1, 1993 and 25% on January 1, 1994;
(ii) the V.A.T. rebates of 4.2% for German (other than West
Berlin) enterprises which purchase goods from West Berlin
taxpayers' enterprises were abolished effective July 1, 1991;
(iii) special accelerated depreciation allowances which permitted
West Berlin taxpayers to pay to write off 75% of the cost of
qualifying fixed assets at any time during the first three years
after acquisition have been modified to limit the write off to
50%; (iv) certain special investment subsidies have been
restricted and were completely eliminated by the end of 1994; and
(v) tax credits on German federal income taxes were reduced from
22.5% in 1990 to 20% in 1991, 13.5% in 1992, 9.0% in 1993 and
4.5% in 1994, and were phased out completely by December 31,
1994.
During 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. While no
written claim or assessment has been issued, the German tax
authorities have orally proposed preliminary adjustments which
range from $1.4 million (which has been accrued) to $5.0 million.
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, 1996,
all of which are fully utilized unless otherwise noted:
Annual
Building Rental
Location Use Square Feet Payments
(In 000s)
Las Vegas, Nv. Executive offices, route
operations and manufacturing 72,000 $ 486
Washington, D.C. Administrative offices 400 31
New York, N.Y. Executive offices 4,400 158
Sparks, Nv. Administrative offices and
warehousing 38,000 311
Sparks, Nv. Sales offices and warehousing 11,000 114
Absecon, N.J. Sales offices and warehousing 15,800 54
Biloxi, Ms. Sales offices 5,000 24
Golden, Co. Sales offices 1,500 16
Rosemont, Il. Sales offices 4,900 22
Dania, Fl. Sales offices 3,400 34
Elko, Nv. Sales office and route operations 4,200 22
Laughlin, Nv. Sales offices 600 9
Sidney, Australia Sales offices 700 36
Johannesburg,
So. Africa Sales offices 2,000 20
Las Vegas, Nv. Warehousing 57,000 242
Berlin, Germany Administrative offices and
manufacturing 98,000 565
Hannover, Germany Administrative offices and
warehousing 32,000 251
Las Vegas, Nv. Subleased office space 9,500 58
Reno/Sparks, Nv. Route operations 2,100 71
Carson City, Nv. Route operations 2,500 8
Fallon, Nv. Route operations 900 5
Las Vegas, Nv. Route location 8,000 419
Las Vegas, Nv. Tavern 4,900 100
Las Vegas, Nv. (1) Ground Lease --- 320
Sparks, Nv. (2) Ground Lease --- 4
New Orleans, La. Administrative offices &
route operations 6,000 53
Covington, La. OTB Operation 2,500 36
Metairie, La. OTB Operation 11,000 51
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.
The following table sets forth information regarding properties
owned by the Company as of June 30, 1996, all of which are fully
utilized unless otherwise noted:
Building
Location Use Square Feet (1)
(In 000s)
Las Vegas, Nv. Administrative offices and
manufacturing 150,000
Reno/Sparks, Nv. Casino 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
In addition, the Company leases approximately 20 properties which
have been subleased in connection with its gaming device routes.
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 14 years with monthly payments ranging from
approximately $1,700 to $10,200. See Note 11 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.
In addition to the principal facilities, the Company has 21
leased locations and 2 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 1,000 square feet to 10,000 square feet. The
leased locations have terms of occupancy varying from month-to-
month tenancies to 6 years with monthly payments ranging from
approximately $750 to $9,600. Management believes that its
existing facilities are adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
Litigation Relating to the Merger.
On or about June 19, 1995, three purported class actions were
filed in the Chancery Court of Delaware by BGII stockholders
against BGII and its directors (the "Fiorella, Cignetti and
Neuman Actions") in connection with the then-proposed merger of
BGII with WMS ("WMS Merger"). Also on or about June 19, 1995, a
purported class action was filed in the Delaware Court of
Chancery by a BGII stockholder against BGII and its directors and
the Company (the "Strougo Action") in connection with the tender
offer and consent solicitation made by the Company (subsequently
superseded by the execution of the Merger Agreement). On or about
July 6, 1995, the plaintiffs in the Fiorella, Cignetti, Neuman
and Strougo Actions (collectively, the "Stockholder Plaintiffs")
filed with the Court a motion to consolidate the four actions. On
or about July 27, 1995, certain of the Stockholder Plaintiffs
filed an amended complaint that adopted certain allegations
concerning self-dealing by BGII directors in connection with the
merger agreement entered into with WMS (the "WMS Agreement");
added a claim relating to BGII's alleged failure to hold an
annual meeting as required; and added WMS as defendant. The
amended complaint also alleged that BGII intended, in violation
of Delaware law, to sell Bally Wulff without first seeking
stockholder approval of the sale. The action sought an order
enjoining defendants from proceeding with, consummating or
closing the WMS Merger, or rescinding it if it closed; preventing
the sale of Bally Wulff without prior stockholder approval;
declaring invalid BGII's agreement to pay WMS a fee if the WMS
Agreement is terminated by BGII in certain circumstances;
compelling an auction of BGII and the provision of due diligence
to the Company; scheduling an immediate meeting of BGII
stockholders; and awarding compensatory damages. Management
believes these claims to be without merit and intends to
vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State
Court against BGII for BGII's failure to pay $4.8 million upon
termination of the WMS Agreement. Management intends to
vigorously defend this action. On November 22, 1995, BGII
answered the complaint and brought counterclaims against WMS
alleging that WMS repudiated and breached the WMS Agreement by,
among other things, failing to act in good faith toward the
consummation of the WMS Merger, advising BGII that it would not
perform as agreed but would impose new conditions on the WMS
Merger, acting in excess of its authority and undermining the
ability of BGII to perform the WMS Agreement. On February 8, 1996
WMS moved for summary judgment. On April 2, 1996, BGII opposed
WMS's motion and cross-moved for summary judgment.
On September 14, 1995, a stockholders' class and derivative
action was commenced by Richard Iannone, a stockholder of the
Company, against the Company, the members of its current Board of
Directors and certain of its former directors in Federal District
Court in Nevada asserting, among other matters, that the Company
has wasted corporate assets in its efforts to acquire BGII by,
among other things, agreeing to onerous and burdensome financing
arrangements that threaten the Company's ability to continue as a
going concern and that the Company had made false and misleading
statements and omissions in connection with that effort by
failing to disclose the need to refinance an additional $53.0
million of existing BGII indebtedness, by failing to disclose how
the Company would recapitalize the combined indebtedness of both
companies and by failing to disclose the allegedly leading role
played by Richard Rainwater in the Company's efforts to acquire
control of BGII which, given assurances made by the Company to
gaming regulators in Nevada that the unlicensed Mr. Rainwater
would not play an active role in the management of the Company,
could expose the Company to suspension or revocation of its
Nevada gaming license. In addition, the stockholder action
against the Company alleges that (i) the Company substantially
inflated its results of operations by selling gaming machines at
inflated prices in exchange for promissory notes (without any
down payment) which the Company knew could not be paid in full
but which the Company nevertheless recorded at full value,
(ii) the Company doctored reports sent to its route customers and
(iii) the directors of the Company had caused the Company to
engage in self-dealing transactions with certain directors which
resulted in the exchange of the Company assets for assets and
services of vastly lesser value. On September 21, 1995, a United
States magistrate denied the plaintiffs' request for expedited
discovery, stating that Mr. Iannone was not an adequate
representative and was not likely to succeed on the merits. On
October 4, 1995, the defendants filed a motion to dismiss the
action. On December 18, 1995, the plaintiff filed an amended
shareholder derivative complaint. The plaintiff is no longer
asserting any class claims. On March 5, 1996 the defendants filed
a motion to dismiss the amended complaint. On May 16, 1996, the
magistrate judge, on motion of defendants, stayed discovery in
this case pending a ruling by the court on the defendants' motion
to dismiss the amended complaint.
Other Litigation
In 1994, after an intensive Federal investigation of Bally
Gaming's former Louisiana distributor, eighteen individuals were
indicted on charges of racketeering and fraud against Bally
Gaming and the Louisiana regulatory system. Among those indicted
were the former distributor's stockholders, directors, employees
and others alleged to be associated with organized crime. Fifteen
entered pleas of guilty before trial and the remaining three were
convicted in October 1995. In addition, Alan Maiss, a former
director and president of BGII, pled guilty to misprision of a
felony in connection with such investigation. BGII, its
subsidiaries and its current employees were not subject to such
investigation.
Prior to the conclusion of the Federal criminal case, BGII's
activities with regard to its former VLT distributor in Louisiana
were the subject of inquiries by gaming regulators and a report
by the New Jersey Division of Gaming Enforcement dated August 24,
1995. The New Jersey Commission and Division of Gaming have
indicated that in light of the merger and consequent personnel
changes that have occurred at BGII, there will be no need for a
hearing and the inquiry can be resolved by stipulation. There
has been no indication from the New Jersey Commission and
Division of Gaming that the inquiry will have any effect on
BGII's pending license application. The Gaming Authorities in
Ontario, Canada, who have investigated the matter, issued a
gaming registration to Bally Gaming on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a class
action lawsuit filed in Federal District Court in Nevada, by
Larry Schreirer on behalf of himself and all others similarly
situated (the "plaintiffs"). The plaintiffs filed suit against
BGII and approximately 45 other defendants (each a "defendant,"
and collectively the "defendants"). Each defendant is involved in
the gaming business as either a gaming machine manufacturer,
distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video
poker machines and electronic slot machines. The plaintiffs
allege that the defendants have engaged in a course of fraudulent
and misleading conduct intended to induce people into playing
their gaming machines based on a false belief concerning how
those machines actually operate as well as the extent to which
there is actually an opportunity to win on any given play. The
plaintiffs allege that the defendants' actions constitute
violations of the Racketeer Influenced and Corrupt Organizations
Act (RICO) and give rise to claims of common law fraud and unjust
enrichment. The plaintiffs are seeking monetary damages in excess
of one billion dollars, and are asking that any damage awards be
trebled under applicable Federal law. Management believes the
plaintiffs' lawsuit to be without merit. The Company intends to
vigorously pursue all legal defenses available to it.
The Company is also a party to various lawsuits relating to
routine matters incidental to its business. Management does not
believe that the outcome of such litigation, including the
matters above, in the aggregate, will have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1996,
the Company's stockholders, through the solicitation of proxies
or otherwise, acted by written consent to approve the
issuance of up to $85 million of the Company's 7.5% Convertible
Senior Subordinated Debentures due 2003 (the "New Convertible
Debentures") in exchange for its existing $85 million of 7.5%
Convertible Subordinated Debentures due 2003, as well as the
issuance on conversion of the New Convertible Debentures of up to
850,000 shares of the Company's 11.5% Non-Voting Junior
Convertible Pay-in-Kind Special Stock, Series E, par value $.10
per share (the "Series E Special Stock") and the issuance on
conversion of the New Convertible Debentures and the Series E
Special Stock of up to 17,857,143 shares of the Company's Common
Stock, without taking into account shares of Series E Special
Stock that may in the future be issued as pay-in-kind dividends
and shares of Common Stock that may be issued on conversion of
shares of Series E Special Stock so issued or as a result of
antidilution adjustments. This item was approved by consent of a majority
of the common stockholders on May 31, 1996.
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.
Price Range of
Common Stock
High Low
Fiscal Year Ended June 30, 1995
1st Quarter $ 8.50 $5.13
2nd Quarter 7.88 5.13
3rd Quarter 8.00 5.38
4th Quarter 6.50 4.25
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
As of September 15, 1996 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 Senior Secured
Notes (the "Indenture") restrict the Company's ability to pay
dividends. 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been
derived from the audited financial statements of the Company for
the years ended June 30, 1992, 1993, 1994, 1995 and 1996. The
table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and Notes thereto.
Fiscal Years EndedJune 30,
1992 1993 1994 1995 1996 (1)
(In 000's, Except Per Share Amounts)
Statements of Operations Data
Revenues:
Gaming machine operations $ 77,940 $ 96,282 $102,830 $106,827 $109,938
Casino operations 14,936 16,710 20,159 25,134 48,509
Equipment and systems sales (2) 379 99 65 27 13,778
Other revenues --- --- --- --- 153
93,255 113,091 123,054 131,988 172,378
Costs and expenses:
Cost of gaming machine operations 58,585 72,614 76,332 79,875 84,212
Cost of casino operations 10,826 11,543 14,955 14,231 22,046
Cost of equipment and systems sales 284 49 20 12 9,235
Selling, general and administrative 14,240 19,758 22,629 28,249 30,620
Provision for doubtful receivables 539 461 705 400 1,020
Depreciation and amortization 7,355 8,718 9,530 9,520 10,988
Direct merger costs (3) --- --- --- 1,669 55,843
Unusual items 2,307 --- 6,351 2,293 5,498
94,136 113,143 130,522 136,249 219,462
Operating loss (881) (52) (7,468) (4,261) (47,084)
Other income (expense)
Interest income 1,324 998 2,084 2,798 1,571
Interest expense (4,505) (5,046) (6,830) (8,133) (8,897)
Royalty fees (4) --- --- --- (810) (4,070)
Minority interest in income --- --- (506) (397) (963)
Other, net (618) 450 (167) 317 301
Loss before income taxes (4,680) (3,650) (12,887) (10,486) (59,142)
Income tax provision --- --- (241) (265) (755)
Net loss (4,680) (3,650) (13,128) (10,751) (59,897)
Preferred stock dividends --- --- --- --- (362)
Net loss applicable to
common stockholders $ (4,680) $ (3,650) $(13,128) $(10,751) $(60,259)
Net loss per common share $ (0.51) $ (0.38) $ (1.28) $ (0.95) $ (4.64)
Other Data
Operating income (loss) before
unusual items and direct merger
costs $ 1,426 $ (52) $ (1,117) $ (299) $14,257
ITEM 6. SELECTED FINANCIAL DATA (continued)
As ofJune 30
1992 1993 1994 1995 1996
(In 000's)
Balance Sheet Data
Cash and cash equivalents and
securities available for sale $10,239 $9,580 $49,574 $37,414 $48,057
Working capital 11,557 7,991 50,926 31,476 111,009
Total assets 75,594 73,768 119,416 126,348 375,504
Total long term debt,
including current maturities 43,282 44,798 90,726 101,397 191,344
Series B Special Stock (5) --- --- --- --- 51,552
Total stockholders' equity 23,660 22,665 15,099 9,985 69,846
(1) The Company acquired BGII on June 18, 1996. Therefore the
results of operations for the year ended June 30, 1996
include the results of operations of BGII for the last
twelve days of the fiscal year. See note 2 to the
Consolidated Financial Statements.
(2) Includes sales to related parties of $236 (1992), $2(1993),
$6 (1994),$0 (1995), and $0 (1996).
(3) Includes non-cash accounting loss on debenture
conversion of $30,079 in fiscal year 1996.
(4) Represents royalty fee related to the HFS financing at the
Rainbow Casino.
(5) Redeemable preferred stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
On June 18, 1996, the Company completed the acquisition of all
the outstanding shares of BGII. The consideration paid consisted
of $77,243,000 in cash, $2,957,000 in the Company's common stock
and $36,571,000 in the Company's Series B Special Stock and
totaled $11.84 per share for the 9,855,500 shares of BGII
outstanding (excluding the 1,000,000 shares beneficially owned by
the Company). The Company incurred direct merger costs of
$1,669,000 and $55,843,000 during the fiscal years ended June 30,
1995, and 1996, respectively, which for fiscal year 1996 includes
the $30,079,000 non-cash, accounting loss on the exchange offer
component of the financing for the Merger plus legal, accounting,
transaction financing fees, public and investor relations and
printing costs and related costs.
At June 30, 1996, the Company had $48,057,000 in cash and cash
equivalents and $16,262,000 in availability on revolving lines
of credit. In addition the Company had working capital of
approximately $111,009,000, an increase of approximately
$79,263,000 from June 30, 1995 resulting primarily from the
Merger. Consolidated cash and cash equivalents at June 30, 1996
includes approximately $8,000,000 of cash which is utilized in
gaming operations which is held in vaults, cages or change banks
and $5,230,000 of cash restricted to the Company's Video
Services, Inc. subsidiary until a certain debt instrument is
paid. In September 1996, the Company prepaid this debt and
therefore the remaining cash balance is no longer restricted.
The following table presents an analysis of the consolidated
working capital at June 30, 1995 and 1996 and the components of
the changes from the prior year:
Impact
Balances at June 30, Total of BGII Net
1995 1996 Change Merger Change
(In $000's)
Cash and Cash Equivalents $13,734 $48,057 $34,323 $5,582 $28,741
Securities Available for Sale 23,680 - (23,680) (10,481) (13,199)
Accounts and Notes Receivable,
net 3,316 93,502 90,186 91,298 (1,112)
Inventories, net 714 41,656 40,942 41,574 (632)
Other Current Assets 4,665 8,354 3,689 3,847 (158)
Total Current Assets 46,109 191,569 145,460 131,820 13,640
Accounts Payable 1,758 16,479 14,721 14,418 303
Accrued Liabilities 8,610 38,304 29,694 17,947 11,747
Current Maturities of Long
Term Debt 3,995 25,777 21,782 21,729 53
Total Current Liabilities 14,363 80,560 66,197 54,094 12,103
Net Working Capital $31,746 $111,009 $79,263 $77,726 $1,537
Excluding the increase in working capital resulting from the BGII
merger of $77,726,000, the following are the significant changes
in the components of the Company's working capital:
Cash and Cash Equivalents and Securities Available for Sale
The change in cash and cash equivalents resulted from the net
proceeds from the offering of the Senior Secured Notes and Series
B Special Stock, less the cash used to repay BGII's 10 3/8%
Senior Secured Notes, the approximately $77,243,000 paid to the
stockholders of BGII in the Merger and cash used to pay direct
merger costs. The change in securities available for sale
resulted from selling the securities primarily to fund direct
merger costs, and the retirement of $10,481,000 worth of BGII
stock purchased in fiscal year 1995.
Accounts and Notes Receivable and Accrued Liabilities
During the fiscal year 1996, the Company received a net cash
inflow from its accounts and notes receivable and received the
proceeds from the early payoff of one large customer receivable.
Accrued liabilities increased over the prior year due to accrued
and unpaid direct merger costs, accrued and unpaid compensation,
and accrued distribution payable to the limited partner in the
Rainbow Casino Vicksburg Partnership, L.P.
Cash provided in operating activities for fiscal year 1996
decreased approximately $1,417,000 from amounts reported for
fiscal 1995. Significant changes in operating assets and
liabilities in fiscal 1996 from fiscal 1995 were (1) an increase
in accounts and notes receivable of $5,934,000 related to BGII's
sales in the post-acquisition period, (2) a decrease in
inventories of $5,844,000 primarily related to the
aforementioned increase in BGII's sales activity in the post-
acquisition period, and (3) an increase of $12,780,000 in accrued
and other payables resulting primarily from accrued and unpaid
direct merger costs, accrued compensation and the accrued
distribution payable to the limited partner in RCVP. Significant
non-cash items added back in the computation of cash flows from
operating activities for fiscal year 1996 include the $30,079,000
non-cash, accounting loss on the Company's convertible
debentures, $10,988,000 of depreciation and amortization and the
write down of assets of $6,095,000.
Cash flows used in investing activities in fiscal year 1996
increased by $53,610,000 from the prior year. The increase is
primarily the result of the cash used for the acquisition of the
net assets of BGII (net of cash acquired) of $79,209,000, offset
by sales of securities available for sale in fiscal year 1996 of
$13,516,000, versus purchases of securities available for sale in
fiscal year 1995.
Cash flows from financing activities in fiscal year 1996
increased $112,701,000 from fiscal year 1995, as a result of the
proceeds from the Senior Secured Note offering, the Series B
Special Stock offering, and a private placement of common stock,
totaling $164,820,000. The increase was offset by cash used to
repay the acquired Senior Secured Notes of BGII on June 18, 1996
including accrued interest totaling $42,164,000 and principal
reductions of existing long-term debt and revolving line of
credit borrowings.
In the prospectus for the Senior Secured Notes and Series B
Special Stock issued to finance the Merger, the Company had
presented adjusted operating cash flow for the combined companies
which consists of the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA"), net of casino royalty
and minority interest and adjusted to exclude direct merger costs
and unusual items and as further adjusted to include BGII's
results for the entire period, to assume cost savings synergies
resulting from the Merger and to adjust business development
expenses to an assumed annual amount of $3,000,000.
The following is a reconciliation of both the Company and BGII
combined historical EBITDA by business unit to adjusted operating
cash flows:
Twelve Months Ending June 30,
1995 1996
(In $000's)
EBITDA by Business Unit:
Bally Gaming and Systems $13,039 $10,390
Bally Wulff 18,840 13,376
Gaming Machine Operations (a) 18,784 16,186
Casinos Operations (a) 3,932 10,771
Corporate Administrative Expenses
and Other (19,637) (11,974)
Direct Merger Costs (b) (1,669) (73,377)
Unusual Items (2,793) (8,827)
Subtotal 30,496 (43,455)
Adjustments:
Direct Merger Costs 1,669 73,377
Unusual Items or Non-recurring
Charges 3,993 11,027
Development Expense (c) 3,150 (462)
Synergy Cost Savings (d) 5,000 5,000
Adjusted Operating Cash Flows $44,308 $45,487
_________________
(a) Minority interest and, for casino operations, casino royalty
have been offset against business unit EBITDA.
(b) Includes the $30,079,000 non-cash accounting loss on the
exchange offer for the Company's convertible debentures in fiscal 1996.
(c) Adjusts business development expense to an assumed annual
amount of $3,000,000.
(d) Adjusts for estimated synergy cost savings including elimination
of certain duplicative costs, such as facility, legal, accounting, and
compensation.
The Company believes that the above analysis of adjusted
operating cash flows is a useful adjunct to net income, cash flow
and other GAAP measurements. However, this information should
not be construed as an alternative to net income or any other
GAAP measure of performance as an indicator of the Company's
performance or to GAAP-defined cash flows generated by operating,
investing and financing activities as an indicator of cash flows
or a measure of liquidity.
During March 1993, Bally Wulff obtained two bank revolving lines
of credit that currently provide for borrowings up to DM
18,000,000 (approximately $11,784,000 at June 30, 1996) of which
approximately $10,511,000 had been borrowed at June 30, 1996.
In May 1995, Bally Wulff obtained a working capital line of
credit that provides for borrowings up to DM 16,300,000
(approximately $10,667,000 at June 30, 1996) of which
approximately $3,153,000 had been borrowed at June 30, 1996.
Bally Gaming, Inc., BGII's domestic subsidiary, obtained a bank
revolving line of credit in March 1993 which, as amended,
provides for borrowings tied to a percentage of Bally Gaming,
Inc.'s eligible (as defined in the credit agreement) inventory
and accounts receivable with a maximum borrowing capacity of
$15,000,000 with the expiration date of March 31, 1997. At June
30, 1996 Bally Gaming, Inc.'s eligible borrowing capacity under
this agreement was approximately $15,000,000 of which $7,525,000
was outstanding. Through bank credit agreements at Bally Wulff
and Bally Gaming, Inc., the Company has unused lines of credit of
approximately $16,262,000 at June 30, 1996. The Company is
currently evaluating new financing alternatives, including a
replacement of Bally Gaming, Inc.'s revolving line of credit
facility, in order to free up certain non-working capital based
collateral and to obtain a lower interest rate. The indenture
for the Company's Senior Secured Notes limits the Company's
maximum borrowings under working capital or revolving credit
facilities to $40,000,000.
The indenture for the Company's Senior Secured Notes contains
various limitations on incurrence of additional indebtedness, on
restricted payments and on dividends and payment restrictions on
subsidiaries. The Company does not have any material capital
expenditure commitments at June 30, 1996. The Company
anticipates that its existing cash and cash equivalents, cash
flow from future operations and borrowings available under
existing lines of credit will be sufficient to fund its cash
needs for at least the next twelve months.
Management believes that customer financing terms have become an
increasingly important competitive factor in certain emerging
markets for the Bally Gaming and Systems business unit.
Competitive conditions sometimes require Bally Gaming and Systems
to grant extended payment terms on gaming machines and other
gaming equipment. While these financings are normally
collateralized by such equipment, the resale value of the
collateral in the event of a default may be less than the amount
financed. In conjunction with sales by Bally Gaming and Systems,
with recourse to the Company, of certain trade receivables to
third parties, the Company had guaranteed amounts due from
various customers of approximately $15,700,000 at June 30, 1996.
It is possible that one or more customers whose obligation has
been guaranteed by Bally Gaming and Systems may be unable to
make payments as such amounts become due. In such event, Bally
Gaming and Systems may become responsible for repayment of at
least a portion of such amounts over the term of the receivables.
In general, under the terms of these contracts, the Company may
be responsible for monthly payments of the outstanding
obligations. Accordingly, the Company will have greater exposure
to the financial condition of its customers in emerging markets
than has historically been the case in established markets like
Nevada and Atlantic City. In August 1996, the Company received
demand notices from the holder of notes related to one customer's
trade receivables for which payments were in arrears from
December 1995. The demand notice is for $3,571,000 and although
the Company is negotiating a restructuring with the holder of
these notes and the customer, there can be no assurance that a
successful restructuring will take place. Bally Wulff provides
customer financing for approximately 20% of its sales, and
management expects this practice temporarily to increase during
the latter half of calendar 1996. In order to be competitive in
meeting customer demand for financing of gaming equipment in
emerging markets, the Company plans to continue to evaluate the
need to involve third party finance companies or secure
additional financing, although there is no assurance that such
additional financing will be obtained.
In March 1992, Alfred H. Wilms, a director and the Company's
largest stockholder, committed to provide to VSI, a majority-
controlled subsidiary of Alliance, a subordinated loan for up to
$6,500,000 (the "VSI Loan"). The VSI Loan, as amended, bore
interest at a rate equal to the London Interbank Offered Rate for
a period of ninety days plus 2%, payable quarterly, and was due
on September 21, 1998. The VSI Loan was secured by liens in
favor of N.V. Continental Trust Company ("CTC"), an affiliate of
Mr. Wilms, on substantially all of VSI's assets. Pursuant to the
terms of the VSI Loan, VSI could not pay cash dividends or make
any distribution of its property. Alliance also issued to Mr.
Wilms warrants to purchase 2,000,000 shares of Common Stock at
$2.50 per share in connection with such loan which expire on
September 1, 1998 (the "Wilms Warrants"). As of June 30, 1996
there was an outstanding balance of $2,780,000 on this loan. On
September 2, 1996 the Company paid off this loan. As a result
VSI is now permitted to pay cash dividends or make distributions,
although VSI has no current plans to pay dividends or make
distributions.
Results of Operations:
Fiscal 1996 Compared with Fiscal 1995
Gaming Machine Operations
Total revenues from gaming machine operations for the fiscal year
ended June 30, 1996 were approximately $109,938,000, an increase
of $3,111,000 (2.9%) over fiscal year 1995. Revenues from gaming
machine operations in Louisiana increased $1,308,000 (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 $56.42 in fiscal 1995 to
$68.54 in fiscal 1996, which resulted from higher revenues earned
on a lower average number of machines. The average number of
machines in the Louisiana gaming machine operations decreased
from 720 for fiscal 1995 to 676 for fiscal 1996. Revenues from
gaming machine operations in Nevada increased approximately
$1,803,000 (2.0%) over fiscal year 1995. This increase was
attributable to an increase in the average net win per gaming
machine per day from $47.72 in fiscal year 1995 to $48.57 in
fiscal year 1996 (accounting for $1,389,000 of such increase) and
an increase in the weighted average number of gaming machines
during fiscal year 1996 to 5,285 units as compared to 5,257 units
in fiscal year 1995 (accounting for $414,000 of such increase).
During fiscal year 1996 the Company received regulatory approval
for its Gambler's Bonus product, and began installation into
locations in Southern Nevada. Net win at locations in which
Gambler's Bonus was installed experienced an average increase in
revenues of 19% compared to revenues earned in the thirteen week
period preceding the installation. 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.
Cost of revenues for gaming machine operations for fiscal 1996
totaled $84,212,000, an increase of $4,337,000 (5.4%) over fiscal
1995. Costs of revenues for gaming machine operations in
Louisiana increased $761,000 (7.6%) primarily as a result of the
increase in revenues. As a percent of related revenues, cost of
revenues for gaming machine operations in Louisiana remained
relatively constant, at approximately 63.8%. Cost of revenues
for gaming machine operations in Nevada increased $3,756,000
(5.4%) as compared to the prior fiscal year and increased
slightly as a percent of related revenues due primarily to
increased costs associated with new and renewed contracts. Cost
of gaming machine revenues for gaming machine operations includes
rents under both space lease and revenue sharing arrangements,
gaming taxes and direct labor, including related payroll taxes
and benefits.
Selling, general and administrative expenses related to gaming
machine operations for the fiscal year 1996 remained relatively
flat from fiscal year 1995 at $8,383,000. Selling, general and
administrative expenses for gaming machine operations in
Louisiana decreased approximately $46,000 (2.1%) as costs
associated with the aforementioned opening of a new OTB parlor
were more than offset by cost containment measures in other
locations. Selling, general and administrative expenses for
gaming machine operations in Nevada remained relatively flat in
comparison to the prior year.
In the 1996 fiscal year, gaming machine operations in Nevada
incurred unusual items totaling $2,119,000. Reserves were
increased by $1,369,000 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 $750,000 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.
Casino Operations
Revenues from casino operations for fiscal year 1996, including
food and beverage sales, were approximately $45,363,000, an
increase of $27,164,000 or 149.3% from fiscal 1995. 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 fiscal
year 1995 included only three months of the Rainbow Casino
results of operations. Fiscal year 1996 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 $33,861,000 for fiscal year 1996
compared to $7,642,000 in fiscal year 1995. During the
approximately nine-month period ended March 29, 1995, the Company
recorded royalty income from the Rainbow Casino of $852,000, and
such royalty was terminated upon the change in ownership referred
to above. Revenues from the Plantation Casino were relatively
flat at $11,502,000, resulting from lower patronage during the
first six months of the fiscal 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 fiscal year 1996,
including costs of food and beverage revenues, were approximately
$19,769,000, an increase of $9,611,000 or 94.6% compared to
fiscal year 1995. The increase is primarily due to the
aforementioned impact of the Rainbow Casino operations. The cost
of revenues at the Plantation Casino were relatively flat at
$7,444,000. Cost of casino revenues includes cost of goods sold,
gaming taxes, rent and direct labor, including related taxes and
benefits.
Selling, general and administrative costs for casino operations
for fiscal year 1996 were approximately $10,248,000, an increase
of $6,823,000 or 199.2% compared to fiscal year 1995. The
increase is primarily due to the aforementioned impact of the
Rainbow Casino operations. Selling, general and administrative
costs for the Plantation Casino increased $270,000 to $1,929,000
for fiscal year 1996 primarily for the marketing campaigns to
attract local patrons back to the casino after completion of the
nearby road construction.
Revenues and Expenses for Closed Casinos and Taverns
During fiscal years 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 growth strategy. The Company does not
believe these businesses constitute a disposal of a segment of a
business, as defined in APB Opinion 30, and therefore the results
of operations from these businesses are included in the
applicable revenue and expense captions in the consolidated
statements of operations. Revenues for these properties are
included in casino revenues and totaled $6,084,000 and $3,146,000
for the fiscal years 1995 and 1996, respectively. The related
costs of revenues are included in casino cost of revenues and
totaled $4,073,000 and $2,277,000 for the fiscal years 1995 and
1996, respectively. The related selling, general and
administrative expenses are included in selling general and
administrative expenses and totaled $1,817,000 and $1,056,000 for
the fiscal years 1995 and 1996, respectively.
Consolidated
As previously discussed, the Company acquired BGII on June 18,
1996. Therefore the consolidated results of operations for the
fiscal year ended June 30, 1996 include the results of operation
of BGII for the last twelve days of the fiscal year.
Total revenues for the fiscal year ended June 30, 1996 were
approximately $172,378,000, an increase of $40,390,000 (30.6%)
over fiscal year 1995. This increase is due to BGII revenues of
$13,917,000 during the post- acquisition period (included in
Equipment and Systems Sales in the consolidated statements of
operations) as well as the aforementioned increases in revenues
at both the gaming machine operations and casino operations
business units.
Cost of revenues for fiscal year 1996 increased to $115,493,000
(22.7%) over fiscal year 1995 due to BGII cost of revenues of
$9,235,000 during the post-acquisition period as well as the
aforementioned increases in cost of revenues at both the gaming
machine operations and casino operations business units. The
total cost of revenues as a percentage of total revenues
including BGII's operations in the post-acquisition period
improved by 4.1% compared to fiscal year 1995.
For fiscal year 1996 the Company's development costs (included in
Selling, General and Administrative) associated with pursuing the
Company's business development strategy was approximately
$2,538,000, which represented a decrease of $3,636,000 (58.9%)
from the prior fiscal year. The level of business development
activities, which is exclusive of direct merger costs, has been
reduced from prior periods due to the concentration of efforts on
the Merger during fiscal 1996 and due to the termination of two
executives in this business unit and use of lower cost office
space. These business development expenses include salaries and
wages, related taxes and benefits, rent, professional fees,
travel expense and other expenses associated with supporting the
Company's business development strategy.
Corporate administrative expenses for fiscal year 1996 were
approximately $6,380,000, a decrease of $3,355,000 (34.5%) from
fiscal year 1995. After excluding fiscal year 1995 non-recurring
compensation expense of $1,331,000, the primary components of the
decrease were staff reductions and cost containment measures.
Corporate administrative expenses include salaries and wages,
related taxes and benefits, rent, professional fees and other
expenses associated with maintaining the corporate office and
providing centralized corporate services for the Company.
Exclusive of the development and corporate expenses noted above,
selling, general and administrative expenses for fiscal year 1996
increased $7,086,000 (48.3%) from the prior fiscal year. This
increase is due to BGII selling, general and administrative
expenses in the post-acquisition period of $2,014,000 and the
aforementioned increase in the casino operations business unit,
partially offset by the aforementioned decrease selling, general
and administrative costs at the closed casinos and taverns.
Provisions for bad debt for fiscal year 1996 increased $820,000
from the prior fiscal year. The increase was due primarily to a
$412,500 provision for specifically identified bad debt accounts
in the Company's gaming machine operations unit and the impact of
including BGIIs operations in the post-acquisition period of
$306,000.
During both fiscal years 1995 and 1996, the Company expensed
direct merger costs related to the acquisition of BGII, totaling
$1,669,000 and $55,843,000, respectively. Such costs for fiscal
year 1996 includes the $30,079,000 non-cash, accounting loss on
the debenture conversion portion of the financing for the Merger,
plus legal, accounting, financial advisory, printer, SEC filing
fees and other related expenses.
On December 17, 1993, the Company incurred a fire loss at the
Fairgrounds Race Course in New Orleans, Louisiana where the
Company operated 199 gaming devices prior to the fire (of which
193 were destroyed by the fire) through its controlled
subsidiary, Video Services, Inc. The Company was fully insured
for all equipment, leasehold improvements, other assets and
business income with the exception of approximately $46,000 in
deductibles. During fiscal years 1994, 1995 and 1996, the
Company received business interruption insurance proceeds of
$241,000, $247,000 and $327,000, respectively. The Company is
discussing settlement of additional business interruption claims
with the insurance carrier. The Company has also received
insurance proceeds based on the replacement value of the assets
destroyed in the fire and, therefore, recognized a gain of
approximately $156,000 which is included in other income in
fiscal year 1994.
In fiscal 1996 the Company incurred $5,498,000 in unusual items.
Due to events that may adversely affect the legalization of
casino-style electronic gaming machines in Kansas and in
California, management evaluated its investments in Kansas
Financial Partners, L.L.C. ("KFP") and Native American
Investment, Inc. ("NAI") and determined that neither was
recoverable. Accordingly, a provision was recorded of
approximately $1,794,000 for NAI and $1,585,000 for KFP to fully
reserve for the net book value of these investments. Management
will continue to monitor the status of both of these investments.
In addition, the Company incurred the aforementioned unusual
items in its gaming machine operations of $2,119,000.
Interest Income and Expense and Income Taxes
In fiscal year 1996, interest income decreased $1,227,000 from
fiscal year 1995 to $1,571,000, resulting from a decline in the
level of cash invested during fiscal 1996. In fiscal year 1996,
interest expense increased $764,000 from fiscal year 1995 to
$8,897,000. This increase was a result of the aforementioned
impact of consolidating the Rainbow Casino results of operations
for the full twelve months in fiscal year 1996, 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 $83,358,000 of the convertible debentures
which converted into equity instruments.
The provision for income taxes in fiscal year 1996 increased
$490,000 from fiscal year 1995 to $755,000. This increase was a
result of a provision for Alternative Minimum Tax due to the
taxable nature of the conversion of the Companys 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 Merger. At June 30, 1996, the
Company has net operating loss carry forwards for federal income
tax purposes of approximately $17 million which are available to
offset future federal taxable income, if any, expiring in the
years 2007 through 2010. At June 30, 1996 the Company has
foreign tax credit carry forwards of approximately $14 million
and alternative minimum tax credit ("AMT") carry forwards of
approximately $.6 million. Foreign tax credits are available to
offset future taxes due in the U.S. on future foreign taxable
income and expire between 1997 and 2001 unless utilized prior to
such time. AMT credits are available to be carried forward
indefinitely and may be utilized against regular U.S. Corporate
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.
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. While no
written claim or assessment has been issued, the German tax
authorities have orally proposed preliminary adjustments which
range from $1.4 million (which has been accrued) to $5.0 million.
During fiscal year 1996, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS No. 121"), management evaluates the
carrying value of all long-lived assets to determine
recoverability based on an analysis generally of non-discounted
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, 1996.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Awards of
Stock-Based Compensation to Employees" ("SFAS No. 123") which
will be effective for the Company's year ending June 30, 1997.
SFAS No. 123 provides alternative accounting treatment to APB
No. 25 with respect to stock-based compensation and requires
certain additional disclosures, including disclosures if the
Company elects not to adopt the accounting requirements of SFAS
No. 123. At this point, the Company does not anticipate adopting
the accounting requirements of SFAS No. 123 and therefore in
future years would expect to provide the required additional
disclosures in the footnotes to the consolidated financial
statements.
Fiscal 1995 Compared with Fiscal 1994
Gaming Machine Operations
Total revenues from gaming machine operations for the fiscal year
ended June 30, 1995 were approximately $106,827,000, an increase
of $3,997,000 (3.9%) over fiscal year 1994. Revenues from gaming
machine operations in Louisiana declined $1,796,000 (10.3%)
primarily as a result of increased competition from riverboat
operations as well as the opening of a land based casino in New
Orleans and a decrease in the average net win per gaming machine
per day from $60.87 in fiscal year 1994 to $56.42 in fiscal year
1995. Revenues from gaming machine operations in Nevada
increased approximately $5,739,000 (6.7%) as compared to the
prior year. This increase was attributable to an increase in the
average net win per gaming machine per day from $46.00 in fiscal
year 1994 to $47.72 in fiscal year 1995 (accounting for
$4,042,000 of such increase) and an increase in the weighted
average number of gaming machines during fiscal year 1995 as
compared to fiscal year 1994 (accounting for $1,751,000 of such
increase).
Cost of revenues for gaming machine operations for the fiscal
year ended 1995 totaled approximately $79,875,000 an increase of
$3,543,000 (4.6%) over that for fiscal year 1994. Cost of
revenues for gaming machine operations in Louisiana decreased
$1,199,000 (10.7%) as revenues declined primarily as a result of
increased competition. As a percent of related revenues, cost of
revenues for gaming machine operations in Louisiana remained
relatively constant. Cost of revenues for gaming machine
operations in Nevada increased $4,742,000 (7.3%) as compared to
the prior year and increased slightly as a percent of related
revenues due primarily to increased costs associated with
additional and renewed space lease contracts. Cost of revenues
for gaming machine operations includes rents under both space
lease and revenue sharing arrangements, gaming taxes and direct
labor, including related taxes and benefits.
Selling, general and administrative expenses for fiscal year 1995
related to gaming machine operations decreased $1,340,000 (13.8%)
from fiscal year 1994 to $8,396,000. Selling, general and
administrative expenses for Louisiana gaming machine operations
declined approximately $660,000 (23.8%) as staff reductions and
cost containment measures were implemented to counter increased
competition in that market. Selling, general and administrative
expenses for Nevada gaming machine operations decreased $680,000
(9.8%) as the benefit of staff reductions and cost controls taken
in late fiscal year 1994 was realized.
Casino Operations
Total revenues from casino operations, including food and
beverage sales, were approximately $19,055,000 an increase of
$8,314,000 (77.4%) during fiscal year 1995 as compared to those
for the prior fiscal year as revenues recognized from the Rainbow
Casino, which were consolidated beginning March 29, 1995,
amounted to $7,642,000.
The total cost of casino revenues for fiscal year 1995, including
the cost of food and beverage sales, were $10,158,000, an
increase of $3,177,000 (44.7%) compared to fiscal year 1994. The
consolidation of the Rainbow Casino operations contributed
$2,781,000 of the increase.
Selling, general and administrative costs for fiscal year 1995
increased for casino operations by $1,899,000, (126.5%) of the
prior fiscal year to $3,400,000. The consolidation of the
Rainbow Casino operations contributed $1,766,000 to the increase.
Revenues and Expenses for Closed Casinos and Taverns
In fiscal year 1994, due to continuing losses from operations,
negative cash flows and incompatibility with the Company's long-
term growth strategy, the Company's Board of Directors resolved
to 1) exit the downtown Las Vegas gaming market and 2) dispose of
the currently operated small independent tavern operations.
Based on these decisions, the Company recognized total expenses
of approximately $5,883,500 in fiscal 1994. As a result of the
decision to exit the downtown Las Vegas gaming market, in
September 1994, the Company substantially reduced operations at
both the Trolley Stop Casino and Miss Lucy's Gambling Hall &
Saloon. Included in the 1994 statements of operations are total
expenses of approximately $3,246,000 related to exiting the
downtown market. The total charge included approximately
$488,000 related to the write-down of assets and approximately
$2,758,000 representing primarily the present value of the future
lease payments net of estimated future sublease income. The
decision to withdraw from the tavern business resulted in
expenses of approximately $2,638,000 being recognized in fiscal
year 1994. Approximately $1,813,000 of the total amount was
related to the write down of assets while approximately $825,000
represented primarily the present value of the future lease
payments net of estimated future sublease income. Revenues for
these properties are included with casino revenues and totaled
$6,084,000 and $9,418,000 for the fiscal years ended 1995 and
1994, respectively. The related costs of gaming are included in
casino cost of gaming and totaled $4,073,000 and $7,934,000 for
the fiscal years ended 1995 and 1994, respectively. The related
selling general and administrative expenses are included in
selling general and administrative expenses and totaled
$1,817,000 and $2,119,000 for the fiscal years ended 1995 and
1994, respectively.
Consolidated
Total revenues for the fiscal year ended June 30, 1995 were
approximately $131,988,000, an increase of $8,934,000 (7.3%) over
those for fiscal 1994. This increase is due to the aforementioned
increase in revenues at both the gaming machine operations and
casino operations business units.
Cost of revenues for the fiscal year ended June 30, 1995
increased $2,811,000 (3.1%) over that for fiscal year 1994. This
increase is due to the aforementioned increases at both the
gaming machine operations and the casino operations business
units. Although the gross margin percentage for Nevada gaming
machine operations declined slightly during fiscal year 1995, the
decline was completely offset by the addition of the Rainbow
Casino and a small improvement in the Louisiana gross margin
percentage. As a result, the total cost of revenues as a
percentage of total revenues declined by 2.9% compared to fiscal
year 1994.
For fiscal year 1995, the Company incurred development costs
associated with pursuing the Company's long term growth strategy
of approximately $6,174,000, an increase of approximately
$4,982,000 (418.0%) from fiscal year 1994. Included as an offset
to development costs for fiscal year 1994 was a non-recurring
gain of $3,600,000 related to the Company's effort to acquire
Capital Gaming International, Inc. Prior year development costs
also include certain significant expenses associated with the
Company's purchase of NAI. Development costs include
salaries and wages, related taxes and benefits, rent,
professional fees, travel expenses, payments to third parties for
business development options and other expenses associated with
supporting the Company's long-term growth strategy.
Corporate administrative expenses for fiscal year 1995 were
approximately $9,735,000, an increase of $1,853,000 over the same
amounts for fiscal year 1994. The primary cause for the increase
was an unusual item of $1,331,000 in compensation expense
recognized upon the issuance of 250,000 shares of Common Stock to
the Company's President, Chief Executive Officer and Chairman of
the Board, in connection with his employment agreement. Also
contributing to the increase in corporate administrative expenses
was another unusual item of $485,000 of expenses related to
certain service contracts and termination costs. Corporate
administrative expenses include salaries and wages, related taxes
and benefits, rent, professional fees and other expenses
associated with maintaining the corporate office and providing
centralized corporate services for the Company.
Exclusive of the development and corporate expenses noted above,
selling, general and administrative expenses for fiscal year 1995
increased $1,078,000 (7.9%) from the prior year. This increase is
primarily due to the aforementioned increase in casino operation
expenses partially offset by the aforementioned decrease in the
gaming machine operations expenses. Also contributing to the
increase in selling, general and administrative expenses was an
unusual item of $478,000 of expenses related to certain service
contracts and termination costs for individuals formerly in the
business development group.
___________________________________
This Annual Report on Form 10-K may contain forward-looking
statements that involve risks and uncertainties, including, but
not limited to, the impact of competitive products and pricing,
product demand and market acceptance risks, the presence of
competitors with greater financial resources, product development
and commercialization risks, costs associated with the
integration and administration of acquired operations, capacity
and supply constraints or difficulties, the results of financing
efforts and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission.
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
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
Page
1. Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1995 and 1996 F-2
Consolidated Statements of Operations for the Years Ended
June 30, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
2. Consolidated Supplemental Schedules:
Not applicable.
3. Exhibits:
Exhibit
Number Description
2.1 Agreement and Plan of Merger among Alliance, BGII
Acquisition Corp. and BGII, dated as of October 18,
1995, as amended and restated (incorporated herein by
reference to Annex I to the prospectus included in
Alliance's Form S-4, Registration Number 333-02799 ).
2.2 Basic Agreement, dated as of October 29, 1993, among
United Gaming, Inc., The Rainbow Casino Corporation,
John A. Barrett, Jr. and Leigh Seippel, and exhibits
thereto (incorporated herein by reference to Alliance's
Form 8-K dated October 29, 1993).
2.3 Letter Agreement, dated as of November 5, 1993, among
United Gaming, Inc., Capital Gaming International, Inc.,
I.G. Davis, Jr. and John E. Dell, with exhibits thereto
(incorporated herein by reference to Alliance's Form 8-K
dated November 5, 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).
Exhibit
Number Description
3.3 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Special Stock and Qualifications, Limitations and
Restrictions thereof of 15% Non-Voting Senior Pay-in-
Kind Special Stock, Series B (incorporated herein by
reference to Exhibit 4.1 to Alliance's Form S-4,
Registration Number 333-10111).
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 Gaming
Corporation dated May 23, 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 12 7/8%
Senior Secured Notes due 2003 (including form of Senior
Secured Note and Guarantee) (incorporated by reference
to Exhibit 4.7 to Form S-2 registration statement
registration No. 333-02147).
4.2 Form of collateral documents (incorporated by reference
to Exhibit 4.8 to Form S-2 registration statement
registration No. 333-02147).
The Registrant agrees to furnish to the Commission upon
request copies of agreements with respect to its other
long-term debt.
10.1 Loan and Warrant Agreement dated March 24, 1992 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).
10.2 Lease, dated August 3, 1988, as amended April 6, 1989,
from Walter Schwartz to Alliance for Alliance's
corporate headquarters building at 4380 Boulder Highway,
Las Vegas, Nevada (incorporated herein by reference to
Alliance's Form 10-K for the year ended June 30, 1989).
10.3 Employment Agreement between United Gaming, Inc. and
John W. Alderfer (incorporated herein by reference to
Alliance's Form 10-Q for the quarter ended March 31,
1993).*
10.4 Amendment to Employment Agreement between United Gaming,
Inc. and John Alderfer (incorporated herein by reference
to Alliance's Form 10-K for the year ended June 30,
1994).*
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).
Exhibit
Number Description
10.6 Advisory Agreement, dated June 25, 1993 among United
Gaming, Inc., Gaming Systems Advisors, L.P. and, as to
certain provisions, Mr. Alfred H. Wilms, including
Exhibit A (Form of Warrant Agreement) and Exhibit B
(Form of press release) thereto (incorporated herein by
reference to Alliance's Form 8-K dated June 25, 1993).
10.7 United Gaming, Inc. 1991 Long-Term Incentive Stock
Option Plan (incorporated herein by reference to
Alliance's Form S-8 Registration Number 33-45811 and
Registration Number 33-75308).*
10.8 Gaming and Technology, Inc. 1984 Employee Stock Option
Plan (incorporated herein by reference to Alliance's
Form S-8 Registration Number 2-98777).*
10.9 Agreement, dated as of September 14, 1993, by and among
United Gaming, Inc., Kirkland-Ft. Worth Investments
Partners, L.P., Kirkland Investment Corporation, Gaming
Systems Advisors, L.P. and Alfred H. Wilms (incorporated
herein by reference to Alliance's Form 8-K dated
September 21, 1993).
10.10 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).
10.16 Secured Promissory Note, dated as of October 29, 1993,
from John A. Barrett, Jr. and Leigh Seippel to United
Gaming, Inc. (incorporated herein by reference to
Alliance's Form 8-K dated October 29, 1993).
Exhibit
Number Description
10.18 Pledge Agreement, dated as of October 29, 1993, among
United Gaming, Inc. (as secured party) and The Rainbow
Casino Corporation, John A. Barrett, Jr. and Leigh
Seippel (as pledgors) (incorporated herein by reference
to Alliance's Form 8-K dated October 29, 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).
10.20 Letter Agreement, dated as of December 10, 1993, among
United Gaming, Inc., Capital Gaming International, Inc.
and I.G. Davis, Jr. (incorporated herein by reference to
Alliance's Form 8-K dated December 10, 1993).
10.21 Loan and Security Agreement, dated as of August 2,1993,
between United Gaming, Inc., Alfred H. Wilms and Video
Services, Inc. (incorporated herein by reference to
Alliance's Form S-2, Registration Number 33-72990).
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).
10.23 Common Stock Purchase Warrant, dated as of September 21,
1993, between United Gaming, Inc. and Donaldson, Lufkin
& Jenrette Securities Corporation (incorporated herein
by reference to Alliance's Form S-2, Registration Number
33-72990).
10.24 Common Stock Purchase Warrant, dated as of September 21,
1993, between United Gaming, Inc. and Oppenheimer & Co.
Inc. (incorporated herein by reference to Alliance's
Form S-2, Registration Number 33-72990 and subsequent
amendments thereto).
10.25 Common Stock Purchase Warrant, dated as of September 21,
1993, between United Gaming, Inc. and L.H. Friend,
Weinress & Frankson, Inc. (incorporated herein by
reference to Alliance's Form S-2, Registration Number 33-
72990).
10.26 Common Stock Purchase Warrant, dated as of September 21,
1993, between United Gaming, Inc. and Donaldson, Lufkin
& Jenrette Securities Corporation (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 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).
Exhibit
Number Description
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).
10.35 Promissory Note, dated as of July 16, 1994, from John A.
Barrett, Jr. and Leigh Seippel to United Gaming, Inc.
(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, 1994, 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).
10.37 Employment Agreement between United Gaming, Inc. and
Johnann McIlwain (incorporated herein by reference to
Alliance's Form 10-K for the year ended June 30, 1994).*
10.38 Employment Agreement, dated August 15, 1994, between
Alliance and Steve Greathouse (incorporated herein by
reference to Alliance's Form S-3 Registration Number 33-
58233).*
10.39 Warrant Agreement, dated August 15, 1994, between
Alliance and Steve Greathouse (incorporated herein by
reference to Alliance's Form S-3 Registration Number 33-
58233).
10.40 Agreement, dated September 1, 1994, between Alliance and
Craig Fields (incorporated herein by reference to
Alliance's Form S-3 Registration Number 33-58233).*
Exhibit
Number Description
10.41 Warrant Agreement, dated September 1, 1994, between
Alliance and Craig Fields (incorporated herein by
reference to Alliance's Form S-3 Registration Number 33-
58233).*
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, 2995).
10.47 Release, dated March 29, 1995, by United Gaming Rainbow
and Alliance and their affiliates of RCC, Rainbow
Development Corporation, John A. Barrett, Jr. and Leigh
Seippel and their affiliates (other than RCVP)
(incorporated herein by reference to Alliance's Form 8-
K dated March 29, 1995).
10.48 Release, dated March 29, 1995, by RCC Rainbow
Development Corporation, John A. Barrett, Jr. and Leigh
Seippel and their affiliates (other than RCVP) of United
Gaming Rainbow and Alliance and their affiliates
(incorporated herein by reference to Alliance's Form 8-K
Dated March 29, 1995).
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).
Exhibit
Number Description
10.52 Agreement dated January 8, 1993 by and between Bally
Gaming International, Inc. and Bally Manufacturing
Corporation (incorporated herein by reference to exhibit
10(i)(p) included in BGII's Annual Report on Form 10-K
for the period ended December 31, 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, 1992
(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.*
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).*
Exhibit
Number Description
10.63 Award Agreement (Performance Units), dated June 8, 1994,
by and between Hans Kloss and Bally Gaming
International, Inc. (incorporated herein by reference to
exhibit 10(iii)(h) included in BGII's Annual Report on
Form 10-K for the period ended December 31, 1994).*
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).*
10.67 Employment Agreement, effective as of May 15, 1993,
between Bally Gaming International, Inc., Bally Gaming,
Inc. and Hans Kloss and Bally Gaming International, Inc.
(incorporated herein by reference to exhibit 99(b)
included in BGII's Registration Statement No. 33-71154
on Form S-3 filed on November 1, 1993).*
10.68 Amendment, dated June 8, 1994, to the Employment
Agreement effective as of May 15, 1993, between Hans
Kloss and Bally Gaming International, Inc. (incorporated
herein by reference to exhibit 10(iii)(q) included in
BGII's Annual Report on Form 10-K for the period ended
December 31, 1994).*
10.69 Employment Agreement, dated as of March 24, 1995,
between Scott D. Schweinfurth and Bally Gaming
International, Inc. (incorporated herein by reference to
exhibit 10(iii)(z) included in BGII's Annual Report on
Form 10-K/A for the period ended December 31, 1994).*
21 Subsidiaries of the Registrant (incorporated by refrence to
Form S-2 Registration Statement Registration No. 333-02147)
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months
ended June 30, 1996.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
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 26, 1996
By /s/ Steve Greathouse
Steve Greathouse, Chairman of
the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
By /s/ Scott D. Schweinfurth
Scott D. Schweinfurth, Sr. Vice
President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Name Title Date
/s/ Joel Kirschbaum Director September 26, 1996
Joel Kirschbaum
/s/ Alfred H. Wilms Director September 26, 1996
Alfred H. Wilms
/s/Anthony DiCesare Director September 26, 1996
Anthony DiCesare
/s/ Craig Fields Vice Chairman of the Board September 26, 1996
Dr. Craig Fields
/s/ David Robbins Director September 26, 1996
David Robbins
/s/ Jacques Andre Director September 26, 1996
Jacques Andre
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, 1995
and 1996 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, 1996. 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 1995, and the results of their operations and
their cash flows for each of the years in the three-year period
ended June 30, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
September 16, 1996
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's)
ASSETS
June 30, June 30,
1995 1996
Current assets:
Cash and cash equivalents $ 13,734 $ 48,057
Securities available for sale 23,680 ---
Accounts and notes receivables,
net of allowance for doubtful
accounts of $886 and $17,727 3,316 93,502
Inventories, net:
Raw materials and work-in-process --- 14,453
Finished goods 714 27,203
Other current assets 4,665 8,354
Total current assets 46,109 191,569
Long-term notes receivables,
net of allowance for doubtful
accounts of $773 and $1,770 5,309 14,184
Property, plant and equipment, at cost:
Land and improvements 17,296 20,336
Buildings and leasehold improvements 14,224 29,819
Gaming equipment 36,396 42,459
Furniture, fixtures and equipment 11,582 15,614
Less accumulated depreciation
and amortization (29,146) (30,144)
Property, plant and equipment, net 50,352 78,084
Excess of costs over net assets of
acquired businesses,net of accumulated
amortization of $585 and $422 3,842 60,292
Intangible assets, net of accumulated
amortization of $5,516 and $5,216 12,405 20,247
Deferred tax assets 1,399 5,459
Other assets, net of reserves
of $0 and $1,585 6,932 5,669
$126,348 $375,504
(Continued)
See accompanying notes to consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(In 000's, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, June 30,
1995 1996
Current liabilities:
Accounts payable $ 1,758 $ 16,479
Accrued liabilities 8,610 38,304
Current maturities of long term debt 3,995 25,777
Total current liabilities 14,363 80,560
Senior Secured Notes, net of unamortized
discount of $3,071 --- 150,929
Other long term debt, less current
maturities 97,402 14,638
Deferred tax liabilities 1,399 4,731
Other liabilities 2,556 2,100
Total liabilities 115,720 252,958
Commitments and contingencies
Minority interest 643 1,148
Series B Special Stock, $.10 par value, $100
liquidation value; 684,551 shares issued
and outstanding in 1996, net of discount --- 51,552
Stockholders' equity:
Common Stock, $.10 par value; 175,000,000
shares authorized;11,654,000 shares and
31,763,000 shares issued and outstanding 1,165 3,176
Initial Series Special Stock, $0.10
par value; 10,000,000 shares of Special
Stock authorized; 1,333,333 shares
issued and outstanding in 1995 133 ---
Series E Special Stock, $100 liquidation
value;113,160 shares issued and outstanding
in 1996 --- 11,316
Additional paid-in capital 32,134 139,031
Unrealized loss on securities available
for sale (316) ---
Cumulative translation adjustment --- (287)
Accumulated deficit (23,131) (83,390)
Total stockholders' equity 9,985 69,846
$126,348 $375,504
See accompanying notes to consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share amounts)
Years Ended June 30,
1994 1995 1996
Revenues:
Gaming machine operations $102,830 $106,827 $109,938
Casino operations 15,679 21,287 45,097
Food and beverage sales 4,480 3,847 3,412
Equipment and systems sales 65 27 13,778
Other revenues --- --- 153
123,054 131,988 172,378
Costs and expenses:
Cost of gaming machine
operations 76,332 79,875 84,212
Cost of casino operations 11,871 11,436 19,538
Cost of food and beverage 3,084 2,795 2,508
Cost of equipment and
systems sales 20 12 9,235
Selling, general and
administrative 22,629 28,249 30,620
Provision for doubtful
receivables 705 400 1,020
Depreciation and amortization 9,530 9,520 10,988
Direct merger costs --- 1,669 55,843
Unusual items 6,351 2,293 5,498
130,522 136,249 219,462
Operating loss (7,468) (4,261) (47,084)
Other income (expense):
Interest income 2,084 2,798 1,571
Interest expense (6,830) (8,133) (8,897)
Royalty fees --- (810) (4,070)
Minority interest in income (506) (397) (963)
Other, net (167) 317 301
Loss before income taxes (12,887) (10,486) (59,142)
Income tax provision (241) (265) (755)
Net loss (13,128) (10,751) (59,897)
Special Stock dividends --- --- (362)
Net loss applicable to common
shares $ (13,128) $ (10,751) $ (60,259)
Net loss per common share $ (1.28) $ (0.95) $ (4.64)
Weighted average common shares
outstanding 10,251 11,300 13,000
See accompanying notes to consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In 000's)
Initial Series Retained Total
and Series E Additional Earnings Unrealized Cumulative Stock-
Common Stock Special Stock Paid-in (Accum. Loss on Translation holders'
Shares Dollars Shares Dollars Capital Deficit) Securities Adjustment Equity
Balance at June 30, 1993 10,000 $1,001 - $ - $20,917 $748 $ - $ - $22,666
Net loss - - - - - (13,128) - - (13,128)
Shares issued for acquisition 112 11 - - 238 - - - 249
Common stock warrants issued - - - - 116 - - - 116
Cost of private placement - - - - (201) - - - (201)
Net change in unrealized loss on
securities available for sale - - - - - - (421) - (421)
Issuance of Initial Series
Special Stock - - 1,333 133 4,866 - - - 4,999
Shares issued upon exercise of
options 394 39 - - 780 - - - 819
Balance 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
See accompanying notes to consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Years Ended June 30,
1994 1995 1996
Cash flows from operating activities:
Net loss $(13,128) $(10,751) $(59,897)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization 9,530 9,520 10,988
Amortization of debt discounts 292 297 245
Loss on abandoned casinos and taverns 6,351 --- ---
Loss on conversion of convertible
debentures --- --- 30,079
Write down of other assets 1,817 2,796 6,095
Loss on sale of assets --- --- 105
Provision for losses on receivables 705 400 1,020
Other --- 1,282 1,544
Change in operating assets and liabilities,
net of effects of businesses acquired:
Accounts and notes receivable (1,260) 1,345 (5,934)
Inventories 78 (40) 5,844
Other current assets (626) 255 (95)
Accounts payable 269 (447) (1,889)
Accrued liabilities 3,774 (2,355) 12,780
Net cash provided by
operating activities 7,802 2,302 885
Cash flows from investing activities:
Acquisition of businesses,
net of cash acquired --- 2,481 (79,209)
Additions to property, plant and equipment (5,385) (8,887) (8,101)
Proceeds from disposal of property and
equipment 1,466 351 2,282
Net (purchases) sales of securities
available for sale (12,910) (11,086) 13,516
Other (9,210) (5,852) (5,091)
Net cash used in investing activities (26,039) (22,993) (76,603)
Cash flows from financing activities:
Proceeds from long-term debt,
net of expenses 81,984 --- 145,420
Reduction of long-term debt (41,776) (3,125) (51,446 )
Issuance of common stock warrants 116 --- ---
Issuance of Series B Stock, net of discount --- --- 15,000
Fees paid for conversion of convertible
debentures --- --- (3,333)
Issuance of special stock, net of costs 4,799 --- ---
Issuance of common stock 619 465 4,400
Net cash provided by (used in) financing
activities 45,742 (2,660) 110,041
Cash and cash equivalents:
Increase (decrease) for year 27,505 (23,351) 34,323
Balance, beginning of year 9,580 37,085 13,734
Balance, end of year $ 37,085 $ 13,734 $ 48,057
See accompanying notes to consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1994, 1995 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUS
INESS
Description of business
Alliance Gaming Corporation (the "Company") is a diversified gaming
company. As part of its long-term growth strategy, the Company
acquired Bally Gaming International, Inc. ("BGII") by merger ("the
Merger") which was consummated on June 18, 1996 and as a result,
BGII became a wholly owned subsidiary of the Company.
The Company, through the trade names Bally Gaming, Bally Systems
and Bally Wulff, is a leading designer, manufacturer and
distributor of electronic gaming machines,and also designs, assembles
and sells computerized monitoring systems for slot and video gaming
machines which provide casino operators with on-line real time
accounting, security,
maintenance and player tracking capabilities. In addition, the
Company is the largest gaming machine operator in Nevada, where it
operates approximately 5300 gaming machines (primarily video poker
and slot machines), and is the exclusive operator of approximately
700 video poker machines at the only racetrack and ten associated
off-track betting parlors (OTBs) in the greater New Orleans area.
The Company also owns and operates a small casino in each of
Vicksburg, Mississippi and Sparks/Reno, Nevada.
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of Alliance Gaming Corporation, its wholly-owned
subsidiaries and its partially owned, controlled subsidiaries. In
the case of Video Services, Inc. ("VSI"), the Company owns 490
shares of class B voting stock, which constitutes 100% of the
voting stock. The Company is entitled to receive 71% of
dividends declared by VSI, if any, at such time that dividends are
declared. In July 1994, the Company acquired a 45% limited
partnership interest in the Rainbow Casino-Vicksburg Partnership
("RCVP"). Accordingly, the Company accounted for its investment in
this partnership under the equity method until March 29, 1995 at which
time the Company assumed the general partnership interest.
Effective March 29, 1995, the results of operations of the Rainbow
Casino have been included in the accompanying consolidated
financial statements. Effective June 18, 1996, the results of
operations of BGII have been included in the accompanying
consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated.
Cash, cash equivalents and securities available for sale
Cash equivalents consist of highly liquid debt instruments
purchased with an original maturity of three months or less and are
carried at cost, which approximates market value.
Statement of Financial Accounting Standard No. 115 "Accounting for
Certain Investments in Debt and Equity Securities," requires that,
except for debt securities classified as "held-to-maturity"
securities, investments in debt and equity securities should be
reported at fair market value. The Company designates certain
securities as being available for sale at the time of purchase.
The Company determines which securities are available for sale by
evaluating whether such securities would be sold in response to
liquidity needs, asset/liability management and other factors.
Securities available for sale are recorded at market value with the
resulting unrealized gains and losses being recorded, net of tax,
as a component of stockholders' equity. Gains or losses on these
securities are determined using the specific identification method.
Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market. Cost elements included for
work-in-process and finished goods include raw materials, freight,
direct labor and manufacturing overhead.
Property, plant and equipment
Depreciation and amortization of property, plant and equipment is
provided 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
Leasehold improvements 5-20 years
Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated
depreciation of assets retired or otherwise disposed of are
eliminated from the accounts and any resulting gain or loss is
credited or charged to income as appropriate.
Excess of costs over net assets of acquired businesses
Excess of costs over net assets of an acquired business 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 40 years, with an average life of approximately
11 years, and deferred issuance costs for financing which are
amortized over the life of the related financing.
In July 1992, BGII reached an agreement for an exclusive license
until December 31, 2005, subject to extension, of a patent relating
to the use of credit cards in gaming machines, and acquired 1% of
the stock of Scotch Twist, Inc., a private company which granted
this license, in exchange for consideration paid by BGII. The
licensing agreement requires the Company to commit $1.2 million in
research and development costs related to the patent plus any costs
related to obtaining required regulatory approvals and licenses.
Since July 1992, approximately $1 million has been expensed
relative to this commitment.
Other Assets
Other assets includes assets held for sale, long-term deposits and
other non-current assets. In fiscal year 1993 the Company paid a
$2,500,000 refundable deposit to the owner of certain grocery
stores as part of a ten year agreement to operate gaming devices at
their locations.
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
As required by Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of" ("SFAS No. 121"), management
evaluates the carrying value of all long-lived assets to determine
recoverability based on an analysis generally of non-discounted
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, 1996.
Revenue recognition
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 gaming machine
operations which operate under revenue-sharing arrangements and
revenue-sharing payments as a cost of gaming machine operations.
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 recreational and amusement equipment is normally
recognized at the time products are shipped and title has passed to
the customer. Revenue from sales of software included in
computerized 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.
Location rent expense
The Company recognizes expenses for fixed, periodic rental payments
(including scheduled increases) made in connection with space lease
arrangements or sublease agreements in its gaming machine
operations unit on a straight line basis over the terms of the
agreements including any extension periods which are expected to be
exercised. Contingent periodic rental payments are expensed in the
period incurred.
Foreign currency translation
The functional currency of the Company's German subsidiaries is the
German Deutsche Mark. Assets and liabilities of the German
subsidiaries are translated at the rate of exchange at the end of
the period, and the statements of operations are translated at the
average rate of exchange for the period. Translation adjustments
are reflected as a separate component of stockholder's equity.
Gains and losses on foreign currency transactions are included in
net income.
Stock-based employee compensation awards
The Company accounts for its stock-based employee compensation
awards in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Under
APB 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price on date of grant, no
compensation expense is recognized.
In 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was
issued which will be effective for the Company's year ending
June 30, 1997. SFAS No. 123 provides alternative accounting
treatment to APB No. 25 with respect to stock-based compensation
and requires certain additional disclosures, including disclosures
if the Company elects not to adopt the measurement and recognition
criteria of SFAS No. 123. At this point, the Company does not
anticipate adopting the measurement and recognition criteria of
SFAS No. 123 and therefore in future years would expect to provide
the required additional disclosures in the footnotes to the
consolidated financial statements.
Income taxes
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
income in the period that includes the enactment date.
Taxes on income of the Company's German subsidiaries are provided
at the tax rates applicable to the tax jurisdictions in Germany, as
the German subsidiaries file separate German income tax returns.
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.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform with the current year presentation.
2. ACQUISITIONS
BGII
On June 18, 1996, the Company completed the acquisition of all the
outstanding shares of BGII. The consideration paid consisted of
approximately $77,243,000 in cash, $2,957,000 in the Company's
common stock and $36,571,000 in the Company's Series B Special
Stock 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, 1996, the
excess of purchase price over the BGII assets acquired was
approximately $58,292,000 which is being amortized on a straight-
line basis over 40 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and BGII as if
the acquisition had occurred at July 1, 1994, with pro forma
adjustments to give effect to amortization of goodwill, net
increase in interest expense resulting from the issuance of the
Company's Senior Secured Notes, the payoff of the BGII Senior
Secured Notes and the impact of the exchange offer for the Old
Convertible Debentures (for further discussion see "Debt and Lines
of Credit") and certain other adjustments, together with related
income tax effects:
Years ended June 30,
1995 1996
(In 000's, except per share amounts)
Revenues $385,121 $396,050
Net loss applicable to common shares (23,942) (26,480)
Net loss per common share $(0.80) $(0.83)
The Company incurred direct merger costs of $1,669,000 and
$55,843,000 during the fiscal years ended June 30, 1995, and 1996,
respectively. The direct merger costs have been presented
separately in the Company's consolidated statements of operations,
as management believes that such presentation provides additional
relevant information. Direct merger costs include the $30,079,000
non-cash accounting loss on the exchange offer component of the
financing for the merger plus legal, accounting, transaction
financing fees, public and investor relations, printing costs
and related costs.
Rainbow Casino
On March 29, 1995, the Company consummated certain transactions
whereby the Company acquired from Rainbow Casino Corporation("RCC")
the controlling general
partnership interest in RCVP and increased its partnership
interest. In exchange for the commitments by NGM, a subsidiary of
National Gaming Corporation, and the Company to provide additional
financing (up to a maximum of $2.0 million each) to be used, among
other things for the completion of certain incomplete elements of
the project which survived the opening of the casino (which RCC was
to have been responsible for, but failed to complete) and for a
$0.5 million payment to HFS as a waiver fee, and a commitment by
the Company to fund any additional capital necessary for the
completion, upgrading or working capital of the project, the
following occurred: (i) a subsidiary of the Company became the
general partner and RCC became the limited partner and (ii) the
respective partnership interests were adjusted. Pursuant to the
transactions consummated on March 29, 1995, RCC is now entitled to
receive 10% of the net available cash flows after debt service and
other items, as defined (which amount increases to 20% of such
amount if revenues exceed $35.0 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. Also, the Company's 5.2% royalty on
gross revenues was terminated on the date it became the general
partner. In addition, if during any continuous 12-month period
until December 31, 1999 the casino achieved earnings from the
project of at least $10.5 million before deducting depreciation,
amortization, royalty and income taxes, then the Company would be
obligated to make a one time payment to certain principals of the
original partnership of an amount aggregating $1.0 million in cash
or shares of the Company's common stock 180 days after the
occurrence. The casino has achieved the required earnings as
adjusted in the twelve-months ended March 31, 1996, and the Company
intends to make the required payment in cash by September 27, 1996.
3. SEGMENT INFORMATION
As a result of the merger with BGII, the Company now has
operations based in Germany and the United States. As the
operations from BGII were consolidated for only the last twelve
days of the fiscal year, the geographic segment information related
to the statements of operations is not material and has not been
presented. The table below presents information as to the
Company's identifiable assets by geographic region at June 30,
1996:
(In 000's)
Germany $ 101,767
United States 288,884
Eliminations (15,147)
Consolidated $ 375,504
The German operation's customers are a diverse group of operators
of arcades, hotels, restaurants and taverns, primarily in Germany.
Bally Gaming and Systems' customers are primarily casinos and
gaming machine distributors in the United States and abroad.
Receivables of the German operations and Bally Gaming and Systems
are generally collateralized by the related equipment. See
"Concentration of Credit Risk."
4. RECEIVABLES
The Bally Gaming and Systems business unit grants certain customers
extended payment terms under contracts of sale. These contracts are
generally for terms of one to three years, with interest at
prevailing rates, and are generally collateralized by the related
equipment sold although the value of such equipment, if
repossessed, may be less than the receivable balance outstanding.
See "Concentration of Credit Risk." The Company's Nevada gaming
machine operations from time to time make loans to location
operators in order to participate in revenues over extended periods
of time. The loans, made for build-outs, tenant improvements and
initial operating expenses are, generally secured by the personal
guarantees of the operators and the locations' assets. The
majority of the loans are interest bearing and are expected to be
repaid over a period of time not to exceed the life of the revenue
sharing arrangement. The loans have varying payment terms
requiring payments to be made either weekly or monthly. Interest
rates on the loans range from prime plus 1.50% to stated rates of
8% to 11% with various due dates ranging from July 1996 to April
2007. The loans are expected to be repaid from the locations' cash
flows or proceeds from the sale of the leaseholds to new operators.
The following table represents, at June 30, 1996, scheduled
collections of accounts and notes receivable (net of allowances for
doubtful accounts) by fiscal year:
(In 000's)
1997 $93,502
1998 8,560
1999 2,366
2000 817
2001 562
Thereafter 1,879
Total $107,686
5. DEBT AND LINES OF CREDIT
Long-term debt and lines of credit at June 30, 1995 and 1996
consist of the following:
1995 1996
(In 000's)
12 7/8% Senior Secured Notes due 2003, net of
unamortized discount of $3,071,000 $ --- $150,929
7.5% Convertible subordinated debentures due
2003, unsecured 85,000 1,642
Hospitality Franchise Systems note payable,
secured by the assets of the Rainbow Casino 9,065 7,864
Subordinated note payable to stockholder, net of
discount of $747,619 in 1995 and $511,528
in 1996, secured by the assets of VSI 3,309 2,268
Bally Wulff revolving lines of credit --- 13,664
Bally Gaming and Systems revolving line of credit --- 7,525
Other, secured by related equipment 4,023 7,452
101,397 191,344
Less current maturities 3,995 25,777
Long-term debt, less current maturities $97,402 $165,567
In June 1996, the Company completed a public offering of
$154,000,000 aggregate principal amount of its 12 7/8% Senior
Secured Notes due 2003 (the "Senior Secured Notes") as part of the
financing of the BGII merger. Interest on the Senior Secured Notes
is payable semi-annually in arrears on June 30 and December 30 of
each year, commencing December 30, 1996. The Senior Secured Notes
will mature on June 30, 2003. The Senior Secured Notes will be
redeemable at the option of the Company, in whole or in part, at
any time on or after June 30, 2000 at the redemption prices of
104.292% in 2000, 102.146% in 2001 and 100% thereafter plus accrued
and unpaid interest, if any, to the date of redemption. Upon the
occurrence of a change of control as defined in the indenture, the
Company is required to make an offer to repurchase the Senior
Secured Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of
repurchase. The Senior Secured Notes are secured by an exclusive
pledge of the equity interests directly or indectly held by the Company
in its subsidiaries, except for the equity interests in BGII
and its subsidiaries, but including the equity interests in
Alliance Holding Company ("Holding"), which was formed to hold the
equity interests of BGII and its subsidiaries. The Senior Secured
Notes are fully and unconditionally guaranteed on a joint and
several senior basis by each present and future subsidiary as
defined, of the Company, other than (i) the partially-owned
entities through which the Company's Mississippi casino and Louisiana
gaming machine operations are conducted and (ii) specified entities
through which the Company's German operations are conducted. The
Indenture for the Company's Senior Secured Notes contains various
limitations on incurrence of additional indebtedness, on restricted
payments and on dividends and payment restrictions on subsidiaries.
In September 1993, the Company completed the private placement of
$85,000,000 aggregate principal amount of its 7.5% Convertible
Subordinated Debentures ("Old Convertible Debentures") due 2003.
The debentures pay interest semi-annually on March 15 and September
15. These debentures are convertible at any time into shares of the
Company's common stock at a conversion price of $10 per share
(equivalent to a conversion rate of 100 shares per $1,000 principal
amount of debentures), subject to adjustment. In June 1996, in
response to a solicitation from the Company, the debenture holders
exchanged $83,358,000 aggregate principal amount of Old Convertible
Debentures for a like principal amount of its 7.5% Convertible
Subordinated Debentures ("New Convertible Debentures") due 2003,
which upon the consummation of the Merger automatically converted
to either common stock, or at the election of the debenture holder,
into Series E Special Stock. Holders of $11,316,000 principal
amount of New Convertible Debentures elected to receive Series E
Special Stock and $72,042,000 elected conversion into Common Stock.
To induce the holders of the Old Convertible Debentures to exchange
their debentures for New Convertible Debentures, the Company
increased the number of common shares per each $1,000 such
debenture holders would receive from 100 shares to 210 shares.
This inducement was accounted for in accordance with Statement of
Financial Accounting Standards No. 84 "Induced Conversions of
Convertible Debt". The non-cash accounting charge for inducement
for early conversion, representing the value of the incremental 110
common shares offered, totaled $30,079,000 and has been reflected
as additional paid in capital on the balance sheet and in the
statements of operations as a direct merger cost. For tax purposes
the automatic conversion resulted in a gain on extinguishment of
debt. However, this tax gain was primarily offset against the
Company's net operating loss carry forwards.
During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to
loan $7,750,000 to the Company's majority controlled subsidiary
RCVP in connection with the construction of the Rainbow Casino.
The loan amount was subsequently increased to $10,000,000. The
note bears interest at 7.5% per annum and requires monthly payments
of principal and interest over a 24-month period. In exchange for
funding this loan, HFS is also entitled to receive a monthly
royalty fee based on the casino's gaming revenues of 12% on the
first $40.0 million, 11% on the next $10.0 million, and 10%
thereafter. The consolidated statement of operations for fiscal
years 1995 and 1996 include approximately $810,000 and $4,070,000
of such royalties, respectively.
In March 1992, Alfred H. Wilms, director and principal stockholder
(and then Chairman of the Board of Directors and Chief Executive
Officer) of the Company, committed to provide or cause others to
provide a $6,500,000 five year subordinated loan to VSI, the
Company's controlled subsidiary, which loan has been funded in full
and is secured by a subordinated interest in all of VSI's present
and future personal property. Until August 1993, the loan required
quarterly payments of interest. In August 1993, the loan agreement
was amended to extend the maturity of the loan to September 1, 1998
and to require quarterly payments of principal and interest.
Interest on the loan accrues at the rate of 200 basis points above
the 90-day London Inter Bank Offered Rate, adjusted quarterly. At
June 30, 1996 the interest rate for the note was 7.6875%. In
September 1996 this note was paid in full.
During March 1993, the Bally Wulff entities obtained two bank
lines of credit for the purpose of financing the acquisition of
assets acquired from an independent distributor. The agreements
provide for borrowings of DM 16,000,000 (approximately $10,470,000,
at June 30, 1996) and DM 2,000,000 (approximately $1,314,000 at
June 30, 1996), respectively. The DM 2,000,000 line of credit was
originally DM 5,000,00 and has been, and will continue to be,
reduced by DM 250,000 principal amount per quarter, and expires on
March 31, 1998. Borrowings under this line of credit bear interest
at 6.95%. The working capital revolving credit line of DM16,000,000
bears interest at a rate tied to an international borrowing rate
plus 1% (4.44% at June 30, 1996) and is due on demand. These lines
are collateralized by a pledge of the assets acquired.
Approximately $10,511,000 was outstanding under these lines at June
30, 1996. In May 1993, the Bally Wulff entities obtained a
DM16,300,000 (approximately $10,667,000 at June 30, 1996) revolving
line of credit for general working capital purposes. This agreement
bears interest at a rate tied to an international borrowing rate
plus 1% (4.61% at June 30, 1996) and is due on demand. This line is
collateralized by the receivables of the Bally Wulff entities.
Approximately $3,153,000 was outstanding under this line at June
30, 1996.
In March 1993, BGII's domestic subsidiary, Bally Gaming, Inc.,
obtained a bank revolving line of credit which, as amended,
provides for borrowings tied to a percentage of Bally Gaming,
Inc.'s eligible (as defined in the credit agreement) inventory and
accounts receivable with a maximum borrowing capacity of
$15,000,000. Borrowings under this agreement, which expires
March 31, 1997, bear interest at one and one-half percent above the
bank's prime rate (9.75% at June 30, 1996). The Company must pay an
annual facility fee of one-half of one percent of the maximum
borrowing capacity and a monthly unused line fee of one-quarter of
one percent of the difference between the maximum borrowing
capacity and the average daily outstanding balance during any
month. This line of credit is collateralized by property, plant and
equipment and the eligible inventory and accounts receivable. The
agreement and subsequent amendments also contain certain financial
and other restrictive covenants, including the maintenance by Bally
Gaming, Inc. of specified levels of minimum net working capital,
working capital ratio, tangible net worth, net worth ratio, and
minimum net income after taxes, all as defined in the credit
agreement. Eligible borrowing capacity under this agreement at June
30, 1996 was $15,000,000. Approximately $7,525,000 was outstanding
at June 30, 1996.
Maturities of long-term debt, net of discount, for each of the five
fiscal years ending subsequent to June 30, 1996 are as follows:
(In 000's)
1997 $25,777
1998 6,419
1997 2,275
2000 1,830
2001 1,978
Thereafter 153,065
Total $191,344
6. SERIES B SPECIAL 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 for the Merger. The
Series B Special Stock is redeemable at the option of the Company
at any time, in whole or in part, at a price per share equal to
$100 per share ("Liquidation Value"), plus accrued and unpaid
dividends and distributions thereon, if any, to the date of
redemption. In addition, the Company is required to redeem all
outstanding shares of Series B Special Stock on or prior to
June 30, 2004 at $100 per share. Dividends accrue and are
cumulative from the date of issuance and are payable quarterly in
cash in an amount per share equal to $3.75 (or 15% of liquidation
value per annum), except that the Company may elect to pay such
dividends in additional shares of Series B Special Stock (or
fractions thereof) until June 30, 2003, provided that the portion
of any dividends payable in shares of Series B Special Stock after
June 30, 2001 will be limited to $2.00 per share (or 8% of
liquidation value per annum). The Series B Special Stock sold in
the offering and issued as part of the consideration for the Merger
was issued at a discount from par, which amount is being amortized
and included in the Series B Special Stock dividends. The Series B
Special Stock is senior to the Series E Special Stock discussed
below.
All shares of Series B Special Stock are required to be redeemed in
cash on the eighth anniversary of the date of initial issuance in
an amount equal to the Liquidation Value. If the Company fails to
redeem such shares by that date and the holders of Series B Special
Stock have not already elected two directors to the Board, then the
number of directors constituting the Board of Directors of the
Company will be increased by two, and not more than two, and the
holders of the shares of Series B Special Stock will have the right
until all such shares are redeemed, voting separately as a class,
to elect two directors to the Board of Directors. In no event will
holders of Series B Special Stock have the right to elect more than
two directors in total. In addition, if required redemption is not
made or dividends are not paid, no dividends or distributions may
be made on the common stock.
7. 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 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 has
been met and during fiscal year 1996 Kirkland elected to convert
its shares to common stock.
During fiscal year 1996, the Company issued (a) 484,551 shares of
Series B Special Stock to BGII holders as a part of the merger
consideration, (b) 200,000 shares of Series B Special Stock in a
public offering and (c) 113,160 shares of Series E Special Stock to
certain holders of the New Convertible Debentures upon consummation
of the Merger.
Each share of Series E Special Stock will accrue dividends only for
the first three years following issuance 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 are convertible after two years into common stock at an
initial conversion price of $5.88 per share (equivalent to a
conversion rate beginning at approximately 17.004 shares of common
stock per share of Series E Special Stock), subject to adjustment
under certain circumstances, and will have 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. 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. At June
30, 1996, there were incentive stock options covering 10,000 shares
and non-qualified stock options covering 207,000 shares outstanding
under the 1984 Plan. Generally, options are granted at the fair
market value of the Company's Common Stock at the date of the grant
and become exercisable over five years.
In 1992, the Company created the 1991 Long Term Incentive Plan (the
"Incentive Plan") that, as amended, provides for the issuance of up
to 3,000,000 shares of common stock to Company employees and
directors. At June 30, 1996 there were incentive stock options
covering 2,318,834 shares outstanding under the Incentive Plan.
Generally, options are granted at the fair market value of the
Company's Common Stock at the date of the grant and become
exercisable over five years.
Pursuant to the merger 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 at an exercise price of $3.80 per
share.
On August 29, 1996, the Board of Directors repriced the exercise
price for 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
Shares Exercise Price
Balance, June 30, 1993 1,251,850 1.375-8.750
Granted 690,500 6.500-10.125
Exercised (393,850) 1.625-4.000
Canceled (58,000) 2.125-4.000
Balance, June 30, 1994 1,490,500 1.375-10.125
Granted 1,598,334 5.750-8.000
Exercised (186,000) 1.375-4.000
Canceled (285,000) 3.500-10.000
Balance, June 30, 1995 2,617,834 1.625-9.250
Granted 689,000 3.80-5.50
Exercised --- ---
Canceled (621,000) 5.50-7.625
Balance, June 30, 1996 2,685,834 1.625-8.375
Exercisable at June 30, 1996 1,464,000 1.625-8.375
Warrants
At June 30, 1996, Mr. Wilms held warrants to purchase 2,000,000
shares of Common Stock at $2.50 per share, subject to adjustment.
These warrants were issued in connection with the funding of the
$6,500,000 five year subordinated loan for VSI.
Upon closing of the private placement of the Company's 7.5%
Convertible Subordinated Debentures and the $5 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. 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 Old Convertible Debentures; Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") and Oppenheimer &
Co., Inc. ("Oppenheimer"), respectively. In fiscal 1995, in
connection with the commencement of their employment with the
Company, Steve Greathouse, the Company's Chairman of the Board,
President and Chief Executive Officer and Dr. Craig Fields, Vice
Chairman of the Board were each granted warrants to purchase
250,000 shares of common stock on the same terms as the Kirkland
warrants described above. At the completion of the Merger, GSA
was issued an additional 2,500,000 warrants on the same terms as
the original warrants issued to Kirkland described above, Dr. Fields
was issued 150,000 stock options, and Cerberus Partners L.P. and certain
affiliates of Canyon Partners, Inc. were issued 250,000 warrants.
As of June 30, 1996, none of the warrants granted
to Kirkland, GSA, Friend, Greathouse or Fields are exercisable.
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. In addition, BGII issued warrants to purchase 300,000 shares
of BGII common stock at a purchase price of $15 per share,
exercisable during a four-year period ending November 11, 1996, to
the underwriters of the initial public offering of BGII's common
stock, of which 2,000 warrants have been exercised. 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.
At June 30, 1996, shares of the Company's Common Stock were
reserved for future issuance as follows:
(In 000's)
Shares underlying stock options issued or
issuable under the 1984 Plan 217
Shares underlying stock options issued or
issuable under the 1991 Plan 2,970
Shares underlying all warrants issued 10,150
Shares underlying remaining Old Convertible
Debentures 164
Shares for former BGII option holders 373
Total 13,874
8. UNUSUAL ITEMS
The Company and Casino Magic Corporation, through wholly owned
subsidiaries, are members in Kansas Gaming Partners, L.L.C. ("KGP")
and Kansas Financial Partners, L.L.C. ("KFP"), both Kansas limited
liability companies. Under an option agreement (the "option
agreement") granted to KGP by Camptown Greyhound Racing, Inc.
("Camptown") and The Racing Association of Kansas-Southeast ("TRAK
Southeast"), KGP has been granted the exclusive right, which right
expires on September 13, 2013, to operate gaming machines and/or
casino-type gaming at Camptown's racing facility in Frontenac,
Kansas if and when such gaming is permitted in Kansas. In
December 1994, Camptown received a $3,205,000 loan from Boatmen's
Bank which was guaranteed by KFP. The Company and Casino Magic
Corporation each invested $1,580,000 in KFP which was used to
purchase a certificate of deposit to collateralize its guaranty.
Construction of Camptown's racing facility has been completed and
the facility opened for business in May 1995. The racing facility
was closed on November 5, 1995 due to poor financial results.
Camptown filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in January 1996 and has stated an intention to
reopen for business following bankruptcy reorganization. Boatmen's
Bank demanded payment of the Camptown loan from KFP under the terms
of the guaranty. KFP paid the loan and Boatmen's Bank returned
KFP's certificate of deposit and KFP assumed Boatmen's Bank's
position in the loan to Camptown which is secured by a second
mortgage on Camptown's greyhound racing facility in Frontenac,
Kansas. TRAK Southeast and Camptown continue to be bound by the
Option Agreement. KFP intends to vigorously pursue all of its
rights and remedies which may include, among other things, seeking
authority from the bankruptcy court to commence a foreclosure
action. In the case of a foreclosure action, KFP would be required
to assume or pay the existing first mortgage of approximately
$2,000,000 if KFP becomes the purchaser at any such sale. The
Kansas legislature considered gaming bills during the 1996 session
although none passed. There can be no assurance that casino-style
electronic gaming machines will ever be legalized in Kansas.
Management has evaluated this investment and determined it not to
be recoverable. The Company fully reserved the net book value of
approximately $1,585,000 through a charge to operations in fiscal
1996 which was recorded as an unusual item in the consolidated
statement of operations. Management will continue to monitor the
status of gaming in Kansas.
Native American Investments, Inc. ("NAI"), a wholly-owned
subsidiary, has a contract to develop Class II and III gaming
opportunities with an Indian tribe in California. Class II gaming
is subject to the concurrent jurisdiction of the National Indian
Gaming Commission ("NIGC") and the applicable Indian tribe.
Class III gaming is a residual category composed of all forms of
gaming that are not Class I gaming or Class II gaming, including
casino style gaming. The contract is subject to negotiations
resulting in satisfactory compacts with the state and approval of
the contract by the NIGC. The Governor of California has to date
refused to negotiate a compact covering Class III electronic gaming
machines and house-banked games in California and is currently
engaged in related litigation over the scope of gaming issues with
certain Indian tribes. There can be no assurance as to the ultimate
outcome of these litigation activities or successful completion of
any part of the Company's project. On March 27, 1996, the United
States Supreme Court ruled that a portion of the Indian Gaming
Regulatory Act was unconstitutional. As a result, Federal courts
cannot oversee negotiations between Indian tribes and state
officials. The Company believes that this ruling will have a
materially adverse effect upon its Native American casino
development activities in California. Accordingly, Management has
evaluated this investment and determined it not to be
unrecoverable. Management has fully reserved the net book value of
approximately $1,794,000 through a charge to operations in fiscal
1996 which was recorded as an unusual item in the consolidated
statement of operations. Management will continue to monitor the
status of Class II and III gaming in California.
In fiscal year 1996, Nevada gaming machine operations recorded
unusual items totaling $2,119,000. Reserves were increased by
$1,369,000 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
introduction of the new Gambler's Bonus product. In addition an
accrual of $750,000 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.
During 1995 the Company incurred unusual items consisting of
$1,331,000 in compensation expense recognized upon the issuance of
250,000 shares of Common Stock to the Company's President, Chief
Executive Officer and Chairman of the Board, in connection with his
employment agreement, and $962,000 related to certain service
contracts and termination costs.
In fiscal 1994, due to continuing losses from operations, negative
cash flows and incompatibility with the Company's long-term growth
strategy, the Company's Board of Directors resolved to 1) exit the
downtown Las Vegas gaming market and 2) dispose of the currently
operated small independent taverns on commercially reasonable terms
as market conditions warrant. As a result of the decision to exit
the downtown Las Vegas gaming market, the Company substantially
reduced operations at both the Trolley Stop Casino and Miss Lucy's
Gambling Hall & Saloon. Included in the 1994 statements of
operations are total expenses of approximately $3,246,000 related
to these actions. The total charge included approximately $488,000
related to the write-down of assets and approximately $2,758,000
representing primarily the present value of the future lease
payments net of estimated future sublease income.
The decision to withdraw from the tavern business resulted in
expenses of approximately $2,638,000 being recognized in fiscal
1994. Approximately $1,813,000 of the total amount was related to
the write down of assets while approximately $825,000 represented
primarily the present value of the future lease payments net of
estimated future sublease income. The Company entered into an
agreement to sell all of its tavern locations to an unaffiliated
third party which was completed in September 1995.
In fiscal year 1994 the Company gave notice to terminate a lease at
a rural hotel casino, and accrued for certain lease terminate costs
totaling $467,500.
9. INCOME TAXES
Except for the Bally Wulff entity's operations, the Company
generally accounts for income taxes and files its income tax
returns on a consolidated basis, including VSI, in which the
Company holds 100% of the voting interests.
The components of the Company's income tax expense for the years
ended June 30, 1994, 1995 and 1996 are:
1994 1995 1996
(In 000s)
Current tax expense:
U. S. Federal $ 73 $ --- $ 533
Foreign --- --- 172
State 31 102 50
104 102 755
Deferred tax expense
U. S. Federal 118 163 ---
State 19 --- ---
Total provision for income taxes $ 241 $ 265 $ 755
A reconciliation of the Company's income tax provision as compared
to the tax provision calculated by applying the statutory federal
tax rate (34%) to the loss before income taxes follows for the
years ended June 30, 1994, 1995 and 1996:
1994 1995 1996
(In 000's)
Computed expected income tax
benefit at 34% $(4,202) $(3,565) $(20,108)
Change in valuation allowance 4,385 3,736 (6,453)
Change in estimates, principally
due to changes in estimated tax
depreciation and NOL's 1,166
State income taxes, net of
federal benefit 33 67 33
Tax gain on conversion of debt to
equity, net 18,265
Fair value adjustment to inventories
at BGII 340
Acquisition costs not currently
deductible for tax purposes 7,102
Other, net 25 27 410
$ 241 $ 265 $ 755
The major components of the deferred tax assets and liabilities for
the years ended June 30, 1995 and 1996 are presented below.
1995 1996
(In 000's)
Deferred Tax Assets:
Net operating loss carry forwards $12,470 $6,012
Foreign tax credit carry forwards --- 13,769
Inventory obsolescence reserves 179 5,211
Bad debt reserves 564 4,630
Accruals not currently deductible
for tax purposes 362 4,325
Reserves for abandoned projects 1,356 1,863
Other 376 1,586
Total gross deferred tax assets 15,307 37,396
Less: Valuation allowance (13,908) (31,937)
Deferred tax assets $1,399 $5,459
Deferred Tax Liabilities:
Property and equipment,
principally due to deprecation
differences 1,399 2,625
Other --- 2,106
Total gross deferred tax liabilities 1,399 4,731
Net deferred tax assets $ --- $ 728
The change in the valuation allowance for the year ended June 30,
1996 is comprised of the following:
(In 000's)
Reduction in valuation allowance, primarily
due to realization of net operating
loss carry forwards $ (6,453)
Valuation allowance resulting from the Merger 24,482
Total change in valuation allowance $18,029
Management has considered certain tax planning strategies as
permitted by Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). Management has
determined tax benefits associated with recorded deferred tax
assets, net of valuation allowance, are considered to be more
likely than not realizable through future taxable income and future
reversals of existing taxable temporary differences.
At June 30, 1996, the Company has net operating loss carry forwards
for federal income tax purposes of approximately $17 million which
are available to offset future federal taxable income, if any,
expiring in the years 2007 through 2010. At June 30, 1996 the
Company has foreign tax credit carry forwards of approximately $14
million and alternative minimum tax credit ("AMT") carry forwards of
approximately $.6 million. Foreign tax credits are available to
offset future taxes due in the U.S. on future foreign taxable
income and expire between 1997 and 2001 unless utilized prior to
such time. AMT credits are available to be carried forward
indefinitely and may be utilized against regular U.S. Corporate tax
to the extent it does not exceed computed AMT calculations. The
Company is subject to annual limitations with respect to net
operating losses pursuant to Section 382 of the Internal Revenue
Code.
10. SUPPLEMENTAL FINANCIAL INFORMATION
Cash Flow Information
The following supplemental information is related to the
consolidated statements of cash flows. In fiscal 1996, the Company
recorded the following significant non-cash items:
(In 000's)
Convertible debentures converted
to equity securities $83,358
Common and Series B Special Stock
issued in Merger 42,738
BGII common stock purchased in fiscal year
1995 and canceled upon consummation
of the Merger 10,481
Accrual of contingent payment to RCC 1,000
Accrual of pay-in-kind Special Stock
dividends, net of discount amortization 362
Initial Series Special Stock converted
to Common Stock 133
In fiscal 1995, the Company reclassified approximately $212,000
from receivables to intangible assets and reclassified amounts to
property and equipment of $1,074,000 and receivables of $25,000
from other assets. Additionally, numerous non-cash items related
to the Company's acquisition of the general partnership interest in
RCVP impacted the statement of cash flows. The most significant of
these non-cash items included non-cash additions to property, plant
and equipment of approximately $23,400,000 and additions to total
debt of approximately $13,839,000.
In fiscal 1994, the Company reclassified amounts to intangible
assets totaling $1,393,000 and property and equipment totaling
$52,000, from accounts receivable.
Payments for interest expense in fiscal years 1994, 1995 and 1996
were approximately $4,690,000, $5,590,000 and $7,951,000
respectively.
Reserves and Allowances
The following tables represent the activity for each of the fiscal
years ended June 30, 1994, 1995, and 1996 for each of the valuation
reserve and allowance accounts (000's):
Balance at Balance at
Beginning of End of
Year Additions Deductions Year
Allowance for doubtful accounts
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
Year ended June 30, 1994 1,588 1,739 1,938 1,389
Inventory valuation allowance
Year ended June 30, 1996 $ 631 11,315(a) 1,831 $10,115
Year ended June 30, 1995 1,762 213 1,344 631
Year ended June 30, 1994 2,349 305 892 1,762
Other assets valuation
reserves $ --- 1,585 --- $1,585
----------------------------
(a) Includes reserves assigned to BGII receivables and inventory in
purchase accounting totaling $17,622 and $9,809, respectively.
11. 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 $1,000,000 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
twelve days ended June 30, 1996 was immaterial.
The Company leases office space, equipment, warehouse and repair
facilities, gaming machine operation locations, casino and other
locations under non-cancelable operating leases.
Future minimum rentals under non-cancelable operating leases at
June 30, 1996 are:
Year Total Net
Ended Minimum Sublease Minimum
June 30, Rentals Income Rentals
(In 000's)
1997 $11,765 $1,235 $ 10,530
1998 9,814 1,197 8,617
1999 8,052 1,178 6,874
2000 5,679 778 4,901
2001 4,806 458 4,348
Thereafter 32,041 1,988 30,053
$ 72,157 $ 6,834 $ 65,323
Certain gaming machine operation location leases provide only for
contingent rentals based upon a percentage of gaming revenue and
are cancelable at any time by either party.
Operating lease rental expense, including contingent lease rentals,
for years ended June 30 1994, 1995 and 1996 was as follows:
1994 1995 1996
(In 000's)
Minimum rentals $13,743 $ 9,704 $10,194
Contingent rentals 55,910 58,113 60,525
69,653 67,817 70,719
Sublease rental income (1,004) (1,192) (1,487)
$68,649 $66,625 $69,232
In conjunction with sales by Bally Gaming, Inc., with recourse to
Bally Gaming, Inc. and/or the Company, of certain trade receivables
to third parties, Bally Gaming, Inc. and/or the Company have
guaranteed amounts due from various customers of approximately
$19.6 million at June 30, 1996. In years prior to the Merger
BGII recognized charges for discounts as a result of
these sales of receivables which aggregated approximately $.5
million, $1.0 million and $.1 million during 1993, 1994 and 1995,
respectively. No such charges were incurred in the post-
acquisition period. It is possible that one or more of Bally Gaming,
Inc.'s customers whose obligation has been guaranteed by Bally
Gaming, Inc. 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, 1996, 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 these notes.
Although the Company is negotiating a restructuring with the holder of
the notes and the customer, there can be no assurance that a successfull
restructuring will take place. 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 $7.2 million on
all receivables with recourse is included in the Company's
allowance for doubtful accounts at June 30, 1996.
Litigation Relating to the Merger.
On or about June 19, 1995, three purported class actions were filed
in the Chancery Court of Delaware by BGII stockholders against BGII
and its directors (the "Fiorella, Cignetti and Neuman Actions") in
connection with the then-proposed merger of BGII with WMS ("WMS
Merger"). Also on or about June 19, 1995, a purported class action
was filed in the Delaware Court of Chancery by a BGII stockholder
against BGII and its directors and the Company (the "Strougo
Action") in connection with the tender offer and consent
solicitation made by the Company (subsequently superseded by the
execution of the Merger Agreement). On or about July 6, 1995, the
plaintiffs in the Fiorella, Cignetti, Neuman and Strougo Actions
(collectively, the "Stockholder Plaintiffs") filed with the Court a
motion to consolidate the four actions. On or about July 27, 1995,
certain of the Stockholder Plaintiffs filed an amended complaint
that adopted certain allegations concerning self-dealing by BGII
directors in connection with the merger agreement entered into with
WMS (the "WMS Agreement"); added a claim relating to BGII's alleged
failure to hold an annual meeting as required; and added WMS as
defendant. The amended complaint also alleged that BGII intended,
in violation of Delaware law, to sell Bally Wulff without first
seeking stockholder approval of the sale. The action sought an
order enjoining defendants from proceeding with, consummating or
closing the WMS Merger, or rescinding it if it closed; preventing
the sale of Bally Wulff without prior stockholder approval;
declaring invalid BGII's agreement to pay WMS a fee if the WMS
Agreement is terminated by BGII in certain circumstances;
compelling an auction of BGII and the provision of due diligence to
the Company; scheduling an immediate meeting of BGII stockholders;
and awarding compensatory damages. Management believes these claims
to be without merit and intends to vigorously defend these actions.
On October 23, 1995, WMS instituted a suit in New York State Court
against BGII for BGII's failure to pay $4.8 million upon
termination of the WMS Agreement. Management intends to vigorously
defend this action. On November 22, 1995, BGII answered the
complaint and brought counterclaims against WMS alleging that WMS
repudiated and breached the WMS Agreement by, among other things,
failing to act in good faith toward the consummation of the WMS
Merger, advising BGII that it would not perform as agreed but would
impose new conditions on the WMS Merger, acting in excess of its
authority and undermining the ability of BGII to perform the WMS
Agreement. On February 8, 1996 WMS moved for summary judgment. On
April 2, 1996, BGII opposed WMS's motion and cross-moved for
summary judgment.
On September 14, 1995, a stockholders' class and derivative action
was commenced by Richard Iannone, a stockholder of the Company,
against the Company, the members of its current Board of Directors
and certain of its former directors in Federal District Court in
Nevada asserting, among other matters, that the Company has wasted
corporate assets in its efforts to acquire BGII by, among other
things, agreeing to onerous and burdensome financing arrangements
that threaten the Company's ability to continue as a going concern
and that the Company had made false and misleading statements and
omissions in connection with that effort by failing to disclose the
need to refinance an additional $53.0 million of existing BGII
indebtedness, by failing to disclose how the Company would
recapitalize the combined indebtedness of both companies and by
failing to disclose the allegedly leading role played by Richard
Rainwater in the Company's efforts to acquire control of BGII
which, given assurances made by the Company to gaming regulators in
Nevada that the unlicensed Mr. Rainwater would not play an active
role in the management of the Company, could expose the Company to
suspension or revocation of its Nevada gaming license. In addition,
the stockholder action against the Company alleges that (i) the
Company substantially inflated its results of operations by selling
gaming machines at inflated prices in exchange for promissory notes
(without any down payment) which the Company knew could not be paid
in full but which the Company nevertheless recorded at full value,
(ii) the Company doctored reports sent to its route customers and
(iii) the directors of the Company had caused the Company to engage
in self-dealing transactions with certain directors which resulted
in the exchange of the Company assets for assets and services of
vastly lesser value. On September 21, 1995, a United States
magistrate denied the plaintiffs' request for expedited discovery,
stating that Mr. Iannone was not an adequate representative and was
not likely to succeed on the merits. On October 4, 1995, the
defendants filed a motion to dismiss the action. On December 18,
1995, the plaintiff filed an amended shareholder derivative
complaint. The plaintiff is no longer asserting any class claims.
On March 5, 1996 the defendants filed a motion to dismiss the
amended complaint. On May 16, 1996, the magistrate judge, on motion
of defendants, stayed discovery in this case pending a ruling by
the court on the defendants' motion to dismiss the amended
complaint.
Other Litigation
In 1994, after an intensive Federal investigation of Bally Gaming's
former Louisiana distributor, eighteen individuals were indicted on
charges of racketeering and fraud against Bally Gaming, Inc. and the
Louisiana regulatory system. Among those indicted were the former
distributor's stockholders, directors, employees and others alleged
to be associated with organized crime. Fifteen entered pleas of
guilty before trial and the remaining three were convicted in
October 1995. In addition, Alan Maiss, a former director and
president of BGII, pled guilty to misprision of a felony in
connection with such investigation. BGII, its subsidiaries and its
current employees were not subject to such investigation.
Prior to the conclusion of the Federal criminal case, BGII's
activities with regard to its former VLT distributor in Louisiana
were the subject of inquiries by gaming regulators and a report by
the New Jersey Division of Gaming Enforcement dated August 24,
1995. The New Jersey Commission and Division of Gaming have
indicated that in light of the Merger and consequent personnel
changes that have occurred at BGII, there will be no need for a
hearing and the inquiry can be resolved by stipulation. There has
been no indication from the New Jersey Commission and Division of
Gaming that the inquiry will have any effect on BGII's pending
license application. The Gaming Authorities in Ontario, Canada, who
have investigated the matter, issued a gaming registration to Bally
Gaming, Inc. on February 8, 1996.
On September 25, 1995, BGII was named as a defendant in a class
action lawsuit filed in Federal District Court in Nevada, by Larry
Schreirer on behalf of himself and all others similarly situated
(the "plaintiffs"). The plaintiffs filed suit against BGII and
approximately 45 other defendants (each a "defendant," and
collectively the "defendants"). Each defendant is involved in the
gaming business as either a gaming machine manufacturer,
distributor, or casino operator. The class action lawsuit arises
out of alleged fraudulent marketing and operation of casino video
poker machines and electronic slot machines. The plaintiffs allege
that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people into playing their
gaming machines based on a false belief concerning how those
machines actually operate as well as the extent to which there is
actually an opportunity to win on any given play. The plaintiffs
allege that the defendants' actions constitute violations of the
Racketeer Influenced and Corrupt Organizations Act (RICO) and give
rise to claims of common law fraud and unjust enrichment. The
plaintiffs are seeking monetary damages in excess of one billion
dollars, and are asking that any damage awards be trebled under
applicable Federal law. Management believes the plaintiffs' lawsuit
to be without merit. The Company intends to vigorously pursue all
legal defenses available to it.
While the ultimate outcome of the matters described above are not
presently determinable, management does not expect that the outcome
will have a material adverse effect on the Company's results of
operations, financial position or cash flows.
The Company and its subsidiaries are also involved from time to
time in various claims and legal actions arising in the ordinary
course of business. Management believes that the ultimate outcome
of these matters will not have a material adverse effect on the
Company's consolidated financial statements taken as a whole.
12. 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, 1996 net accounts and notes receivable, including
obligations of various customers which are guaranteed by the
Company, by region as a percentage of total net receivables are as
follows:
Gaming
Bally Bally Gaming Machine Casino
Wulff and Systems Operations Operations Total
Germany 38.7% % % % 38.7%
Mississippi Riverboats 10.5 10.5
Nevada 11.8 5.4 17.2
Atlantic City 5.7 5.7
International 2.4 15.0 17.4
Louisiana
Others individually less
than 5% 10.5 10.5
41.1% 53.5 % 5.4% 0.0% 100.0%
Bally Gaming, Inc.'s, receivables and customer obligations
guaranteed by Bally Gaming, Inc. and/or the Company from or on
behalf of riverboat casinos and casinos on Indian land generally
represent sales to recently opened casinos and, in many cases, new
customers to Bally Gaming, Inc. Approximately 43% of the accounts
and notes receivable and customer obligations guaranteed by the
Company at June 30, 1996 relate to these emerging markets including
approximately 25% to three customers operating in Mississippi.
Receivables and customer obligations guaranteed by the Company from
emerging market customers contain increased risk factors compared
to receivables at the Bally Wulff entities or other traditional
markets for Bally Gaming, Inc.
In early 1995, the Governor of the State of New Mexico signed
compacts with certain Indian tribes to permit casino gaming on
tribal lands in New Mexico. These compacts went through appropriate
federal approval processes and a number of casinos began operating.
In July 1995 the Supreme Court of New Mexico found that the
Governor did not have proper authority to sign the compacts. The
Indian tribes have filed a lawsuit in federal court to seek
resolution of this issue. On July 12, 1996, the United States
District Court judge entered an order that the gaming compacts
signed by New Mexico Governor Johnson with the New Mexican Indian
tribes were invalid. The Indian tribes filed an immediate appeal
to the 10th Circuit Court of Appeals. On July 25, 1996, the judge
entered an order staying the enforcement of the order pending the
decision of the 10th Circuit on plaintiffs' appeal. This stay
order permits the New Mexican Indian gaming entities subject to the
lawsuit to continue business operations through the issuance of the
appellate court ruling. Bally Gaming and Systems had sold product
to the Indian tribes prior to this ruling. At June 30, 1996, the
Company has $3.9 million in accounts and notes receivable from an
operator of two casinos for two different Indian tribes including
$1.6 million of trade receivables sold to a third party with
recourse to Bally Gaming, Inc. This operator is currently several
months ahead on payments. No provision for doubtful accounts for
this customer has been included in the accompanying financial
statements as management believes the receivable is properly valued
at June 30, 1996. As events develop during 1997 management will
reevaluate its estimate of the realizability of the receivable.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Standards No. 107, "Disclosures About Fair
Value of Financial Instruments' ("SFAS No. 107"), requires
disclosure of the fair value of financial instruments for which it
is practicable to estimate that value. SFAS No. 107 specifically
excludes certain items from its disclosure requirements. 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, 1996 for the Company's financial
instruments approximate their fair value.
14. INTERIM FINANCIAL INFORMATION (Unaudited)
Following is the unaudited quarterly results of the Company for the
years ended June 30, 1996 and 1995. This information is not
covered by the Independent Auditors' Report.
Primary
Total Net Loss Per
Revenues Loss Share(1)
(In 000's, except per share amounts)
1995
First Quarter $30,824 $(1,926) $(.18)
Second Quarter 31,514 (3,090) (.28)
Third Quarter 31,439 (1,775) (.16)
Fourth Quarter 38,211 (3,960) (.34)
1996
First Quarter $38,541 $(3,418) $(.29)
Second Quarter 37,687 (6,013) (.50)
Third Quarter 40,568 (5,398) (.42)
Fourth Quarter 55,582 (45,430) (3.43)
(1) The sum of the loss per share for the four quarters,
which are based on average shares outstanding during each quarter,
does not equal the loss per share for the year, which is
based on average shares outstanding during the year.
15. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to
provide information regarding Alliance Gaming Corporation, its
parent company and wholly-owned "Guaranteeing Subsidiaries", its
"Pledging Subsidiaries", consisting of VSI, Rainbow Casino
Vicksburg L.P. and Alliance Holding Company (the entity that holds
the Company's investment in BGII) and its non-pledging and non-
guaranteeing subsidiary Alliance Automaten GmbH & Co KG, (the subsidiary
that holds the Company's German
interests). The "Pledging Subsidiaries" are shown separately because
all of the Company's interest in these entities is pledged as
collateral for the Senior Secured Notes. The notes to consolidating
financial statements should be read in conjunction with these
consolidating financial statements.
CONSOLIDATING BALANCE SHEETS
June 30, 1995
(In 000's)
ASSETS
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Current assets:
Cash and cash equivalents $ 8,234 $5,500 $ $13,734
Securities available for sale 23,680 23,680
Accounts and notes receivables, net 4,322 50 (1,056) 3,316
Inventories, net 700 14 714
Other current assets 3,495 1,170 4,665
Total current assets 40,431 6,734 (1,056) 46,109
Long-term notes receivable, net 9,839 (4,530) 5,309
Property, plant and equipment, at cost
Land and improvements 3,230 14,066 17,296
Building and leasehold improvements 9,565 4,659 14,224
Gaming equipment 30,465 7,706 (1,775) 36,396
Furniture, fixtures and equipment 9,351 2,231 11,582
Less accumulated depreciation and
amortization (28,528) (2,393) 1,775 (29,146)
Property, plant and equipment, net 24,083 26,269 50,352
Excess of costs over net assets of an
acquired business,net of accumulated
amortization 3,864 (22) 3,842
Intangible assets, net of accumulated
amortization 12,153 230 22 12,405
Deferred tax assets 1,399 1,399
Other assets 15,720 282 (9,070) 6,932
$107,489 $33,515 $(14,656) $126,348
See accompanying notes.
CONSOLIDATING BALANCE SHEETS (Continued)
June 30, 1995
(In 000's)
LIABILITIES AND STOCKHOLDERS' EQUITY
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Current liabilities:
Accounts payable $1,254 $ 504 $ $1,758
Accrued expenses 6,683 2,373 (446) 8,610
Current maturities of long
term debt 186 4,419 (610) 3,995
Total current liabilities 8,123 7,296 (1,056) 14,363
Long term debt, less current
maturities 85,219 16,438 (4,255) 97,402
Deferred tax liabilities 475 924 1,399
Other liabilities 3,572 4,665 (5,681) 2,556
Total liabilities 97,389 29,323 (10,992) 115,720
Commitments and contingencies
Minority interest 642 1 643
Stockholders' equity (deficiency):
Preferred stock 253 (253)
Common Stock 1,283 2 (120) 1,165
Initial Series Special Stock 133 133
Additional paid-in capital 33,971 1,455 (3,292) 32,134
Unrealized loss on securities
available for sale, net (316) (316)
Accumulated deficit (25,224) (2,093) (23,131)
Total stockholders' equity
(deficiency) 10,100 3,550 (3,665) 9,985
$107,489 $33,515 $(14,656) $126,348
See accompanying notes.
CONSOLIDATING BALANCE SHEETS
June 30, 1996
(In 000's)
ASSETS
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
Current assets:
Cash and cash equivalents $37,249 $8,684 $2,124 $ $48,057
Accounts and notes receivables,
net 47,915 35 46,850 (1,298) 93,502
Inventories, net:
Raw materials and work-in-process 9,136 5,317 14,453
Finished goods 15,860 12 11,331 27,203
Other current assets 6,317 552 1,485 8,354
Total current assets 116,477 9,283 67,107 (1,298) 191,569
Long-term notes receivables, net 16,935 1,773 (4,524) 14,184
Property, plant and equipment,
at cost:
Land and improvements 4,834 15,067 435 20,336
Buildings and leasehold
improvements 18,191 6,260 5,368 29,819
Gaming equipment 31,433 7,500 3,526 42,459
Furniture, fixtures and equipment 10,661 2,388 2,565 15,614
Less accumulated depreciation and
amortization (25,783) (4,278) (83) (30,144)
Property and equipment, net 39,336 26,937 11,811 78,084
Excess of costs over net assets
of acquired businesses,net of
accumulated amortization 40,396 18,332 1,564 60,292
Intangible assets, net of
accumulated amortization 19,827 420 20,247
Investment in subsidiaries 80,292 (80,292)
Deferred tax assets 4,131 1,328 5,459
Other assets, net of reserve 12,148 2,994 1,416 (10,889) 5,669
$229,542 $39,634 $101,767 $ (95,439) $375,504
See accompanying notes.
CONSOLIDATING BALANCE SHEETS (Continued)
June 30, 1996
(In 000's)
LIABILITIES AND STOCKHOLDERS' EQUITY
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
Current liabilities:
Accounts payable $15,076 $ 213 $ 3,750 $(2,560) $16,479
Accrued liabilities 53,474 4,110 6,140 (25,420) 38,304
Current maturities of long term
debt 8,200 3,913 13,664 25,777
Total current liabilities 76,750 8,236 23,554 (27,980) 80,560
Senior Secured Notes due 2003, net
of unamortized discount of $3,071 150,929 150,929
Other long term debt, less current
maturities 2,750 12,984 3,007 (4,103) 14,638
Deferred tax liabilities 4,731 4,731
Other liabilities 2,612 5,313 (5,825) 2,100
Total liabilities 237,772 26,533 26,561 (37,908) 252,958
Commitments and contingencies
Minority interest 1,147 1 1,148
Series B Special Stock, $.10 par
value, $100 liquidation value 51,552 51,552
Stockholders' equity:
Common Stock 3,547 2 (373) 3,176
Series E Special Stock 11,316 11,316
Additional paid-in capital 118,513 2,455 75,222 (57,159) 139,031
Cumulative translation adjustment 3 (290) (287)
Accumulated deficit (93,161) 9,497 274 (83,390)
Total stockholders' equity 40,218 11,954 75,206 (57,532) 69,846
$329,542 $39,634 $101,767 $(95,439) $375,504
See accompanying notes.
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1994
(In 000's)
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Revenues:
Gaming machine operations $86,268 $17,389 $(827) $102,830
Casino and tavern
operations 16,150 (471) 15,679
Food and beverage sales 6,306 (1,826) 4,480
Equipment sales 65 65
108,789 17,389 (3,124) 123,054
Costs and expenses:
Cost of gaming machine
operations 65,971 11,214 (853) 76,332
Cost of casino and tavern
operations 12,316 (445) 11,871
Cost of food and beverage 3,084 3,084
Cost of equipment sales 20 20
Selling, general and
administrative 21,418 2,884 (1,673) 22,629
Provision for doubtful
receivables 705 705
Unusual items 6,351 6,351
Depreciation and
amortization 8,652 878 9,530
118,517 14,976 (2,971) 130,522
Operating (loss) income (9,728) (2,413) (153) (7,468)
Other income (expense):
Interest income 2,049 35 2,084
Interest expense (6,173) (657) (6,830)
Minority interest in income (506) (506)
Other, net (498) 178 153 (167)
(Loss) income before income
taxes (14,350) 1,463 (12,887)
Income tax provision (241) (241)
Net (loss) income $(14,350) $1,222 $ $(13,128)
See accompanying notes.
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1995
(In 000's)
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Revenues:
Gaming machine operations $92,007 $15,592 $(772) $106,827
Casino and tavern
operations 14,997 6,759 (469) 21,287
Food and beverage sales 5,522 207 (1,882) 3,847
Net equipment sales 27 27
112,553 22,558 (3,123) 131,988
Costs and expenses:
Cost of gaming machine
operations 70,637 10,015 (777) 79,875
Cost of casino and
tavern operations 9,155 2,698 (417) 11,436
Cost of food and beverage 2,712 83 2,795
Cost of equipment sales 12 12
Selling, general and
administrative 25,627 4,208 (1,586) 28,249
Direct merger costs 1,669 1,669
Unusual items 2,293 2,293
Provision for doubtful
receivables 387 13 400
Depreciation and
amortization 8,175 1,345 9,520
120,667 18,362 (2,780) 136,249
Operating (loss) income (8,114) 4,196 (343) (4,261)
Other income (expense):
Interest income 2,786 115 (103) 2,798
Interest expense (7,131) (1,106) 104 (8,133)
Royalty fees (810) (810)
Minority interest in income (397) (397)
Other, net (220) 195 342 317
(Loss) income before
income taxes (12,679) 2,193 (10,486)
Income tax provision 434 (699) (265)
Net income (loss) $(12,245) $ 1,494 $ $(10,751)
See accompanying notes.
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1996
(In 000's)
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
Revenues:
Gaming machine
operations $93,378 $16,901 $ $(341) $109,938
Casino operations 11,493 33,794 (190) 45,097
Food and beverage
sales 4,550 919 (2,057) 3,412
Equipment and
systems sales 10,574 3,205 (1) 13,778
Other revenues 101 152 (100) 153
120,096 51,614 3,357 (2,689) 172,378
Costs and expenses:
Cost of gaming
machine operations 73,777 10,776 (341) 84,212
Cost of casino
operations 7,693 12,024 (179) 19,538
Cost of food
and beverage 2,208 300 2,508
Cost of equipment
and systems sales 7,216 2,020 (1) 9,235
Selling, general
and administrative 20,231 11,479 911 (2,001) 30,620
Provision for
doubtful receivables 1,001 17 2 1,020
Depreciation and
amortization 8,747 2,176 65 10,988
Direct merger costs 55,843 55,843
Unusual items 5,498 5,498
182,214 36,772 2,998 (2,522) 219,462
Operating income (loss) (62,118) 14,842 359 (167) (47,084)
Other income (expense):
Interest income 1,654 290 101 (474) 1,571
Interest expense (7,407) (1,933) (31) 474 (8,897)
Royalty fees (4,070) (4,070)
Minority interest
in income (963) (963)
Other, net 662 372 3 (736) 301
Loss before
income taxes (67,209) 8,538 432 (903) (59,142)
Income tax provision (366) (1,134) (158) 903 (755)
Net income (loss) (67,575) 7,404 274 (59,897)
Special Stock dividends (362) (362)
Net loss applicable
to common shares $ (67,937) $ 7,404 $274 $ $ (60,259)
See accompanying notes.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1994
(In 000's)
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Cash flows from operating
activities:
Net (loss) income $(14,350) $1,222 $ $(13,128)
Adjustments to reconcile
net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 8,652 878 9,530
Loss on abandoned casinos 6,351 6,351
Write down of other assets 1,793 24 1,817
Provision for losses on
receivables 705 705
Amortization of debt discounts 46 246 292
Net change in operating
assets and liabilities:
Accounts and notes receivable 6,813 (8) (8,065) (1,260)
Inventories 78 78
Other current assets 35 (661) (626)
Accounts payable 548 (279) 269
Accrued payables 3,000 774 3,774
Intercompany accounts (122) 122
Net cash (used in) provided
by operating activities 13,549 2,318 (8,065) 7,802
Cash flows from investing
activities:
Additions to property
and equipment (4,061) (1,324) (5,385)
Proceeds from disposal
of property and equipment 368 1,098 1,466
Acquisition of securities
available for sale (12,910) (12,910)
Other (8,843) (325) (42) (9,210)
Net cash used in investing
activities (25,446) (551) (42) (26,039)
Cash flows from financing
activities:
Proceeds from long-term debt,
net of expenses 81,484 500 81,984
Issuance of common stock
warrants 116 116
Reduction of long-
term debt (47,694) (2,189) 8,107 (41,776)
Issuance of Special Stock,
net of costs 4,799 4,799
Issuance of common stock 619 619
Net cash (used in) provided
by financing activities 39,324 (1,689) 8,107 45,742
Cash and cash equivalents:
Increase (decrease) for year 27,427 78 27,505
Balance, beginning of year 7,323 2,257 9,580
Balance, end of year $34,750 $2,335 $ $37,085
See accompanying notes.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1995
(In 000's)
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Cash flows from operating
activities:
Net (loss) income $(12,245) $1,494 $ $(10,751)
Adjustments to reconcile net
(loss) income to net cash
provided by operating activities:
Depreciation and amortization 8,175 1,345 9,520
Write down of other assets 2,892 (96) 2,796
Provision for losses on
receivables 387 13 400
Amortization of debt
discounts 62 235 297
Other 1,282 1,282
Net 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 495 185 (3,035) (2,355)
Intercompany accounts 37 (37)
Net cash (used in) provided
by operating activities 2,572 3,016 (3,286) 2,302
Cash flows from investing
activities:
Additions to property
and equipment (7,643) (1,244) (8,887)
Proceeds from disposal
of property and equipment 225 126 351
Net cash provided by
acquisition of business 2,481 2,481
Acquisition of securities
available for sale (11,086) (11,086)
Other (9,427) 3,575 (5,852)
Net cash (used in) provided
by investing activities (27,931) 1,363 3,575 (22,993)
Cash flows from financing
activities:
Proceeds from long-term
debt, net of expenses 1,504 (1,504)
Reduction of long-term debt (579) (2,718) 172 (3,125)
Issuance of common stock (578) 1,043 465
Net cash used in
financing activities (1,157) (1,214) (289) (2,660)
Cash and cash equivalents:
Increase (decrease) for year (26,516) 3,165 (23,351)
Balance, beginning of year 34,750 2,335 37,085
Balance, end of year $ 8,234 $5,500 $ $13,734
See accompanying notes.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1996
(In 000's)
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
Cash flows from operating
activities:
Net (loss) income $(67,575) $7,404 $274 $ $(59,897)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization 8,747 2,176 65 10,988
(Gain) loss on sale of
property and equipment (31) 118 18 105
Write downs of other assets 6,117 (22) 6,095
Provision for losses on
receivables 1,001 17 2 1,020
Amortization of debt
discounts 9 236 245
Loss on debenture
conversion 30,079 30,079
Other 2,872 (1,328) 1,544
Change in operating
assets and liabilities, net of
effects of business acquired:
Accounts and notes
receivable (5,638) (2) (391) 97 (5,934)
Inventories 5,761 2 81 5,844
Other current assets (1,506) 619 792 (95)
Intercompany accounts 2,610 (1,712) (898)
Accounts payable (3,197) (291) 1,696 (97) (1,889)
Accrued liabilities 12,931 223 (397) 23 12,780
Net cash (used in)
provided by
operating activities (7,820) 8,768 (86) 23 885
Cash flows from
investing activities:
Additions to property
and equipment (6,290) (1,811) (8,101)
Proceeds from disposal
of property and equipment 2,109 16 157 2,282
Sales of securities
available for sale 13,516 13,516
Acquisitions of business,
net of cash acquired (81,343) 2,134 (79,209)
Other (4,754) (337) (5,091)
Net cash (used in)
provided by investing
activities (77,035) (2,131) (2,291) (76,603)
Cash flows from
financing activities:
Proceeds from long-term
debt, net of expenses 144,764 1,301 (645) 145,420
Issuance of common stock 4,400 4,400
Reduction of long-term
debt (47,234) (4,753) (81) 622 (51,446)
Issuance of Special Stock 15,000 15,000
Fees paid for conversion of
convertible debentures (3,333) (3,333)
Net cash (used in)
provided by
financing activities 113,597 (3,452) (81) 23 110,041
Cash and cash equivalents:
Increase (decrease)
for year 29,015 3,184 2,124 34,323
Balance, beginning of year 8,234 5,500 13,734
Balance, end of year $37,249 $8,684 $2,124 $ $48,057
See accompanying notes.
Basis of Presentation and Description of Business
These notes to consolidating financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto.
Certain reclassifications have been made to prior years' financial
statements to conform with the current year presentation.
Receivables
Aggregate receivables at June 30, 1995 consist of the following
(in 000's):
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ment Subsidiaries
Accounts and notes
receivable $14,161 $50 $(5,586) $8,625
Less current amounts (4,322) (50) 1,056 (3,316)
Long-term receivables,
excluding current amounts $9,839 $ -- $(4,530) $5,309
Aggregate receivables at June 30, 1996 consist of the following
(in 000's):
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaresies
Accounts and notes
receivable $64,850 $35 $48,623 $(5,822) $107,686
Less current amounts (47,915) (35) (46,850) 1,298 (93,502)
Long-term receivables,
excluding current
amounts $16,935 $ -- $1,773 $(4,524) $14,184
Debt and lines of Credit
Long-term debt at June 30, 1995 consist of the following (in 000's):
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
7.5% Convertible subordinated
debentures due 2003, unsecured $85,000 $ $ $85,000
Subordinated note payable to
stockholder, net of discount 3,309 3,309
Hospitality Franchise Systems
note payable 9,065 9,065
Other 405 8,483 (4,865) 4,023
85,405 20,857 (4,865) 101,397
Less current maturities (186) (4,419) 610 (3,995)
Long-term debt, less current
maturities $85,219 $16,438 $(4,255) $97,402
Long-term debt and lines of credit at June 30, 1996 consist of the
following (in 000's):
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
Senior Secured notes,
12 7/8%, due 2003 net of
unamortized discount $150,929 $ $ $ $150,929
7.5% Convertible
subordinated debentures
due 2003, unsecured 1,642 1,642
Subordinated note payable
to stockholder, net of
discount, secured by the
assets off VSI 2,268 2,268
Hospitality Franchise
Systems note payable 7,864 7,864
Bally Wulff revolving
line of credit 13,664 13,664
Bally Gaming and
Systems line of credit 7,525 7,525
Other 1,783 6,675 3,007 (4,103) 7,452
161,879 16,897 16,671 (4,103) 191,344
Less current maturities (8,200) (4,257) (13,664) 344 (25,777)
Long-term debt, less
current maturities $153,679 $12,640 $3,007 $(3,759) $165,567
Aggregate annual maturities of long-term debt, net of discount, for the
five years subsequent to June 30, 1996 are as follows (in 000's):
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
1997 $8,200 $4,257 $13,664 (344) $25,777
1998 551 3,670 3,007 (809) 6,419
1999 558 2,597 (880) 2,275
2000 2,788 (958) 1,830
2001 3,021 (1,043) 1,978
Thereafter 152,571 564 (69) 153,065
Total $161,879 $16,897 $16,671 (4,103) $191,344
Income Taxes
The federal and state income tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities for the year ended June 30, 1995 are as follows (in 000's):
Alliance
Gaming
Parent and Corporation
Guaranteeing Pledging Adjust- and
Subsidiaries Subsidiaries ments Subsidiaries
Deferred Tax Assets:
Net operating loss carry
forwards $12,470 $ $ $12,470
Inventory obsolescence reserves 179 179
Bad debt reserves 564 564
Reserves for abandoned projects 1,356 1,356
Other 738 738
Total gross deferred tax assets 15,013 15,307
Less: Valuation allowance (13,908) (13,908)
Deferred tax assets $ 1,399 $ $ $1,399
Deferred Tax Liabilities:
Property and equipment,
principally due to
depreciation differences 1,399 1,399
Total gross deferred tax
liabilities 1,399 1,399
Net deferred tax assets $-- $ $ $ --
The federal and state income tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities for the year ended June 30, 1996 are as follows (in 000's):
Alliance
Gaming
Parent and Non-Pledging Corporation
Guaranteeing Pledging Non- Adjust- and
Subsidiaries Subsidiaries Guaranteeing ments Subsidiaries
Deferred Tax Assets:
Net operating loss carry
forwards $ 6,012 $ $ $ $ 6,012
Inventory obsolescence
reserves 3,298 1,913 5,211
Bad debt reserves 4,630 4,630
Foreign tax credit
carryforwards 13,769 13,769
Reserves for abandoned
projects 1,863 1,863
Accruals not currently
deductible for tax
purposes 4,325 4,325
Other 1,586 1,586
Total gross deferred
tax assets 21,714 15,682 37,396
Less: Valuation
allowance (17,583) (14,354) (31,937)
Deferred tax assets $ 4,131 $ --- $ 1,328 $ $ 5,459
Deferred Tax Liabilities:
Property and equipment,
principally due to
depreciation differences $ 2,625 $ $ $ $ 2,625
Other 2,106 2,106
Total gross deferred tax
liabilities 4,731 4,731
Net deferred tax assets $ (600) $ $ 1,328 $ $ 728
The Rainbow Casino Vicksburg Partnership L.P. has been consolidated
since March 29, 1995, and as a partnership its earnings are passed
through to the partnership principals.