UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-4281
ALLIANCE GAMING CORPORATION
(Exact name of registrant as specified in its charter)
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NEVADA |
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88-0104066 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
6601 S. Bermuda Rd. Las Vegas, Nevada 89119
(Address of principal executive offices)
Registrant’s telephone number: (702) 270-7600
Registrant’s website: www.alliancegaming.com
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.
ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2).
ý Yes o No
The aggregate market value of the common equity held by non-affiliates of the registrant was approximately $847,446,308 as of September 2, 2004.
The number of shares of Common Stock, $0.10 par value, outstanding as of September 2, 2004, according to the records of registrant’s registrar and transfer agent, was 51,035,660.
ALLIANCE GAMING CORPORATION
FORM 10-K
Year Ended June 30, 2004
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year and are incorporated by reference into Part III of this Form 10-K.
Operating under the name Bally Gaming and Systems, we are a worldwide leader in designing, manufacturing and distributing traditional and nontraditional gaming machines, having marketed over 100,000 gaming machines during the past five years. We define traditional gaming machines as being Class III, casino-style games, and nontraditional gaming machines such as games that are centrally determined or Video Lottery Terminals (“VLT”). We also design, integrate and sell highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with over 270,000 game monitoring units (“GMUs”) installed worldwide. We also own and operate a dockside casino in Vicksburg, Mississippi, which has approximately 12 table games and approximately 930 gaming devices (“Casino Operations”). Further information about our business units is contained in the notes to the Consolidated Financial Statements.
As is more fully discussed below, in July 2003 we announced our intention to dispose of certain non-core businesses, including our route operations in Nevada and Louisiana, and our Bally Wulff wall machine and amusement games business in Germany. In December 2003, we also announced our intention to sell Rail City Casino. The sale of Bally Wulff was completed on July 18, 2003; the sale of Rail City Casino was completed on May 3, 2004; and the sale of our Nevada route operations was completed on June 30, 2004.
During the current fiscal year, we also completed a number of acquisitions to complement our core business units. On December 31, 2003, we acquired 100% of the assets of U.K. based Crown Gaming from Crown Leisure Limited (“Crown”). The acquisition, which includes Crown’s distributorship agreements for a wide variety of automated table games and video bingo machines, strategically builds on the Company’s focus towards future growth projected in England.
On February 19, 2004, we completed the acquisition of substantially all of the assets and liabilities of MindPlay LLC (“MindPlay”), a leading developer of advanced table game technologies. The MindPlay technologies are designed to provide casino operators data and information to improve customer service, provide enhanced security, and increase profitability by lowering cost of operation and enhancing the patron experience.
On March 2, 2004, the Company acquired 100% of the shares of privately held Sierra Design Group (“SDG”), a leading supplier of Class II and Class III gaming devices, systems and technology. Class II gaming consists of bingo, pull-tabs and bingo games that are played against other players, rather than against the house as in traditional Class III gaming environments.
We were incorporated in Nevada on September 30, 1968, under the name Advanced Patent Technology. We changed our name to Gaming and Technology, Inc., in 1983, to United Gaming, Inc., in 1988 and to Alliance Gaming Corporation on December 19, 1994. We conduct our gaming operations through directly and indirectly owned subsidiaries. The terms “the Company,” “we,” and “our” as used herein refer to Alliance Gaming Corporation and subsidiaries unless the context otherwise requires. Our principal executive offices are located at 6601 South Bermuda Road, Las Vegas, Nevada 89119; telephone (702) 270-7600. Our internet address is www.alliancegaming.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
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Acquisitions
On March 2, 2004, we purchased 100 percent of the outstanding stock of SDG for consideration of approximately $108.6 million in cash and 662,000 shares of our Common Stock. In addition, we assumed approximately $8 million of debt, plus transaction fees and expenses, resulting in total initial consideration of $126.4 million. Additional contingent consideration of up to $95.6 million may become payable, in equal portions of cash and stock, over the next three fiscal years upon the SDG business unit achieving certain significant revenue and EBITDA targets.
On February 19, 2004, we acquired substantially all of the assets and liabilities of MindPlay. The consideration consisted of $9 million in cash, a note payable totaling $4.0 million, the assumption and subsequent payment of $2.0 million of long-term debt, warrants to purchase 100,000 shares of Alliance common stock (valued at $0.9 million), and $0.9 million for the present value of the minimum guaranteed earn out payments described below. The earn out is payable based upon 10% of gross margin from the sale of MindPlay products for the first seven years, and 4.25% of gross margin for the subsequent 6 years, subject to adjustments pursuant to the conditions contained in the sale agreement.
On December 31, 2003, we acquired 100 percent of the assets of U.K. based Crown Gaming. The total cash consideration was $3.9 million. The acquisition, which includes distributorship agreements for a wide variety of automated table games and video bingo machines, strategically builds on the Company’s focus towards projected future growth in England.
Dispositions and Discontinued Operations
During Fiscal Year 2004 we completed three divestitures in accordance with our plan to sell our “non-core” businesses, which was a strategy we announced in July 2003. On July 18, 2003, we completed the sale of Bally Wulff to a private equity investor and received $16.5 million in cash. On June 30, 2004, we completed the sale of United Coin Machine Co. (“UCMC”), our Nevada route operations, to Century Gaming, Inc. and received approximately $100 million in cash and the assumption by Century Gaming of approximately $5 million in debt. On May 3, 2004, we completed the sale of Rail City Casino to The Sands Regent and received $37.9 million in cash. The sale of our Louisiana route operations was not consummated pursuant to the previously announced sale terms and the agreement with the proposed buyer was cancelled. We intend to continue our efforts to divest our interest in this subsidiary and therefore will continue to carry these assets as a discontinued operation.
Bally Gaming and Systems
Overview
The Bally Gaming and Systems business unit consists of three separate divisions: Gaming Products, Gaming Operations and Gaming Systems. The following table sets forth the percentages of revenues provided by each of these divisions for the periods indicated:
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Revenue by division |
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Percentage of Revenues |
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2004 |
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2003 |
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2002 |
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Gaming Products |
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54 |
% |
56 |
% |
47 |
% |
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Gaming Systems |
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28 |
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27 |
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29 |
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Gaming Operations |
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18 |
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17 |
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24 |
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100 |
% |
100 |
% |
100 |
% |
Gaming Products
We design, manufacture and sell a variety of electronic slot, video and centrally determined gaming machines. Gaming machines are differentiated from one another by graphic design and theme, cabinet style and size, pay table, reel-type
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design, betting denomination and minimum/maximum betting amount. Slot machines are normally produced to specific order, with design and configuration customized to a customer’s particular requirements. Customers may also change from one gaming model to another gaming model by ordering a “conversion kit” consisting of artwork, reel strips, and a computer chip. Our video gaming machines are designed to simulate various card games, video reel-spinning games, and keno through a video display, and can offer the player the chance to play a multitude of different games. New games and themes are introduced periodically to satisfy customer demand and to compete with product designs introduced by competitors. The gaming products created are a result of a comprehensive product development effort. The development process includes extensive testing of the new products in-house and on casino floors for reliability and player appeal.
In March 1998, we introduced the first major upgrade to our ProSeries™ game and upgraded the Game Maker® product line that is capable of multi-line video and multi-coin functionality. Revenues from sales of ProSeries machines were approximately $103.4 million, $95.4 million and $36.4 million for the years ended June 30, 2004, 2003 and 2002, respectively.
We also offer a variety of video gaming devices which can offer up to ten different video games within one gaming device, or can be configured as a dedicated single title game. The games can be selected by the casino from a game library that has over 200 games. The games simulate various card games, keno and popular reel-spinning games. These video machines are available in upright, bar top, slim-line and slant top cabinets. Revenues from sales of these machines were approximately $25.0 million, $17.0 million and $30.4 million for the years ended June 30, 2004, 2003 and 2002, respectively.
We commenced development of a new game platform in January 2000, with the intent of creating enhanced audio and video capabilities for our video product line. We engaged Microsoft to assist in the development of an NTÔ based graphics and audio package addition to the legacy video game board. The result was the Evolution platform, or EVOÔ, that offers improved audio and graphic capabilities on the wealth of Windows® based software and content programmers available in the marketplace. The first EVOÔ products were marketed in the mid summer of 2001, with sales totaling $19.0 million, $41.4 million and $17.5 million for years ended June 30, 2004, 2003 and 2002, respectively.
We typically offer a 90-day parts and labor warranty for new gaming machines sold and are actively involved in customer service after the original installation. We provide several after-sale, value-added services to our customers including customer education programs, a 24-hour customer service telephone hot-line, an Internet web site for technical support, field service support programs, and spare parts programs. Our historical warranty expense as a percentage of revenues has been less than 1%.
In addition, we sell and service used gaming machines and sell parts for existing machines. We often accept used machines as trade-ins toward the purchase of new gaming equipment. While a small secondary market exists in the United States, used machines are typically resold into the international market. Some used equipment is reconditioned for direct sale, but much is sold in container lots on an “as is” basis through independent brokers. Sale of used equipment was approximately $7.2 million, $7.2 million and $4.8 million for the years ended June 30, 2004, 2003 and 2002, respectively.
Gaming machines have a mechanical life that can exceed ten years. However, in the established markets, our experience is that casino operators usually replace gaming machines after a much shorter period. The factors that result in replacement of gaming machines earlier than their mechanical life include technological advances, development of new entertaining games, new sound and visual features and changing preferences of casino patrons. Casinos typically recoup the purchase cost of their electronic gaming machines in a few months, which allows casinos to replace machines with new models that are popular with casino patrons.
During 2004, we completed two strategic acquisitions in the gaming area: Crown, and SDG. The acquisition of Crown, which includes Crown’s distributorship agreements for a wide variety of automated table games and video bingo machines, strategically builds on the Company’s focus towards future growth projected in England. SDG is a leading supplier of Class II and Class III gaming devices, systems and technology. This acquisition has positioned the Company to take advantage of significant opportunities in both the domestic and international markets, from the technology advances in traditional casino style gaming to the Class II environments with central determination features. Revenue from SDG products since the acquisition date of March 2, 2004 totaled $61.5 million.
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In fiscal year 2003, Bally Gaming and Systems responded to a proposal by the New York Lottery to provide VLT devices at race tracks in the state of New York. Through the competitive bidding process, we were awarded approximately 25% of the initial VLT’s to be installed. The financial model for this market requires the manufacturer to build, deploy and maintain the VLT’s in return for a share of the net win from the VLT’s. The first games were installed at the Saratoga race track in January 2004, and have since been followed by installations at three additional tracks. SDG was also a successful bidder in the New York Lottery VLT market, having been awarded approximately 27% of the units. The successful SDG proposal was accomplished in the period before SDG was acquired by Alliance, and the combined share for Bally and SDG in this market is currently approximately 52%, or approximately 2,610 units. Certain operational efficiencies have been realized by combining the service groups in this market.
Gaming Systems
We design and sell casino enterprise systems (“CES”) which provide casino operators integrated modules across multiple platforms. Our primary products include slot monitoring, casino management and cashless systems designed to streamline casino business processes through the use of technology. Our slot monitoring products are comprised of (i) hardware consisting of micro controller based printed circuit boards installed within the slot machines as well as card readers, displays and keypads which provide casinos the ability to track player gaming activity through our casino management systems and monitor employee access to slot machines, (ii) firmware developed by us, which provides access to the slot machines’ and player’s activity data gathered by the micro controller hardware; and (iii) slot monitoring business applications developed by us which manages the slot machine activity including security events, revenue, expenses and other financial reporting metrics. Our casino management systems provide casino operators patron loyalty solutions which are similar to frequent guest programs offered in other leisure industries; table games accounting including the calculation of all revenue and expense related items; and cage and credit accountability for all extensions of credit and cage cash balancing functions. Our cashless systems provide a suite of products for casino operators to provide bonusing and cashless gaming activity to casino patrons. Bally products operate on Windows, AS/400 (iSeries), and UNIX platforms allowing our customers to choose a technology solution that meets their existing or future infrastructure requirements. Gaming Systems generated revenues of approximately $124.3 million, $91.5 million and $64.8 million for the years ended June 30, 2004, 2003 and 2002, respectively.
During 2002, we completed two strategic acquisitions in the systems area: Casino Marketplace and Advanced Casino Systems Corporation (“ACSC”). These acquisitions expanded our product offerings to include player marketing and bonusing software. The ACSC product remains the only fully integrated AS/400 (iSeries) solution available in the casino industry. This has strategic importance as the AS/400 (iSeries) solution remains the popular technology platform used in the gaming industry
During 2003, we completed three strategic acquisitions in the systems area: CMS, LLC (“CMS”), Micro Clever Consulting (“MCC”) and Honeyframe Software Development Ltd. (“HSD”). These acquisitions again expanded our system product offerings and expanded the number of platforms such products operate on.
During 2004, the Company completed the acquisition of substantially all of the assets and liabilities of MindPlay, a leading developer of advanced table game technologies. Under the protection of a number of patents, we envision a series of new table game products that can potentially redefine the market with the advances of automation and powerful new gaming features to attract and retain players.
Gaming Operations
The proprietary gaming operations division of offers games which are either linked on a wide-area progressive system, operate on a proprietary near-area progressive system or are non-linked niche games, which are games that generally offer more complex features such as bonus rounds. These gaming machines are placed in casinos and earn recurring revenues and cash flows for us rather than being sold on a one-time basis. These gaming machines are generally more
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profitable as a result of the recurring nature of the revenue derived from such games, but they require us to invest capital in the cost of manufacturing the gaming machines, obtaining intellectual property, and in purchasing signs and seating, and are dependent on the success of the game in order for it to stay deployed for an extended period of time. Gaming Operations generated revenues of approximately $79.1 million, $55.6 million and $53.2 million for the years ended June 30, 2004, 2003 and 2002, respectively.
We received regulatory approval from the Nevada Gaming Control Board of our wide-area progressive jackpot system named “Thrillions™” in November 1998. The Thrillions system has been designed to allow patrons playing nickel, quarter and dollar machines to compete for the same progressive jackpot with the odds of winning the jackpot adjusted based on the amount wagered. Separate wide-area progressives are being operated by us in Nevada, Mississippi and Native American lands, and by a separate third-party trust arrangement in Atlantic City, New Jersey.
As of June 30, 2004, the following was the installed base of our wide-area progressive games:
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Date |
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Installed Base |
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Betty Boop |
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March 1999 |
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404 |
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Blondie |
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March 2001 |
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123 |
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Millionaire 777’s |
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June 2001 |
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386 |
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Popeye |
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August 2001 |
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58 |
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Cash For Life |
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March 2003 |
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441 |
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Quartermillions |
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March 2004 |
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314 |
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1,726 |
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As an alternative to wide-area games, we also offer customers the option of purchasing gaming devices and our providing the customer with near-area progressive technology, allowing the customer to create their own branded progressive links, for which we also collect a daily fee. Currently, Caesar’s Entertainment utilizes the Thrillions system as a platform for their near-area progressive networks of linked games for their properties in Nevada and Mississippi markets, as does Isle of Capri in Mississippi. We have also utilized certain web-based technologies, such as virtual private networks (“VPN’s”) to be able to monitor wide-area progressives operating in non-domestic markets, such as the 160 game link currently being operating in Russia.
We also offer a variety of non-linked daily fee games. These games have been marketed under such titles as Playboy (Playboy and Rabbit Head Design are marks of Playboy and used under license by Bally Gaming, Inc.), Monte CarloÔ, Saturday Night LiveÔ, and others, all of which are approved in most major gaming markets. We also earn recurring revenues from 715 devices deployed at horseracing facilities under agreements with the Delaware State Lottery Commission. As of June 30, 2004, we had a total installed base of daily fee games totaling 7,985 units.
Additionally, our SDG unit has a base of centrally determined games operating primarily in Washington, Florida, and Oklahoma. Generally these games have been sold to the customer, with SDG retaining a daily fee for its central determination software license, although straight participation arrangements are also popular with certain customers. As of June 30, 2004, the installed base for such games totaled 17,995 units.
Product Development
We believe that providing games and systems with high entertainment value that are preferred by the casino patron is a key to meeting the demands of casinos. We believe that the use of existing computer technology is accelerating which can give newer gaming machines and systems that incorporate this technology a competitive advantage over older gaming machines and systems. Total spending on product research and development by the Bally Gaming and Systems business unit was approximately $36.6 million, $20.0 million and $15.0 million during the years ended June 30, 2004, 2003 and 2002, respectively. The increase in research and development spending in the year ended June 30, 2004, is a result of the EVOÔ platform development and advance product development efforts.
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We develop our products for both the domestic and international market. Our product development process is divided into two areas: hardware and software. Major areas of hardware development include cabinet style, electronic capability, printer capability, and coin and currency handling. Hardware development efforts are focused on player appeal, product reliability and ease of maintenance. Development cycles for hardware can range from a few days for simple enhancements to more than a year for new electronics or new mechanical packages.
The software development process for new games, which includes graphics development, involves a continuous effort requiring relatively significant human resource allocations. Creativity in software development is an important element in product differentiation, as the major manufacturers tend to deploy similar hardware and related technology. Ideas for new models are generated internally, from customers and from other third parties, many of whom have entered into strategic relationships with us. On an annual basis, we expect to introduce more than ninety new models to the market. However, no assurance can be made with respect to the rate of new model introductions or our ability to obtain regulatory approvals for them.
All new or modified hardware and software are designed to satisfy all applicable testing standards. Typically, new products require regulatory approval for most North American jurisdictions, but many jurisdictions outside North America generally do not require approval. For Nevada, new gaming machine platforms must be filed with the state gaming laboratory which tests the products for two to three months or more before a mandatory 30 to 60 day field test is conducted in a casino. The Nevada State Gaming Control Board and the Nevada Gaming Commission must each approve new product platforms at their monthly, public meetings. For modifications of existing products or casino associated equipment, the process in Nevada is similar to new platforms, except a field test is usually not required and the Nevada State Gaming Control Board staff can approve the product administratively. Each jurisdiction that requires regulatory approval of new products has its own filing requirement and process. Once products are approved by the gaming regulators, customers may require a 30 to 90 day field trial of the product in their casinos with the right to return the product at any time during the field trial period. We do not recognize revenue until the customer ends the field trial and accepts the gaming machines.
Product development for casino enterprise systems is also divided into hardware and software. The major areas of hardware development include micro controller circuit board design and programming as well as user interface devices such as card readers, keypads, and displays. Systems has developed a modular and extendible hardware and software architecture, which focuses development on achieving greater functionality, product reliability, and ease of maintenance for the casino operator and ease of use for the slot player. In addition, the architecture allows customers to upgrade existing components or add new components with minimal impact. Development cycles for hardware can vary between a few months for minor revisions to more than a year for major design changes or for changes made by various slot manufacturers with which Systems’ product must communicate and be physically integrated. Software development results in (i) periodic product releases that include new features that extend and enhance casino enterprise systems; (ii) periodic maintenance releases that enable casino operators to correct problems or improve the usability of the system; and (iii) documentation needed to install and use the system.
We have developed a series of cashless products marketed under the Bally eSERIES name. The eSERIES products represent an integrated set of cashless features to enhance the gaming experience of casino patrons. These products allow the transfer of funds using bar coded coupons and/or encrypted pin numbers to download either restricted or unrestricted credits to the gaming device. These products allow casino operators to reduce cash and coin handling expenses and minimize overall operating expenditures. Our cashless products are in use in Nevada, Michigan, New Jersey, Mississippi, Louisiana, Iowa, Colorado, Missouri, Indiana and various Native American jurisdictions encompassing many states.
The software development process for our systems includes the design and development of features to meet various regulatory standards. The regulatory standards vary by jurisdiction forcing us to develop multiple software settings based on the individual state and tribal gaming standards. Each jurisdiction requires the approval of any software modifications or new products prior to deploying at casino locations. Approval processes can vary significantly by jurisdiction, based on the software changes developed, technology enhancements, and regulator resources.
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Product Markets
We believe that the domestic installed base of traditional Class III gaming devices now exceeds 750,000 units. The state of Nevada has the largest installed base, totaling approximately 200,000 units as of June 30, 2004.
The gaming industry continues to expand in international markets. Our primary international markets are Europe, U.K., Canada, Latin America and, to a lesser extent, the Far East and the Caribbean. We conduct our business in Canada through our staff based in the United States. We also distribute gaming machines, manufactured by Bally Gaming, through direct and indirect subsidiaries: Bally Gaming International, GmbH (“GmbH”), from our sales office in Hannover, Germany principally to customers in Europe and Russia; Bally Gaming de Puerto Rico, Inc., principally to customers in Puerto Rico; and Bally Gaming and Systems, SA, in Montevideo, Uruguay and its branches in Peru and Argentina, principally to customers in South America.
Presently, Class II gaming devices are marketed to certain Native American gaming markets. We believe the domestic installed base of Class II gaming devices now exceeds 21,000. Class II gambling, specifically excludes all banked card games.
Casino enterprise systems are composed of various software and hardware products affecting departments throughout the casino. We market our casino enterprise solutions through Bally Gaming and Systems under the names SDS, ACSC, CMP, CMS, MCC, HSD and MindPlay table games systems.
The primary markets for casino enterprise systems are the United States and, to a lesser extent, Canada, Latin America, Europe and the Caribbean. Markets for systems within the United States include traditional land-based casinos predominantly in Nevada and Atlantic City, New Jersey, Native American casinos and riverboats and dockside casinos. Domestically, our market for casino enterprise systems is new casinos and existing or new customers who either (a) acquire casinos with a competitor’s system, which is replaced with our system, or (b) expand their casino floors or upgrade their hardware or software to a new product release. Unlike the United States market, where most jurisdictions require the implementation of systems, there have been few international markets to do so. Management believes, however, that the international market for such systems is increasing, and if that expansion occurs that our Gaming Systems’ sales to such markets are likely to increase accordingly.
Sales and Marketing
Bally Gaming and Systems uses a direct sales force and, to a lesser extent, an independent distributor network to distribute our products. Bally Gaming and Systems’ North America sales staff consists of approximately 44 people in offices in Nevada, New Jersey, Mississippi, Illinois, California and Florida.
Bally Gaming and Systems’ direct sales force generated approximately, 80%, 98% and 76% of new unit sales for the years ended June 30, 2004, 2003 and 2002, respectively. On a limited basis, Bally Gaming and Systems uses distributors for sales to certain international jurisdictions. The agreements with distributors do not specify minimum purchases but generally provide that we may terminate such agreements if certain performance standards are not met. These independent distributors generated approximately, 20%, 2% and 24% of new gaming machine unit sales for the years ended June 30, 2004, 2003, and 2002, respectively.
As of June 30, 2004, we had approximately 279,000 game monitoring units installed in 219 locations, of which approximately 92% are in the United States. Substantially all of System’s revenues are generated by our direct sales force.
We sell gaming equipment and systems on normal credit terms (generally 2%, net 30) and also offers financing to qualified customers for periods generally between 6 and 48 months with interest at rates ranging from 8% to 14%. International sales are generally consummated on a cash basis backed by a letter of credit or financed over three years or less. In addition, in certain situations we have participated in the financing of other gaming-related equipment manufactured by third parties in emerging markets. For casino enterprise system sales, we generally offer limited financing terms, normally less than one year, for sales to new installations. Most sales, however, are invoiced on a net 30-day basis. Management believes that financing of customer sales is an important factor in certain emerging markets.
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For casino enterprise system sales, we offer our customers the option of signing separate hardware and software maintenance agreements at the time of sale. These agreements are for periods of one year and automatically renew unless otherwise canceled in writing by the customer or us. After an initial warranty period, typically 90 days, the customer is invoiced a monthly hardware and software maintenance fee which provides essentially for repair or replacement of malfunctioning hardware and software, software version upgrades, and on-call support for software.
Customers
The demand for slot machines and video gaming machines varies depending on the level of new construction and renovation of casinos and other facilities and the corresponding need for new equipment as well as the replacement of existing machines. These machines generally have an average replacement cycle of three to seven years. For the year ended June 30, 2004, the ten largest customers (including corporate customers with multiple casino properties) accounted for approximately 33% of the Bally Gaming and Systems’ new unit sales, with the largest single customer accounting for 6% of new unit sales.
In addition we provide games to original equipment manufactures (“OEM’s”) that in turn provide games primarily to the Class II non-traditional gaming markets. Typically the OEM also purchases the rights to certain Bally themes, which entitles them to certain Bally proprietary game themes and redesigns these game themes to be compatible with its operating system configurations. Sales of base gaming devices to OEM’s totaled approximately $14.4 million, $7.9 million, and $10.7 million for years ended June 30, 2004, 2003 and 2002, respectively, and sales of game themes to the OEM’s totaled approximately $4.0 million, $3.2 million and $1.2 million for the years ended June 30, 2004, 2003 and 2002, respectively.
The demand for casino enterprise systems is driven by regulatory requirements in a given jurisdiction and by a casino operators’ competitive need to properly track machine and player activity and to establish and compile individual machine and player profitability and other demographic information. All of this enables casinos to develop or enhance marketing strategies. Revenues for casino enterprise systems are derived from selling to new installations and to new or existing customers who either (a) acquire casinos with a competitor’s system, which is replaced with our system or (b) expand their casino floors or upgrade their hardware to a new product release. For the year ended June 30, 2004, the ten largest casino enterprise system customers (which include certain multi-site casino operators that have corporate agreements) accounted for approximately 59% of game monitoring unit sales revenues.
Future growth of Bally Gaming and Systems will be based on continued penetration in the international markets, further expansion in the established and emerging markets, as well as continued development efforts to provide customers with new and innovative hardware and software product offerings.
Assembly Operations
Bally Gaming and Systems’ Las Vegas primary facility was completed in 1990 specifically for the design, assembly and distribution of gaming equipment. The 150,000-square foot facility was designed to meet fluctuating product design demands and volume requirements, and management believes the facility enables Bally Gaming and Systems to increase production without significant capital expenditures.
Management believes our assembly operations allow for rapid generation of different models to fill orders quickly and efficiently. Another major advantage of the existing plant operation is that machines can be altered in many ways including the size, type and color of glass, sound and payoff patterns to produce a “customized” product for each customer. Bally Gaming and Systems keeps an inventory of parts that allow machines to be altered quickly to conform to a particular customer’s design/feature request. Bally Gaming and Systems produces products for individual customer orders, thereby reducing the risk of a backlog of finished goods inventories. Bally Gaming and Systems designs all of the major assemblies that are incorporated into the final machine configuration.
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Competition
The market for gaming machines and progressive systems in North America is dominated by a single competitor, International Game Technology, Inc. (“IGT”), with WMS Industries, Inc. (“WMS”) recently launching a progressive system as well. Worldwide there are a number of other well-established, well-financed and well-known companies producing gaming machines that compete with each of our lines in each of our markets. The other major competitors are AC Coin and Slot, Aristocrat Leisure Limited (“Aristocrat”), Atronic Casino Technology LTD (“Atronic”), Mikohn Gaming Corporation (“Mikohn”), Sigma Games, Inc., Universal Distributing of Nevada, Inc., WMS, Konami Co Ltd (“Konami”), Multimedia Gaming (“MGAM”), and Rocket Gaming. Many of these companies look to expand their market share by decreasing our current market share. Besides Bally Gaming, IGT, Aristocrat and Mikohn offer wide-area progressive systems, and others may enter this market. Competition among gaming product manufacturers, particularly with respect to sales of gaming machines into new and emerging markets, is vigorous. The competition is based on which machines generate the most net win to the casinos, competitive customer pricing and financing terms, quality of the product and the existence of an extensive distribution, sales and support network.
The main competition in casino enterprise systems currently consists of IGT, Acres Gaming, Aristocrat, MIS Grips and to a lesser extent, Konami and Mikohn. Competition is keen in this market due to the number of providers and the limited number of casinos and jurisdictions in which they operate. Pricing, product feature and function, accuracy, and reliability are all key factors in determining a provider’s success in selling its system. Management believes the future success of our operations will be determined by our ability to bring new and innovative products to the market while maintaining our base of loyal existing customers.
Casino Operations
Rainbow Casino
The Rainbow Hotel Casino, located in Vicksburg, Mississippi, began operations in July 1994. The facility includes a 33,000-square foot casino, with 930 gaming devices and 12 table games as well as a 310-seat restaurant/buffet and 20,000-square foot conference center. The facility also includes the 89-room Rainbow Hotel, which is owned and operated by a third party. Rainbow Casino is marketed as a “locals” casino and draws customers principally from within a 75-mile radius of Vicksburg. The Vicksburg casino market generated approximately $243 million in gaming revenue in the twelve months ended June 30, 2004, representing a growth rate of 2%.
We are the general partners of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), the limited partnership that operates the Rainbow Casino. The limited partner, Rainbow Corporation, an independent third party, is entitled to receive 10% of the net available cash flows after debt service and other items, as defined (which amount increases to 20% of such amount for the proportional revenues above $35.0 million) each year through December 31, 2010. The Company holds the remaining economic interest in the partnership.
Sales and Marketing
The Rainbow Casino targets the mid-level gaming customers in the market. We promote the casino primarily through direct mail, special promotional events, and by providing quality food at reasonable prices.
Competition
Gaming of all types is available throughout Mississippi in numerous locations, including many locations that compete directly or indirectly with our casino. The operation of casinos is a highly competitive business. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the amenities and customer services offered and the implementation and success of marketing programs. The Rainbow Casino faces substantial direct competition for gaming customers from the three other gaming facilities in Vicksburg, as well as other gaming operations throughout Mississippi.
Discontinued Operations
Rail City Casino
In April 1990, the Company purchased, for an aggregate purchase price of $9.5 million, substantially all of the assets of the Rail City Casino (formerly the Plantation Station Casino), a 20,000 square-foot casino located near the border between the cities of Reno and Sparks in northern Nevada. The sale of Rail City Casino to the Sands Regent was completed on May 3, 2004. We received $37.9 million in cash. We reported a gain on the sale before income taxes of $23.1 million, or $14.3 million after tax.
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Route Operations
Our route operations involve the selection, ownership, installation, operation and maintenance of video poker devices, reel-type slot machines and other electronic gaming machines in local establishments such as taverns, restaurants, supermarkets, drug stores, convenience stores and casinos operated by third parties (“local establishments”). Our route operations target residents who generally frequent local establishments close to their homes.
Nevada Operations
In July 2003 we announced that we had entered into an agreement to sell our Nevada route operations, UCMC, to Century Gaming, Inc., a privately held route operator based in Montana, which disposition was completed on June 30, 2004. We received approximately $100 million in cash and the assumption by Century Gaming of approximately $5 million in debt. We reported a gain on the sale before income taxes of $15.3 million, or $9.1 million after tax.
Overview. In March 1992 we obtained a contract to operate video poker gaming machines in the greater New Orleans, Louisiana area through a subsidiary, VSI. VSI operates pursuant to an agreement with Fair Grounds Corporation and its affiliates, Jefferson Downs Corporation and Finish Line Management Corporation (collectively, “Fair Grounds”), pursuant to which VSI is the exclusive operator of video poker machines at the only racetrack in the greater New Orleans area and nine associated off-track betting parlors (“OTB’s”). We operate the game rooms where the video poker machines are located for each of the nine facilities owned by Fair Grounds, for which we pay a percentage of the revenue generated by the machines. As of June 30, 2004, we had approximately 740 video poker machines in Louisiana.
Under the Louisiana gaming laws and regulations, the majority stockholder of any entity operating video poker machines in Louisiana must be a domiciled resident of the State of Louisiana. As a result, we own 49% of the common stock of VSI and three prominent members of the Louisiana business and legal community own the remaining 51%. We, however, own all the voting stock of VSI and all of VSI’s officers and directors are Company employees. We are also entitled to receive 71% of the dividends declared by VSI.
We 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 we are entitled to receive 60% of any SVS dividends. Under the terms of our contract with Fair Grounds, we 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.
We are prohibited by the Louisiana Video Draw Poker Device Control Law and the rules and regulations promulgated there under (“the Louisiana Act”) from engaging in both the manufacture and operation of video poker gaming in Louisiana and, therefore, we do not manufacture our own video poker machines for use in Louisiana.
In July 2003 we announced that we entered into an agreement to sell our interest in VSI to Gentilly Gaming, LLC to be effective June 30, 2004. Gentilly eventually decided not to proceed with the transaction, resulting in a cancellation of the sale agreement and VSI has obtained another extension of the current operation agreement to June 30, 2005. We intend to continue our efforts to divest our interest in this subsidiary and as such will continue to carry the assets as a discontinued operation.
Wall Machines and Amusement Games
On July 18, 2003, we completed the sale of our Bally Wulff wall machine and amusement game business unit to a third party equity investor for $16.5 million in cash, and recorded a loss on sale totaling $25.4 million.
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Patents, Copyrights and Trade Secrets
Bally Gaming, Inc. is the copyright owner (or has licenses to use) game software, artwork and video presentations. Some games, cash handling mechanisms, and other gaming device mechanisms (either currently used or reserved for future development) are covered either by pending patent applications or issued patents, both foreign and domestic. The expiration dates of these patents vary and are based on their filing or issue dates. In addition, many of the games have trademarks registered with the U.S. Patent and Trademark Office, state trademark registries, or both. Together with our subsidiaries, we have over four hundred registered or pending trademark applications in the United States and around the world.
Bally Gaming, Inc., is obligated under several licensing agreements to pay royalties ranging from approximately $10 to $500 per machine depending on the components in the gaming machines. In addition, we have obtained the rights to certain game ideas and intellectual property that require Bally Gaming and Systems to pay royalties based on either fixed amounts or variable amounts based upon the number of units sold or leased. Royalty expense for Bally Gaming and Systems for the years ended June 30, 2004, 2003 and 2002 was $6.2 million, $4.2 million, and $2.8 million, respectively, and is included in cost of gaming and systems in the Consolidated Financial Statements.
As of June 30, 2004, we and our subsidiaries employed approximately 1,735 persons (excluding employees of discontinued operations and subsidiaries sold as of June 30, 2004, which include approximately 1,210 persons in Nevada, 420 persons in Mississippi, 60 persons in Louisiana, 5 persons in various other states and 100 in various foreign countries). These employees are not covered by collective bargaining agreements. We believe we have satisfactory relationships with our employees.
Gaming Regulations and Licensing
General. The manufacture and distribution of gaming machines and the operation of gaming facilities are subject to extensive federal, state, local, and foreign regulation. Although the laws and regulations of the various jurisdictions in which we operate and may expand our gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of these jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture and distribution of gaming machines and the operation of gaming facilities, as well as the individual licensing of officers, directors, major stockholders and key personnel of such companies.
Any person who acquires a controlling interest in the Company would have to meet the requirements of all governmental bodies that regulate our gaming businesses. A change in the make-up of our board of directors and management may require the various gaming authorities to examine the qualifications of the new board and management.
Nevada. The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the “Nevada Act”); and (ii) various local ordinances and regulations. Our gaming, manufacturing, and distributing operations (collectively referred to as “gaming machine operations”) are subject to the licensing and regulatory control of the Nevada State Gaming Control Board (the “Nevada Board”), the Nevada Gaming Commission (the “Nevada Commission”), the Clark County Liquor and Gaming Licensing Board (the “Clark County Board”), and various other county and city regulatory agencies, all of which are collectively referred to as the “Nevada Gaming Authorities.”
The laws, regulations, and supervisory procedures of the Nevada Gaming Authorities are based on declarations of public policy concerned with, among other things: (i) the prevention of unsavory and unsuitable persons from having any involvement with gaming; (ii) the strict regulation of all persons, locations, practices, associations and activities
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related to the operation of licensed gaming establishments and the manufacture and distribution of gaming machines, cashless wagering systems and associated equipment; (iii) the establishment and maintenance of responsible accounting practices and procedures; (iv) the maintenance of effective control over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record-keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent practices; and (vi) providing a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on our gaming-related operations.
Alliance is registered with the Nevada Commission as a publicly traded corporation (a “Registered Corporation”). Its direct and indirect subsidiaries that manufacture or distribute gaming devices or conduct gaming operations at various locations (collectively, the “Nevada Subsidiaries”) are required to be licensed by the Nevada Gaming Authorities. The licenses held by the Nevada Subsidiaries require periodic payments of fees and taxes and are not transferable. The Company, through registered intermediary companies (individually an “Intermediary Company” and collectively the “Intermediary Companies”), has been found suitable to own the stock of the Nevada Subsidiaries, each of which is a corporate licensee (individually a “Corporate Licensee” and collectively the “Corporate Licensees”) under the terms of the Nevada Act. As a Registered Corporation, we are required periodically to submit detailed financial and operating reports to the Nevada Gaming Authorities and furnish any other information the Nevada Gaming Authorities may require. No person may become a stockholder of or receive any percentage of the profits from the Corporate Licensees without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, the Intermediary Companies, and the Corporate Licensees have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits, and licenses required to engage in gaming activities, gaming machine operations, and in the manufacture and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada.
All gaming machines and cashless wagering systems manufactured, sold, or otherwise distributed for use or play in Nevada or for distribution outside of Nevada must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming machines manufactured for use or play in Nevada must be approved by the Nevada Commission before they are distributed or exposed for play. The approval process for gaming machines and cashless wagering systems includes rigorous testing by the Nevada Board, a field trial, and a determination as to whether the gaming machines or cashless wagering systems meet strict technical standards set forth in the regulations of the Nevada Commission. Associated equipment (as defined in the Nevada Act) must be administratively approved by the chairman of the Nevada Board before it is distributed in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material relationship or material involvement with us, the Intermediary Companies or the Corporate Licensees to determine whether that individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors, and key employees of the Company and the Intermediary Companies who are actively and directly involved in the licensed activities of the Corporate Licensees are or may be required to be licensed or found suitable by the Nevada Gaming Authorities. 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 licensing, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. The Nevada Gaming Authorities may deny an application for licensing or finding of unsuitability for any cause they deem reasonable.
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 Intermediary Companies, the Corporate Licensees, or us, the companies involved would have to sever all relationships with that person. In addition, the Nevada Commission may require the Intermediary Companies, the Corporate Licensees or us to terminate the employment of any person who refuses to file appropriate applications. Licensing and suitability determinations are not subject to judicial review in Nevada.
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We and the Corporate Licensees that hold non-restricted licenses are required to submit detailed financial and operating reports to the Nevada Commission. A non-restricted license is a license for an operation consisting of sixteen or more slot machines, or for any number of slot machines together with any other game, gaming device, race book, or sports pool at one establishment. Substantially all material loans, leases, sales of securities, and similar financing transactions by the Corporate Licensees that hold non-restricted licenses must be reported to or approved by the Nevada Commission.
If it were determined that a Corporate Licensee had violated the Nevada Act, the licenses it holds could be limited, conditioned, suspended, or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the Intermediary Companies, the Corporate Licensees, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate any non-restricted gaming establishment operated by a Corporate Licensee and, under certain circumstances, earnings generated during the supervisor’s appointment (except for reasonable rental of the casino property) could be forfeited to the state. Limitation, conditioning, or suspension of the gaming licenses of the Corporate Licensees or the appointment of a supervisor could, and revocation of any gaming license would, materially adversely affect the gaming-related operations of the Company.
The Gaming Authorities may, at their discretion, require the holder of any of our securities to file applications, be investigated, and be found suitable to own our securities if the Nevada Commission has reason to believe that the holder’s ownership would be inconsistent with the declared policies of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5 percent of any class of a Registered Corporation’s voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10 percent of any class of a Registered Corporation’s voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the chairman of the Nevada Board mails written notice requiring such filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, that acquires more than 10 percent, but not more than 15 percent (19 percent if such additional ownership results from a stock repurchase program conducted by the Registered Corporation, subject to certain conditions), of a class of a Registered Corporation’s voting securities may apply to the Nevada Commission for a waiver of finding of suitability if the institutional investor holds the securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the corporate charter, bylaws, management, policies, or operations of the Registered Corporation or any of its gaming affiliates, or any other action the Nevada Commission finds to be inconsistent with holding the Registered Corporation’s voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in the Registered Corporation’s management, policies, or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with investment-only intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership, or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within thirty 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. We are subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company, the Intermediary Companies, or the Corporate Licensees, we (i) pay that person any dividend or interest upon voting securities of the Company; (ii) allow that person to exercise, directly or
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indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.
The Nevada Commission may in its discretion require the holder of any debt securities of a Registered Corporation to file applications, be investigated, and be found suitable to own the debt security if the Nevada Commission has reason to believe that such ownership would be inconsistent with the declared policies of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals if, without the prior approval of the Nevada Commission, it (i) pays the unsuitable person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
We are required to maintain in Nevada a current stock ledger, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are 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 previously imposed this requirement on the Company but removed it in June 2004.
We may not make a public offering of our securities without the prior approval of the Nevada Commission if the securities or proceeds there from are intended to be used to construct, acquire, or finance gaming facilities in Nevada or to retire or extend obligations incurred for such purposes. In addition, (i) a Corporate Licensee may not guarantee a security issued by a Registered Corporation pursuant to a public offering without the prior approval of the Nevada Commission; and (ii) restrictions on the transfer of an equity security issued by a Corporate Licensee or Intermediary Company and agreements not to encumber such securities (collectively, “Stock Restrictions”) are ineffective without the prior approval of the Nevada Commission.
Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct whereby a person or entity acquires control may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission on a variety of stringent standards before assuming control of the Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors, and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as a part of the approval process relating to the transaction.
The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities, and corporate defense tactics affecting Nevada corporate gaming licensees and Registered Corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse affects of these business practices on Nevada’s gaming industry and to promote Nevada’s policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before a Registered Corporation can make exceptional repurchases of voting securities above the current market price (commonly called “ greenmail”) and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation’s board of directors in response to a tender offer made directly to the Registered Corporation’s stockholders for the purpose of acquiring control of the Registered Corporation.
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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 conduct their operations. Depending upon the particular fee or tax involved, these fees and taxes are payable, either monthly, quarterly, or annually and are based on either (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. The Corporate Licensees that hold gaming device route operator licenses or manufacturer or distributor licenses also pay certain fees to Nevada.
Any person who is licensed, required to be licensed, registered, required to be registered, or who 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 $25,000 revolving fund to pay the expenses of investigation by the Nevada Board of the Licensee’s participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operations who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability.
Mississippi. The manufacture and distribution of gaming and associated equipment and the ownership and operation of casino facilities in Mississippi are subject to extensive state and local regulation, but primarily the licensing and regulatory control of the Mississippi Gaming Commission (the “Mississippi Commission”).
The Mississippi Gaming Control Act (the “Mississippi Act”), which legalized dockside casino gaming in Mississippi, is similar to the Nevada Gaming Control Act. The Mississippi Commission has adopted regulations that are also similar in many respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the Mississippi Commission are based on declarations of public policy that are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing for reliable record keeping and requiring the filing of periodic reports with the Mississippi Commission; (iv) the prevention of cheating and fraudulent practices; (v) providing a source of state and local revenues through taxation and licensing fees; and (vi) ensuring that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi Commission. We believe our compliance with the licensing procedures and regulatory requirements of the Mississippi Commission will not affect the marketability of our securities. Changes in Mississippi law or regulations may limit or otherwise materially affect the types of gaming that may be conducted, and such changes, if enacted, could have an adverse effect on us and our Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming in each of the fourteen counties that border the Gulf Coast or the Mississippi River, but only if the voters in the county have not voted to prohibit gaming in that county. Currently, dockside gaming is permissible in nine of the fourteen eligible counties in the state, and gaming operations have commenced in seven counties. Under Mississippi law, gaming vessels must be located on the Mississippi River or on navigable waters in eligible counties along the Mississippi River, or in the waters of the State of Mississippi lying south of the state in eligible counties along the Mississippi Gulf Coast. The Mississippi Act permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space that may be utilized for gaming.
The Mississippi Act permits substantially all traditional casino games and gaming devices. The Company, RCVP, Bally Gaming, Inc. (“BGI”), and their affiliates are subject to the licensing and regulatory control of the Mississippi Commission. We are registered under the Mississippi Act as a publicly traded corporation (a “Registered
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Corporation”) and holding company of RCVP and BGI. As a Registered Corporation, we are required periodically to submit detailed financial and operating reports to the Mississippi Commission and furnish any other information the Mississippi Commission may require. If we are unable to continue to satisfy the registration requirements of the Mississippi Act, we and our affiliates cannot own or operate gaming facilities or continue to act as a manufacturer and distributor in Mississippi. No person may become a stockholder of, or receive any percentage of profits from, a licensed subsidiary of a Registered Corporation or a holding company without first obtaining licenses and approvals from Mississippi Commission. We and our affiliates have obtained the necessary licenses and approvals from the Mississippi Commission. RCVP must maintain a gaming license from the Mississippi Commission to operate a casino in Mississippi and BGI must maintain a manufacturer and distributor license from the Mississippi Commission to manufacture and distribute gaming products and a wide-area progressive operator license to operate its progressive slot system. Such licenses are issued by the Mississippi Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations.
There are no limitations on the number of licenses that may be issued in Mississippi. Gaming and manufacturer and distributor licenses are not transferable, are issued for a three-year period (and may be renewed for two additional three-year periods) and must be renewed or continued thereafter. In June 2003, RCVP was granted a three-year renewal of its gaming license by the Mississippi Commission, and BGI was granted three-year renewals of its manufacturer and distributor license and its wide-area progressive operator license.
Certain of our officers and employees and the officers, directors, and certain key employees of our licensed subsidiaries must be found suitable or be licensed by the Mississippi Commission. We believe we have obtained, applied for, or are in the process of applying for all necessary findings of suitability with respect to such persons affiliated with us, RCVP or BGI, although the Mississippi Commission, in its discretion, may require additional persons to file applications for findings of suitability. In addition, any person having a material relationship or involvement with us may be required to be found suitable, in which case those persons must pay the costs and fees associated with such investigation. The Mississippi Commission may deny an application for a finding of suitability for any cause it deems reasonable. Changes in certain licensed positions must be reported to the Mississippi Commission. In addition to its authority to deny an application for findings of suitability, the Mississippi Commission can disapprove a change in a licensed position. The Mississippi Commission has the power to require the Company and its registered or licensed subsidiaries to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities.
Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Mississippi. At anytime, the Mississippi Commission has the power to investigate and require the finding of suitability of any record or beneficial stockholder of the Company. The Mississippi Act requires any person who acquires more than 5 percent of any class of voting securities of a Registered Corporation, as reported to the Securities and Exchange Commission (“SEC”), to report the acquisition to the Mississippi Commission, and such person may be required to be found suitable. Also, any person who becomes a beneficial owner of more than 10 percent of any class of voting securities of a Registered Corporation, as reported to the SEC, must apply for a finding of suitability by the Mississippi Commission. The Mississippi Commission generally has exercised its discretion to require a finding of suitability of any beneficial owner of more than 5 percent of any class of voting securities of a Registered Corporation. However, the Mississippi Commission has adopted a policy that permits certain institutional investors to own beneficially up to 15 percent of a class of voting securities of a Registered Corporation without a finding of suitability. If a stockholder who must be found suitable is a corporation, partnership, or trust, it must submit detailed business and financial information including a list of beneficial owners.
Any record or beneficial stockholder required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with the 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 Mississippi Commission 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 person found unsuitable and who holds, directly or indirectly, any beneficial ownership of such securities beyond such time as the Mississippi Commission prescribes may be guilty of a misdemeanor. We may be subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any
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other relationship with us or our Mississippi gaming subsidiaries, the company involved: (i) pays the unsuitable person any dividend or other distribution on that person’s voting securities; (ii) recognizes the exercise, directly or indirectly, of any voting rights conferred by securities held by the unsuitable person; (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances; or (iv) fails to pursue all lawful efforts to require the unsuitable person to divest himself of the securities, including, if necessary, the immediate purchase of the securities for cash at a fair market value.
We may be required to disclose to the Mississippi Commission on request the identities of the holders of any of our debt or other securities. In addition, under the Mississippi Act, the Mississippi Commission may in its discretion require the holders of any debt security of a Registered Corporation to file an application, be investigated, and be found suitable to own the debt security if the Mississippi Commission has reason to believe that the ownership would be inconsistent with the declared policies of the state of Mississippi. Although the Mississippi Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Commission retains the discretion to do so for any reason, including but not limited to a default or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with the investigation. If the Mississippi Commission determines that a person is unsuitable to own a debt security, then the Registered Corporation may be sanctioned, including the loss of its approvals, if without the prior approval of the Mississippi Commission it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by the unsuitable person in connection with those 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.
RCVP and BGI must maintain in Mississippi a current ledger with respect to the ownership of their equity securities, and we must maintain a current list of stockholders in the principal office of RCVP, which list must reflect the record ownership of each outstanding share of any class of our equity securities. The ledger and stockholder lists must be available for inspection by the Mississippi Commission 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 Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We must also render maximum assistance in determining the identity of the beneficial owner.
The Mississippi Act requires that the certificates representing securities of a Registered Corporation bear a legend indicating that the securities are subject to the Mississippi Act and the regulations of the Mississippi Commission. We have received from the Mississippi Commission a waiver of this legend requirement. The Mississippi Commission has the power to impose additional restrictions on the holders of our securities at any time.
Substantially all material loans, leases, sales of securities and similar financing transactions by a Registered Corporation or a licensed gaming subsidiary must be reported to or approved by the Mississippi Commission. A licensed gaming subsidiary may not make a public offering of its securities, but may pledge or mortgage casino facilities. A Registered Corporation may not make a public offering of its securities without the prior approval of the Mississippi Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. Such approval, if given, does not constitute a recommendation or approval of the investment merits of the securities subject to the offering.
Under the regulations of the Mississippi Commission, a Mississippi gaming subsidiary may not guarantee a security issued by an affiliated company pursuant to a public offering, or pledge its assets to secure payment or performance of the obligations evidenced by the security issued by the affiliated company, without the prior approval of the Mississippi Commission. A pledge of the stock of a Mississippi gaming subsidiary and the foreclosure of such a pledge are ineffective without the prior approval of the Mississippi Commission. Moreover, restrictions on the transfer of an equity security issued by a Mississippi gaming subsidiary and agreements not to encumber such securities are ineffective without the prior approval of the Mississippi Commission.
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Changes in control of the Company through merger, consolidation, acquisition of assets, management or consulting agreements, or act or conduct by a person by which he or she obtains control, may not occur without the prior approval of the Mississippi Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Mississippi Commission in a variety of stringent standards prior to assuming control of the Registered Corporation. The Mississippi Commission may also require controlling stockholders, officers, directors, and other persons having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi and Registered Corporations may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi’s gaming industry and to promote Mississippi’s policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi Commission before a Registered Corporation may make exceptional repurchases of voting securities (such as repurchases that treat holders differently) in excess of the current market price and before a corporate acquisition opposed by management may be consummated. Mississippi’s gaming regulations also require prior approval by the Mississippi Commission of a plan of recapitalization proposed by a Registered Corporation’s board of directors in response to a tender offer made directly to the stockholders for the purpose of acquiring control of the Registered Corporation.
Neither we nor any of our subsidiaries may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require determinations that, among other things, there are means for the Mississippi Commission to have access to information concerning the out-of-state gaming operations of the Company and its affiliates. We have previously obtained a waiver of foreign gaming approval from the Mississippi Commission for operations in other states and will be required to obtain the approval or a waiver of such approval from the Mississippi Commission prior to engaging in any additional future gaming operations outside of Mississippi.
If the Mississippi Commission determined that we or a licensed gaming subsidiary violated a gaming law or regulation, the Mississippi Commission could limit, condition, suspend, or revoke our approvals and the license of the subsidiary. In addition, we, the licensed subsidiary, and the persons involved could be subject to substantial fines for each separate violation. Because of such violations, the Mississippi Commission could seek to appoint a supervisor to operate our casino facilities. Limitation, conditioning or suspension of any gaming license or approval or the appointment of a supervisor could (and revocation of any gaming license or approval would) materially adversely affect us and RCVP’s gaming operations or BGI’s manufacturer, distributor, and wide-area progressive operations, as the case may be.
License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Mississippi and to the counties and cities in which a licensed gaming subsidiary’s operations are conducted. Depending on the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly, or annually and are based on (i) a percentage of the gross gaming revenues received by the casino operation; (ii) the number of gaming devices operated by the casino; or (iii) the number of table games operated by the casino. The license fee payable to the State of Mississippi is based upon “gaming receipts” (generally defined as gross receipts less payouts to customers as winnings), and equals four percent (4%) of gaming receipts of $50,000 or less per month, six percent (6%) of gaming receipts that exceed $50,000 but do not exceed $134,000 per month, and eight percent (8%) of gaming receipts that exceed $134,000 per month. The foregoing license fees we pay are allowed as a credit against our Mississippi income tax liability paid for the year. The gross revenue fee imposed by the City of Vicksburg, Mississippi, where RCVP’s casino operations are located, equals approximately 4 percent of gaming receipts.
19
The Mississippi Commission’s regulations require as a condition of licensing or license renewal that an existing licensed gaming establishment’s plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities that amount to at least 25% of the casino cost. We believe the Rainbow Casino is in compliance with this requirement. The Mississippi Commission adopted a change to this regulation increasing the infrastructure requirement to 100 percent; however, the regulation grandfathers existing licensees and applies only to new casino projects and casinos that are not operating at the time of acquisition or purchase by new owners.
In recent years, certain anti-gaming groups proposed for the adoption, through the initiative and referendum process, certain amendments to the Mississippi Constitution that would prohibit gaming in the state. The proposals were declared illegal by the Mississippi courts on constitutional and procedural grounds. The latest ruling was appealed to the Mississippi Supreme Court, which affirmed the decision of the lower court. If another such proposal were to be offered and if a sufficient number of signatures were to be gathered to place a legal initiative on the ballot, it is possible for the voters of Mississippi to consider such a proposal in November 2006. While we are unable to predict whether such an initiative will appear on a ballot or the likelihood of such an initiative being approved by the voters, if such an initiative were passed and gaming were prohibited in Mississippi, it would have a significant adverse effect on us and our Mississippi gaming operations.
The sale of alcoholic beverages by the Rainbow Casino owned and operated by RCVP is subject to the licensing, control and regulation by both the City of Vicksburg and the Alcoholic Beverage Control Division (the “ABC”) of the Mississippi State Tax Commission. The Rainbow Casino area has been designated as a special resort area, which allows the Rainbow Casino to serve alcoholic beverages on a 24-hour basis. The ABC has the full power to limit, condition, suspend or revoke any license for the serving of alcoholic beverages or to place such a licensee on probation with or without conditions. Any such disciplinary action could (and revocation would) have a material adverse effect on the RCVP’s operations. Certain officers and managers of RCVP must be investigated by the ABC in connection with its liquor permits, and changes in certain positions must be approved by the ABC.
New Jersey. BGI is licensed by the New Jersey Casino Control Commission (the “New Jersey Commission”) as a gaming-related casino service industry (“CSI”) in accordance with the New Jersey Casino Control Act (the “Casino Control Act”). We are a holding company, as that term is defined by the Casino Control Act, of BGI and thus are a qualifier in connection with BGI’s CSI license and have been approved as such by the New Jersey Commission.
The New Jersey Commission requires the officers, directors, key personnel, financial sources, and stockholders (in particular those with holdings in excess of 5 percent) of a CSI license holder and its holding and intermediary companies to qualify in accordance with the Casino Control Act. BGI is required to notify the New Jersey Commission of any appointment, nomination, election, resignation, termination, incapacitation, or death of any person or entity otherwise required to qualify pursuant to the Casino Control Act. Such persons and entities may be investigated and may be required to make certain regulatory filings and to disclose and/or to provide consents to disclose personal and financial data. The costs associated with such investigation are typically borne by the applicant.
Louisiana. The manufacture, distribution, servicing, and operation of video draw poker devices (“Devices”) in Louisiana are 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 maintained by a single gaming control board for the regulation of gaming in Louisiana. This Board, created on May 1, 1996, is called the Louisiana Gaming Control Board (the “Louisiana Board”) and oversees all licensing for all forms of legalized gaming in Louisiana (including all regulatory enforcement, and supervisory authority that exists in the state as to gaming on Native American lands). 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”) performs the investigative functions for the Louisiana Board. The laws and regulations of Louisiana are based on policies of maintaining the health, welfare, and safety of the general public and protecting the video gaming industry from elements of organized crime, illegal gambling activities, and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of devices.
20
Video Services, Inc. VSI, the indirect operating subsidiary for our gaming operations in Louisiana, has been granted a license as a device owner by the Division. VSI is a Louisiana Licensee under the terms of the Louisiana Act. The license held by VSI expired at midnight on June 30, 2004, and is subject to renewal for five-year terms thereafter. Annual fees must be paid on or before July 1 in each year regardless of the license expiration date. (Another subsidiary, Southern Video Services, Inc., has been dormant and so the Company allowed its license to lapse.)
The Louisiana Board may deny, impose a condition on, or suspend or revoke a license, renewal, or application for a license for violations of any rules and regulations of the Louisiana Board or any violations of the Louisiana Act. In addition, fines for violations of gaming laws or regulations may be levied against the Louisiana Licensees and the persons involved for each violation of the gaming laws. The license is deemed a pure and absolute privilege and issuance, condition, denial, suspension or revocation of a license is at the discretion of the Louisiana Board under the provisions of the Louisiana Act. A license is not property or a protected interest under the constitution of either the United States or Louisiana.
The Division has the authority to conduct overt and covert investigations of any person involved directly or indirectly in the video gaming industry in Louisiana. These investigations have extended to information regarding a prospective licensee’s and his or her spouse’s immediate family and relatives and their affiliations with certain organizations or other business entities. The investigation may also extend to any person who has or controls more than a 5 percent ownership of, or interest in income or profits in, an applicant for or holder of a license or who is a key employee or who has the ability to exercise significant influence over the licensee. All persons or entities investigated must meet all suitability requirements and qualifications for a licensee. The Louisiana Board may deny an application for licensing for any cause it may deem reasonable. The applicant for licensing must pay a filing fee, which applies to the cost of the investigation.
In order for a corporation to be licensed as an operator or distributor of video poker gaming devices by the Louisiana Board, a majority of the stock of the corporation must be owned by persons who have been domiciled in Louisiana for at least two years prior to the date of the application.
Bally Gaming has an application pending to renew our license as a manufacturer of devices under the Louisiana Gaming Law. In the past, a manufacturer would have to obtain a separate permit to do business with video poker, riverboat, and land-based casino licensees. However, recent changes have been enacted to Louisiana’s Gaming Law to allow manufacturers to apply for and obtain one permit to be able to conduct business in the different gaming venues.
Federal Registration. The operating subsidiaries of the Company that are involved in the manufacture, sale, distribution, or operation of gaming machines are required to register annually with the Attorney General of the United States. All currently required filings have been made.
From time to time, certain legislators have proposed the imposition of a federal tax on gross gaming revenues. No specific proposals for the imposition of such a federal tax are currently pending. However, no assurance can be given that such a tax will not be imposed in the future. Any such tax could have a material adverse effect on our businesses, financial conditions, or results of operations.
Additional Jurisdictions. We, in the ordinary course of our business, routinely consider business opportunities to expand our gaming operations into additional jurisdictions. Although the laws and regulations of the various jurisdictions in which we operate or into which we may expand our gaming operations vary in their technical requirements and are subject to amendment from time to time, virtually all of those jurisdictions require licenses, permits, documentation of qualification, including evidence of financial stability, and other forms of approval for companies engaged in the manufacture, distribution and operation of gaming machines as well as for the officers, directors, major stockholders, and key personnel of such companies.
We and our key personnel have obtained, or applied for, all government licenses, registrations, findings of suitability, permits, and approvals necessary for the manufacture, distribution and, where permitted, operation of gaming machines in the jurisdictions in which we do business. We and the holders of our securities may be subject to the provisions of the gaming laws of each jurisdiction where we or our subsidiaries are licensed or are applying for licensing or conduct business, including, without limitation, Arizona, California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New
21
Jersey, New Mexico, New York, Oklahoma, Pennsylvania, Puerto Rico, South Dakota, Washington, West Virginia, Wisconsin, and the local regulatory authorities within each such state, as well as Australian, Canadian, and other foreign gaming jurisdictions in which Bally Gaming International, Inc. (“BGII”) and its subsidiaries are licensed or conduct business.
Holders of common stock of an entity licensed to manufacture and sell gaming machines, and in particular those with holdings in excess of 5 percent, should note that local laws and regulations may affect their rights regarding the purchase of such common stock and may require such persons or entities to make certain regulatory filings or seek licensing, findings of qualification, or other approvals. In some cases this process may require the holder or prospective holder to disclose or provide consents to disclose personal and financial data in connection with necessary investigations, the costs of which are typically borne by the applicant. The investigative and approval process can take three to six months to complete under normal circumstances.
22
The following table sets forth information regarding our leased properties for our Bally Gaming and Systems business unit, and our casino operations as of June 30, 2004, all of which are fully utilized unless otherwise noted (dollars in 000s):
|
Location |
|
Use |
|
Building |
|
Annual |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sparks, NV |
|
Administrative offices and warehousing |
|
33,384 |
|
$ |
401 |
|
|
Atlantic City, NJ |
|
Sales offices and warehousing |
|
15,800 |
|
136 |
|
|
|
Biloxi, MS |
|
Sales offices |
|
5,000 |
|
47 |
|
|
|
Westchester, IL |
|
Sales offices |
|
4,900 |
|
44 |
|
|
|
Hollywood, FL |
|
Sales offices |
|
3,400 |
|
8 |
|
|
|
Temecula, CA |
|
Sales offices |
|
2,000 |
|
20 |
|
|
|
Huntington Beach, CA |
|
Offices |
|
3,340 |
|
52 |
|
|
|
Atlantic City, NJ |
|
Administrative offices |
|
750 |
|
10 |
|
|
|
San Juan, P R |
|
Sales offices |
|
2,135 |
|
27 |
|
|
|
Las Vegas, NV |
|
Warehousing |
|
86,300 |
|
549 |
|
|
|
Las Vegas, NV |
|
Offices |
|
20,640 |
|
273 |
|
|
|
Absecon, NJ |
|
Direct mail office |
|
5,300 |
|
63 |
|
|
|
Egg Harbor Township, NJ |
|
General and research and development office |
|
15,500 |
|
332 |
|
|
|
Slidell, LA |
|
Offices |
|
1,250 |
|
13 |
|
|
|
Reno, NV |
|
Office/warehouse |
|
30,500 |
|
412 |
|
|
|
Reno, NV |
|
Office |
|
20,284 |
|
365 |
|
|
|
Reno, NV |
|
Warehousing |
|
9,626 |
|
81 |
|
|
|
Fife, WA |
|
Office/warehouse |
|
3,105 |
|
23 |
|
|
|
Fife, WA |
|
Warehousing |
|
1,530 |
|
13 |
|
|
|
Marysville, WA |
|
Warehousing |
|
4,400 |
|
26 |
|
|
|
Las Vegas, NV |
|
Office |
|
2,939 |
|
48 |
|
|
|
Sommerville, NJ |
|
Warehousing |
|
1,000 |
|
12 |
|
|
|
Sommerville, NJ |
|
Lease terminated 8/1/04 |
|
— |
|
73 |
|
|
|
Bellevue, WA |
|
Administrative offices |
|
7,581 |
|
91 |
|
|
|
Pleasanton, CA |
|
Office and storage |
|
3,176 |
|
50 |
|
|
|
Cheektowage, NY |
|
Offices |
|
1,143 |
|
7 |
|
|
|
Vicksburg, MS |
|
Storage |
|
3,000 |
|
21 |
|
|
|
Vicksburg, MS |
|
Administrative offices |
|
1,500 |
|
10 |
|
|
|
Las Vegas, NV (1) |
|
Ground Lease |
|
— |
|
365 |
|
|
|
Shropshire, England |
|
Administrative offices |
|
3,000 |
|
15 |
|
|
|
Hannover, Germany |
|
Administrative offices and warehousing |
|
13,292 |
|
80 |
|
|
|
Hannover, Germany |
|
Administrative offices |
|
248 |
|
10 |
|
|
|
Graz, Austria |
|
Administrative offices |
|
1,184 |
|
11 |
|
|
|
Nice, France |
|
Administrative offices |
|
5,500 |
|
127 |
|
|
|
Montevideo, Uruguay |
|
Administrative offices |
|
1,367 |
|
28 |
|
|
|
Province of Cordoba, Argentina |
|
Administrative offices |
|
969 |
|
4 |
|
|
|
Lima, Peru |
|
Administrative offices |
|
2,928 |
|
15 |
|
|
(1) Lease consists of ground lease for parking.
23
The following table sets forth information regarding properties owned by us as of June 30, 2004 for our casino operation business unit, all of which are fully utilized unless otherwise noted:
|
Location |
|
Use |
|
Building |
|
|
Vicksburg, MS |
|
Casino |
|
33,000 |
|
|
Vicksburg, MS |
|
Entertainment facility |
|
20,000 |
|
|
Vicksburg, MS |
|
Administrative offices |
|
3,200 |
|
|
Vicksburg, MS |
|
Vacant-Land |
|
— |
|
See Note 12 to the Consolidated Financial Statements for information as to our lease commitments with respect to the foregoing rental properties. We believe our facilities are suitable for our needs and we have no future expansion plans that would make these properties inadequate.
The following table sets forth information regarding our discontinued operations leased properties as of June 30, 2004 (exclusive of space leases), all of which are fully utilized unless otherwise noted (dollars in 000s):
|
Location |
|
Use |
|
Building |
|
Annual |
|
|
|
New Orleans, LA |
|
Louisiana route operations |
|
6,000 |
|
$ |
72 |
|
|
Metairie, LA |
|
OTB operation |
|
5,000 |
|
$ |
57 |
|
|
LaPlace, LA |
|
OTB operation |
|
2,500 |
|
$ |
51 |
|
|
Harahan, LA |
|
OTB operation |
|
2,300 |
|
$ |
72 |
|
Litigation
On September 25, 1995, Bally Gaming International Inc, (“BGII”) was named as a defendant in a class action lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on behalf of himself and all others similarly situated. The plaintiffs filed suit against BGII and approximately forty-five other defendants. Each defendant is involved in the gaming business as a gaming machine manufacturer, distributor, or casino operator. The class action lawsuit arises out of alleged fraudulent marketing and operation of casino video poker machines and electronic slot machines. The plaintiffs allege that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people into playing their gaming machines based on a false belief concerning how those machines actually operate as well as the extent to which there is actually an opportunity to win on any given play. The plaintiffs allege that the defendants’ actions constitute violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give rise to claims of common law fraud and unjust enrichment. The plaintiffs are seeking monetary damages in excess of $1.0 billion, and are asking that any damage awards be trebled under applicable Federal law. In June 2002, the Federal district court denied the plaintiffs’ motion for class action certification. On August 10, 2004, the Ninth Circuit Court of Appeals affirmed the district court’s denial of class action certification. Plaintiffs have until early November 2004 to ask the U.S. Supreme Court to consider the case. Management believes the plaintiffs’ lawsuit to be without merit. We will continue to pursue all legal defenses available to us.
In June 2004, putative class actions were filed against Alliance Gaming Corporation and its officers, Robert Miodunski, Robert Saxton, Mark Lerner, and Steven Des Champs, in the Federal District Court for the District of Nevada. The nearly identical complaints allege violations of the Securities Exchange Act of 1934 stemming from revised earnings guidance, declines in the stock price, and sales of stock by insiders. Plaintiffs have filed a motion to consolidate all of the cases and appoint a lead plaintiff. A hearing date has not been scheduled. Alliance believes the lawsuits are without merit and intends to vigorously defend itself and its officers. In addition, in July 2004 two derivative lawsuits were filed in Nevada state court against the members of the board of directors and the officers listed above. The Company is named as a nominal defendant in the derivative lawsuits as the claims are purportedly asserted for the benefit of the Company. These lawsuits assert claims for breach of fiduciary duty and waste of corporate assets arising out of the same events as those giving rise to the class actions described above. These two cases have been consolidated and plaintiffs have until September 20, 2004 to file a consolidated complaint.
24
We are also a party to various lawsuits relating to routine matters incidental to our 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 our financial position.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On December 12, 2002 our common stock became listed on the New York Stock Exchange under the symbol “AGI”. Formerly our common stock was traded on the NASDAQ Index under the symbol “ALLY”. The following table sets forth the high and low closing bid price of the Common Stock as reported by the NYSE or NASDAQ for the periods indicated.
|
|
|
Price Range of |
|
||||
|
|
|
High |
|
Low |
|
||
|
|
|
|
|
|
|
||
|
Fiscal Year Ended June 30, 2004 |
|
|
|
|
|
||
|
1st Quarter |
|
$ |
23.78 |
|
$ |
19.01 |
|
|
2nd Quarter |
|
27.37 |
|
20.72 |
|
||
|
3rd Quarter |
|
33.45 |
|
23.27 |
|
||
|
4th Quarter |
|
34.00 |
|
15.63 |
|
||
|
|
|
|
|
|
|
||
|
Fiscal Year Ended June 30, 2003 |
|
|
|
|
|
||
|
1st Quarter |
|
$ |
16.06 |
|
$ |
11.55 |
|
|
2nd Quarter |
|
18.01 |
|
13.31 |
|
||
|
3rd Quarter |
|
17.30 |
|
13.38 |
|
||
|
4th Quarter |
|
19.03 |
|
14.50 |
|
||
As of September 1, 2004, we had approximately 1,000 holders of record of our Common Stock.
We have never declared or paid cash dividends on our Common Stock. We intend to follow a policy of retaining earnings, if any, to finance growth of our business and do 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 our Board of Directors and will depend on our profitability, our ability to pay dividends under the terms of our bank credit agreement and our financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.
25
Equity Compensation Plans
The following table sets forth information as of June 30, 2004 with respect to our equity compensation plans that provides for the issuance of stock options to purchase our common stock:
|
|
|
Number of Securities |
|
Wt. average |
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
|
5,702,733 |
|
$ |
15.50 |
|
2,721,932 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
— |
|
— |
|
— |
|
|
|
Total |
|
5,702,733 |
|
$ |
15.50 |
|
2,721,932 |
|
26
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited consolidated financial statements. 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. The amounts shown below have been restated to conform to present the route operations, Bally Wulff and Rail City Casino businesses as discontinued operations.
|
|
|
Fiscal Years Ended June 30, |
|
|||||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
(In 000s, except per share amounts) |
|
|||||||||||||
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total revenues from continuing operations |
|
$ |
488,876 |
|
$ |
386,381 |
|
$ |
275,914 |
|
$ |
214,098 |
|
$ |
184,005 |
|
|
Unusual items (1) |
|
12,293 |
|
— |
|
— |
|
6,489 |
|
2,164 |
|
|||||
|
Operating income |
|
98,722 |
|
84,972 |
|
52,203 |
|
29,449 |
|
5,789 |
|
|||||
|
Income (loss) from continuing operations before income taxes |
|
67,918 |
|
57,718 |
|
23,654 |
|
(7,627 |
) |
(28,232 |
) |
|||||
|
Income tax expense (benefit) (2) |
|
24,293 |
|
20,556 |
|
(38,440 |
) |
(1,313 |
) |
(940 |
) |
|||||
|
Net income (loss) from continuing operations |
|
43,625 |
|
37,162 |
|
62,094 |
|
(6,314 |
) |
(27,292 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Loss on sale of wall machines and amusement games unit, net (3) |
|
— |
|
(25,358 |
) |
— |
|
— |
|
— |
|
|||||
|
Gain on sale of Rail City Casino, net |
|
14,329 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Gain on sale of Nevada Route, net |
|
9,124 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Income (loss) from discontinued operations of wall machines and amusement games unit, net (4) |
|
(2,172 |
) |
(895 |
) |
(17,167 |
) |
2,453 |
|
(5,740 |
) |
|||||
|
Income from discontinued operations of Nevada Route, net |
|
14,539 |
|
4,059 |
|
12,580 |
|
12,339 |
|
11,677 |
|
|||||
|
Income from discontinued operations of Louisiana Route, net |
|
1,768 |
|
1,288 |
|
1,439 |
|
1,540 |
|
2,438 |
|
|||||
|
Income from discontinued operations of Rail City, net |
|
3,301 |
|
3,267 |
|
4,903 |
|
4,464 |
|
3,882 |
|
|||||
|
Income (loss) from discontinued operations |
|
40,889 |
|
(17,639 |
) |
1,755 |
|
20,796 |
|
12,257 |
|
|||||
|
Net income (loss) |
|
$ |
84,514 |
|
$ |
19,523 |
|
$ |
63,849 |
|
$ |
14,482 |
|
$ |
(15,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Basic earning (loss) per share:(5) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Continuing operations |
|
$ |
0.87 |
|
$ |
0.76 |
|
$ |
1.34 |
|
$ |
(0.14 |
) |
$ |
(0.66 |
) |
|
Discontinued operations |
|
$ |
0.82 |
|
$ |
(0.36 |
) |
$ |
0.04 |
|
$ |
0.49 |
|
$ |
0.29 |
|
|
Total |
|
$ |
1.69 |
|
$ |
0.40 |
|
$ |
1.38 |
|
$ |
0.35 |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Diluted earning (loss) per share:(5) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Continuing operations |
|
$ |
0.85 |
|
$ |
0.74 |
|
$ |
1.30 |
|
$ |
(0.14 |
) |
$ |
(0.66 |
) |
|
Discontinued operations |
|
$ |
0.80 |
|
$ |
(0.35 |
) |
$ |
0.04 |
|
$ |
0.48 |
|
$ |
0.29 |
|
|
Total |
|
$ |
1.65 |
|
$ |
0.39 |
|
$ |
1.34 |
|
$ |
0.34 |
|
$ |
(0.37 |
) |
27
|
|
|
As of June 30, |
|
|||||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
(In 000s) |
|
|||||||||||||
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and cash equivalents |
|
$ |
172,726 |
|
$ |
38,884 |
|
$ |
31,800 |
|
$ |
29,129 |
|
$ |
10,914 |
|
|
Working capital (6) |
|
281,956 |
|
152,965 |
|
101,788 |
|
53,297 |
|
56,914 |
|
|||||
|
Total assets |
|
750,654 |
|
525,165 |
|
459,880 |
|
371,017 |
|
352,930 |
|
|||||
|
Total long term debt, including current maturities |
|
428,955 |
|
345,215 |
|
341,793 |
|
339,540 |
|
321,601 |
|
|||||
|
Total stockholders’ equity (deficiency) |
|
200,803 |
|
91,630 |
|
45,986 |
|
(39,205 |
) |
(50,795 |
) |
|||||
(1) The Company has recorded the following unusual items:
• During the year ended June 30, 2004, we recorded a refinancing charge of $12.3 million which is more fully disclosed in Note 8 in the Consolidated Financial Statements.
• During the year ended June 30, 2001, the Company incurred costs and expenses to sell the Nevada route operations totaling $6.5 million consisting primarily of the break-up fee paid by the Company to terminate the sale.
• During the year ended June 30, 2000, gains for the sale of certain gaming management and development rights totaled $4.0 million.
• During the year ended June 30, 2000, restructuring and related charges totaled approximately $6.2 million. The restructuring and related costs were incurred pursuant to a plan adopted by the Company for staff reductions throughout the Company.
(2) During the year ended June 30, 2002, we recorded a tax benefit resulting from the reduction of previously recorded valuation reserves against net deferred tax assets, primarily net operating loss carry forwards, totaling $37 million.
(3) In June 30, 2003, we entered into a definitive agreement for the sale of Bally Wulff and we wrote down the carrying value of the remaining net assets of Bally Wulff to the sale price of $16.5 million, resulting in a charge of $25.4 million, net of tax (included in discontinued operations).
(4) During the year ended June 30, 2002, we recorded a non-cash charge to write-down goodwill and other long-lived assets of Bally Wulff, totaling $24.1 million (included in discontinued operations).
(5) The earnings per share amounts have been restated for all periods presented to reflect the two-for-one stock splits effective August 21, 2001 and April 9, 2002.
(6) Excludes assets and liabilities of discontinued operations held for sale.
28
|
ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
Certain matters in this Form 10-K and our other filings with the Securities and Exchange Commission, including, without limitation, certain matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Quantitative and Qualitative Disclosures about Market Risk, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby. Those statements reflect the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, future events and financial trends affecting the Company.
Forward-looking statements are typically identified by the words “believes,” “expects,” “anticipates,” and similar expressions. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the impact of competition and uncertainties concerning such matters as the Company’s ability to service debt, product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, the ability to integrate future acquisitions, strict regulation by gaming authorities, the outcome of pending litigation matters including the pending securities class actions, gaming taxes, currency fluctuations and market risk. Certain of these factors are discussed in the “Risk Factors” section below. The Company undertakes no obligation to publicly update or revise these forward-looking statements because of new information, future events or otherwise.
Introduction
Operating under the name Bally Gaming and Systems, we are a worldwide leader in designing, manufacturing and distributing traditional and nontraditional gaming machines, having marketed over 100,000 gaming machines during the past five years, and computerized monitoring systems for gaming facilities. We also own and operate a dockside casino in Vicksburg, Mississippi, which has approximately 12 table games and approximately 930 gaming devices (“Casino Operations”). Further information about our business units is contained in the notes to the Consolidated Financial Statements and the “Business” section.
Sources of Revenue
We recognize revenue from the following sources: sales of gaming machines, operation of wide-area progressive systems and lease of gaming machines, sales of computerized monitoring systems and related recurring hardware and software maintenance revenue, and from casino operations.
Revenue from sales of gaming machines is generally recognized at the time products are shipped and title has passed to the customer. Games placed with customers on a trial basis are not recognized as revenue until the trial period ends and the customer accepts the games. The Company sells gaming equipment on normal credit terms (generally 2%, net 30) and offers financing to qualified customers for periods generally between 6 and 48 months.
Our gaming operations division earns revenues from recurring revenue sources that consist of the operation of wide-area progressive jackpot systems and revenues from gaming machines placed in a casino on a daily lease or rental basis. Revenue from these sources is recognized based on the contractual terms of the participation or rental agreements and is generally based on a share of money wagered, a share of the net winnings, or on a fixed daily rental rate basis.
In fiscal year 2003, Bally Gaming and Systems responded to a proposal by the New York Lottery to provide VLT devices at race tracks in the state of New York. Through the competitive bidding process, we were awarded approximately 25% of the initial VLT’s to be installed. The financial model for this market requires the manufacturer to build, deploy and maintain the VLT’s in return for a share of the net win from the VLT’s. The first games were installed at the Saratoga race track in January 2004, and have since been followed by installations at three additional tracks. SDG was also a successful bidder in the New York Lottery VLT market, having been awarded approximately 27% of the units. The successful SDG proposal was accomplished in the period before SDG was acquired by Alliance, and the combined share for Bally and SDG in this market is currently approximately 52%.
29
Revenue from sales of computerized monitoring systems is recognized in accordance with the AICPA’s Statement of Position 97-2 (“SOP 97-2”) “Software Revenue Recognition”, and Emerging Issues Task Force (“EITF”) issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In accordance with the provisions of SOP 97-2 and EITF 00-21, the contracts for the sale of computerized monitoring units are considered to have “multiple elements” because they include hardware, software, installation, supervision, training, and post-contract customer support. Accordingly, revenues from the sale of systems are deferred and begin to be recognized at the point when the system is deemed to be functionally operational, and the residual method is used to recognize revenue for the remaining elements as they are delivered, each having vendor-specific objective evidence of relative fair values. Post-contract customer support revenues are recognized over the period of the support agreement (generally one year).
In accordance with industry practice, we recognize gaming revenues in our casino operations as the net win from gaming machine operations, which is the difference between coins and currency deposited into the machines and payments to customers.
Components of Expenses
Our most significant expenses are (1) cost of sales, (2) research and development expenses, (3) advertising and promotional expenses and (4) administrative expenses. We strive to control these expenses by working closely with division unit leaders and by centralizing functions such as finance, accounting, legal, human resources and management information systems. We also use our market presence and purchasing power to negotiate favorable rates with vendors and suppliers.
Our research and development costs are driven by the development cycle for hardware which vary between a few months for minor revisions to more than a year for major design changes or for changes made by various slot manufacturers with which Systems’ product must communicate and be physically integrated. Software development results in (i) periodic product releases that include new features that extend and enhance casino enterprise systems; (ii) periodic maintenance releases that enable casino operators to correct problems or improve the usability of the system; and (iii) documentation needed to install and use the system.
Depreciation and amortization of tangible and intangible assets historically have been significant factors in determining our overall profitability. Based on intangible assets currently held by us and the preliminary allocation of the aggregate purchase price of acquisitions completed during the year ended June 30, 2004, we expect the total amortization expense incurred will continue to increase.
Basis of Presentation
Our results include the accounts of Alliance Gaming Corporation, and its wholly-owned and partially-owned, controlled subsidiaries.
30
Overall Consolidated Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) |
|
|||||
|
|
|
2004 |
|
% Rev |
|
2003 |
|
% Rev |
|
2002 |
|
% Rev |
|
04 vs 03 |
|
03 vs 02 |
|
|||
|
|
|
(dollars in millions, except earnings per share) |
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Revenues |
|
$ |
488.9 |
|
100 |
% |
$ |
386.4 |
|
100 |
% |
$ |
275.9 |
|
100 |
% |
27 |
% |
40 |
% |
|
Gross profit |
|
291.2 |
|
60 |
% |
220.8 |
|
57 |
% |
156.2 |
|
57 |
% |
32 |
% |
41 |
% |
|||
|
Income from operations |
|
98.7 |
|
20 |
% |
85.0 |
|
22 |
% |
52.2 |
|
19 |
% |
16 |
% |
63 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income from continuing operations |
|
$ |
43.6 |
|
9 |
% |
$ |
37.2 |
|
10 |
% |
$ |
62.1 |
|
22 |
% |
17 |
% |
(40 |
)% |
|
Income (loss) from discontinued operations |
|
40.9 |
|
8 |
% |
(17.6 |
) |
(5 |
)% |
1.8 |
|
1 |
% |
332 |
% |
(1,078 |
)% |
|||
|
Net income |
|
$ |
84.5 |
|
17 |
% |
$ |
19.6 |
|
5 |
% |
$ |
63.9 |
|
23 |
% |
331 |
% |
(69 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Continuing operations |
|
$ |
0.85 |
|
|
|
$ |
0.74 |
|
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
Discontinued operations |
|
0.80 |
|
|
|
(0.35 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|||
|
Net income |
|
$ |
1.65 |
|
|
|
$ |
0.39 |
|
|
|
$ |
1.34 |
|
|
|
|
|
|
|
Fiscal 2004 vs Fiscal 2003
• Revenues from continuing operations increased primarily due to the following:
• Acquisition of SDG which contributed $61.5 million in revenues including $49.6 million in game sale revenues, and $11.9 million from its gaming operations.
• Decrease in Bally Gaming new unit sales revenues of $4.7 million primarily due to weaknesses in the European markets (particularly in Russia), partially offset by stronger domestic unit sales. The reduced sales in Europe are due to a variety of factors including changes in certain sales executives who cover this area, and poor performance of certain product features which were more successful in domestic markets. Although we are expending significant resources to improve the product offerings in the non-domestic markets, there can be no assurance that we will be able to return to historical unit sales levels in those markets.
• Increase in Gaming Systems revenue of $32.8 million driven by strong growth in both hardware and software sales driven by strong sales to certain multi-property operators. Given the size of the investments by casino operators in such systems, there can be no assurances that such sales to multi-property operators will continue at such levels in the future.
• Increase in Gaming Operations revenue which contributed an incremental $11.6 million driven by the larger installed base of recurring revenue games.
• Gross profit improved due to increases in higher margin system sales and gaming operations sales.
• Income from operations as a percentage of revenue decreased primarily as a result of higher research and development costs.
• Net Income, including discontinued operations, totaled $84.5 million or $1.65 per diluted share, compared to $19.5 million or $0.39 in the prior year which included a loss on the sale of Bally Wulff of $25.4 million, or $0.51 per diluted share.
Fiscal 2003 vs Fiscal 2002
• Revenues from continuing operations increased due to the following:
• Gaming unit sales revenue increased $111.7 million or 50% due to an increase in game sale revenues driven by a 49% increase in new units sold.
• Gaming Systems revenues increased $26.7 million or 41% driven by higher hardware sales and sales of software licenses for the industry’s leading single-wire ticket-in, ticket out (“TITO”) cashless solution, eTICKET™.
• Increase in Gaming Operations revenue driven by an increase of 11% in the average installed base of wide-area progressive (WAP) and daily-fee games deployed.
• Gross profit increased primarily due to the increase in higher margin system sales and recurring revenue through our gaming operations division.
31
• Total net income decreased to $19.5 million or $0.39 per diluted share in fiscal 2003 from $63.8 million or $1.34 per diluted share in fiscal 2002 primarily as a result of a provision for income taxes of $20.6 million in fiscal 2003 compared to a one-time tax benefit due to the reduction of reserves against its net operating loss carryforwards of $37.0 million in the fiscal 2002.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) |
|
|||||
|
|
|
2004 |
|
% Rev |
|
2003 |
|
% Rev |
|
2002 |
|
% Rev |
|
04 vs 03 |
|
03 vs 02 |
|
|||
|
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Selling, general and administrative |
|
$ |
122.0 |
|
25 |
% |
$ |
93.9 |
|
24 |
% |
$ |
72.5 |
|
26 |
% |
30 |
% |
29 |
% |
|
Depreciation and amortization |
|
31.6 |
|
6 |
% |
20.5 |
|
5 |
% |
13.9 |
|
5 |
% |
54 |
% |
47 |
% |
|||
|
Research and development |
|
36.6 |
|
7 |
% |
20.0 |
|
5 |
% |
15.0 |
|
5 |
% |
83 |
% |
33 |
% |
|||
|
Provision for bad debts |
|
2.3 |
|
1 |
% |
1.4 |
|
1 |
% |
2.5 |
|
1 |
% |
64 |
% |
(44 |
)% |
|||
|
Total |
|
$ |
192.5 |
|
39 |
% |
$ |
135.8 |
|
35 |
% |
$ |
103.9 |
|
37 |
% |
42 |
% |
31 |
% |
Fiscal 2004 vs Fiscal 2003
Fiscal 2004 operating expenses increased over 2003 primarily due to the acquisitions of SDG, Mindplay and Crown and to the launch of the New York Lottery resulting in increases in all operating expense categories. Fiscal 2004 operating expenses also increased as a result of:
• Legal costs related to the protection of our intellectual property rights.
• Higher payroll and payroll related cost primarily in product development and customer service.
• Increase in our investment in research and development costs primarily as a result of the EVO TM platform development and advance product development.
• Depreciation and amortization due to an increase in our installed base of proprietary gaming units.
Fiscal 2003 vs Fiscal 2002
Fiscal 2003 operating expenses increased over 2002 as a result of:
• Legal costs related to the protection of our intellectual property rights.
• Higher payroll and payroll related costs primarily in product development and manufacturing.
• Increase in our investment in research and development costs.
Other Income (Expense) and Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) |
|
|||||
|
|
|
2004 |
|
% Rev |
|
2003 |
|
% Rev |
|
2002 |
|
% Rev |
|
04 vs 03 |
|
03 vs 02 |
|
|||
|
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Interest income |
|
$ |
2.3 |
|
1 |
% |
$ |
0.2 |
|
— |
|
$ |
0.4 |
|
— |
|
1,050 |
% |
(50 |
)% |
|
Interest expense |
|
(17.9 |
) |
(4 |
)% |
(25.6 |
) |
(7 |
)% |
(28.2 |
) |
(10 |
)% |
(30 |
)% |
(9 |
)% |
|||
|
Minority interest |
|
(2.3 |
) |
(1 |
)% |
(2.0 |
) |
(1 |
)% |
(1.9 |
) |
(1 |
)% |
15 |
% |
5 |
% |
|||
|
Refinancing Charge |
|
(12.3 |
) |
(2 |
)% |
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||
|
Miscellaneous, net |
|
(0.5 |
) |
— |
|
0.2 |
|
— |
|
1.2 |
|
— |
|
(150 |
)% |
(117 |
)% |
|||
|
Total other income (expense) |
|
(30.7 |
) |
(6 |
)% |
(27.2 |
) |
(7 |
)% |
(28.5 |
) |
(11 |
)% |
(13 |
)% |
3 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Provision for income taxes |
|
24.3 |
|
5 |
% |
20.6 |
|
5 |
% |
(38.4 |
) |
(14 |
)% |
18 |
% |
(153 |
)% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Tax rate |
|
35.8 |
% |
|
|
35.6 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
|||
Fiscal year 2004 other expense increased to $30.7 million from $27.6 million in the fiscal year 2003 primarily as a result of refinancing our debt in September 2003 which resulted in a charge of $12.3 million. This charge was offset by a reduction in interest expense of $7.7 million as a result of the refinancing.
Our effective income tax rate in fiscal 2003 was 36%. In fiscal 2002, we reversed the reserves against our net operating loss carry forwards, and recorded a one time tax benefit of $37.0 million.
32
Liquidity and Capital
As of June 30, 2004, we had $173 million in cash and cash equivalents. In addition we had net working capital of approximately $282 million (excluding assets and liabilities of discontinued operations), an increase of approximately $129 million from June 30, 2003, which is explained in the working capital section below. Consolidated cash and cash equivalents at June 30, 2004, include approximately $2.1 million of cash utilized in our Casino Operations that is held in vaults, cages or change banks. Additionally, pursuant to various state gaming regulations, we maintain certain cash accounts to ensure availability of funds to pay wide-area progressive jackpot awards, which totaled approximately $15.6 million at June 30, 2004. In addition, we purchase U.S. Treasury Strip Securities for the benefit of jackpot winners who elect to receive annual instalment payments. These securities are presented as restricted long-term investments in the accompanying consolidated balance sheets, and totaled $2.5 million and $0.9 million as of June 30, 2004 and 2003, respectively.
In September 2003, we completed a refinancing of our senior bank credit facility, which now consists of a $275.0 million term loan (later increased to $350.0 million), and a $125.0 million revolving credit facility (“the Refinancing”). Proceeds from the term loan were used to repay our existing bank term loans totaling approximately $188 million, repay $150.0 million of our 10% Senior Subordinated Notes and to pay transaction fees and expenses. The new term loan has a 1% per year mandatory principal amortization, with a 6 year maturity and bears interest at LIBOR plus 2.75% (later reduced to 2.50%). The revolving credit facility commitment decreases ratably over the 5 year term of the commitment to a 60% balloon and bears interest at LIBOR plus 2.50%. The bank loan contains certain financial and operational covenants, however there are no borrowing base requirements. As of June 30, 2004 we are in compliance with the covenants.
Our new credit facility contains a number of significant covenants that, among other things, restrict our ability and certain of our subsidiaries to dispose of assets, incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, enter into certain acquisitions, repurchase equity interests or subordinated indebtedness, issue or sell equity interests of our subsidiaries, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. There can be no assurance that such restrictions will not adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. In addition, the bank credit facility also requires us to maintain compliance with certain financial ratios. Our ability to comply with such ratios may be affected by events beyond our control. A breach of any of these covenants or our inability to comply with the required financial ratios could result in a default under the bank credit facility. In the event of any such default, the lenders under the credit facility could elect to declare all borrowings outstanding under the bank credit facility, together with accrued interest and other fees, to be due and payable and to require us to apply all of our available cash to repay such borrowings. If we were unable to repay any such borrowings when due, the lenders could proceed against our collateral. If the indebtedness under the bank credit facility were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
Our obligation to make principal and interest payments on outstanding indebtedness, and to comply with the covenants in the agreements governing borrowings under the bank credit facility, will have several important effects on our future operations including the following: (i) the portion of our cash flow from operations which will be dedicated to the payment of principal and interest on our indebtedness will not be available for other purposes; (ii) the bank facility borrowings are at variable rates of interest, which could result in higher expense in the event of increases in interest rates; (iii) we may be more vulnerable to downturns in our business or in the general economy and may be restricted from making acquisitions, introducing new technologies or exploiting business opportunities; and (iv) our ability to obtain additional financing in the future for working capital, capital expenditures, general corporate or other purposes may be impaired. Additionally, our ability to meet our debt service obligations and to reduce our total debt will be dependent upon our future performance, which will be subject to general economic and regulatory conditions and to financial, business and other factors affecting our operation, many of which are beyond our control.
As a result of the sale of UCMC and Rail City, the terms of the bank loan agreement requires us to use approximately 50% of the net proceeds (as defined in the agreement) to reduce the term loan and revolver principal balances on a pro rata basis. See also Contingent Commitments section.
Cash flows from operating activities are derived from the cash receipts from the sale of goods and services, from the operation of wide area progressive systems, lease payments and monthly cash receipts from maintenance agreements for our casino systems customers. In addition, we generate cash through our casino operations. We utilize our cash to acquire materials for the manufacture of goods for resale or lease, payroll and all other selling, general and administrative expenses. Management believes that cash flows from operating activities, cash and cash equivalents held and the availability of the revolving credit facility commitment will provide us with sufficient capital resources and liquidity. At June 30, 2004, we had no material commitments for capital expenditures.
Working Capital
The following table presents the components of consolidated working capital at June 30, 2004 and 2003, excluding assets and liabilities of discontinued operations (dollars in 000s):
|
|
|
Balance at June 30, |
|
|
|
|||||
|
|
|
2004 |
|
2003 |
|
Change |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash and cash equivalents |
|
$ |
172,726 |
|
$ |
38,884 |
|
$ |
133,842 |
|
|
Accounts and notes receivable, net |
|
129,779 |
|
98,368 |
|
31,411 |
|
|||
|
Inventories, net |
|
61,135 |
|
32,102 |
|
29,033 |
|
|||
|
Deferred tax assets, net |
|
20,054 |
|
44,821 |
|
(24,767 |
) |
|||
|
Other current assets |
|
12,420 |
|
8,010 |
|
4,410 |
|
|||
|
Total current assets |
|
396,114 |
|
222,185 |
|
173,929 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Accounts payable |
|
37,515 |
|
22,726 |
|
14,789 |
|
|||
|
Jackpot liabilities |
|
12,075 |
|
10,588 |
|
1,487 |
|
|||
|
Accrued liabilities |
|
51,469 |
|
31,438 |
|
20,031 |
|
|||
|
Taxes payable |
|
7,233 |
|
931 |
|
6,302 |
|
|||
|
Current maturities of long-term debt |
|
5,866 |
|
3,537 |
|
2,329 |
|
|||
|
Total current liabilities |
|
114,158 |
|
69,220 |
|
44,938 |
|
|||
|
Net working capital |
|
$ |
281,956 |
|
$ |
152,965 |
|
$ |
128,991 |
|
33
The primary fluctuations contributing to the increase in working capital were:
• A net increase in accounts and notes receivable resulting from an increase in revenue and the acquisition of SDG in the Bally Gaming and Systems business unit.
• An increase in inventory due to a larger backlog of participation units.
• A decrease in deferred tax assets due primarily to the sale of our Nevada route operations and Rail City.
• The impact of foreign exchange fluctuations between the dollar and the euro dollar on all working capital categories.
• Cash received upon sale of the Nevada route, Rail City and Bally Wulff.
Cash Flow
During the year ended June 30, 2004, we generated $110.3 million of cash flows from operating activities of continuing operations, compared to $38.1 million in the prior year. This increase in cash flow was driven by the increased revenue, gross margins, accounts payable, and accrued liabilities in 2004, offset by the increase in accounts receivable and inventory.
During the year ended June 30, 2004, cash flow used in investing activities totaled $32.8 million due to the following:
• Cash provided from the sale of the Nevada route operations of $100 million, Rail City of $37.9 million and Bally Wulff of $16.5 million.
• Cash used in acquisitions as follows (see Note 3 to the Consolidated Financial Statements for assets and liabilities assumed in the acquisitions)
• SDG totaled $108.6 million
• MindPlay totaled $11.0 million
• Crown totaled $3.9 million
• Capital expenditures of $11.8 million
• Costs incurred to produce participation games totaling $38.1 million
• Additions to other long-term assets of $14.5 million
During the year ended June 30, 2004, $73.8 million cash was provided by financing activities of continuing operations resulting from a $70 million increase in term loans and $350.0 million of proceeds from the issuance of long-term debt and $7.3 million of cash provided from the exercise of stock options, offset by the $337.6 million payoff of debt from refinancing, $7.0 million of refinancing costs and $5.4 million of premium paid on the early redemption of the subordinated notes and principal payments on long term debt totaling $3.5 million.
Customer Financing
Management believes that customer financing terms and leasing have become an increasingly important competitive factor for the Bally Gaming and Systems business units. Competitive conditions sometimes require Bally Gaming and Systems to grant extended payment terms on gaming machines, systems and other gaming equipment, especially for sales in emerging markets. While these financings are normally collateralized by such equipment, the resale value of the collateral in the event of default may be less than the amount financed. Accordingly, we have greater exposure to the financial condition of our customers in emerging markets than had historically been the case in established markets like Nevada and Atlantic City.
Euro Currency Conversion
Our European subsidiaries use the euro as its functional currency. The euro currency replaced the primarily all other European currencies after a phase in period, which began January 1, 1999 and was fully adopted in January 2002.
34
Results of Operations
The following table reconciles our earnings before interest, taxes, depreciation and amortization and refinance charge (“EBITDA”) to our consolidated net income from continuing operations (in 000s):
|
|
|
Years ended June 30, |
|
|||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income from continuing operations |
|
$ |
43,625 |
|
$ |
37,162 |
|
$ |
62,094 |
|
|
Income tax expense (benefit) |
|
24,293 |
|
20,556 |
|
(38,440 |
) |
|||
|
Other expense |
|
2,830 |
|
1,829 |
|
698 |
|
|||
|
Interest expense, net |
|
15,681 |
|
25,425 |
|
27,851 |
|
|||
|
Refinancing charge |
|
12,293 |
|
— |
|
— |
|
|||
|
Operating income |
|
98,722 |
|
84,972 |
|
52,203 |
|
|||
|
Depreciation and amortization |
|
31,565 |
|
20,462 |
|
13,929 |
|
|||
|
EBITDA from continuing operations |
|
$ |
130,287 |
|
$ |
105,434 |
|
$ |
66,132 |
|
The following tables reconcile operating income by business segment to EBITDA:
For the year ended June 30, 2004 (in 000s):
|
|
|
Operating |
|
Depreciation |
|
EBITDA |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Bally Gaming and Systems |
|
$ |
96,034 |
|
$ |
27,260 |
|
$ |
123,294 |
|
|
Casino Operations |
|
16,942 |
|
2,780 |
|
19,722 |
|
|||
|
Corporate expenses |
|
(14,254 |
) |
1,525 |
|
(12,729 |
) |
|||
|
|
|
$ |
98,722 |
|
$ |
31,565 |
|
$ |
130,287 |
|
|
|
|
|
|
|
|
|
|
|||
|
For the year ended June 30, 2003 (in 000s): |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
Operating |
|
Depreciation |
|
EBITDA |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Bally Gaming and Systems |
|
$ |
82,879 |
|
$ |
16,002 |
|
$ |
98,881 |
|
|
Casino Operations |
|
15,306 |
|
2,174 |
|
17,480 |
|
|||
|
Corporate expenses |
|
(13,213 |
) |
2,286 |
|
(10,927 |
) |
|||
|
|
|
$ |
84,972 |
|
$ |
20,462 |
|
$ |
105,434 |
|
|
|
|
|
|
|
|
|
|
|||
|
For the year ended June 30, 2002 (in 000s): |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
Operating |
|
Depreciation |
|
EBITDA |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Bally Gaming and Systems |
|
$ |
47,172 |
|
$ |
10,236 |
|
$ |
57,408 |
|
|
Casino Operations |
|
17,593 |
|
1,491 |
|
19,084 |
|
|||
|
Corporate expenses |
|
(12,562 |
) |
2,202 |
|
(10,360 |
) |
|||
|
|
|
$ |
52,203 |
|
$ |
13,929 |
|
$ |
66,132 |
|
35
The following table reconciles our earnings before interest, taxes, depreciation and amortization (“EBITDA”) to our consolidated net income (loss) from our discontinued operations (in 000s):
|
|
|
Years ended June 30, |
|
|||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net income (loss) from discontinued operations |
|
$ |
40,889 |
|
$ |
(17,639 |
) |
$ |
1,755 |
|
|
Income tax expense (benefit) |
|
26,319 |
|
(8,665 |
) |
2,563 |
|
|||
|
Other expense |
|
(785 |
) |
654 |
|
825 |
|
|||
|
Gain on sale |
|
(36,759 |
) |
|
|
|
|
|||
|
Interest (income) expense, net |
|
1,004 |
|
(926 |
) |
(955 |
) |
|||
|
Operating income (loss) |
|
30,668 |
|
(26,576 |
) |
4,188 |
|
|||
|
Depreciation and amortization |
|
565 |
|
17,892 |
|
17,923 |
|
|||
|
EBITDA from discontinued operations |
|
$ |
31,233 |
|
$ |
(8,684 |
) |
$ |
22,111 |
|
In accordance with generally accepted accounting principles, depreciation and amortization for these discontinued operations ceased as of July 1, 2003 as a result of their designation as assets held for sale.
For the year ended June 30, 2004 (in 000s):
|
|
|
Operating |
|
Depreciation |
|
EBITDA |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Route Operations |
|
$ |
25,281 |
|
$ |
— |
|
$ |
25,281 |
|
|
Rail City Casino |
|
5,387 |
|
565 |
|
5,952 |
|
|||
|
|
|
$ |
30,668 |
|
$ |
565 |
|
$ |
31,233 |
|
|
|
|
|
|
|
|
|
|
|||
|
For the year ended June 30, 2003 (in 000s): |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
Operating |
|
Depreciation |
|
EBITDA |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Wall Machines and Amusement Games |
|
$ |
(1,875 |
) |
$ |
2,731 |
|
$ |
856 |
|
|
Route Operations |
|
9,063 |
|
14,020 |
|
23,083 |
|
|||
|
Rail City Casino |
|
4,964 |
|
1,141 |
|
6,105 |
|
|||
|
Asset impairment charges |
|
(38,728 |
) |
— |
|
(38,728 |
) |
|||
|
|
|
$ |
(26,576 |
) |
$ |
17,892 |
|
$ |
(8,684 |
) |
During the year ended June 30, 2003, we recorded a charge of $38.7 million to write down the assets of Bally Wulff to the sales price.
For the year ended June 30, 2002 (in 000s):
|
|
|
Operating |
|
Depreciation |
|
EBITDA |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Wall Machines and Amusement Games |
|
$ |
7,942 |
|
$ |
5,213 |
|
$ |
13,155 |
|
|
Route Operations |
|
15,470 |
|
12,069 |
|
27,539 |
|
|||
|
Rail City Casino |
|
4,905 |
|
641 |
|
5,546 |
|
|||
|
Asset impairment charges |
|
(24,129 |
) |
— |
|
(24,129 |
) |
|||
|
|
|
$ |
4,188 |
|
$ |
17,923 |
|
$ |
22,111 |
|
36
During the year ended June 30, 2002 we recorded a charge of $24.1 million to write down the goodwill and other long-lived assets of Bally Wulff.
We believe that the analysis of EBITDA is a useful adjunct to operating income, net income, cash flows and other GAAP-based measures. However, EBITDA should not be construed as an alternative to net income (loss) or cash flows from operating, investing and financing activities determined in accordance with GAAP or as a measure of liquidity. EBITDA is a common measure of performance in the gaming industry but may not be comparable to similarly titled measures reported by other companies. We disclose EBITDA primarily because it is a performance measure used by management in evaluating the performance of our business units and is one of several performance measures used in our management incentive plan. Additionally, EBITDA is utilized as a performance measure in covenants for our bank credit agreement.
37
Bally Gaming and Systems
Summary financial results and operating statistics:
|
|
|
Year Ended June 30, |
|
Increase/(Decrease) |
|
|||||||||||||||
|
|
|
2004 |
|
% Rev |
|
2003 |
|
% Rev |
|
2002 |
|
%Rev |
|
04 vs 03 |
|
03 vs 02 |
|
|||
|
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Game sales |
|
$ |
233.1 |
|
53 |
% |
$ |
188.3 |
|
56 |
% |
$ |
105.7 |
|
47 |
% |
24 |
% |
78 |
% |
|
System sales |
|
124.3 |
|
29 |
% |
91.5 |
|
27 |
% |
64.8 |
|
29 |
% |
36 |
% |
41 |
% |
|||
|
Gaming operations |
|
79.1 |
|
18 |
% |
55.6 |
|
17 |
% |
53.2 |
|
24 |
% |
42 |
% |
5 |
% |
|||
|
Total revenues |
|
$ |
436.5 |
|
100 |
% |
$ |
335.4 |
|
100 |
% |
223.7 |
|
100 |
% |
30 |
% |
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Game sales |
|
$ |
107.8 |
|
25 |
% |
$ |
81.8 |
|
24 |
% |
$ |
40.7 |
|
18 |
% |
32 |
% |
101 |
% |
|
System sales |
|
94.4 |
|
22 |
% |
70.1 |
|
21 |
% |
48.3 |
|
22 |
% |
35 |
% |
45 |
% |
|||
|
Gaming operations |
|
56.8 |
|
13 |
% |
39.2 |
|
12 |
% |
36.0 |
|
16 |
% |
45 |
% |
9 |
% |
|||
|
Total gross margin |
|
$ |
259.0 |
|
60 |
% |
$ |
191.1 |
|
57 |
% |
$ |
125.0 |
|
56 |
% |
36 |
% |
53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Selling, general and administrative |
|
$ |
99.1 |
|
23 |
% |
$ |
72.2 |
|
22 |
% |
$ |
52.6 |
|
23 |
% |
37 |
% |
37 |
% |
|
Research and development costs |
|
36.6 |
|
8 |
% |
20.0 |
|
6 |
% |
15.0 |
|
7 |
% |
83 |
% |
33 |
% |
|||
|
Depreciation and amortization |
|
27.3 |
|
6 |
% |
16.0 |
|
5 |
% |
10.2 |
|
5 |
% |
71 |
% |
57 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating income |
|
$ |
96.0 |
|
22 |
% |
$ |
82.9 |
|
25 |
% |
$ |
47.2 |
|
21 |
% |
16 |
% |
76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
New Gaming Devices Sold |
|
20,350 |
|
|
|
19,634 |
|
|
|
13,183 |
|
|
|
4 |
% |
49 |
% |
|||
|
Game Monitoring Units Sold |
|
46,432 |
|
|
|
35,500 |
|
|
|
40,545 |
|
|
|
31 |
% |
(12 |
)% |
|||
|
End of period installed base |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
WAP |
|
1,726 |
|
|
|
1,910 |
|
|
|
2,283 |
|
|
|
(10 |
)% |
(16 |
)% |
|||
|
Daily-fee games |
|
7,985 |
|
|
|
2,483 |
|
|
|
1,352 |
|
|
|
222 |
% |
84 |
% |
|||
|
Centrally determined games |
|
17,995 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
— |
|
|||
Fiscal 2004 vs Fiscal 2003
Total revenues increased $101.1 million or 30% due to the following:
• Bally Gaming revenue increased by $44.8 million or 24% primarily due to the acquisition of SDG which contributed an incremental $49.6 million and higher domestic new unit sales, offset by a decrease in international new unit sales.
• Bally System revenue increased by $32.8 million or 36% primarily as a result of:
• Increased sales of software licenses for our TITO solution, as well as its bonusing and promotions software.
• Recurring hardware and software maintenance revenues increased by 23% to $20.7 million for the fiscal year, resulting from the larger base of installed units, which now stands at approximately 279,000.
• Gaming Operations revenues increased 42% for fiscal 2004 compared to 2003 due to the following:
• An increase of 222% in the installed base of daily-fee games deployed, which increased to 7,985 units installed. This increase is primarily a result of the launch of the New York Lottery and the acquisition of SDG.
38
• Gross Margin improved to 60% as a result of higher margin systems sales and gaming operations revenue as proportion of total sales.
• Selling, general and administrative expenses increased 37% in fiscal 2004 over 2003 primarily due to the acquisitions of SDG, MindPlay and Crown and to the launch of the New York Lottery resulting in increases in all operating expense categories except bad debt. In addition, SG&A expenses also increased as a result of:
• Legal costs related to the protection of our intellectual property rights.
• Higher payroll and payroll related costs primarily in customer service.
• Research and development costs increased as a result of increased headcount and the acquisition of SDG.
• Depreciation and amortization increased as a result of our installed base of proprietary gaming units and amortization related to the current year acquisitions.
Fiscal 2003 vs Fiscal 2002
Total revenues increased due to the following:
• Bally Gaming revenue increased $82.6 million or 78% primarily as a result of an increase in game units sold of 6,451 and the average new-unit selling price increased 10% (excluding OEM games).
• Bally System revenue increased $26.7 million or 41% primarily as a result of:
• Increased sales of software licenses for our cashless software as well as its bonusing and promotions software and a 32% increase in the average selling price per unit, offset by a 12% decrease in game monitoring units shipped.
• Bally Systems recurring hardware and software maintenance revenues increased to $16.9 million for the fiscal year, resulting from the larger base of installed systems.
• Gaming Operations revenues increased $2.4 million or 5% primarily due to the following:
• An increase of 21% in the average installed base of wide-area progressive (WAP) and daily-fee games deployed, which totaled 1,910 and 2,483, respectively, offset by a decrease in the average revenue per unit.
• The placements included the continued roll out of “Cash for Life” which in addition to the Nevada link, was launched in both Mississippi and Native American casinos in June 2003.
• Gross Margin increased slightly to 57% compared to 56% in the prior year as a result of higher
margin system revenues.
• Selling, general and administrative expenses increased 37% for the year-to-date period primarily due to:
• Legal costs related to the protection of our intellectual property rights.
• Higher payroll and payroll related costs due to increased headcount.
• Research and development costs increased as a result of the increase in hardware and software engineers added during fiscal 2003.
• Depreciation and amortization expense increased primarily as a result of the increase in the installed base of wide-area progressive and daily fee games, which have displaced certain fully depreciated games in the field.
39
Rainbow Casino Operations
Summary financial results and operating statistics:
|
|
|
Year Ended June 30, |
|
Increase/(Decrease) |
|
|||||||||||||||
|
|
|
2004 |
|
% Rev |
|
2003 |
|
% Rev |
|
2002 |
|
%Rev |
|
04 vs 03 |
|
03 vs 02 |
|
|||
|
|
|
(dollars in millions) |
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Revenue |
|
$ |
52.3 |
|
100 |
% |
$ |
50.9 |
|
100 |
% |
$ |
52.2 |
|
100 |
% |
3 |
% |
(2 |
)% |
|
Gross Margin |
|
32.2 |
|
62 |
% |
29.7 |
|
58 |
% |
31.2 |
|
60 |
% |
8 |
% |
(5 |
)% |
|||
|
Selling, general and administrative |
|
12.5 |
|
24 |
% |
12.2 |
|
24 |
% |
12.1 |
|
23 |
% |
3 |
% |
1 |
% |
|||