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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _____ to _____
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0104066
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
6601 S. Bermuda Rd. Las Vegas, Nevada 89119
(Address of principal executive offices)
Registrant's telephone number: (702) 270-7600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common equity held by non-affiliates of the
registrant was approximately $76,697,000 as of September 21, 1998.
The number of shares of Common Stock, $0.10 par value, outstanding as of
September 21, 1998 according to the records of registrant's registrar and
transfer agent, was 34,261,167.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders will be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year and are incorporated by
reference into Part III of this Form 10-K.
1
ALLIANCE GAMING CORPORATION
FORM 10-K
Year Ended June 30, 1998
PART I
ITEM 1. BUSINESS
Introduction
Alliance is a diversified, worldwide gaming company that (i) designs,
manufactures and distributes gaming machines and computerized monitoring systems
for gaming machines, (ii) owns and manages a significant installed base of
gaming machines, (iii) owns and operates two casinos and (iv) in Germany, is a
full-service supplier of wall-mounted gaming machines and amusement games.
Alliance has achieved a leading market position for each of its business units.
Operating under the name Bally Gaming and Systems the Company is the second
largest gaming machine manufacturer in North America, having marketed
approximately 90,000 gaming machines during the past five years; it also
designs, integrates and sells highly specialized computerized monitoring systems
that provide casinos with networked accounting and security services for their
gaming machines with approximately 90,000 game monitoring units ("GMUs")
installed worldwide. The Company also owns, operates and services an installed
base of over 7,700 slot and video gaming machines that are located mostly in
non-casino venues in Nevada and Louisiana ("Route Operations"). Alliance is the
largest route operator in Nevada and the largest operator of gaming machines at
racetracks in Louisiana. Alliance also owns and operates what management
believes is the most profitable dockside casino in Vicksburg, Mississippi and a
locals casino in Sparks, Nevada, which together have 21 table games and 1,200
gaming machines (collectively, "Casino Operations"). In addition, operating
under the Bally Wulff name, the Company believes that it is a leading supplier
of wall-mounted gaming machines and amusement games in Germany.
The Company was incorporated in Nevada on September 30, 1968 under the name
Advanced Patent Technology. The Company changed its name to Gaming and
Technology, Inc. in 1983, to United Gaming, Inc. in 1988 and to Alliance Gaming
Corporation on December 19, 1994. The Company conducts its gaming operations
through directly and indirectly owned subsidiaries. On June 18, 1996 the Company
acquired Bally Gaming International, Inc. which includes the Bally Gaming and
Systems and Wall Machines and Amusement Games business units. The term "Company"
as used herein refers to Alliance Gaming Corporation and subsidiaries unless the
context otherwise requires. The Company's principal executive offices are
located at 6601 South Bermuda Road, Las Vegas, Nevada 89119; telephone (702)
270-7600.
Business Units
Bally Gaming and Systems
Prior to May 1998, the operations of Bally Gaming and Systems were managed
separately without substantial integration. The market has seen a convergence of
the game management systems and the games themselves. Therefore, in May 1998 the
Company consolidated the operations of Bally Gaming and Systems.
Overview. The Company's primary markets for its gaming machine products are the
United States, Canada and Europe and Latin America, and, to a lesser extent, the
Far East and the Caribbean. The following table sets forth the percentage of new
unit sales by market segment during the periods indicated:
New Units by Market Segment Percentage of New Gaming Units Sold
Year ended Six months Years ended
December 31, ended June 30, June 30,
1995 1996 1997 1998
Nevada and Atlantic City 42% 37% 47% 25%
International 30 45 40 49
Riverboats 12 11 5 15
Indian Gaming 14 7 7 10
Other (principally VLTs) 2 - 1 1
---- ---- ---- -----
100% 100% 100% 100%
=== === === ===
Markets for Bally Gaming. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 180,000 machines as of June 30, 1998. The Company estimates that
Atlantic City, the second largest market, had an installed base of approximately
35,000 machines as of June 30, 1998. Product sales of the Company's casino-style
gaming equipment in these markets are primarily to established casino customers
either to replace existing machines or as par of an expansion or refurbishment
of the casino. Also, because gaming machine revenues have increased at a higher
rate than table game revenues over the past decade, casino operators have tended
to increase floor space dedicated to gaming machines. In addition, major casino
openings in Nevada, expansions of existing casinos and the proliferation of
casinos in emerging markets have created additional floor space available for
new gaming products and are anticipated to further increase competitive
pressures on casino operators to replace existing equipment with new machines on
an accelerated basis.
Riverboat and dockside casinos began operating in 1991 and, as of June 30, 1998,
riverboat and dockside casinos were operating in Indiana, Iowa, Illinois,
Mississippi, Missouri and Louisiana. The estimated installed base of gaming
machines on riverboats or dockside casinos is approximately 85,000 machines as
of June 30, 1998.
Casino-style gaming continues to expand on Native American lands. Native
American gaming is regulated under the Indian Gaming Regulatory Act of 1988
which permits specific types of gaming. The Company's machines are placed only
with Native American gaming operators who have negotiated a compact with the
state and received approval by the U.S. Department of the Interior. The Company
sells machines to casinos on Native American lands in Arizona, Connecticut,
Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North Dakota, South
Dakota and Wisconsin. Compacts have also been approved in Oregon, Colorado and
Louisiana, although Bally Gaming has 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 estimated base of all Native American gaming
machines as of June 30, 1998 was approximately 80,000 units.
Currently casino gaming also is legal in Colorado and South Dakota. The
estimated installed base of machines in these markets as of June 30, 1998 was
approximately 15,000 machines.
In 1997, Michigan voters approved the establishment of three casinos in the city
of Detroit. Although voters recently reaffirmed the first vote, there could be
other legal challenges before temporary or permanent casinos open. There is no
gaming presently in Detroit.
In addition to the domestic markets, the gaming industry is also expanding in
international markets. The Company's primary international markets are Europe,
Canada and Latin America, and, to a lesser extent, the Far East and the
Caribbean. The Company conducts its business in Canada through its staff in the
United States. The Company has begun, and plans to continue, expansion into the
Australian market, and has an office in Sydney, Australia. In July 1998, the
Company's Australian subsidiary, BGI Australia Pty, Ltd., was approved for
licensing by the New South Wales Liquor Administration Board which licenses
gaming operators and suppliers in New South Wales. The New South Wales market is
the second largest gaming machine market in the world with an estimated
installed base of 70,000 units at June 30, 1998. The Company also distributes
gaming machines, manufactured by Bally Gaming, through its direct and indirect
subsidiaries, Bally Gaming International, GmbH ("GmbH"), from its sales office
in Hannover, Germany principally to customers in Europe and Russia, through
Bally Gaming Africa, Pty. Ltd., from its sales office in Johannesburg, South
Africa, principally to customers on the African continent and Bally Gaming de
Puerto Rico, Inc., principally to customers in Puerto Rico.
The percentage of Bally Gaming's international revenues by geographic area for
the periods indicated are set forth below:
New Units by Geographic Area Percentage of New Gaming Units Sold
Year ended Six months Years ended
December 31, ended June 30, June 30,
1995 1996 1997 1998
---- ---- ---- ----
Europe 51% 40% 33% 37%
Canada 22 31 26 35
Latin America 20 25 39 22
Far East 4 2 2 2
Other 3 2 - 4
----- ----- ---- -----
100% 100% 100% 100%
=== === === ===
Markets for Systems. Systems' primary markets for its computerized monitoring
systems are the United States and, to a lesser extent, Canada, New Zealand,
Latin America, Europe and the Caribbean. Markets for Systems within the United
States include traditional land-based casinos predominantly in Nevada and
Atlantic City, New Jersey, Native American casinos and riverboats and dockside
casinos. Domestically, the market for computerized monitoring systems is divided
equally between selling to new installations and to existing customers who are
either expanding their casino floors or are upgrading their hardware to a new
product release. Unlike the United States, where most jurisdictions require the
implementation of systems, there have been few international markets to do so.
Management believes, however, that the international market for such systems is
increasing, and that Systems' sales to such markets will increase accordingly.
Gaming Products. Bally Gaming designs, manufactures and distributes a variety of
electronic slot and video gaming machines. Gaming machines are differentiated
from one another by graphic design and theme, cabinet style and size, pay table,
reel-type design, betting denomination and minimum/maximum betting amount. Slot
machines are normally produced to specific order, with design and configuration
customized to a customer's particular requirements. Customers may also change
from one gaming model to another gaming model by ordering a "conversion kit"
which consists of artwork, reel strips and a computer chip. Bally Gaming's video
gaming machines are designed to (i) simulate various live card games, video
reel-spinning games and keno through a video display and (ii) for GameMaker(R)
gaming machines, offer the player the chance to play up to ten different games.
New games and themes are introduced periodically in order to satisfy customer
demand and to compete with product designs introduced by competitors.
Gaming introduced its ProSeries((TM)) reel-type slot machines during late 1993
and its multi-game touch screen machine, the GameMaker(R), during late 1994.
In March 1998 the Company introduced the first major upgrade to both the
ProSeries and GameMaker product lines.
The GameMaker can offer up to 10 different video games within one gaming device.
The ten games can be selected by the casino from a game library that has over
600 games. The games simulate various card games, keno and popular reel-spinning
games. The GameMaker machines contain bill acceptors and many other features
believed to be popular with casinos and their customers. The GameMaker machines
are available in upright, bar top and slant top cabinets. Revenues from sales of
GameMaker machines were approximately $27.4 million during the year ended
December 31, 1995, $12.9 million for the six months ended June 30, 1996 and
$34.9 million and $22.7 million for the years ended June 30, 1997 and 1998,
respectively.
The ProSeries was the result of a comprehensive product development effort which
began in 1991. The development process included extensive testing of the new
products in-house and on casino floors for reliability and player appeal.
Revenues from sales of ProSeries machines were approximately $57.1 million
during the year ended December 31, 1995, $38.5 million for the six months ended
June 30, 1996 and $66.6 million and $45.8 million for the years ended June 30,
1997 and 1998, respectively.
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 telephone hot-line, an internet web site for technical support
and field service support programs and spare parts programs. Bally Gaming's
historical warranty expense as a percentage of revenues has been less than 1%.
In addition, Bally Gaming sells and services used gaming machines and sells
parts for existing machines. 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" basis through independent brokers.
Sales of used equipment were $9.2 million during the year ended December 31,
1995, $2.0 million for the six months ended June 30, 1996 and $5.4 million and
$3.6 million for the years ended June 30, 1997 and 1998, respectively.
The following table sets forth the percentages of revenues provided by each of
Bally Gaming's major product lines for the periods indicated:
Percentage of Revenues
Year ended Six months Years ended
December 31, ended June 30, June 30,
1995 1996 1997 1998
Slot machines 53% 63% 55% 53%
Video gaming machines 31 24 30 30
Other (primarily used machines,
parts and services) 16 13 15 17
--- --- --- ---
100% 100% 100% 100%
=== === === ===
The Company believes that video gaming products and second feature bonus games
will continue to gain floor space in casinos. 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 entertaining games, new sound and visual features and
changing preferences of casino patrons. Casinos typically recoup the purchase
cost of their electronic gaming machines in a few months, which allows casinos
to replace machines with new models that are popular with casino patrons.
System Products. Bally Systems designs, integrates, and sells a computerized
monitoring system ("SDS 6000") for slot and video gaming machines which provide
casino operators with on-line real time data relative to a machine's accounting,
security and cash monitoring functions. The SDS 6000, when purchased along with
other third party player tracking applications, also provides data to, and
receives data from casinos to track their players to establish and compile
individual player profitability and other demographic information. SDS 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 readers, 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) firmware developed by Systems which provides access
to the slot machine's and player's activity data gathered by the microcontroller
hardware, and (3) business applications software developed by Systems which
manages the slot machine's and player's activity information. This software
resides on Unix or PC based servers. Systems also provides software and hardware
support services, including maintenance, repair and training for purchasers of
its monitoring systems.
Product Development. The Company believes that providing games and systems with
high entertainment value that are preferred by the casino patron is a key to
meeting the demands of casinos. The Company believes that the use of existing
computer technology is accelerating which can give gaming machines and systems a
competitive advantage in the gaming industry. Total spending on product research
and development by Bally Gaming and Systems was $5.6 million during the year
ended December 31, 1995, $2.9 million during the six months ended June 30, 1996,
and $6.7 million and $12.7 million during the years ended June 30, 1997 and
1998, respectively. The increase in research and development spending in the
year ended June 30, 1998 resulted from increasing the number of new product
platforms introduced, product development efforts and growth in the number of
products to support with ongoing development.
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 and coin and currency handling.
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 tend to deploy similar
hardware and related technology. Ideas for new models are generated internally,
from customers and other third parties, many of whom have entered into strategic
relationships with the Company. On an annual basis, Bally Gaming expects to
introduce approximately 25 new models to the market. However, no assurance can
be made with respect to the rate of new model introductions or the obtaining of
regulatory approvals in respect thereof.
Bally Gaming continues to focus on development of new innovative gaming
machines. Key members from the marketing and design groups meet to analyze
machines currently being marketed by Bally Gaming 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 further developed.
Bally Gaming typically pursues 15 to 20 projects at any given time, and
approximately 2 to 3 machines are submitted for licensin each year. These new
machines are built in limited quantities and then test marketed in various
locations throughout the U.S. for three to six months. 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 Gaming's machines and their continued
acceptance and success in the marketplace.
All new or modified hardware and software are designed to satisfy all applicable
testing standards. Typically, new products require regulatory approval for most
North American and Australian jurisdictions, but generally no approval is needed
for other jurisdictions. Each jurisdiction that requires regulatory approval of
new products has its own filing requirements and process. For Nevada, new gaming
machine platforms must be filed with the state gaming laboratory that will test
the products from 60 days to three months or more before a mandatory 30 to 60
day field test is conducted in a casino. For new product platforms, the Nevada
State Gaming Control Board and the Nevada Gaming Commission must each approve
these products at their meetings which are held monthly. For modifications of
existing products or casino associated equipment, the process in Nevada is
similar to new platforms, except a field test is usually not required and the
product can be approved administratively by the Nevada State Gaming Control
Board staff. Once products are approved by the gaming regulators, customers will
typically require a 30 to 90 day field trial of the product in their casinos
with the right to return the product at any time during the field trial period.
The Company does not recognize revenue until the customer has agreed to end the
field trial and has accepted the gaming machines.
During the year ended June 30, 1998, the Company received regulatory approval in
certain jurisdictions to manufacture and distribute several new gaming machines.
Roll The Dice(R) is the Company's first in a series of second feature bonus
games to be distributed on a recurring revenue basis. The Company intends to
introduce new games for this platform every four to six months. Feature
Frenzy(R), the Company's first nine-line, multi-coin video gaming machine was
developed based on successful games in the Australian market. Shipments to
customers for trial of both of these products began in the quarter ended June
30, 1998. The Company recently began the field trial in Nevada for GameMagic(R),
a high-resolution graphics multi-game video gaming machine offering up to ten
different games and is awaiting regulatory approval in Nevada and other
jurisdictions. Shipments of GameMagic to customers in jurisdictions which do not
require regulatory approval of the games (primarily certain European markets and
the Caribbean) began in June 1998. The Company will seek regulatory approval for
all of the products in other gaming jurisdictions during fiscal 1999.
In May 1998, the Company began the field test required by the Nevada Gaming
Control Board of its wide-area progressive jackpot system named "Thrillions(TM)"
at Hilton Gaming Corporation's Bally's Las Vegas casino under its proprietary
name "Pay Day". The system has been designed to allow patrons playing nickel,
quarter, dollar etc. machines to compete for the same progressive jackpot with
different odds of winning. The system also permits the casino patron to play for
more than one jackpot meter with a single play of the machine. The system has
been designed to allow casinos to use their own branding for the product. The
Company will begin deployment of the Thrillions product once it receives
approvals from gaming regulators. The Company has filed the Thrillions system
with the New Jersey regulators and plans to apply for approval with regulators
of other gaming jurisdictions in fiscal 1999.
In March 1998, Bally Gaming introduced a product called Cash Cage(TM), which
dispenses paper tokens (currency or casino customized scrip) from a bill hopper
in partial substitution for complete coin payouts. Cash Cage will be marketed as
a means to reduce hopper fills and jackpots paid by hand . This new technology
should benefit casinos in several ways: improve customer satisfaction by
eliminating the need for customers to wait for a slot attendant to fill a coin
hopper or pay certain levels of jackpots; reduce operating costs through fewer
coin hopper fills and hand payouts; improve casino cage accounting efficiency
and increase security due to fewer operations performed by hand. The Company has
filed the Cash Cage system with the Nevada Gaming Control Board and plans to
apply for approval with regulators of other gaming jurisdictions in fiscal 1999.
Pursuant to a long term agreement, the Company has agreed to license JCM
American, a U.S. subsidiary of Japan Coin Machine Company, a leading supplier of
bill acceptors to the gaming industry, to be its worldwide exclusive
manufacturer and distributor of the Cash Cage technology, for which the Company
will receive a royalty for each Cash Cage unit shipped.
Systems' product development is also divided into hardware and software. The
major areas of hardware development include microcontroller circuit board design
and programming as well as user interface devices such as card readers, keypads
and displays. Systems has developed a modular and extendible hardware and
software architecture which allows new development to be focused upon achieving
greater functionality, product reliability and ease of maintenance for the
casino operator and achieving greater visua appeal and ease of use for the slot
customer. In addition, the architecture allows customers to upgrade existing
components or add new components with minimal impact. Development cycles for
hardware can vary between a few months for minor revisions to more than a year
for major design changes or for changes made by various slot manufacturers with
which Systems' product must communicate and be physically integrated. Software
development results in (1) periodic product releases that include new features
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 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. Bally Gaming
and Systems development groups continue to direct development efforts towards
other forms of cashless wagering for use on Bally Gaming's slot machines and the
SDS 6000 system. The bar-coded coupon product is currently in regulatory field
test in New Jersey, and has been submitted to the regulators in Nevada.
Sales and Marketing. Bally Gaming and Systems uses a direct sales force and an
independent distributor network to distribute its products. Bally Gaming and
Systems North America sales staff consists of approximately 28 people and
operates offices in Nevada, New Jersey, Mississippi, Illinois, Colorado and
Florida.
Approximately 78% of new unit machine sales over the calendar year 1995, 81% for
the six months ended June 30, 1996 and 89% and 80% for the years ended June 30,
1997 and 1998, respectively were generated by Bally Gaming's direct sales force
other than those at GmbH. On a limited basis, Bally Gaming uses distributors for
sales to 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 for the calendar year
1995, 2% for the six months ended June 30, 1996 and 4% and 6% for the years
ended June 30, 1997 and 1998, respectively, were generated through independent
distributors. Approximately 8% of new gaming machine unit sales for the calendar
year 1995, 2% for the six months ended June 30, 1996 and 7% and 14% for the
years ended June 30, 1997 and 1998, respectively, were generated through GmbH.
Systems has approximately 90,000 game monitoring units installed, of which
approximately 78,000 are in the United States. At June 30, 1998, Systems had 92
installed locations. Approximately 78% of System's sales over the calendar year
1995, 93% for the six months ended June 30, 1996 and 92% and 96% for the years
ended June 30, 1997 and 1998, respectively were generated by the Bally Gaming
and Systems direct sales force.
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 customers. I 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.
For the year ended June 30, 1998, approximately 83% of Bally Gaming's slot and
video gaming machine sales were on terms of 90 days or less. Approximately 17%
of Bally Gaming's sales, primarily in certain emerging markets such as riverboat
and Native American gaming casinos, are financed over extended periods as long
as 36 months and bear interest at rates ranging from 8% to 14%. International
sales are generally consummated on a cash basis or financed over three years 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. 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. Management believes that financing of customer sales is an
important factor in certain emerging markets.
Systems offers its customers the option of signing separate hardware and
software maintenance agreements at the time of sale. These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly hardware and software maintenance fee which
provides essentially for repair and/or replacement of malfunctioning hardware
and software, software version upgrades, and on-call support for software.
Customers. The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment as well as the replacement of existing machines
(which have an average replacement cycle of three to seven years). For the year
ended December 31, 1995, the six months ended June 30, 1996 and the years ended
June 30, 1997 and 1998, Bally Gaming's largest customer accounted for
approximately 5%, 8%, 11% and 7% respectively of Bally Gaming's revenues, while
Bally Gaming's 10 largest customers accounted for approximately 25%, 42%, 45%
and 48% of Bally Gaming's revenues during such periods, respectively.
The demand for computerized slot monitoring systems is driven by regulatory
requirements in a given jurisdiction and/or by a casino operator's competitive
need to properly track machine and player activity and establish and compile
individual machine and player profitability and other demographic information,
all of which is of particular importance to casinos in developing marketing
strategies. Systems' revenues are derived approximately equally from selling to
new installations and to existing customers who are either expanding their
casino floors or upgrading their hardware to a new product release. For the year
ended December 31, 1995, the six months ended June 30, 1996 and the years ended
June 30, 1997 and 1998, Systems' ten largest customers (which include certain
multi-site casino operators that have corporate agreements with Systems)
accounted for approximately 92%, 84%, 70% and 53% of Systems' revenues,
respectively. Due to the high initial costs of installing a computerized
monitoring system, customers for such systems generally have tended not to
change suppliers once they have installed such a system.
Future growth of Bally Gaming and Systems will be based on penetration of the
international markets, further expansion in the established and emerging
markets, as well as continued development efforts to provide customers with new
and innovative hardware and software product offerings.
Assembly Operations. Bally Gaming and Systems Las Vegas facility was completed
in 1990 specifically for the design, assembly and distribution of gaming
equipment. The 150,000-square foot facility was designed to meet fluctuating
product design demands and volume requirements, and management believes the
facility enables Bally Gaming and Systems to increase production without
significant capital expenditures. Effective July 1, 1998 all assembly of
Systems' products are being performed in the Las Vegas
facility.
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 produces products
for individual customer orders and therefore finished goods inventories are
kept low. Bally Gaming designs all of the major assemblies that are incorporated
into the final machine configuration.
Competition. The market for gaming machines and progressive systems in North
America is dominated by a single competitor, International Game Technology, Inc.
("IGT"). Management believes based on industry estimates made by analysts that
Bally Gaming has the second largest market share in North America. Worldwide
there are a number of other well established, well-financed and well-known
companies producing gaming machines that compete with each of Bally Gaming's
lines in each of Bally Gaming's markets. The other major competitors are AC Slot
and Coin, Anchor Gaming, Casino Data Systems, ("CDS"), Innovative Gaming
Corporation of America, Mikohn Gaming Corporation, Powerhouse Technologies,
Inc., Shuffle Master, Inc., Sigma Games, Inc., Silicon Gaming, Universal
Distributing of Nevada, Inc. and WMS Industries, Inc., ("WMS"), and companies
that market gaming machines under the brand names of Aristocrat, Atronic, Cirsa,
Novomatic and Sega Enterprises Ltd. Many of these companies look to expand their
market share by decreasing the Company's and IGT's current market share. Other
companies may enter the gaming machine business and several of these companies
offer or plan to offer second feature bonus games. Only IGT and CDS currently
offer wide-area progressive systems, although others may enter this area.
Competition among gaming product manufacturers, particularly with respect to
sales of gaming machines into new and emerging markets, is vigorous and is based
on which machines generate the most net win to the casinos, competitive customer
pricing and financing terms, quality of the product and having an extensive
distribution and sales network.
Systems' main competition currently consists of IGT, CDS, and to a lesser extent
Gaming Systems International, Mikohn Gaming Corporation, Acres Gaming, Inc. and
Logical Solutions International and companies marketing systems under the brand
names of Aristocrat and Grips. Competition is keen in this market due to the
number of providers and the limited number of casinos and jurisdictions in which
they operate. Pricing, product feature and function, accuracy, and reliability
are all key factors in determining a provider's success in selling its system.
Management believes the future success of its operations will be determined by
its ability to bring new and innovative products to the market while maintaining
its base of loyal existing customers.
Wall Machines and Amusement Games
Industry Overview
Management believes that the German wall machine market consists of
approximately 220,000 wall machine units. In addition, management believes there
are 56,000 token machine units in Germany. German regulations currently limit
the useful life of wall machines to a period of four years. As a result, annual
market demand for wall machines in Germany approximates 40,000 to 55,000 units
with fluctuations resulting primarily from economic conditions, and regulatory
changes and new product development. Effective January 1, 1996, a regulatory
change took effect requiring all arcade operators to have at least 15 square
meters of space for each wall machine and a maximum of 10 machines per arcade.
Starting in mid-1995, arcade operators began removing wall machines from their
arcades to meet the requirements of this new regulation. All wall machines
manufactured since 1992 have meters that monitor the amount inserted by players
and paid out by the machine. Wall machines without meters were required to be
removed from service by the end of 1996. This led to an increase in demand for
metered wall machines in the quarter ending December 31, 1996 which carried
through the quarter ended March 31, 1997. Management believes that the size of
the wall machine market has declined slightly from prior years due to changes in
the arcade and tavern markets, as well as the impact from the overall slowdown
in the German economy. A portion of this annual demand is not available to the
Company as it relates to machines i arcades operated by the Company's two main
German competitors.
Wall machine sales into the arcade market account for approximately 30% of the
total wall machine sales in Germany. A significant number of arcades
(approximately 10%) are owned by the two largest competitors, Gauselmann AG and
NSM AG. Generally these competitors do not purchase wall machines from Bally
Wulff for their arcades. Management believes Bally Wulff's share of the German
wall machine market was approximately 25% for the years ended December 31, 1995
and 1996, and was 33% and 30% for the years ended June 30, 1997 and 1998,
respectively. The German legislative authorities regulate and monitor the wall
machine industry on an ongoing basis to ensure conformance with certain
manufacturing standards and the fairness of each machine to users. Legislation
presently affecting the wall machine industry relates to prescribed licensing
procedures, the use, installation and operation of wall machines and the
taxation of wall machines.
Operations of Bally Wulff
Products. Bally Wulff's manufacturing operations were founded in Berlin in 1950.
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 $0.22 at the exchange rate of $1.00=DM 1.81 prevailing
as of June 30, 1998, which rate is used hereinafter) to play, although the
player may deposit larger amounts to provide continuous play but not to increase
payoffs. German regulations limit the maximum payout to ten times the player's
stake (DM 4.00 or approximately $2.22 per game). Current models of wall machines
provide the player the opportunity to win 100 special games on one play, which
increases the potential amount that can be won on the minimum wager. German
regulations require a minimum payback of 60% for wall machines, although many
machines are generally programmed to pay back at somewhat higher rates to
encourage play. Bally Wulff has also manufactured 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 be a full service provider 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 for the periods indicated:
Percentage of Revenues
Year ended Six months Years ended
December 31, ended June 30, June 30,
1995 1996 1997 1998
---- ---- ---- ----
Sale of wall machines manufactured
by Wulff 39% 42% 52% 44%
Leasing of wall machines manufactured
by Wulff 3 4 6 10
Recreational and amusement machines
and third party wall machines
distributed 23 22 25 26
Other (primarily used machines,
parts and service) 35 32 17 20
--- --- --- ---
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.
Total spending on product research and development by Bally Wulff was $3.6
million during the year ended December 31, 1995, $1.8 million during the six
months ended June 30, 1996, and $3.3 million and $3.0 million during the years
ended June 30, 1997 and 1998, respectively.
Sales and Marketing. Bally Wulff sells approximately 93% of its products through
its own sales force of 58 individuals located in 22 regional sales offices.
Independent German distributors account for approximately 7% of sales.
Approximately 99% 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 held in Frankfurt, Germany, at which Bally Wulff introduces new
products. The next Amusement Game Fair will be held in November 1998.
The wall machines manufactured and sold by Bally Wulff generally sell for prices
ranging from DM 5,500 to DM 6,200 (approximately $3,000 to $3,500). Due to price
competition among the three largest manufacturers, selling prices have declined
from 1997. Management believes that such declines in prices may continue in the
future. For the year ended June 30, 1998 approximately 85% of Bally Wulff
machine sales were on terms of 90 days or less. Remaining sales of machines are
financed by Bally Wulff generally over a 12-month period, with interest rates 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 15% of its sales, and management
expects this practice to increase during fiscal 1999. Leasing machines to
customers accounted for 10% of total revenues for the year ended June 30, 1998
compared to 3%, 4% and 6% during the year ended December 31, 1995, the six
months ended June 30, 1996, and the year ended June 30, 1997, respectively. The
leasing market is the fastest growing revenue segment and the management expects
a continued increase for the months ahead. In approximately 70% 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 10 customers in 1998 has maintained its
relationship with Bally Wulff for over four years. For the year ended June 30,
1998, no single customer accounted for more than 3% of Bally Wulff's revenues,
while Bally Wulff's top 10 largest customers accounted for approximately 11% of
Bally Wulff's revenues. For the year ended December 31, 1995, the six months
ended June 30, 1996 and the year ended June 30, 1997, Bally Wulff's top ten
customers accounted for approximately 10%, 15% and 12% of Bally Wulff's
revenues, respectively, while no single customer accounted for more than 3%, 6%
and 3% of Bally Wulff's revenues for such periods, respectively.
Bally Wulff's customer base for wall machines may be divided into two categories
which differ based on the preferences of their clientele. Operators who place
wall machines in arcades are generally interested in purchasing the newest
products in the hopes that an innovation will result in a high level of public
demand to play the new "hot" product. Street location operators serving hotels,
restaurants and taverns, on the other hand, are generally more inclined to
purchase lower-priced existing models with proven earnings records to provide as
an amenity to customers.
Assembly Operations. Bally Wulff's manufacturing process is primarily an
assembly operation. Its manufacturing facility consists of a four-story,
100,000-square foot building in Berlin, Germany. Bally Wulff purchases its key
raw materials, sub-assemblies and fabricated parts from a variety of suppliers,
and most parts are purchased from multiple suppliers. While there exist no
formal long-term contract commitments to any single supplier, Bally Wulff has
placed certain standing orders with suppliers to hel assure the availability of
specific quantities on an as-needed basis. These orders are cancelable by Bally
Wulff at any time without penalty. Most of the component parts are standard on
all models of all Bally Wulff's wall machines, which promotes easy conversion
from the production of one model to another in response to customer demand.
Except in connection with certain promotions, Bally Wulff generally maintains
low inventory levels of assembly parts, and the amount of work-in-process is
generally less than the number of machines sold in one week.
Because of its manufacturing structure, Bally Wulff is capable of substantially
increasing its wall machine output without significant capital expenditures.
Bally Wulff continues to improve its manufacturing efficiency and productivity
through the use of computer-aided design systems, automated production equipment
and devotion of substantial resources to product quality control.
Competition. Germany's wall machine manufacturing industry is dominated by Bally
Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management
believes these three entities collectively account for approximately 95% 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.
Route Operations
Nevada Operations
Overview. The Company's Nevada route operations involve the selection,
ownership, installation, operation and maintenance of video poker devices,
reel-type slot machines and other electronic gaming machines in local
establishments such as taverns, restaurants, supermarkets, drug stores and
convenience stores operated by third parties ("local establishments"). The
Company's route operations target Nevada residents who generally frequent local
establishments close to their homes.
The following table sets forth certain historical data concerning the Company's
Nevada route operations for the years ended June 30:
1996 1997 1998
Average number of gaming machines owned 5,290 5,660 6,460
Average number of locations 524 562 624
Average win per day per gaming machine $48.60 $52.40 $53.70
At June 30, 1998 the Company operated approximately 7,060 machines on its Nevada
route. The Company has grown the number of gaming machines owned and operated
principally through the strategic takeover of contracts at locations operated by
several mid-sized route operators. Such acquisitions have added approximately
230 and 580 gaming machines to the Nevada route during the years ended June 30,
1997 and 1998, respectively.
The Company enters into long-term agreements with local establishments through
either space leases or revenue-sharing arrangements. Under revenue sharing
arrangements, most common with taverns, restaurants and convenience stores, the
Company does not pay rent, but rather receives a percentage of the net win from
the gaming machines. Under revenue sharing arrangements, 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 amount to the owner of the local establishment and the
Company receives all of the net win derived from the gaming machines. Under
space lease arrangements, only the Company (and not the establishment owner) is
required to hold a gaming license. Most of the local establishments serviced by
the Company are restricted by law to operating no more than 15 gaming machines.
Revenue-sharing arrangements accounted for approximately 85%, 85%, and 87% of
revenues and 77%, 77%, and 77% of installed machines, respectively, in the
Company's Nevada route operations for the years ended June 30, 1996, 1997, and
1998. At June 30, 1998, the weighted average remaining term of the Company's
revenue sharing arrangements was approximately 3.0 years. Space lease
arrangements accounted for approximately 15%, 15%, and 13% of revenues and 23%,
23%, and 23% of installed machines, respectively, in the Company's Nevada route
operations for the years ended June 30, 1996, 1997, and 1998. At June 30, 1998,
the weighted average remaining term of the Company's space leases was 2.8 years.
The Company has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
The Company has emphasized return on investment rather than increasing market
share in renewing or entering into new contracts and has undertaken a systematic
review process to adjust its contract mix to emphasize higher margin contracts
and, where permissible, canceling or not renewing unprofitable contracts.
Sales and Marketing. As the largest route operator in Nevada, the Company
believes that it is able to differentiate itself from its competitors through a
full-service operation providing its customers support for marketing promotional
allowances and using its advanced design capabilities to provide electronic
gaming machines with features customized to customers' needs. The Company
developed and continues to implement a system called "Gamblers Bonus". Gamblers
Bonus is a cardless slot players' club and player tracking system, which allows
multiple local establishments to be linked together into a distributed gaming
environment. Through this technology, the Company is able to provide its players
and customers with many of the same gaming choices otherwise available only in a
larger scale casino environment such as multi-location progressive jackpots,
bigger jackpot payouts and traditional players' club enhancements. Additionally,
the Company is offering a series of new and unique games available only t
members of Gamblers Bonus.
Since launching Gamblers Bonus, the gaming machines linked to Gamblers Bonus
have experienced an increase in net win per day per machine. As of June 30,
1998, the Company had the Gamblers Bonus installed in over 2,000 gaming machines
at approximately 180 locations or 30 percent of the installed base of gaming
machines. The Company believes Gamblers Bonus will continue to improve both the
revenues and operating efficiencies of its Nevada route operations and has the
potential to create additional opportunities in the route operations segment of
the gaming industry. 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.
The Company has benefited from the growth in population in Nevada, as with
growth more gaming venues are created. Certain local politicians have proposed
limiting or curtailing the number or type of venues where gaming is authorized.
Management does not believe the outcome of these proposals will have a material
impact on financial results of the Company.
Customers. The Company believes it has a diversified customer base with no one
customer accounting for more than 10%, 6% and 5% of the Company's revenues
generated from Nevada route operations during the years ended June 30, 1996,
1997 and 1998, although approximately 14%, 13% and 11% of such revenues were
generated through an affiliated group of such customers for such periods,
respectively. The affiliated group consists of eight partnerships each having
one individual partner who is common to all such partnerships. For the years
ended June 30, 1996, 1997 and 1998, the ten largest customers accounted for
approximately 26%, 23% and 20% of Nevada route operations revenues,
respectively.
Assembly Operations. In previous years, the Company manufactured electronic
gaming machines for use in its Nevada route operations. The Company manufactured
approximately 64% of the electronic gaming machines currently used in the Nevada
route operations. The Company is currently using a third party to perform
assembly operations of the electronic gaming machines used in the Nevada route
operations. In July 1998, the Company received regulatory approval to begin
using the Bally GameMaker platform for gaming machines deployed on the Nevada
route.
Competition. The Company is subject to substantial direct competition for its
revenue-sharing and space lease locations from several large route operators and
numerous small operators, located principally in Las Vegas, Reno and the
surrounding areas. The Company, Jackpot Enterprises, Inc., Anchor Gaming, ET&T
and Southwest Gaming are the dominant route operators in Nevada. The principal
method of competition for route operators includes the economic terms of the
revenue sharing or space lease arrangement, the services provided and the
reputation of the route operator. Price competition is intense and can reduce
the Company's gross margin on such operations if the percentage of the gaming
machine revenues retained by local establishment increases.
Louisiana Operations
Overview. On the basis of its Nevada route operations expertise, in March 1992
the Company obtained a contract to operate video poker gaming machines in the
greater New Orleans, Louisiana area through a subsidiary, Video Services, Inc.
("VSI"). The Company entered into an operating agreement which runs through May
2002 (with a five-year renewal option under certain conditions) with Fair
Grounds Corporation, and its affiliates, Jefferson Downs Corporation and Finish
Line Management Corporation (collectively, "Fair Grounds"), for the Company to
be the exclusive operator of video poker machines at the only racetrack and ten
associated off-track betting parlors (OTB's) in the greater New Orleans area.
The Company operates the game rooms where the video poker machines are located
for each of the eleven facilities owned by Fair Grounds, for which it receives a
percentage of the revenue generated by the machines. As of June 30, 1998 the
Company had approximately 710 video poker machines in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder of any
entity operating video poker machines in Louisiana must be a domiciled resident
of the State of Louisiana. As a result, the Company owns 49% of the common stock
of VSI and three prominent members of the Louisiana business and legal community
own the remaining 51%. The Company, however, owns all the voting stock of VSI
and all of its officers and directors are Company employees. The Company has a
71% interest in dividends o 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. T date,
SVS and VDSI have not engaged in business in Louisiana.
The Company is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of video poker gaming in Louisiana and, therefore, the
Company does not manufacture its own video poker machines for use in Louisiana.
On November 5, 1996 voters in Louisiana approved a proposition to allow video
poker to continue in six of the seven parishes in which the Company operates
OTB's in the greater New Orleans area. In addition, voters approved video poker
in three parishes in the greater New Orleans area where the Company currently
does not operate. In the one parish in which the Company operates where video
poker was voted down, the Company will be allowed to continue to conduct
business through June 30, 1999. The two OTB' in this parish accounted for $2.2
million of revenues and approximately 9% of operating income for VSI during the
year ended June 30, 1998. After June 30, 1999, the Company plans to redeploy the
video poker machines from these two closed sites to six other sites, pending
appropriate approvals. The Louisiana legislature has considered other
legislation to curtail video poker in the past and may do so again in the
future.
Sales and Marketing. VSI has developed an extensive marketing program under the
names "The Players Room" and "Rockin' Horse Lounge" which are designed to
attract primarily local residents to its facilities. Media placement has focused
on newspaper and radio advertising with promotions including a player's club,
direct mailings and offerings of a wide range of prizes. The Company intends to
selectively expand its operations in the greater New Orleans area by increasing
the number of video poker machines in certain of its existing locations as
demand warrants. While the Company has investigated the addition of new
locations under its current contract with the Fair Grounds in areas where
competitive factors are favorable, no plans currently exist to add new
locations. Under the Louisiana Act, racetracks and OTBs are permitted to install
an unlimited number of video poker machines while truckstops and taverns may
install only limited numbers of such machines.
Competition. The Company is subject to extensive competition for contracts to
operate video poker machines and the Company's racetrack and OTB parlors compete
with various riverboats, truckstops and locations with liquor licenses
throughout the New Orleans area. Each truckstop is permitted to operate up to 50
video poker machines and each tavern is permitted to operate up to three video
poker machines. Louisiana has riverboat gaming statewide and three riverboats
are currently operating in the greater New Orleans area. Riverboats are
permitted to have live table games and an unlimited number of gaming machines,
including slot machines. Louisiana has also authorized one land-based casino,
permitted to include live table games and an unlimited number of gaming machines
in New Orleans, which opened in May 1995; however, its operator filed for
bankruptcy reorganization and ceased operations in November 1995. At present it
is anticipated that the land-based casino will reopen following reorganization
but completion of the facility is not expected to occur until October 1999.
Casino Operations
Overview.
Rainbow Casino. On July 16, 1994, the Rainbow Casino located in Vicksburg,
Mississippi permanently opened for business. The project includes the Rainbow
Casino, which is a 24,000-square foot casino owned and operated by the Company
which as of June 30, 1998, operated approximately 780 gaming machines and 15
table games as well as a 245-seat restaurant. The facility also includes the
89-room Rainbow hotel and a 10-acre indoor and outdoor entertainment complex
called Funtricity Entertainment Park, which was developed by a subsidiary of Six
Flags Corporation. Both the hotel and entertainment park, which were
substantially completed in late May 1995, are owned and operated by third
parties. The Company has a signed a letter of intent to acquire the
entertainment park for $0.5 million. The park closed in September 1998 and
management is evaluating alternative uses for the facility once the purchase is
consummated. Rainbow Casino is marketed as a "locals" casino and draws its
customers principally from within a 75-mile radius of Vicksburg. The Vicksburg
casino market generated approximately $192.2 million in gaming revenue in the
twelve months ended June 30, 1998.
The Company is the general partner of the partnership ("RCVP") that owns the
Rainbow Casino. Pursuant to transactions consummated in March 1995, Rainbow
Casino Corporation, an independent company that was the former general partner
of RCVP became a limited partner entitled to receive 10% of the net available
cash flows after debt service and other items, as defined (which amount
increases to 20% of such amount when revenues exceed $35.0 million but only on
such incremental amount), for a period of 15 years. The Company holds the
remaining economic interest in the partnership. As part of the refinancing
completed in August 1997, the Company purchased notes payable to HFS Gaming
Corporation ("HFS") and National Gaming Mississippi, Inc. ("NGM") and acquired
the casino royalty previously due to HFS.
Rail City Casino. In April 1990, the Company purchased, for an aggregate
purchase price of $9.5 million, substantially all of the assets of the Rail City
Casino (formerly the Plantation Station Casino) located near the border of the
cities of Reno and Sparks in northern Nevada. Rail City is a 20,000 square-foot
casino which as of June 30, 1998 operated approximately 420 gaming machines, 6
table games, and keno. In addition, Rail City Casino includes a 300-seat
restaurant, which was fully remodeled in th year ended June 30, 1998, and offers
a race and sports book which is leased to an independent race and sports book
operator. Rail City Casino is convenient to both Reno and Sparks and caters to
the local market.
Sales and Marketing. The Company's casinos target the mid-level gaming customers
in the market. The Company promotes its casinos primarily through special
promotional events and by providing quality food at reasonable prices.
Competition. Gaming of all types is available throughout Nevada and Mississippi
in numerous locations, including many locations which may compete directly or
indirectly with the Company's casino operations. The operation of casinos is a
highly competitive business. The principal competitive factors in the industry
include the quality and location of the facility, the nature and quality of the
amenities and customer services offered and the implementation and success of
marketing programs. Many of Rail City Casino's competitors include large
casino-hotels which offer more amenities and may be perceived to have more
favorable locations than the Company. The Rainbow Casino is the fourth gaming
facility to open in Vicksburg and as such faces substantial direct competition
for gaming customers in the region. In August 1997 it was announced the Lady
Luck Gaming Corporation and Horseshoe Gaming, LLC were going to form a joint
venture to develop a project that would include a dockside casino, hotel and
relate amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel
and auto racing complex on the Big Black River which is between Vicksburg and
Jackson, Mississippi. The legality of that site for gaming is currently in
litigation. At this time management does not know which, if any, of these sites
will be developed. Both of these projects will be contingent on several factors
including regulatory approval and financing.
Patents, Copyrights and Trade Secrets
Bally Gaming is the copyright owner of both the source code and the video
presentation of its games and has registered many of these copyrights with the
U.S. Copyright Office. Game version upgrades and new games are registered with
the U.S. Copyright office as they are finalized. The copyrights expire at
various dates from the year 2000 through 2072. Some games, cash handling
mechanisms, and other gaming device mechanisms (either currently used or
reserved for future development) are covered either by pending patent
applications or issued patents, both foreign and domestic. The expiration dates
of these patents vary and are based upon their filing dates or issue date. In
addition, some of the games have trademarks registered with the U.S. Patent and
Trademark Office, state trademark registries, or both.
Bally Gaming is obligated under several patent agreements to pay royalties
ranging from approximately $25 to $100 per game depending on the components in
the gaming machines. Additionally, based on an amendment to the trademark
licensing agreement between the Company and Bally Entertainment Corporation
("BEC") dated May 10, 1996, Bally Gaming is obligated to pay a royalty of $35
per machine on new machines sold beginning on June 18, 1996, with a minimum
annual royalty payment of $1.0 million for the initial five-year term of the
amended agreement, which is subject to annual renewals by the Company
thereafter. Royalty expense for Bally Gaming for the year ended December 31,
1995, the six months ended June 30, 1996 and the years ended June 30, 1997 and
1998 was $3.0 million, $1.1 million, $3.0 million and $2.2 million,
respectively. The Company has over two hundred registered or pending trademark
applications in the United States and around the world, including the registered
U.S. trademark, Gamblers Bonus.
Employees and Labor Relations
As of June 30, 1998, the Company employed approximately 1,270 persons in the
State of Nevada, VSI employed 80 persons in the State of Louisiana, RCVP
employed 480 persons in the State of Mississippi, the Company employed
approximately 40 persons in various other states and 20 persons in various other
countries and Bally Wulff employed 460 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 that 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.
Nevada. The ownership and operation of casino gaming facilities in Nevada are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (the "Nevada Act") and (ii) various local ordinances and regulations.
The Company's gaming, manufacturing, distributing and slot route operations
(herein collectively referred to as "gaming machine operations") are subject to
the licensing and regulatory control of the Nevada State Gaming Control Board
(the "Nevada Board"), the Nevada Gamin Commission (the "Nevada Commission"), the
Clark County Liquor and Gaming Licensing Board (the "Clark County Board"), and
various other county and city regulatory agencies, all of which are collectively
referred to as the "Nevada Gaming Authorities".
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based on declarations of public policy concerned with, among
other things: (i) the prevention of unsavory and unsuitable persons from having
any involvement with gaming; (ii) the strict regulation of all persons,
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture and distribution of gaming
machines, cashless wagering systems and associated equipment; (iii) the
establishment and maintenance of responsible accounting practices and
procedures; (iv) the maintenance of effective control over the financial
practices of licensees, including establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent
practices; and (vi) providing a source of state and local revenues through
taxation and licensing fees. Change in such laws, regulations and procedures
could have an adverse effect on the Company's gaming-related operations.
The Company is registered with the Nevada Commission as a publicly traded
corporation (a "Registered Corporation"). The Company's direct and indirect
subsidiaries that conduct gaming operations at various locations, conduct gaming
machine operations (collectively, the "Nevada Subsidiaries") are required to be
licensed by the Nevada Gaming Authorities. The licenses held by the Nevada
Subsidiaries require periodic payments of fees and taxes and are not
transferable. The Company, through registered intermediary companies
(individually an "Intermediary Company" and collectively the "Intermediary
Companies"), has been found suitable to own the stock of the Nevada
Subsidiaries, each of which is a corporate licensee (individually a "Corporate
Licensee" and collectively the "Corporate Licensees") under the terms of the
Nevada Act. As a Registered Corporation, the Company is required periodically to
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information the Nevada Commission may require. No person may
become a stockholder of or receive any percentage of the profits from the
Corporate Licensees without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company, the Intermediary Companies and the
Corporate Licensees have obtained from the Nevada Gaming Authorities the various
registrations, findings of suitability, approvals, permits and licenses required
to engage in gaming activities, gaming machine operations, and in the
manufacture and distribution of gaming devices for use or play in Nevada or for
distribution outside of Nevada.
All gaming machines and cashless wagering systems manufactured, sold or
distributed for use or play in Nevada or for distribution outside of Nevada must
be manufactured by licensed manufacturers and distributed or sold by licensed
distributors. All gaming machines manufactured for use or play in Nevada must be
approved by the Nevada Commission before 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 set forth in the regulations of the Nevada Commission. Associated
equipment (as defined in the Nevada Act) must be administratively approved by
the chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, the Intermediary
Companies or the Corporate Licensees to determine whether that individual is
suitable or should be licensed as a business associate of a gaming licensee.
Officers, directors and key employees of the Company and the Intermediary
Companies who are actively and directly involved in the licensed activities of
the Corporate Licensees are or may be require to be licensed or found suitable
by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an
application for licensing for any cause they deem reasonable. A finding of
suitability is comparable to licensing, and both require submission of detailed
personal and financial information followed by a thorough investigation. The
applicant for licensing or a finding of suitability must pay all the costs of
the investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Intermediary Companies or the Corporate
Licensees, the companies involved would have to sever all relationships with
that person. In addition, the Nevada Commission may require the Company, the
Intermediary Companies or the Corporate Licensees to terminate the employment of
any person who refuses to file appropriate applications. Licensing and
suitability determinations are not subject to judicial review in Nevada.
The Company and the Corporate Licensees that hold nonrestricted licenses are
required to submit detailed financial and operating reports to the Nevada
Commission. A nonrestricted license is a license for an operation consisting of
16 or more slot machines, or for any number of slot machines together with any
other game, gaming device, race book or sports pool at one establishment.
Substantially all material loans, leases, sales of securities and similar
financing transactions by the Corporate Licensees that hold nonrestricted
licenses must be reported to or approved by the Nevada Commission.
If it were determined that a Corporate Licensee had violated the Nevada Act, the
licenses it holds could be limited, conditioned, suspended or revoked, subject
to compliance with certain statutory and regulatory procedures. In addition, the
Company, the Intermediary Companies, the Corporate Licensees and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevad Commission to operate any nonrestricted gaming
establishment operated by a Corporate Licensee and, under certain circumstances,
earnings generated during the supervisor's appointment (except for reasonable
rental of the casino property) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of the gaming licenses of the Corporate
Licensees or the appointment of a supervisor could (and revocation of any gaming
license would) materially adversely affect the gaming-related operations of the
Company.
The Gaming Authorities may, at their discretion, require the holder of any
security of the Company, such as the Notes or the New Notes, to file
applications, be investigated, and be found suitable to own the security of the
Company if the Nevada Commission has reason to believe that the holder's
ownership would be inconsistent with the declared policies of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of any class of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of any class of a Registered Corporation's voting securities apply to the
Nevada Commission for a finding of suitability within 30 days after the chairman
of the Nevada Board mails written notice requiring such filing. If there is a
default in the payment of dividends fo six consecutive dividend payment dates
for the Company's 11 1/2% Non-Voting Junior Convertible Pay-in-Kind Special
Stock, Series E (the "Series E Preferred Stock"), it will qualify as a voting
security under the terms of the Nevada Act and will be considered as a separate
class of voting securities for purposes of determining beneficial ownership.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, that acquires more than 10%, but not more than 15%, of a class of a
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of finding of suitability if the institutional investor holds the
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the corporate charter, bylaws,
management, policies or operations of the Registered Corporation or any of its
gaming affiliates, or any other action the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities that are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i) voting on
all matters voted on by stockholders; (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with investment only intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock beyond such period
of time as may be prescribed by the Nevada Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company, the Intermediary Companies or the Corporate
Licensees, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities, including, if necessary, the
immediate purchase of said voting securities for cash at fair market value.
Additionally, the Clark County Board has taken the position that it has the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may in its discretion require the holder of any debt
securities of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security if the Nevada Commission has reason
to believe that such ownership would be inconsistent with the declared policies
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if, without the prior
approval of the Nevada Commission, it (i) pays the unsuitable person any
dividend, interest or any distribution whatsoever, (ii) recognizes any voting
right by such unsuitable person in connection with such securities, (iii) pays
the unsuitable person remuneration in any form, or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.
The Company is required to maintain in Nevada a current stock ledger, which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to impose a requirement that a Registered Corporation's stock certificates
bear a legend indicating that the securities are subject to the Nevada Act. The
Nevada Commission has imposed this requirement on the Company.
The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in Nevada
or to retire or extend obligations incurred for such purposes. In addition, (i)
a Corporate Licensee may not guarantee a security issued by a Registered
Corporation pursuant to a public offering without the prior approval of the
Nevada Commission; and (ii) restrictions o the transfer of an equity security
issued by a Corporate Licensee or Intermediary Company and agreements not to
encumber such securities (collectively, "Stock Restrictions") are ineffective
without the prior approval of the Nevada Commission. The Nevada Commission has
also imposed a requirement on the Company that it must receive the prior
administrative approval of the Nevada Board chairman for any offer for the sale
of an equity security in a private transaction.
Changes in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission on a variety of
stringent standards before assuming control of such Registered Corporation. The
Nevada Commission may also require controlling stockholders, officers, directors
and other persons having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as a part of the
approval process relating to the transaction.
The Nevada Legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse affects of these business practices on
Nevada's gaming industry and to promote Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make exceptional repurchases of
voting securities above the current market price (commonly called " greenmail")
and before a corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization proposed
by the Registered Corporation's board of directors in response to a tender offer
made directly to the Registered Corporation's stockholders for the purpose of
acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to the counties and
cities in which the Licensees' 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 on either (i) a percentage of the
gross revenues received, (ii) the number of gaming devices operated, or (iii)
the number of games operated. casino entertainment tax is also paid by casino
operations where entertainment is furnished in connection with the selling of
food or refreshments. The Corporate Licensees that hold gaming device route
operator licenses or manufacturer or distributor licenses also pay certain fees
to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be
registered, or under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board and thereafter maintain a
$10,000 revolving fund to pay the expenses of investigation by the Nevada Board
of the Licensee's participation in such foreign gaming. The revolving fund is
subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operations who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.
The sale of alcoholic beverages at establishments operated by a Corporate
Licensee is subject to licensing, control and regulation by applicable
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse affect on the operations of the Corporate Licensees.
Louisiana. The manufacture, distribution, servicing and operation of video draw
poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw
Poker Devices Control Law and the Rules and Regulations promulgated thereunder
(the "Louisiana Act"). Until May 1, 1996, licensing and regulatory control was
maintained by the Video Gaming Division of the Gaming Enforcement Section of the
Office of State Police within the Department of Public Safety and Corrections
(the "Division"). The Louisiana legislature passed a bill which created a single
gaming control board for the regulation of gaming in Louisiana. This Board is
called the Louisiana Gaming Control Board (the "Louisiana Board") and oversees
all licensing for all forms of legalized gaming in Louisiana (including gaming
on Native American lands). The Division will continue to perform investigatory
functions for the Louisiana Board. The laws and regulations of Louisiana are
based on policies of maintaining the health, welfare and safety of the general
public and protecting the video gaming industry from elements of organized
crime, illegal gambling activities and other harmful elements, as well as
protecting the public from illegal and unscrupulous gaming to ensure the fair
play of devices.
VSI and SVS, the indirect operating subsidiaries for the Company's gaming
operations in Louisiana, has each been granted a license as a device owner by
the Division. The other indirect subsidiary of the Company, VDSI, has been
granted a license as a distributor by the Division. These gaming subsidiaries
are Louisiana Licensees (the "Louisiana Licensees") under the terms of the
Louisiana Act. The licenses held by the Louisiana Licensees expire at midnight
on June 30 of each year and must be renewed annually through payment of fees.
All license fees must be paid on or before May 15 in each year licenses are
renewable.
The Louisiana Board may deny, impose a condition on or suspend or
revoke a license, renewal or application for a license for violations of any
rules and regulations of the Louisiana Board or any violations of the Louisiana
Act. In addition, fines for violations of gaming laws or regulations may be
levied against the Louisiana Licensees and the persons involved for each
violation of the gaming laws. The issuance, condition, denial, suspension or
revocation is deemed a pure and absolute privilege and is a the discretion of
the Louisiana Board under the provisions of the Louisiana Act. A license is not
property or a protected interest under the constitution of either the United
States or Louisiana.
The Division has the authority to conduct overt and covert investigations of any
person involved directly or indirectly in the video gaming industry in
Louisiana. These investigations have extended to information regarding a
prospective licensee's and his or her spouse's immediate family and relatives
and their affiliations with certain organizations or other business entities.
The investigation may also extend to any person who has or controls more than a
5% ownership, income or profits interest in an applicant for or holder of a
license or who is a key employee, or who has the ability to exercise significant
influence over the licensee. All persons or entities investigated must meet all
suitability requirements and qualifications for a licensee. The Louisiana Board
may deny an application for licensing for any cause it may deem reasonable. The
applicant for licensing must pay a filing fee, which 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 at
least two years prior to the date of the application.
In addition to being licensed as a manufacturer of devices under the Louisiana
Act, Bally Gaming has been licensed as a manufacturer under the Louisiana
Riverboat Economic Development and Gaming Control Act (the "Louisiana Riverboat
Act"). Gaming's application for a permanent manufacturer's license as it relates
to the land-based casino in New Orleans was pending before the Louisiana
Economic Development and Gaming Corporation ("LEDGC") at the time the operator
of the land-based casino filed for bankruptc reorganization and ceased
operations, resulting in the termination of funding for and 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
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 and approvals as may be required.
Mississippi. The manufacture and distribution of gaming and associated equipment
and the ownership and operation of casino facilities in Mississippi are subject
to extensive state and local regulation, primarily the licensing and regulatory
control by the Mississippi Gaming Commission (the "Mississippi Commission") and
the Mississippi State Tax Commission.
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Commission has adopted regulations that are also similar in many
respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and making periodic reports to the Mississippi Commission; (iv) prevent cheating
and fraudulent practices; (v) provide a source of state and local revenues
through taxation and licensing fees; and (vi) ensure that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are
subject to amendment and interpretation by the Mississippi Commission. Changes
in Mississippi law or regulations may limit or otherwise materially affect the
types o gaming that may be conducted and could have an adverse effect on the
Company and the Company's Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the 14 counties that either border the Gulf Coast or the Mississippi River, but
only if the voters in each of those counties have not voted to prohibit gaming
in that county. Currently, dockside gaming was permissible in nine of the 14
eligible counties in the state and gaming operations had commenced in Adams,
Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under
Mississippi law, gaming vessels must be located on the Mississippi River or on
navigable waters in eligible counties along the Mississippi River, or in the
waters of the State of Mississippi lying south of the state in eligible counties
along the Mississippi Gulf Coast. Litigation is pending with respect to the
expansion of eligible gaming sites in which a landowner and a license applicant
have appealed a finding of suitability by the Mississippi Commission of a site
on the Big Black River in Warren County near Interstate 20 between Jackson an
Vicksburg, Mississippi, where the Rainbow Casino, operated by RCVP, is located.
A Hinds County Circuit Court has ruled that the subject site is legal and
suitable for gaming and the Mississippi Commission has appealed the decision to
the Mississippi Supreme Court. The law permits unlimited stakes gaming on
permanently moored vessels on a 24-hour basis and does not restrict the
percentage of space that may be utilized for gaming. There are no limitations on
the number of gaming licenses that may be issued in Mississippi.
The Company, RCVP, Bally Gaming, Inc. ("BGI") and their affiliates are subject
to the licensing and regulatory control of the Mississippi Commission. The
Company is registered under the Mississippi Act as a publicly traded holding
company of RCVP and BGI is required to periodically submit detailed financial
and operating reports to the Mississippi Commission and furnish any other
information the Mississippi Commission may require. If the Company is unable to
continue to satisfy the registration requirements of the Mississippi Act, the
Company and its affiliates cannot own or operate gaming facilities or continue
to act as a manufacturer and distributor in Mississippi. RCVP must maintain a
gaming license from the Mississippi Commission to operate a casino in
Mississippi and BGI must maintain a manufacturer and distributor license from
the Mississippi Commission to manufacture and distribute gaming products. Such
licenses are issued by the Mississippi Commission subject to certain conditions,
including continued compliance with all applicable state laws and regulations.
Gaming and manufacturer and distributor licenses are not transferable, are
issued for a two-year period and must be renewed every two years thereafter.
RCVP was granted a renewal of its gaming license by the Mississippi Commission
in 1998 and the license must be renewed in June 2000. BGI was granted a renewal
of its manufacturer and distributor license in 1998 and such license must be
renewed in June 2000. No person may become a stockholder of, or receive any
percentage of profits from, a licensed subsidiary of a holding company without
first obtaining licenses and approvals from the Mississippi Commission. The
Company and its affiliates have obtained the necessary approvals from the
Mississippi Commission.
Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's licensed subsidiaries must be found
suitable or be licensed by the Mississippi Commission. The Company believes it
has obtained, applied for, or is in the process of applying for all necessary
findings of suitability with respect to such persons affiliated with the
Company, RCVP or BGI, although the Mississippi Commission, in its discretion,
may require additional persons to file applications for findings of suitability.
In addition, any person having a material relationship or involvement with the
Company may be required to be found suitable, in which case those persons must
pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a finding of suitability for any cause it
deems reasonable. Changes in certain licensed positions must be reported to the
Mississippi Commission. In addition to its authority to deny an application for
a findings of suitability, the Mississippi Commission can disapprove a change in
a licensed position. The Mississippi Commission has the power to require the
Company and its registered or licensed subsidiaries to suspend or dismiss
officers, directors and other key employees or sever relationships with other
persons who refuse to file appropriate applications or whom the authorities find
unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
must refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors or knowingly violated the Mississippi Act or for any other
reasonable cause.
The Mississippi Commission may, at any time, investigate and require the finding
of suitability of any record or beneficial stockholder of the Company.
Mississippi law requires any person who acquires more than 5% of the common
stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the Securities and Exchange Commission, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a public
company's common stock. However, the Mississippi Commission has adopted a policy
that permits certain institutional investors to own beneficially up to 10% of a
registered public company's common stock without a finding of suitability. If a
stockholder who must be found suitable is a corporation, partnership or trust,
it must submit detailed business and financial information including a list of
beneficial owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. Any person found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the securities of the
Company beyond such time as the Mississippi Commission prescribes may be guilty
of a misdemeanor. The Company is subject to disciplinary action if, after
receiving notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its licensed subsidiaries, the Company:
(i) pays the unsuitable person any dividend or other distribution on the voting
securities of the Company; (ii) recognizes the exercise, directly or indirectly,
of any voting rights conferred by securities held by the unsuitable person;
(iii) pays the unsuitable person any remuneration in any form for services
rendered or otherwise, except in certain limited and specific circumstances; or
(iv) fails t pursue all lawful efforts to require the unsuitable person to
divest himself of the securities, including, if necessary, the immediate
purchase of the securities for cash at fair market value. Management believes
that compliance by the Company with the licensing procedures and regulatory
requirements of the Mississippi Commission will not affect the marketability of
the Company's securities.
The Company may be required to disclose to the Mississippi Commission on request
the identities of the holders of any debt securities. In addition, under the
Mississippi Act, the Mississippi Commission may in its discretion (i) require
holders of debt securities of registered corporations to file applications, (ii)
investigate such holders and (iii) require such holders to be found suitable to
own such debt securities. Although the Mississippi Commission generally does not
require the individual holders of obligations such as notes to be investigated
and found suitable, the Mississippi Commission retains the discretion to do so
for any reason, including but not limited to a default or where the holder of
the debt instrument exercises a material influence over the gaming operations of
the entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with the investigation.
RCVP and BGI must maintain in Mississippi a current ledger with respect to the
ownership of their equity securities and the Company must maintain a current
list of stockholders in the principal office of RCVP, which list must reflect
the record ownership of each outstanding share of any equity issued by the
Company. The ledger and stockholder lists must be available for inspection by
the Mississippi Commission at any time. If any securities of the Company are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Mississippi Commission. A
failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company must also render maximum assistance in determining the
identity of the beneficial owner.
The Mississippi Act requires that the certificates representing securities of a
registered publicly traded corporation bear a legend to the general effect that
such securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi Commission
an exemption from this legend requirement. The Mississippi Commission has the
power to impose additional restrictions on the holders of the Company's
securities at any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a licensed gaming subsidiary must be reported to or approved by
the Mississippi Commission. A licensed gaming subsidiary may not make a public
offering of its securities, but may pledge or mortgage casino facilities if it
obtains the prior approval of the Mississippi Commission. The Company may not
make a public offering of its securities without the prior approval of the
Mississippi Commission if any part of the proceeds of the offering is to be used
to finance the construction, acquisition or operation of gaming facilities in
Mississippi or to retire or extend obligations incurred for one or more such
purposes. Such approval, if given, does not constitute a recommendation or
approval of the investment merits of the securities subject to the offering.
Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover cannot occur
without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors, and
other persons having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upo Mississippi's gaming
industry and to promote Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities above the current market price (commonly called "greenmail") or
before a corporate acquisition opposed by management may be consummated.
Mississippi's gaming regulations will also require prior approval by the
Mississippi Commission if the Company adopts a plan or recapitalization proposed
by its board of directors opposing a tender offer made directly to the
stockholders for the purpose of acquiring control of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Company has previously
obtained a waiver of foreign gaming approval from the Mississippi Commission for
operations in Nevada and will be required to obtain the approval or a waiver of
such approval from the Mississippi Commission prior to engaging in any
additional future gaming operations outside of Mississippi.
If the Mississippi Commission decides that a licensed gaming subsidiary violated
a gaming law or regulation, the Mississippi Commission could limit, condition,
suspend or revoke the license of the subsidiary. In addition, the licensed
subsidiary, the Company and the persons involved could be subject to substantial
fines for each separate violation. The Mississippi Commission could also attempt
to appoint a supervisor to operate the casino facilities. Limitation,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the Company's and RCVP's gaming operations or BGI's
manufacturer and distributor operations, as the case may be.
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the countries and
cities in which a licensed gaming subsidiary's operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based on (i) a percentage
of the gross gaming revenues received by the casino operation, (ii) the number
of slot machines operated by the casino or (iii) the number of table games
operated by the casino. The license fee payable to the State of Mississippi is
based upon "gaming receipts" (generally defined as gross receipts less payouts
to customers as winnings) and equals 4% of gaming receipts of $50,000 or less
per month, 6% of gaming receipts over $50,000 and less than $134,000 per month,
and 8% of gaming receipts over $134,000. The foregoing license fees are allowed
as a credit against the Company's Mississippi income tax liability for the year
paid. The gross revenue fee imposed by the City of Vicksburg, Mississippi, where
RCVP's casino operations are located, equals approximately 4% of gaming
receipts.
The Mississippi Commission has adopted a regulation requiring as a condition of
licensing or license renewal that a gaming establishment's plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities, which will amount to at least 25% of the casino cost.
Management of the Company believes it is in compliance with this requirement.
In Mississippi, two referenda have been proposed which, if approved, would
repeal legalized gaming in Mississippi and impose a two year period for all
gaming operations to terminate. A Mississippi State Circuit Court ruled that the
first of the proposed referenda was invalid because, among other reasons, it
failed to include required information regarding its anticipated affect on state
government revenues. Proponents of the referenda have filed an appeal with the
Mississippi State Supreme Court to review the Circuit Court ruling. The second
referendum proposal included the same language on government revenues as the
first and similarly was ruled invalid by a Mississippi State Circuit Court on
the same grounds as the first. Any such referendum may be resubmitted, but first
must be approved by the Mississippi Secretary of State and signatures of
approximately 98,000 registered voters must be gathered and certified by October
7, 1998, in order for the proposal to be included on the November 1999 ballot.
If the October 7, 1998 deadline is not met, however, the proponents could
attempt to place such a proposal on the November 2000 ballot or the ballot
during another statewide election in subsequent years.
The sale of alcoholic beverages by the Rainbow Casino operated by RCVP is
subject to the licensing, control and regulation by both the City of Vicksburg
and the Alcoholic Beverage Control Division (the "ABC") of the Mississippi State
Tax Commission. The Rainbow Casino area has been designated as a special resort
area, which allows the Rainbow Casino to serve alcoholic beverages on a 24-hour
basis. The ABC has the full power to limit, condition, suspend or revoke any
license for the serving of alcoholic beverages or to place such a licensee on
probation with or without conditions. Any such disciplinary action could (and
revocation would) have a material adverse effect on the Rainbow Casino's
operations. Certain officers and managers of the Rainbow Casino must be
investigated by the ABC in connection with its liquor permits, and changes in
certain positions must be approved by the ABC.
New Jersey. BGI has previously been licensed by the New Jersey Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act"). Due to the change of ownership of
BGI as a result of the merger with Alliance Gaming Corporation, and by operation
of state law, BGI's CSI license was deemed to have lapsed. Prior to the change
of ownership of BGI and in anticipation of same, the Company submitted an
application for qualification. The New Jersey Commission deemed the application
complete and as a result thereof, since the merger, the Company's operations in
New Jersey continue uninterrupted by full regulatory consent, to transactional
waivers which have been granted by the New Jersey Casino Control Commission with
consent of the New Jersey Division of Gaming Enforcement, and which the Company
believes should continue to be granted by the New Jersey Casino Control
Commission on six-month blanket terms for parts and service and on a
sale-by-sale basis for all other products pending final regulatory action on the
Company's now pending application for CSI qualification.
In considering the qualifications of an applicant for a CSI license, the New
Jersey Commission may require the officers, directors, key personnel, financial
sources and stockholders (in particular those with holdings in excess of 5%) of
the applicant and its holding and intermediary companies to demonstrate their
qualifications. In this regard, such persons and entities may be investigated
and may be required to make certain regulatory filings and to disclose and/or to
provide consents to disclose personal and financial data. The costs associated
with such investigation are typically borne by the applicant.
Federal Registration. The operating subsidiaries of the Company that are
involved in gaming activities are required to register annually with the
Attorney General of the United States in connection with the sale, distribution
or operation of gaming machines. All currently required filings have been made.
The United States Congress has created the National Gambling Impact and Policy
Commission to conduct a comprehensive study of all matters relating to the
economic and social impact of gaming in the United States. The enabling
legislation provides that, not later than two years after the enactment of such
legislation, the commission would be required to issue a report containing its
findings and conclusions, together with recommendations for legislation and
administrative actions. Any such recommendations, if enacted into law, could
adversely affect the gaming industry and have a material adverse effect
on the Company's business, financial condition or results of operations.
From time to time, certain legislators have proposed the imposition of a federal
tax on gross gaming revenues. No specific proposals for the imposition of such a
federal tax are currently pending. However, no assurance can be given that such
a tax will not be imposed in the future. Any such tax could have a material
adverse effect
on the Company's business, financial condition or results of operations.
Germany. German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently affecting the
wall machine industry relates to prescribed licensing procedures and the use,
installation, operation and taxation of machines.
Wall machine manufacturers are dependent on the successful introduction of new
products each year and currently are required to receive prior government
approval for each new product introduction. Manufacturers are required to apply
for licenses through an agency of the German Federal Ministry of Economics. Such
agency maintains a policy of accepting only two licensing applications from an
individual applicant at any given time. Bally Wulff, through affiliates and
subsidiaries, is in a position to file up to six concurrent applications. After
receiving a prototype of a machine for which the applicant seeks government
licensing approval, the federal agency deliberates for periods that range from
approximately 6 to 24 months. If that product is approved, the wall machine
manufacturer is permitted to reproduce the sample machine initially submitted
for government approval. Every wall machine carries with it a small license card
that permits the machine to be operated for up to four years after the initial
date of sale, after which it may not be used in Germany. In Germany, wall
machines sold via the secondary market may be operated by a new owner but only
for the residual time remaining on each machine's four-year life. In addition to
licensing requirements for manufacturers, any person or entity that intends to
operate a licensed wall machine must apply to local regulatory authorities for a
license, which will not be granted by the authorities if facts justify the
assumption that the applicant does not possess the requisite reliability. In
this proceeding, the applicant must furnish a police certificate of conduct.
German legislation prohibits the public play of wall machines by people under 18
years old. Voluntary agreements among manufacturers and certain amusement game
trade associations, among other things, restrict wall machine advertising and
the ability of a player to play more than two machines at once, require all
machines to carry visible warning notices and provide that every wall machine is
automatically switched off for three minutes after one hour of continuous play.
The Spielverordnung (gaming ordinance) specifically governs wall machines. These
regulations limit game payouts to DM 4.00 (approximately $2.22) per game,
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations that specify how many machines may operate within
defined square foot areas (15 square meters per machine, with a maximum of ten
machines per location). In taverns, restaurants, hotels and certain other
establishments, no more than two gaming machines are permitted.
The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs
the zoning classification of land and the type and density of development within
the various zoning classifications. Effective January 27, 1990, the
Baunutzungsverordnung was amended to restrict the development of larger gaming
halls to core commercial areas, limit the permissibility of smaller gaming halls
in various types of mixed use zones and to ban gaming halls in most types of
residential and all types of industrial use areas. Prior to the amendment,
gaming halls, regardless of size, were generally allowed in core, business,
mixed and industrial zones. In addition, on a case-by-case basis, each local
zoning agency is authorized to exclude certain types of otherwise permissible
uses, including gaming halls.
Subject to certain exceptions, a value-added tax (VAT) of 16% is generally
assessed on the sale or supply of any goods and services in Germany. Since the
total amount paid for particular goods or services is considered to be the gross
price in calculating such tax, the actual rate is 13.79%. The basis for taxation
is the cash remaining in the machines. The rule requiring a minimum payout
percentage is applied to the amount remaining in the cash box net of such VAT
Depending on the municipality in which machine is located, operators may also
have to pay a monthly leisure tax on each machine of up to DM 600 (approximately
$332). The government in the German state of North Rhine Westfalia recently
modified regulations that permitted local municipalities to independently impose
rate increases on taxes on gaming machine operators beginning January 1, 1999.
During fiscal 1996, Bally Wulff increased the amount of tax reserves by $1.0
million (to a total reserve of $1.4 million) as a result of developments in an
ongoing quadrennial audit of Wulff's tax returns for the years 1988 through
1991. The German tax authorities have proposed preliminary adjustments which
range from $1.4 million (which has been accrued) to $5.0 million. The German tax
authorities have not yet issued the final assessment from their quadrennial
audit.
Additional Jurisdictions. The Company, in the ordinary course of its business,
routinely considers business opportunities to expand its gaming operations into
additional jurisdictions. Although the laws and regulations of the various
jurisdictions in which the Company operates or into which the Company may expand
its gaming operations vary in their technical requirements and are subject to
amendment from time to time, virtually all of those jurisdictions require
licenses, permits, documentation of qualification, including evidence of
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such companies.
The Company and its key personnel have obtained, or applied for, all government
licenses, registrations, findings of suitability, permits and approvals
necessary for the manufacture, distribution and, where permitted, operation of
their gaming machines in the jurisdictions in which the Company does business.
The Company and the holders of its securities may be subject to the provisions
of the gaming laws of each jurisdiction where the Company or its subsidiaries
are licensed or conduct business, including, without limitation, 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 authorities within each such state
as well as Australian, Canadian and other foreign gaming jurisdictions in which
BGII and its subsidiaries are licensed or conduct business. As a result of the
consummation of the Acquisition, the Company and its officers and directors have
been required to apply for any government licenses, permits and approvals
necessary or required by each of these jurisdictions.
Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensing, findings of qualification or other
approvals. ln some cases this process may require the holder or prospective
holder to disclose or provide consents to disclose personal and financial data
in connection with necessary investigations, the costs of which are typically
borne by the applicant. The investigatory and approval process can take three to
six months to complete under normal circumstances.
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, 1998, all of which are fully utilized unless otherwise
noted:
Annual
Building Rental
Location Use Square Feet Payments
(In 000s)
Las Vegas, NV Subleased 72,000 $ 515
Las Vegas, NV Nevada route operations 18,500 182
Las Vegas, NV Advanced Product Development Group 7,100 85
Sparks, NV Administrative offices and
warehousing 38,300 274
Sparks, NV Sales offices and warehousing 11,000 122
Absecon, NJ Sales offices and warehousing 15,800 54
Carson City, NV Proprietary gaming development 1,500 15
Biloxi, MS Sales offices 6,400 24
Golden, CO Sales offices 1,500 17
Rosemont, IL Sales offices 4,900 23
Dania, FL Sales offices 3,400 37
Elko, NV Sales office and route operations 4,200 22
Laughlin, NV Sales offices 600 9
Atlantic City, NJ Administrative offices 750 9
San Juan,
Puerto Rico Sales offices 1,000 12
Sidney, Australia Sales offices 1,700 56
Johannesburg, So. Sales offices 1,000 28
Las Vegas, NV Warehousing 103,500 390
Berlin, Germany Administrative offices and
manufacturing 108,500 520
Hannover, Germany Administrative offices and
warehousing 20,100 217
Sparks, NV Route operations 12,100 77
Carson City, NV Route operations 2,500 9
Winnemucca, NV Route operations 1,200 5
Pahrump, NV Route operations 800 5
Las Vegas, NV Route location 8,000 453
Las Vegas, NV (1) Ground lease --- 330
Sparks, NV (2) Ground lease --- 5
Vicksburg, MS Administrative offices 2,700 19
Vicksburg, MS Administrative offices 1,200 9
New Orleans, LA Louisiana route operations 6,000 57
Covington, LA OTB operation 2,500 36
Metairie, LA OTB operation 11,000 54
New Orleans, LA OTB operation 5,100 26
(1) Lease consists of ground lease for parking at the Trolley Stop.
(2) Lease consists of long-term land lease for parking at Rail City Casino.
The following table sets forth information regarding properties owned by the
Company as of June 30, 1998, all of which are fully utilized unless otherwise
noted:
Building
Location Use Square Feet
(In 000s)
Las Vegas, NV Administrative offices and
manufacturing (a) 150,000
Reno/Sparks, NV Casino (a) 35,000
Vicksburg, MS Casino 24,000
Vicksburg, MS Administrative offices 3,200
Vicksburg, MS Vacant- Land ---
Las Vegas, NV Tavern/Land 5,000
No Las Vegas, NV Land/Parking ---
(a) These facilities are mortgaged collateral for the Company's Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
In addition, the Company leases 21 bar and tavern properties that have been
subleased to other operators in connection with its Nevada route operations. The
properties range in size from approximately 1,750 square feet to 7,700 square
feet. The remaining terms of the leases range from 10 months to 13 years with
monthly payments ranging from approximately $1,800 to $10,500.
In addition to the principal facilities, the Company has 21 leased locations and
two owned locations in Germany which are primarily used for sales and service
offices as well as for warehousing purposes. The properties range in size from
approximately 3,300 square feet to 14,200 square feet. The leased locations have
terms of occupancy varying from 6 months to eight years with monthly payments
ranging from approximately $1,000 to $9,000.
See Note 8 of Notes to Consolidated Financial Statements for information as to
the Company's lease commitments with respect to the foregoing rental properties.
The Company believes its facilities are suitable for its needs and the Company
has no future expansion plans that would make these properties inadequate.
ITEM 3. LEGAL PROCEEDINGS
Litigation
On September 25, 1995, BGII was named as a defendant in a class action lawsuit
filed in Federal District Court in Nevada, by Larry Schreirer on behalf of
himself and all others similarly situated. The plaintiffs filed suit against
BGII and approximately 45 other defendants. Each defendant is involved in the
gaming business as a gaming machine manufacturer, distributor, or casino
operator. The class action lawsuit arises out of alleged fraudulent marketing
and operation of casino video poker machines and electronic slot machines. The
plaintiffs allege that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people into playing their gaming machines
based on a false belief concerning how those machines actually operate as well
as the extent to which there is actually an opportunity to win on any given
play. The plaintiffs allege that the defendants' actions constitute violations
of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise
to claims of common law fraud and unjust enrichment. The plaintiffs are seeking
monetary damages in excess of $1.0 billion, and are asking that any damage
awards be trebled under applicable Federal law. Management believes the
plaintiffs' lawsuit to be without merit. The Company intends to vigorously
pursue all legal defenses available to it.
In an action filed on December 2, 1996, the Company was named as a defendant in
an action brought by Canpartners Investments IV and Cerberus Partners, in
federal district court for the Southern District of New York relating to loan
commitment letters from August 1995, contemplating that the plaintiffs would
lend approximately $30 million to partially fund the Company's then pending
hostile tender offer for BGII. In August 1998 the Company and the plaintiffs
settled the litigation for approximately $2.0 million
The Company is also a party to various lawsuits relating to routine matters
incidental to its business. Management does not believe that the outcome of such
litigation, including the matters above, in the aggregate, will have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"ALLY". The following table sets forth the high and low closing bid price of the
Common Stock as reported by Nasdaq for the periods indicated. These prices
reflect inter-dealer prices, without retail mark-up or mark-down or commissions
and may not necessarily represent actual transactions.
Price Range of
Common Stock
High Low
Fiscal Year Ended June 30, 1997
1st Quarter $ 4.00 $ 2.00
2nd Quarter 4.38 3.00
3rd Quarter 4.56 3.38
4th Quarter 4.00 3.07
Fiscal Year Ended June 30, 1998
1st Quarter $6.31 $3.63
2nd Quarter 6.44 4.00
3rd Quarter 5.94 4.75
4th Quarter 5.37 3.87
As of September 8, 1998 the Company had approximately 1,700 holders of record of
its Common Stock.
There is currently no established public trading market for the Company's Series
E Special Stock.
The Company has never declared or paid cash dividends on its Common Stock. The
indenture for the Company's 10% Senior Subordinated Notes (the "Indenture") and
the credit agreement for the Company's credit facility each restrict the
Company's ability to pay any dividends or make any other payment or distribution
of any of its Restricted Subsidiaries' Equity Interests (as defined). The
Company intends to follow a policy of retaining earnings, if any, to finance
growth of its business and does not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment of future dividends on the
Common Stock will be at the sole discretion of the Board of Directors and will
depend on the Company's profitably, ability to pay dividends under the terms of
the Indenture and the Company's financial condition, capital requirements,
statutory and contractual restrictions, future prospects and other factors
deemed relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
audited financial statements of the Company. The table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto.
Fiscal Years Ended June 30,
1994 1995(1) 1996(2) 1997(5) 1998
(In 000's, Except Per Share Amounts)
Statements of Operations Data
Revenues:
Gaming equipment and systems $ 65 $ --- $ 10,575 $134,734 $109,597
Wall machines and amusement games --- --- 3,356 131,934 98,611
Route operations 102,830 106,854 109,938 127,028 148,507
Casino operations 20,159 25,134 48,509 51,450 60,657
------- ------- ------- ------- -------
123,054 131,988 172,378 445,146 417,372
Costs and expenses:
Cost of gaming equipment and systems 20 --- 7,213 84,496 61,684
Cost of wall machines and amusement
games --- --- 2,022 68,426 54,241
Cost of route operations 76,332 79,887 84,212 95,716 114,645
Cost of casino operations 14,955 14,231 22,046 22,269 25,930
Selling, general and administrative 23,334 28,649 31,640 109,474 102,096
Depreciation and amortization 9,530 9,520 10,988 22,606 22,838
Direct acquisition costs (3) --- 1,669 55,843 --- ---
Unusual items 6,351 2,293 5,498 700 (325)
------- ------- ------- ------- ------
130,522 136,249 219,462 403,687 381,109
------- ------- ------- ------- -------
Operating income (loss) (7,468) (4,261) (47,084) 41,459 36,263
Other income (expense)
Interest income 2,084 2,798 1,571 1,620 813
Interest expense (6,830) (8,133) (8,897) (23,626) (28,600)
Rainbow royalty (4) --- (810) (4,070) (4,722) (587)
Rainbow Royalty Buyout (4) --- --- --- --- (19,000)
Minority interest (506) (397) (963) (1,092) (2,002)
Other, net (167) 317 301 139 1,025
------ ---- ---- ----- ------
Income (loss) before income taxes (12,887) (10,486) (59,142) 13,778 (12,088)
Income tax provision (241) (265) (755) (7,993) (3,185)
Income (loss) before extraordinary item (13,128) (10,751) (59,897) 5,785 (15,273)
Extraordinary loss without tax benefit --- --- --- --- (42,033)
Net income (loss) (13,128) (10,751) (59,897) 5,785 (57,306)
Special stock dividends --- --- (362) (11,264) (3,551)
Premium on repurchase/redemption of
Series B Special Stock --- --- --- (710) (16,553)
Net loss applicable to common shares $(13,128) $(10,751) $(60,259) $(6,189) $(77,410)
Basic net loss per common share $ (1.28) $ (0.95) $ (4.64) $ (0.19) $ (2.42)
======== ======== ======== ======== ========
Other Data
Operating income (loss) before unusual
items and direct acquisition costs$ (1,117) $ (299) $ 14,257 $ 42,159 $35,938
ITEM 6. SELECTED FINANCIAL DATA (continued)
As of June 30, .
---------------------------------------
1994 1995 1996 1997(5) 1998
---- ---- ---- ------ ----
(In 000's)
Balance Sheet Data
Cash and cash equivalents and
securities available for sale $49,574 $37,414 $48,057 $28,924 $23,487
Working capital 50,926 31,476 111,009 110,795 119,480
Total assets 119,416 126,348 375,504 352,016 366,837
Total long term debt,
including current maturities 90,726 101,397 191,344 173,839 325,953
Series B Special Stock --- --- 51,552 58,981 ---
Total stockholders' equity (deficiency) 15,099 9,985 69,846 53,555 (23,748)
(1) The Company acquired the general partnership interest in the Rainbow Casino
Vicksburg Partnership, L.P. (RCVP) on March 29, 1995 and began consolidating the
results of RCVP on that date.
(2) The Company acquired BGII on June 18, 1996. Therefore the results of
operations for the year ended June 30, 1996 include the results of operations of
BGII for the last twelve days of that fiscal year. See note 2 to the
Consolidated Financial Statements.
(3)Includes non-cash accounting loss on debenture conversion of $30.1 million in
fiscal year 1996 as a result of the conversion of the Company's Convertible
Debentures into equity securities.
(4) Represents royalty fee related to the HFS financing at the Rainbow
Casino. The Company repurchased this royalty obligation from HFS on August 12,
1997.
(5) See discussion of refinancing transaction completed in August 1997
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital
Resources In August 1997 the Company completed a series of related transactions
as described below (the "Refinancing") which consisted of the private placement
of $150.0 million of Senior Subordinated Notes and the closing of $230.0 million
of bank financing. The bank financing provides for (i) term loans in the
aggregate amount of up to $140.0 million, comprised of a $75.0 million tranche
with a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with
an 8-year term (the "Tranche C Term Loan") and a $25.0 million tranche with a 7
1/2-year term (the "Delayed Draw Term Facility," and together with the Tranche B
Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a
$90.0 million revolving credit facility with a 6-year term (the "Revolving
Credit Facility"). The borrowing base for the revolving credit facility consists
of eligible receivables and inventory, as defined in the credit agreement and at
June 30, 1998 totaled $72.1 million.
As part of the Refinancing, the Company used the proceeds of the Senior
Subordinated Note offering, together with borrowings under the Revolving Credit
Facility and the Term Loan Facilities and cash on hand, to fund (a) the
repurchase at a premium of substantially all of the Company's 12 7/8% Notes,
plus accrued interest to August 8, 1997 totaling $183.7 million, (b) the
redemption at liquidation value of all of the Company's Series B Preferred Stock
on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming
Corporation of the right to receive royalty payments based on revenues of the
Rainbow Casino and the purchase of related debt owed to an HFS affiliate,
National Gaming Mississippi, Inc. on August 12, 1998 totaling $26.3 million and
(d) the payment of transaction fees and expenses totaling $16.5 million.
Additionally, in July 1997 the Company redeemed the remaining balance of its 7
1/2 Convertible Debentures at a price of 104, or a total of $1.7 million.
On a pro forma basis for the year ended June 30, 1998, assuming the
Refinancing had occurred on July 1, 1997, the Company would have reported net
income available to common shares of $0.8 million and net income per share of
$0.02 or a $2.44 improvement over the reported net loss per share of $2.42. In
conjunction with the Refinancing, the Company incurred charges of approximately
$77.6 million, including the $27.7 million premium on the repurchase of the 12
7/8% Notes, $16.6 million for the difference between the carrying value and the
liquidation value of the Series B Preferred Stock and $19.0 million for the
Rainbow Casino royalty buyout. On an ongoing basis the Company will continue to
be highly leveraged and will have significant interest costs; however, in the
near term the Company will have lower overall fixed costs and only limited
principal payments required on its long-term indebtedness.
At June 30, 1998, the Company had $23.5 million in cash and cash equivalents and
$37.1 million in unborrowed availability on its revolving lines of credit in
accordance with borrowing base limitations in the credit agreement.
In addition the Company had working capital of approximately $119.5 million,
an increase of approximately $8.7 million from June 30, 1997 which is explained
below. Consolidated cash and cash equivalents at June 30, 1998 includes
approximately $14.4 million of cash which is utilized in Casino and Route
Operations which is held in vaults, cages or change banks.
The Credit Agreement for the bank financing has both financial and operational
covenants. On August 31, 1998, the Company obtained a consent from its bank
group which cured a technical default under the Credit Agreement related to the
transfer of assets from a non-domestic subsidiary to a domestic subsidiary
related to the formation of a wholly-owned subsidiary, Bally Gaming Africa Pty.
Ltd., as well as a consent to a change in the definition of Restricted Payments
to allow for an unrestricted amount of up to $7.0 million of Restricted Payments
(as defined in the Credit Agreement). As of June 30, 1998 the Company is in
compliance with these covenants. The Company is also in compliance with the
operational covenants contained in the indenture for the Senior Subordinated
Notes.
Management believes that cash flow from operating activities, cash and cash
equivalents held and the $90.0 million Revolving Credit Facility, as limited by
the borrowing base, will provide the Company with sufficient capital resources
and liquidity. At June 30, 1998, the Company did not have any significant
commitments for capital expenditures.
Working Capital
The following table presents the components of consolidated working capital
at June 30, 1997 and 1998:
Balances at June 30,
1997 1998 Change
(In $000's)
Cash and cash equivalents $28,924 $23,487 $(5,437)
Accounts and notes receivable, net 87,701 93,459 5,758
Inventories, net 37,329 42,418 5,089
Other current assets 9,627 11,711 2,084
Total current assets 163,581 171,075 7,494
Accounts payable 14,270 10,477 3,793
Accrued liabilities 37,392 39,122 (1,730)
Current maturities of long-term debt 1,124 1,996 (872)
Total current liabilities 52,786 51,595 1,191
Net working capital $110,795 $119,480 $8,685
======== ======== ======
The primary fluctuations contributing to the increase in working capital
were: (i) reductions in accounts payable based on timing of payments, (ii) a net
increase in accounts receivable resulting from the reversal of the provision for
doubtful receivables related to the Alpha Hospitality obligation discussed
below, partially offset by decreases in accounts receivable due to cash
collections and lower revenues, (iii) an increase in inventory due to new
product sales expected in the first quarter o fiscal year 1999, (iv) an increase
in prepaid assets due to higher prepaid gaming taxes and insurance, (v) an
increase in accrued liabilities due to higher accrued interest payable, (vi) the
impact of foreign exchange fluctuations between the dollar and the deutschemark
on all working capital categories, and (vii) the corresponding impact of the
above listed items on cash and cash equivalents.
Cash Flow
During the year ended June 30, 1998, the Company used $8.7 million of
cash in operating activities resulting from a net loss less an extraordinary
loss and depreciation and amortization, offset by an increase in inventories
primarily at Bally Gaming and Systems, increases in prepaid taxes and insurance,
and a net reduction in accounts payable and accrued expenses and a net increase
in accounts receivable.
During the year ended June 30, 1998, the Company used $25.1 million of cash in
investing activities primarily resulting from $15.5 million in capital
expenditures and cash payments made related to taking over the contracts of
locations operated by several mid-sized route operators.
During the year ended June 30, 1998, $28.5 million was provided by financing
activities. The refinancing transaction provided proceeds of $303.7 million, of
which $175.8 million was used to repay outstanding debt, $77.6 million was used
to repurchase the Series B Special Stock, and $44.2 million was used to pay
other transaction fees and expenses. Additionally, during the year ended June
30, 1998, the Company had a net increase in borrowings on its credit line of
$25.4 million.
The Company believes that the analysis of EBITDA is a useful adjunct to net
income, cash flow and other GAAP measurements. However, this information should
not be construed as an alternative to net income or any other GAAP measure of
performance as an indicator of the Company's performance or to GAAP-defined cash
flows generated by operating, investing and financing activities as an indicator
of cash flows or a measure of liquidity.
Customer Financing Management believes that customer financing terms and
leasing have become an increasingly important competitive factor for the Bally
Gaming and Systems and Wall Machine and Amusement Games business units,
respectively. Competitive conditions sometimes require Bally Gaming and Systems
to grant extended payment terms on gaming machines, systems and other gaming
equipment, especially for sales in emerging markets. While these financings are
normally collateralized by such equipment, the resale valu of the collateral in
the event of default may be less than the amount financed. 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. Bally Wulff provides customer financing for
approximately 15% of its sales and also provides lease financing to its
customers. Lease terms are generally for six months, but are also available for
12 and 43 month terms.
Year 2000
The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information on and beyond January 1, 2000. The result could create errors in
information or system failures. Assessments of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
has and is continuing to actively analyze, assess and plan for various Year 2000
issues across its businesses.
The Year 2000 issue has an impact on both information technology ("IT") systems
and non-IT systems, such as its manufacturing systems and physical facilities
including, but not limited to, security systems and utilities. Although
management believes that a majority of the Company's IT systems are Year 2000
ready, such systems still have to be tested for Year 2000 readiness. The Company
plans to replace or upgrade those systems that are identified as non-Year 2000
ready during calendar 1999. Certain IT systems previously identified as non-Year
2000 compliant are being upgraded or replaced which should be complete by June
30, 1999. Non-IT system issues are more difficult to identify and resolve. The
Company is actively identifying non-IT Year 2000 issues concerning its products
and services, as well as its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Management is in the process of engaging
outside consultants to assist and advise management in this assessment process.
Although management believes that its efforts will be successful and the costs
will be immaterial to its consolidated financial position and results of
operations, it also recognizes that any failure or delay could cause a
disruption in its business and have a significant financial impact. To minimize
this potential impact, the Company is actively planning and designing a
contingency plan to support critical business processes.
The Company has also initiated efforts to ensure the Year 2000 readiness of its
products and services. The Company is actively evaluating its strategy and legal
obligations for any communication to its customers. As part of its assessment of
current products and services, the Company is currently upgrading all Bally
Systems SDS customers to version 7.0 software, for which the Company has
developed a year 2000 compliance "patch" which is currently being distributed.
The Company plans to have all customers upgraded to version 7.0 by December
1998, and have the patch installed by July 1999. The Company is currently
shipping version 7.1 of the software, which is also year 2000 compliant.
Customers are also being advised that the IBM or Unix operating systems they are
using must also be upgraded to versions that are year 2000 compliant. Bally
Systems has obtained the operating system upgrades from the vendors and has
offered to assist users in installing the upgrade. The Company has also tested
most of the products manufactured in the United states and Germany in recent
years to determine compliance with Year 2000 and plans to advise customers what,
if any, non-compliance issues exist before December 31, 1998.
Based upon the results of research and investigation, management will formulate
further plans as necessary. The Year 2000 readiness of its customers varies, and
the Company is encouraging its customers to evaluate and prepare their own
systems. These efforts by customers to address Year 2000 issues may affect the
demand for certain products and services; however, the impact to the revenue or
any change in revenue patterns is highly uncertain.
The Company has also initiated efforts to assess the Year 2000 readiness of its
key suppliers and business partners. The Company's direction in this effort is
to ensure the adequacy of resources and supplies to minimize any potential
business interruptions. Management plans to complete this part of its Year 2000
readiness plan in the earlier part of calendar 1999. As part of the Company's
contingency plans, management will begin to identify and solidify relationships
with and access to alternative suppliers and resources to ensure the support and
continuation of its critical business operations.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact the Company, such as public utility failures, potential claims
against it for damages arising from products and services that are not Year 2000
compliant, and the response ability of certain government and gaming commissions
of the various jurisdictions where the Company conducts business. While the
Company continues to believe the Year 2000 issues described above will not
materially affect its consolidated financial position or results of operations,
it remains uncertain as to what extent, if any, the Company may be impacted.
Results of Operations
The following table presents the Company's revenues, earnings before interest,
taxes, depreciation and amortization ("EBITDA") and operating income by business
unit:
Years Ended June 30,
1996(a) 1997 1998
(In $000's)
Revenues by business unit:
Bally Gaming and Systems $132,329 $134,734 $109,597
Wall Machines and Amusement Games 107,094 131,934 98,611
Route Operations 109,938 127,028 148,507
Casino Operations 48,509 51,450 60,657
Total Revenues $397,870 $445,146 $417,372
EBITDA by business unit:
Bally Gaming and Systems $15,716 $16,671 $10,808
Wall Machines and Amusement Games 13,376 29,719 18,661
Route Operations 16,691 20,200 24,577
Casino Operations 15,107 17,352 20,781
Corporate expenses (17,108) (19,177) (16,051)
Unusual item (8,827) (700) 325
Total EBITDA $34,955 $64,065 $59,101
Operating income by business unit:
Bally Gaming and Systems $13,836 $10,616 $ 5,238
Wall Machines and Amusement Games 7,628 23,332 13,094
Route Operations 9,268 13,082 16,432
Casino Operations 13,041 15,407 18,736
Corporate expenses (19,759) (20,278) (17,562)
Unusual items (8,827) (700) 325
Total Operating Income $15,187 $41,459 $36,263
(a) To enhance the comparability, the operating results for 1996 are presented
on a pro forma basis assuming the BGII acquisition had occurred prior to the
start of the 1996 year. The acquisition of BGII actually occurred on June 18,
1996.
1998 Compared with 1997
Bally Gaming and Systems
For the year ended June 30, 1998, Bally Gaming and Systems reported revenues of
$109.6 million, a decrease of 19%, compared to revenues of $134.7 million in the
prior year. The decrease is due primarily to a 26% decrease in shipments of new
gaming machines to approximately 13,400 units compared to shipments of
approximately 18,200 in the prior year. The volume decline resulted primarily
from customers delaying purchase until the upgraded products were made available
in March 1998 and a lower number of new casino openings compared to the prior
year. By market segment, Bally Gaming's unit sales for the current year
consisted of approximately 3,300 units to the Nevada and Atlantic City markets,
6,600 units to international markets and 3,500 units to riverboats, Native
American and other domestic markets. Bally Gaming reported revenues from the
sale of new gaming machines of $68.9 million, a decrease of 29%, compared to
$96.7 million in the prior year due to lower unit volume and a 3% decrease in
the average selling prices of new machines due to a higher percentage of
international sales which tend to be lower priced. Bally Systems reported
revenues of $22.0 million, a decrease of 1%, compared to revenues of $22.3
million in the prior year period. Bally Systems revenues resulted primarily from
shipments to new installations such as Casino Windsor, John Ascuaga's Nugget,
Flamingo Hilton- Laughlin and Harrah's Cherokee Smokey Mountain.
For the year ended June 30, 1998, gross profit margins improved to 44% from 37%
in the prior year period. The gross margin improvement resulted primarily from a
greater proportion of higher margin Systems sales and lower provisions for
inventory obsolescence in the current year period. Bally Gaming and Systems
reported operating income of $5.2 million, a decrease of 51%, compared to
operating income of $10.6 million in the prior year period. The operating income
decrease resulted primarily from lower revenues and higher selling, general and
administrative expenses, principally a $6.0 million increase in research and
development, partially offset by the gross margin improvement.
Wall Machines and Amusement Games
For the year ended June 30, 1998, Wall Machines and Amusement Games reported
revenues of $98.6 million, a decrease of 25%, compared to revenues of $131.9
million in the prior year. The decrease in revenues resulted primarily from a
24% decrease in shipments of new wall machine units, a 18% decrease in average
selling price of new machines and a 13% decrease in amusement game revenues,
partially offset by a 29% increase in leased wall machine revenues. The prior
year period was favorably affected by a change in German regulations effective
January 1, 1997, requiring all wall machines to have internal meters to track
play. The currency translation impact of the fluctuation of the German mark
versus the U.S. dollar reduced revenues by $12.2 million during the current
year.
The Wall Machines and Amusement Games business unit continued to expand its
leasing program whereby new wall machines are leased to customers pursuant to
operating leases which provide a stream of revenues and cash flows over the term
of the leases which range from six months to three and one half years. As of
June 30, 1998, a total of 5,700 wall machines were deployed in the leasing
program compared to 4,800 at June 30, 1997, an increase of 21%.
For the year ended June 30, 1998, gross profit margin decreased to 45% from
48% in the prior year. The gross margin decrease resulted primarily from the
unfavorable impact of lower production volume at the Wall Machines and Amusement
Games' production facility and an 18% decrease in average selling price for new
wall machines, partially offset by an increase in higher margin lease revenue.
Wall Machines and Amusement Games reported operating income of $13.1 million, a
decrease of 44%, compared to $23.3 million in the prior year period. The
decrease in operating income resulted primarily from the aforementioned decrease
in revenues and gross margins, partially offset by a decrease in selling,
general and administrative expenses, principally lower marketing costs, a lower
provision for doubtful receivables and lower depreciation expense.
Route Operations
For the year ended June 30, 1998, the Route Operations business unit reported
total revenues of approximately $148.5 million, an increase of 17%, compared to
revenues of $127.0 million in the prior year. Revenues from Nevada route
operations increased to approximately $127.4 million or 18% over the prior year.
This improvement was attributable to an increase in the average net win per
gaming machine per day of 3% to $53.70 from $52.40 in the prior year and an
increase in the weighted average number of gaming machines during the current
year of 14% to 6,460 units as compared to 5,660 units in the prior year.
Gamblers' Bonus, a cardless slot players club and player tracking system,
continued to have a favorable impact on the net win per day. As of June 30,
1998, the Gamblers' Bonus product was installed in over 2,000 gaming machines at
approximately 180 locations statewide or 30% of its installed base of gaming
machines. Revenues from route operations in Louisiana improved to $21.1 million,
an increase of 12% compared to the prior year. This increase was the result
primarily of an improvement in the net win per gaming machine per day of 4% to
$77.40 from $74.10 in the prior year and a 7% increase in the average number of
machines to 750 from 700 in the prior year.
For the year ended June 30, 1998, cost of revenues for Route Operations totaled
$114.6 million, an increase of 20% compared to costs of $95.7 million in the
prior year. As a percentage of revenues, costs of revenues increased to 77% from
75% in the prior year. Cost of revenues for Nevada route operations increased,
as a percent of related revenues, to 79% from 77% in the prior year. The
increase was due primarily to lower margins on new and renewed locations (due to
competitive pressures) and higher payroll benefit costs coupled with an increase
in direct labor costs associated with the recent contracts taken over from other
route operators. Costs of revenues for route operations in Louisiana, as a
percent of related revenues, remained relatively flat at 64% between periods as
the increase in costs were in line with the increase in revenues. Cost of route
revenues for Route Operations includes rents under both space lease and revenue
sharing arrangements, gaming taxes and direct labor including payroll taxes and
benefits.
For the fiscal year ended June 30, 1998, the Route Operations business unit
reported operating income of $16.4 million, an increase of 26% compared to
operating income of $13.1 million in the prior year. The operating income
improvement resulted from the aforementioned increase in revenues, an
improvement in selling, general, and administrative expenses as a percentage of
revenues, and a lower provision for doubtful receivables for the Nevada route
operations, partially offset by the aforementioned increase in operating costs
as a percentage of revenues and an increase in depreciation as the result of the
increased number of gaming machines deployed.
Casino Operations
For the year ended June 30, 1998, the Casino Operations business unit reported
revenues of $60.7 million, an increase of 18%, compared to revenues of $51.5
million in the prior year. This improvement is due to a 19% increase in revenues
at the Rainbow Casino and a 14% increase in revenues at the Rail City Casino.
The improvement at the Rainbow Casino was attributable to an increase in the
average gaming machine net win per day of 14% to $150 from $131 in the prior
year. The improvement at the Rail City Casino was attributable to the enhanced
marketing programs including the new Rail City Casino Players Club which led to
an increase in the average gaming machine net win per day of 23% to $60 from $49
in the prior year.
For the year ended June 30, 1998, the cost of revenues for Casino Operations
increased 16% to $25.9 million compared to $22.3 million in the prior year. As a
percentage of revenues, the costs of revenues remained relatively flat at 43%
for both periods. As a percent of related revenues, cost of revenues for the
Rainbow Casino remained relatively flat at 37% between periods as the increase
in costs were in line with the increase in revenues.. Cost of revenues for the
Rail City Casino, as a percent of related revenues, improved to 62% from 64% in
the prior year due primarily to the achievement of higher revenues without a
corresponding increase in direct gaming costs. Cost of casino revenues includes
cost of goods sold, gaming taxes, rent and direct labor including payroll taxes
and benefits.
For the year ended June 30, 1998, the Casino Operations business unit reported
operating income of $18.7 million, an increase of 22%, compared to operating
income of $15.4 million in the prior year. The operating income improvement is
due primarily to the aforementioned increase in revenues while both operating
costs and selling, general and administrative costs, as percentages of revenues,
remained flat between periods.
Unusual Items
During the year ended June 30, 1998, the Company recorded the following unusual
items:
(1) The Company settled a dispute with Alpha Hospitality and General Electric
Credit Corporation concerning certain customer notes receivable on which the
Company had certain recourse obligations. The Company contributed $2.5 million
to the final settlement with the holder of the notes, and reversed $6.0 million
of reserves previously established for these recourse obligations. In addition,
as part of the settlement the Company became the sole owner of approximately
566,000 shares of Alpha Hospitality common stock which trades on the NASDAQ
Small Cap market. Pursuant to the limitations provided for in the settlement
agreement, the Company has sold 235,000 shares of Alpha Hospitality through June
30, 1998.
(2) As a result of settling a dispute over the exclusive use of certain
technologies and changes in gaming regulations, the Company evaluated the cash
flow of certain of its technology assets, in accordance with the provisions of
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," and
determined certain items met the definition of having become impaired. During
the year ended June 30, 1998 the Company recorded write-downs totaling $2.8
million for these items.
(3) The Company accrued $0.7 million for the present value of contractual
payments due to a former member of the board of directors who was not re-elected
to the board at the December 1997 annual shareholders meeting.
(4) The Company accrued $0.6 million as restructuring charges for Bally Gaming
and Systems.
(5) The Company recorded a $1.6 million charge for final settlement of
litigation related to the acquisition of BGII.
During the year ended June 30, 1997, the Company incurred $0.7 million in
unusual items related primarily to separation costs of Alliance personnel
subsequent to the BGII acquisition.
Consolidated
Total revenues for the year ended June 30, 1998 were approximately $417.4
million, a decrease of 6% compared to revenues of $445.1 million in the prior
year. The decrease is primarily due to the decreases in revenues at the Bally
Gaming and System and Wall Machines and Amusement Games business units,
partially offset by the increases in revenues at the Route Operations and Casino
Operations business units.
Cost of revenues for the year ended June 30, 1998 was approximately $256.5
million, a decrease of 5% compared to costs of $270.9 million in the prior year.
This decrease is due to the decreases in costs at the Bally Gaming and System
and Wall Machines and Amusement Games business units, partially offset by
increases in costs at the Route Operations and Casino Operations business units.
Cost of revenues as a percentage of total revenues increased slightly to 62%
from 61% in the prior year period.
Selling, general and administrative expenses for the year ended June 30, 1998
were approximately $86.3 million, a decrease of 13% compared to costs of $99.5
million in the prior year. This decrease is due to the decreases in expenses at
the Bally Gaming and Systems, Wall Machines and Amusement Games and Route
Operations business units, a decrease in corporate administrative costs,
principally lower payroll and related expenses, and a lower provision for
doubtful receivables, partially offset by an increas in expenses at the Casino
Operations business unit.
Research and development costs for the year ended June 30, 1998 were
approximately $15.8 million, an increase of 59% compared to costs of $10.0
million in the prior year. This increase is due to an increase in costs at the
Bally Gaming and Systems business unit to develop and support a greater number
of products, partially offset by a decrease in costs at the Wall Machines and
Amusement Games business unit.
Depreciation and amortization for the year ended June 30, 1998 was $22.8
million, an increase of 1% compared to depreciation and amortization of $22.6
million in the prior fiscal year. This increase is due primarily to an increase
in amortization of deferred financing costs and an increase in depreciation
related to the growth in the number of gaming machines deployed for the Route
Operations, partially offset by a decrease at the Wall Machines and Amusement
Games business unit.
As a result of the refinancing transaction, the Company recorded an
extraordinary loss of $42.0 million, which included $27.7 million for the
premium on the 12 7/8% Senior Notes, $5.0 million in transaction fees and
expenses, and $9.3 million for the write-off of deferred financing costs. The
Company also recorded a $19.0 million charge for the cost of the Rainbow Royalty
Buyout. Additionally, the Company recorded a $16.6 million charge to equity and
a corresponding increase in the net loss applicable to common shares for the
difference between the carrying value and the liquidation value of the Series B
Special Stock, all of which was redeemed on September 8, 1997 at the liquidation
price of $100 per share, plus accrued dividends.
Interest Income and Expense and Income Taxes
Net interest expense in the year ended June 30, 1998, increased to $27.8
million, an increase of 26% compared to the net interest expense of $22.0
million in the prior year. The increase is primarily due to a higher level of
debt resulting from the Company's new 10% Senior Subordinated Notes due 2007 and
the Term Loan Facilities and revolving credit facility which replaced the
Company's 12 7/8% Senior Secured Notes and the 15% Series B Special Stock as
part of the refinancing of the Company's capital structure completed in
September 1997, resulting in substantially lower overall fixed charges.
The Company recorded an income tax provision of $3.2 million in the year ended
June 30, 1998, compared to a provision of $8.0 million in the prior year. The
current year provision is due primarily to income taxes for the Wall Machines
and Amusement Games business unit and domestic state income taxes. At June 30,
1998, the Company has net operating loss carry forwards for federal income tax
purposes of approximately $44.2 million which are available to offset future
federal taxable income, if any, expiring in the years 2007 through 2013. At June
30, 1998 the Company has foreign tax credit carry forwards of approximately
$12.8 million and alternative minimum tax credit (AMT) carry forwards of
approximately $1.7 million. Foreign tax credits are available to offset future
taxes due in the U.S. on future foreign taxable income and expire between 1999
and 2003 unless utilized prior to such time. AMT credits are available to be
carried forward indefinitely and may be utilized against regular U.S. corporate
tax to the extent it does not exceed computed AMT calculations. In addition,
approximately $21.3 million of the net operating loss carryforwards are limited
to annual utilization of $4.7 million per year subject to certain carryover
provisions pursuant to Section 382 of the Internal Revenue Code.
1997 Compared with 1996
General
To enhance the comparability for the following discussion of the results of
operations, the operating results for 1996 are presented on a pro forma basis
assuming the BGII acquisition had occurred prior to the start of the 1996 year.
The acquisition of BGII actually occurred on June 18, 1996.
Bally Gaming and Systems
For the year ended June 30, 1997, Bally Gaming and Systems reported revenues of
$134.7 million, an increase of 2%, compared to revenues of $132.3 million in the
prior year. Bally Gaming and Systems reported shipments of approximately 18,200
new gaming machines, an increase of 1% compared to shipments of approximately
18,000 in the prior year. The volume improvement resulted primarily from a
general increase in replacement demand from existing casinos offset by a lower
number of new casino openings in the year ended June 30, 1997. By market
segment, Bally Gaming's unit sales for the current year consisted of
approximately 8,300 units to the Nevada and Atlantic City markets, 7,600 units
to international markets and 2,300 units to riverboats, Native American and
other domestic markets. Bally Gaming and Systems reported revenues from the sale
of new gaming machines of $96.7 million, an increase of 6%, compared to $91.3
million in the prior year due to higher unit volume and higher average selling
prices of ne machines. Bally Systems reported revenues of $22.3 million, an
increase of 22%, compared to revenues of $18.2 million in the prior year period.
Bally Systems revenue improvement resulted primarily from increased shipments to
new installations such as New York-New York, Casino Niagara, Casino Rama, and
the Harrah's Riverboat and Players Island Casinos in St. Louis.
For the year ended June 30, 1997, gross profit margins improved to 37% from 35%
in the prior year period. The gross margin improvement resulted primarily from a
higher average sales price for new machines and the impact of higher Bally
Systems sales. Bally Gaming and Systems reported operating income of $10.6
million, a decrease of 23%, compared to operating income of $13.8 million in the
prior year period. The operating income decrease resulted primarily from greater
selling, general and administrative expenses (including higher research and
development costs) and the impact of greater depreciation expense from
amortizing goodwill and other intangibles as a result of the BGII acquisition,
partially offset by the aforementioned revenue and gross margin increases.
Wall Machines and Amusement Games
For the year ended June 30, 1997, Wall Machines and Amusement Games reported
revenues of $131.9 million, an increase of 23%, compared to revenues of $107.1
million in the prior year. The revenue improvement resulted primarily from an
87% increase in new wall machine units sold as Wall Machines and Amusement Games
expanded its market share due to popularity of its product offerings and, to a
lesser extent, demand increased as a result of a change in German regulations
effective January 1, 1997, requiring all wall machines to have internal meters
to track play. In addition, Wall Machines and Amusement Games enhanced its
leasing program whereby new wall machines are leased to customers pursuant to
operating leases which provide a stream of revenues and cash flows over the term
of the leases which range from six months to three and one half years. For the
year ended June 30, 1997, Wall Machines and Amusement Games leased approximately
4,000 new wall machines, which is a 300% increase from the prior year period.
Revenues were unfavorably impacted by a decrease in amusement game sales as
operators weighted their mix of capital expenditures toward new wall machines.
The currency translation impact of the fluctuation of the German mark versus the
U.S. dollar reduced revenues by $12.2 million during the current year.
For the year ended June 30, 1997, gross profit margin improved to 48% from 39%
in the prior year. The gross margin improvement resulted primarily from the
favorable impact of greater production volume in Wall Machines and Amusement
Games' production facility. Wall Machines and Amusement Games reported operating
income of $23.3 million, an increase of 207%, compared to $7.6 million in the
prior year period. The operating income improvement resulted primarily from the
aforementioned revenue and gross margin increases, partially offset by an
increased provision for doubtful receivables as well as higher selling, general
and administrative expenses due to increased marketing costs.
Route Operations
For the year ended June 30, 1997, the Route Operations business unit reported
total revenues of approximately $127.0 million, an increase of 16%, compared to
revenues of $109.9 million in the prior year. Revenues from Nevada route
operations increased approximately $15.0 million (16%) over the prior year. This
increase was attributable to an increase in the average net win per gaming
machine per day of 8% to $52.40 from $48.60 in the prior year and an increase in
the weighted average number of gaming machines during the current year of 7% to
5,660 units as compared to 5,290 units in the prior year. Gamblers' Bonus, a
cardless club and player tracking system launched in December 1995, had a
favorable impact on the net win per day. As of June 30, 1997, the Gamblers'
Bonus product was installed in approximately 1,500 gaming machines at 130
locations statewide. Revenues from route operations in Louisiana increased $2.0
million (12%) primarily as a result of an improvement in the net win per gaming
machin per day of 8% to $74.10 from $68.50 in the prior year and a 3% increase
in the average number of machines to 700 from 680 in the prior year.
For the year ended June 30, 1997, cost of revenues for Route Operations totaled
$95.7 million, an increase of $11.5 million (14%) compared to the prior year. As
a percentage of revenues, costs of revenues improved to 75.4% from 76.6% in the
prior year. Cost of revenues for Nevada route operations increased 14% as
compared to the prior year, but, as a percent of related revenues, improved to
77.3% from 79.0% in the prior year due primarily to higher revenues while costs
associated with new and renewed contracts remained relatively flat. Costs of
revenues for route operations in Louisiana increased 13% primarily as a result
of the increase in revenues. As a percent of related revenues, cost of revenues
for route operations in Louisiana increased to 64.2% from 63.3% in the prior
primarily due to a slight increase in the percentage of revenues paid to the
Fairgrounds Racetrack. Cost of route revenues for Route Operations includes
rents under both space lease and revenue sharing arrangements, gaming taxes and
direct labor, including payroll taxes and benefits.
In the year ended June 30, 1996, Nevada route operations incurred unusual items
totaling $2.1 million. Reserves were increased by $1.4 million for certain parts
inventories which became obsolete and were subsequently disposed of due to the
impact of recent technological changes to gaming devices being deployed as a
result of the new Gambler's Bonus product. In addition an accrual of $0.7
million was established to reserve for the present value of the future lease
payments for one small casino location for which cash flows received under the
participation agreement are currently inadequate to service the building lease
paid by the Company.
For the fiscal year ended June 30, 1997, the Route Operations business unit
reported operating income of $13.1 million, an increase of 41% compared to
operating income of $9.3 million in the prior year. The operating income
improvement resulted from the aforementioned increase in revenues and the
improvement in operating costs as a percentage of revenues and the lack of
unusual items in the current year, partially offset by an increase in selling,
general, and administration expenses, primarily greater marketing costs at both
operations and an increased provision for doubtful receivables for the Nevada
route operations.
Casino Operations
For the year ended June 30, 1997, the Casino Operations business unit reported
revenues of $51.5 million, an increase of 13%, compared to revenues of $45.4
million in the prior year excluding revenues from closed casinos and taverns as
described below. This increase is due to a 17% increase at the Rainbow Casino
and a 2% increase at the Rail City Casino. The improvement at the Rainbow Casino
was attributable to the continuing impact of its direct marketing campaigns and
a higher average market share than in the prior year. Revenues during the
current year at the Rail City Casino were adversely impacted by severe weather
in the Reno area during the third quarter and an internal remodeling project,
which has now been completed.
For the year ended June 30, 1997, the cost of revenues for Casino Operations
increased 13% to $22.3 million compared to $19.8 million in the prior year
excluding cost of revenues from closed casinos and taverns. As a percentage of
revenues, the costs of revenues improved slightly to 43.3% compared to 43.6% in
the prior year. As a percent of related revenues, cost of revenues for the
Rainbow Casino increased to 37.1% from 36.4% in fiscal 1996 primarily due to
increased costs associated with taking over operations at the newly remodeled
restaurant. Cost of revenues for the Rail City Casino, as a percent of related
revenues, improved to 64.1% from 64.7% in the prior year due primarily to higher
revenues while direct costs remained relatively stable. Cost of casino revenues
includes cost of goods sold, gaming taxes, rent and direct labor including taxes
and benefits.
For the year ended June 30, 1997, the Casino Operations business unit reported
operating income of $15.4 million, an increase of 14%, compared to operating
income of $13.5 million in the prior year excluding operating from closed
casinos and taverns. The operating income improvement resulted from the
aforementioned increase in revenues and reduced operating costs as a percentage
of revenues, partially offset by an increase in selling, general and
administrative costs, principally due to increased marketin efforts at both
locations. The Rainbow Casino royalty fees paid to HFS during the fiscal year
ended June 30, 1997 totaled $4.7 million.
Revenues and Expenses for Closed Casinos and Taverns
During the year ended June 30, 1996, the Company disposed of or terminated
operations at several small casinos and taverns as these operations were not
deemed to be compatible with the Company's long-term strategy. No revenues or
expenses were reported for these properties in the fiscal year ended June 30,
1997. For the fiscal year ended June 30, 1996, revenues for these properties are
included in Casino Operations revenues and totaled $3.1 million. The related
costs of revenues are included in cost of Casino Operations and totaled $2.3
million. The related selling, general and administrative expenses totaled $1.1
million.
Consolidated
The following discussion of the Company's consolidated results of operations for
the year ended June 30, 1997 is presented in comparison to the actual
consolidated results of operations for the prior year which include the results
of operations of the Bally Gaming and Systems and Wall Machines and Amusement
Games business units for only the last twelve days of the year ended June 30,
1996.
Total revenues for the year ended June 30, 1997 were approximately $445.1
million, an increase of $272.7 million (158%) over revenues of $172.4 in prior
year. This increase is primarily due to the incremental revenues of $252.7
million from Bally Gaming and Systems sales and Wall Machines and Amusement
Games sales, as well as the aforementioned increases in revenues at both the
Route Operations and Casino Operations business units.
Cost of revenues for the year ended June 30, 1997 were approximately $270.9, an
increase of $155.4 million (135%) compared to $115.5 in prior year. This
increase is due to the incremental cost of revenues of $143.7 million and from
Bally Gaming and Systems sales and Wall Machines and Amusement Games sales, as
well as the aforementioned increases in cost of revenues at both the Route
Operations and Casino Operations business units.
Selling, general and administrative expenses for the year ended June 30, 1997
were approximately $99.5 million, an increase of $68.2 million (218%) compared
to costs of $31.3 for the prior year. This increase is due to the impact of
including the Bally Gaming and Systems and the Wall Machines and Amusement Games
business units expenses for the entire year and higher legal and professional
fees in the current year, partially offset by cost savings such as elimination
of certain duplicative costs.
Research and development costs for the year ended June 30, 1997 were $10.0
million, an increase of $9.6 million from the prior year. The increase was due
to the impact of including the research and development costs of the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units for
the entire year.
Depreciation and amortization for the fiscal year ended June 30, 1997 was $22.6
million, an increase of 105% compared to depreciation and amortization of $11.0
million in the prior fiscal year. This increase is due to the inclusion of Bally
Gaming and Systems and Wall Machine and Amusement Game depreciation and
amortization in the entire fiscal year, higher depreciation and amortization in
the Route Operations business unit and the impact of amortizing goodwill and
other intangibles resulting from the BGI acquisition.
During the year ended June 30, 1996, the Company expensed direct acquisition
costs related to the acquisition of BGII, totaling $55.8 million. Such costs
included the $30.1 million non-cash, accounting loss on the debenture conversion
portion of the financing for the acquisition, plus legal, accounting, financial
advisory, printer, SEC filing fees and other related expenses.
During the year ended June 30, 1997, the Company incurred $0.7 million in
unusual items related primarily to separation costs of Alliance personnel
subsequent to the BGII acquisition. During the year ended June 30, 1996, the
Company incurred $5.5 million in unusual items including a provision of $3.4
million to fully reserve the net book value of assets that the Company deemed
impaired and the aforementioned unusual items at its Route Operations business
unit of $2.1 million.
Interest Income and Expense and Income Taxes
Net interest expense in the year ended June 30, 1997, increased to $22.0
million, an increase of 201% compared to the net interest expense of $7.3
million in the prior year. The increase is due primarily to interest on the
Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June 1996,
partially offset by lower interest expense on the Company's 7 1/2% Convertible
Debentures due 2003, substantially all of which were converted into equity as
part of the financing of the BGII acquisition.
The Company recorded an income tax provision of $8.0 million in the year ended
June 30, 1997, compared to a provision of $0.8 million in the prior year. The
current year provision is due primarily to income taxes at Wall Machines and
Amusement Games and domestic state income taxes. The effective tax rate is 58%,
which resulted from taxable income currently being generated in Germany, which
has a higher effective rate than in the U.S. At June 30, 1997, the Company has
net operating loss carry forwards for federal income tax purposes of
approximately $21.5 million which are available to offset future federal taxable
income, if any, expiring in the years 2007 through 2011. At June 30, 1997 the
Company has foreign tax credit carry forwards of approximately $11.8 million and
alternative minimum tax credit (AMT) carry forwards of approximately $1.5
million. Foreign tax credits are available to offset future taxes due in the
U.S. on future foreign taxable income and expire between 1998 and 2002 unless
utilized prior to such time. AMT credits are available to be carried forward
indefinitely and may be utilized against regular U.S. corporate tax to the
extent it does not exceed computed AMT calculations. In addition, the Company's
annual limitation with respect to net operating losses is limited pursuant to
Section 382 of the Internal Revenue Code.
Risk Factors
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The information contained in this Form 10-K and the Company's other filings with
the Securities Exchange Commission may contain "forward-looking" statements
within the meaning of section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1933, as amended, and is subject to the
safe harbor created thereby. Such information involves important risks and
uncertainties that could significantly affect results in the future and,
accordingly, such results may differ from those expressed in any forward looking
statements herein. Future operating results may be adversely affected as a
result of a number of factors. Set forth below are certain important factors
that could cause actual results to differ materially from those in such "looking
forward" statements.
High Leverage; Ability to Service Debt
After the completion of the Refinancing, the Company has a substantially
increased amount of indebtedness. As of June 30, 1998 the aggregate outstanding
principal amount of the Company's long-term indebtedness including current
maturities was $326.0 million. The Company also has available to it up to $37.1
million in unborrowed capacity under the Revolving Credit Facility. On a pro
forma basis after giving effect to the Refinancing (assuming the Refinancing
occurred June 30, 1997) and the use of proceed thereof, the Company's ratio of
earnings to fixed charges (excluding the imputed fixed charges for contingent
rental expense related to revenue-sharing agreements in its Route Operations of
approximately $23.0 million annually) would have been 1.1x for the year ended
June 30, 1998. The Company had a net capital deficiency at June 30, 1998 of
$23.7 million.
The Company's credit facility and indenture contain a number of significant
covenants that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, enter into
certain acquisitions, repurchase equity interests (as defined) or subordinated
indebtedness, issue or sell equity interests of the Company's subsidiaries (as
defined), engage in mergers or consolidations, or engage in certain transactions
with subsidiaries and affiliates and otherwise restrict corporate activities.
There can be no assurance that such restrictions will not adversely affect the
Company's ability to finance its future operations or capital needs or engage in
other business activities that may be in the interest of the Company. In
addition, the new credit facility also requires the Company to maintain
compliance with certain financial ratios. The ability of the Company to comply
with such ratios may be affected by events beyond the Company's control. A
breach of any of these covenants or the inability of the Company to comply with
the required financial ratios could result in a default under the new credit
facility. In the event of any such default, the lenders under the new credit
facility could elect to declare all borrowings outstanding under the new credit
facility, together with accrued interest and other fees, to be due and payable,
to require the Company to apply all of its available cash to repay such
borrowings or to prevent the Company from making debt service payments on the
Senior Subordinated Notes, any of which would be an event of default under the
Senior Subordinated Notes. If the Company were unable to repay any such
borrowings when due, the lenders could proceed against their collateral. If the
indebtedness under the new credit facility or the Notes were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay such indebtedness in full.
The Company's obligations to make principal and interest payments on outstanding
indebtedness, and to comply with the covenants in the Indenture and the
agreements governing borrowings under the new credit facility, will have several
important effects on its future operations including the following: (i) the
portion of the Company's cash flow from operations which will be dedicated to
the payment of principal and interest on its indebtedness will not be available
for other purposes; (ii) certain of the Company's borrowings are at variable
rates of interest, which could result in higher expense in the event of
increases in interest rates; (iii) the Company may be more vulnerable to
downturns in its business or in the general economy and may be restricted from
making acquisitions, introducing new technologies or exploiting business
opportunities; and (iv) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, general corporate or other
purposes may be impaired. Additionally, the Company's ability to meet its debt
service obligations and to reduce its total debt will be dependent upon the
Company's future performance, which will be subject to general economic and
regulatory conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control.
No assurance can be given that the Company will be able to generate the cash
flow necessary to permit the Company to meet its fixed charges and repayment
obligations. Any inability of the Company to service its fixed charges and
repayment obligations would have a significant adverse effect on the Company.
Operating History--Recent Losses
The Company incurred a net loss of $59.9 million (including $55.8 million of
costs related to the BGII acquisition) for the year ended June 30, 1996, net
income of $5.8 million for the year ended June 30, 1997 and a net loss of $57.3
million (including $61.0 million of costs related to the Refinancing) for the
fiscal year ended June 30, 1998. During the year ended June 30, 1998, the Bally
Gaming and Systems and Wall Machine and Amusement Games business units
experienced a decrease in revenues of 19% and 25%, respectively, which adversely
effected the Company's financial results from operations. There can be no
assurance that the Company will be profitable, and that there will not be
similar or other unusual or non-recurring charges, in the future.
Competition
Bally Gaming and Systems. The market for gaming machines is extremely
competitive, and there are a number of established, well-financed and well-known
companies producing machines that compete with each of Bally Gaming's product
lines in each of Bally Gaming's markets. The domestic market for gaming machines
is dominated by a single competitor, International Game Technology ("IGT"), with
a number of smaller competitors in the field. In addition, certain
technology-oriented companies have recently entere or may enter the gaming
machine market. Management believes that some of these competitors have greater
capital resources than the Company. Competition among gaming machine
manufacturers, particularly with respect to sales of gaming machines into new
and emerging markets, is based on competitive customer pricing and financing
terms, appeal to the player and quality of the product, and having an extensive
distribution and sales network. Sales to established casinos in Nevada normally
require completion of a successful trial period for the machines in the casino.
The competition for the computerized monitoring systems designed and sold by
Systems currently consists of IGT, Casino Data Systems and, to a lesser extent,
Acres Gaming, Inc., Gaming Systems International, Inc., Mikohn Gaming
Corporation and Logical Solutions International. Competition is keen in this
market due to the number of providers and the limited number of casinos and the
jurisdictions in which they operate. Pricing, product feature and function,
accuracy, and reliability are all main factors i determining a provider's
success in selling its system. Systems believes the future success of its
operations will be determined by its ability to bring new and innovative
products to the marketplace while at the same time maintaining the base of loyal
existing customers.
Wall Machines and Amusements Games. Germany's wall machine manufacturing
industry is dominated by Bally Wulff and two of its competitors. Management
believes these three entities collectively account for more than 95% of the
entire market for wall machines (which exists almost exclusively in Germany).
Bally Wulff's two major competitors have greater resources than the Company and
own and operate a significant number of arcades, which gives them a competitive
advantage arising from a built-in market for their games and the ability to test
market new games in their own arcades. In addition, wall machines compete for
floor space in arcades with token machines, which are not subject to the strict
German licensing requirements governing wall machines.
Route Operations. The competition for obtaining and renewing route contracts in
Nevada is high and continues to intensify. Such competition has, over time,
reduced the Company's gross profit margins for such operations. In addition,
such competition has required the Company to provide financial incentives to
retain or obtain certain route locations. Such incentives include long-term
lease commitments, guarantees of leases in favor of owners of local
establishments, substantial advance deposits, payments of lease rentals in
advance and loans for buildings and tenant-improvement costs. Although the
Company believes that it now has adequate procedures for evaluating and managing
such risks, historically substantial losses have been incurred in connection
with such transactions reflecting, in part, former management's willingness to
accept higher levels of risk to further its policy of emphasizing market share.
Notwithstanding the change in the Company's business strategy to one emphasizing
profitability rather than market share, the future success of the Company's
Route Operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although the Company has
historically generated sufficient new route contracts to offset the loss of old
route contracts, due to increased competition, the increased sophistication and
bargaining power of customers and possibly other factors not yet known, there
can be no assurance that the Company will be able to obtain new route contracts
or renew or extend its route contracts upon their expiration or termination, or
that, if renewed or extended, the terms will be favorable to the Company. In
Louisiana, the Company's Route Operations at the racetrack and OTBs compete with
various truck stops and locations with liquor licenses throughout the New
Orleans area, as well as riverboat gaming and one land-based casino which may
re-open in New Orleans.
Casino Operations. The operation of casinos is also a highly competitive
business. The principal competitive factors in the industry include the quality
and location of the facility, the nature and quality of the amenities and
customer services offered and the implementation and success of marketing
programs. In Sparks, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market. The Company's
Rainbow Casino in Vicksburg, Mississippi faces intense direct competition from
other gaming facilities serving this market. Competition from casinos in nearby
locations may also be reducing the market area from which Vicksburg casinos draw
most of their patrons. Moreover, additional potential gaming sites remain in and
around Vicksburg and Sparks; some of these sites may be closer to larger
population centers and, if developed, might enjoy a competitive advantage over
the Company's casinos. In August 1997 it was announced the Lady Luck Gaming
Corporation and Horseshoe Gaming, LLC were going to form a joint venture to
develop a project that would include a dockside casino, hotel and related
amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel and
auto racing complex on the Big Black River which is between Vicksburg and
Jackson, Mississippi. The legality of that site for gaming is currently in
litigation. At this time management does not know which, if any, of these sites
will be developed. Both of these projects will be contingent on several factors
including regulatory approval and financing.
Product Development
The future success of the Company depends to a large extent upon its ability to
design, manufacture and market technologically sophisticated products that
achieve high levels of player acceptance. The development of a successful new
product or product design by a competitor could adversely affect sales of the
Company's products and force it to attempt to respond quickly with its own
competing products. Response speed is lower in jurisdictions requiring product
approvals prior to commercialization. The Company's plans with respect to the
introduction of more sophisticated technology into the electronic gaming machine
market are designed to lead to an increase in market share and profitability for
the Company. However, there is no assurance that any such products will be
developed, or that if developed they will receive necessary regulatory approvals
or be commercially successful. Although the Company is developing a number of
new products, there can be no guarantee of commercial acceptance of any of it
products.
The gaming industry is employing new technology in many new areas, and the
Company and its competitors continue to file for patents protecting such
technologies. Although the Company is not aware of any patent violations, there
can be no assurances that patents currently pending may be determined to have
infringed upon an existing patent held by a third party.
Sales to Non-Traditional Gaming Markets
The continued growth of the non-traditional markets outside of Nevada and
Atlantic City for electronic gaming machines is contingent upon the public's
acceptance of these markets and an ongoing regulatory approval process by
Federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the
Company's participation in any such markets or that jurisdictions currently
permitting gaming will continue to do so in the future.
Foreign Operations
The Company's business in foreign markets is subject to the risks customarily
associated with such activities. These risks include fluctuations in foreign
currency exchange rates and controls, expropriation, nationalization and other
economic, tax and regulatory policies of local governments as well as the laws
and policies of the United States affecting foreign trade and investment. The
Company does not generally enter into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations.
Dependence on Key Personnel
The success of the Company will be dependent, to a significant extent, upon the
continued services of a relatively small group of executive personnel. The loss
or unavailability of one or more of such executive officers or the inability to
attract or retain key employees in the future could have an adverse effect upon
the Company's operations. In December 1996, the Company's President and Chief
Executive Officer stepped down as the Company's strategic direction changed
after the BGII acquisition. In June, 1997, the Company named Morris Goldstein as
its President and Chief Executive Officer.
Strict Regulation by Gaming Authorities
The manufacture and distribution of gaming machines and the conduct of gaming
operations is subject to extensive Federal, state, local and foreign regulation
by various gaming authorities (each, a "Gaming Authority"). Although the laws
and regulations of the various jurisdictions in which the Company operates vary
in their technical requirements and are subject to amendment from time to time,
virtually all these jurisdictions require licenses, permits, documentation of
the qualification, including evidence of integrity and financial stability, and
other forms of approval for companies engaged in gaming operations and the
manufacture and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such companies. The Company
and its key personnel have obtained, or applied for, all government licenses,
registrations, findings of suitability, permits and approvals necessary for the
manufacture and distribution, and operation where permitted, of its gaming
machines in the jurisdictions in which it currently does business. However,
there can be no assurance that such licenses, registrations, findings of
suitability, permits or approvals will be given or renewed in the future or that
the Company will obtain the licenses necessary to operate in emerging markets.
Gaming was previously licensed by the New Jersey Commission as a gaming-related
casino service industry, which is required by the New Jersey Casino Control Act
in order for the Company to sell gaming devices and systems in New Jersey. Due
to the change of ownership of Bally Gaming as a result of the BGII acquisition,
Bally Gaming's New Jersey license was invalidated. Prior to the change of
ownership of Bally Gaming and in anticipation of same, the Company submitted an
application for casino service industry licensure. The New Jersey Commission
deemed the application complete and, as a result, since the BGII acquisition the
Company's operations in New Jersey have continued uninterrupted pursuant to
transactional waivers which have been granted by the New Jersey Commission on a
six-month blanket basis for parts and service and on a sale-by-sale basis for
all other products pending final action on the Company's license application.
The Company's business is dependent on regulatory requirements. For example,
recurring demand exists for Bally Wulff's products because German regulations
limit the permissible use of wall machines to a period of four years. A change
in applicable regulations could adversely affect the market for the Company's
products and services.
The Company has benefited from the growth in population in Nevada, as with
growth more gaming venues are created. Certain local politicians have proposed
limiting or curtailing the number or type of venues where gaming is authorized.
The Company currently has an agreement with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation to be the exclusive
operator of video poker machines at the only racetrack and ten associated OTBs
in the greater New Orleans area. On November 5, 1996 voters in Louisiana
approved a proposition to allow video poker to continue in six of the seven
parishes in which the Company operates off-track betting locations in the
greater New Orleans area. In addition, voters approved video poker in three
parishes in the greater New Orleans area where the Company currently does not
operate. In the one parish in which the Company operates where video poker was
voted down, the Company will be allowed to continue to conduct business through
June 30, 1999. For the year ended June 30, 1998, the two off-track betting
locations in this parish accounted for $2.2 million of revenues and
approximately 9% of operating income of the Company's Route Operations in
Louisiana or less than 1 of the Company's operating income. These operations
also depend on the financial viability of the racetrack, which is beyond the
control of the Company. See "Business--Gaming Regulations and Licensing".
Gaming Taxes and Value Added Taxes
Gaming operators are typically subject to significant taxes and fees in addition
to corporate income taxes, and such taxes and fees are subject to increase at
any time. Any material increase in these taxes or fees, which could occur
prospectively or retroactively, would adversely affect the Company. Sales of
Bally Wulff's products in Germany are generally subject to value added taxes
("V.A.T."). During 1995, Bally Wulff increased the amount of V.A.T. reserves by
$1.0 million as a result of development to date in an ongoing quadrennial audit
of Bally Wulff's tax returns for the years 1988 through 1991. The German tax
authorities have proposed preliminary adjustments which range from approximately
$1.4 million (which has been accrued) to approximately $5.0 million. The
government in the German State of North Rhine Westphalia recently modified its
regulations that permit local municipalities to independently impose additional
taxes on gaming machine operators beginning January 1, 1999. In the past, the
imposition of tax rate increases has adversely affected Bally Wulff's sales.
There can be no assurance that municipalities will not impose new taxes or raise
existing taxes in the future.
The Company pays and expects to continue to pay substantial taxes and fees in
Nevada, Louisiana and Mississippi and expects to pay substantial taxes and fees
in any other jurisdiction in which it conducts gaming operations. There can be
no assurance as to future increases in taxation on gaming operations.
Change of Control
Upon the occurrence of a Change of Control (as defined), each holder of the
Senior Subordinated Notes may require the Company to repurchase the Senior
Subordinated Notes held by such holder at 101% of the principal amount thereof,
plus accrued interest to the date of repurchase. The new credit facility
prohibits the Company from purchasing any Senior Subordinated Notes, and
provides that the occurrence of certain change of control events with respect to
the Company would constitute a default thereunder. In the event of a change of
control, the Company must offer to repay all borrowings under the new credit
facility or obtain the consent of its lenders under the credit agreement to the
purchase of Senior Subordinated Notes. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing Senior Subordinated Notes. In such case, the Company's failure to
repurchase tendered Senior Subordinated Notes would constitute a default under
the indenture, which, in turn, would constitute a default under the new credit
facility. There can be no assurance that the Company will have the financial
ability to purchase the Senior Subordinated Notes upon the occurrence of a
change of control. There can be no assurance that the Company will be able to
comply with all of its obligations under the new credit facility, the indenture,
and its other indebtedness upon the occurrence of a change of control.
Currency Rate Fluctuations
The company derives revenues from its non-U.S. subsidiaries, all of which
revenues are denominated in their local currencies, and their results are
affected by changes in the relative values of non-U.S. currencies and the U.S.
dollar. Most of the currencies in countries in which the Company has foreign
operations weakened versus the U.S. dollar in 1997 and 1998, which resulted in
assets and liabilities denominated in local currencies to be translated into
fewer dollars. The currency rate changes also resulted in an unfavorable impact
on consolidated revenues of approximately $12.1 million or 3% and $12.2 million
or 3% and on operating income (loss) of $2.2 million or 5% and $1.6 million or
4% during the years ended June 30, 1997 and 1998, respectively. Transaction
losses, resulting from transactions denominated in currencies other than the
functional currencies of the Company or its subsidiaries, totaled less than $1.0
million for each of the years ended June 30, 1997 and 1998. The Company does not
currently utilize hedging instruments.
Market risks
During the normal course of business the Company is routinely subjected to a
variety of market risks, examples of which include, but are not limited to,
interest and currency rate movements, collectibility of accounts and notes
receivable, and recoverability of residual values on leased assets. The Company
constantly assesses these risks and has established policies and practices to
protect against the adverse effects of these and other potential exposures.
Although the Company does not anticipate any material losses in these risk
areas, no assurances can be made that material losses will not be incurred in
these areas in the future.
The Company has performed a sensitivity analysis of its financial instruments
which consist of the Company's cash and cash equivalents and debt. The Company
has no derivative financial instruments. In performing the sensitivity analysis,
the Company defines risk of loss as the hypothetical impact on earnings,
resulting from changes in the market interest rates or currency exchange rates.
The results of the sensitivity analysis at June 30, 1998, are as follows:
Interest Rate Risk:
The Company had total debt as of June 30, 1998 of $326.0 million, of which
$139.1 million of borrowings under the Term Loan Facilities and $22.7 million of
borrowings on the Revolving Credit Facility are at a floating rate based on
LIBOR and $12.3 million of German borrowings on revolving credit facilities are
at a floating rate based on the Eurodeutschmark borrowing rate. Although the
maturity dates for these borrowings are in excess of five years, the Credit
Agreement generally requires that the Compan borrow in individual tranches, each
not to exceed six months, which subjects the Company to interest rate risks. If
the LIBOR and Eurodeutschmark rates were each to increase or decrease by 100
basis points, with all other factors remaining constant, earnings would decrease
or increase by approximately $1.8 million on a pre-tax basis, all other factors
remaining constant.
Foreign Currency Exchange Rate Risk:
The Company has subsidiaries with the following functional currencies: German
Deutschemark, Australian Dollar and South African Rand, although the only
subsidiaries currently with material amounts of assets, liabilities and revenues
are in Germany. If the German deutschemark was to decline 10 percent against the
U.S. dollar, there be a corresponding decrease in earnings reported in the
consolidated group, when compared to the equivalent level of German deutschemark
earnings, of approximately $0.9 million. Such a change in the German
deutschemark would result in an immaterial transaction loss, but would result in
a charge to the cumulative translation account, which is a component of
stockholder's equity, of approximately $7.3 million, all other factors remaining
constant.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Item 6 of this Report- "Risk Factors- Currency Rate Fluctuations and
Market Risks."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, including the notes thereto,
and supplementary financial information are listed in Part IV, Item 14, of this
Report and 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.
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, 1997 and 1998 F-2
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-6
2. Consolidated Supplemental Schedules:
Not applicable.
3. Exhibits:
Exhibit
Number Description
2.1 Agreement and Plan of Merger among Alliance, BGII Acquisition Corp. and
BGII,dated as of October 18, 1995, as amended and restated (incorporated
herein by reference to Annex I to the prospectus included in Alliance's
Form S-4, Registration Number 333-02799 ).
2.2 Basic Agreement, dated as of October 29, 1993, among United Gaming, Inc.,
The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, and
exhibits thereto (incorporated herein by reference to Alliance's Form 8-K
dated October 29, 1993).
2.3 Consolidation Agreement, dated March 29, 1995 among United Gaming Rainbow,
Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development
Corporation and Leigh Seippel and John A. Barrett, Jr. (incorporated herein
by reference to Alliance's Form 8-K dated March 29, 1995).
3.1 Restated Articles of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3.1 to Alliance's Form S-2,
Registration Number 33-72990).
3.2 Revised and Amended By-Laws of the Registrant (incorporated herein by
reference to Alliance's Form 10-Q for the quarter ended December 31, 1997.)
3.3 Certificate of Designations, Preferences, and Relative, Participating,
Optional and Other Special Rights of Special Stock and Qualifications,
Limitations and Restrictions of 11 1/2% Non-Voting, Pay-in-Kind Special
Stock, Series E (incorporated herein by reference to Exhibit 9(c)(5) to
Amendment No. 1 to Alliance's Schedule S-4 dated May 9, 1996).
Exhibit
Number Description
4.1 Form of Indenture among the Company, certain Guarantors referred to therein
and United States Trust Company of New York, as Trustee, in respect of
Alliance's 10% Senior Subordinated Notes due 2007 (including form of Senior
Subordinated Note and Guarantee) (incorporated by reference to Alliance's
Form S-4 dated December 1, 1997).
4.2 Credit Agreement among Alliance Gaming Corporation, Bally Wulff Vertriebs
GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit Suisse
First Boston, dated August 8, 1997 (incorporated herein by reference to the
Company's annual report on Form 10-K dated June 30 1997).
4.3 First Amendment and Consent among Alliance Gaming Corporation, Bally Wulff
Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and Credit
Suisse First Boston, dated August 8, 1997 (incorporated herein by
reference).
4.4 Rights Agreement dated as of March 9, 1998 between the Company and American
Stock Transfer & Trust Company (incorporated herein by reference to Form
8-A dated March 10, 1998).
4.11 First Amendment to the Rights Agreement dated as of September 15, 1998
between the Company and American Stock Transfer & Trust Company
(incorporated herein by reference).
4.12 Form of Certificate of Designations with respect to Series F Special Stock
(attached as Exhibit A to the Rights Agreement) (incorporated herein by
reference to Form 8-A dated March 10, 1998).
4.13 Form of Right Certificate (attached as Exhibit B to the Rights Agreement)
(incorporated herein by reference to Form 8-A dated March 10, 1998).
4.14 Summary of Rights to Purchase Series F Special Shares (attached as Exhibit
C to the Rights Agreement) (incorporated herein by reference to Form 8-A
dated March 10, 1998).
10.4 Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated
herein by reference to the Company's Form S-8 filed August 12, 1997).*
10.5 Letter of Agreement dated June 25, 1993 among United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment
Corporation and as to certain provisions, Alfred H. Wilms, including
Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of
Stockholders Agreement), Exhibit C (Form of Certificate of Designations of
Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of Warrant
Agreement), and Exhibit E (Form of press release) thereto (incorporated
herein by reference to Alliance's Form 8-K dated June 25, 1993).
10.6 Advisory Agreement, dated June 25, 1993 among United Gaming, Inc., Gaming
Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred H. Wilms,
including Exhibit A (Form of Warrant Agreement) and Exhibit B (Form of
press release) thereto (incorporated herein by reference to Alliance's Form
8-K dated June 25, 1993).
10.7 United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan
(incorporated herein by reference to Alliance's Form S-8 Registration
Number 33-45811 and Registration Number 33-75308).*
10.8 Gaming and Technology, Inc. 1984 Employee Stock Option Plan (incorporated
herein by reference to Alliance's Form S-8 Registration Number 2-98777).*
Exhibit
Number Description
10.9 Agreement, dated as of September 14, 1993, by and among United Gaming,
Inc., Kirkland-Ft. Worth Investments Partners, L.P., Kirkland Investment
Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms
(incorporated herein by reference to Alliance's Form 8-K dated September
21, 1993).
10.10 Warrant Agreement, dated as of September 21, 1993, by and between United
Gaming, Inc. and Kirkland-Ft. Worth Investment Partners, L.P. relating to
warrants to purchase 2.75 million shares of Common Stock (incorporated
herein by reference to Alliance's Form 8-K dated September 21, 1993).
10.11 Warrant Agreement, dated as of September 21, 1993, by and between United
Gaming, Inc. and Gaming Systems Advisors, L.P. relating to warrants to
purchase 1.25 million shares of Common Stock (incorporated herein by
reference to Alliance's Form 8-K dated September 21, 1993).
10.12 Stockholders Agreement, dated as of September 21, 1993, by and among
United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., and
Alfred H. Wilms (incorporated herein by reference to Alliance's Form 8-K
dated September 21, 1993).
10.13 Amendment to Stockholders Agreement dated as of October 20, 1994
(incorporated herein by reference to Alliance's Form S-8 Registration
Number 33-45811 and Registration Number 33-75308).
10.14 Selling Stockholder Letter Agreement dated as of March 20, 1995
(incorporated herein by reference to Alliance's Form S-3 Registration
Number 33-58233).
10.15 Securities Purchase Agreement, dated as of September 21, 1993, by and
among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P. and
Kirkland Investment Corporation (incorporated herein by reference to
Alliance's Form 8-K dated September 21, 1993).
10.19 Management Agreement, dated as of October 29, 1993, among Rainbow
Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation and
Mississippi Ventures, Inc., as manager (incorporated herein by reference to
Alliance's Form 8-K dated October 29, 1993).
10.22 Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc.
and Alfred H. Wilms (incorporated herein by reference to Alliance's Form
S-2, Registration Number 33-72990).
10.28 Letter Agreement, dated as of June 29,1994, among United Gaming, Inc.,
Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel,
consented to by HFS Gaming Corporation (incorporated herein by reference to
Alliance's Form 8-K dated August 11, 1994).
10.29 Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc.,
Rainbow Casino Corporation,John A. Barrett, Jr. and Leigh Seippel,
consented to by HFS Gaming Corporation (incorporated herein by reference to
Alliance's Form 8-K dated August 11, 1994).
10.30 Second Amendment to Casino Financing Agreement, dated as of August 11,
1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow
Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation, John A.
Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated herein
by reference to Alliance's Form 8-K dated August 11, 1994).
10.31 Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated
as of July 8, 1994 (incorporated herein by reference to Alliance's Form 8-K
dated August 11, 1994).
Exhibit
Number Description
10.32 Second Amended and Restated Agreement of Limited Partnership, dated March
29,1995, between United Gaming Rainbow and Rainbow Casino Corporation
(incorporated herein by reference to Alliance's Form 8-K dated March 29,
1995).
10.43 Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC,
Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara, Stevens &
Cannada (incorporated herein by reference to Alliance's Form 8-K dated
March 29, 1995).
10.44 Class A Note Payable, dated March 29, 1995, issued by RCVP to United
Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
10.45 Class B Note Payable, dated March 29, 1995, issued by RCVP to United
Gaming Rainbow (incorporated herein by reference to Alliance's Form 8-K
dated March 29, 1995).
10.46 Class B Note Payable, dated March 29, 1995, issued by RCVP to National
Gaming Mississippi, Inc. (incorporated herein by reference to Alliance's
Form 8-K dated March 29, 1995).
10.50 Trademark License Agreement, dated November 11, 1991 between Bally
Manufacturing Corporation and Bally Gaming International, Inc.
(incorporated herein by reference to exhibit 10(i)(d) included in BGII's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.51 Amended and Restated Trademark License Agreement, dated July 8, 1992, by
and between Bally Gaming International, Inc. and Bally Manufacturing
Corporation (incorporated herein by reference to exhibit 10(i)(d) included
in BGII's Registration Statement on Form S-1 No. 33-48347 filed on July 9,
1992).
10.53 Second Amendment to Trademark License Agreement and Settlement Agreement,
dated March 31, 1995, by and between Bally Entertainment Corporation and
Bally Gaming International, Inc. (incorporated herein by reference to
Exhibit I, included in BGII's Current Report on Form 8-K dated April 3,
1995).
10.54 Third Amendment to Trademark License Agreement and Settlement
Agreement, dated May 10, 1996, by and between Bally Entertainment
Corporation, Alliance Gaming Corporation and BGII Acquisition Corp.
(incorporated by reference to exhibit 10.77 to S-2 Registration Statement
No. 333-02147).
10.55 1991 Incentive Plan of Bally Gaming International, Inc. (incorporated
herein by reference to exhibit 10(iii)(a) included in BGII's Registration
Statement No. 33-42227 on Form S-1, effective November 8, 1991).*
10.56 Amendment No. 1 to the 1991 Incentive Plan of Bally Gaming International,
Inc. effective February 6, 1993 (incorporated herein by reference to
exhibit 10(iii)(b) included in BGII's Registration Statement No. 33-42227
on Form S-1 effective November 1, 1991).*
10.57 Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International, Inc.
(incorporated herein by reference to exhibit 99(e) included in BGII's
Registration Statement No. 33-71154 on Form S-3 filed on November 1,
1993).*
Exhibit
Number Description
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).*
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 Agreement between Hans Kloss and Alliance Gaming Corporation
dated July 1, 1998 (incorporated herein by reference).*
10.72 Employment Agreement Supplement, dated as of August 29, 1996, between the
Company and Joel Kirschbaum (incorporated by reference to the Company
quarterly report on Form 10-Q for March 31, 1997).*
10.73 Employment Agreement Supplement, dated as of August 29, 1996, between the
Company and Anthony DiCesare (incorporated by reference to the Company
quarterly report on Form 10-Q for March 31, 1997).*
10.74 Employment Agreement, dated as of June 24, 1996, between the Company and
Scott D. Schweinfurth (incorporated by reference to the Company quarterly
report on Form 10-Q for March 31, 1997).*
10.75 Employment Agreement, dated as of June 17, 1997 between the Company and
Morris Goldstein. (incorporated herein by reference to the Company's Annual
Report on Form 10-K dated June 30 1997).*
10.76 Employment Agreement, dated July 1, 1997 between the Company and Joel
Kirschbaum (incorporated herein by reference to the Company's Annual Report
on Form 10-K dated June 30 1997).*
10.77 Employment Agreement, dated July 1, 1997 between the Company and Anthony
DiCesare (incorporated herein by reference to the Company's Annual Report
on Form 10-K dated June 30 1997).*
Exhibit
Number Description
10.78 Agreement, between the Company and Kirkland Investment Corporation dated
July 1, 1997 (incorporated herein by reference to the Company's Annual
Report on Form 10-K dated June 30 1997).
10.79 Amendment Number 1 to the agreement between the Company and Kirkland
Investment Corporation dated July 1, 1997 (incorporated herein by reference
to the Company's Annual Report on Form 10-K dated June 30 1997).
10.80 Employment Agreement, dated July 1, 1997 between the Company and Robert L.
Miodunski. (incorporated by reference to the Company quarterly report on
Form 10-Q for March 31, 1998).*
10.81 Employment Agreement, dated July 1, 1997 between the Company and John
Hudson (incorporated herein by reference).*
11 Computation of earnings (loss) per share.
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP
27.1 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, 1998.
(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 22, 1998
By /s/ Morris Goldstein
Morris Goldstein,
Director, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ Morris Goldstein Director, President and Chief September 22, 1998
Morris Goldstein Officer (Principal Executive
Officer)
/s/ Scott D. Schweinfurth Sr. Vice President, Treasurer September 22, 1998
Scott D. Schweinfurth Financial Officer (Principal
Financial and Accounting Officer)
/s/ Jacques Andre Director September 22, 1998
Jacques Andre
/s/ Anthony DiCesare Director September 22, 1998
Anthony DiCesare
/s/ Michael Hirschfeld Director September 22, 1998
Michael Hirschfeld
/s/ Joel Kirschbaum Director September 22, 1998
Joel Kirschbaum
/s/ David Robbins Director and Chairman of the September 22, 1998
David Robbins Borad
/s/ Morton Topfer Director September 22, 1998
Morton Topfer
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, 1997 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for each of the years in the three-year period ended June 30, 1998.
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, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
August 14, 1998
F-1
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000's except share amounts)
ASSETS
June 30, June 30,
1997 1998
Current assets:
Cash and cash equivalents $28,924 $23,487
Accounts and notes receivable, net of allowance
for doubtful accounts of $21,929 and $11,932 87,701 93,459
Inventories, net of reserves of $8,856 and $6,797 37,329 42,418
Other current assets 9,627 11,711
------ -------
Total current assets 163,581 171,075
------- -------
Long-term notes receivable, net of allowance for
doubtful accounts of $1,972 and $1,109 8,981 7,931
Leased gaming equipment, net of accumulated
depreciation of $4,116 and $4,020 7,902 7,325
Property, plant and equipment, net of accumulated
depreciation and amortization of $39,695 and $46,090 74,647 77,905
Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $1,723 and $3,199 62,098 59,952
Intangible assets, net of accumulated amortization
of $9,626 and $13,358 18,231 26,732
Deferred tax assets, net of valuation allowance 11,776 11,467
Other assets, net of reserves of $3,502 and $3,488 4,800 4,450
------ ------
$352,016 $366,837
LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIENCY)
Current liabilities:
Accounts payable $14,270 $10,477
Accrued liabilities 37,392 39,122
Current maturities of long term debt 1,124 1,996
------ ------
Total current liabilities 52,786 51,595
Term loan facilities - 137,800
Senior Subordinated Notes due 2007, net - 149,245
Senior Secured Notes, net 151,224 -
Other long term debt, less current maturities 21,491 36,912
Other liabilities 12,433 12,718
------- -------
Total liabilities 237,934 388,270
------- -------
Minority interest 1,546 2,315
Series B Special Stock, $.10 par value, $100
liquidation value; 754,198 shares issued and
outstanding as of June 30, 1997 58,981 -
Commitments and contingencies
Stockholders' equity (deficiency):
Special Stock, 10,000,000 shares authorized:
Series E, $100 liquidation value; 123,689 shares
and 137,317 shares issued and outstanding 12,368 13,732
Common Stock, $.10 par value; 175,000,000 shares
authorized,31,852,000 shares and 32,122,000 shares
issued and outstanding 3,185 3,212
Additional paid-in capital 138,590 122,980
Cumulative translation adjustment (11,719) (13,946)
Accumulated deficit (88,869) (149,726)
Total stockholders' equity (deficiency) 53,555 (23,748)
------ ------
$352,016 $366,837
See accompanying notes to consolidated financial statements.
F-2
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's, except per share amounts)
Years Ended June 30,
1996 1997 1998
Revenues:
Gaming equipment and systems $10,575 $134,734 $109,597
Wall machines and amusement games 3,356 131,934 98,611
Route operations 109,938 127,028 148,507
Casino operations 48,509 51,450 60,657
------- ------- -------
172,378 445,146 417,372
------- ------- -------
Costs and expenses:
Cost of gaming equipment and systems 7,213 84,496 61,684
Cost of wall machines and amusement games 2,022 68,426 54,241
Cost of route operations 84,212 95,716 114,645
Cost of casino operations 22,046 22,269 25,930
Selling, general and administrative 31,270 99,520 86,318
Research and development costs 370 9,954 15,778
Depreciation and amortization 10,988 22,606 22,838
Direct acquisition costs 55,843 - -
Unusual items 5,498 700 (325)
------- ------ ------
219,462 403,687 381,109
------- ------- -------
Operating income (loss) (47,084) 41,459 36,263
Other income (expense):
Interest income 1,571 1,620 813
Interest expense (8,897) (23,626) (28,600)
Rainbow royalty (4,070) (4,722) (587)
Rainbow royalty buyout - - (19,000)
Minority interest (963) (1,092) (2,002)
Other, net 301 139 1,025
----- ----- ------
Income (loss) before income taxes (59,142) 13,778 (12,088)
Income tax provision (755) (7,993) (3,185)
-------- -------- --------
Net income (loss) before extraordinary item (59,897) 5,785 (15,273)
Extraordinary loss, without tax benefit - - (42,033)
Net income (loss) (59,897) 5,785 (57,306)
Special Stock dividends (362) (11,264) (3,551)
Premium on repurchase/redemption of Series B
Special Stock - (710) (16,553)
Net loss applicable to common shares $(60,259) $(6,189) $(77,410)
Basic and diluted loss per share:
Loss before extraordinary item $(4.64) $(0.19) $(1.11)
Extraordinary loss - - (1.31)
------ ------ -----
Net loss $(4.64) $(0.19) $(2.42)
====== ====== ======
Weighted average common shares outstanding 13,000 31,822 31,998
====== ====== ======
See accompanying notes to consolidated financial statements.
F-3
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(In 000's)
Total
Initial Series Stock-
and Series E Additional Unrealized Cumulative holders'
Common Stock Special Stock Paid-in Accum. Loss on Translation Equity
Shares Dollars Shares Dollars Capital Deficit Securities Adjustment (Deficiency)
Balances at June 30, 1995 11,654 $ 1,165 1,333 $ 133 $ 32,134 $ (23,131) $ (316) $ -- $ 9,985
Net loss -- -- -- -- -- (59,897) -- -- (59,897)
Shares issued for acquisition and
related financing 2,145 215 -- -- 7,496 -- -- -- 7,711
Initial Series Special Stock
converted into common stock 1,333 133 (1,333) (133) -- -- -- -- --
Conversion of subordinated
debentures 15,136 1,513 113 11,316 95,151 -- -- -- 107,980
Common stock issued in
private placement 1,495 150 -- -- 4,250 -- -- -- 4,400
Special Stock dividend -- -- -- -- -- (362) -- -- (362)
Net change in unrealized loss on
securities available for sale -- -- -- -- -- -- 316 -- 316
Foreign currency translation
adjustment -- -- -- -- -- -- -- (287) (287)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1996 31,763 3,176 113 11,316 139,031 (83,390) -- (287) 69,846
Net income -- -- -- -- -- 5,785 -- -- 5,785
Shares issued upon exercise of
options 92 9 -- -- 281 -- -- -- 290
Adjustments to acquisition
consideration (3) -- -- -- (12) -- -- -- (12)
Special Stock dividends -- -- 10 1,052 -- (11,264) -- -- (10,212)
Special Stock repurchase premium -- -- -- -- (710) -- -- -- (710)
Foreign currency translation
adjustment -- -- -- -- -- -- -- (11,432) (11,432)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1997 31,852 3,185 123 12,368 138,590 (88,869) -- (11,719) 53,555
Net loss -- -- -- -- -- (57,306) -- -- (57,306)
Shares issued upon exercise of
options 250 25 -- -- 830 -- -- -- 855
Special Stock dividends -- -- 14 1,479 -- (3,551) -- -- (2,072)
Conversion of Series E Special
Stock to common stock 20 2 -- (115) 113 -- -- -- --
Special Stock redemption premium -- -- -- -- (16,553) -- -- -- (16,553)
Foreign currency translation
adjustment -- -- -- -- -- -- -- (2,227) (2,227)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1998 32,122 $ 3,212 137 $ 13,732 $ 122,980 $(149,726) $ -- $ (13,946) $ (23,748)
========= ========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
Years Ended June 30,
1996 1997 1998
Cash flows from operating activities:
Net income (loss) $ (59,897) $ 5,785 $(57,306)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 10,988 22,606 22,838
Amortization of debt discounts 245 807 44
Extraordinary item --- --- 42,033
Loss on debenture conversion 30,079 --- ---
Write down of other assets 6,095 1,075 2,329
Loss on sale of assets 105 1,233 133
Provision for losses on (recovery of)
receivables 1,020 9,059 (7,194)
Other 1,544 (651) (51)
Change in operating assets and liabilities,
net of effects of businesses acquired:
Accounts and notes receivable (5,934) (4,601) 1,946
Inventories 5,844 (6,898) (9,221)
Other current assets (95) (1,549) (3,012)
Accounts payable (1,889) (1,970) (3,793)
Accrued liabilities 12,780 (760) 2,594
------ ------ ------
Net cash provided by (used in) operating
activities 885 24,136 (8,660)
Cash flows from investing activities:
Acquisitions of businesses, net of cash
acquired (79,209) --- ---
Additions to property, plant and equipment (8,101) (13,257) (15,541)
Proceeds from disposal of property, plant
and equipment 2,282 254 55
Proceeds from sales of securities available
for sale 13,516 --- ---
Additions to other long-term assets (5,091) (8,574) (9,633)
------ ------ ------
Net cash used in investing activities (76,603) (21,577) (25,119)
Cash flows from financing activities:
Conversion/refinancing fees and expenses (3,333) --- (32,752)
Capitalized debt issuance costs (10,472) --- (11,456)
Proceeds from long-term debt 155,892 --- 303,734
Reduction of long-term debt (51,446) (6,774) (179,747)
Net change in credit lines --- (11,578) 25,398
Issuance of Series B Special Stock, net of
discount 15,000 --- ---
Issuance of common stock 4,400 --- ---
Repurchase/redemption of Series B Special
Stock --- (3,879) (77,568)
Proceeds from exercise of stock options --- 767 855
------ ----- ------
Net cash provided by (used in) financing
activities 110,041 (21,464) 28,464
Effect of exchange rate changes on cash --- (228) (122)
------ ------ ------
Cash and cash equivalents:
Increase (decrease) for year 34,323 (19,133) (5,437)
Balance, beginning of year 13,734 48,057 28,924
------ ------ ------
Balance, end of year $48,057 $28,924 $23,487
======= ======= =======
See accompanying notes to consolidated financial statements.
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1996, 1997 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
Description of business
Alliance Gaming Corporation ("Alliance" or the "Company") is a
diversified, worldwide gaming company that (i) designs and manufactures
gaming machines and computerized monitoring systems for gaming machines,
(ii) owns and manages a significant installed base of gaming machines,
(iii) owns and operates two regional casinos and (iv) in Germany, is a
full-service supplier of wall-mounted gaming machines and amusement games.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Alliance Gaming Corporation, and its wholly-owned and partially owned,
controlled subsidiaries. In the case of Video Services, Inc. ("VSI"), the
Company owns 100% of the voting stock. The Company is entitled to receive
71% of dividends declared by VSI, if any, at such time that dividends are
declared. Effective June 18, 1996, the Company acquired Bally Gaming
International, Inc. ("BGII"); the results of operations o BGII have been
included in the accompanying consolidated financial statements since that
date. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to prior year
financial statements to conform with the current year presentation.
Cash and cash equivalents
Cash equivalents consist of highly liquid debt instruments purchased with
an original maturity of three months or less at the date of purchase and
are carried at cost, which approximates market value. Also, includes $14.4
million which is utilized in Casino and Route Operations which is held in
vaults, cages or change banks.
Inventories Inventories are stated at the lower of cost, determined on a
first-in, first-out basis, or market. Cost elements included for
work-in-process and finished goods include raw materials, freight, direct
labor and manufacturing overhead.
Inventories, net of reserves, consist of the following at June 30, 1997
and 1998:
1997 1998
(In 000's)
Raw materials $9,356 $12,075
Work-in-process 1,683 2,668
Finished goods 26,290 27,675
------ ------
Total $37,329 $42,418
======= =======
Property, plant and equipment and leased gaming equipment
Property, plant and equipment are stated at cost and depreciated over the
estimated useful lives or lease terms, if less, using the straight line
method as follows: buildings and improvements, 30-39 years; gaming
equipment, 3-7 years; furniture, fixtures and equipment, 3-10 years; and
leasehold improvements, 5-20 years. Leased gaming equipment is stated at
cost and depreciated over estimated useful lives ranging from 3-4 years.
Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated
depreciation of assets retired or otherwise disposed of are eliminated
from the accounts and any resulting gain or loss is credited or charged to
income as appropriate.
Property, plant and equipment consists of the following at June 30, 1997
and 1998:
1997 1998
(In 000's)
Land and land improvements $21,610 $21,058
Buildings and leasehold improvements 30,027 29,926
Gaming equipment 46,247 50,341
Furniture, fixtures and equipment 16,458 22,670
Less accumulated depreciation and amortization (39,695) (46,090)
------ ------
Property, plant and equipment, net $74,647 $77,905
======= =======
Excess of costs over net assets of acquired businesses
The excess of the cost over the fair value of net assets of acquired
businesses is generally amortized on the straight-line method over a
period of 40 years.
Intangible assets
Intangible assets consist primarily of costs associated with the
acquisition of location leases which are capitalized and amortized using
the straight-line method over the terms of the leases, ranging from one to
24 years, with an average life of approximately 10 years, and deferred
issuance costs for financings which are amortized over the life of the
related financing.
Accrued liabilities
Accrued liabilities consists of the following at June 30, 1997 and 1998:
1997 1998
(In 000's)
Payroll and related costs $ 6,974 $ 9,150
Interest 566 8,782
Professional and consulting fees 1,564 3,569
Sales, use and income taxes 7,922 3,380
Litigation settlement 428 2,000
Other 19,938 12,241
------ ------
Total $37,392 $39,122
======= =======
Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Impairment recognition
Management evaluates the carrying value of all long-lived assets to
determine recoverability based on an analysis of non-discounted future
cash flows. Based on its most recent analysis, management believes that no
material impairment in the value of long-lived assets exists at June 30,
1998.
Revenue recognition
The Company sells equipment and systems on normal credit terms (90 days or
less), or over terms of generally up to 36 months or more or through
payments from net winnings of the machines until the purchase price is
paid. Revenue from sales of gaming machines and amusement games is
normally recognized at the time products are shipped and title has passed
to the customer. Revenue from sales of 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.
In accordance with industry practice, the Company recognizes gaming
revenues as the net win from gaming machine operations, which is the
difference between coins and currency deposited into the machines and
payments to customers and, for other games, the difference between gaming
wins and losses. The Company recognizes total net win from gaming machines
as revenues for route operations which operate under revenue-sharing
arrangements and revenue-sharing payments as a cost of route operations.
The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
Unusual items
The Company discloses as a separate component of operating income (loss),
income and expense items that are unusual and infrequently occurring.
During the year ended June 30, 1998, the Company recorded the following
unusual items:
(1) The Company settled a dispute with Alpha Hospitality and General
Electric Credit Corporation concerning certain customer notes receivable
on which the Company had certain recourse obligations. The Company
contributed $2.5 million to the final settlement with the holder of the
notes, and reversed $6.0 million of reserves previously established for
these recourse obligations. In addition, as part of the settlement the
Company became the sole owner of approximately 566,000 shares of Alpha
Hospitality common stock which trades on the NASDAQ Small Cap market.
Pursuant to the limitations provided for in the settlement agreement, the
Company has sold 235,000 shares of Alpha Hospitality through June 30,
1998.
(2)As a result of settling a dispute over the exclusive use of certain
technologies and changes in gaming regulations, the Company evaluated the
cash flow of certain of its technology assets, in accordance with the
provisions of Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of," and determined certain items met the definition of
having become impaired. During the year ended June 30, 1998 the Company
recorded write-downs totaling $2.8 million for these items.
(3) The Company accrued $0.7 million for the present value of contractual
payments due to a former member of the board of directors who was not
re-elected to the board at the December 1997 annual shareholders meeting.
(4) The Company accrued $0.6 million as restructuring charges to more
fully integrate Bally Gaming and Systems.
(5) The Company recorded a $1.6 million charge for final settlement of
litigation related to the acquisition of BGII.
During the year ended June 30, 1997 the Company incurred unusual charges
of $0.7 million related primarily to separation costs of Alliance
personnel subsequent to the BGII acquisition.
During the year ended June 30, 1996 the Company incurred unusual charges
for the write off of its investments in projects in Kansas and one Native
American development project, totaling $3.4 million. Also in fiscal year
1996 the Company incurred unusual charges in its route operations for
reserves for certain parts inventories which became obsolete due to
technological changes to gaming devices being deployed as a result of the
new Gambler's Bonus product, as well as an accrual to reserve for the
present value of the future lease payments for one small casino location
for which cash flows received under the participation agreement were
inadequate to service the building lease paid by the Company, totaling
$2.1 million.
Foreign currency translation
The functional currency of the Company's foreign subsidiaries is their
local currency. Assets and liabilities of foreign operations are
translated into U.S. dollars at the rate of exchange at the end of the
period, and the income and expense accounts are translated at the average
rate of exchange for the period. Translation adjustments are reflected as
a separate component of stockholders' equity (deficiency). Gains and
losses on foreign currency transactions are included in the accompanying
consolidated statements of operations.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the period that includes the enactment date. Taxes on income of the
Company's foreign subsidiaries are provided at the tax rates applicable to
the tax jurisdictions in which they are located.
Loss per share of common stock
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which
supersedes APB Opinion No. 15. This statement replaces primary EPS with
basic EPS, and generally requires dual presentation of basic and diluted
EPS. For the years ended June 30, 1996 and 1997, the basic EPS does not
differ from the primary EPS and dilutive EPS does not differ from the
basic EPS because for these periods the Company reported net losses which
would result in anti-dilution.
The following securities were not included in the computation of diluted
loss per share because to do so would have been anti-dilutive for the
period presented:
Fiscal Years ended June 30,
1996 1997 1998
(in 000's)
Stock options 2,832 4,647 5,434
Warrants 10,125 10,125 10,125
Convertible preferred stock 1,924 2,041 2,335
------ ------ ------
14,881 16,813 17,894
====== ====== ======
Adjusted for application of the
treasury stock method 1,045 596 2,028
===== ===== =====
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The carrying amounts
at June 30, 1998 for the Company's financial instruments approximate fair
value.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for the year ending June 30,
1999. Comprehensive income includes items such as foreign currency
translation adjustments which are currently being presented by the Company
as a component of stockholders' equity. This is a disclosure item only and
will have no impact on reported earnings per share.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for
disclosure about operating segments in annual financial statements and
selected information in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers and will supersede SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for years beginning after December 15, 1997.
This is a disclosure item only and will have no impact on reported
earnings per share.
2. ACQUISITION
On June 18, 1996, the Company completed the acquisition of all the
outstanding shares of BGII. The consideration paid consisted of
approximately $77.2 million in cash, $3.0 million in the Company's common
stock and $36.6 million in the Company's Series B Special Stock. The
acquisition was 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. During the year
ended June 30, 1997 the Company made certain adjustments aggregating
approximately $6.6 million to the goodwill originally recorded, related to
the settlement of certain pre-acquisition contingencies.
During the year ended June 30, 1996, the Company incurred direct costs
including a $30.1 million non-cash accounting loss on the exchange offer
component of the financing for the acquisition plus legal, accounting,
transaction financing fees, public and investor relations, printing costs
and related costs. The direct acquisition costs have been presented
separately in the Company's consolidated statements of operations, as
management believes that such presentation provides additional relevant
information.
3. RECEIVABLES
The Gaming Equipment and Systems and Wall Machines and Amusement Games
business units grant customers payment terms under contracts of sale.
These contracts are generally for terms of one to three years, with
interest at prevailing rates, and are generally collateralized by the
related equipment sold, although the value of such equipment, if
repossessed, may be less than the receivable balance outstanding. See
"Concentration of Credit Risk". The Company's Nevada route operations from
time to time make loans to location operators for build-outs, tenant
improvements and initial operating expenses, which are generally secured
by the personal guarantees of the operators and the locations' assets. The
majority of the loans bear interest rates between 8% to 14% and are
expected to be repaid over a period of time not to exceed the life of the
revenue sharing arrangement and have due dates ranging from November 1998
to July 2011.
The following table represents, at June 30, 1998, scheduled collections of
accounts and notes receivable (net of allowances for doubtful accounts) by
fiscal year:
Years ending June 30,
(In 000's)
1999 2000 2001 2002 2003 Thereafter Total
$93,459 $5,400 $1,219 $364 $232 $716 $101,390
==================================================================
4. DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION
In August 1997 the Company effected a series of related transactions (as
described below, the "Refinancing"). Long-term debt and lines of credit at June
30, 1997, prior to the Refinancing and at June 30, 1998, after the refinancing,
consisted of the following:
1997 1998
(In 000's)
10 % Senior Subordinated Notes due 2007, net of $ - $149,245
unamortized discount of $755
Term loan facilities:
Tranche B Term Loan - 74,438
Tranche C Term Loan - 39,700
Delayed Draw Term Facility - 25,000
Revolving Credit Facility - 34,971
12 7/8% Senior Secured Notes due 2003, net of
unamortized discount of $2,776 151,224 -
7 1/2% Convertible subordinated debentures
due 2003, unsecured 1,642 -
National Gaming Mississippi, Inc., note payable,
secured by the assets of the Rainbow Casino 6,569 -
Bally Wulff revolving lines of credit 9,611 -
Other, secured by related equipment 4,793 2,599
----- -----
179,839 325,953
Less current maturities 1,124 1,996
----- -----
$172,715 $323,957
The Refinancing consisted of the private placement of $150.0 million of
Senior Subordinated Notes and the closing of $230.0 million of bank
financing. The bank financing provides for (i) term loans in the aggregate
amount of up to $140.0 million, comprised of a $75.0 million tranche with
a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche
with an 8-year term (the "Tranche C Term Loan"), and a $25.0 million
tranche with a 7 1/2-year term (the "Delayed Draw Term Facility" and
together with the Tranche B Term Loan and the Tranche C Term Loan, the
"Term Loan Facilities"); and (ii) a $90.0 million revolving credit
facility (the "Revolving Credit Facility") with a 6-year term. Each of
these credit facilities is variable rate borrowings in accordance with a
credit grid. The interest rates at the highest level of the credit grid
and maturity dates are as follows:
Initial Maturity
Rate Date
Tranche B Term Loan LIBOR + 2.75% January 31, 2005
Tranche C Term Loan LIBOR + 3.00% July 31, 2005
Delayed Draw Term Facility LIBOR + 2.75% January 31, 2005
Revolving Credit Facility LIBOR + 2.25% July 31, 2005
The Revolving Credit Facility also allows for German Deutschemark
borrowings at the Eurodeutschemark rate plus 2.25% (or 5.9% at June 30,
1998).
As part of the Refinancing, the Company used the proceeds of the Senior
Subordinated Note offering, together with borrowings under the Revolving
Credit Facility, the Term Loan Facilities and cash on hand to fund (a) the
repurchase at a premium of substantially all of the Company's 12 7/8%
Senior Secured Notes plus accrued interest to August 8, 1997 totaling
$183.7 million, (b) the redemption at liquidation value of all of the
Company's Series B Special Stock on September 8, 1997 totaling $77.6
million, (c) the purchase from HFS Gaming Corporation ("HFS") of the right
to receive royalty payments based on revenues of the Rainbow Casino for
$19.0 million (the "Rainbow Royalty Buyout"), (d) the repayment of related
debt owed to an HFS affiliate, National Gaming Mississippi, Inc. ("NGM"),
on August 12, 1997 totaling $7.3 million, (e) repayment of amounts
outstanding under the domestic and foreign revolving lines of credit and
(f) the payment of transaction fees and expenses totaling $16.5 million.
At June 30, 1998, borrowings under the $90.0 million Revolving Credit
Facility totaled $35.0 million, of which $12.3 million were German
Deutschemark borrowings. Based on the terms of the Revolving Credit
Facility, the Company would have been able to borrow an additional $37.1
million as of June 30, 1998. The borrowing base for the revolving credit
facility includes eligible receivables and inventory (as defined).
Additionally, in July 1997 the Company redeemed the remaining balance of
the % Convertible Debentures at a price of 104%, or a total of $1.7
million.
The bank facility is collateralized by substantially all domestic property
and is guaranteed by each domestic subsidiary of the U.S. Borrower and
German Subsidiaries (both as defined), other than the entity which holds
the Company's interest in its Louisiana operations and other non-material
subsidiaries (as defined), and secured by both a U.S. and German Pledge
Agreement (both as defined). The bank facility contains a number of
maintenance covenants and it and the indenture have other significant
covenants that, among other things, restrict the ability of the Company
and certain of its subsidiaries to dispose of assets, incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, enter into certain acquisitions, repurchase equity
interests (as defined) or subordinated indebtedness, issue or sell equity
interests of the Company's subsidiaries (as defined), engage in mergers or
acquisitions, or engage in certain transactions with subsidiaries and
affiliates, and that otherwise restrict corporate activities.
The Senior Subordinated Notes bear interest at 10%, are due in 2007, and
are general unsecured obligations of the Company, ranking subordinate in
right of payment to all Senior Debt (as defined) of the Company, including
indebtedness under the bank financing. The Senior Subordinated Notes will
be fully and unconditionally guaranteed on a joint and several senior
subordinated basis by all existing and future domestic Restricted
Subsidiaries (as defined) of the Company, subject to certain exceptions
including the partially-owned entities through which its Mississippi
casino and Louisiana route operations are conducted. The Subsidiary
Guarantees (as defined) are general unsecured obligations of the
Guarantors, ranking subordinate in right of payment to all Senior Debt of
the Guarantors. The Company will be able to designate other current or
future subsidiaries as Unrestricted Subsidiaries (as defined) under
certain circumstances. Unrestricted Subsidiaries will not be required to
issue a Subsidiary Guarantee and will not be subject to many of the
restrictive covenants set forth in the Indenture pursuant to which the
Senior Subordinated Notes were issued. The Indenture for the Company's
Senior Subordinated Notes contains various covenants, including
limitations on incurrence of additional indebtedness, on restricted
payments and on dividend and payment restrictions on subsidiaries. The
Senior Subordinated Notes may not be redeemed for the first five years.
Upon the occurrence of a Change of Control (as defined), the holders of
the Senior Subordinated Notes will have the right to require the Company
to purchase their notes at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
As a result of the Refinancing described above, the Company recorded an
extraordinary loss of $42.0 million consisting of the $27.7 million
premium paid to repurchase the Senior Secured Notes, the payment of
related transaction fees and expenses (including $2.0 million paid to
related parties pursuant to employment agreements), and the charge-off of
the unamortized debt discount and deferred financing fees. There was no
tax benefit recognized for the extraordinary item as a valuation allowance
was recorded to fully reserve the net operating losses created.
The Company also recorded a $19.0 million charge for the cost of the
Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6 million
charge to equity and a corresponding increase in the net loss applicable
to common shares for the difference between the carrying value and the
liquidation value of the Series B Special Stock, all of which was redeemed
on September 8, 1997 at the liquidation price of $100 per share, plus
accrued dividends.
In connection with the acquisition of BGII, the Company issued $154.0
million aggregate principal amount of 12 7/8% Senior Secured Notes due
2003 (the "12 7/8% Notes") and 15% Non Voting Senior Pay-in-Kind Special
Stock Series B (the "Series B Preferred Stock") with an original
liquidation value of $68.5 million. As part of the Refinancing, the 12
7/8% Notes were repaid and the Series B Preferred Stock was redeemed.
During 1995, HFS and its affiliate, NGM, together agreed to loan up to
$12.0 million to the Company's majority controlled subsidiary Rainbow
Casino Vicksburg Partnership, L.P. ("RCVP"). Of these loan commitments,
RCVP ultimately borrowed $10.0 million and $1.3 million from HFS and NGM
respectively.
The notes were purchased by the Company as part of the Refinancing.
Prior to the Refinancing, HFS was entitled to receive a monthly
royalty fee based on the Rainbow Casino's gaming revenues of 12% on the
first $40.0 million, 11% on the next $10.0 million, and 10%
thereafter.
Prior to the refinancing, the Bally Wulff entities held three bank lines
of credit which provided for borrowings of DM16,300,000, DM16,000,000 and
DM750,000. These lines of credit were repaid with proceeds from the new
Revolving Credit Facility.
Maturities of long-term debt, for each of the five fiscal years ending
subsequent to June 30, 1998 are as follows:
Years ending June 30,
(In 000's)
1999 2000 2001 2002 2003 Thereafter Total
$1,996 $1,954 $1,954 $2,142 $14,304 $303,603 $325,953
================================================================
5. STOCKHOLDERS' EQUITY, OPTIONS, WARRANTS AND RIGHTS
Special Stock
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of special stock ("Special Stock"). To date, there have
been four series of Special Stock authorized for issuance: the Initial
Series, the Series B, the Series E and the Series F. Special Stock
consists of non-voting stock where no holder of the Special Stock shall be
entitled to vote at any meeting of stockholders or otherwise, except as
may be specifically provided by law or as approved by the Board of
Directors in certain limited circumstances at the time of the stock
issuance. The Special Stock may be issued from time to time in one or more
series, each series having such designations, preferences and relative,
participating, optional or other special rights, qualifications,
limitations or restrictions as shall be stated and expressed in the
resolution providing for the issuance of Special Stock or any series
thereof adopted by the Board of Directors.
The Board had designated an initial series of Special Stock as "Non-voting
Junior Convertible Special Stock" which consisted of 1,333,333 shares (the
"Initial Series") which were sold to Kirkland - Ft. Worth Investment
Partners, L.P. ("Kirkland"), pursuant to a Letter Agreement dated June 25,
1993, for $5.0 million. The Initial Series had certain conditions relating
to regulatory licensing, which, when met allowed the holder to convert on
a one-for-one basis into shares of common stock. The licensing condition
was met and during fiscal year 1996 Kirkland elected to convert its shares
to common stock.
In June 1996, the Company completed an offering of 200,000 shares of its
15% Non-Voting Senior Pay-in-Kind Special Stock, Series B (the "Series B
Special Stock"). The Series B Special Stock was also issued as part of the
consideration in the BGII acquisition. During fiscal year 1997 the Company
repurchased a total of 18,000 shares of Series B Special Stock at a
premium to their carrying value of $0.7 million. As discussed in Note 4,
on September 8, 1997 the Company redeemed all of the outstanding shares of
Series B Special Stock at their liquidation price of $100 per share, plus
accrued dividends. The Company recorded non-cash dividends in the form of
additional shares of Series B Special Stock totaling $10.2 million and
$2.0 million for years ended June 30, 1997 and 1998, respectively.
In June 1996, the Company issued 113,160 shares of Series E Special Stock
to certain holders of the Company's 71/2% Convertible Subordinated
Debentures who elected to receive such stock in lieu of receiving common
stock. Each share of Series E Special Stock accrues cumulative dividends
until June 18, 1999 at an annual rate of 111/2%, payable quarterly in cash
or, at the Company's option, in additional shares of Series E Special
Stock. The Series E Special Stock is convertible after June 18, 1998 into
common stock at a conversion price of $5.88 per share (equivalent to a
conversion rate of approximately 17.007 shares of common stock per share
of Series E Special Stock), subject to adjustment under certain
circumstances, and has a $100 liquidation preference per share. The
holders of shares of Series E Special Stock have no voting rights except
as required by law.
Stock Option Plans
In 1984, the Company created an Employee Stock Option Plan (the "1984
Plan") that provides for the issuance of up to 2,000,000 shares of common
stock to Company employees and directors. Generally, options are granted
at the fair market value of the Company's Common Stock at the date of the
grant and are exercisable over ten years.
In 1992, the Company created the 1991 Long Term Incentive Plan (the "1991
Plan") that, as amended, provides for the issuance of up to 3,000,000
shares of common stock to Company employees and directors. Generally,
options are granted at the fair market value of the Company's Common Stock
at the date of the grant and are exercisable over five to ten years.
In April 1997 the Company's shareholders approved the 1996 Long-Term
Incentive Plan (the "1996 Plan") which provides for the issuance of up to
3,000,000 shares of common stock to Company employees, directors and
designated paid consultants. Generally, options are granted at the fair
value of the Company's common stock at the date of grant and are
exercisable over five to ten years.
Pursuant to the BGII acquisition agreement, the Company assumed BGII's
obligations with respect to each of its outstanding stock options, and
such options became exercisable pursuant to employee election (except for
certain identified former executive officers and directors of BGII) for a
number of shares of common stock equal to the number of shares of BGII
common stock subject thereto. Such options expire on June 18, 1999.
On August 29, 1996, the Board of Directors repriced the exercise price of
previously issued, unexercised options for substantially all current
employees and directors to $3.4375 per share which was the closing price
of the Company's common stock on the closing date of the BGII acquisition,
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
Weighted-Average
Shares Exercise Price
Balance, June 30, 1995 2,617,834 $6.00
Granted 689,000 3.39
Exercised -- --
Canceled (621,000) 5.97
-------- ----
Balance, June 30, 1996 2,685,834 5.53
Granted 3,726,319 3.50
Exercised (91,836) 1.65
Canceled (1,704,000) 5.97
--------- ----
Balance, June 30, 1997 4,616,317 3.84
Granted 1,466,904 4.37
Exercised (250,084) 3.80
Canceled (399,334) 6.95
--------- ----
Balance, June 30, 1998 5,433,803 $3.77
---------------------- ========= =====
Exercisable at June 30, 1998 3,286,086 $3.73
========= =====
The following options were outstanding as of June 30, 1998:
Options Outstanding Options Exercisable
Weighted-Avg. Weighted-Avg.
Range of Remaining Outstanding Remaining Outstanding
Exercise Prices Contractual Life Shares Contractual Life Shares
$2.25 - $3.00 2.47 89,500 2.47 89,500
$3.01 - $4.00 4.16 3,808,399 3.77 2,948,298
$4.01 - $5.00 4.40 1,392,904 4.33 198,288
over $5.01 3.17 143,000 1.30 50,000
-------- -------
5,433,803 3,286,086
========= =========
At June 30, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.25 - $8.375 and
4.16 years, respectively.
The Company accounts for its stock-based employee compensation awards in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Under APB 25, because the
exercise price of the Company's employee stock options equals or exceeds
the market price on date of grant, no compensation expense is recognized.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, " Accounting for
Stock Based Compensation," the Company's net loss applicable to common
shares would have increased from $60.3 million (or $(4.64) per share) to
$61.2 million (or $(4.71) per share) on a pro forma basis for the year
ended June 30, 1996, from a loss of $6.2 million (or $(0.19) per share) to
$8.3 million (or $(0.26) per share) on a pro forma basis for the year
ended June 30, 1997 and from a loss of $77.4 million (or ($2.42) per
share) to $79.3 million (or $2.48 per share) on a pro forma basis for the
year ended June 30, 1998. The pro forma net loss reflects only options
granted in 1996, 1997 and 1998. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in
the pro forma net income amounts presented above because compensation cost
is reflected over the options' vesting period, generally three years, and
compensation cost for options granted prior to July 1, 1995 is not
considered.
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $5.80, $1.43 and $1.71 respectively, on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1996, 1997 and 1998: expected dividend
yield of 0%, risk free interest rates ranging from 5.0% to 6.5%, a
volatility factor of .79, .51 and .69 for 1996, 1997 and 1998,
respectively, and expected lives varying from 3 to 10 years.
Warrants
Upon closing of the private placement of the Company's 7 1/2% Convertible
Subordinated Debentures and the $5.0 million equity investment in the
Initial Series by Kirkland-Ft. Worth Investment Partners, L.P.
("Kirkland") on September 21, 1993, the Company issued warrants to
purchase up to 2,750,000 shares of Common Stock at $1.50 per share to
Kirkland which expire September 21, 1999. 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. Under certain circumstances the
expiration date on a portion of the above warrants may be extended.
Pursuant to employment agreements, the holders of approximately 1,400,000
of the warrants can extend the expiration date of their warrants until
June 30, 2002 by paying an aggregate of approximately $1.1 million in cash
or foregoing cash bonuses of an equal amount prior to September 21, 1999.
All of these warrants became exercisable one year after the grant dates
and vest in three equal increments only after the market price of the
Common Stock reaches $11, $13 and $15. The Company also issued warrants to
purchase 500,000 and 250,000 shares of Common Stock at $8.25 per share to
the initial purchasers of the 7 1/2% Convertible Debentures; Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") and Oppenheimer & Co.,
Inc. ("Oppenheimer"), respectively, each of which expire on September 21,
1999. During the year ended June 30, 1996, in connection with the
commencement of employment with the Company, the then Board Chairman and
then Vice-Chairman each were each granted warrants to purchase 250,000
shares of common stock on the same terms as the Kirkland warrants
described above except that such warrants expire on September 21, 2000. At
the completion of the BGII acquisition, GSA was issued an additional
2,500,000 warrants on the same terms as the original warrants issued to
Kirkland described above, except with an expiration date of June 18, 2002.
During the financing stage of the BGII acquisition, Cerberus Partners L.P.
and certain affiliates of Canyon Partners, Inc. were issued warrants to
purchase 250,000 shares of Common Stock at $5.00 per share which expire on
August 31, 2002. None of the warrants granted to Kirkland, GSA, Friend,
and the now former Board members were exercisable at June 30, 1998.
Prior to the merger, BGII had issued warrants to purchase 1,200,000 shares
of BGII common stock at a purchase price of $12.50 per share. Pursuant to
the merger agreement, the Company assumed BGII's obligation with respect
to each warrant, which are exercisable for the merger consideration per
share of BGII common stock subject to such warrants. During July 1998, the
holders exercised these warrants resulting in the Company issuing 94,680
shares of common stock and $0.3 million in cash.
At June 30, 1998, shares of the Company's Common Stock were reserved for
future issuance as follows:
Shares underlying stock options issued or
issuable under the 1984 Plan 107,000
Shares underlying stock options issued or
issuable under the 1991 Plan 2,934,000
Shares underlying stock options issued or
issuable under the 1996 Plan 3,000,000
Shares underlying all warrants issued 10,125,000
Shares for former BGII option holders 202,500
---------
Total (see below) 16,368,500
==========
Included in the warrants above are warrants held by Mr. Alfred Wilms to
purchase 2,000,000 shares of Common Stock at $2.50 per share, subject to
adjustment, that were to expire September 1, 1998. These warrants were
issued in connection with the funding of a $6.5 million five year
subordinated loan for VSI which has since been repaid. On August 25, 1998,
(after the date of the auditors' report) Mr. Wilms exercised these
warrants.
Stockholder Rights Plan
In February 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan ("Plan"). The Plan is designed to preserve the long-term value
of the shareholders' investment in the Company. Pursuant to the Plan, each
shareholder received a distribution of one Right for each share of the
Company's outstanding common stock of record on March 12, 1998. Each Right
expires on March 12, 2008, and entitles the holder to purchase one
one-hundredth (1/100) of a share of a Series F Special Stock for $25
Initially the Rights are represented by the Company's common stock
certificates and are not exercisable. The Rights become exercisable only
after a person or group acquires beneficial ownership of 10% or more of
the Company's Common Stock (or 15% if the acquirer is an institutional
investor) or publicly announces its intention to commence a tender offer
that would result in that beneficial ownership level. Under certain
circumstances involving a buyer's acquisition of 10% of the Company's
Common Stock (or 15% in the case of an institutional investor), all Rights
holders except the buyer will be entitled to purchase Common Stock at half
price. If the Company is acquired through a merger, after such an
acquisition, all Rights holders except the buyer will be entitled to
purchase stock in the buyer at half price. The Company may redeem the
rights at $0.001 at any time before a buyer acquires 10% (or 15% in the
case of an institutional investor) of the Company's Common Stock.
6. INCOME TAXES
The components of the Company's income tax expense for the years ended
June 30, 1996, 1997 and 1998 are as follows:
1996 1997 1998
(In 000s)
Current tax expense:
U. S. Federal $ 533 $ 225 $ -
Foreign 172 7,701 2,743
State 50 750 568
755 8,676 3,311
Deferred tax expense
U. S. Federal - - -
Foreign - (683) (126)
State - - -
----- ---- -----
Total provision for income taxes $ 755 $7,993 $3,185
===== ===== =====
A reconciliation of the Company's income tax provision as compared to the
tax provision calculated by applying the statutory federal tax rate (35%)
to the income (loss) before income taxes for the years ended June 30,
1996, 1997 and 1998 are as follows:
1996 1997 1998
(In 000's)
Computed expected income tax expense (benefit)
at 35% $(20,700) $4,826 $(18,942)
Change in valuation allowance (6,453) 169 17,613
Change in estimates, principally due to changes
in estimated tax depreciation and NOL's 1,166 686 -
State income taxes, net of federal benefit 33 488 369
Tax gain on conversion of debt to equity, net 18,265 - -
Acquisition costs not currently deductible 7,102 - -
Foreign taxes, net of federal benefit - 1,940 754
Foreign tax credits - - 1,770
Other, net 1,342 (116) 1,621
----- ----- -----
$ 755 $7,993 $3,185
===== ===== =====
The major components of the deferred tax assets and liabilities as of June
30, 1997 and 1998 are presented below.
1997 1998
(In 000's)
Deferred Tax Assets:
Net operating loss carry forwards $ 6,049 $15,254
Foreign tax credit carry forwards 11,843 12,816
Inventory obsolescence reserves 4,008 3,582
Bad debt reserves 6,359 2,056
Accruals not currently deductible for tax
purposes 3,585 4,108
Refinancing costs being amortized for tax
purposes - 13,125
Other 9,404 7,611
Total gross deferred tax assets 41,248 58,552
Less: Valuation allowance 29,472 47,085
------ ------
Deferred tax assets $11,776 $11,467
======= =======
Deferred Tax Liabilities:
Property and equipment, principally due to
depreciation differences $ 3,703 $ 4,762
Other 6,662 5,168
Total gross deferred tax liabilities (a) 10,365 9,930
------ -----
Net deferred tax assets $ 1,411 $ 1,537
======= =======
(a) Included in the other non-current liabilities in the accompanying
consolidated balance sheets.
Management has considered certain tax planning strategies as permitted by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes". Management has determined that tax benefits associated with
recorded deferred tax assets, net of valuation allowance, are more likely
than not realizable through future taxable income and future reversals of
existing taxable temporary differences.
At June 30, 1998, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $44.2 million which are
available to offset future federal taxable income, if any, expiring in the
years 2007 through 2013. In addition, approximately $21.3 million of the
Company's net operating loss carryforwards are limited to annual
utilization of $4.7 million per year subject to certain carryover
provisions pursuant to Section 382 of the Internal Revenue Code. At June
30, 1998 the Company has foreign tax credit carry forwards of
approximately $12.8 million and alternative minimum tax credit (AMT) carry
forwards of approximately $1.7 million. Foreign tax credits are available
to offset future taxes due in the U.S. on future foreign taxable income
and expire between 1999 and 2003 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 AM calculations.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the consolidated
statements of cash flows. The Company recorded the following significant
non-cash items for the years ended June 30, 1996, 1997 and 1998:
1996 1997 1998
(In 000's)
Reclassify inventory to property, plant and
equipment and leased gaming equipment $ - $9,642 $4,132
Dividends for Series E and Series B Special
Stock - 11,264 3,551
Translation rate adjustment - 11,204 2,105
Reclassify other assets to property, plant
and equipment - 1,818 -
Reclassify receivables to other assets - 1,837 540
Reclassify excess costs over net assets of
acquired business to property, plant and
equipment - 1,436 -
Convertible debentures converted to equity
securities 83,358 - -
Common and Series B Special Stock issued in
the BGII Acquisition 42,738 - -
BGII common stock purchased in fiscal year
1995 and canceled upon consummation of the
BGII Acquisition 10,481 - -
Accrual of contingent payment to RCC 1,000 - -
Payments for interest expense in fiscal years 1996, 1997 and 1998 were
approximately $8.0 million, $22.5 million and $19.9 million, respectively.
Payments for income taxes in fiscal years 1996, 1997 and 1998 were
approximately $0.3 million, $3.5 million and $7.3 million, respectively.
8. COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, or other sources are recorded when it is
probable that a liability has been incurred and the amount of the
liability can be reasonably estimated.
The Company is obligated under several patent agreements to pay royalties
ranging from approximately $50 to $200 per game depending on the
components in the gaming machines. Additionally, based on an amendment to
the trademark licensing agreement between BGII and Bally Entertainment
Corporation dated May 10, 1996, the Company is obligated to pay a royalty
on new machines sold or leased after June 18, 1996 of $35 per machine with
a minimum annual royalty payment of $1.0 million for the initial five-year
term of the amended agreement, which is subject to annual renewals
thereafter at the option of the Company. Royalty expense under this
agreement for the years ended June 30, 1997 and 1998 was $1.0 million.
The Company leases office space, equipment, warehouse and repair
facilities, Route Operation locations, casino and other locations under
non-cancelable operating leases. Certain Route Operation location leases
provide only for contingent rentals based upon a percentage of gaming
revenue and are cancelable at any time by either party. Future minimum
rentals under non-cancelable operating leases at June 30, 1998 are:
Years ended June 30,
(In 000's)
1999 2000 2001 2002 2003 Thereafter Total
Minimum rentals $13,039 $9,106 $7,099 $4,984 $3,490 $38,297 $76,015
Total sublease
income (1,314) (915) (566) (535) (462) (1,959) (5,751)
-------------------------------------------------------
Net minimum
rentals $11,725 $8,191 $6,533 $4,449 $3,028 $36,338 $70,264
========================================================
Operating lease rental expense, including contingent lease rentals, for
years ended June 30, 1996, 1997 and 1998 was as follows:
1996 1997 1998
(In 000's)
Minimum rentals $10,194 $15,126 $15,534
Contingent rentals 60,525 70,744 85,915
------ ------ ------
70,719 85,870 101,449
Sublease rental income (1,487) (1,606) (2,136)
------ ------ ------
$69,232 $84,264 $99,313
======= ======= =======
Pursuant to the transactions consummated in March 1995, Rainbow Casino
Corporation (RCC), the former owner of 55% of the Rainbow Casino, is now
entitled to receive 10% of the net available cash flow after debt service
and other items, as defined (which amount increases to 20% of such amount
when revenues exceed $35.0 million but only on such incremental amount),
for a period of 15 years. In addition, the agreement with RCC required
that, if under defined circumstances the casino achieved earnings of at
least $10.5 million before deducting depreciation, amortization, royalty
and income taxes, then the Company would be obligated to make a one time
payment to certain principals of the original partnership of $1.0 million
which payment was earned in the year ended June 30, 1996 and paid in cash
in September 1996.
During fiscal 1996, Bally Wulff increased the amount of tax reserves by
$1.0 million (to a total reserve of $1.4 million) as a result of
developments in an ongoing quadrennial audit of Wulff's tax returns for
the years 1988 through 1991. The German tax authorities have proposed
preliminary adjustments which range from $1.4 million (which has been
accrued) to $5.0 million. The German tax authorities have not yet issued
the final assessment from their quadrennial audit.
Litigation
On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on
behalf of himself and all others similarly situated. The plaintiffs filed
suit against BGII and approximately 45 other defendants. Each defendant is
involved in the gaming business as either a gaming machine manufacturer,
distributor, or casino operator. The class action lawsuit arises out of
alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants'
actions constitute violations of the Racketeer Influenced and Corrupt
Organizations Act (RICO) and give rise to claims of common law fraud and
unjust enrichment. The plaintiffs are seeking monetary damages in excess
of $1.0 billion, and are asking that any damage awards be trebled under
applicable Federal law. Management believes the plaintiffs' lawsuit to be
without merit. The Company intends to vigorously pursue all legal defenses
available to it.
In an action filed on December 2, 1996, the Company was named as a
defendant in an action brought by Canpartners Investments IV and Cerberus
Partners, relating to loan commitment letters from August 1995,
contemplating that the plaintiffs would lend approximately $30.0 million
to partially fund the Company's then pending hostile tender offer for
BGII. In August 1998 the Company and the plaintiffs settled the litigation
for approximately $2.0 million which has been accrued for at June 30, 1998
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.
9. CONCENTRATION OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts and notes
receivable. Each of the Company's business units conducts business in and
the resulting receivables are concentrated in specific legalized gaming
regions. The ComAt June 30, 1998 net accounts and notes receivable by
region as a percentage of total net receivables are as follows:
Gaming Wall Machines
Equipment and Amusement Route Casino
and Systems Games Operations Operations Total
Germany 0.3 45.6% --% --% 45.9%
Other international
jurisdictions 25.7 0.5 -- -- 26.2
Nevada 9.1 -- 5.7 -- 14.7
Michigan 5.7 -- -- -- 5.7
Mississippi 1.1 -- 0.1 1.2
Atlantic City 1.0 -- -- -- 1.0
Others individually
less than 5% 5.3 -- -- -- 5.3
---- ---- ---- ---- ----
48.2% 46.1% 5.7% 0.1% 100.0%
==== ==== ==== ==== =====
Receivables from emerging market customers contain increased risk factors
compared to receivables at the Bally Wulff entities or other traditional
markets for Bally Gaming.
10. SEGMENT INFORMATION
The Company has operations based primarily in Germany and the United
States. The German operation's customers are a diverse group of operators
of wall machines and amusement games at arcades, hotels, restaurants and
taverns, primarily in Germany. Gaming Equipment and Systems' customers are
primarily casinos and gaming machine distributors in the United States and
abroad. Receivables of the German operations and Gaming Equipment and
Systems are generally collateralized by the related equipment. See
"Concentration of Credit Risk".
The table below presents information as to the Company's identifiable
assets and revenues, operating income, capital expenditures and
depreciation and amortization by geographic region for the years ended June
30, 1997 and 1998.
At June 30,
1997 1998
(In 000's)
Identifiable assets:
Germany $110,371 $106,886
United States 242,450 265,922
Eliminations (805) (5,971)
------- -------
Consolidated $352,016 $366,837
======== ========
Year ended June 30, 1997
(In 000's)
Operating Capital Depreciation and
Revenues Income Expenditures Amortization
Germany $142,961 $23,356 $ 2,091 $ 6,579
United States 311,334 19,346 11,166 16,027
Eliminations (9,149) (1,243) - -
------ ------ ------ ------
Consolidated $445,146 $41,459 $13,257 $22,606
======== ======= ======= =======
Year ended June 30, 1998
(In 000's)
Operating Capital Depreciation and
Revenues Income Expenditures Amortization
Germany $111,505 $13,978 $ 1,372 $ 5,747
United States 314,100 22,311 14,169 17,091
Eliminations (8,233) (26) - -
------- ------ ------ ------
Consolidated $417,372 $36,263 $15,541 $22,838
======== ======= ======= =======
11. INTERIM FINANCIAL INFORMATION (Unaudited)
Following is the unaudited quarterly results of the Company for the years
ended June 30, 1997 and 1998. This information is not covered by the
Independent Auditors' Report.
Quarter
First Second Third Fourth
(In 000's, except per share data)
1997
Revenues $102,912 $128,703 $101,691 $111,840
Operating income 8,956 13,909 8,882 9,712
Net income 635 4,145 561 444
Net income (loss) applicable
to common shares (2,261) 1,051 (2,420) (2,559)
Income (loss) per share $(0.07) $0.03 $(0.08) $(0.08)
Quarter
First Second Third Fourth
(In 000's, except per share data)
1998
Revenues $97,971 $106,714 $102,226 $110,461
Operating income 7,444 11,442 7,988 9,389
Net income (loss) (60,909) 3,346 (731) 988
Net income (loss) applicable
to common shares (79,862) 2,973 (1,115) 594
Income (loss) per share $(2.51) $0.09 $(0.03) $0.02
12. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements are presented to provide
certain financial information regarding guaranteeing and non-guaranteeing
subsidiaries in relation to the Company's Senior Subordinated Notes which
were issued in the Refinancing transaction completed in August 1997 (see
note 4). The financial information presented includes Alliance Gaming
Corporation (the "Parent") and its wholly-owned guaranteeing subsidiaries
(together the "Parent and Guaranteeing Subsidiaries"), and the
non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow,
BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and
Alliance Automaten GmbH & Co. KG (the subsidiary that holds the Company's
German interests) (together the "Non-Guaranteeing Subsidiaries"). The
notes to consolidating financial statements should be read in conjunction
with these consolidating financial statements.
CONSOLIDATING BALANCE SHEETS
June 30, 1997
(In 000's)
ASSETS
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Current assets:
Cash and cash equivalents $ 16,462 $ 12,462 $ - $ 28,924
Accounts and notes receivable, net 31,799 57,207 (1,305) 87,701
Inventories, net 19,231 18,778 (680) 37,329
Other current assets 6,695 2,932 - 9,627
------ ------ ------- ------
Total current assets 74,187 91,379 (1,985) 163,581
Long-term notes receivable, net 96,271 1,501 (88,791) 8,981
Leased equipment, net - 7,902 - 7,902
Property, plant and equipment, net 41,836 32,811 - 74,647
Excess of costs over net assets of acquired
businesses, net 41,185 21,031 (118) 62,098
Intangible assets, net 17,979 252 - 18,231
Investments in subsidiaries 100,605 - (100,605) -
Deferred tax assets 6,265 5,511 - 11,776
Other assets, net 16,045 (11,269) 24 4,800
------- ------- ------- -------
$394,373 $149,118 $(191,475) $352,016
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 9,936 $ 4,262 $ 72 $ 14,270
Accrued liabilities 21,129 16,727 (464) 37,392
Current maturities of long-term debt 585 1,348 (809) 1,124
----- ------ ----- ------
Total current liabilities 31,650 22,337 (1,201) 52,786
Senior Secured Notes, net 151,224 - - 151,224
Other long-term debt, less current
maturities 87,924 22,676 (89,109) 21,491
Other liabilities 9,366 3,500 (433) 12,433
Total liabilities 280,164 48,513 (90,743) 237,934
------- ------ ------- -------
Minority interest 1,546 - - 1,546
Series B Special Stock 58,981 - - 58,981
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock 12,368 - - 12,368
Common Stock 3,185 17,832 (17,832) 3,185
Additional paid-in capital 138,590 68,699 (68,699) 138,590
Cumulative translation adjustment (11,719) (11,880) 11,880 (11,719)
Retained earnings (accumulated
deficit) (88,742) 25,954 (26,081) (88,869)
Total stockholders' equity
(deficiency) 53,682 100,605 (100,732) 53,555
------ ------- ------- ------
$394,373 $149,118 $(191,475) $352,016
======== ======== ======== ========
See accompanying notes.
CONSOLIDATING BALANCE SHEETS
June 30, 1998
(In 000's)
ASSETS
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Current assets:
Cash and cash equivalents $ 8,609 $ 14,878 $ - $ 23,487
Accounts and notes receivable, net 44,757 52,380 (3,678) 93,459
Inventories, net 27,957 14,990 (529) 42,418
Other current assets 7,998 3,713 - 11,711
------ ------ -------- -------
Total current assets 89,321 85,961 (4,207) 171,075
Long-term notes receivable, net 95,036 1,926 (89,031) 7,931
Leased equipment, net 2 7,323 - 7,325
Property, plant and equipment, net 45,052 32,853 - 77,905
Excess of costs over net assets of acquired
businesses, net 39,963 19,989 - 59,952
Intangible assets, net 26,248 484 - 26,732
Investments in subsidiaries 104,219 - (104,219) -
Deferred tax assets 7,123 4,344 - 11,467
Other assets, net 15,330 (5,468) (5,412) 4,450
------- ------ --------- -------
$422,294 $147,412 $(202,869) $366,837
======== ======== ========== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 7,373 $ 3,104 $ - $ 10,477
Accrued liabilities 26,415 13,705 (998) 39,122
Current maturities of long-term debt 6,912 3,176 (8,092) 1,996
------ ------ ------- ------
Total current liabilities 40,700 19,985 (9,090) 51,595
Term loan facilities 137,800 - - 137,800
Senior Subordinated Notes due 2007, net 149,245 - - 149,245
Other long-term debt, less current
maturities 105,279 20,878 (89,245) 36,912
Other liabilities 10,729 2,330 (341) 12,718
Total liabilities 443,753 43,193 (98,676) 388,270
------- ------ -------- -------
Minority interest 2,315 - - 2,315
Commitments and contingencies
Stockholders' equity ( deficiency):
Series E Special Stock 13,732 - - 13,732
Common Stock 3,212 17,832 (17,832) 3,212
Additional paid-in capital 122,980 68,700 (68,700) 122,980
Cumulative translation adjustment (13,946) (14,140) 14,140 (13,946)
Retained earnings (accumulated deficit)(149,752) 31,827 (31,801) (149,726)
Total stockholders' equity
(deficiency) (23,774) 104,219 (104,193) (23,748)
------ ------- ------- ------
$422,294 $147,412 $(202,869) $366,837
======== ======== ======== ========
See accompanying notes.
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1996
(In 000's)
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Revenues:
Gaming equipment and systems $ 11,700 $1,223 $(2,348) $ 10,575
Wall machines and amusement games - 3,356 - 3,356
Route operations 93,037 16,901 - 109,938
Casino operations 14,747 33,862 (100) 48,509
------- ------ ------- ------
119,484 55,342 (2,448) 172,378
------- ------ ------- -------
Costs and expenses:
Cost of gaming equipment and systems 8,531 1,030 (2,348) 7,213
Cost of wall machines and amusement
games - 2,022 - 2,022
Cost of route operations 73,436 10,776 - 84,212
Cost of casino operations 9,722 12,324 - 22,046
Selling, general and administrative 19,652 11,710 (92) 31,270
Research and development 236 134 - 370
Depreciation and amortization 8,746 2,242 - 10,988
Direct acquisition costs 55,843 - - 55,843
Unusual items 5,498 - - 5,498
----- ------ ------ ------
181,664 40,238 (2,440) 219,462
------- ------ ------ -------
Operating income (loss) (62,180) 15,104 (8) (47,084)
Earnings in consolidated subsidiaries 8,378 - (8,378) -
Other income (expense):
Interest income 1,654 391 (474) 1,571
Interest expense (7,407) (1,964) 474 (8,897)
Rainbow royalty - (4,070) - (4,070)
Minority interest (963) - - (963)
Other, net 987 209 (895) 301
----- ----- ----- -----
Income (loss) before income taxes (59,531) 9,670 (9,281) (59,142)
Income tax provision (366) (1,292) 903 (755)
------ ------- ----- ------
Net income (loss) (59,897) 8,378 (8,378) (59,897)
Special Stock dividends (362) - - (362
------ ----- ----- ------
Net income (loss) applicable to
common shares $(60,259) $ 8,378 $ (8,378) $(60,259)
======== ======= ======= ========
See accompanying notes.
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1997
(In 000's)
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Revenues:
Gaming equipment and systems $130,764 $ 11,070 $ (7,100) $134,734
Wall machines and amusement games - 131,954 (20) 131,934
Route operations 108,148 18,880 - 127,028
Casino operations 11,738 39,712 - 51,450
------- ------- ------ --------
250,650 201,616 (7,120) 445,146
------- ------- ------- -------
Costs and expenses:
Cost of gaming equipment and systems 82,673 8,796 (6,973) 84,496
Cost of wall machines and amusement
games - 68,437 (11) 68,426
Cost of route operations 83,592 12,124 - 95,716
Cost of casino operations 7,528 14,741 - 22,269
Selling, general and administrative 53,913 45,616 (9) 99,520
Research and development 6,701 3,253 - 9,954
Depreciation and amortization 13,390 9,216 - 22,606
Unusual items 700 - - 700
------ ------- ------ -------
248,497 162,183 (6,993) 403,687
------- ------- ------ -------
Operating income (loss) 2,153 39,433 (127) 41,459
Earnings in consolidated subsidiaries 23,624 - (23,624) -
Other income (expense):
Interest income 1,635 369 (384) 1,620
Interest expense (21,042) (2,968) 384 (23,626)
Rainbow royalty - (4,722) - (4,722)
Minority interest (1,092) - - (1,092)
Other, net 135 4 - 139
----- ----- ------ ------
Income before income taxes 5,413 32,116 (23,751) 13,778
Income tax benefit (provision) 499 (8,492) - (7,993)
----- ------- ------ ------
Net income 5,912 23,624 (23,751) 5,785
Special Stock dividends (11,974) - - (11,974)
------- ------ ------ -------
Net income (loss) applicable to
common shares $(6,062) $23,624 $(23,751) $(6,189)
======= ======= ======= =======
See accompanying notes.
CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 1998
(In 000's)
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Revenues:
Gaming equipment and systems $104,141 $ 13,455 $(7,999) $109,597
Wall machines and amusement games - 98,759 (148) 98,611
Route operations 127,424 21,083 - 148,507
Casino operations 13,426 47,231 - 60,657
------- ------- ------ -------
244,991 180,528 (8,147) 417,372
------- ------- ------ -------
Costs and expenses:
Cost of gaming equipment and systems 60,154 9,555 (8,025) 61,684
Cost of wall machines and amusement
games - 54,389 (148) 54,241
Cost of route operations 101,052 13,593 - 114,645
Cost of casino operations 8,278 17,652 - 25,930
Selling, general and administrative 47,066 39,252 - 86,318
Research and development 12,739 3,039 - 15,778
Depreciation and amortization 14,181 8,657 - 22,838
Unusual items (370) 45 - (325)
------ ------- ------ ------
243,100 146,182 (8,173) 381,109
------- ------- ------ -------
Operating income 1,891 34,346 26 36,263
Earnings in consolidated subsidiaries 22,844 - (22,844) -
Other income (expense):
Interest income 1,339 418 (944) 813
Interest expense (27,581) (1,963) 944 (28,600)
Rainbow royalty 4,884 (5,471) - (587)
Rainbow royalty buyout (19,000) - - (19,000)
Minority interest (2,002) - - (2,002)
Other, net 1,136 (111) - 1,025
------ ----- ------ ------
Income (loss) before income taxes (16,489) 27,219 (22,818) (12,088)
Income tax (provision) benefit 1,190 (4,375) - (3,185)
------ ------ ------ -------
Net income (loss) before extraordinary
item (15,299) 22,844 (22,818) (15,273)
Extraordinary loss, without tax benefit(42,033) - - (42,033)
Net income (loss) (57,332) 22,844 (22,818) (57,306)
Special Stock dividends (3,551) - - (3,551)
Premium on repurchase of Series B
Special Stock (16,553) - - (16,553)
------- ------ ------- -------
Net income (loss) applicable to
common shares $(77,436) $22,844 $(22,818) $(77,410)
======== ======= ======== ========
See accompanying unaudited note.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1996
(In 000's)
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Cash flows from operating activities:
Net income (loss) $(59,897) $ 8,378 $(8,378) $(59,897)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,746 2,242 - 10,988
Amortization of debt discounts 9 236 - 245
Loss on debenture conversion 30,079 - - 30,079
Write down of other assets 6,117 (22) - 6,095
(Gain) loss on sale of assets (13) 118 - 105
Provision for doubtful receivables 973 47 - 1,020
Other 2,839 (1,295) - 1,544
Change in operating assets and liabilities,
net of effects of businesses acquired:
Accounts and notes receivable (3,642) (2,389) 97 (5,934)
Inventories 5,754 90 - 5,844
Other current assets (1,508) 1,413 - (95)
Intercompany accoumts (7,038) (1,340) 8,378 -
Accounts payable (3,195) 1,403 (97) (1,889)
Accrued liabilities 12,930 (174) 24 12,780
------ ------ ----- ------
Net cash provided by (used in) operating
activities (7,846) 8,707 24 885
Cash flows from investing activities:
Acquisitions of businesses, net of cash
acquired (79,209) - - (79,209)
Additions to property, plant and equipment (6,290) (1,811) - (8,101)
Proceeds from disposal of property and
equipment 2,106 176 - 2,282
Proceeds from sales of securities available
for sale 13,516 - - 13,516
Other (7,156) 2,065 - (5,091)
------ ----- ----- ------
Net cash provided by (used in) investing
activities (77,033) 430 - (76,603)
Cash flows from financing activities:
Proceeds from long-term debt 155,236 1,301 (645) 155,892
Capitalized debt issuance costs (10,472) - - (10,472)
Reduction of long-term debt (47,233) (4,834) 621 (51,446)
Issuance of Series B Special Stock, net of
discount 15,000 - - 15,000
Issuance of common stock 4,400 - - 4,400
Convertible debentures conversion fees (3,333) - - (3,333)
------ ----- ----- -------
Net cash provided by (used in)
financing activities 113,598 (3,533) (24) 110,041
Cash and cash equivalents:
Increase for year 28,719 5,604 - 34,323
Balance, beginning of year 8,235 5,499 - 13,734
------ ------ ------ ------
Balance, end of year $36,954 $11,103 $ - $48,057
======= ======= ======= =======
See accompanying notes.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1997
(In 000's)
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Cash flows from operating activities:
Net income $ 5,912 $23,624 $(23,751) $ 5,785
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 13,390 9,216 - 22,606
Amortization of debt discounts 295 512 - 807
Write down of other assets 803 272 - 1,075
Loss on sale of assets 503 730 - 1,233
Provision for doubtful receivables 5,049 4,010 - 9,059
Other 32 (683) - (651)
Net change in operating assets and liabilities:
Accounts and notes receivable 1,912 (10,495) 3,982 (4,601)
Inventories 4,587 (12,165) 680 (6,898)
Other current assets (287) (1,262) - (1,549)
Intercompany accounts (20,472) 5,673 14,799 -
Accounts payable (4,425) (177) 2,632 (1,970)
Accrued liabilities (8,943) 7,269 914 (760)
------ ------ ----- ------
Net cash provided by (used in) operating
activities (1,644) 26,524 (744) 24,136
Cash flows from investing activities:
Additions to property, plant and equipment (9,198) (4,059) - (13,257)
Proceeds from disposal of property, plant
and equipment 78 176 - 254
Other additions to long-term assets (8,375) (199) - (8,574)
------ ------ ----- ------
Net cash used in investing activities (17,495) (4,082) - (21,577)
Cash flows from financing activities:
Reduction of long-term debt (767) (6,751) 744 (6,774)
Net change in credit lines (7,525) (4,053) - (11,578)
Repurchase of Series B Special Stock (3,879) - - (3,879)
Proceeds from exercise of stock options 767 - - 767
Dividends received (paid) 10,051 (10,051) - -
------- ------- ---- -------
Net cash used in financing activities (1,353) (20,855) 744 (21,464)
Effect of exchange rate changes on cash - (228) - (228)
Cash and cash equivalents:
Increase (decrease) for period (20,492) 1,359 - (19,133)
Balance, beginning of period 36,954 11,103 - 48,057
------- ------- ---- -------
Balance, end of period $16,462 $12,462 $ - $28,924
======= ======= ====== =======
See accompanying unaudited note.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 1998
(In 000's)
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Cash flows from operating activities:
Net income (loss) $(57,332) $22,844 $(22,818) $(57,306)
Adjustments to reconcile net income
(loss)to net cash provided by
(used in) operating activities:
Depreciation and amortization 14,181 8,657 - 22,838
Amortization of debt discounts 44 - - 44
Extraordinary item 42,033 - - 42,033
Write down of other assets 2,447 - (118) 2,329
(Gain) loss on sale of assets 185 (52) - 133
Provision for losses on (recovery of)
receivables (8,278) 1,084 - (7,194)
Other (140) (3) 92 (51)
Net change in operating assets and liabilities:
Accounts and notes receivable (4,795) 3,318 3,423 1,946
Inventories (8,870) (200) (151) (9,221)
Other current assets (1,100) (1,912) - (3,012)
Intercompany accounts (17,688) (430) 18,118 -
Accounts payable (2,563) (1,158) (72) (3,793)
Accrued liabilities 6,150 (3,022) (534) 2,594
------- ------ ----- -----
Net cash provided by (used in operating
activities (35,726) 29,126 (2,060) (8,660)
Cash flows from investing activities:
Additions to property, plant and equipment (11,534) (4,007) - (15,541)
Proceeds from disposal of property, plant
and equipment (88) 143 - 55
Additions to long-term assets (9,263) (5,873) 5,503 (9,633)
Net cash used in investing activities (20,885) (9,737) 5,503 (25,119)
------- ------ ----- -------
Cash flows from financing activities:
Refinancing fees and expenses (32,752) - - (32,752)
Capitalized debt issuance costs (11,456) - - (11,456)
Proceeds from long-term debt 309,318 - (5,584) 303,734
Reduction of long-term debt (179,348) (2,540) 2,141 (179,747)
Net change in credit lines 22,738 2,660 - 25,398
Redemption of Series B Special Stock (77,568) - - (77,568)
Proceeds from exercise of stock options 855 - - 855
Dividends received (paid) 16,971 (16,971) - -
------- ------- ------ -------
Net cash provided by (used in)
financing activities 48,758 (16,851) (3,443) 28,464
Effect of exchange rate changes on cash - (122) - (122)
Cash and cash equivalents:
Increase (decrease) for period (7,853) 2,416 - (5,437)
Balance, beginning of period 16,462 12,462 - 28,924
------ ------- ------ ------
Balance, end of period $ 8,609 $14,878 $ - $23,487
======= ======= ====== =======
See accompanying unaudited note.
Basis of Presentation
These notes to consolidating financial statements should be read in conjunction
with the consolidated financial statements and notes thereto. Certain
reclassifications have been made to prior years' financial statements to conform
with the current year presentation.
Debt and Lines of Credit
Long-term debt and lines of credit at June 30, 1998 consist of the following :
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
(in 000's)
10% Senior Subordinated Notes due
2007, net of unamortized
discount $149,245 $ - $ - $149,245
Term loan facilities:
Tranche B Term Loan 74,438 - - 74,438
Tranche C Term Loan 39,700 - - 39,700
Delayed Draw Term Facility 25,000 - - 25,000
Revolving Credit Facility 22,700 12,271 - 34,971
Intercompany notes payable 88,096 9,241 (97,337) -
Other 57 2,542 - 2,599
------- ------ ------- -------
399,236 24,054 (97,337) 325,953
Less current maturities 6,912 3,176 (8,092) 1,996
------- ------ ------- -------
Long-term debt, less current
maturities $392,324 $20,878 $(89,245) $323,957
======== ======= ======== ========
Income Taxes
The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 1997 are as follows (in 000's):
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Deferred Tax Assets:
Net operating loss carry forwards $ 6,049 $ $ $ 6,049
Foreign tax credit carry forwards 11,843 11,843
Inventory obsolescence reserves 3,360 648 4,008
Bad debt reserves 6,359 6,359
Accruals not currently deductible
for tax purposes 3,585 3,585
Other 4,541 4,863 9,404
----- ------ ----- -----
Total gross deferred tax assets 35,737 5,511 41,248
Less: Valuation allowance 29,472 29,472
------ ------ ----- ------
Deferred tax assets $6,265 $ 5,511 $ - $ 11,776
------ ------- ------ --------
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Deferred Tax Liabilities:
Property and equipment, principally
due to depreciation differences $3,703 $ $ $ 3,703
Other 3,162 3,500 6,662
----- ----- ---- -----
Total gross deferred tax liabilities 6,865 3,500 10,365
----- ----- ---- ------
Net deferred tax assets (liabilities) $ (600) $2,011 $ - $ 1,411
====== ====== ==== ======
The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 1998 are as follows (in 000's):
Alliance
Gaming
Parent and Non- Corporation
Guaranteeing Guaranteeing Elimina- and
Subsidiaries Subsidiaries tions Subsidiaries
Deferred Tax Assets:
Net operating loss carry forwards $15,254 $ $ $15,254
Foreign tax credit carry forwards 12,816 12,816
Inventory obsolescence reserves 2,729 853 3,582
Bad debt reserves 2,045 11 2,056
Accruals not currently deductible
for tax purposes 3,809 299 4,108
Refinancing costs being amortized
for tax purposes 13,125 13,125
Other 4,430 3,181 7,611
------ ----- ----- -----
Total gross deferred tax assets 54,208 4,344 58,552
Less: Valuation allowance (47,085) (47,085)
------ ----- ----- ------
Deferred tax assets $ 7,123 $ 4,344 $ - $11,467
------- ------- ----- -------
Deferred Tax Liabilities:
Property and equipment, principally
due to depreciation differences $ 3,268 $ 1,494 $ $ 4,762
Other 4,332 836 5,168
----- ----- ----- -----
Total gross deferred tax liabilities 7,600 2,330 9,930
----- ----- ----- -----
Net deferred tax assets (liabilities) $ (477) $ 2,014 $ - $ 1,537
======= ======= ====== =======
13. RESERVES AND ALLOWANCES
The following tables represent the activity for each of the fiscal years
ended June 30, 1996, 1997 and 1998 for each of the valuation reserve and
allowance accounts (in 000,s):
Balance at Balance at
Beginning of End of
Year Additions Deductions Year
Allowance for doubtful accounts:
Year ended June 30, 1998 $23,901 $ 2,722 $13,582 (b) $13,041
Year ended June 30, 1997 19,497 9,179 4,775 23,901
Year ended June 30, 1996 1,659 18,995 (a) 1,157 19,497
Inventory valuation allowance:
Year ended June 30, 1998 $8,856 $ 355 $2,414 $6,797
Year ended June 30, 1997 9,484 1,719 2,347 8,856
Year ended June 30, 1996 - 11,315 (a) 1,831 9,484
Other assets valuation reserve:
Year ended June 30, 1998 $3,502 $ 18 $ 32 $3,488
Year ended June 30, 1997 3,679 162 339 3,502
Year ended June 30, 1996 631 4,629 1,581 3,679
_______________
(a) Includes reserves assigned to BGII receivables and inventory in purchase
accounting of $17.6 million and $9.8 million, respectively.
(b) Includes the $6.0 million net reversal of bad debt reserves related to the
resolution of certain receivables sold with recourse to General Electric
Capital Corporation. Such amount was included in unusual items in the
accompanying consolidated statement of operations.