-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NBbqAUU/pVs2qRNEsRbd+KBStSFD75zoRyaFGzRjwfCDxWeGxxJeKa049xcqyGhN h0aIOiMAGwZqWrOpR09a2A== 0000002491-95-000003.txt : 19951002 0000002491-95-000003.hdr.sgml : 19951002 ACCESSION NUMBER: 0000002491-95-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE GAMING CORP CENTRAL INDEX KEY: 0000002491 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880104066 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04281 FILM NUMBER: 95576750 BUSINESS ADDRESS: STREET 1: 4380 BOULDER HGWY CITY: LAS VEGAS STATE: NV ZIP: 89121 BUSINESS PHONE: 7024354200 MAIL ADDRESS: STREET 1: 4380 BOULDER HIGHWAY CITY: LAS VEGAS STATE: NV ZIP: 89121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED GAMING INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMING & TECHNOLOGY INC DATE OF NAME CHANGE: 19890206 FORMER COMPANY: FORMER CONFORMED NAME: ADVANCED PATENT TECHNOLOGY INC DATE OF NAME CHANGE: 19830519 10-K 1 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 [FEE REQUIRED] For the Fiscal Year ended June 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the SECURITIES EXCHANGE ACT OF 1934 [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.) 4380 Boulder Highway Las Vegas, Nevada 89121 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (702) 435-4200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value (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 The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $32,641,000 as of September 25, 1995. The number of shares of Common Stock, $0.10 par value, outstanding as of September 25, 1995 according to the records of registrant's registrar and transfer agent, was 11,654,150. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on or about December 15, 1995 (to be filed) are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS Introduction Alliance Gaming Corporation (the "Company") is a diversified gaming company which (at June 30, 1995) operates approximately 7,184 gaming devices (primarily video poker devices and slot machines). The Company is the largest private gaming device route operator in Nevada and one of the largest in the United States. In its Nevada gaming device route operations, the Company selects, owns, installs, manages and services gaming devices (approximately 5,208 as of June 30, 1995) in third-party owned local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores (approximately 516 locations as of June 30, 1995). Also in Nevada, the Company owns and operates one full service small casino and leases and operates a small casino, one small casino-hotel and three taverns which collectively have approximately 703 gaming devices and 9 table games. In the fiscal year ended June 30, 1992, the Company expanded its gaming device route operations to Louisiana, where it is the operator of approximately 694 video poker devices at the only racetrack and associated off-track betting parlors ("OTBs") in the greater New Orleans area. In March 1995, the Company completed its acquisition of the general partnership interest in the Rainbow Casino Vicksburg Partnership, L.P. ("RCVP"). RCVP owns a dockside casino in Vicksburg, Mississippi which contains approximately 579 gaming devices and 28 table games. Additionally, the Company is manages the casino pursuant to a long term management contract. The Company had previously acquired 45% of RCVP through a limited partnership interest acquired in July 1994. The Company also designs and manufactures gaming devices which are exclusively used in its Nevada operations. The Company's gaming strategy is to aggressively build its gaming business in both existing markets, such as Nevada, as well as in emerging gaming markets nationally. The Company will use its diversified gaming expertise, strengthened executive management, business partners and investment community relationships to pursue new casino operations as well as dockside, riverboat and Native American operations in addition to expanding the existing route business as well as the supply and management of gaming devices. The Company was incorporated in Nevada on September 30, 1968 under the name Advanced Patent Technology. The Company changed its name to Gaming & Technology, Inc. in 1982, to United Gaming, Inc. in 1988 and to Alliance Gaming Corporation on December 19, 1994. The Company conducts its gaming operations through directly and indirectly owned subsidiaries. The term "Company" as used herein refers to Alliance Gaming Corporation and such subsidiaries unless the context otherwise requires. The Company's principal executive offices are located at 4380 Boulder Highway, Las Vegas, Nevada 89121; telephone (702)435-4200. Gaming Device Route Operations Nevada Operations. The Company's Nevada gaming route operations involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other gaming devices in local establishments such as taverns, restaurants, supermarkets, drug stores and convenience stores operated by third parties ("local establishments"). The Company's gaming device route operations target local residents who generally frequent local establishments close to their homes. The following table sets forth certain historical data concerning the Company's Nevada gaming device route operations:
As of June 30 1991 1992 1993 1994 1995 Number of gaming devices owned 5,240 5,505 5,121 5,148 5,208 Number of locations 527 552 508 496 516
The Company enters into gaming device route agreements with local establishments through either space leases or revenue-sharing agreements. In revenue sharing arrangements, most common with taverns, restaurants and convenience stores, the Company does not pay rent, but rather receives a percentage of the revenues from the gaming devices. In revenue sharing arrangements, both the owner of the local establishment and the Company must have a gaming license. In space lease arrangements, most common with supermarkets and drug stores, the Company pays a fixed rental to the owner of the local establishment and the Company receives all of the revenues derived from the gaming devices. In such 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 devices. Revenue-sharing arrangements accounted for approximately 86% of the Nevada gaming device route revenues and 64% of its operating Nevada route gaming devices in fiscal 1995. At June 30, 1995, the weighted average remaining term of the Company's revenue sharing arrangements was approximately 4.2 years. Space lease arrangements accounted for approximately 14% of the Nevada gaming device route revenues and 36% of its operating Nevada route gaming devices in fiscal 1995. At June 30, 1995, the weighted average remaining term of the Company's space leases was 2.7 years. The Company has historically been able to renew or replace revenues from expiring agreements with revenues generated by renewal or replacement contracts. However, during the past few years, increased competitive pressures in the gaming route business have increased the portion of gaming route revenues payable to the local establishment, decreasing the Company's gross margins from these operations. As a result, the Company has refocused its Nevada gaming device route operations to emphasize return on investment rather than increasing market share and has undertaken a systematic review process to adjust its contract mix to emphasize higher margin contracts and, where permissible, cancelling or not renewing unprofitable contracts. Marketing. The Company believes it has a diversified customer base with no one customer accounting for more than 10% of the Company's revenues generated from Nevada gaming device route operations during the fiscal year ended June 30, 1995 (although approximately 14.1% of such revenues was generated through an affiliated group of such customers). As the largest Nevada gaming device route operator, the Company believes that it is able to differentiate itself from its competitors through a full-service operation providing its customers marketing assistance and promotional allowances and using its advanced design capabilities to provide gaming devices with features customized to customers' needs, such as Gambler's Choice, a multi-game device tailored to the local gaming market. Strategy. The Company believes that technological enhancements are the key to improving the appeal of its games and locations, thereby increasing operating margins. As a result, the Company has developed and is currently testing a new system called "Gamblers Bonus". Gamblers Bonus is designed as a cardless slot players' club and player tracking system which, upon approval of by Nevada gaming authorities, will allow multiple route locations to be linked together into a distributed gaming environment. Through this technology, the Company will be able to provide its players and customers with many of the same gaming choices currently available only in a larger scale casino environment such as multi-location progressive jackpots, bigger jackpot payouts and traditional players' club enhancements. Additionally, the Company will offer a series of new and unique games available only to members of the Gamblers Bonus players' club. The Company believes Gamblers Bonus will improve both the revenues and operating efficiencies of its Nevada route operations and has the potential to enhance the basic structure of the gaming route segment of the gaming industry. The Company is continuing its efforts to achieve cost reductions (subsequent to cost reductions made in fiscal 1994) and adjust its contract mix to emphasize higher margin arrangements designed to incentivize location owners to increase gaming revenues. Additionally, in keeping with the trends in the Nevada market, the Company is updating its gaming device base with bill-acceptor equipped gaming devices which are also expected to improve revenues and operating efficiencies. The Company continues to investigate further technological enhancements. The Company believes that following these steps will maximize the potential of its mature and competitive Nevada gaming route operations. In addition, the Company intends to utilize its expertise in Nevada gaming route operations to develop new route operation opportunities in less mature markets. Louisiana Operations. In March 1992, the Company capitalized on its Nevada gaming device route expertise to obtain a contract to operate video poker gaming devices in the greater New Orleans, Louisiana area through its controlled subsidiary, Video Services, Inc. ("VSI"). The Company entered into an operating agreement which runs through May 2002 with Fair Grounds Corporation, Jefferson Downs Corporation and Finish Line Management Corporation (collectively, "Fair Grounds") for the Company to be the exclusive operator of video poker devices at the only racetrack and nine associated OTB parlors in the greater New Orleans area. The Company selects, installs, manages and services video poker devices for each of the 10 facilities owned by Fair Grounds for which it receives a percentage of the revenue generated by the devices. The Company currently has installed 694 video poker devices in Louisiana. Under the Louisiana gaming laws and regulations, the majority stockholder of any entity operating video poker devices in Louisiana must be a domiciled resident of the State of Louisiana. As a result, the Company owns 49% of the capital stock of VSI and three prominent members of the Louisiana business and legal community own the remaining 51%. The Company, however, owns all the voting stock of VSI and the majority of its officers and directors are Company employees. The Company has a 71% interest in dividends of VSI in the event dividends are declared. The Company also formed two other Louisiana subsidiaries, Southern Video Services, Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI are structured in a manner similar to VSI except that the Company is entitled to receive 60% of any SVS dividends. Under the terms of its contract with Fair Grounds, the Company must conduct any additional video poker operations in Louisiana other than gaming at racetracks or OTB parlors through SVS. To date, SVS and VDSI have not engaged in business in Louisiana. In addition, the Company and Fair Grounds may have certain mutual rights of first refusal to participate in certain Louisiana riverboat gaming opportunities of the other party on terms and conditions to be specified. The Company is prohibited by the Louisiana Act from engaging in both the manufacture and operation of gaming devices in Louisiana and, therefore, the Company does not manufacture its own gaming devices for use in Louisiana. On December 17, 1993, the Company incurred a fire loss at the Fairgrounds Race Course in New Orleans where the Company operated 199 gaming devices prior to the fire, 193 of which were destroyed in the fire. The Company was fully insured for all equipment, leasehold improvements, other assets and business income with the exception of immaterial deductibles. From December 17, 1993 through June 30, 1995, the Company recorded approximately $488,000 of income from business interruption insurance proceeds. The Company is discussing settlement of additional business interruption claims with the insurance carrier. Marketing. VSI has developed an extensive marketing program under the name "The Players Room" which is 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. Strategy. The Company intends to selectively expand its operations in the greater New Orleans area by increasing the number of video poker devices in certain of its existing locations as demand warrants, as well as investigating the addition of new locations under its current contract with the Fair Grounds in areas where competitive factors are favorable. Under the Louisiana Act, racetracks and OTB parlors are permitted to install an unlimited number of video poker devices while truckstops and taverns may install only limited numbers of such devices. Casino Operations On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. Through a wholly-owned subsidiary, the Company originally purchased a 45% limited partnership interest in RCVP, a Mississippi limited partnership which owns the casino, all assets (including the gaming equipment) associated with the casino and certain adjacent parcels of land. The 55% general partnership interest in RCVP was held by The Rainbow Casino Corporation, an unaffiliated Mississippi corporation ("RCC"). Pursuant to a management agreement, the Company, through a wholly-owned subsidiary also serves as manager of the casino. As previously reported, in connection with the completion of the casino and the acquisition of its original 45% limited partnership interest, the Company funded a $3,250,000 advance to RCC on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to payments due to HFS). Under the terms of this financing, the Company received a royalty of 5.2% of annual gross revenues. On March 29, 1995, the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in RCVP and increased its partnership interest. In exchange for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a financing fee payable to HFS) related to the completion of certain incomplete elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy), a related cash payment by the Company to NGM and commitments by the Company and NGM to fund additional financing required to complete the project (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As adjusted, RCC is entitled to receive 10% of the net available cash flows after debt service and other items, as defined, (which amount shall increase to 20% of cash above $35,000,000 (i.e. only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. Also, the Company's 5.2% royalty on gross revenues was terminated on the date it became the general partner. The entire project consists of the Rainbow Casino and also includes an 89-room Days Inn hotel and a 10 acre indoor and outdoor state-of-the-art entertainment complex called Funtricity Entertainment Park, which was developed by a subsidiary of Six Flags. Both the hotel and entertainment park opened in late May 1995. The entire property, known as Vicksburg Landing, is the only destination of its kind in Mississippi containing a unique casino/family entertainment complex. At June 30, 1995, the Company's Nevada casino operations consisted of owning and operating the Plantation and leasing and operating a small casino and one small casino-hotel. In April 1990, the Company purchased substantially all of the assets of the Plantation Casino (the "Plantation") located near the border of Reno and Sparks in northern Nevada. The Plantation is a 20,000 square foot casino containing 477 gaming devices, keno and 7 table games, including blackjack, craps, roulette and poker. In addition, the Plantation offers a race and sports book which is leased to an independent race and sports book operator. The Plantation, which also includes an approximately 300 seat restaurant, is convenient to both Reno and Sparks and caters to the local market. In July 1993, the Company began leasing and operating the casino at the 326 room Quality Inn located approximately one mile from the Las Vegas Strip. The casino at Quality Inn contains 156 gaming devices and 3 table games. The Company's lease to operate this facility expired in July 1995. The Company has chosen not to exercise its renewal rights under this lease. The Company is currently operating under modified lease terms which expire in December 1995. The Company leases and operates the Mizpah Hotel and Casino ("Mizpah"), a small casino and hotel in Tonopah, Nevada. The Mizpah has 56 rooms, two restaurants and 70 gaming devices catering primarily to local residents and travelers between Reno and Las Vegas. The Company's Mizpah lease has a remaining term of approximately 7.5 years with an option on the Company's behalf to terminate the lease arrangement at any time after December 31, 1995 with 120 days notice. The Company has notified the landlord of the Mizpah of its intention to exercise the termination clause of the lease and gave the requisite 120 days notice at that time. Accordingly, the Company's lease will expire in April 1996. Marketing. The Company's casinos target the cost conscious local market. The Company promotes its casinos primarily by providing quality food at reasonable prices and through special promotional events. The Company believes its experience with operating small casinos targeted to local markets will enable it to effectively operate casinos in emerging gaming jurisdictions that have similar characteristics. Tavern Operations The Company currently operates three taverns in the Las Vegas area. The taverns were acquired when the owners of the locations defaulted on their subleases with the Company. The three locations operate a total of 80 gaming devices. In addition, each of the locations include full-service restaurants. The Company owns three additional such locations which defaulted on their subleases, but which are not currently open for business or are operated by unaffiliated third parties pending the sale of the properties. The remaining terms of the leases on the taverns range from approximately 3 to 15 years with an average remaining lease term of approximately 7 years. The lease payments range from approximately $6,700 to $10,280 per month for locations ranging in size from approximately 3,500 square feet to approximately 7,000 square feet. The Company's tavern operations are designed to attract the local customer and emphasize repeat business. Due to continuing operating losses and the incompatibility of small independent tavern operations with the Company's overall growth strategy, in fiscal 1994 the Company elected to dispose of its currently operated taverns. As a result of this decision, the Company wrote down certain assets related to the taverns to their net realizable value and expensed the present value of future lease payments net of assumed future sublease income. Subsequently, the Company has entered into an agreement to sell all six tavern locations to an unaffiliated third party. This agreement is subject to, among other conditions, obtaining appropriate approvals from Nevada gaming authorities, which approval is expected by December 1995. No material gain or loss will be recognized upon consummation of this sale, but the Company expects ongoing results of operations to improve as a result of the disposition of these unprofitable tavern locations. In the future, although it does not intend to, the Company may acquire other taverns due to defaults of current tenants on their subleases or otherwise. In each such case, the Company will evaluate the prospects and determine the best method of disposing of such locations. Manufacturing Operations The Company currently manufactures and distributes gaming devices in Nevada for use in its gaming device route operations. The Company manufactured approximately 80% of the gaming devices currently used in its Nevada gaming device route operations. The manufacturing process generally involves the assembly of standard components which are readily available from various sources. The Company is not dependent upon any one supplier for the materials or components used in its manufacturing operations. The Company also participates in the development of gaming ideas, technology and manufacturing. The Company has developed gaming devices with bill acceptor and ticket printer features, as well as touch screen and multi-game capabilities. The Company anticipates utilizing these devices in many of its Nevada gaming device route locations instead of the traditional coin operated devices. The Company believes the adoption of the bill acceptor and ticket printer features will increase the reliability of its Nevada gaming devices, thereby reducing service costs. The Company believes its development and manufacturing capabilities are a competitive advantage. Competition Nevada. Gaming of all types is available throughout Nevada in numerous locations, including many locations similar to those at which the Company operates gaming devices. All of these other gaming opportunities may compete directly or indirectly with the Company. Many of the Company's competitors possess substantially greater financial and other resources than the Company. Many of such competitors include large casino-hotels which offer more variety and amenities and may be perceived to have more favorable locations than the Company. The Company is subject to substantial direct competition for its space lease and revenue sharing gaming device locations from several large gaming route operators and numerous small operators, located principally in Las Vegas, Reno and the surrounding areas. The principal method of competition for gaming route operators include the economic terms of the space lease or revenue sharing arrangement, the services provided and the reputation of the route operator. Price competition is intense and has reduced the Company's gross margin on such operations over the past several years as the percentage of the gaming device revenues retained by local establishment owners has increased. The Company expects this trend to continue. The operation of casinos and taverns 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. The Company's primary casino and tavern operations focus on the local market rather than the tourist market. Accordingly, the Company believes that the principal competition for the Company's operations comes from smaller casinos and taverns. Although large hotels and casinos also attract gaming customers from the local market. Louisiana. The Company is subject to extensive competition for contracts to operate video poker devices and the Company's racetrack and OTB parlors compete with various truck stops and locations with liquor licenses throughout the New Orleans area. Each truck stop is permitted to operate up to 50 video poker devices and each tavern is permitted to operate up to 3 video poker devices. In addition, Louisiana has authorized river boat gaming statewide and several riverboats are operating in Orleans Parish. Riverboats are permitted to have live table games and an unlimited number of gaming devices, including slot machines. Louisiana has also authorized one land based casino, permitted to include live table games and an unlimited number of gaming devices, which is now open and operating in temporary facilities in New Orleans. The adjacent state of Mississippi has legalized dockside gaming, which attracts many local and tourist players from the New Orleans area. The Company has one such casino located in Vicksburg, Mississippi. Dockside gaming in Mississippi, riverboat casinos in Louisiana and the land based casino in Orleans Parish have a wide variety of gaming devices and table games, while the Louisiana Act limits the Company's operations to video poker devices only. Further, the Louisiana Act limits the jackpot that may be paid by a video poker device to a maximum of $1,000 per play in some cases and $500 per play in others while other gaming activities have no such limits. Mississippi. Dockside gaming, in the form of full-service casinos, is legal throughout the state of Mississippi with no limit on the number of licenses to be granted by the state gaming authorities. As a result, the operation of casinos has become a highly competitive business. Like Nevada, 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. The Rainbow Casino appeals to both locals and visitors to historic Vicksburg, Mississippi. Upon completion of the three phase plan for the Rainbow Entertainment Park which includes an 88-room Days Inn resort and a 10-acre entertainment complex to be developed by a subsidiary of Six Flags, Rainbow will be the only destination of its kind in Mississippi and as such hopes to encourage a significant number of repeat visits by both locals and tourists. The Rainbow Casino is the fourth gaming facility to open in Vicksburg, Mississippi and, as such, faces substantial direct competition for gaming customers in the region. Patents, Copyrights and Trade Secrets The Company does not believe patent, copyright or trademark protection to be material to its business. However, the Company has copyrighted both the source code and the video presentation of its games and registered many of these copyrights with the U. S. Copyright Office under the Copyright Act of 1976. Game version upgrades and new games are currently in the process of United States patent and copyright registration. In addition, some of the games have federal and/or state trademarks registered with the U.S. Patent and Trademark office. Some of the games (either currently used or reserved for future development) also are covered by patents filed with the U.S. Patent and Trademark office. The Company has registered the trademark "CEI" and its design and the logos of United Gaming, Inc. and United Coin Machine Co. with the U.S. Patent and Trademark Office. Business Development Activity On June 19, 1995, the Company publicly proposed a negotiated acquisition of Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common stock. Prior to making this offer, the Company had acquired 500,000 shares of BGII stock on the open market and at June 30, 1995 held 1,000,000 shares (approximately 9.3% of BGII's total outstanding shares, based on BGII's most recent public filings) which it acquired at an average cost of approximately $10.41 per share. Under the proposed terms of the offer, approximately 60% of BGII shares not held by the Company would be acquired for cash with the remainder exchanged for shares of the Company's common stock. The offer was contingent upon satisfactory due diligence, regulatory and stockholder approval and reasonable financing. At the time the offer was made public, the Company requested expedited due diligence, subject to a confidentiality agreement. BGII had previously announced a planned merger with WMS Industries ("WMS") which included an exclusive period for WMS to negotiate the terms of that proposed merger. WMS's exclusive negotiating period had expired several weeks before the Company's proposal was made without announcement or action on the part of BGII or WMS. On July 25, 1995, after being refused due diligence access and the announcement by BGII that a definitive agreement had been reached to merge with WMS, the Company announced its intent to make a tender offer for BGII. The tender offer was on largely the same terms as the originally proposed acquisition. On the same date, the Company announced it had filed litigation in Delaware Chancery Court requesting that the court require BGII to grant the Company due diligence access, enjoin BGII from proceeding with the WMS merger (including a provision therein requiring the sale of BGII's German operations) and declare the breakup fee provided for in the WMS merger to be invalid. The Company indicated that it would increase the price per share of BGII stock to $13.00 per share if the breakup fee was declared invalid. The tender offer was conditioned upon the Company being validly tendered a number of shares of BGII stock, which combined with its own holdings of such stock, would give the Company a majority of BGII's outstanding shares. The tender offer commenced on July 28, 1995 and, as extended to date, is currently set to expire on October 3, 1995. Subsequently, the Company announced its intention to proceed with a consent solicitation to elect a majority of independent directors to the BGII Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly announced an agreement whereby the parties would hold in abeyance all activities related to pending litigation until September 1, 1995, refrain from commencing new litigation until that same date, BGII would schedule its annual shareholder meeting for consideration of the proposed WMS merger and the election of directors on October 30, 1995, and the Company would extend the expiration date of the tender offer until September 12, 1995 and refrain from soliciting proxies until September 1, 1995. On September 1, 1995, the Company disclosed that it had obtained firm financing commitments to fund the tender offer and that such commitments were not conditioned on due diligence of BGII. Accordingly, the Company extended the expiration date of its tender offer to September 29, 1995. BGII and WMS have filed lawsuits against the Company alleging numerous public misrepresentations had been made by the Company with regards to the WMS-BGII agreement, the Company's tender offer and the level of cooperation of BGII's board of directors. The Company considers these claims to be without merit and will mount a vigorous defense against said claims. Subsequent to filing its lawsuit against the Company, BGII adopted a poison pill provision designed to discourage the Company's acquisition efforts. In response to the poison pill adoption, the Company announced it had increased its tender offer to $13.00 per share of BGII common stock and increased to 5,400,000 the number of BGII common shares being sought in the tender offer. The increase in the tender offer price is being financed by the Company's cash on hand and the proceeds of an equity private placement of approximately 3,300,000 shares of the Company's non-voting Junior Convertible Special Stock. The proceeds of the private placement include commitments for over $1,000,000 of new investments by certain directors and officers of the Company. The Company also established a collar on the number of Company shares to be offered in the proposed back-end merger. The Company will exchange between 2.167 to 3.059 shares of its common stock for each share of BGII common stock. The exact value of the Company's common stock to be used for the exchange ratio will be determined by averaging the closing price of the Company's common stock for a period of ten Nasdaq trading days ending five days prior to the closing of the merger. Through a wholly owned subsidiary, Native American Investments, Inc. ("NAI"), the Company has a contract to develop Class II and III gaming opportunities with an Indian tribe in California. The contract is subject to negotiations resulting in satisfactory compacts with the state and approval of the contract by the National Indian Gaming Commission. The Governor of California has to date refused to negotiate a compact covering Indian gaming in California and is currently engaged in related litigation with certain Indian tribes. In one case, Rumsey Indian Rancheria vs. Wilson, which had been appealed to the U.S. Ninth Circuit Court of Appeals, a three judge panel ruled that the State of California may be obligated to negotiate compacts with Indian tribes for Class III gaming with respect to slot machines. However, the determination of a legal definition for slot machines was remanded to the U.S. Federal District Court for the Eastern District of California. In the case of Western Telcon vs. California State Lottery, a three judge panel from the Second Appellate District Court of Appeals ruled that the state's lottery machines are the legal equivalent of slot machines. This ruling was recently upheld by the full Court. The State of California has appealed this ruling to the state Supreme Court. There can be no assurance as to the ultimate outcome of these litigation activities or the successful completion or operation of any part of this project. The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial Partners, LLC ("KFP"), both Kansas limited liability companies. Under an option agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP has been granted the exclusive right to operate gaming devices and/or casino-type gaming at Camptown's facility if and when such gaming is permitted in Kansas. In September 1994, the Kansas Racing Commission approved a revised financing proposal submitted by Camptown that would facilitate completion of construction of a greyhound racing facility on the 320 acre site in Frontenac, Kansas. Camptown has received a $3,205,000 loan commitment which has been guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for its portion of the loan guarantee which was made in the form of a certificate of deposit. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. Camptown's obligation to begin to repay the loan guaranteed by KFP commenced in June 1995 with interest only payments. Principal repayment is scheduled to commence in June 1996. There can be no assurance as to the successful completion or operation of any part of this project. Growth Strategy The Company's growth strategy is to utilize its diversified gaming expertise, strengthened executive management, business partners and investment community relationships to pursue a variety of business and investment opportunities in existing market areas such as Las Vegas and other Nevada locations, as well as emerging gaming markets, including land based, dockside, or riverboat (including Native American owned) casinos, the operation of gaming device routes and the supply and management of gaming devices. The Company believes it is well positioned to capitalize on investment opportunities in both existing gaming markets, especially in Nevada, as well as emerging jurisdictions as a result of (i) its diversified gaming expertise including gaming device route management, casino operations and gaming device design and manufacture, (ii) an experienced management team, (iii) its affiliation with Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") and Gaming Systems Advisors, L.P. ("GSA") and (iv) its demonstrated ability to expand its gaming operations to new jurisdictions, as evidenced by its operations in Louisiana and Mississippi. Employees As of June 30, 1995, the Company employed approximately 825 persons in the State of Nevada and approximately 10 persons in various states related to its business development activities, VSI employed approximately 62 persons in the State of Louisiana and RCVP employed 347 persons in the State of Mississippi. None of such employees is covered by a collective bargaining agreement. The Company believes its relationships with its employees are satisfactory. Gaming Regulations and Licensing 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 are subject to the licensing and regulatory control of the Nevada State Gaming Control Board (" Nevada Board"), the Nevada Gaming Commission ("Nevada Commission"), the County Liquor and Gaming Licensing Board ("Clark County Board") and various other county and city regulatory agencies, all of which are collectively referred to as the "Nevada Gaming Authorities". The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things, (i) the prevention of unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) 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; (iv) the preventing of cheating and fraudulent practices; and (v) 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, manufacturing, distributing and slot route operations. The Company is registered with the Nevada Commission as a publicly traded corporation ("Registered Corporation"). The Company's direct and indirect subsidiaries which conduct gaming operations at various locations, operate a gaming device route and manufacture and distribute gaming devices (collectively, "Nevada Subsidiaries") are required to be licensed by the Nevada Gaming Authorities. The licenses held by the Nevada Subsidiaries require the periodic payments of fees, or fees and taxes, and are not transferable. The Company has been found suitable to own the stock of the Nevada Subsidiaries, each of which is a corporate licensee (individually, "Corporate Licensee" and collectively, "Corporate Licensees") under the terms of the Nevada Act. As a Registered Corporation, the Company is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of the profits from the Corporate Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and Corporate Licensees have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities, gaming device route operations, and in the manufacture and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or the Corporate Licensees in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and key employees of the Company who are actively and directly involved in the licensed activities of the Corporate Licensees may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or Corporate Licensees, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or the Corporate Licensees to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and Corporate Licensees that hold nonrestricted licenses are required to submit detailed financial and operating reports to the Nevada Commission. A nonrestricted license is a license for an operation consisting of 16 or more slot machines, or a license for any number of slot machines together with any other game, gaming device, race book or sports pool at one establishment. Substantially all material loans, leases, sales of securities and similar financing transactions by the Corporate Licensees that hold a nonrestricted license must be reported to or approved by the Nevada Commission. If it were determined that the Nevada Act was violated by a Corporate Licensee, the licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the Corporate Licensees and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further a supervisor could be appointed by the Nevada Commission to operate any nonrestricted gaming establishment operated by a Corporate Licensee and, under certain circumstances, earnings generated during the supervisor's appointment (except for reasonable rental of the casino) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of the gaming licenses of the Corporate Licensees or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of a Registered Corporations's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor" as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or the Corporate Licensees, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. The Nevada Commission may, in its discretion, require the holder of any debt securities of a Registered Corporation, to file applications, be investigated and be found suitable to own the debt security. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if, without the prior approval of the Nevada Commission, it (i) pays the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to impose a requirement that a Registered Corporation's stock certificates bear a legend indicating that the securities are subject to the Nevada Act. The Nevada Commission has imposed this requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Any such approval, if granted, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. The Nevada Commission has also imposed a requirement on the Company that it must receive the prior administrative approval of the Nevada Board Chairman for any offer for the sale of an equity security in a private transaction. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as a part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse affects of these business practices on Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada, and to the counties and cities in which the Licensees' respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either (i) a percentage of the gross revenues received, (ii) the number of gaming devices operated, or (iii) the number of games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. The Corporate Licensee's that hold a license as an operator of a gaming device route, or a manufacturer's or distributor's license also pay certain fees to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the state of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operations who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at establishments operated by a Corporate Licensee are subject to licensing, control and regulation by applicable regulatory agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse affect upon the operations of the Corporate Licensees. Louisiana. The manufacture, distribution, servicing and operation of video draw poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw Poker Devices Control Law and the Rules and Regulations promulgated thereunder (the "Louisiana Act"). Licensing and regulatory control is provided by the Video Gaming Division of the Gaming Enforcement Section of the Office of State Police within the Department of Public Safety and Corrections (the "Division"). The laws and regulations of the Division are based upon a primary consideration of maintaining the health, welfare and safety of the general public and upon a policy which is concerned with protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of Devices. Each of the indirect operating subsidiaries for the Company's gaming operations in Louisiana, VSI and SVS, has been granted a license as a Device owner by the Division. The other indirect subsidiary of the Company, VDSI, has been granted a license as a distributor by the Division. These gaming subsidiaries are Louisiana Licensees 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 Division 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 Division 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 a pure and absolute privilege and is at the discretion of the Division in accordance with the provisions of the Louisiana Act. A license is not property or a protected interest under the constitution of either the United States or the State of Louisiana. The Division has the authority to conduct overt and covert investigations of any person involved directly or indirectly in the video gaming industry in Louisiana. This investigation may extend to information regarding a person's immediate family and relatives and their affiliations with certain organizations or other business entities. The investigation may also extend to any person who has or controls more than a 5% ownership, income or profits interest in an applicant for or holder of a license or who is a key employee, or who has the ability to exercise significant influence over the licensee. All persons or entities investigated must meet all suitability requirements and qualifications for a licensee. The Division may deny an application for licensing for any cause which it may deem reasonable. The applicant for licensing must pay a filing fee which also covers the cost of the investigation. In order for a corporation to be licensed by the Division, a majority of the stock of the corporation must be owned by persons who have been domiciled in Louisiana for a period of at least two years prior to the date of the application. Devices must meet strict specifications established by the Division. The number of devices permitted depends on the type of location at which the Devices are operated. Fees payable to the Division include an application fee which is non-refundable, an annual fee based upon a percentage of net revenues from the operation of each Device, a Device owner's fee, a Device operators fee, a license establishment fee and a Device owner's franchise fee. All fees are payable in either quarterly or annual installments depending on the fee being paid. Mississippi. The ownership and operation of gaming devices in Mississippi is subject to extensive state and local laws and regulations, including the Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the "Mississippi Regulations") promulgated thereunder. The Mississippi Gaming Commission (the "Mississippi Commission") oversees licensing and regulatory compliance. Gaming in Mississippi can be legally conducted only on vessels of a certain minimum size in navigable waters of the Mississippi River or in waters of the State of Mississippi which lie adjacent and to the south (principally in the Gulf of Mexico) of the counties of Hancock, Harrison and Jackson, and only in counties in Mississippi in which the registered voters have not voted to prohibit such activities. The voters in Jackson County, the southeastern-most county of Mississippi, have voted to prohibit gaming in that county. However, gaming could be authorized in Jackson County should the voters fail to disapprove of gaming in that county in any referendum, which could be held annually. The underlying policy of the Mississippi Act is to ensure that gaming operations in Mississippi are conducted (i) honestly and competitively, (ii) free of criminal and corruptive influences and (iii) in a manner which protects the rights of the creditors of gaming operations. Gaming in the future may also be legally conducted on American Indian lands in Mississippi as regulated in part by the 1988 Indian Gaming Regulatory Act, which activity will not be subject to the Mississippi Act. The Mississippi Act requires that a person (including any corporation or other entity) must be licensed to conduct gaming activities in Mississippi. A license will be issued only for a specified location which has been approved as a gaming site by the Mississippi Commission. The Company, through its interest in Rainbow Casino-Vicksburg Partnership ("RCVP") must apply for renewal of such licenses, which renewal cannot be assured. The Mississippi Act also requires that each officer or director of a gaming licensee, or other person who exercises a significant influence over the licensee, either directly or indirectly, must be found suitable by the Mississippi Commission. In addition, any employee of the licensee which is directly involved in gaming, must obtain a work permit from the Mississippi Commission. The Mississippi Commission will not issue a license or make a finding of suitability unless it is satisfied, only after an extensive investigation paid for by the applicant, that the persons associated with the gaming licensee or applicant for a license are of good character, honesty and integrity, with no relevant or material criminal record. In addition, the Mississippi Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources, and that persons associated with the applicant have sufficient business probity, competence and experience to engage in the proposed gaming enterprise. The Mississippi Commission may refuse to issue a work permit to a gaming employee (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or knowingly violated the Mississippi Act or Mississippi Regulations, or (ii) for any other reasonable cause. If an employee is denied a license, the Company must terminate his or her employment. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or fine any person, as it deems reasonable and in the public interest, subject to any opportunity for a hearing. The Mississippi Commission may fine any licensee or person who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations, which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but filing of such petition does not necessarily stay any action by the Mississippi Commission pending a decision by the Circuit Court. Each gaming licensee must pay a license fee to the State of Mississippi based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings). The license fee equals four percent of gaming receipts of $50,000 or less per month, six percent of gaming receipts over $50,000 and up to $134,000 per month and eight percent of gaming receipts over $134,000 per month. The foregoing license fees are allowed as a credit against any Mississippi State income tax liability for the year paid. An additional license fee, equal to $100 for each table game conducted or planned to be conducted on the gaming premises, is payable to the State annually in advance. Municipal and county fees may also be assessed and vary from jurisdiction to jurisdiction. All taxes and fees must be paid timely in order to retain a gaming license.The Mississippi Act also imposes certain audit and record keeping laws and regulations, primarily to ensure compliance with the Mississippi Act, including compliance with the provisions relating to the payment of license fees. Under the Mississippi Regulations, a gaming licensee cannot be publicly held, although an affiliated corporation, such as the Company, may be publicly held so long as the Company registers with and gets the approval of the Mississippi Commission. In addition, approval of any subsequent public offerings of the securities of the Company must be obtained from the Mississippi Commission if any part of the proceeds from that offering are intended to be used to pay for or reduce debt used to pay for the construction, acquisition or operation of any gaming facility in Mississippi. Under the Mississippi Regulations, a person is prohibited from acquiring control of a licensee without the prior approval of the Mississippi Commission. Any person who, directly or indirectly, or in association with others, acquires beneficial ownership of more than five percent of a licensee must notify the Mississippi Commission of this acquisition. The Mississippi Commission may require that a person be found suitable if that person holds between a five percent and ten percent ownership position and must require that a person be found suitable if that person owns more than ten percent of a licensee. Furthermore, regardless of the amount of ownership, any person who acquires beneficial ownership may be required to be found suitable if the Mississippi Commission has reason to believe that the acquisition of such ownership would be inconsistent with the declared policy of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit with the State Tax Commission a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission shall not be permitted to have any direct or indirect ownership in the licensee. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in the licensee if found unsuitable, is guilty of a misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied or revoked by the Mississippi Commission, the licensee is not permitted to pay such person for services rendered, or to employ or enter into any contract with such person. Dockside casinos may be required to be moved to a "safe harbor" in the event of a threatened hurricane. The appropriate county civil defense director will determine when such movement is required. In general, it is anticipated that casino vessels will have to be moved in the event of a Class III or more severe hurricane warning, where there is the possibility of 125 miles per hour wind speeds. The movement of a casino barge will not necessarily insure protection against damage or destruction by a hurricane. Furthermore, the removal of a casino barge will generally require several days, and as a consequence, the casino barge will be out of business during that movement, even if no hurricane strikes the casino site. Any permanently moored vessel used for casino operations must meet the fire safety standard of the Mississippi Fire Prevention Code, the Life Safety Code and the Standards for the Construction and Fire Protection of Marine Terminals, Piers and Wharfs of the National Fire Protection Association. Additionally, any establishment to be constructed for dockside gaming must meet the Southern Standard Building Code or the local building code, if such a local building code has been implemented at the casino's site. While unpowered and permanently moored vessels do not require certification by the United States Coast Guard, the Mississippi Commission has engaged the American Bureau of Shipping, an independent consulting agency, which will inspect and certify all casino barges with respect to stability and single compartment flooding integrity, in accordance with Mississippi Regulations. The laws and regulations permitting and governing Mississippi casino gaming were adopted during 1990 and 1991, and the first casinos opened in August 1992. Consequently, the interpretation and application of Mississippi law and regulations may evolve over time, and any such changes may have an adverse effect on Mississippi licensees. Additional Jurisdictions. The Company, in the ordinary course of its business, routinely considers business opportunities to expand its gaming operations into additional jurisdictions. Any such expansion would subject the Company and, possibly, some or all of its officers, directors, employees and stockholders, to regulatory requirements in addition to those with which such parties are presently obligated to comply. As previously noted, the Company is currently attempting to acquire Bally Gaming, International, Inc. which is licensed in many states as a manufacturer of gaming devices. If the Company is successful in its attempted acquisition, the Company will be required to be licensed in each of these states. Federal Registration. The operating subsidiaries of the Company that are involved in gaming activities are required to file annually with the Attorney General of the United States in connection with the sale, distribution or operation of gaming devices. All currently required filings have been made. 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, 1995, all of which are fully utilized unless otherwise noted:
Annual Building Rental Location Use Square Feet Payments (In 000s) Las Vegas, Nv. Executive offices, route operations 72,000 $ 486 and manufacturing Washington, D.C. Administrative offices 400 31 New York, N.Y. Executive offices 4,650 279 Vicksburg, Mississippi Casino administration offices 2,000 15 Las Vegas, Nv. Subleased office space 9,500 58 Reno/Sparks, Nv. Route operations 12,100 71 Carson City, Nv. Route operations 2,500 8 Fallon, Nv. Route operations 900 5 Elko, Nv. Route operations 1,000 8 Las Vegas, Nv. Route location 8,000 419 Tonopah, Nv. Casino Hotel 10,000 210 Las Vegas, Nv. (1) Casino 24,700 494 Las Vegas, Nv. Tavern 7,000 122 Las Vegas, Nv. Tavern 4,864 96 Las Vegas, Nv. (1) Tavern 4,300 81 Las Vegas, Nv. Tavern 3,500 88 Las Vegas, Nv. Tavern 4,200 54 Las Vegas, Nv. Tavern 4,225 80 Las Vegas, Nv. (2) Ground Lease 320 Sparks, Nv. (3) Ground Lease 4 New Orleans, La. Administrative offices & route operations 6,000 53
(1) See discussion in Item 7. Management's Discussion and Analysis of Financial Condition for changes in utilization of these properties. (2) Lease consists of ground lease for parking at the Trolley Stop. (3) Lease consists of long-term land lease for parking at the Plantation. In addition, the Company leases approximately 16 properties which have been subleased in connection with its gaming device routes. The properties range in size from approximately 1,750 square feet to 7,700 square feet. The remaining terms of the leases range from 5 months to 14 years with monthly payments ranging from approximately $1,500 to $8,100. See Note 10 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. The following table sets forth information regarding properties owned by the Company as of June 30, 1995, all of which are fully utilized unless otherwise noted:
Building Location Use Square Feet (1) (In 000s) Reno/Sparks, Nv. Casino 35,000 Vicksburg, Mississippi Casino 24,000 Las Vegas, Nv. (1) Vacant - Casino/Tavern 7,700 Las Vegas, Nv. Tavern/Land 5,000 North Las Vegas, Nv. Parking --- (1) See discussion in Item 7. Management's Discussion and Analysis of Financial Condition for changes in utilization of these properties. ITEM 3. LEGAL PROCEEDINGS On June 19, 1995, the Company publicly proposed a negotiated acquisition of Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common stock. Prior to making this offer, the Company had acquired 500,000 shares of BGII stock on the open market and at June 30, 1995 held 1,000,000 shares (approximately 9.3% of BGII's total outstanding shares, based on BGII's most recent public filings) which it acquired at an average cost of approximately $10.41 per share. Under the proposed terms of the offer, approximately 60% of BGII shares not held by the Company would be acquired for cash with the remainder exchanged for shares of the Company's common stock. The offer was contingent upon satisfactory due diligence, regulatory and stockholder approval and reasonable financing. At the time the offer was made public, the Company requested expedited due diligence, subject to a confidentiality agreement. BGII had previously announced a planned merger with WMS Industries, Inc. ("WMS") which included an exclusive period for WMS to negotiate the terms of that proposed merger. WMS's exclusive negotiating period had expired several weeks before the Company's proposal was made without announcement or action on the part of BGII or WMS. On July 25, 1995, after being refused due diligence access and the announcement by BGII that a definitive agreement had been reached to merge with WMS, the Company announced its intent to make a tender offer for BGII. The tender offer was on largely the same terms as the originally proposed acquisition. On the same date, the Company announced it had filed litigation in Delaware Chancery Court requesting that the court require BGII to grant the Company due diligence access, enjoin BGII from proceeding with the WMS merger (including a provision therein requiring the sale of BGII's German operations) and declare the breakup fee provided for in the WMS merger to be invalid. The Company indicated that it would increase the price per share of BGII stock to $13.00 per share if the breakup fee was declared invalid. The tender offer was conditioned upon the Company being validly tendered a number of shares of BGII stock, which combined with its own holdings of such stock, would give the Company a majority of BGII's outstanding shares. The tender offer commenced on July 28, 1995 and, as extended to date, is currently set to expire on October 3, 1995. Subsequently, the Company announced its intention to proceed with a consent solicitation to elect a majority of independent directors to the BGII Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly announced an agreement whereby the parties would hold in abeyance all activities related to pending litigation until September 1, 1995, refrain from commencing new litigation until that same date, BGII would schedule its annual shareholder meeting for consideration of the proposed WMS merger and the election of directors on October 30, 1995, and the Company would extend the expiration date of the tender offer until September 12, 1995 and refrain from soliciting proxies until September 1, 1995. On September 1, 1995, the Company disclosed that it had obtained firm financing commitments to fund the tender offer and that such commitments were not conditioned on due diligence of BGII. Accordingly, the Company extended the expiration date of its tender offer to September 29, 1995. BGII and WMS have filed lawsuits against the Company alleging numerous public misrepresentations had been made by the Company with regards to the WMS-BGII agreement, the Company's tender offer and the level of cooperation of BGII's board of directors. The Company considers these claims to be without merit and will mount a vigorous defense against said claims. Subsequent to filing its lawsuit against the Company, BGII adopted a poison pill provision designed to discourage the Company's acquisition efforts. In response to the poison pill adoption, the Company announced it had increased its tender offer to $13.00 per share of BGII common stock and increased to 5,400,000 the number of BGII common shares being sought in the tender offer. The increase in the tender offer price is being financed by the Company's cash on hand and the proceeds of an equity private placement of approximately 3,300,000 shares of the Company's non-voting Junior Convertible Special Stock. The proceeds of the private placement include commitments for over $1,000,000 of new investments by certain directors and officers of the Company. The Company also established a collar on the number of Company shares to be offered in the proposed back-end merger. The Company will exchange between 2.167 to 3.059 shares of its common stock for each share of BGII common stock. The exact value of the Company's common stock to be used for the exchange ratio will be determined by averaging the closing price of the Company's common stock for a period of ten Nasdaq trading days ending five days prior to the closing of the merger. The Company and its directors are currently defendants in a lawsuit filed by a stockholder. This suit seeks class action status and alleges several breaches of fiduciary duty by the Company's current and former directors. The Company believes this lawsuit was filed to thwart its attempted acquisition of BGII, the allegations contained therein are without merit and intends to vigorously defend itself against such claims. In the initial ruling on this case, the plaintiff's motion for expedited discovery was denied by the U.S. District Court of Nevada. The District Court also stated that it is unlikely that the plaintiff in the case would be able to represent other shareholders in fairly and adequately as defined by law. The Company is also a party to various lawsuits relating to routine matters incidental to its business. Management does not believe that the outcome of such litigation, including the matters above, in the aggregate, will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended June 30, 1995, no matter was submitted to a vote of the Company's stockholders, through the solicitation of proxies or otherwise. 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 sales prices of the Common Stock as reported by Nasdaq for the periods indicated.
Price Range of Common Stock High Low Fiscal Year Ended June 30, 1994 1st Quarter $ 9.88 $6.75 2nd Quarter 11.88 7.75 3rd Quarter 10.13 6.75 4th Quarter 7.25 5.13 Fiscal Year Ended June 30, 1995 1st Quarter $ 8.50 $5.13 2nd Quarter 7.88 5.13 3rd Quarter 8.00 5.38 4th Quarter 6.50 4.25
As of September 25, 1995 the Company had approximately 1,674 holders of record of its Common Stock. The Company has never declared or paid cash dividends on its Common Stock. 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 and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data have been derived from the audited financial statements of the Company for the years ended June 30, 1991, 1992, 1993, 1994 and 1995. 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 1991 1992 1993 1994 1995 (In Thousands, Except Per Share Amounts) Statements of Operations Data Revenues: Gaming Routes $ 77,150 $ 77,940 $ 96,282 $102,830 $106,827 Casinos and taverns 11,281 11,560 12,526 15,679 21,287 Food and beverage sales 3,120 3,376 4,184 4,480 3,847 Net equipment sales (1) 214 379 99 65 27 91,765 93,255 113,091 123,054 131,988 Costs and expenses: Cost of gaming Routes 58,299 58,585 72,614 76,332 79,875 Casinos and taverns 8,528 8,459 8,667 11,871 11,436 Cost of food and beverage 2,249 2,367 2,876 3,084 2,795 Cost of equipment sales 151 284 49 20 12 Selling, general & administrative 8,059 8,950 12,667 13,555 14,633 Business development costs --- --- 900 1,192 7,843 Corporate administrative expenses 7,567 5,290 6,191 7,882 9,735 Bad debt expense 4,845 539 461 705 400 Write down of inventory 2,050 --- --- --- --- Write-off intangible and other assets 2,932 --- --- --- --- Loss on abandoned casinos 7,847 2,307 --- 3,713 --- Loss on abandoned taverns --- --- --- 2,638 --- Depreciation and amortization 7,092 7,355 8,718 9,530 9,520 Total costs and expenses 109,619 94,136 113,143 130,522 136,249 Operating loss (17,854) (881) (52) (7,468) (4,261) Other income (expense) Interest income 1,750 1,324 998 2,084 2,798 Interest expense (4,663) (4,505) (5,046) (6,830) (8,133) Other, net (1,007) (618) 450 (673) (890) Loss before taxes (21,774) (4,680) (3,650) (12,887) (10,486) Income tax (expense) benefit 5,958 --- --- (241) (265) Net loss $ (15,816) $ (4,680) $ (3,650) $ (13,128) $(10,751) Net loss per common share $ (1.73) $ (0.51) $ (0.38) $ (1.28) $ (0.95)
ITEM 6. SELECTED FINANCIAL DATA (continued)
As of June 30 1991 1992 1993 1994 1995 Balance Sheet Data Cash and cash equivalents $ 5,774 $ 10,239 $ 9,580 $ 37,085 $ 13,734 Securities available for sale --- --- --- 12,489 23,680 Net working capital 10,450 11,557 7,991 50,926 31,552 Total assets 79,024 75,594 73,768 119,416 126,348 Total long term debt, including current maturities 44,450 43,282 44,798 90,726 101,397 Total stockholders' equity 27,008 23,660 22,665 15,099 9,985 (1) Includes sales to related parties of $86 (1991), $236 (1992), $2 (1993), $6 (1994) and $0 (1995). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources At June 30, 1995, the Company had working capital of approximately $31,552,000, a decrease of approximately $19,374,000 from June 30, 1994. The decrease in working capital is primarily in cash and cash equivalents which were used to fund activities in connection with the Company's growth strategy. As of June 30, 1995, the Company had approximately $37,414,000 in cash, cash equivalents and securities available for sale. During fiscal 1995, the Company incurred approximately $7,843,000 in expenses associated with pursuit of the Company's growth strategy. The Company's strategy is to use its strengthened management team, diversified gaming expertise and business and investment community relationships to develop new opportunities in the operation of land-based (including Native American owned), dockside and riverboat casinos, gaming systems and technology and the supply and management of gaming devices. As previously reported, on July 16, 1994 the Rainbow Casino in Vicksburg, Mississippi permanently opened for business. In connection with the completion of the casino and the acquisition of its original 45% limited partnership interest, the Company, through a wholly-owned subsidiary funded a $3,250,000 advance to RCC on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS"). On March 29, 1995, the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in RCVP and increased its partnership interest. In exchange for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a financing fee payable to HFS) related to the completion of certain incomplete elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy), a related $652,000 cash payment by the Company to NGM and commitments by the Company and NGM to fund additional financing required to complete the project (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As adjusted, RCC is entitled to receive 10% of the net available cash flows, as defined, (which amount shall increase to 20% of cash above $35,000,000 (i.e., only on such incremental amount)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial Partners, LLC ("KFP"), both Kansas limited liability companies. Under an option agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP has been granted the exclusive right to operate gaming devices and/or casino-type gaming at Camptown's facility if and when such gaming is permitted in Kansas. In September 1994, the Kansas Racing Commission approved a revised financing proposal submitted by Camptown that would facilitate completion of construction of a greyhound racing facility on the 320 acre site in Frontenac, Kansas. Camptown has received a $3,205,000 loan commitment which has been guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for its portion of the loan guarantee which was made in the form of a certificate of deposit. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. Camptown's obligation to begin to repay the loan guaranteed by KFP commenced in June 1995 with interest only payments. Principal repayment is scheduled to commence in June 1996. There can be no assurance as to the successful completion or operation of any part of this project. Cash provided by operations for fiscal 1995 decreased approximately $8,105,000 from amounts reported for fiscal 1994. Included in the prior year's cash flows from operations was a non-recurring gain of $3,600,000 associated with the termination of the Company's letter agreement with Capital Gaming International, Inc. and $6,351,000 of charges related to the Company's decision to exit the downtown Las Vegas gaming market and dispose of its tavern operations. Exclusive of these prior year items, expenditures related to supporting the Company's growth strategy increased approximately $3,051,000. Long-term accrued expenses decreased by approximately $1,031,000 as the Company paid rent and other exit expenses against the amounts accrued in fiscal 1994 as noted above. The remaining change in accrued expenses accounted for a use of cash in the amount of $4,710,000. These uses of cash were partially offset by an increase in cash flows from operations of approximately $2,666,000 from the Company's ongoing business operations and an operating cash contribution of approximately $3,089,000 from the first year of operations by the Rainbow Casino. Significant non-cash items added back to cash flows from operations for 1995 include $1,313,000 in non-cash compensation expense and $1,075,000 related to certain service contracts and termination costs. Cash flows used for investing activities decreased by $5,651,000 from the prior year. In the prior year, the Company completed the private placement of the Debentures. Net collections on receivables improved by $2,605,000 compared to fiscal 1994 as receivable activity returned to historical norms. In fiscal 1994, the Company funded approximately $7,250,000 in loans to Capital Gaming International Inc. and the original general partner in RCVP which additions were partially offset by increased collections of receivables related primarily to the collection of the Capital Gaming loan in fiscal 1994. Additionally, the Company is reporting increased cash of $2,481,000 as a result of acquiring its consolidated interest in RCVP and changing from the equity method of accounting to full consolidation of RCVP. Cash flows from financing activities declined $48,402,000 from fiscal 1994. As noted above, in September 1993, the Company completed the private placement of $85,000,000 aggregate principal amount of its Debentures. Concurrent with the closing of the issuance of the Debentures, Kirkland Ft. Worth Investment Partners, L.P. ("KFW") invested $5,000,000 in the Company in exchange for 1,333,333 shares of the Company's Non-Voting Junior Convertible Special Stock and warrants to purchase up to 2,750,000 shares of Common Stock, subject to certain conditions. A portion of the net proceeds from these transactions was used to repay previously existing debt and accrued interest of approximately $38,245,000. Management believes the Company's present working capital and funds generated from operations will be sufficient to meet its existing commitments, debt payments and other obligations as they become due. As discussed in previous reports, however, it remains a part of the Company's business strategy to seek additional gaming opportunities, including opportunities in which its route and casino experience may be applicable. As part of its business activities, the Company is regularly involved in the identification, investigation and development of such opportunities. Accordingly, in order to support such activities, the Company may in the future elect to issue additional debt or equity securities if and when appropriate opportunities become available on terms satisfactory to management. The Company currently holds firm commitments for $65,000,000 of bridge financing and $15,000,000 of equity investments related to its attempted acquisition of Bally Gaming International, Inc. Results of Operations: Fiscal 1995 Compared with Fiscal 1994 Revenues Total revenues for the fiscal year ended June 30, 1995 were approximately $131,988,000, an increase of $8,934,000 (7.3%) over those for fiscal 1994. Revenues from all gaming route operations increased $3,997,000 (3.9%) to approximately $106,827,000 in fiscal 1995. Revenues from route operations in the state of Louisiana declined $1,796,000 (10.3%) primarily as a result of increased competition from riverboat operations as well as the opening of a land based casino in New Orleans. Revenue from Nevada route operations increased approximately $5,739,000 (6.7%) over those for the same period last year. The increase in the Nevada gaming route revenues was attributable to a $2.15 increase in the average net win per gaming device per day in fiscal 1995 compared to fiscal 1994 (accounting for an increase of approximately $4,042,000 of such increase) and an increase in the weighted average number of gaming devices on location during fiscal 1995 as compared to fiscal 1994 (accounting for an increase of approximately $1,751,000). Revenues from casino and tavern operations, including food and beverage sales, increased approximately $4,975,000 (24.6%) during fiscal 1995 as compared to those for the prior year as revenues recognized from the Rainbow Casino, which were consolidated beginning March 29, 1995, exceeded the revenues lost with the closing of the Company's properties in downtown Las Vegas and the termination of the Company's lease at the Royal Casino. Costs and Expenses Costs of Revenues Cost of gaming route revenues for the fiscal year ended June 30, 1995 increased $3,543,000 (4.6%) over that for fiscal 1994. Costs of revenues for route operations in Louisiana decreased $1,199,000 (a decrease of 10.7% from last year) as revenues declined primarily as a result of increased competition in that market. As a percent of related revenues, Louisiana route costs of revenues remained relatively constant. Cost of gaming revenues for Nevada gaming route revenues increased $4,742,000 (7.3%) as compared to the prior year and increased slightly as a percent of Nevada gaming route revenues due primarily to increased costs associated with additional and renewed space lease contracts. Cost of route revenues includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenues, including the cost of food and beverage sales, decreased $724,000 (4.8%) compared to fiscal 1994 primarily due to the closing of the Company's properties in downtown Las Vegas and the termination of the Company's lease at the Royal Casino. These decreases were partially offset by Rainbow Casino costs of revenues which were consolidated beginning in March 1995. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor expenses, including taxes and benefits. Although the gross margin percentage for Nevada operations declined slightly during fiscal 1995, the decline was completely offset by the addition of the Rainbow Casino and a small improvement in the Louisiana gross margin percentage. As a result, the total cost of revenues as a percentage of total revenues declined by 2.9% compared to fiscal 1994. Expenses For fiscal 1995, the Company incurred development costs associated with pursuing the Company's long term growth strategy of approximately $7,843,000, an increase of approximately $6,651,000 (558.0%) from fiscal 1994. Included as an offset to development costs for fiscal 1994 was a non-recurring gain of $3,600,000 related to the Company's effort to acquire Capital Gaming International, Inc. Prior year development costs also include certain significant expenses associated with the Company's purchase of NAI. Development costs include salaries and wages, related taxes and benefits, professional fees, travel expenses, payments to third parties for business development options and other expenses associated with supporting the Company's long-term growth strategy. The Company expects to continue to incur a significant level of development costs. Corporate administrative expenses for fiscal 1995 were approximately $9,735,000, an increase of $1,853,000 over the same amounts for fiscal 1994. The primary cause for the increase was $1,331,000 in compensation expense recognized upon the issuance of 250,000 shares of Common Stock to Steve Greathouse, the Company's President, Chief Executive Officer and Chairman of the Board in connection with his employment agreement. Also contributing to the increase in corporate administrative expenses are $485,000 of expenses related to certain service contracts and termination costs. Corporate administrative expenses include salaries and wages, related taxes and benefits, professional fees and other expenses associated with maintaining the corporate office and providing centralized corporate services for the Company. Exclusive of the development and corporate expenses noted above, selling, general and administrative expenses for fiscal 1995 increased $1,078,000 (7.9%) from the prior year. Selling, general and administrative expenses related to gaming route operations decreased $1,340,000 (13.8%) from fiscal 1994. Selling, general and administrative expenses for Louisiana route operations declined approximately $660,000 (23.8%) as staff reductions and cost containment measures were implemented to counter increased competition in that market. The same costs for Nevada route operations decreased $680,000 (9.8%) as the benefit of staff reductions and cost controls taken in late fiscal 1994 was realized. Selling, general and administrative costs increased for casino and tavern operations by $1,595,000 (44.0%) from the prior year. The acquisition of the Rainbow Casino, which contributed $1,984,000 to the increase, was partially offset by the closing of the Company's downtown Las Vegas properties and the termination of the lease at the Royal Hotel. Also contributing to the increase in selling, general and administrative expenses are $478,000 of expenses related to certain service contracts and termination costs. Selling, general and administrative expenses may be subject to further increases. In addition to the revenue improvements discussed above, the cost reductions in selling, general and administrative expenses contributed to improved operating margins. Operating income before depreciation ("EBITDA") as a percent of the related revenues improved for Nevada route operations from 14.8% in fiscal 1994 to 16.5% in fiscal 1995 and for Louisiana route operations from 18.9% to 21.5% for the same periods. EBITDA as a percent of revenues for the casino and tavern operations also increased from 5.6% in fiscal 1994 to 17.5% in fiscal 1995 due primarily to the acquisition of the Rainbow Casino. In fiscal 1994, due to continuing losses from operations, negative cash flows and incompatibility with the Company's long-term growth strategy, the Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming market and 2) dispose of the currently operated small independent tavern operations. Based on these decisions, the Company recognized total expenses of approximately $5,883,500 in fiscal 1994. As a result of the decision to exit the downtown Las Vegas gaming market, in September 1994, the Company substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. On December 17, 1993, the Company incurred a fire loss at the Fairgrounds Race Course in New Orleans, Louisiana where the Company operated 199 gaming devices prior to the fire (of which 193 were destroyed by the fire) through its controlled subsidiary, Video Services, Inc. The Company was fully insured for all equipment, leasehold improvements, other assets and business income with the exception of approximately $46,000 in deductibles. During fiscal 1995, the Company recorded approximately $247,000 of income from business interruption insurance proceeds compared to $241,000 of such proceeds in the prior year. The Company is discussing settlement of additional business interruption claims with the insurance carrier. The Company has also received insurance proceeds based on the replacement value of the assets destroyed in the fire and, therefore, recognized a gain of approximately $156,000 which is included in other income in fiscal 1994. Fiscal 1994 Compared with Fiscal 1993 Revenues Total revenues for the fiscal year ended June 30, 1994 were approximately $123,054,000 for fiscal 1994 an increase of $9,963,000 (8.8%) over those for fiscal 1993. Revenues from all gaming route operations increased $6,548,000 (6.8%) to approximately $102,830,000 in fiscal 1994. Route operations in the state of Louisiana contributed $5,222,000 (an increase of 42.9%) to the overall increase in route revenues as the Company continued to experience increasing demand in that relatively young market. Revenue from Nevada route operations increased approximately $1,326,000 (1.6%) over those for the same period last year. The increase in the Nevada gaming route revenues was attributable to a $1.30 increase in the average net win per gaming device per day in fiscal 1994 compared to fiscal 1993 (accounting for an increase of approximately $2,608,000 of such increase) which was partially offset by a decrease in the weighted average number of gaming devices on location during fiscal 1994 as compared to fiscal 1993 (accounting for a decrease of approximately $1,282,000). Revenues from casino and taverns increased approximately $3,449,000 (20.6%) during fiscal 1994 as compared to those for the prior year due to the continued expansion of casino operations and operating additional troubled tavern locations. Costs and Expenses Costs of Revenues Cost of gaming route revenues for the fiscal year ended June 30, 1994 increased $3,718,000 (5.1%) over that for fiscal 1993. Route operations in Louisiana contributed $2,854,000 (an increase of 40.6% from last year) to the overall increase. Cost of gaming revenues for Nevada gaming route revenues increased $864,000 (1.3%) as compared to the prior year. The increase to cost of Nevada route revenues was primarily due to an increase in location operators' share of gaming revenues caused by replacing a large space lease contract with revenue-sharing arrangements. Cost of route revenues includes rents under both space lease and revenue sharing arrangements, gaming taxes and direct labor, including related taxes and benefits. The cost of casino and tavern revenue increased $3,412,000 (29.6%) compared to fiscal 1993 primarily due to the first full year of operations of two small casinos and the first full year of operating the hotel and food and beverage operations at the Mizpah Hotel and Casino. Previously, the Company had operated only the casino at the Mizpah, but in January, 1993 began operating the entire facility including food and beverage operations to insure its availability for the casino. Cost of casino and tavern revenues includes cost of goods sold, gaming taxes, rent and direct labor expenses, including taxes and benefits. Although the gross margin percentage from Nevada operations declined during fiscal 1994, the decline was offset by increases in the Louisiana operating margin percentage. As a result, the combined cost of gaming revenues as a percentage of gaming revenues remained relatively constant from fiscal 1993 to fiscal 1994. Expenses In August 1994, due to continuing losses from operations, negative cash flows and incompatibility with the Company's long-term growth strategy, the Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming market and 2) dispose of the currently operated small independent tavern operations. Based on these decisions, the Company recognized total expenses of approximately $5,883,500 in fiscal 1994. As a result of the decision to exit the downtown Las Vegas gaming market, in September 1994, the Company substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. The Company's lease at the Mizpah Hotel and Casino ("Mizpah") has a remaining lease term of approximately 8.5 years with an option on the Company's behalf to terminate the lease arrangement at any time after December 31, 1995 with 120 days notice. In September 1994, the Company notified the landlord of the Mizpah of its intent to exercise the termination clause of its lease at the earliest possible date of January 1, 1996 and give 120 days notice at that time. As a result of this decision, the Company recognized additional charges of $467,500 in fiscal 1994. Also included in selling, general and administrative expenses for fiscal 1994 are development costs associated with pursuing the Company's long term growth strategy of approximately $1,192,000. These developmental costs include approximately $4,792,000 in legal fees, travel expenses and other expenses associated with supporting the Company's long-term growth strategy, which expenses are partially offset by the $3,600,000 recovered under the Capital Gaming termination agreement. Fiscal 1994 was the first year in which significant funds were expended in pursuit of this strategy. Exclusive of the reserves, write downs and development expenses noted above, selling, general and administrative expenses for fiscal 1994 increased $1,679,000 (8.5%) from the prior year. The primary causes for the increase include a $400,000 fiscal 1994 bonus granted to Shannon L. Bybee as part of the restructuring of his employment with the Company, $350,000 in fees incurred under the one year consulting contract with Carole A. Carter, the former President and Chief Operating Officer of the Company, continued expansion of the Louisiana route operations which contributed approximately $546,000 to the overall increase and $274,000 of overall increases in Nevada route operations. The general and administrative costs for casinos and taverns were $3,622,000 or 18.0% of related revenues for fiscal 1994 as compared to $3,511,000 or 21.0% for fiscal 1993. The same costs for gaming device route operations were $9,736,000 or 9.5% of revenues for fiscal 1994 and $8,916,000 or 9.3% of revenues for fiscal 1993. Bad debt expense in fiscal 1994 increased 52.9% to approximately $705,000 as compared to the 1993 year expense of $461,000 due primarily to the financial difficulties of a particular customer in Northern Nevada. On December 17, 1993, the Company incurred a fire loss at the Fairgrounds Race Course in New Orleans, Louisiana where the Company operated 199 gaming devices prior to the fire (of which 193 were destroyed by the fire) through its controlled subsidiary, Video Services, Inc. The Company is fully insured for all equipment, leasehold improvements, other assets and business income with the exception of approximately $46,000 in deductibles. Through June 30, 1994, the Company had recorded approximately $241,000 of income from business interruption insurance proceeds. The Company will continue to receive proceeds under this policy while the Fairgrounds Race Course is rebuilt. The Company has also received insurance proceeds based on the replacement value of the assets destroyed in the fire and, therefore, recognized a gain of approximately $156,000 which is included in other income in fiscal 1994. 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 regarding the identification and background of the Company's directors is incorporated by reference to 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. As to those executive officers and significant employees of the Company and its subsidiaries at June 30, 1995 and the subsequent dates noted, who, except as noted, are not directors, of the Company, the following information is provided:
Name Age Position Steven Greathouse 44 Chairman of the Board, President and Chief Executive Officer Shannon L. Bybee 56 Executive Vice President - Government Affairs Anthony L. DiCesare 33 Executive Vice President - Development John W. Alderfer 51 Sr. Vice President - Finance and Administration, Chief Financial Officer and Treasurer David D. Johnson 44 Sr. Vice President - Law and Government, Secretary and Corporate Legal Counsel Robert L. Miodunski 44 Sr. Vice President - Nevada Route Group Robert L. Saxton 41 Vice President - Casino Group Robert M. Hester 39 Vice President - Human Resources and Administration Robert A. Woodson 45 Vice President - Regulatory Compliance Johnann F. McIlwain 48 Vice President - Marketing
Steve Greathouse joined the Company as President and Chief Executive Officer in August 1994 and was elected Chairman of the Board of Directors in March 1995. Mr. Greathouse, who has held various positions in the gaming industry since 1974, most recently served as the president of Harrah's Casino Hotels Division of the Promus Companies. In this position, Mr. Greathouse had responsibility for Harrah's resorts in Las Vegas, Laughlin, Reno, Lake Tahoe and Atlantic City. From July 1991 to September 1993 Mr. Greathouse served as president and chief operating officer of Harrah's Southern Nevada, overseeing the operations of Harrah's Las Vegas and Harrah's Laughlin, then the two largest hotel-casinos in the Harrah's chain. Mr. Greathouse is an active member and is currently serving as the Chairman of the Board of the Nevada Resort Association and is on the Executive Committee of United Way. He has also served as a member of the Board of Directors of the Las Vegas Convention and Visitors Authority and on the Executive Committee of the Nevada Development Authority. Mr. Greathouse is a graduate of the University of Missouri. Mr. Bybee joined the Company in July 1993 as President and Chief Operating Officer. In July 1994, Mr. Bybee assumed the roles of Executive Vice President - Government Affairs and Special Advisor to the Board of Directors. Additionally, Mr. Bybee took a position with the William F. Harrah College of Hotel Administration and the UNLV International Gaming Institute at the University of Nevada, Las Vegas. Mr. Bybee also currently serves as a member of the board of directors of The Claridge Hotel and Casino Corporation, a position he has held since August 1988. Prior to his association with the Company, Mr. Bybee had served as Chief Executive Officer of The Claridge Hotel and Casino Corporation since August 1989. From 1983 to 1987 Mr. Bybee served as Senior Vice President and from 1978 to 1981 as Vice President of Golden Nugget, Inc. (now Mirage Resorts, Inc.), which operated the Golden Nugget Casino-Hotel in Atlantic City and operates the Mirage Casino and the Golden Nugget Casino-Hotel in Las Vegas, Nevada. From 1981 to 1983, Mr. Bybee served as President of GNAC Corporation which operated the Golden Nugget Casino-Hotel in Atlantic City. Prior to joining Golden Nugget, Inc. in 1978, Mr. Bybee practiced law for over three years in the Las Vegas firm of Hilbrecht, Jones, Schreck and Bybee. Prior thereto, Mr. Bybee served on the Nevada Gaming Control Board for four and one-half years commencing in 1971. Mr. Bybee has served as Chairman of the Gaming Law Committee, General Practice Section, of the American Bar Association. He is a founder and past President of the International Association of Gaming Attorneys ("IAGA") and is currently a director of IAGA. Mr. Bybee was Chairman of the Atlantic City Convention and Visitors Bureau from 1983 to 1987. He received a Bachelor of Arts degree from the University of Nevada, Reno in 1966, and obtained his Juris Doctorate in 1969 from the University of Utah College of Law, where he was Managing Editor of the Utah Law Review. Anthony L. DiCesare was employed by KIC from April 1991 to July 1994 and joined Alliance in July 1994. Prior to that time and since he graduated from business school in 1989, he was employed as an associate at Wasserstein, Perella & Co., Inc., where he worked in the Mergers and Acquisitions group. Mr. DiCesare graduated from Harvard College, with an A.B. degree in economics, in 1985 and from the Harvard Business School, from which he obtained an M.B.A. degree, in 1989. John W. Alderfer joined the Company in September 1990 as Vice President, Chief Financial Officer and Treasurer. Mr. Alderfer was subsequently promoted to Senior Vice President in December 1993. Prior to joining the Company, Mr. Alderfer had been the Chief Financial Officer of The Bicycle Club, which is a Los Angeles-based card casino, since February 1989. From 1971 to 1988 Mr. Alderfer served in various financial capacities with the Summa Corporation, the Howard R. Hughes Estate Businesses, which operated numerous gaming establishments in Las Vegas and Reno. From 1966 to 1971 he was employed as a certified public accountant by Deloitte & Touche (then known as Haskins & Sells). Mr. Alderfer received his Bachelor of Science in Business Administration with an accounting major from Texas Tech University in 1966 and is a certified public accountant. David D. Johnson joined the Company as Senior Vice President and General Counsel in March 1995. Previously, Mr. Johnson developed extensive gaming industry experience representing a diverse group of casino clients as a Senior Partner at Schreck, Jones, Bernhard, Woloson & Godfrey, one of Nevada's leading law firms. Prior to joining Schreck, Jones, et al, Mr. Johnson served as Chief Deputy Attorney General for the gaming division of the Nevada Attorney General's office. Mr. Johnson serves as Vice Chairman of the Executive Committee of the Nevada State Bar's Gaming Law Section and is an officer and founding member of the Nevada Gaming Attorneys Association. He is also a member of IAGA and has served as Editor of The Gaming Lawyer, the quarterly newsletter of IAGA and the Gaming Law Section of the American Bar Association. Mr Johnson holds a Bachelor of Arts degree in Political Science from the University of Nevada at Las Vegas and earned his Doctor of Law degree from Creighton University in 1978. Robert L. Miodunski joined the Company as Senior Vice President - Nevada Route Group in March 1994. From January 1991 to March 1994, Mr. Miodunski was President of Mulholland-Harper Company, a sign manufacturing and service company. From 1984 through 1990, Mr. Miodunski held various positions with Federal Signal Company, the most recent being Vice President and General Manager of the Midwest Region of the Sign Group. He received his B.S. in Mechanical Engineering from the University of Missouri and an M.B.A. from the University of Dallas. Robert L. Saxton joined the Company in 1982 as Corporate Controller and was elected a Vice President in December 1993. Since joining the Company, Mr. Saxton has held various management positions with the Nevada Route Group and is currently responsible for casino operations. He also serves as President of the Company's Louisiana subsidiaries. Mr. Saxton received his B.S. from the University of Nevada, Las Vegas and is a certified public accountant. Robert M. Hester joined the Company in October 1993 as Director of Human Resources and was promoted to Vice President - Human Resources and Administration in December 1993. From 1989 to 1993, Mr. Hester was Director of Human Resources for Sam's Town Hotel & Casino in Las Vegas. From 1987 to 1989, he was Director of Human Resources for the Showboat Hotel & Casino in Las Vegas. Mr. Hester received his B.S. from the University of Nevada, Las Vegas. Robert A. Woodson joined the Company in 1988 as Director of Gaming Compliance and was promoted to Vice President - Regulatory Compliance in September 1993. Prior to joining the Company, Mr. Woodson was with the Investigation Division of the State of Nevada Gaming Control Board for 10 years. Mr. Woodson received his B.S. from California State University, Fullerton. Johnann F. McIlwain joined the Company in June 1994 as Vice President - Marketing. From 1991 to 1992, Ms. McIlwain was Vice President of Marketing for Greenwood, Inc., a Philadelphia-based gaming and entertainment company. From 1989 to 1991, she was Director of Marketing Services for Hospitality Franchise Systems, Inc. in Parsippany, New Jersey. Prior to joining Hospitality Franchise Systems, Ms. McIlwain served as Director of Advertising for the Resorts International Casino Hotel and the Trump Taj Mahal Casino Hotel. Ms. McIlwain received her B.A. from the University of Miami in 1969 and an M.B.A. from the Florida Atlantic University in 1976. The information required by this item related to the Company's directors who are not also employees is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year covered by this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of report: Page 1. Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets as of June 30, 1994 and 1995 F-2 Consolidated Statements of Operations for the Years ended June 30, 1993, 1994 and 1995 F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994 and 1995 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1993, 1994 and 1995 F-6 Notes to Consolidated Financial Statements F-7 2. Consolidated Supplemental Schedules: Not applicable.
3. Exhibits:
Exhibit Number Description 2.1 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. (12) 2.2 Letter Agreement, dated as of November 5, 1993, among United Gaming, Inc., Capital Gaming International, Inc., I.G. Davis, Jr. and John E. Dell, with exhibits thereto. (14) 2.3 Asset purchase agreement between Plantation Investments, Inc. and Richards-Schnack Development Corp. dated April 2, 1990. (1) 2.4 First Amendment to Agreement of purchase and sale between Plantation Investments, Inc. and Richards-Schnack Development Corp. (1) 2.5 Bill of Sale between Plantation Investments, Inc. and Richards-Schnack Development, Corp. (1) 2.6 Consolidation Agreement, dated March 29, 1995 among the Company, United Gaming Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation, Rainbow Development Corporation and Leigh Seippel and John A. Barrett, Jr. (23) 2.7 Offer to Purchase common shares of Bally Gaming International, Inc., dated July 28, 1995. (24) 3.1 Restated Articles of Incorporation of the Registrant, as amended. (16) 3.2 Revised By-Laws of the Registrant. (20) 4.1 Common Stock Purchase Warrant issued to Alfred H. Wilms upon execution of his loan commitment with Video Services, Inc. (6) 4.2 Certificate of Designations, Preferences and Relative, Participating, Optional and other Special rights of Special Stock and Qualifications, Limitations and Restrictions thereof of Non-Voting Junior Convertible Special Stock of United Gaming, Inc. (8) 4.3 Form of Certificate evidencing Non-Voting Junior Convertible Special Stock. (8) 4.4 Indenture, dated as of September 14, 1993, between United Gaming, Inc. and NationsBank of Texas, N.A., as Trustee in respect of the Company's 7-1/2% Convertible Subordinated Debentures due 2003. (16) 4.5 Form of 7-1/2% Convertible Subordinated Debenture due 2003 (included in Exhibit 4.4, above). 4.6 Registration Rights Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Donaldson Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc. and L.H. Friend, Weinress & Frankson, Inc. (16) 10 Loan and Warrant Agreement dated March 24, 1992 between United Gaming, Inc., Video Services, Inc. and Alfred H. Wilms. (6) 10.1 Lease, dated August 3, 1988, as amended April 6, 1989, from Walter Schwartz to the Company for the Company's Corporate headquarters building at 4380 Boulder Highway, Las Vegas, Nevada. (2) 10.5 * Employment agreement between United Gaming, Inc. and Ira S. Levine. (13) 10.5.1 * Amendment to Employment agreement between United Gaming, Inc. and Ira S. Levine. (21) 10.6 * Employment agreement between United Gaming, Inc. and John W. Alderfer. (13) 10.6.1 * Amendment to Employment agreement between United Gaming, Inc. and John W. Alderfer. (20) 10.7 Letter Agreement dated June 25, 1993 among United Gaming, Inc., 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 Special Stock), Exhibit D (Form of Warrant Agreement), and Exhibit E (form of press release) thereto. (7) 10.8 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. (7) 10.9 * United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan (10) 10.10 * Gaming and Technology, Inc. 1984 Employee Stock Option Plan (11) 10.12 Agreement, dated as of September 14, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms. (8) 10.13 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. (8) 10.14 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. (8) 10.15 Stockholders Agreement, dated as of September 21, 1993, by and among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms. (8) 10.15.1 Amendment to Stockholders Agreement dated as of October 20, 1994 (16) 10.15.2 Selling Stockholder Letter Agreement dated as of March 20, 1995 (22) 10.16 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 (8) 10.20 * Confidential Separation and Consulting Agreement with Carole A. Carter (including mutual release) dated July 15, 1993. (9) 10.21 * Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993. (9) 10.21.1 * Amendment to Executive Severance Agreement with Shannon L. Bybee dated July 15, 1993. (20) 10.23 Secured Promissory Note, dated as of October 29, 1993, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc. (12) 10.24 Escrow Agreement, dated as of October 29, 1993, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada. (12) 10.25 Pledge Agreement, dated as of October 29, 1993, among United Gaming, Inc. (as secured party) and The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel (as pledgors) (12) 10.26 Management Agreement, dated as of October 29, 1993, among Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation and Mississippi Ventures, Inc., as manager. (12) 10.28 Letter Agreement, dated as of December 10, 1993, among United Gaming, Inc., Capital Gaming International, Inc.and I.G. Davis, Jr. (15) 10.29 Loan and Security Agreement, dated as of August 2, 1993, between United Gaming, Inc., Alfred H. Wilms and Video Services, Inc. (16) 10.30 Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc. and Alfred H. Wilms. (16) 10.31 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. (16) 10.32 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Oppenheimer & Co. Inc. (16) 10.33 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and L.H. Friend, Weinress & Frankson, Inc. (16) 10.34 Common Stock Purchase Warrant, dated as of September 21, 1993, between United Gaming, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. (16) 10.36 Consulting Agreement, dated as of November 8, 1993, between David A. Scheinman and United Gaming, Inc. (16) 10.37 Letter Agreement, dated as of March 3, 1994, by and among United Native American Gaming, Inc., USA Gaming of Native America, Inc., USA Gaming, Inc. and others. (17) 10.38 Letter Agreement, dated as of February 25, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel. (18) 10.39 Letter Agreement, dated as of June 29, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation. (19) 10.40 Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel, consented to by HFS Gaming Corporation. (19) 10.41 Second Amendment to Casino Financing Agreement, dated as of August 11, 1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow Casino-Vicksburg Partnership, L.P., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming Corporation. (19) 10.42 Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P., dated as of July 8, 1994. (19) 10.42.1 Second Amended and Restated Agreement of Limited Partnership, dated march 29, 1995, between United Gaming Rainbow and RCC. (23) 10.43 Promissory Note, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation. (19) 10.44 Pledge Agreement, dated as of July 16, 1994, from United Gaming Rainbow, Inc. to The Rainbow Casino Corporation. (19) 10.45 Promissory Note, dated as of July 16, 1994, from John A. Barrett, Jr. and Leigh Seippel to United Gaming, Inc. (19) 10.46 Escrow Agreement, dated as of August 11, 1994, among United Gaming Rainbow, Inc., The Rainbow Casino Corporation, John A. Barrett, Jr., Leigh Seippel and Butler, Snow, O'Mara, Stevens & Cannada, together with Agreement dated February 7, 1994, as amended July 11, 1994 between Rainbow Casino-Vicksburg Partnership, L.P. and the City of Vicksburg, Mississippi. (19) 10.47 * Employment Agreement between United Gaming, Inc. and Johnann McIlwain. (20) 10.48 Settlement Agreement, dated December 4, 1994, by and among the Company, United Gaming of Iowa, Inc., GDREC and Joseph and Paula Zwack (16) 10.49 * Employment Agreement, dated August 15, 1994, between the Company and Steven Greathouse (22) 10.50 Warrant Agreement, dated August 15, 1994, between the Company and Steven Greathouse (22) 10.51 Agreement, dated September 1, 1994, between the Company and Craig Fields (22) 10.52 Warrant Agreement, dated September 1, 1994, between the Company and Craig Fields (22) 10.53 Agreement, dated March 20, 1995, between the Company and Joel Kirschbaum (22) 10.54 Letter Agreement, dated March 29, 1995, among United Gaming Rainbow, RCC, Leigh Seippel, John A. Barrett, Jr and Butler, Snow, O'Mara, Stevens & Cannada. (23) 10.55 Class A Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow. (23) 10.56 Class B Note Payable, dated March 29, 1995, issued by RCVP to United Gaming Rainbow. (23) 10.57 Class B Note Payable, dated March 29, 1995, issued by RCVP to National Gaming Mississippi, Inc. (23) 10.58 Release, dated March 29, 1995, by United Gaming Rainbow and the Company and their affiliates of RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP). (23) 10.59 Release, dated March 29, 1995, by RCC, Rainbow Development Corporation, John A. Barrett, Jr. and Leigh Seippel and their affiliates (other than RCVP) of United Gaming Rainbow and the Company and their affiliates. (23) 10.60 Letter Agreement, dated August 14, 1995, among the Company, Bally Gaming International, Inc. and WMS Industries, Inc. (24) 10.61 Commitment Letter, dated August 30, 1995, between Foothill Capital Corporation and the Company. (25) 10.62 Commitment Letter, dated August 30, 1995, between Canpartners Investments IV, LLC and Cerberus Partners, L.P. and the Company. (25) 10.63 Fee Letter, dated August 30, 1995, between Canyon Capital Management, L.P. and the Company. (25) 10.64 Fee Letter, dated August 30, 1995, between Cerberus Partners, L.P. and the Company. (25) 10.65 Guarantee, dated August 30, 1995, from CPI Securities, L.P. and The Value Realization Fund, L.P. to the Company. (25) 10.66 Form of Stock Purchase Agreement, dated September 15, 1995 for the private placement of Non-Voting Junior Convertible Special Stock, Series B. 21 Subsidiaries of the Registrant 23 Consent of KPMG Peat Marwick LLP 24 Power of Attorney 27 Financial Data Schedule 99 Complaint in Alliance Gaming Corporation v. Bally Gaming International, Inc., WMS Industries, Inc., Richard Gillman, Hans Kloss, Neil E. Jenkins, Charles C. Carella, James J. Florio, Lewis Katz, and Kenneth D. McPherson filed in the Chancery Court of Delaware for New Castle County on July 25, 1995. (24)
(1) Incorporated by reference to the Registrant's Form 8-K dated April 9, 1990 as amended. (2) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1989. (3) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1990. (4) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1990. (5) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1991. (6) Incorporated by reference to the Registrant's Form 8-K dated March 31, 1992. (7) Incorporated by reference to the Registrant's Form 8-K dated June 25, 1993. (8) Incorporated by reference to the Registrant's Form 8-K dated September 21, 1993. (9) Incorporated by reference to the Registrant's Form 10-Q dated September 30, 1993. (10) Incorporated by reference to the Registrant's Forms S-8 Reg. Nos. 33-45811 and 33-75308. (11) Incorporated by reference to the Registrant's Form S-8 Reg. No. 2-98777. (12) Incorporated by reference to the Registrant's Form 8-K dated October 29, 1993. (13) Incorporated by reference to the Registrants's Form 10-Q for the quarter ended March 31, 1993. (14) Incorporated by reference to the Registrant's Form 8-K dated November 5, 1993. (15) Incorporated by reference to the Registrant's Form 8-K dated December 10, 1993. (16) Incorporated by reference to the Registrant's Form S-2 Reg. No. 33-72990 and subsequent amendments thereto. (17) Incorporated by reference to the Registrant's Form 8-K dated March 7, 1994. (18) Incorporated by reference to the Registrant's Form 8-K dated March 15, 1994. (19) Incorporated by reference to the Registrant's Form 8-K dated August 11, 1994. (20) Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1994. (21) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1994. (22) Incorporated by reference to the Registrant's Form S-3 Reg. No. 33-58233. (23) Incorporated by reference to the Registrant's Form 8-K dated March 29, 1995. (24) Incorporated by reference to the Registrant's Schedule 14D-1 and Schedule 13D dated July 28, 1995. (25) Incorporated by reference to the Registrant's amended Schedule 14D-1 and amended Schedule 13D dated September 1, 1995. * Identifies each management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this Report.
(b) Reports on Form 8-K: There were no reports filed on Form 8-K for the three months ended June 30, 1995. (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 27, 1995 By /s/ Steve Greathouse Steve Greathouse, Chairman of the Board of Directors, President and Chief Executive Officer By /s/ John W. Alderfer John W. Alderfer, Sr. Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ Joel Kirschbaum Director September 27, 1995 Joel Kirschbaum /s/ Alfred H. Wilms Director September 27, 1995 Alfred H. Wilms /s/ Anthony DiCesare Director September 27, 1995 Anthony DiCesare /s/ Craig Fields Vice Chairman September 27, 1995 Dr. Craig Fields of the Board /s/ David Robbins Director September 27, 1994 David Robbins SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE GAMING CORPORATION DATED: September 27, 1995 By Steve Greathouse, Chairman of the Board of Directors, President and Chief Executive Officer By John W. Alderfer, Sr. Vice President and Chief Financial 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 Director September 27, 1995 Joel Kirschbaum Director September 27, 1995 Alfred H. Wilms Director September 27, 1995 Anthony DiCesare Vice Chairman September 27, 1995 Dr. Craig Fields of the Board Director September 27, 1995 David Robbins INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Alliance Gaming Corporation We have audited the consolidated balance sheets of Alliance Gaming Corporation and subsidiaries as of June 30, 1995 and 1994 and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the three-year period ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial statements, effective July 1, 1993 Alliance Gaming Corporation adopted the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes. KPMG Peat Marwick LLP September 1, 1995 F-1 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1994 and 1995
ASSETS 1994 1995 (In thousands) Current assets: Cash and cash equivalents $ 37,085 $ 13,734 Securities available for sale 12,489 23,680 Receivables, net 5,924 3,316 Inventories 661 714 Prepaid expenses 4,420 4,148 Refundable income taxes 361 361 Other 30 156 Total current assets 60,970 46,109 Property and equipment: Land and improvements 3,229 17,296 Building and improvements 4,286 8,822 Gaming equipment 30,395 36,396 Furniture, fixtures and equipment 9,632 11,582 Leasehold improvements 5,222 5,372 Construction in progress 212 30 52,976 79,498 Less accumulated depreciation and amortization 24,293 29,146 Property and equipment, net 28,683 50,352 Other assets: Receivables, net 4,609 5,309 Excess of costs over net assets of an acquired business, net of accumulated amortization of $295 (1994) and $585 (1995) 3,789 3,842 Intangible assets, net of accumulated amortization of $4,145 (1994) and $5,516 (1995) 13,527 12,405 Deferred tax assets 1,081 1,399 Investment in minority owned subsidiary 2,000 1,585 Other 4,757 5,347 Total other assets 29,763 29,887 $119,416 $126,348
See accompanying notes to consolidated financial statements. F-2 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1994 and 1995 LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1995 (In thousands) Current liabilities: Current maturities of long term debt $ 1,504 $ 3,995 Accounts payable 1,661 1,758 Accrued expenses, including related parties of $312 (1994) and $931 (1995) 6,879 8,804 Total current liabilities 10,044 14,557 Long term debt, less current maturities 89,222 97,402 Deferred tax liabilities 1,218 1,205 Other liabilities 3,587 2,556 Total liabilities 104,071 115,720 Commitments and contingencies Minority interest 246 643 Stockholders' equity: Common stock, $.10 par value; authorized 175,000,000 shares; issued 10,505,928 shares (1994) and 11,654,150 shares (1995) 1,051 1,165 Special stock, $0.10 par value; authorized 10,000,000 shares; issued 1,333,333 (1994 and 1995) 133 133 Paid-in capital 26,716 32,134 Unrealized loss on securities available for sale (421) (316) Accumulated deficit (12,380) (23,131) Total stockholders' equity 15,099 9,985 $119,416 $126,348
See accompanying notes to consolidated financial statements. F-3 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30 1993, 1994 and 1995
1993 1994 1995 (In thousands, except per share amounts) Revenues: Gaming Routes $ 96,282 $102,830 $106,827 Casino and gaming arcades 12,526 15,679 21,287 Food and beverage sales 4,184 4,480 3,847 Net equipment sales 99 65 27 113,091 123,054 131,988 Costs and expenses: Cost of gaming: Routes 72,614 76,332 79,875 Casino and taverns 8,667 11,871 11,436 Cost of food and beverage 2,876 3,084 2,795 Cost of equipment sales 49 20 12 Selling, general & administrative 12,667 13,555 14,633 Business development expenses 900 1,192 7,843 Corporate expenses 6,191 7,882 9,735 Bad debt expense 461 705 400 Loss on abandoned small casinos --- 3,713 --- Loss on abandoned taverns --- 2,638 --- Depreciation and amortization 8,718 9,530 9,520 113,143 130,522 136,249 Operating loss (52) (7,468) (4,261) Other income (expense): Interest income 998 2,084 2,798 Interest expense (5,046) (6,830) (8,943) Minority share of income --- (506) (397) Equity in income of affiliate --- --- 31 Other, net 450 (167) 286 Loss before income taxes (3,650) (12,887) (10,486) Income tax expense (241) (265) Net loss $ (3,650) $(13,128) $(10,751) Net loss per common share $ ( 0.38) $ (1.28) $ (0.95) Weighted average common shares outstanding 9,696 10,251 11,300
See accompanying notes to consolidated financial statements. F-4 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30 1993, 1994 and 1995
1993 1994 1995 Cash flows from operating activities: (In thousands) Net loss $ (3,650) $(13,128) $ (10,751) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 8,718 9,530 9,520 Loss on abandoned casinos --- 3,713 --- Loss on abandoned taverns --- 2,638 --- Write-off of other assets 149 1,817 2,796 Provision for losses on receivables 461 705 400 Amortization of debt discounts 265 292 297 Undistributed earnings of affiliate --- --- (31) Non-cash stock compensation expense --- --- 1,313 Net change in operating assets and liabilities: (Increase) decrease in: Inventories (233) 78 (40) Prepaid expenses 1,475 (519) 381 Refundable income taxes 766 (361) --- Other 305 254 (126) Increase (decrease) in: Accounts and slot contracts payable (2,378) 269 (447) Accrued and deferred income taxes --- 137 (137) Other liabilities, including minority interest (153) 511 397 Accrued expenses 184 3,126 (2,615) Net cash provided by operating activities: 5,909 9,062 957 Cash flows from investing activities: Additions to property and equipment (5,092) (5,385) (8,887) Proceeds from sale of property and equipment 257 1,466 351 Additions to receivables (8,715) (18,801) (8,970) Cash collections on receivables 7,925 17,541 10,315 Net cash provided by acquisition of business --- --- 2,481 Acquisition of securities available for sale --- (12,910) (11,086) Acquisition of partnership interests --- (2,000) (1,585) Additions to intangible assets (77) (5,179) (390) Additions to other long-term assets (3,296) (2,031) (3,877) Net cash used in investing activities (8,998) (27,299) (21,648) Cash flows from financing activities: Proceeds from long-term debt, net of expenses 1,941 81,984 --- Issuance of common stock warrants 559 116 --- Reduction of long-term debt (2,167) (41,776) (3,125) Issuance of special stock, net of costs --- 4,799 --- Issuance of common stock 2,097 619 465 Net cash provided by (used in) financing activities 2,430 45,742 (2,660) Cash and cash equivalents: (Decrease) increase for year (659) 27,505 (23,351) Balance, beginning of year 10,239 9,580 37,085 Balance, end of year $ 9,580 $ 37,085 $ 13,734
See accompanying notes to consolidated financial statements. F-5 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended June 30, 1993, 1994 and 1995
(in thousands) Total Retained Stock- Earnings Unreal. holders Common Stock Special Stock Paid-in (Accum. Loss on Equity Shares Dollars Shares Dollars Capital Deficit) Securities Balances, June 30, 1992 $23,660 9,409 $ 941 --- --- $18,320 $ 4,399 --- Net loss (3,650) --- --- --- --- --- (3,650) --- Common stock warrants issued 559 --- --- --- --- 559 --- --- Shares issued upon exercise of options 2,096 591 59 --- --- 2,038 --- --- Balances, June 30, 1993 22,665 10,000 1,000 --- --- 20,917 748 --- Net loss (13,128) --- --- --- --- --- (13,128) --- Shares issued for acquisitions 249 112 11 --- --- 238 --- --- Common stock warrants issued 116 --- --- --- --- 116 --- --- Cost of private placement (201) --- --- --- --- (201) --- --- Net change in unrealized loss on securities available for sale (421) --- --- --- --- --- --- (421) Shares issued for capital infusion 4,999 --- --- 1,333 133 4,866 --- --- Shares issued upon exercise of options 819 394 39 --- --- 780 --- --- Balances, June 30, 1994 15,099 10,506 1,051 1,333 133 26,716 (12,380) (421) Net loss (10,751) --- --- --- --- --- (10,751) --- Shares issued for acquisitions 3,754 712 71 --- --- 3,683 --- --- Compensatory stock issued 1,313 250 25 --- --- 1,288 --- --- Cost of private placement 22 --- --- --- --- 22 --- --- Net change in unrealized loss on securities available for sale 105 --- --- --- --- --- --- 105 Shares issued upon exercise of options 443 186 18 --- --- 425 --- --- Balances, June 30, 1995 $ 9,985 11,654 $1,165 1,333 $ 133 $32,134 $(23,131) $ (316)
See accompanying notes to consolidated financial statements. F-6 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 1993, 1994 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS Description of business Alliance Gaming Corporation and its subsidiaries (collectively, the "Company") are presently engaged in gaming device route operations in Nevada and in the greater New Orleans, Louisiana area; casino operations in Nevada and Mississippi; and the design, manufacture and refurbishment of gaming devices. Principles of consolidation The accompanying consolidated financial statements include the accounts of Alliance Gaming Corporation, its wholly-owned subsidiaries and indirect subsidiaries and its partially owned, controlled subsidiaries. In the case of Video Services, Inc. ("VSI"), the Company owns 490 shares of class B voting stock, which constitutes 100% of the voting stock, of VSI. The Company is entitled to receive 71% of dividends declared by VSI, if any, at such time that such dividends are declared. In July 1994, the Company acquired a 45% limited partnership interest in the Rainbow Casino- Vicksburg Partnership. Accordingly, the Company accounted for its investment in this partnership under the equity method until March 29, 1995 at which time the Company increased its partnership interest and assumed the general partnership position (see Note 11). Effective March 29, 1995, the results of operations of the Rainbow Casino have been included in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. Revenue recognition In accordance with industry practice, the Company recognizes gaming revenues as the net win from route, casino and tavern operations, which is, for gaming devices, the difference between coins and currency deposited into the devices and payments to customers and, for other games, the difference between gaming wins and losses. The Company recognizes total net win from gaming devices as revenues for gaming routes which operate under revenue- sharing arrangements and revenue-sharing payments as a cost of gaming routes. The Company recognizes revenue from parts and equipment sales to outside purchasers when the products are shipped. Location rent expense For financial statement purposes, the Company recognizes expenses for fixed periodic rental payments (including scheduled increases) made in connection with route operation space lease arrangements or sublease agreements on a straight line basis over the term of the agreement including any extension periods which are expected to be exercised. Contingent periodic rental payments are expensed in the period incurred. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Such investments of $29,799,000 (1994) and $5,238,000 (1995) are included in cash and cash equivalents and are carried at cost, which approximates market value. Securities available for sale Effective January 1, 1994, the Company adopted Financial Accounting Standard No. 115. For fiscal years beginning after December 15, 1993, Statement 115 requires that, except for debt securities classified as "held-to-maturity" securities, investments in debt and equity securities should be reported at fair market value. The Company has designated certain securities as being available for sale. Securities are designated as available for sale at the time of their purchase. The Company determines which securities are available for sale by evaluating whether such securities would be sold in response to liquidity needs, asset/liability management and other factors. Securities available for sale are recorded at market value with the resulting unrealized gains and losses being recorded, net of tax, as a component of stockholders' equity. Gains or losses on these securities are determined using the specific identification method. F-7 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS (Continued) Inventories Inventories are stated at the lower of cost or market and are determined by the first-in, first out method. Property and equipment Property and equipment are stated at cost and are depreciated and amortized over their estimated useful lives or lease terms, if less, using the straight line method as follows: Building and improvements 31-39 years Gaming equipment 5-7 years Furniture, fixtures and equipment 3-10 years Leasehold improvements 5-20 years Excess of costs over net assets of an acquired business Excess of costs over net assets of an acquired business is the excess of the cost over the value of net tangible assets of an acquired business and is generally amortized on the straight-line method over a period of 40 years. In the case of the Company's majority-owned subsidiary, Native American Investments, Inc., where the assets acquired are largely intangible, the Company has elected a 10-year amortization period representing the estimated life of the rights acquired, consisting principally of contracts to conduct gaming operations on Indian lands. Intangible assets Intangible assets consist primarily of costs associated with the acquisition of location leases which are capitalized and amortized using the straight-line method over the terms of the leases, ranging from one to 40 years, with an average life of approximately 11 years. Intangible assets for fiscal 1995 includes approximately $4,547,000 of commissions, discounts and other capitalized costs related to the issuance of the Company's 7.5% Convertible Subordinated Debentures due 2003, net of approximately $957,000 of accumulated amortization. At June 30, 1994, intangible assets includes $4,993,000 of such costs, net of $405,000 of accumulated amortization. Such amounts are being amortized over the term of the debentures. Other Assets Other assets includes assets held for sale, long-term deposits and other non-current assets. In fiscal 1993, the Company paid to certain property owners a $2,500,000 refundable deposit to operate gaming devices at their location. Additionally, other assets are presented net of valuation allowances of $1,763,000 and $631,000 at June 30, 1994 and 1995, respectively. Loss per share of common stock Loss per share of common stock has been computed based on the weighted average number of shares of common stock outstanding. Fully diluted earnings per share is not presented because the effect would be anti-dilutive. Income taxes In February 1992, the Financial Accounting Standards Board issued Financial Accounting Standard No. 109 Accounting for Income Taxes. Under the asset and liability method of Statement 109, 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 F-8 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS (Continued) to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective July 1, 1993, the Company adopted Statement 109. The Company previously used the asset and liability method under Statement 96. Reclassifications Certain reclassifications have been made to prior year financial statements to conform with the current year presentation. 2. RECEIVABLES The Company's gaming route operations from time to time involve making loans to location operators in order to participate in revenues over extended periods of time. The loans, made for build-outs, tenant improvements and initial operating expenses are generally secured by the personal guarantees of the operators and the locations' assets. The majority of the loans are interest bearing and are expected to be repaid over a period of time not to exceed the life of the revenue sharing arrangement. The loans have varying payment terms, with weekly payment amounts ranging from $200 to $1,440 and monthly payment amounts ranging from $200 to $18,780. Interest rates on the loans range from prime plus 1.50% to stated rates of 12% with various due dates ranging from July 1995 to April 2007. The loans are expected to be repaid from the locations' cash flows or proceeds from the sale of the leaseholds.
Receivables at June 30 consist of the following: 1994 1995 (In thousands) Notes receivable-location operators $ 8,319 $ 7,760 Other receivables 2,214 865 10,533 8,625 Less current amounts (5,924) (3,316) Long-term receivables, excluding current amounts $ 4,609 $ 5,309
Receivables are presented net of an allowance for doubtful accounts of $1,389,000 and $1,659,000 as of June 30, 1994 and 1995, respectively. The allowance is allocated between current and long-term receivables on a pro rata basis related to notes receivable from location operators. During fiscal 1994, the Company cancelled certain sublease agreements as a result of defaults by payors in making payments and acquired title to the assets and operating rights to the tavern locations in exchange for releases of the customers' debt owed to the Company. During fiscal 1994, interest income of approximately $48,000 was recognized on these receivables. Total interest income of $130,000 would have been recognized if the receivables had been current in accordance with their original terms. The total initial investment in these tavern locations of approximately $2,011,000 includes the net receivables of approximately $1,362,000 and other assets of $649,000. No such transactions were completed in fiscal 1995. Management of the Company has determined the fair value of the locations' assets from knowledge of sales of comparable establishments and expertise acquired from operating its gaming devices at similar locations. Due to the Company's decision to dispose of the currently operated small independent tavern operations, certain reserves and write downs were recognized in fiscal 1994 results of operations. Management believes properly managing the disposal of these operations will protect the Company's existing contractual arrangements from the tavern locations as well as assure their continued operation while preserving the Company's investment. Management cannot estimate when or how many of these locations will be obtained and subsequently disposed. F-9 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 3. LOSS ON ABANDONMENT OF SMALL CASINOS AND TAVERNS In fiscal 1994, due to continuing losses from operations, negative cash flows and incompatibility with the Company's long- term growth strategy, the Company's Board of Directors resolved to 1) exit the downtown Las Vegas gaming market and 2) dispose of the currently operated small independent taverns on commercially reasonable terms as market conditions warrant. As a result of the decision to exit the downtown Las Vegas gaming market, the Company substantially reduced operations at both the Trolley Stop Casino and Miss Lucy's Gambling Hall & Saloon. Included in the 1994 statements of operations are total expenses of approximately $3,246,000 related to these actions. The total charge included approximately $488,000 related to the write-down of assets and approximately $2,758,000 representing primarily the present value of the future lease payments net of estimated future sublease income. The decision to withdraw from the tavern business resulted in expenses of approximately $2,638,000 being recognized in fiscal 1994. Approximately $1,813,000 of the total amount was related to the write down of assets while approximately $825,000 represented primarily the present value of the future lease payments net of estimated future sublease income. The Company has entered into an agreement to sell all of its tavern locations to an unaffiliated third party. The sale is contingent upon, among other conditions, approval by Nevada gaming authorities. In addition to the items noted above, the Company's lease on the Mizpah Hotel and Casino has a remaining term of approximately 7.5 years with an option on the Company's behalf to terminate the lease arrangement with 120 days written notice at any time after December 31, 1995. The Company has notified the landlord of the Mizpah of its intention to exercise the termination clause of the lease at that time. As a result of this decision, the Company recognized an expense of $467,500 in fiscal 1994. 4. DEBT
Long-term debt at June 30 consists of the following: 1994 1995 (In thousands) 7.5% Convertible subordinated debentures due 2003 $85,000 $85,000 Due to stockholder, net of discount of $983,709 (1994) and $747,619 (1995). 4,390 3,309 Hospitality Franchise Systems --- 9,065 Other 1,336 4,023 90,726 101,397 Less current maturities 1,504 3,995 Long-term debt, less current maturities $89,222 $97,402
F-10 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 4. DEBT (continued) Accrued interest of approximately $1,893,000 (1994) and $1,991,000 (1995) is included in accrued expenses in the Consolidated Balance Sheets. Included in these amounts are $30,343 (1994) and $27,813 (1995) due to affiliates of Alfred H. Wilms, principal stockholder and member of the Board of Directors of the Company, related to funding of VSI's gaming device route operations. In September 1993, the Company completed the private placement of $85,000,000 aggregate principal amount of its 7.5% Convertible Subordinated Debentures due 2003. The debentures pay interest semi-annually on March 15 and September 15. These debentures are convertible at any time into shares of the Company's common stock at a conversion price of $10 per share (equivalent to a conversion rate of 100 shares per $1,000 principal amount of debentures), subject to adjustment. Upon certain defined events, including a change of control, holders of the debentures have the right to require the Company to redeem the debentures for cash at the rate of 101% of principal amount plus accrued interest. The debentures are redeemable at predetermined redemption prices, in whole or in part, at the option of the Company for cash at any time on and after September 15, 1995 if the market price of the common stock exceeds 250% of the conversion price for 20 out of any 30 consecutive trading days or at any time on and after September 15, 1996. In March 1992, Alfred H. Wilms, director and principal stockholder (and then Chairman of the Board of Directors and Chief Executive Officer) of the Company, committed to provide or cause others to provide a $6,500,000 five year subordinated loan to VSI, the Company's controlled subsidiary which loan has been funded in full and is secured by a subordinated interest in all of VSI's present and future personal property. Until August 1993, the loan required quarterly payments of interest. In August 1993, the loan agreement was amended to extend the maturity of the loan to September 1, 1998 and to require quarterly payments of principal and interest. Interest on the loan accrues at the rate of 200 basis points above the 90-day London Inter Bank Offered Rate, adjusted quarterly. At June 30, 1995 the interest rate for the note was 8.2275%. During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan $7,750,000 to the Company's majority controlled subsidiary RCVP in connection with the construction of the Rainbow Casino. The loan amount was subsequently increased to $10,000,000. The note bears interest at 7.5% per annum and requires monthly payments of principal and interest over an 24 month period. In exchange for funding this loan, HFS is also entitled to receive a monthly royalty fee equal to 12% of the casino's gaming revenues. Included in the consolidated results of operations for fiscal 1995 are approximately $810,000 of such royalties.
Maturities of long-term debt for each of the five years ending subsequent to June 30, 1995 are as follows: 1996 $ 3,995,000 1997 3,927,000 1998 2,825,000 1999 1,670,000 2000 1,723,000 Thereafter 87,257,000
F-11 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 5. STOCKHOLDERS' EQUITY The Company's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of special stock, par value $.10 per share ("Special Stock"). 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 otherwise 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 has designated an initial series of Special Stock as "Non-voting Junior Convertible Special Stock" which consists of 1,333,333 shares (the "Initial Series"). The Company's Articles of Incorporation provide that the Initial Series is intended to have the same rights as the Common Stock except that the Initial Series has no voting rights and a $.01 per share liquidation preference. At June 30, 1995, only the Initial Series of Special Stock was outstanding. The Initial Series is convertible on a share for share basis into shares of Common Stock of the Company. In 1984, the Company created an Employee Stock Option Plan (the "1984 Plan") that provides for the issuance of up to 2,000,000 shares of common stock to Company employees and directors. At June 30, 1995, there were incentive stock options covering 207,000 shares and non-qualified stock options covering 10,000 shares outstanding under the 1984 Plan. At June 30, 1994 there were incentive stock options covering 376,000 shares and non-qualified stock options covering 15,000 shares outstanding under the 1984 Plan. Generally, options are granted at the fair market value of the Company's Common Stock at the date of the grant and become exercisable over five years. In 1992, the Company created the 1991 Long Term Incentive Plan (the "Incentive Plan") that, as amended, provides for the issuance of up to 3,000,000 shares of common stock to Company employees and directors. At June 30, 1995 there were incentive stock options covering 2,400,834 shares outstanding under the Incentive Plan. At June 30, 1994 there were incentive stock options covering 1,099,500 shares outstanding under the Incentive Plan. Generally, options are granted at the fair market value of the Company's Common Stock at the date of the grant and become exercisable over five years. Transactions involving stock options are summarized as follows:
Options Outstanding Shares Exercise Price Balance, June 30, 1992 1,546,150 1.375-8.750 Granted 300,000 5.875-8.750 Exercised (590,700) 1.375-4.875 Cancelled (3,600) 3.875 Balance, June 30, 1993 1,251,850 1.375-8.750 Granted 690,500 6.500-10.125 Exercised (393,850) 1.625-4.000 Cancelled (58,000) 2.125-4.000 Balance, June 30, 1994 1,490,500 1.375-10.125 Granted 1,598,334 5.750-8.000 Exercised (186,000) 1.375-4.000 Cancelled (285,000) 3.500-10.000 Balance, June 30, 1995 2,617,834 1.625-9.250 Exercisable at June 30, 1995 825,600 1.625-9.250
F-12 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 5. STOCKHOLDERS' EQUITY (Continued) Also at June 30, 1995, Mr. Wilms held warrants to purchase 2,000,000 shares of Common Stock at $2.50 per share, subject to adjustment. These warrants were issued in connection with the funding of the $6,500,000 five year subordinated loan for VSI. Upon closing of the private placement of the Company's 7.5% Convertible Subordinated Debentures and the $5 million equity investment by Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") on September 21, 1993, the Company issued warrants to purchase up to 2,750,000 shares of Common Stock at $1.50 per share to Kirkland. These warrants are exercisable one year after the grant date and only after the market price of the Common Stock reaches certain predetermined levels. Under the same terms, the Company issued warrants to purchase 1,250,000 and 30,000 shares of Common Stock to Gaming Systems Advisors, L.P. ("GSA") and L.H. Friend, Weinress & Frankson, Inc. ("Friend"), respectively. The Company also issued warrants to purchase 500,000 and 250,000 shares of Common Stock at $8.25 per share to the initial purchasers of the Debentures, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Oppenheimer & Co., Inc. ("Oppenheimer"), respectively. Under the same general terms and conditions, DLJ may earn warrants to purchase an additional 250,000 shares of the Company's Common Stock. In fiscal 1995, in connection with the commencement of their employment with the Company, Steve Greathouse, the Company's Chairman of the Board,President and Chief Executive Officer and Dr. Craig Fields, Vice Chairman of the Board were each granted warrants to purchase 250,000 shares of common stock on the same terms as the Kirkland warrants described above. As of June 30, 1995, none of the warrants granted to Kirkland, GSA, Friend, Greathouse or Fields are exercisable. 6. INCOME TAXES The Company generally accounts for income taxes and files its income tax returns on a consolidated basis. However, VSI, in which the Company holds 100% of the voting interests, has previously filed its income tax returns on a separate basis and was not consolidated for tax purposes. During the quarter ended December 31, 1994, the Company determined that VSI can be consolidated for tax purposes. As a result, the Company filed for and has received a refund of estimated income taxes paid for fiscal year 1994. Effective July 1, 1993, the Company adopted Financial Accounting Standard No. 109 Accounting for Income Taxes, prospectively. Under the asset and liability method of Statement 109, 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 are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-13 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 6. INCOME TAXES (continued) The federal and state income tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 1995 are presented below.
1994 1995 (in thousands) Deferred Tax Assets: Net Operating Loss Carryforwards $ 8,495 $ 12,470 Inventory Obsolescence Reserve 578 179 Receivables, Bad Debt Allowance 472 564 Organization and Start-up Costs 267 172 Reserves for abandoned projects 1,577 1,356 Other 307 566 Total gross deferred tax assets 11,696 15,307 Less: Valuation allowance (10,615) (13,908) Net deferred tax assets $ 1,081 $ 1,399 Deferred tax liabilities: Property and equipment, principally due to depreciation differences 1,218 1,399 Total gross deferred tax liabilities (in 1995, $194 is included in accrued expenses) 1,218 1,399 Net deferred tax assets (liabilities) $ (137) $ ---
The valuation allowance for deferred tax assets as of June 30, 1994 was $10,615,000. The net change in the total valuation allowance for the twelve months ended June 30, 1995 was an increase of $3,293,000. At June 30, 1995, the Company has estimated net operating loss carryforwards for federal income tax purposes of approximately $36,678,000 which are available to offset future federal taxable income, if any, expiring in the years 2007 through 2010. A reconciliation of the Company's provision for income tax expense as compared to the tax benefit calculated by applying the statutory federal tax rate to the loss before income taxes follows.
1994 1995 (in thousands) Statutory Rate $(4,202) $(3,565) Meals, entertainment 3 27 State Income Taxes 33 67 Tax losses for which no current benefit is recognized 4,385 3,736 Alternative Minimum Tax 22 --- $ 241 $ 265
F-14 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 6. INCOME TAXES (continued) The components of the Company's income tax expense for the year ended June 30, 1995 are:
1994 1995 (in thousands) Federal - current $ 73 $ --- State - current 31 102 Federal - deferred 118 163 State - deferred 19 --- Total $ 241 $ 265 7. STATEMENTS OF CASH FLOWS The following supplemental information is related to the Consolidated Statements of Cash Flows. In fiscal 1995, the Company reclassified approximately $212,000 from receivables to intangible assets and reclassified other assets of approximately $1,099,000 to property and equipment ($1,074,000) and receivables ($25,000). Additionally, numerous non- cash items related to the Company's acquisition of the general partnership interest in RCVP impacted the statement of cash flows. The most significant of these non-cash items included non-cash additions to property, plant and equipment of approximately $23,400,000 and additions to total debt of approximately $13,839,000. See also Note 11. In fiscal 1994, the Company reclassified approximately $1,445,000 of accounts receivable to intangible assets ($1,393,000) and property and equipment ($52,000) on a net basis. Payments for interest expense in 1993, 1994 and 1995 were approximately $4,408,000, $4,690,000 and $7,102,000 respectively. F-15 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 8. INTERIM FINANCIAL INFORMATION (Unaudited) Following is the unaudited quarterly results of the Company for the years ended June 30, 1994 and 1995. This information is not covered by the Independent Auditors' Report.
Primary Net Income Total (Loss) (Loss) Per Revenues Income Share(1) (Dollars in thousands, except per share amounts) 1994 First Quarter $28,419 $ (1,376) $ (.14) Second Quarter 30,566 (1,221) (.12) Third Quarter 31,807 847 .08 Fourth Quarter 32,262 (11,378) (1.09) 1995 First Quarter $30,824 $ (1,926) $ (.18) Second Quarter 31,514 (3,090) (.28) Third Quarter 31,439 (1,775) (.16) Fourth Quarter 38,211 (3,960) (.34)
(1) The sum of the income (loss) per share for the four quarters, which are based on average shares outstanding during each quarter, does not equal income (loss) per share for the year, which is based on average shares outstanding during the year. 9. RELATED PARTY TRANSACTIONS The Company sold products to Seeben N.V., a company in which Alfred H. Wilms is the brother of a member of the company's board of directors. Sales to this company were approximately $2,000 (1993), $6,000 (1994) and $0 (1995). No accounts receivable were due from this company at June 30, 1994 or June 30, 1995. Sales prices and terms were similar to those of non-affiliated persons. In March 1992, Alfred H. Wilms, a director and principal stock holder (and then Chairman and Chief Executive Officer of the Company), committed to provide or cause others to provide a $6,500,000 five year, unsecured, subordinated loan to VSI, a majority-controlled subsidiary of the Company engaged in the Company's Louisiana gaming device route operations. As consideration for this commitment, the Company issued to Mr. Wilms five year warrants to purchase 200,000 shares of Common Stock at $2.50 per share subject to certain adjustments, and agreed to issue an additional warrant to purchase 1,800,000 shares of Common Stock at $2.50 per share subject to certain adjustments upon complete funding of the loan. At June 30, 1993 approximately $6,000,000 of the loan had been funded. The remaining $500,000 was funded in October 1993 at which time the Company issued to Mr. Wilms the additional warrant for 1,800,000 shares of common stock. David Robbins, a director appointed to the Board in July 1994, as a designee of Kirkland Investment Corporation ("KIC"), is employed by the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel which has represented the Company in various matters related to the Company's growth strategy and its transactions with Kirkland and KIC. The Company paid fees of approximately $1,046,000 and $493,000 to such firm in fiscal 1994 and fiscal 1995, respectively. In connection with the agreements with KIC (100% owned by Joel Kirschbaum) and its affiliates and related transactions, the Company has paid to or on behalf of Kirkland and its affiliates a total of approximately $346,000 in fiscal 1994 and $597,000 in fiscal 1995 primarily for reimbursement of expenses incurred on behalf of the Company. F-16 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 9. RELATED PARTY TRANSACTIONS (continued) In 1993 and 1994 the Company entered into employment agreements with certain key employees. These agreements range from one to three years in length and cover certain other terms of employment including compensation. As a condition of his employment, in April 1995 the Company issued 250,000 shares of common stock to Steve Greathouse, the Company's Chairman, President and Chief Financial Officer and recognized a non-cash charge of $1,313,000 related to this transaction. 10. COMMITMENTS AND CONTINGENCIES The Company leases office space, equipment, warehouse and repair facilities, gaming route locations, casino and other locations under non-cancelable operating leases. Future minimum rentals under non-cancelable operating leases at June 30, 1995 are:
Year Total Net Ended Minimum Sublease Minimum June 30 Rentals Income Rentals (In thousands) 1996 $ 8,828 $ 921 $ 7,907 1997 6,462 842 5,620 1998 6,173 809 5,364 1999 5,623 758 4,865 2000 3,737 598 3,139 Thereafter 34,349 2,757 31,592 $ 65,172 $ 6,685 $ 53,387
Certain gaming route location leases provide only for contingent rentals based upon a percentage of gaming revenue and are cancelable at any time by either party. Operating lease rental expense, including contingent lease rentals, for years ended June 30 was as follows:
1993 1994 1995 (In thousands) Minimum rentals $ 11,727 $ 13,743 $ 9,704 Contingent rentals 49,621 55,910 58,113 61,348 69,653 67,817 Sublease rental income (850) (1,004) (1,192) $ 60,498 $ 68,649 $ 66,625
These amounts are included in the cost of gaming revenues on the accompanying Consolidated Statements of Operations. In April, 1990, the Company entered into a ten year lease to operate a non-restricted gaming location in Las Vegas, Nevada. The lease commencement date was scheduled to begin no later than 90 days after the construction had been finalized. In January, 1991, the Company received notice that the construction was complete; however, upon review of the property, the Company did not believe that construction had been completed. In August, 1992, the lessor filed a suit against the Company seeking compensatory and exemplary damages totalling $18,700,000. In fiscal 1992, the Company had accrued a $480,000 F-17 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 10. COMMITMENTS AND CONTINGENCIES (continued) liability representing back rent owed to the lessor. In February, 1993 the lawsuit was settled and the Company paid the lessor $425,000 in return for resolution of all prior and current disputes regarding the lease terms. The lease calls for monthly rentals of approximately $31,000 and provides for annual increases based on certain indices. At June 30, 1992, the Company sublet the property to a location operator in exchange for the right to operate gaming devices at the property under a space lease arrangement for a period of 10 years beginning December, 1992. The Company and Casino Magic Corporation, through wholly owned subsidiaries, are members in Kansas Gaming Partners, LLC ("KGP") and Kansas Financial Partners, LLC ("KFP"), both Kansas limited liability companies. Under an option agreement granted to KGP by Camptown Greyhound Racing, Inc. ("Camptown"), KGP has been granted the exclusive right to operate gaming devices and/or casino-type gaming at Camptown's facility if and when such gaming is permitted in Kansas. In September 1994, the Kansas Racing Commission approved a revised financing proposal submitted by Camptown that would facilitate completion of construction of a greyhound racing facility on the 320 acre site in Frontenac, Kansas. Camptown has received a $3,205,000 loan commitment which has been guaranteed by KFP. In December 1994, the Company invested $1,580,000 in KFP for its portion of the loan guarantee which was made in the form of a certificate of deposit. Construction of Camptown's racing facility has been completed and the facility opened for business in May 1995. Camptown's obligation to begin to repay the loan guaranteed by KFP commenced in June 1995 with interest only payments. Principal repayment is scheduled to commence in June 1996. There can be no assurance as to the successful completion or operation of any part of this project. The Company is also involved in various claims and legal actions arising in the ordinary course of business. Management of the Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. 11. ACQUISITIONS On July 16, 1994, the Rainbow Casino located in Vicksburg, Mississippi permanently opened for business. Through a wholly-owned subsidiary, the Company originally purchased a 45% limited partnership interest in RCVP, a Mississippi limited partnership which owns the casino, all assets (including the gaming equipment) associated with the casino and certain adjacent parcels of land. As consideration for its 45% limited partnership interest, the Company paid $2,000,000 in cash and issued 600,000 shares of its common stock to RCC and its two sole shareholders. The 55% general partnership interest in RCVP was held by RCC. In connection with the completion of the casino, the Company, through a wholly-owned subsidiary, funded a $3,250,000 advance to RCC on the same terms as RCC's financing from Hospitality Franchise Systems, Inc. ("HFS") (other than the fact that such advance is subordinate to payments due to HFS). On March 29, 1995, the Company consummated certain transactions whereby the Company acquired from RCC the controlling general partnership interest in RCVP and increased its partnership interest. In exchange for the assumption by National Gaming Mississippi, Inc. ("NGM"), a subsidiary of National Gaming Corporation, of approximately $1,140,000 of liabilities (plus a financing fee payable to HFS) related to the completion of certain incomplete elements of the project which survived the opening of the casino (for which RCC was to have been responsible, but failed to satisfy), a related $652,000 cash payment by the Company to NGM and commitments by the Company and NGM to fund additional financing required to complete the project (i) a subsidiary of the Company became the general partner and RCC became the limited partner and (ii) the respective partnership interests were adjusted. As a result of these transactions, RCVP assumed $1,304,000 of new debt of which 50% was payable to the Company. Under the adjusted partnership interests, RCC is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount shall increase to 20% of cash above $35,000,000 (i.e., only on such incremental amounts)), for a period of 15 years, such period being subject to one year extensions for each year in which a minimum payment of $50,000 is not made. This transaction was accounted for as an acquisition using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values. This treatment resulted in no cost in excess of net assets acquired (goodwill) being recognized. The Rainbow Casino's results of operations have been included in the consolidated results of operations since the date of acquisition. F-18 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 11. ACQUISITIONS (continued) The following summarized, unaudited pro forma results of operations for the fiscal year ended June 30, 1995, assume the complete acquisition of RCVP occurred on the date the casino permanently opened for business.
1995 Revenues $ 142,051 Net loss (10,862) Net loss per common share $ (0.96)
12. RECENT DEVELOPMENTS (Unaudited) On June 19, 1995, the Company publicly proposed a negotiated acquisition of Bally Gaming International, Inc. ("BGII") for $12.50 per share of BGII common stock. Prior to making this offer, the Company had acquired 500,000 shares of BGII stock on the open market and at June 30, 1995 held 1,000,000 shares (approximately 9.3% of BGII's total outstanding shares, based on BGII's most recent public filings) which it acquired at an average cost of approximately $10.41 per share. Under the proposed terms of the offer, approximately 60% of BGII shares not held by the Company would be acquired for cash with the remainder exchanged for shares of the Company's common stock. The offer was contingent upon satisfactory due diligence, regulatory and stockholder approval and reasonable financing. At the time the offer was made public, the Company requested expedited due diligence, subject to a confidentiality agreement. BGII had previously announced a planned merger with WMS Industries, Inc. ("WMS") which included an exclusive period for WMS to negotiate the terms of that proposed merger. WMS's exclusive negotiating period had expired several weeks before the Company's proposal was made without announcement or action on the part of BGII or WMS. On July 25, 1995, after being refused due diligence access and the announcement by BGII that a definitive agreement had been reached to merge with WMS, the Company announced its intent to make a tender offer for BGII. The tender offer was on largely the same terms as the originally proposed acquisition. On the same date, the Company announced it had filed litigation in Delaware Chancery Court requesting that the court require BGII to grant the Company due diligence access, enjoin BGII from proceeding with the WMS merger (including a provision therein requiring the sale of BGII's German operations) and declare the breakup fee provided for in the WMS merger to be invalid. The Company indicated that it would increase the price per share of BGII stock to $13.00 per share if the breakup fee was declared invalid. The tender offer was conditioned upon the Company being validly tendered a number of shares of BGII stock, which combined with its own holdings of such stock, would give the Company a majority of BGII's outstanding shares. The tender offer commenced on July 28, 1995 and, as extended to date, is currently set to expire on October 3, 1995. Subsequently, the Company announced its intention to proceed with a consent solicitation to elect a majority of independent directors to the BGII Board of Directors. On August 14, 1995, the Company, BGII and WMS jointly announced an agreement whereby the parties would hold in abeyance all activities related to pending litigation until September 1, 1995, refrain from commencing new litigation until that same date, BGII would schedule its annual shareholder meeting for consideration of the proposed WMS merger and the election of directors on October 30, 1995, and the Company would extend the expiration date of the tender offer until September 12, 1995 and refrain from soliciting proxies until September 1, 1995. On September 1, 1995, the Company disclosed that it had obtained firm financing commitments to fund the tender offer and that such commitments were not conditioned on due diligence of BGII. Accordingly, the Company extended the expiration date of its tender offer to September 29, 1995. BGII and WMS have filed lawsuits against the Company alleging numerous public misrepresentations had been made by the Company with regards to the WMS-BGII agreement, the Company's tender offer and the level of cooperation of BGII's board of directors. The Company considers these claims to be without merit and will mount a vigorous defense against said claims. Subsequent to filing its lawsuit against the Company, BGII adopted a poison pill provision designed to discourage the Company's acquisition efforts. In response to the poison pill adoption, the Company announced it had increased its tender offer to $13.00 per share of BGII common stock and increased to 5,400,000 the number of BGII common shares being sought in the tender offer. The increase in the tender offer price is being financed by the Company's cash on hand and the proceeds of an equity private placement of approximately 3,300,000 shares of the Company's non-voting Junior Convertible Special Stock. The proceeds of the private placement include commitments for over $1,000,000 of new investments by certain directors and officers of the Company. F-19 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended June 30, 1993, 1994 and 1995 12. RECENT DEVELOPMENTS (continued) The Company also established a collar on the number of Company shares to be offered in the proposed back-end merger. The Company will exchange between 2.167 to 3.059 shares of its common stock for each share of BGII common stock. The exact value of the Company's common stock to be used for the exchange ratio will be determined by averaging the closing price of the Company's common stock for a period of ten Nasdaq trading days ending five days prior to the closing of the merger. F-20 EXHIBIT 21 ALLIANCE GAMING CORPORATION SUBSIDIARIES OF THE REGISTRANT AS OF JUNE 30, 1995
Subsidiary State of Incorporation Casino Electronics, Inc. Nevada BGII Acquisition Corporation Delaware APT Games, Inc. Nevada United Coin Machine Company (1) Nevada APT Coin Machines, Inc. dba Miss Lucy's (1) Nevada Slot Palace, Inc. dba Quality Inn Casino (1) Nevada Trolley Stop, Inc. dba Trolley Stop Casino (1) Nevada United Games, Inc. (6) Nevada Mizpah Investments, Inc. dba Mizpah Casino (1) Nevada Plantation Investments, Inc. dba Plantation Casino (1) Nevada Double Eagle Hotel and Casino, Inc. (1) Nevada WCAL, Inc. (1) Nevada FCJI, Inc. (2) Nevada Foreign Gaming Ventures, Inc. Nevada Oregon Ventures, Inc. (3) Nevada Louisiana Ventures, Inc. (3) Nevada Video Services, Inc. (4) Louisiana Video Distributing Services, Inc. (4) Louisiana Southern Video Services, Inc. (5) Louisiana Mississippi Ventures, Inc. (3) Nevada Mississippi Ventures II, Inc. (3) Nevada United Gaming Rainbow, Inc. (3) Nevada Rainbow Casino Vicksburg Partnership (7) Mississippi United Native American, Inc. (3) Nevada Native American Investments, Inc. (8) Delaware Indiana Gaming Ventures, Inc. (3) Nevada United Gaming of Iowa, Inc. (3) Nevada Kansas Gaming Ventures, Inc. (3) Nevada Kansas Gaming Partners, LLC (9) Nevada Kansas Financial Partners, LLC (9) Nevada Vermont Financial Ventures, Inc. (3) Nevada Missouri Ventures II, Inc. (3) Nevada Alpine Willow Investments, Inc. (3) California Pennsylvania Gaming Ventures I, Inc. (3) Nevada
(1) 100% owned by APT Games, Inc. (2) 100% owned by WCAL, Inc. (3) 100% owned by Foreign Gaming Ventures, Inc. (4) 71% owned by Louisiana Ventures, Inc. (5) 60% owned by Louisiana Ventures, Inc. (6) 60% owned by APT Games, Inc. (7) General partnership interest owned by United Gaming Rainbow, Inc. (8) 90% owned by United Native American, Inc. (9) 50% owned by Kansas Gaming Ventures, Inc. EX-27 2
5 Financial Data Schedule for 6/30/95 Form 10-K 1,000 YEAR YEAR JUN-30-1994 JUN-30-1995 JUN-30-1994 JUN-30-1995 37,085 13,734 12,489 23,680 5,924 3,316 0 0 661 714 60,970 46,109 28,683 50,352 24,293 29,146 119,416 126,348 10,044 14,557 85,000 85,000 1,051 1,165 0 0 0 0 14,048 8,820 119,416 126,348 4,545 3,874 123,054 131,988 4,004 2,807 91,307 94,118 38,510 41,731 705 400 6,830 8,943 (12,887) (10,486) 241 265 (13,128) (10,751) 0 0 0 0 0 0 (13,128) (10,751) (1.28) (0.95) 0 0
EX-10 3 ALLIANCE GAMING CORPORATION STOCK PURCHASE AGREEMENT AGREEMENT, dated as of September 15, 1995, by and among ALLIANCE GAMING CORPORATION, a Nevada corporation (the "Company"), and each of the persons identified on the signature pages hereof. The persons identified on the signature pages hereof are sometimes hereinafter collectively referred to as the "Purchasers" and individually as a "Purchaser" WHEREAS, the company desires to issue and sell, and the Purchasers desire to purchase, shares of Non-Voting Junior Convertible Special stock, Series B (the "Special Stock"), of the Company, subject to the terms and conditions herein; NOW, THEREFORE, in reliance upon the representations and warranties made herein and in consideration of the premises and the mutual covenants and conditions herein contained, the Company and each Purchaser, severally and not jointly, hereby agree as follows: SECTION I Sale and Purchase of the Shares; Fees 1.1 Sale of Shares. At the Closing (as defined in Section 2.2 hereof ), and subject to the terms and conditions hereof, the Company will issue and sell to the Purchasers and each Purchaser will purchase from the Company the number of shares (the "Shares") of Special Stock set forth below its name on the signature page hereof at a purchase price of $4.50 per share (the "Purchase Price"). 1.2 Issue of Special Stock. On or before the Closing, the Company will have authorized the issuance of up to 6,666,667 shares of Special Stock pursuant to a Certificate of Designations, Preferences and Relative, Participating , Optional and other Special Rights of Special stock and Qualifications, Limitations and Restrictions thereof of Special Stock in the form attached hereto as Annex A (the "Certificate") which will be filed with the appropriate officials of the State of Nevada on or before the Closing Date; and the Company will have authorized, subject to stockholder approval as provided herein, the issuance of 6,666,667 shares of Common Stock, par value $0.10 per share (the "Common Stock"), subject to adjustment as provided in the Certificate, to be issued upon the conversion of the Shares in accordance with the Certificate. The Special Stock will automatically convert, upon the approval of the Company's stockholders, into shares of Common Stock. Pursuant to the Certificate, if the approval for conversion shall not have occurred within six months following the Closing Date, the Company shall immediately make an offer to each holder of the Shares by registered mail to redeem, put of funds legally available therefor, on a date specified in such offer (which shall not be lose than 30 nor more than 60 days after the date of such notice), all such holder's Shares at a cash price equal to the greater of (i) the Quoted Price (as defined in the Certificate) of the Common Stock an the date notice is sent or (ii) 125% of the original issue price of the Shares, upon the acceptance of such offer received by the Company at least 10 days prior to the redemption date specified in the Company's offer. If the holder of any Share shall accept such offer, such Shares shall be redeemed on the specified redemption date, and on surrender of the certificates evidencing the Shares will receive payment of the redemption price. 1.3 Commitment Fees. Each Purchaser shall be paid a commitment fee (the "First Commitment Fee") on September 19, 1995 equal to 1.5% of its total committed purchase amount for the period from the date hereof to November 2, 1995 (the "First Commitment Period"). In addition, if at the option of the Company the First Commitment Period is extended by notice to each Purchaser on or before November 2, 1995, each Purchaser shall be paid on the earlier of (i) the Closing Date, (ii) the termination of the Tender Offer or (iii) December 15, 1995, an additional commitment fee equal to 0.25% of such Purchaser's total committed purchase amount for each week after November 2, 1995, until such time as any of the events specified in clauses (i) through (iii) above shall have occurred (the "Second Commitment Fee", and together with the First Commitment Fee, the "Commitment Fees"). The Commitment Fees shall be payable in immediately available funds by wire transfer (to the extent wire transfer instructions have been provided to Donaldson, Lufkin & Jenrette Securities Corporation (the "Placement Agent") by such Purchaser) or by check sent by first class mail to the address of such Purchaser listed on the signature page hereof. SECTION 2 Closing, Payment And Delivery 2.1 Closing Date and Place of Closing. The closing of the purchase and sale the Shares hereunder (the "Closing") shall be held at the offices of Milbank, Tweed, Hadley & McCloy, 1 Chase Manhattan Plaza, New York, New York at 10:00 a.m. Eastern Time on the Closing Date, as set forth in Section 2.2. -2- 2.2 Closing. Upon the satisfaction of the conditions set forth in Section 2.3 hereof, and subject to obtaining Nevada gaming authority approval for issuance of the Shares, the Company shall notify each Purchaser of the date (the "Closing Date"), place and time of the closing (the "Closing") which shall in no event be later than 10 business days after the time that all of the conditions set forth in Section 2.3 have been satisfied, at which time each Purchaser shall pay to the Company, by wire transfer of immediately available funds to the account specified by the Company in such notice of Closing or such other form of payment as shall be mutually agreed upon by the Company and the Purchaser, the Purchase Price, and the Company shall deliver to the Purchaser a certificate or certificates representing the number of Shares purchased as set forth below such Purchaser's name on the signature page hereof appropriately legended to reflect the restrictions of this Agreement and the Securities Act of 1933, as amended (the "Securities Act"). 2.3 Conditions to Closing. The several obligations of the Purchasers to purchase the Shares on the Closing Date hereunder are subject to the following conditions: (a) the tender offer by the Company's subsidiary, BGII Acquisition Corp., a Delaware corporation ("BGII), for 4.4 million shares of Common Stock, $.01 par value, of Bally Gaming International, Inc., a Delaware corporation ("Bally"), as the same may be amended from time to time (the "Tender Offer"), shall have been consummated on or before December 15, 1995; (b) the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made on and as of such date (except for those made as of a specified date, which shall be true and correct as of such date) and the company shall have performed in all material respects its obligations hereunder required to be performed on or before the Closing Date and the Placement Agent shall have received an Officers' Certificate addressed to the Purchasers and signed by the Chief Executive Officer and the Chief Financial Officer to the effect of the foregoing; (c) the Purchasers shall have received a legal opinion or opinions covering the matters set forth in Annex B; and (d) no injunction, writ, restraining order or other order of any nature arising out of the Tender offer or the purchase of the Shares hereunder shall have been issued by any governmental or judicial authority and remain in force against such Purchaser preventing such Purchaser from purchasing Shares or against the Company preventing the -3- Company from issuing the Shares and the Placement Agent shall have received an Officers' Certificate addressed to the Purchasers and signed by the Chief Executive Officer and the Chief Financial Officer to the effect of the foregoing insofar as the foregoing relates to the Company. SECTION 3 Representations and Warranties of the Company The Company hereby represents and warrants to each Purchaser as follows: 3.1 Due Authorization and Qualification. The Company is duly organized and existing and in good standing,under the laws of the State of Nevada and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified could reasonably be expected to have a material adverse affect on the business, operations, condition (financial or otherwise), finances, or prospects of the Company. 3.2 Due Authorization.--No Conflict. The execution, delivery and performance of this Agreement is within the Company's corporate powers, been duly authorized, and is not in conflict with nor constitute a breach of any provision contained in the Company's Articles or Certificate of Incorporation or By- laws, nor will it constitute an event of default under any material agreement to which the Company is a party or by which its properties or assets may be bound, nor will it violate the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including any Gaming Authority, other than laws, rules, regulations and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to have a material adverse effect on the business, operations, condition (financial or otherwise), finances, or prospects of the Company. "Gaming Authorities" as used herein means all regulatory authorities and other bodies regulating or having jurisdiction over the gaming activities of the Company or any of its subsidiaries (or any entity under the control of the Company or any of its subsidiaries), including, without limitation, the Nevada Gaming Commission. 3.3 Litigation. There are no actions or proceedings pending by or against the Company before any court or administrative agency and the Company does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving the Company, except for: (a) ongoing collection matters in which the Company is the plaintiff; and b) matters that would not reasonably be expected in the Company's good faith judgment to have a materially adverse effect -4- on the condition (financial or otherwise), finances, results of operations or prospects of the Company. 3.4 Capitalization. As of September 14, 1995, the Company's authorized capital stock consists of 175,000,000 shares of Common Stock and 10,000,000, of which as of July 31, 1995 11,654,150 shares of Common Stock and 1,333,333 shares of Special Stock were issued and outstanding. As of the date hereof, the Company had reserved 18,454,834 shares of Common Stock for issuance upon the exercise of outstanding convertible debentures, options and warrants. All of the issued and outstanding shares of Common Stock are validly issued, fully paid and non- assessable. All of the Shares being issued to the Purchasers pursuant to this Agreement, and (subject to stockholder approval as contemplated hereby) all of the shares of Common Stock issuable upon conversion of the Shares (the "Conversion Shares"), upon issuance will be validly issued, fully paid and non- assessable shares of Special Stock and Common Stock, respectively. Except for the foregoing and as disclosed in the Company's Reports (as hereinafter defined), as of the date hereof there are no outstanding options, warrants or other rights of any kind to acquire any additional shares of capital stock of the Company or securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any such additional shares, nor is the Company committed to issue any such option, warrant, right or security. 3.5 No Restrictive Agreements. The issuance and delivery of the Shares to the Purchasers, and the issuance and delivery of the Conversion Shares upon conversion of the Shares, is not and will not be subject to any preemptive rights. 3.6 Valid-Agreement. This Agreement constitutes a valid and binding agreement of the Company enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity. 3.7 Financial Information. The financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 together with the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended September 30, 1994, December 31, 1994 and March 31, 1995 (collectively, the "Exchange Act Documents") present fairly in all material respects in accordance with generally accepted accounting principles consistently followed (except as disclosed therein) the financial position and results of operations of the Company at the dates and for the periods to which they relate (subject, in the case of the unaudited financial statements, to normal year-end adjustments). 3.8 Consents. Except for those consents and filings contemplated by Section 5 hereof and such approvals as at the -5- time of the Closing will have been obtained, no consent, approval, qualification, order or authorization of, or filing with any governmental authority is required in connection with the Company's execution, delivery or performance of this Agreement or the offer, sale or issuance of the Shares by the Company other than as required under "Blue Sky" laws. 3.9 Company Reports; Private Placement Memorandum. Since June 30, 1994, all reports, proxy statements, registration statements and other filings required to be filed by the Company with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act), including without limitation the Company's Schedule 14D-1 and Schedule 13D, each as amended, have been duly filed with the SEC, and none of such documents and the Private Placement Memorandum, dated September 1995, when taken together with such documents as a whole (collectively, the "Company Reports"), contained as of their respective dates any untrue statement of a material fact or omitted to state a material fact required to be stated therein, or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to any projections or other forward-looking information or statements contained in the Private Placement Memorandum except that such projections or forward-looking information or statements were made in good faith based upon reasonable assumptions and provided further that no representation or warranty is made with respect to information concerning any person other than the Company and its affiliates on the date hereof. SECTION 4 Representations, Warranties and Covenants of Purchasers Each Purchaser represents and warrants to the Company and agrees, severally and not jointly, and only as to itself, as follows: 4.1 Experience. It is experienced in evaluating and investing in companies such as the Company, and has such knowledge and experience in evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. It is an "accredited investor," as such term in defined in Regulation D under the Securities Act. It has completed and delivered to the Placement Agent an investors questionnaire, and all information set forth therein is true and correct as of the date hereof. It acknowledges that it has received all information relating to the Company reasonably requested by it and that it has had an opportunity to ask questions and receive answers concerning the investment contemplated hereby. -6- 4.2 Investment. It is acquiring the Shares for investment for its own account and not with the view to, or for resale in connection with, any distribution thereof (subject to the provisions of Sections 5.2 and 5.3 hereof) . It understands that the shares have not been registered under the Securities Act by reason of exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of its investment intent as expressed herein. it acknowledges that the Company may place restrictive legends on, and stop transfer orders against, the certificates representing the Shares being acquired by it. 4.3 Rule 144. It acknowledges that the shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. It agrees that it will not sell, transfer or assign the Shares or the Conversion shares for a period of six months after the Closing and thereafter without furnishing an opinion of counsel reasonably satisfactory to the Company to the effect that such sale will not violate the Securities Act. It has been advised or is aware of the provisions of Rule 144 promulgated under the securities Act, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions and that such Rule may not become available for resale of the Shares. 4.4 Authority. It has full power and authority under all applicable laws to enter into this Agreement and to consummate the transactions herein and has taken all action necessary to authorize its execution and performance of this Agreement. This Agreement when executed and delivered will be duly executed and will constitute a legal, valid and binding obligation of each of the Purchasers, enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement or creditors, rights generally and general principles of equity. Its source of funds is not an employee benefit plan. SECTION 5 Covenants of the Company 5.1 Future Reports; Stockholders Meeting. (a) Until the earlier of the termination of the Purchaser's commitment to purchase the Shares and the Closing Date and thereafter for a period of two (2) years from the Closing Date for so long as the Purchaser is a holder of Shares or Conversion Shares, the Company will furnish to the Purchaser (i) all annual, quarterly and periodic reports and proxy statements filed by the Company with the SEC pursuant to the Exchange Act, (ii) all registration statements filed by the Company under the Securities Act, within five (5) days after filing such report or registration statement -7- with the SEC and (iii) all amendments to the Company's offer to purchase Bally. Until the Closing Date and for so long. after the Closing Date as any Purchaser holds any Shares or Conversion Shares, the Company will file all reports required to be filed by it under the Exchange Act and will take such further action as any Purchaser may reasonably request, all to the extent required to enable such Purchaser to sell pursuant to Rule 144 adopted by the SEC under the Securities Act. Until the closing Date and thereafter for so long as the Purchaser is a holder of shares or Conversion Shares, the Company will also promptly furnish to the Purchasers copies of all reports or other material information relating to the Company which it furnishes to stockholders (as such) of the Company generally. (b) The Company shall cause a meeting of its stockholders (the "Stockholders Meeting"), to be duly called and held within six months of the Closing Data for the purpose of approving the conversion of the Shares into shares of Common Stock. The Board of Directors of the Company shall recommend to its stockholders the approval of such conversion and shall use all reasonable efforts to obtain the approval of such stockholders; provided, however, that nothing herein shall require the Board of Directors of the Company to act, or refrain from acting, in any manner that it may deem, after consultation with its outside counsel, to be necessary to the proper discharge of the Directors' fiduciary duties to their stockholders. In connection with the Stockholders Meeting, the Company shall prepare and file a preliminary proxy statement relating to the conversion of Shares (the "Preliminary Proxy Statement") with the SEC, and the Company shall use its best efforts to respond to the comments of the SEC and to cause a definitive proxy statement (the Definitive Proxy Statement") to be mailed to its stockholders. The Definitive Proxy Statement, as of the date of the mailing of the Definitive Proxy Statement by the Company to its stockholders and as of the date of the Stockholders Meeting, (i) will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder and (ii) will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made not misleading. 5.2 Piggyback Registration. (a) Right to Include Shares. Whenever the Company proposes to register under the securities Act an offering of the Common Stock on any form for the registration of securities under such Act, whether or not for its own account (other than by (i) a registration statement on Form S-4 or S-8 or any successor or similar forms, (ii) any registration statement to be used exclusively in the offering and sale of the Company's securities acquired by any of its or its subsidiaries, employees, directors or consultants pursuant to any employee compensation, option, restricted stock or similar plan arrangement or agreement, (iii) -8- a registration statement filed exclusively in connection with an exchange offer or an offering of securities solely to the securityholders of the Company, or (iv) any registration statement filed exclusively in connection with a rights offering) (a "Piggyback Registration") it shall give written notice to all Purchasers of its intention to do so no later than 20 days prior to the proposed date of filing such registration statement. Such rights are referred to hereinafter as "Piggyback Registration Rights" Upon the written request of any such Purchaser made within 10 days after receipt of any such notice (which request shall specify the Registrable securities (as defined below) intended to be disposed of by such Purchaser), the Company shall subject to Section 5.2(a) hereof, include in the registration statement the Registrable Securities which the company has been so requested to register by the Purchasers thereof (such requesting Purchasers hereinafter the "Holders") and the Company shall keep such registration statement (the "Registration Statement") in affect and maintain compliance with each Federal and state law or regulation for the period necessary for such Holder to effect the proposed sale or other disposition (but in no event for a period greater than 120 days). "Registrable Securities" shall mean any shares of common Stock issued to a Purchaser and/or its permitted designees or transferees on conversion of Shares and/or other securities that may be or are issued by the Company upon conversion of any Shares, including those which may thereafter be issued by the Company in respect of any such securities by means of any stock splits, stock dividends, recapitalizations, reclassifications or the like, and as adjusted pursuant to the Certificate; provided, however, that as to any particular securities contained in Registrable Securities such securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement; or (ii) they shall have boon sold to the public pursuant to Rule 144 (or any successor provision) under the Securities Act or are eligible for sale to the public under Rule 144(k) (or any successor provision) under the Securities Act. (b) Withdrawal of Piggyback Registration by Company. If, at any time after giving written notice of its intention to register any securities in a Piggyback Registration but prior to the effective date of the related Registration Statement, the Company shall determine for any reason not to register such securities, the Company shall give notice of such determination to each Holder and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such Piggyback Registration. All best efforts obligations of the Company pursuant to Section 5.4 hereof shall cease if the company determines to terminate prior to such effective date any registration where Registrable Securities are being registered pursuant to this Section 5.2. -9- (c) Piggyback Registration of Underwritten Public Offerings. If a Piggyback Registration involves an offering by or through underwriters, then (i) all Holders requesting,to have their Registrable Securities included in the Company's Registration Statement must sell their Registrable Securities to the underwriters selected by the Company on the same terms and conditions as apply to other selling stockholders and (ii) any Holder requesting to have his or its Registrable Securities included in such Registration Statement may elect in writing, not later than three Business Days prior to the filing of the Registration Statement filed in connection with such registration, not to have his or its Registrable Securities so included in connection with such registration. (d) Payment of Registration Expenses for Piggyback Registration. The Company shall pay all expenses (including any and all fees, disbursements and expenses incurred in connection with any registration or action incident to performance of or compliance by the Company with Section 5 hereof, including, without limitation, (i) all SEC, national securities exchange and NASD registration and filing fee, all listing fees and all transfer agent fees; (ii) all fees and expenses of complying with state securities or blue sky laws (including the fees and disbursements of counsel of the underwriters in connection with blue sky qualifications of the Registrable Securities); (iii) all printing, mailing, messenger and delivery expenses; (iv) all fees and disbursements of counsel for the Company and of its accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, and all reasonable fees and disbursements of one counsel for the holders of Shares; and (v) any disbursements of underwriters or their counsel in connection with the preparation of a customary blue sky and legal investment survey, but excluding underwriting discounts and commissions, brokerage fees and transfer taxes, if any (all of such expenses hereinafter referred to as "Registration Expenses")) in connection with each registration of Registrable Securities requested pursuant to a Piggyback Registration Right contained in this Section 5.2. (e) Priority in Piggyback Registration. If a Piggyback Registration involves an offering by or through underwriters, the Company, except as otherwise provided herein, shall not be required to include Registrable Securities therein if and to the extent the underwriter managing the offering reasonably believes in good faith and advises the Company that such inclusion would materially adversely affect such offering; provided that any reduction or elimination of the Registrable Securities shall occur (i) first, to the extent necessary to permit the sale of all of the shares of Common Stock to be sold by the company or the other stockholders with demand registration rights requesting a registration and (ii) second, pro rata among persons having piggyback registration rights, based on the number of shares requested to be registered by all such stockholders. -10- If the Piggyback Registration does not involve an offering by or through underwriters, the Company shall not be required to include Registrable Securities therein if and to the extent the company reasonably believes such inclusion would adversely affect such offering; provided, however, that a reduction or elimination in the Registrable Securities included in such registration shall be applied according to the priorities set forth above for an underwritten offering. 5.3 Demand Registration. (a) Request for Registration. If, at any time after a period of six months from the Closing Date, one or more Holders holding in the aggregate at least 10% of the outstanding Registrable Securities request that the Company file a registration statement under the Securities Act with, respect to the Registrable Securities held by such Holder or Holders (a "Demand Registration"), as soon as practicable thereafter the company shall use its best efforts to file a registration statement with respect to all Registrable Securities that it has been so requested to include and obtain the effectiveness thereof, and to take all other action necessary under any Federal or state law or regulation to permit the Registrable Securities that are specified in the notices of the Holders or holders thereof to be sold or otherwise disposed of, and the Company shall maintain such compliance with each such Federal and state law and regulation for the period necessary for such Holder or Holders to effect the proposed sale or other disposition; provided, however the Company shall be entitled to defer such registration for a period of (i) up to 90 days if and to the extent that its board of directors shall determine that such registration would interfere with a pending corporate transaction or (ii) up to 120 days following the effective date of any registration statement previously filed by the Company under the Securities Act, other than registration statements of the type described in clauses (i) through (iv) of Section 5.2(a) hereof. The Company shall promptly give written notice to the Holders of any Registrable Securities who or that have not made a request to the Company pursuant to the provisions of this Section 5.3(a) of its intention to effect any required registration or qualification, and shall use its best efforts to effect as expeditiously as possible such registration or qualification of all such other Registrable Securities that are then held, the Holder or Holders of which have requested such registration or qualification, within 15 days after such notice has been given by the Company, as provided in the preceding sentence. The Company shall be required to effect a registration or qualification pursuant to this Section 5.3(a) in the aggregate on three occasions only. (b) Payment of Expenses for Demand Registration. The company shall pay all Registration Expenses in connection with the Demand Registration. -11- (c) Selection of Underwriters. If any Demand Registration is requested to be in the form of an underwritten offering, the managing underwriter shall be selected by the Company and reasonably acceptable to the holders of a majority of the Registrable Securities included in such Demand Registration, which acceptance will not be unreasonably withheld, and the independent pricer required under the rules of the National Association of Securities Dealers, Inc. ("NASD") (if any) shall be so selected and obtained by the Company. All fees and expenses (other than expenses otherwise required to be paid) of any managing underwriter, any co-manager or any independent underwriter or other independent pricer required under the rules of the NASD shall be paid for by such underwriters or by the Holders whose Registrable Securities are being registered. (d) Procedure for Requesting Demand Registration. Any request for a Demand Registration shall specify the aggregate number of the Registrable Securities proposed to be sold and the intended method of disposition. Within ten (10) days after receipt of such a request, the Company will give written notice of such registration request to all Holders, and, subject to the limitations of Section 5.3(b) hereof, the Company will include in such registration all Registrable Securities with respect to which the company has received written requests for inclusion therein within five business days after the date on which such notice is given. Each such request will also specify the aggregate number of Registrable Securities to be registered and the intended method of disposition thereof. 5.4 Registration Procedures. If and whenever the company is required to use its best efforts to take action pursuant to any Federal or state law or regulation to permit the sale or other disposition of any Registrable Securities in order to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Article 5, the Company shall, as expeditiously as practicable; (a) prepare and file with the SEC, as soon as practicable within ninety (90) days after the and of the period within which requests for registration may be given to the Company under Section 5.3 hereof (but subject to the provision for deferral contained in Section 5.3(a) hereof) a Registration statement or Registration Statements relating to the registration on any appropriate form under the Securities Act, which form shall be selected by the Company and available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof, subject to Section 5.2(c) hereof, and use its best efforts to cause such Registration Statements to become effective; provided that before filing a Registration Statement or prospectus or any amendment or supplements thereto, including documents incorporated by reference after the initial filing of any Registration Statement, the Company will furnish to the Holders of the Registrable Securities covered by such Registration Statement and the -12- underwriters, if any, copies of all such documents provided to be filed, which documents will be subject to the review of such Holders and underwriters; (b) prepare and file with the SEC such amendments and post-effective amendments to a Registration Statement as may be necessary to keep such Registration Statement effective for a reasonable period not to exceed the shorter of the completion of distribution of the registered securities and 120 days; cause the related prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement or supplement to such prospectus; (c) notify the selling Holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such person) confirm such advice in writing, (i) when a prospectus or any prospectus supplement or post- effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (iv) if at any time the representation and warranties of the Company contemplated by paragraph (m) below cease to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (vi) of the happening of any event that makes any statement of a material fact made in the Registration statement, the prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (e) if reasonably requested by the managing underwriters, immediately incorporate in a prospectus supplement or post-effective amendment such information as the underwriters believe (on advice of counsel) should be included therein as required by applicable law relating to the sale of Registrable -13- Securities, including, without limitation, information with respect to the purchase price being paid for the Registrable securities by such underwriters and with respect to any other terms of the underwritten (or "best-efforts" underwritten offering; and make all required filing of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post- effective amendment; (f) furnish to each selling Holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post- effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling Holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the prospectus or prospectuses (including each preliminary prospectus) any amendment or supplement thereto as such persons may reasonably request; the Company consents to the use of such prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such prospectus or any amendment or supplement thereto; (h) prior to any public offering of Registrable Securities, cooperate with the selling Holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United states as any selling Holder or underwriter reasonably requests in writing, keep each such registration or qualification effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the applicable Registration Statement; provided that the Company will not be required to qualify to do business in any Jurisdiction where it is not then so qualified or to take any action which would subject the Company or any of its subsidiaries to general service of process in any jurisdiction where it is not at the time so subject; (i) cooperate with the selling Holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; -14- (j) use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities within the United States as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) upon the occurrence of any event contemplated in Section 5. 4 (c) (vi) above, prepare a supplement or post- effective amendment to the applicable Registration Statement or related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchaser of the Registrable Securities being sold thereunder, such prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (1) with respect to each issue or class of Registrable securities, use its best efforts to cause all Registrable Securities covered by the Registration Statements to be listed on each securities exchange, if any, on which securities of the same class issued by the Company are then listed if requested by the holders of a majority of such issue or class Registrable Securities; (m) enter into such agreements (including an underwriting agreement) and take all such other action consistent with its obligations hereunder and reasonably required in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, if the registration is in connection with an underwritten offering, (i) make such representations and warranties to the underwriters, in such form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions in form, scope and substance shall be reasonably satisfactory to the underwriters) addressed to the underwriters covering the matters customarily covered in opinions requested in underwritten offerings; (iii) obtain "cold comfort" letters and updates thereof from the Company's accountants addressed to the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with underwritten offerings; (iv) set forth in full in any underwriting agreement entered into the indemnification provisions and procedures of Section 5.5 hereof with respect to all parties to be indemnified pursuant to said Section; and (v) deliver such documents and certificates as may be reasonably requested by the underwriters to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; the above shall be done at each closing under such -15- underwriting or similar agreement or as and to the extent required hereunder; (n) make available for inspection upon reasonable notice by one or more representatives of the Holders of Registrable Securities being sold, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by such Holders or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representatives at reasonable times, in connection with such; and (o) otherwise use its best efforts to comply with all applicable Federal and state regulations; and take such other action as may be reasonably necessary to or advisable to enable each such Holder and each such underwriter to consummate the sale or disposition in such jurisdiction or jurisdiction in which any such Holder or underwriter shall have requested that the Registrable Securities be sold. Except as otherwise provided in this Agreement, the Company shall have sole control in connection with the preparation, filing, withdrawal, amendment or supplementing of each Registration Statement, the selection of underwriters, and the distribution of any preliminary prospectus included in the Registration Statement, and may include within the coverage thereof additional shares of Common Stock or other securities for its own account or the account of one or more of its other security holders. The Company may require each seller of Registrable Securities as to which any registration is being affected to furnish to the Company such information regarding the distribution of such securities and such other information as may otherwise be required by the Securities Act to be included in such Registration Statement. 5.5 Indemnification (a) Indemnification by company. In connection with each Registration Statement relating to disposition of Registrable Securities, the Company shall indemnify and hold harmless each Holder and each underwriter of Registrable Securities and each person, if any, who controls such Holder or underwriter (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) (collectively, "Holder Indemnified Parties") against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or -16- other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that such indemnity shall not inure to the benefit of any Holder or underwriter (or any person controlling such Holder or underwriter within the meaning of Section 1 of the Securities Act or Section 20 of the Exchange Act) on account of any losses, claims, damages or liabilities arising from the sale of the Registrable Securities if such untrue statement or omission or alleged untrue statement or omission was made in such Registration Statement, prospectus or preliminary prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Holder or underwriter specifically for use therein. This indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) Indemnification by Holder. In connection with the Registration Statement, each Holder shall indemnify, to the same extent as the indemnification provided by the Company in Section 5.5(a) hereof, the Company, its directors and each officer who signs the Registration Statement and each person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act) but only insofar as such losses, claims, damages and liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in the Registration Statement, the prospectus or preliminary prospectus or any amendment thereof or supplement thereto, in reliance upon and in conformity with information furnished in writing by such Holder to the Company specifically for use therein. In no event shall the liability of any selling Holder of Registrable Securities hereunder be greater in amount than the dollar amount of the not proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above, with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus, registration statement or preliminary prospectus or any amendment thereof or supplement thereto. (c) Conduct of Indemnification Procedure. Any party that proposes to assert the right to be indemnified hereunder will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against any indemnifying party or parties under this Section, notify each such indemnifying party of the -17- commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 5.5(a) or 5.5(b) hereof shall be available to any party who shall fail to give notice as provided in this Section 5.5(c) to the extent the party to whom notice was not given was prejudiced by the failure to give such notice, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party, it shall notify the indemnifying party of the commencement thereof and the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnifying party of such indemnified party of such, counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below. The indemnified party shall have the right to employ its counsel in any such action, but the feet and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnified parties shall not have the right to direct the defense of such action on behalf of the indemnified party) or (iii) the indemnified parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the fees and expenses of counsel shall be at the expenses of the indemnifying parties. The indemnifying party shall not without the prior written consent of each indemnified party affected thereby, effect any settlement of any pending or threatened proceeding in which such indemnified party has sought indemnity hereunder, unless such settlement involves an unconditional release of such Indemnified Party from all liability arising out of such action, claim, litigation or proceeding. (d) Contribution. If the indemnification provided for in this Section 5.5 is unavailable to any party entitled to indemnification pursuant to Section 5.5(a) or 5.5(b) hereof, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, judgments, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and each Holder Indemnified Party on the other from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by -18- applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and each Holder Indemnified Party on the other in connection with trio statements or omissions which resulted in such losses, claims, damages, judgments, liabilities or expenses, an well as any other relevant equitable considerations. The relative fault of the company on the one hand and each Holder Indemnified Party on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by each Holder Indemnified Party on the other and the parties relative intent, knowledge, access or information and opportunity to correct or prevent such statement or omission. (e) The Company and each Holder Indemnified Party agree that it would not be just and equitable if contributions pursuant to Section 5.5(d) hereof were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 5.5(d) hereof. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, liabilities, or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was to found guilty of such fraudulent representation. 5.6 Reservation of Shares. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon conversion of any of the Shares such number of conversion Shares as may be issuable upon conversion of the shares. All Conversion Shares shall be duly authorized, and when issued upon such conversion, shall be validly issued, fully paid and nonassessable, free and clear of all lions, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights. SECTION 6 Miscellaneous 6.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Now York, without giving effect to conflicts of law. 6.2 Survival. The representations and warranties made in Sections 3 aand 4 herein shall survive the Closing Date for a period of one year. -19- 6.3 Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors, permitted assigns, heirs, executors and administrators. No Purchaser may assign its obligations hereunder to be performed on or before the closing. 6.4 Entire agreement Amendment. This Agreement and the documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated except by a written instrument signed by the Company and the Purchasers; provided, however, that Purchasers holding a majority of the Shares together with the Company may by written instrument amend the provisions of Sections 5 or 6 (other than this Section 6.4) hereof. 6.5 Notices, Etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, or by express courier, or delivered either by hand or by messenger, addressed (a) if to a Purchaser, as indicated on the signature page hereof, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at 4380 Boulder Highway, Las Vegas, Nevada 89121, Attn: Chief Financial Officer, or at such other address as the Company shall have furnished to the Purchasers in writing. 6.6 Rights; Separability. Unless otherwise expressly provided herein, the rights of the Purchasers hereunder are several rights, not rights jointly held with any of the other Purchasers. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.7 Information Confidential. Each Purchaser acknowledges that the information received by it pursuant to this Agreement may be confidential and is for the Purchaser's use only. It will not use such confidential information in violation of the Exchange Act or otherwise, or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys and financial advisors), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Purchaser is required to disclose such information by a governmental body. 6.8 Expenses. The company and the Purchasers shall bear their own expenses and legal fees incurred on their behalf with respect to this Agreement and the transactions contemplated hereby. -20- 6.9 Titles and Gender. The titles of the Sections and Subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. Whenever used herein, the singular member includes the plural, the plural includes the singular, and the use of either gender shall include both genders. 6.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -21- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. ALLIANCE GAMING CORPORATION By: PURCHASER: By: Address: No. of Shares: -22- ANNEX A CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF SPECIAL STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF or NON-VOTING JUNIOR CONVERTIBLE SPECIAL STOCK, SERIES 3 OF ALLIANCE GAMING CORPORATION a Nevada corporation, Pursuant to Section 79.195 of the Nevada Revised Statutes ALLIANCE GAMING CORPORATION, a Nevada corporation (the "Corporation"), certifies that, pursuant to the authority contained in Article IV of its Amended Articles of Incorporation (the "Articles of Incorporation") and in accordance with the provisions of Section 78.195 of the Nevada Revised Statutes, the Board of Directors of the Corporation at a meeting duly called and held on September _, 1995, adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that the Articles of Incorporation have authorized 10,000,000 shares of special stock, par value $.10 per share, of which 8,666,667 remain unissued; and FURTHER RESOLVED, that it is necessary to set forth the designation, preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions of 6,666,667 shares of such non-voting special stock; and FURTHER RESOLVED, that there is hereby established a series of authorized special stock having a par value of $.10 per share, which series shall be designated as "Non-Voting Junior Convertible Special Stock, Series B" (herein the "Convertible Special Stock,"), shall consist of 6,666,667 shares and shall have the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: ARTICLE I Certain Definitions Unless the context otherwise requires, the terms defined in this Article I shall have, for all purposes of this resolution, the meanings herein specified: Common Stock. The term "Common Stock" shall mean the common stock, par value $.10 per share, of the corporation. Conversion Condition. The term "Conversion Condition" shall mean that the stockholders of the Corporation, at a duly held annual or special meeting, or by action by written consent in lieu thereof, have taken all action necessary or required under Section 5(i)(1) of the "Non-Quantitative Designation Criteria" of the NASDAQ National Market System to approve the issuance of Common Stock on conversion as contemplated by this Certificate. Conversion Ratio. The term "Conversion Ratio" shall initially mean the issuance, upon conversion as herein provided, of one share of Common Stock for each share of Convertible Special Stock surrendered for conversion and thereafter shall be subject to adjustment from time to time pursuant to the terms of Article IV below. Exchange Date. The term "Exchange Date" shall have the meaning set forth in subparagraph 4.2 below. Initial Issue Date. The term "Initial Issue Date" shall mean the date that shares of Convertible Special Stock are first issued by the Corporation. Liquidation Preference. The term "Liquidation Preference,, shall mean $.01 per share of Convertible Special Stock. Person. The term "Person" shall mean an individual, partnership,, joint venture, corporation, trust or unincorporated organization, a government or any department, agency or political subdivision thereof or other entity, Quoted Price. The term "Quoted Price" shall mean, with respect to the Common Stock, the last reported sales price as reported by the NASDAQ National Market System, or if such security is listed on a securities exchange, the last reported sales price on such exchange which shall be for consolidated trading if applicable to such exchange, or if neither so reported or listed, the last reported bid price. In the absence of such quotations on one or more such trading days, the Board of Directors shall determine the Quoted Price for such trading days on the basis of such quotations as it in good faith considers appropriate. Senior Stock. The term "Senior Stock" shall mean any class or series of stock of the Corporation authorized after the Initial Issue Date ranking senior to the Convertible Special Stock in respect of the right to receive dividends or in respect of the right to participate in any distribution upon liquidation, dissolution or winding up of the affairs of the Corporation. Trading Day. The term "Trading Day" shall mean, with respect to the Common Stock, any day on which any market in which the applicable security is then traded and in which a Quoted Price may be ascertained is open for business. ARTICLE II Dividends or Other Distributions of Property 2.1 General. The holders of Convertible Special Stock shall not be entitled to receive dividends unless and until expressly declared by the Board of Directors of the Corporation with respect to the Convertible Special Stock, or to otherwise participate in any manner in the earnings of the Corporation; provided, however, that in the event the Corporation pays a dividend or makes any other distribution, whether in cash, property or otherwise, including, without limitation, any rights, options, or warrants to acquire securities or other securities (but excluding a stock dividend, stock split or other similar distribution consisting solely of shares of Common Stock which results in an adjustment to the Conversion Ratio pursuant to Article IV), pro rata to the holders of its Common Stock generally, then the record holders of the Convertible Special Stock outstanding on the applicable record date of such dividend or other distribution shall be entitled to receive dividends or such other distributions, out of funds legally available therefor, in an amount per share of Convertible Special Stock equal to the dividend or other distribution receivable had such record holder(s) converted their Convertible Special Stock into Common Stock immediately prior to the record date for such dividend or other distribution pursuant to the terms of this resolution, whether or not such Convertible Special Stock was at such time convertible. 2.2 No Limitations on Dividends. No provision of this resolution shall be deemed to limit or otherwise restrict or qualify the right of the Corporation to declare, pay or set apart, for payment on any of its capital stock (whether outstanding on the date hereof or issued in the future) any dividends, whether in cash, property or otherwise, or to otherwise make any distribution in respect of or purchase, redeem or otherwise acquire any such capital stock, subject only to the right of the holders Of Convertible Special Stock, pursuant to Section 2.1 hereof, to receive certain dividends and other distributions payable in respect of Common Stock. ARTICLE III Distributions Upon Liquidation, Dissolution or Winding Up 3.1 Preference on Liquidation, Etc. In the event of any voluntary or involuntary liquidation, dissolution or other winding up of the affairs of the Corporation, subject to the prior preferences and other rights of any Senior Stock as to liquidation preferences, the holders of Convertible Special Stock shall be entitled to be paid out of the assets of the Corporation in cash or property at its fair market value as determined, in good faith, by the Board of Directors of the Corporation the Liquidation Preference per share prior to any payment to the holders of Common Stock. After payment in full of the Liquidation Preference per share of the Convertible Special Stock, the holders of the Convertible Special Stock and the Common Stock (as defined in Section 4.6 hereof) shall share pro rata based upon (i) the number of shares of Common Stock into which the Convertible Special Stock was convertible immediately prior to such liquidation, dissolution or winding up (assuming, for purposes of such calculation, conversion of the outstanding shares of Convertible Special Stock whether or not such Convertible Special Stock was at such time convertible) and (ii) the number of shares of Common Stock (as defined in Section 4.6 hereof) outstanding. Except as provided in this Section 3.1, holders of Convertible Special Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Corporation. 3.2 Liquidation Pro-rata if Assets Inadequate, If, upon any such liquidation, dissolution or other winding up of the affairs of the Corporation, the assets of the Corporation shall be insufficient to permit the payment in full of the Liquidation Preference per share of the Convertible Special Stock, then the assets of the Corporation remaining after the distributions to holders of any Senior Stock of the full amounts to which they may be entitled shall be ratably distributed among the holders of Convertible Special Stock in proportion to the full amounts to which they would otherwise be respectively entitled if all amounts thereon were paid in full. Neither the consolidation or merger of the Corporation into or with another corporation or corporations, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Corporation to another corporation or any other entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this resolution. ARTICLE IV Conversion 4.1 Conversion. Upon the occurrence of the Conversion Condition, all shares of Convertible Special Stock shall convert into Common Stock. Subject to the adjustments to the Conversion Ratio provided for in this Article IV, each share of Convertible Special Stock shall be convertible into one share of Common Stock. Immediately following such conversion, the rights of the holders of converted Convertible Special Stock shall cease and the persons entitled to receive the Common Stock upon the conversion of Convertible Special Stock shall upon compliance with the requirements of Section 4.2 hereof be treated for all purposes as having become the owners of such Common Stock. 4.2 Procedures. To receive certificates evidencing Common Stock issuable on conversion of Convertible Special Stock, a holder must (i) surrender the certificate or certificates evidencing the shares of Convertible Special Stock to be converted, duly endorsed in a form reasonably satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Convertible Special Stock, (ii) state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and (iii) pay any transfer or similar tax if required by Section 4.4 hereof. The date on which the holder satisfies all those requirements is the "Exchange Date". The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Exchange Date. As soon as practicable, but in any event within 10 business days, the Corporation shall deliver, through the transfer agent, a certificate for the number of full shares of Common Stock issuable upon the conversion and a check for any fractional share. The number of full shares of Common stock issuable to any holder of Convertible Special Stock upon conversion shall be based on the total number of shares of Convertible Special Stock held by such holder. 4.3 Fractional Shares. The Corporation will not issue a fractional share of Common Stock upon conversion of Convertible Special Stock. Instead the Corporation will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined an follows: Multiply the current market price of a full share by the fraction and round the result to the nearest cent. The current market price of a share of Common stock is the Quoted Price of the Common Stock on the last Trading Day prior to the Conversion Date. 4.4 Transfer Taxes. The Corporation will pay all documentary stamp taxes attributable to the initial issuance of shares of Common Stock upon the conversion of Convertible Special Stock; provided, however,, that the Corporation shall not be required to pay any tax or taxes which may be payable in respect of any registration or transfer involved in the loans or delivery of any shares of Common Stock in a name other than that of the registered holder of the Convertible Special Stock surrendered upon the conversion thereof, and the Corporation shall not be required to issue or deliver such shares of Common Stock unless or until the person or persons requesting the issuance thereof shall have paid to the corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. 4.5 obtaining Stock Exchange Listings. The Corporation will from time to time take all action, if any, which may be necessary so that the shares of Common Stock issued upon conversion of the Convertible Special Stock, immediately upon their issuance in accordance with this resolution, will be listed or quoted on the principal securities exchanges and markets, within the United States of America, if any, on which other shares of Common Stock are then listed or quoted. 4.6 Adjustments of Conversion Ratio. (a) General. The Conversion ratio is subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 4.6. For purposes of this Section 4.6, "Common Stock" means shares (other than the Convertible Special Stock) now or hereafter authorized of any class of common stock of the Corporation and any other stock of the Corporation, however designated, that has the right (subject to any prior rights of any class or series of preferred stock) to participate in any distribution of the assets or consolidated earnings of the Corporation without limit as to per share amount. (b) Adjustment for Changes in Common Stock. If the Corporation: (i) subdivides its outstanding shares of Common Stock into a greater number of shares; (ii) combines its outstanding shares of Common Stock into a smaller number of shares; (iii) issues by reclassification of its Common stock any shares of its capital stock; or (iv) declares a stock dividend, stock split or effects any other similar distribution consisting solely of shares of Common Stock payable in respect of Common Stock; then the Conversion Ratio in effect immediately prior to such action shall be proportionately adjusted so that the holder of Convertible Special Stock thereafter converted may receive the aggregate number and kind of shares of capital stock of the Corporation which he would have owned immediately following such action if such Convertible Special Stock had been converted immediately prior to such action (whether or not the Convertible Special Stock was at such time convertible); provided, however., that no adjustment shall be made hereunder if the cash, securities or property which would be the source of such adjustment were distributed to the holders of the Convertible Special Stock pursuant to Section 2.1 hereof. The adjustment shall become effective immediately after the record date, if one is declared, or immediately after the effective date in the case of a subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (c) When De Minimis Adjustment May Be Deferred. No adjustment in the Conversion Ratio need to be made unless the adjustment would require an increase or decrease of at least 1% in the Conversion Ratio. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustments. All calculations under this Section shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (d) When No Adjustment Required. No adjustment need be made for a change in the par value of the Common Stock (including a change from par value to no par value or from no par value to par value). (e) Notice of Adjustment. Whenever the Conversion Ratio is adjusted, the Corporation shall provide the notices required by Section 4.7 hereof. (f) Reorganization of Corporation. If the Corporation shall at any time consolidate or merge with one or more Persons (other than a merger or consolidation in which the corporation is the continuing Person and which does not result in any reclassification, change or exchange of the outstanding shares of Common Stock), or sell, lease, transfer, or convey all or substantially all of its assets, the record holders of the Convertible Special Stock shall have the right thereafter to receive, upon the surrender of a certificate or certificates representing Convertible Special Stock, the cash, securities or other property to which the record holder would have been entitled upon such consolidation, merger, sale, lease, transfer or conveyance (to the extent permitted by applicable law) if the record holder had held the shares of Common Stock issuable upon any conversion thereof immediately prior to any such transaction, whether or not the Convertible Special Stock was at such time convertible. The Corporation shall take such steps in connection with such consolidation or merger or sale, lease, transfer or conveyance as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to any cash, securities or other property thereafter deliverable upon any conversion or redemption hereof. The provisions of this Section 4.6(f) shall similarly apply to successive consolidations, mergers, sales, leases, transfers or conveyances. (g) When Issuance or Payment May Be Deferred. In any case in which this Section 4.6 shall require that an adjustment in the Conversion Ratio be made effective as of a record date for a specified event, the Corporation may elect to defer until the occurrence of such event (i) issuing to the holder of any shares of Convertible Special Stock converted after such record date the Common Stock and other capital stock of the Corporation, if any, issuable upon such conversion over and above the Common Stock and other capital stock of the Corporation, if any, issuable upon such conversion on the basis of the Conversion Ratio and (ii) paying to such holder any amount in cash in lieu of a fractional share pursuant to Section 4.3; provided, however,, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holders right to receive such additional shares of Common Stock, other capital stock and cash upon the occurrence of the event requiring such adjustment. 4.7 Notice to Holders. Upon any adjustment of the Conversion Ratio pursuant to Section 4.6, the Corporation shall promptly thereafter (i) cause to filed with the Corporation a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular auditors of the Corporation) setting forth the Conversion Ratio after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of shares of Common Stock (or portion thereof) issuable after such adjustment in the Conversion Ratio, upon conversion of a share of Convertible Special Stock which certificate shall be conclusive evidence of the correctness of the matters set forth therein, and (ii) cause to be given to each of the registered holders of the Convertible Special Stock at its address appearing on the transfer agent's register written notice of such adjustments by first-class mail, postage prepaid. 4.8 Treatment of converted Shares. All shares of Convertible Special Stock converted pursuant to this resolution shall be retired and shall be restored to the status of authorized and unissued shares of special stock, without designations as to series and may thereafter be reissued as shares of any series of special stock. ARTICLE V Voting Rights 5.1 Voting Rights of Holders of Convertible Special Stock. Except as provided by law to the contrary, the Convertible Special Stock shall be non-voting stock and no holder of Convertible Special Stock shall be entitled (in such capacity) to vote at any meeting of shareholders or otherwise. ARTICLE VI Redemption 6.1 Redemption. If the initial Condition shall not have occurred within six months following the Initial Issue Date, the Corporation shall immediately make an offer to each holder of the convertible Special Stock by registered mail to redeem, out of funds legally available therefor, on a date specified in such offer (which shall not be less than 30 nor more. than 60 days after the date of such notice), all such holder's Convertible Special Stock at a cash price equal to the greater of (i) the Quoted Price of the Common Stock on the date notice is sent and (ii) 125% of the original issue price of the Convertible Special stock, upon the acceptance of such offer received by the Corporation at least 10 days prior to the redemption date specified in the Corporation's offer. If the holder of any share of Convertible Special Stock shall accept such offer, and upon surrender of the certificates evidencing such Convertible Special Stock such holder shall receive the redemption price therefor. ARTICLE VII Miscellaneous 7.1 Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Convertible Special Stock shall not have any powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution and in the Articles of Incorporation. The shares of Convertible Special Stock shall have the same preemptive or subscription rights, if any, as provided for the holders of the Common Stock. 7.2 Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 7.3 Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Convertible Special Stock and qualifications, limitations and restrictions thereof set forth in this resolution is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of the Convertible Special Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of the Convertible Special Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of the Convertible special Stock and qualifications, limitations and restrictions thereof herein act forth shall be deemed dependent upon any other such voting powers, preferences and relative, participation, optional or other special rights of the Convertible Special Stock and qualifications, limitations and restrictions thereof unless so expressed herein. ANNEX B LEGAL OPINIONS OF COUNSEL TO THE COMPANY 1. The company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. 2. The company has all requisite corporate power to enter into the Purchase Agreement and to sell the Shares and to carry out and perform its obligations under the Purchase Agreement and has taken all requisite corporate action on the part of the Company necessary for the authorization, execution, delivery and performance by the Company of the Purchase Agreement and for the authorization, issuance and delivery of the Conversion Shares upon conversion of the Shares, other than receiving stockholder approval for such conversion. The Certificate of Designations establishing the Special Stock has been filed with the Secretary of State of the State of Nevada and is effective under Nevada law and the terms of the Special Stock are valid under the laws of the State of Nevada. The execution, delivery and performance of the Purchase Agreement will not conflict with nor constitute a breach of any provision contained in the Company's Articles or Certificate of Incorporation or By- laws or, to the knowledge of such counsel, in any material agreement to which the Company is a party or by which its properties or assets may be bound. 3. The Shares have been duly authorized and, upon payment of the purchase price therefor as contemplated in the Purchase Agreement, will be validly issued, fully paid and non- assessable. The Conversion Shares have been duly authorized and, upon conversion as contemplated in the Certificate of Designations, will be validly issued, fully paid and non- assessable. 4. The Purchase Agreement has been duly and validly authorized, executed and delivered by the Company and, assuming due execution and delivery by the Purchasers, constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms except as may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity and except that such counsel expresses no opinion as to the enforceability of indemnification or contribution provisions contained in the Purchase Agreement. 5. The issuance of the Shares by the Company is exempt from the registration requirements of the Securities Act. -----END PRIVACY-ENHANCED MESSAGE-----