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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997.
Commission File No. 000-20685
AMERICAN WAGERING, INC.
(Exact name of small business issuer in its charter)
Nevada 88-0344658
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 Grier Drive, Las Vegas, Nevada 89119
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(Address of principal executive offices) (Zip Code)
(702) 735-0101
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
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Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended January 31, 1997 were
$9,030,231.
The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the issuer as of April 15, 1997
computed by reference to the average of the bid and asked prices of the
registrant's Common Stock as quoted by NASDAQ on such date, was approximately
$19,615,289.
The number of shares of the issuer's Common Stock outstanding as of April 15,
1997 was 7,837,500.
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PART I
BUSINESS
American Wagering, Inc. (the "Company") owns and operates
Leroy's Horse and Sports Place ("Leroy's"), the licensed bookmaker with the
largest number of sports book locations in the State of Nevada, and Computerized
Bookmaking Systems, Inc., a Nevada corporation ("CBS") which designs, installs
and maintains sports and race book equipment, software, including the
MEGA$PORTS(R) product for parimutuel sports wagering, and computer systems to
the sports betting industry. Through a central computer located at its Las
Vegas, Nevada headquarters, Leroy's operates a statewide network of sports and
race wagering facilities in 41 small, mid-size and large casinos. The Company
offers casinos a "turn key" sports wagering operation that allows casinos to
satisfy their patrons' desires for sports gaming without bearing the risk and
overhead associated with conducting the operation themselves. By combining
volume from a number of locations, the Company believes it more effectively
hedges risks and more efficiently covers fixed overhead. In addition, since its
sports book operation is its primary business, the Company believes it responds
more quickly to customer requests, such as providing faster pay off on winning
tickets presented other than in person than do many casinos, which operate
sports books as an ancillary part of their businesses.
The Company also owns Leroy's Hotel Corporation (the "Hotel
Operator"), which owns and operates a 150-room Howard Johnson's hotel and
through, its wholly-owned subsidiary, B-P Food Corporation, an adjacent
International House of Pancakes restaurant. Leroy's operates the adjacent casino
(the hotel and casino collectively referred to as the "Hotel/Casino"). The
Hotel/Casino is located at 3111 W. Tropicana Avenue, Las Vegas, Nevada, which is
approximately one-half mile west of the Las Vegas Strip and adjacent to a major
exit from Interstate 15, the freeway linking Las Vegas with Southern California.
Leroy's currently operates 74 gaming devices (including slot machines, video
poker machines and video keno machines) and its home sports and race book
operation in approximately 5,600 square feet of space at the Hotel/Casino. The
Company has plans to renovate the Hotel/Casino under a sports theme, expand the
casino to approximately 12,000 square feet and add gaming tables. However, as a
result of a lawsuit between the Company and the owner of the land underlying the
Hotel/Casino concerning the ground lease for the land, the effectuation of such
plans have been suspended pending resolution of the dispute. See "Hotel/Casino
Operation," "Strategy -- Hotel/Casino" and "Legal Proceedings."
On May 15, 1996, the Company completed an initial public
offering (the "Offering") of its Common Stock at an offering price of $6.00 per
share with 2,250,000 shares sold. On June 28, 1996 the underwriters of the
Offering exercised an over-allotment option and purchased an additional 337,500
shares of the Company's Common Stock at $6.00 per share. Prior to the Offering,
the business of the Company had been operated by Leroy's, which commenced
operations in April 1978, the Hotel Operator, which commenced operations in 1995
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and B-P Gaming Corporation ("B-P"), the former licensed operator of the casino
which commenced operations in 1979, and all of which were under common ownership
with the Company. On May 10, 1996 a corporate reorganization was effected on a
tax free basis pursuant to Section 351 of the Internal Revenue Code, which
resulted in Leroy's and the Hotel Operator becoming wholly-owned subsidiaries
and B-P becoming a 50% owned subsidiary of the Company (the "Reorganization").
In the Reorganization, Messrs. Salerno, Barengo, Ciunci, Merillat and Roxborough
as the stockholders of Leroy's, the Hotel Operator and B-P ("Original
Stockholders") exchanged all the issued and outstanding stock in Leroy's, the
Hotel Operator and B-P, respectively owned by them, for an aggregate of
5,249,900 shares of Common Stock of the Company with the resulting effect that
such stockholders owned an aggregate of 5.25 million shares of the Common Stock
of the Company.
In February and March 1995, the Hotel Operator and the
Original Stockholders had purchased, respectively, 50% interests in BSRB Resorts
Hotel, a Nevada general partnership, which owned and operated the Hotel and B-P.
The Hotel Operator and the Original Stockholders acquired their respective 50%
interests in the Partnership and B-P from the owner of those interests who had
filed for bankruptcy protection. The predecessor to the Partnership, Bruyea Pond
Las Vegas, a Nevada general partnership, comprised of two individual partners,
R. Paul Bruyea ("Bruyea") and Fletcher Pond ("Pond"), had filed on June 11, 1993
for bankruptcy protection in the District of Nevada. Pond had filed for
individual bankruptcy in the Southern District of California on August 5, 1992.
The Hotel Operator and the Original Stockholders purchased all of Pond's
interest in Bruyea Pond Las Vegas and B-P for a cash purchase price of $1.4
million (and assumed liabilities of $1.2 million) in the bankruptcy proceedings
pursuant to an order of the United States Bankruptcy Court, Southern District of
California, and one in bankruptcy court in the District of Nevada. On March 30,
1995, the Partnership succeeded to Bruyea Pond Las Vegas, with the Hotel
Operator and an affiliate of Bruyea constituting its two equal general partners.
On May 15, 1996 the Company purchased the remaining 50%
interests in the Partnership and B-P for approximately $3.6 million in cash and
the assumption of approximately $1.5 million in liabilities from Bruyea and an
affiliate of Bruyea. The Company then contributed the interest in the hotel
operation to the Hotel Operator. On July 25, 1996, Leroy's was licensed by
Nevada regulatory authorities to operate the casino at the Hotel/Casino and B-P
was subsequently dissolved.
On October 25, 1996, the Company purchased CBS (formerly known
as Autotote CBS, Inc.) for $3 million in cash and agreed to guarantee CBS's
obligation under its current mortgage of approximately $2 million on the real
estate and building where the Company maintains its corporate offices.
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Las Vegas Metropolitan Market
The market for 22 of the Company's 41 sports books and for the
Hotel Casino is the "Las Vegas" metropolitan area (hereinafter "Las Vegas")
gaming market. Currently, the Las Vegas gaming market is comprised of 93 casinos
with an aggregate of approximately 55 sports books. The Las Vegas gaming market
attracts both local residents and Las Vegas visitors. Las Vegas' population was
approximately 1.1 million in 1996. Las Vegas is Nevada's principal tourist
destination. Gaming and entertainment are the major attractions, complemented by
warm weather and the availability of many year-round recreational activities.
The number of visitors traveling to Las Vegas has increased from approximately
12.8 million in 1984 to approximately 30 million visitors in 1996. Las Vegas'
principal tourist market is the western region of the United States, most
significantly Southern California and Arizona. Las Vegas is also among the
nation's most popular convention cities, having hosted approximately 3,800
conventions in 1996 which were attended by more than 3.3 million people who it
is estimated spent $3.9 billion, excluding gaming activity.
The number of hotel and motel rooms in Las Vegas has increased
by approximately 87% from 53,000 in 1985 to approximately 99,000 in 1996.
Despite the significant increase in the supply of rooms, Las Vegas's hotel
occupancy rate exceeded 90% for 1996.
From 1985 to 1996, gaming revenues for Clark County (which
consists principally of Las Vegas) have increased from approximately $2.2
billion in 1985 to approximately $5.8 billion in 1996. The Clark County gaming
market has historically achieved significant growth despite adverse economic,
regulatory and competitive events during the past decade, including the
expansion of gaming in other jurisdictions across the United States.
Reno Market
The market for eight of the Company's sports books is the Reno
gaming market. Reno is the second largest city in Nevada with a population of
approximately 150,000 in 1995. Reno is located at the base of the Sierra Nevada
mountains along interstate 80, approximately 135 miles east of Sacramento,
California. Reno is a popular resort area which attracts tourists by offering
gaming as well as numerous other summer and winter recreational activities. The
greater Reno area attracted a total of 5.2 million visitors in 1996.
Currently, the Reno gaming market is comprised of 33 casinos
with an aggregate of approximately 14 sports books.
Sports Wagering
Sports wagering is legal in the State of Nevada, and in
numerous foreign countries, including Canada and Mexico. Sports wagering at
Nevada's sports books increased from $293 million in 1980 to $2.5 billion in
1996. During that same period, the number of
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sports books increased from 24 to 129 in Nevada. With the advent of cable and
satellite television, viewing access to sporting events has increased
significantly. When sporting events are televised, there is wider recognition of
the sports and the teams involved and increased excitement which the Company
believes leads to more interest in sports betting.
A sports wagering facility or "sports book" is a gambling
establishment that sets odds and point spreads and accepts bets on the outcome
of sporting events, such as football, basketball, baseball and hockey games.
Sports books set odds and point spreads aiming not to reflect the final result,
but to maintain a "balanced book" by offering odds or point spreads that will
attract equal amounts of bets on each side of a particular event. As a general
matter, a customer's odds or point spread (the "line") are fixed at the time he
makes his bet regardless of any subsequent movement in the line. Under this
system, the sports book operator attracts bets by changing or "moving" the line
up or down to encourage wagering on a specific team. To the extent that a book
on a particular event is not balanced, the book-making operation takes risk on
the outcome of the event.
Inherent to betting is a long-term percentage against the
player. Profits from bookmaking, table games, keno and slot machines are the
results of steady play against a statistical advantage that the gambling
operator or "house" possesses. The house advantage in bookmaking, however, is
fundamentally different from other gambling games. There are mathematical
advantages to table games and slot machines in favor of the casino. While there
are exceptions (for instance, card counters), statistically all pit players
should go broke after an indefinite period of play. In parimutuel wagering,
which is used by major North American horse racing tracks and jai alai, a wager
is pooled with all other wagers, the house receives a percentage for operating
expenses, profit and taxes and the remainder is distributed to the winners.
Therefore, the race track's gross revenues are directly related to the amount
wagered (the "handle").
For each type of sports bet there is a "theoretical
percentage", which is the advantage a bookmaker would have if the odds
guaranteed it a constant commission regardless of the outcome. For example, for
a straight football bet involving the outcome of one game, it is common practice
that the customer wagers $11 to win $10. Accordingly, if the book were evenly
balanced, the sports book would earn $1 for each $22 wagered or 4.55% (the
winner would receive $21) of the handle, before expenses. The sports book,
however, does not have a built in statistical edge as do the betting tables,
slot machines or the racetrack. The fundamental difference is part of the appeal
for many sports customers, but it also creates risk for the sports book. A
bookmaker operates in a system which is interrelated with oddsmakers and
customers. Bookmakers collect bets, adjust odds to account for the preferences
of their patrons and pay the winners. Customers have opinions concerning the
posted odds and bet into the odds accordingly. Oddsmakers (whose services are
purchased by the bookmakers) ideally make the lines that will split the bets
evenly between the participants in the sporting event so that the bookmaker will
realize profits over time.
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In practice, however, a sports book is rarely perfectly
balanced. The sports book's profit depends upon the reliability of the odds and
its acumen at adjusting the odds when required. Because customers are betting on
propositions of uncertain probability and are paid off according to the line at
which they make their bets rather than the closing odds (as at the racetrack),
the sports book is not assured of a constant profit over time, much less for a
single event.
A sports book attempts to limit the liability it incurs on an
event against potential flaws in the oddsmaker's setting of the line and the
integrity of the games. Limiting liability is accomplished by two main means,
the game limit and line movement. For example, the opening line for a football
game ideally would split the bets from the time it was posted until kick-off.
However, the opening line generally is unbalanced. Because a sports book does
not want to take the risk of accepting unlimited bets on one side of a game, it
creates a game limit -- the maximum amount of money that will be accepted at the
posted line. When the game limit is reached, the line is changed, or "moved", to
attract action on the "other" side. Movement in a line, however, does not
eliminate a bookmaker's risk.
The game limit is established by the sports book based upon
the "earn" in a sport, which is a function of the amount the sports book would
earn if the odds guaranteed it a constant commission regardless of the outcome
(the "theoretical hold percentage"), the quality of the line and the customer
mix. For example, when the sports book anticipates that the majority of the bets
will come from sophisticated customers who know as much as, or more than, the
oddsmaker, the limit will be relatively low. The Company believes that events
with the highest fan popularity and media coverage, such as professional
football's Super Bowl, have a relatively small proportion of sophisticated
customers. Accordingly, the sports book's expected earn on such an event would
be higher and would justify a higher game limit.
In order to effectively balance its books, a bookmaking
operation must take a sufficient volume of wagers to offset large wagers on any
given event. While many of the large casinos in Las Vegas have sufficient
customer traffic to underwrite the risks inherent in a sports book, some large
and smaller casinos typically do not. Sports books have been computerized and
automated in order to severely curtail fraud and to provide for more
sophisticated analysis and up-to-date information. Some larger casinos are not
interested in operating their own sports book because of the associated
overhead. As a result, many casinos cannot profitably operate a sports gambling
operation and, if they do, they are exposed to significant financial risks
associated with an "unbalanced book." Nevertheless, many of these casinos
believe that they need to offer their customers a sports book to remain
competitive with other casinos.
Leroy's Horse and Sports Book Operation
Leroy's retains its main sports book license at the
Hotel/Casino and operates 40 other sports books in major metropolitan areas in
Nevada (of which 21 are located in the Las Vegas area and 8 in the Reno area
with 11 others located throughout the State of Nevada, including in the cities
of Laughlin, Mesquite, Elko and Jackpot), including the Riviera Hotel and
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Casino, the Four Queens Hotel and Casino, the Frontier Hotel and Casino,
Fitzgerald's Hotel and Casino and the Stratosphere Hotel and Casino in Las
Vegas. Under Nevada gaming law, the Company is permitted to own and operate
sports books located on the premises of other nonrestricted gaming operations.
When the Company began operations in 1978, it was one of only
seven sports and race books in Las Vegas. Currently, virtually every major
casino in Nevada offers its patrons a sports and race book. There are now a
total 129 sports books of which the Company owns and operates 41. Of the other
sports books, 75 are operated by the casinos in which the sports book is located
and thirteen by casinos other than where the sports book is located. Generally,
at its sports book locations the Company pays the casinos in which it operates a
flat monthly rental for casino space, although in some instances it shares a
portion of its revenues with the casino.
The typical sports book location for the Company encompasses
300 square feet, contains a board displaying the odds, one or more television
monitors showing sporting events, betting windows, ticket sellers and a cashier.
As a bet is placed, the wagering data is entered into a computer terminal which
is connected via a dedicated phone line to the Company's centralized computer
system which confirms the line, determines that the bet is within the limits set
for the particular event, records the information on a central data base and
issues a ticket evidencing the bet. A ticket is then distributed to the customer
with the Company simultaneously recording the wager. Personnel at the Company's
main offices monitor all bets and adjust the odds as necessary to reflect the
various bets throughout all of the Company's locations.
The Company believes it has lower maximum betting limits than
many sports books which operate at large casinos. It has established these lower
limits in an effort to limit bets from the more sophisticated customers who
often place larger bets. In addition, in order to limit the more sophisticated
bettors from utilizing strategies that would provide an advantage, the Company
sets even lower limits for bets placed over the telephone, which are currently
accepted only from within the State of Nevada. The Company believes that the
geographic spread of its locations to various parts of the State of Nevada is
more likely to attract bets from customers on both sides of a line, thereby
further limiting its risk.
Professional and college football games currently comprise
about 39 percent of the amount bet (the "handle") at the Company's locations
with professional and college basketball games at 30 percent and professional
baseball games next at about 21 percent. As a result, the Company's business
historically has been seasonal in nature with approximately 59 percent of its
handle arising in the months of September through January. Football game
wagering also accounts for the largest portion of the Company's revenues with
basketball wagering accounting for the next largest portion of the Company's
revenues.
At 25 of its 41 sports book locations the Company has a
license to operate a race book but actually operated a race book at only one of
those locations during the fiscal year
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ended January 31, 1997. The Company's race books utilize the same personnel and
facilities as its sports books, but the Company does not set its own odds for
race wagering. The Company accepts wagers for races by offering race patrons the
same odds as the race tracks at which the races occur. During the fiscal year
ended January 31, 1997, the Company earned revenues of $9 million of which only
$18,000 was derived from its race book operations.
Hotel/Casino Operation
The Hotel Operator currently owns and operates the hotel and,
through its wholly owned subsidiary, B-P Food Corporation, the restaurant
located at 3111 W. Tropicana Avenue, Las Vegas, Nevada. Leroy's operates the
adjacent casino and a sports book at the casino. The Hotel/Casino is located
approximately one-half mile west of the Las Vegas Strip and is adjacent to a
major exit from Interstate 15, the freeway linking Las Vegas with Southern
California. The Hotel/Casino currently consists of a 150-room franchised Howard
Johnson's hotel, a 5,600 square foot casino containing 74 gaming devices,
including 23 slot machines, 48 poker video machines and 3 multi-game video
machines and a 2,700 square foot bar, and a franchised International House of
Pancakes restaurant. The Company, through its subsidiaries, is obligated
pursuant to a franchise agreement with Howard Johnson's, a franchise agreement
with International House of Pancakes and a gaming device participation agreement
with Jackpot Enterprises, Inc. The franchise agreement with Howard Johnson's
obligates the Company to pay a fee to Howard Johnson's of 8.5% of total monthly
room revenues. The franchise agreement with International House of Pancakes
obligates the Company to pay a fee of 6.5% of weekly gross food sales to
International House of Pancakes. The agreement with Jackpot obligates the
Company to pay 30% of the gaming devices net win to Jackpot. The Company has
plans to renovate the Hotel/Casino under a sports theme, expand the casino to
approximately 12,000 square feet and add gaming tables. The Company is
considering the renovation of the International House of Pancakes restaurant or
approaching International House of Pancakes to discuss the replacement of the
restaurant with another restaurant and exploring other methods for the operation
of the gaming devices at the Hotel/Casino, if the Company proceeds with its
plans to renovate the Hotel/Casino. However, as a result of a lawsuit between
the Company and the owner of the land underlying the Hotel/Casino concerning the
ground lease for the land, the effectuation of such plans have been suspended
pending resolution of the dispute. The reinstitution of the renovation and
expansion of the Hotel/Casino and the profitability of the Hotel/Casino
operations may be impacted if a court decides the lawsuit adversely to the
Company. See "Strategy -- Hotel/Casino" and "Legal Proceedings."
The following map shows the location of the Hotel/Casino,
which is approximately one-half mile west of the Las Vegas Strip, in relation to
the major Las Vegas Strip hotel-casinos, McCarran International Airport and
Interstate 15. The Hotel/Casino is strategically located to take advantage of
the residential and commercial growth of the western portion of metropolitan Las
Vegas and the expansion of the "mega-resort" entertainment complexes on the Las
Vegas Strip, including the Excalibur, the Luxor, the Monte Carlo, the New York,
New York and the MGM Grand. The map is not to scale and actual distances vary
from those shown.
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The text contains a map which depicts the location of the
Hotel/Casino on Tropicana Avenue in relation to I-15, Las Vegas Boulevard,
Flamingo Road, Paradise Road, McCarran International Airport and the Excalibur,
the Luxor, the Monte Carlo, the New York, New York and other hotel/casinos.
From 1988 through 1995, the Hotel/Casino's occupancy rate has
averaged approximately 72% and the occupancy rate in 1996 was approximately 83%.
The Hotel/Casino currently draws most of its guests from the leisure, commercial
and contract market segments.
The leisure segment consists of individuals and families
either vacationing in the Las Vegas area or en route to other destinations.
Leisure demand is strongest on the weekends, during holiday periods and summer
months. The majority of leisure travelers is generated via overflow from larger
properties on the Las Vegas Strip and downtown Las Vegas and also from patrons
who make reservations via the Howard Johnson's nationwide reservation system.
The commercial market segment is comprised of business travelers visiting
various firms within the market area. Commercial demand is strongest Monday
through Thursday, declining significantly Friday and Saturday, and is relatively
constant throughout the year. The contract demand segment is primarily
associated with airline crews flying in and out of McCarran International
Airport. Airlines contract with local hotel operators for extended periods to
ensure availability of accommodations. Because they are able to guarantee a
specific usage on a daily basis, airlines can negotiate discounted room rates.
Computerized Bookmaking Systems, Inc. Operations
On October 25, 1996, the Company acquired from Autotote
Corporation, a Delaware corporation ("AC"), all of the outstanding shares of
capital stock ("Shares") of CBS, pursuant to a Stock Transfer Agreement between
the Company and AC, and the right to use certain software owned by AC and
Autotote Systems, Inc., a Delaware corporation ("ASI"), useful in CBS' business
("License") pursuant to a Technology Cross License Agreement, as amended, among
CBS, AC and ASI.
As consideration for the Shares and License the Company paid
$3 million in cash from its working capital to AC and agreed to guarantee
pursuant to a Guaranty Agreement CBS's obligation under the its current mortgage
of approximately $2 million on the real estate and building in Las Vegas, Nevada
where the Company currently maintains its corporate offices.
Simultaneously with the execution of the Stock Transfer
Agreement, (i) ASI appointed CBS as its distributor in Nevada of ASI products,
including Probe terminals, MKII terminals, videocards, communication devices and
parimutuel race systems ("Distribution Products"), pursuant to an Authorized
Exclusive Distributorship Agreement between them ("Distributorship Agreement");
(ii) ASI granted CBS the right under certain conditions, to manufacture video
gaming machines, Distribution Products pursuant to a Manufacturing Agreement
between them ("Manufacturing Agreement") and (iii) CBS and ASI agreed to
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cooperate in pursuing business relating to international sports and parimutuel
wagering pursuant to an International Cooperation Agreement between them
("International Agreement").
CBS designs, installs and maintains sports and race book
equipment, software and computer systems for the sports betting industry. CBS is
the dominant provider of such equipment and software in the state of Nevada,
including major casinos along the Las Vegas strip.
CBS provides its sports wagering systems to 86 out of 88
sports and race books in Nevada which are not operated by Leroy's, at all of
Leroy's sports and race books and at the leading operator of sports wagering
facilities in Mexico. Casinos and other sports wagering facilities generally
purchase the computerized wagering system from CBS and enter into an agreement
with CBS for repair and maintenance of the system and software support. Sports
wagering equipment sales revenue is reflected in wagering equipment sales
revenues and revenues from maintenance contracts are included in operating
revenues from wagering systems contracts. Under purchase agreements, CBS sells
its sports wagering system to the facility and provides training for the system
operators and sell/cash terminal clerks. CBS does not provide the operations and
supervisory personnel necessary to operate the system.
In 1994, CBS signed a joint venture agreement with
International Game Technology -- North ("IGT"), a subsidiary of International
Game Technology, for the purpose of developing and marketing a parimutuel sports
system, to be known as MEGA$PORTS(R). CBS expects that MEGA$PORTS(R) will offer
opportunities to wager on the outcome of individual sports contests, events
occurring within or during the contests, and outcomes of groups of sports
contests. The MEGA$PORTS(R) parimutuel wagering system is currently anticipated
to consist of a central computer, communications equipment and terminals.
Pursuant to the terms of the joint venture agreement, the computer system
software and hardware for MEGA$PORTS(R) is to be provided by CBS. In accordance
with the joint venture agreement, marketing will be the responsibility of IGT.
The joint venture agreement is subject to the approval of the Nevada State
Gaming Control Board and Nevada Gaming Commission, and the sports wagering
system must be licensed by the Nevada gaming authorities. There can be no
assurance that CBS will qualify under the new regulations or that the required
license will be issued to CBS.
Strategy
Sports Book
The Company's strategy in the operation of its sports book is
to expand upon its base of 41 locations and renovate certain of its current
locations to increase their attractiveness to patrons. The Company presents
casinos with a "turn key" sports book operation that allows the casinos to
satisfy their patrons' desires for sports gaming without bearing the risk and
overhead associated with operating the books themselves. Utilizing its computer
and communication expertise and equipment, the Company runs all of its satellite
locations from one
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central hub, thereby reducing the overhead that each individual location would
have in personnel and equipment. The Company believes that there are a number of
existing and proposed Nevada casinos which are potential customers over the next
several years. In addition, the Company believes that it will have the
opportunity to expand several of its existing locations as the Las Vegas and
Reno populations continue to grow and if sports wagering continues to gain more
widespread acceptance.
On July 1, 1995, the State of Nevada amended Nevada Law to
allow licensed Nevada sports and race book operations to accept by use of wire
communications facilities, including telephones and computers, interstate
parimutuel wagers from bettors in jurisdictions in which such parimutuel
wagering is legal. As at least six states (including Nevada) and numerous
foreign jurisdictions, including Canada and Mexico, permit parimutuel wagering
by telephone, the Company is exploring possibilities to expand its sports and
race book operations to take advantage of opportunities created by this new law.
The Company has had preliminary discussions with a number of private entities
and North American and foreign jurisdictions concerning the Company's operation
of their sports books and the acceptance of sports and race wagers through
Leroy's. However, the regulations of the Nevada Gaming Commission, issued prior
to the enactment of the new law, currently prohibit licensed sports and race
books in Nevada from accepting telephone bets from interstate locations. In the
event the Nevada Gaming Commission does not on its own amend its regulations to
comport with the new law, the Company may submit a petition to amend (including
proposed regulations) the Commission's current regulations.
The Company believes that expansion into the interstate
parimutuel wagering market may reduce some of the risks inherent its sports book
operations. With parimutuel wagering, the Company believes it will be able to
create forms of wagering that will be pooled and will assure that the Company
will receive a percentage of each pool for operating expenses, profit and taxes,
before the remainder of the pool is distributed to winners. The Company also is
exploring the expansion of its operations outside the United States. The Company
believes that several Caribbean and South American countries and Australia,
which already have casinos and legalized sports gaming present attractive
expansion opportunities. A bill entitled the "Internet Gambling Prohibition Act
of 1997" has been introduced in Congress, which if it becomes law would
adversely impact the Company's ability to take advantage of interstate
parimutuel wagering opportunities. See "Regulation and Licensing -- Interstate
Wagering."
The Company has previously marketed only its main sports book
operation to local residents through local television, radio and print
advertising. The Company is advertising extensively its satellite operations
using the Leroy's name in the Nevada print, television and radio media. The
Company is also advertising Leroy's name on the Internet and maintains a website
at http://www.leroys.com. The Company does not accept wagers through the
Internet. If the Company is able to take advantage of the interstate parimutuel
wagering opportunities, the Company may directly advertise in the jurisdictions
where parimutuel wagering is legal.
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Hotel/Casino
The Company has plans to expand, renovate and convert the
Hotel/Casino utilizing a sports theme and to target local residents, leisure
travelers and business travelers. The Company estimates the expansion to cost
$5.0 million. The $5.0 million expansion, renovation and conversion would add
approximately 7,000 square feet to its public area which includes: a 7,000
square foot expansion of the casino that will accommodate approximately 240 slot
machines and 6 live games and a 3,000 square foot sports and race book that will
have a number of large television screens and a seating area for 100 patrons.
Almost all of the Hotel/Casino's rooms would be renovated. The Company also is
considering either renovating the interior of the Hotel/Casino's International
House of Pancakes restaurant or approaching International House of Pancakes to
discuss replacing it with another restaurant. In addition, the Company believes
that the signage currently located at the Hotel/Casino is inadequate; additional
signage will be purchased and installed. At the time of its acquisition, in May
1996, of the remaining interests in the Hotel/Casino that it had not previously
possessed the Company anticipated that the renovation would be completed by the
end of the first quarter of calendar year 1997. Such renovation has not begun.
As a result of a lawsuit between the Company and the owner of the land
underlying the Hotel/Casino concerning the ground lease for the land, the
expansion of the Hotel/Casino has been suspended pending resolution of the
dispute. See "Legal Proceedings."
The Company intends to create an identifiable marketing
presence by utilizing a sports theme for the Hotel/Casino if the renovation is
reinstituted. The Company believes that it will be the only sports-theme casino
in proximity of the Las Vegas Strip. Legal sports betting is a growing
multi-billion dollar business (approximately $2.5 billion was wagered on
sporting events in Las Vegas in 1996). The Company believes that as televised
sporting events continue to proliferate, sports betting will continue to grow
and a sports-theme casino may capitalize on any such growth.
The Company's business strategy emphasizes attracting and
retaining customers from the Las Vegas area and repeat visitors. The Company
believes that after the Hotel/Casino is renovated utilizing a sports theme, it
will attract local customers who will not only wager on sporting events but will
also play casino games. The Company believes that the Hotel/Casino's location,
convenient access and ample parking will appeal to local gaming customers as
well as to the Las Vegas visitor who desires proximity to the Las Vegas Strip.
The off-Strip location allows Hotel/Casino customers to avoid the
ever-increasing traffic congestion on the Las Vegas Strip and downtown Las
Vegas. The Hotel/Casino is strategically located to take advantage of the growth
of the western portion of metropolitan Las Vegas.
The Company believes that after the renovation of the
Hotel/Casino the Hotel/Casino operations will reduce the seasonality that it
currently experiences in its sports book business. The Company believes the
renovated Hotel/Casino will diversify the Company's business, making it less
dependent upon the revenues derived from sports wagering generally and, in
particular, football.
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Computerized Bookmaking Systems
The Company believes that MEGA$PORTS(R), which may offer
opportunities for sports wagering by creating parimutuel pools on sporting
events, presents business expansion opportunity for CBS. MEGA$PORTS(R) would
combine the interest of sporting events with the potential for large parimutuel
payoffs. With regulatory approval pending, there would be two distinct types of
wagering. Daily wagering may be created on a wide variety of possibilities such
as, highest scorer in professional basketball; football team to score the most
or least points; quarterback to pass for the most yards; and other unique
possibilities. Any event with a field of players may serve as an opportunity to
accept wagers. Weekly multiple proposition MEGACARDS(R) may be created either by
picking all professional football winners, all professional basketball winners,
or a combination picking winners ranging between 16-22 events on a given Sunday.
MEGACARD(R) events would continually change throughout the athletic seasons.
Jackpots are anticipated to begin at $1,000,000 and increase progressively.
The Company believes potential exists for the MEGA$PORTS(R)
products in the global market. IGT, CBS' joint venturer, already has a presence
in Europe, Japan, Peru, Australia and South America. International rivalries
could add more interest to global events with the introduction of MEGA$PORTS(R).
As different geographical groups wager, revenues could be generated in these new
MEGA$PORTS(R) wagering propositions.
Subject to regulatory approval, CBS intends to introduce
self-service terminals that allow players to watch live videos of race and sport
events, to place wagers on race and sports, and to play any one of up to 15
video slot games. CBS products are capable of concurrently operating race and
sports books and MEGA$PORTS(R) from a single system. Keno and other games may be
added. The advantages of such terminals include multiple data applications over
a single communication line and lower the overall costs for each product.
Regulation and Licensing
The ownership and operation of casino gaming facilities,
including race and sports books, in Nevada are subject to extensive state and
local regulation. The Company's gaming operations are subject to the Nevada
Gaming Control Act and the regulations promulgated thereunder (hereinafter
collectively referred to as the "Nevada Act") and various local regulations. The
Company's gaming operations also are subject to the licensing and regulatory
control of the Nevada Gaming Commission (hereinafter referred to as the
"Commission"), the Nevada State Gaming Control Board (hereinafter referred to as
the "Board"), the Clark County Liquor Gaming Licensing Board, the City of Las
Vegas and smaller local jurisdictions. The Commission, the Board, the Clark
County Liquor Gaming Licensing Board, the City of Las Vegas and such smaller
local jurisdictions are hereinafter collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada
Gaming Authorities have their genesis in various declarations of public policy
which are concerned with,
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among other things: (i) the prevention of unsavory or unsuitable persons from
having a 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 mini mum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) the creation of a source of state and local
revenues though taxation and licensing fees. Changes in such laws, regulations
and procedures could have an adverse effect on the Company's gaming operations.
Leroy's is currently licensed by the Nevada Gaming
Authorities. Leroy's holds 41 nonrestricted sports book gaming licenses. Gaming
licenses require the periodic payment of fees and taxes. Furthermore, gaming
licenses are not transferable.
The Company is registered in Nevada as a publicly traded
corporation; and as such, is required to submit, on a periodic basis, detailed
financial and operating reports to the Commission. Additionally, the Company may
be required to furnish any other information requested by the Commission. No
person may become a stockholder of, or receive any percentage of profits from
Leroy's, without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and Leroy',s have received, from the Nevada Gaming
Authorities, various registrations, approvals, permits and licenses required to
permit to engage in gaming activities in Nevada.
The Gaming Authorities may investigate any individual who has
a material relationship to, or material involvement with, the Company or
Leroy's, in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors and
certain key employees of Leroy's must file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. Officers, directors and key employees of the Company who are
actively and directly involved in the gaming activities of Leroy's may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application of licensing for any cause
deemed reasonable. A finding of suitability is comparable to licensing, and both
require the submission of detailed personal and financial information followed
by a thorough investigation. An applicant for licensing or a finding of
suitability must pay all of the costs of the investigation. Changes in licensed
positions with the Company or Leroy's must be reported to the Nevada Gaming
Authorities. In addition to their authority to deny an application for a finding
of suitability or licensure, the Nevada Gaming Authorities also have
jurisdiction to disapprove a change in a corporate position. The officers and
directors of the Company and its subsidiaries have been found suitable by the
Nevada Gaming Authorities.
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
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Company or Leroy's, the companies involved would be required to sever all
relationships with such a person. Additionally, the Commission may require the
Company or Leroy's to terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or questions pertaining
to licensing are not subject to judicial review in Nevada.
If it were determined that the Nevada Act was violated by
Leroy's or the Company, the gaming licenses or registration held by the Company
and Leroy's could be limited, conditioned, suspended or revoked subject to
compliance with certain statutory and regulatory procedures. However, at the
discretion of the Commission, the Company and Leroy's and any person involved
could be subject to substantial fines for each separate violation of the Nevada
Act. Furthermore, a supervisor could be appointed by the Commission to operate
the Company's gaming properties and, under certain circumstances, earnings
generated during the supervisor's appointment (except for the reasonable rental
value of the Company's gaming properties) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could, and certainly the revocation of any gaming
license would, materially adversely affect the Company's gaming operations.
The beneficial holder of the Company's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability as a beneficial holder of
the Company's voting securities be determined if the Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of the
investigation incurred by the Nevada Gaming Authorities in conducting such an
investigation. In addition, the Clark County Liquor Gaming Licensing 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 Act requires any person who acquires more than five
percent (5%) of the Company's voting securities to report the acquisition to the
Commission. The Nevada Act requires that beneficial owners of more than ten
percent (10%) of the Company's voting securities apply to the Commission for a
finding of suitability within thirty (30) days after the Chairman of the Board
mails written notice requiring such a filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
ten percent (10%), but not more than fifteen percent (15%), of the Company's
voting securities may apply to the Commission for a waiver of such a finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investment shall not be deemed to
hold the voting securities for investment purposes only 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 Company, any change in the Company's corporate charter, bylaws,
management, policies or operations of the Company, or any of its gaming
affiliates, or any other action which the Commission finds to be inconsistent
with holding the Company's voting securities for investment purposes only.
Activities which
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are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Commission may determine to be consistent with such investment intent. If the
Commission grants a waiver to an "institutional investor" the waiver does not
include a waiver or exemption from the requirement for prior approval to
"acquire control" of a registered corporation. 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 the 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 (30) days after being ordered to do so by
the Commission or the Chairman of the Board may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owners. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
registered corporation beyond such period of time as may be prescribed by the
Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or its
Subsidiaries, the Company (i) pays that person any dividend or interest upon
voting securities of the Company, (ii) allows that person to exercise, directly
or indirectly, any voting fight conferred through securities held by that
person, (iii) pays remuneration in any form to that person for services rendered
or otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities for cash at fair market
value.
The Company is required to maintain a current stock ledger in
Nevada which may be examined by the Nevada Gaming Authorities at any time. If
any securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such a disclosure may be grounds for
finding the record holder unsuitable. The Company is also required to render
maximum assistance in determining the identity of the beneficial owner. The
Commis sion has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Commission has not imposed such a requirement on the Company.
Changes in control of the Company through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Commission. Entities seeking to acquire
control of a registered corporation must satisfy the Board and the Commission in
a variety of stringent standards prior to assuming control of such registered
corporation. The Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposed to acquire control, to be investigated and licensed as part
of the approval process related to the transaction.
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The Nevada legislature has declared that some corporate
acquisitions opposed by management, repurchases of voting securities and
corporate defense tactics affecting Nevada gaming licensee, and registered
corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada'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 Commission before the Company can make exceptional repurchases
of voting securities above the current market price thereof and before a
corporate acquisition opposed by management can be consummated. The Nevada Act
also requires prior approval of a plan of recapitalization proposed by the
Company's board of directors in response to a tender offer made directly to the
registered corporation's stockholders for the purposes of acquiring control of
the registered corporation.
License fees and taxes, computed in various ways dependent
upon the type of gaming activity involved, are payable to the State of Nevada
and to the counties and cities in which the Nevada licensee's respective
operations are conducted. Depending upon the particular fee or tax involved,
these fees ind taxes are payable either monthly, quarterly or annually and are
based upon either: (i) a percentage of gross revenues received; (ii) the number
of gaming devices operated, or (iii) the number of table 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. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed,
registered, or required to be registered, or is under common control with such
person (hereinafter collectively referred to as "Licensees") and who propose to
become involved in a gaming venture outside the State of Nevada is required to
deposit with the Board, and thereafter maintain, a revolving fund in the amount
of $10,000.00 to pay the expenses of investigation by the Board of his
participation in such foreign gaming. The revolving fund is subject to increase
or decrease in the discretion of the 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 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
operation who has been denied a license or finding of suitability in Nevada on
the basis of personal unsuitability.
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Interstate Sports Wagering
Sports wagering is legal in Nevada, and numerous foreign
jurisdictions, including Canada and Mexico. Pursuant to the Professional and
Amateur Sports Protection Act - (hereinafter referred to as the "Sports Act"),
which was effective January 1, 1993, the proliferation of legalized sports
books and wagering was significantly curtailed. Although the Sports Act
generally prohibits sports wagering in every jurisdiction, including those
jurisdictions subject to the Indian Gaming Regulatory Act, the Sports Act does
permit sports wagering in those jurisdictions that authorized sports wagering
prior to the effective date of the Act. Thus, sports books and wagering are
permitted to continue to operate in Nevada. Moreover, the Interstate Wire Act
(hereinafter referred to as the "Wire Act"), also prohibits those in the
business of betting and wagering from utilizing a wire communication facility
for the transmission in interstate or foreign commerce any bets, wagers or
information assisting in the placing of such bets and wagers on any sporting
event or contest unless such betting or wagering activity is specifically
authorized in each jurisdiction involved.
The Company may not accept bets received by use of wire
communications facilities, including telephones and computers, unless such bets
originated in a jurisdictions wherein such betting or wagering is legal. Nevada
has recently amended the Nevada Gaming Control Act to allow licensed race and
sports books in Nevada to accept interstate parimutuel wagers from other
jurisdictions in which parimutuel wagering is legal. However, the regulations of
the Nevada Gaming Commission currently prohibit any licensed race and sports
book in the State of Nevada from accepting any telephone wagers from interstate
locations. In order for the Company to take advantage of the business
opportunity provided by the new law, the Nevada Gaming Commission must amend its
regulatory restrictions ab initio or the Company can petition the Commission to
remove such regulatory restrictions in whole or in part. There can be no
assurance that any regulatory amendment will be authorized, that any such
amendment would be favorable to the Company, or that any such amendment would
not be burdensome to the Company.
On March 19, 1997 a bill entitled the "Internet Gambling
Prohibition Act of 1997" was introduced in Congress. If enacted into law, the
bill would prohibit any person from engaging in the business of betting or
wagering via electronic communication facilities, including the Internet, if the
transmission is not legal in the state or foreign country in which the
transmission either originates or is received. If this bill becomes law, the
Company's ability to take advantage of interstate parimutuel wagering
opportunities would be adversely impacted.
Competition
There is intense competition among companies in the gaming
industry, most of which have significantly greater financial, marketing,
technical and other resources than the Company. Leroy's faces competition from
all other sports and race wagering operations in the Las Vegas area and
throughout Nevada. There are currently 129 sports books in Nevada, of which the
Company owns and operates 41. Virtually all of the major casinos in Nevada
operate
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sports and race books, some of which are larger and offer more amenities than
the Company's locations and some casinos operate sports books of other casinos.
The Hotel/Casino faces competition from all other casinos and hotels in the Las
Vegas area, including competitors located on the Las Vegas Strip, west of the
Las Vegas Strip and in downtown Las Vegas. The Hotel/Casino is substantially
smaller than Las Vegas's premier "mega-resort" and casino hotels, such as the
MGM Grand, Luxor, Excalibur, Tropicana and Bally's and derives a significant
portion of its demand from mega-resort overflow. Hotel room inventory in Las
Vegas is anticipated to expand by 7,000 rooms by the end of 1997, a significant
increase that will further increase competition. The Hotel/Casino will directly
compete with a number of other operations targeted to local residents as well as
with gaming facilities not related to hotels.
Gaming has become more accepted by society in recent years.
However, the gaming industry is subject to shifting consumer preferences and
perceptions. A dramatic shift in consumer acceptance or interest in gaming could
adversely affect the Company. In addition, the Company's operations compete with
gaming operations in other parts of the State of Nevada, such as Reno, Laughlin
and Lake Tahoe, with facilities in other parts of the United States and the
world and with state-sponsored lotteries, on and off-track wagering, card
parlors, river boat and Native American gaming ventures and other forms of
legalized gaming. While the Las Vegas market is continuing to offer expanded
tourist attractions, such as theme parks being developed by other casinos, there
can be no assurance that the Las Vegas market will sustain its current growth or
current levels of tourism. Legalized casino gaming in other states and on Native
American reservations will provide strong competition to the Company and could
adversely affect the Company's operations, particularly if such gaming were to
occur in areas close to the Company's operations.
Future operating results of the Company are subject to
significant business, economic, regulatory and competitive uncertainties and
contingencies, many of which are beyond the control of the Company. There can be
no assurance that once completed the Company's expansion projects and overall
business strategy will be successful in achieving the Company's goal of
attracting additional customers to the Company or increasing the Company's
gaming revenues and operating profits.
Employees
The Company has approximately 270 employees, 140 of which are
employees of Leroy's, 95 of which are employees of the Hotel Operator and 35 of
which are employees of CBS. No employees of the Company are currently
represented by a labor union. The Company does not currently know whether or to
what extent, if any, its employees will in the future be governed by collective
bargaining agreements. To the extent the Company is successful in acquiring and
implementing its business plan for expanding the Hotel/Casino, the Company's
employment requirements will increase significantly. The Company estimates that
within the next twelve months it will be required to attract and train
approximately 2 qualified management employees to oversee its Hotel/Casino
operations. To implement its present plans
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with respect to the Hotel/Casino, the Company will also be required to attract
and train a significant number of non-management personnel.
The continuing proliferation of legalized gaming in the United
States and the resulting increase in the number of casinos have created a
competitive environment for qualified casino management personnel and other
experienced casino employees on a national basis. Management believes that this
industry-wide factor will make it more difficult for the Company to attract and
retain a trained labor force, which may adversely affect the business of the
Company. The Company anticipates hiring approximately 20 employees to work at
the Hotel/Casino and that the Company will experience strong competition for
such employees with several other local gaming operations. There can be no
assurance that upon or following the expansion of the Hotel/Casino, the Company
will have an adequate number of trained employees to staff the Hotel/Casino. If
the Company is unable to attract and retain qualified management personnel, the
growth and profitability of the Company may be adversely affected.
Item 2. Properties
The Company's corporate offices and central computer
operations and CBS' operations are located in a facility of 29,250 square feet
in Las Vegas, Nevada which is owned by CBS. CBS is a debtor under a loan of
which approximately $2 million is outstanding as of January 31, 1997. The loan
accrues interest at an 8% annual interest rate, is due in full on September 2015
and is secured by a deed of trust and assignment of leases and rents in favor of
the lender. The Company has guaranteed CBS' obligations under the loan.
The Company retains its main sports and race book licenses at
the Hotel/Casino and operates 40 other sports books at locations in major
metropolitan areas in Nevada (of which 21 are located in the Las Vegas area and
8 in the Reno area, with 11 others located in cities throughout the State of
Nevada, including Laughlin, Elko, Mesquite and Jackpot). The Company is a lessee
at each location.
At its satellite sports book locations, the Company leases
between 80 - 300 square feet from the casinos in which it operates for monthly
fees. Satellite location leases vary from one-year to six-year terms (except one
which is on a month to month basis) with automatic one-year extensions unless
either party gives ninety days prior notice of termination. Total rental expense
under the leases was approximately $479,000 and $503,000 for the years ended
January 31, 1997 and 1996, respectively.
The Hotel Operator leases the real property on which the
Hotel/Casino is located pursuant to an 80-year ground lease of which 62 years
are remaining. The method of calculation of percentage rent with respect to
gross gaming revenues under the lease is the subject of certain litigation. See
"Legal Proceedings." The Hotel Operator also is the debtor under a loan, of
which approximately $2.5 million of principal is outstanding as of January 31,
1997. The loan accrues interest at a current annual rate of 10.25% per year, is
due in full in April 5, 2001 and is secured by a deed of trust, assignment of
rents and security agreement in favor of the lender.
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Item 3. Legal Proceedings
Racusin
On August 23, 1995, Leroy's filed a Complaint for Declaratory
Relief in the District Court of Clark County, Nevada, requesting that the Court
declare that two written agreements between Leroy's and Michael Racusin, d.b.a.
M. Racusin & Company, ("Racusin") are vague, ambiguous and unenforceable
contracts. Racusin had introduced certain underwriters, including Equity
Securities Trading Co., Inc. (one of the underwriters of the Company's initial
public offering) to Leroy's and provided Leroy's certain advisory services. The
specific language of the alleged unenforceable agreements provides that Leroy's
will pay to Racusin (i) a commission equal to 5% of the purchase price of
Leroy's in the event Racusin brings in a buyer for Leroy's and (ii) compensation
equal to 4.5% of the "final evaluation in the form of Leroy's common stock plus
$150,000 in cash upon completion of common offering or IPO."
Racusin's position is that Racusin is entitled to either 4.5%
of the stock of Leroy's or 4.5% of the Company's common stock and $150,000 in
cash as a result of the completion of the Company's initial public offering of
its common stock in May 1996. The Company believes that the agreements are
unenforceable contracts.
On September 27, 1995, Racusin answered the complaint
asserting that the two agreements are clear and speak for themselves. The case
was removed to the Nevada Federal District Court on September 30, 1995. On
October 8, 1996 the Nevada Federal District Court granted Racusin's motion to
join the Company as a party to the litigation. On January 25, 1997, Racusin
filed a motion for summary judgment requesting the Court find that Leroy's is an
alter ego of the Company. It is the Company's position that Racusin cannot
evidence that there has been a defacto merger between the Company and Leroy's.
Such motion is pending before the Court and the case is awaiting a trial date.
Ground Lease
On March 31, 1997, James A. Rissler and Patricia R. Rissler
("Landlord") pursuant to the ground lease between the Hotel Operator and the
Landlord by which the Company leases the real property on which the Hotel/Casino
is located, filed a Complaint for Declaratory Relief in the District Court of
Clark County, Nevada, requesting that the amounts paid to Jackpot for its
operation of the slot machines in the Hotel/Casino is not deductible in
calculating the gross gaming revenues for purpose of determining the rent
payable by the Hotel Operator to the Landlord under the Lease. The specific
language of the Lease provides that the Hotel Operator (as the tenant under the
Lease) pay the Landlord additional monthly rent of 5% of (i) the rental paid by
a gaming entity (a subtenant, concessionaire or assignee of the Hotel Operator)
to the Hotel Operator, or (ii) the gross gaming revenue received in or on the
premises, whichever is applicable, or if both are applicable, whichever is
greater.
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The Landlord's position is that any payments made to Jackpot
for operation of the slot machines is not permitted to be deducted prior to
calculating the amount due as additional rent to the Landlord under the Lease.
The Landlord has requested approximately $5,600 of additional rent that is due
from July 1996 through December 1996 and future additional rent as it may come
due pursuant to the Landlord's calculation.
The Company believes that the Landlord is only entitled to
receive 5% of the gross gaming revenues received by the Hotel Operator. The
Landlord has been paid 5% of the gross gaming revenues received by the Hotel
Operator and its predecessors without objection for the past 18 years under the
Lease. The Company believes that the Landlord has waived any objection to the
method of calculation of the percentage rent by its inaction during the prior 18
years and the execution of estoppel certificates at the time of the acquisition
of the Hotel/Casino by the Company in May 1996.
The Landlord also seeks reimbursement of approximately $18,000
for the Landlord's attorney's fees and the Company disputes it is required to
reimburse the Landlord for such fees.
As a result of the dispute, the Company has suspended its
expansion plans for the Hotel/Casino. To the extent that a court determines that
the Landlord is entitled to be paid from the Hotel Operator 5% of the gross
gaming revenues received by all gaming operators at the Hotel/Casino, the
reinstitution of the renovation and expansion of the Hotel/Casino and the
profitability of the Hotel/Casino may be impacted. The Company is considering
other plans for the operation of the Hotel/Casino in the event a determination
by the Court in this lawsuit is made which is adverse to the Company.
The Company is not a party to any other material pending legal
proceeding, nor, to the Company's knowledge, is any other material legal
proceeding threatened against it.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock is reported by the NASDAQ National
Market System under the symbol "BETM". The following table sets forth the range
of high and low bid quotations for the Company's common stock for each of the
periods indicated as reported by the NASDAQ National Market System. Bid
quotations reflect interdealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
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Period High Low
------ ---- ---
July 31, 1996 10 3/4 6 3/4
October 31, 1996 10 1/4 6 5/8
January 31, 1997 15 1/4 9
The approximate number of record holders of shares of the common stock of the
Company outstanding as of April 15, 1997 was 33. No cash dividends have been
declared or paid on the Company's common stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The Company was incorporated under the laws of the State of
Nevada on August 2, 1995 to serve as the holding company of Leroy's, the Hotel
Operator and the Casino Operator and through the Reorganization became such
holding company. The Company did not conduct operations prior to the
Reorganization and accordingly had no revenues during the last two fiscal years.
See "Business" for a general discussion of the plan of operation of the Company,
including without limitation, discussion of parimutuel wagering developments,
acquisition of the Hotel Casino and CBS and expected changes in the number of
Company employees.
Results of Operations
Fiscal Year Ended January 31, 1997 Compared to the Fiscal Year
Ended January 31, 1996
Revenues for the Fiscal year ended January 31, 1997, were
$9,030,000, an increase of $3,453,000 from revenues of $5,577,000 for the Fiscal
year ended January 31, 1996. The increase in revenues was primarily attributed
to the following two events:
1. On May 15, 1996, the Company completed the acquisition of
the Howard Johnson Hotel and Casino ("Hotel/Casino") located in Las Vegas,
Nevada. Revenues from Hotel, Food and Beverage since the date of acquisition
were approximately $2,560,000. Revenues from the Casino since the date of
acquisition were approximately $372,000. The Hotel, Food and Beverage revenues
since the date of acquisition consisted primarily of room sales of $1,421,000
and restaurant and bar sales of $1,018,000. The hotel occupancy rate averaged
83.3% since the acquisition date an increase of 14.6% over the hotel's average
occupancy rate of 72.7% for the same period during the Fiscal year ended January
31, 1996. The favorable variance in occupancy percentage was due to increased
bus tour groups during the summer months, convention attendance and the overall
growth of tourism in Las Vegas. The Casino revenues since the date of
acquisition consisted primarily of slot revenue of $365,000.
2. On October 24, 1996, the Company acquired Computerized
Bookmaking Systems, Inc. ("CBS") located in Las Vegas, Nevada. Revenues from CBS
since the date of
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<PAGE>
acquisition were approximately $915,000. CBS revenues consisted mainly of
maintenance contract revenues of $476,000 and equipment sales of $258,000.
Revenues from horse and sports wagering were approximately
$5,182,000 for the Fiscal year ended January 31, 1997, a decrease of $370,000 or
6.7% from revenues of $5,552,000 for the Fiscal year ended January 31, 1996. The
decrease in horse and sports wagering revenues was attributed to the loss of
certain sportsbooks during the Fiscal year ended January 31, 1997. Revenues of
$4,301,000 for the Fiscal year ended January 31, 1997 at locations operating in
both periods increased $335,000 or 8.4% over revenues of $3,966,000 for the
Fiscal year ended January 31, 1996. Revenues of $881,000 for the Fiscal year
ended January 31, 1997 at the locations that were not operating in both periods
decreased $705,000 or 44.5% from revenues of $1,586,000 for the Fiscal year
ended January 31, 1996. Handle (the total amount wagered at the Company's sports
and race books) for the Fiscal year ended January 31, 1997 was $83,304,000 a
decrease of $1,483,000 or 1.7% from the handle of $84,787,000 for the Fiscal
year ended January 31, 1996. The decrease in handle was principally due to the
loss of certain sportsbook locations partly offset by the handle from the new
replacement locations which were opened at various times during the Fiscal year
ended January 31, 1997. Handle of $70,565,000 for Fiscal year ended January 31,
1997 at locations that were operating in both periods increased $4,542,000 or
6.9% over the handle of $66,023,000 for the Fiscal year ended January 31, 1996.
Handle of $12,739,000 for Fiscal year ended January 31, 1997 at the locations
that were not operating in both periods decreased $6,025,000 or 32.1% from the
handle of $18,764,000 for the Fiscal year ended January 31, 1996. An increase or
decrease in handle is not necessarily indicative of an increase or decrease in
revenues or profits. Net win percentage (revenues divided by handle) for all
race and sports wagering was 6.2% for the Fiscal year ended January 31, 1997 a
decrease of .4% compared to net win percentage for all race and sports wagering
of 6.6% for the Fiscal year ended January 31, 1996. Net win percentage
fluctuates depending on the outcome of various sporting events within the
reporting period. The decrease in the net win percentage was attributed to
unfavorable results in college football, professional basketball and boxing
offset partially by favorable results in horse racing, baseball and hockey.
Direct costs were $4,629,000 for the Fiscal year ended January
31, 1997, an increase of $1,760,000 or 61.3% from direct costs of $2,869,000 for
the Fiscal year ended January 31, 1996. Direct costs include product and
installation cost of sales, labor costs, gaming taxes, gaming supplies,
television simulcasting, franchise fees, and other costs. The increase in total
direct costs was principally due to the acquisition of the Hotel/Casino and CBS.
The acquisition of the Hotel/Casino, which occurred during the Second Quarter of
Fiscal 1997, contributed to an increase in direct costs of $1,664,000 for the
Fiscal year ended January 31, 1997, of which $1,528,000 were Hotel, Food and
Beverage direct costs and $136,000 were Casino direct costs. The acquisition of
CBS, which occurred during the Third Quarter of Fiscal 1997, contributed to an
increase in direct costs of $389,000 for the Fiscal year ended January 31, 1997.
Direct costs associated with horse and sports wagering were $2,540,000, a
decrease of $293,000 or 10.3% as compared to direct costs of $2,833,000 for the
Fiscal year ended January 31, 1996. The decrease in direct costs associated with
horse and sports wagering was
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<PAGE>
primarily attributed to lower labor costs and reduced gaming taxes due to lower
revenues for the Fiscal year ended January 31, 1997, compared to Fiscal year
ended January 31, 1996. Direct costs as a percentage of revenues was 51.3% a
decrease of .1% as compared to direct costs as a percentage of revenues of 51.4%
for the Fiscal year ended January 31, 1996.
Research and Development expenses were $124,000 for the Fiscal
year ended January 31, 1997. These expenses relate exclusively to CBS and are
attributed to software development for new products.
Selling, general and administrative expenses were $3,495,000
for the Fiscal year ended January 31, 1997, an increase of $1,666,000 or 91.1%
from administrative expenses of $1,829,000 for the Fiscal year ended January 31,
1996. The increase in selling, general and administrative expenses for the
Fiscal year ended January 31, 1997 was principally due to the acquisition of the
Hotel/Casino and CBS. The acquisition of the Hotel/Casino which occurred during
the Second Quarter of Fiscal 1997, contributed to an increase in selling,
general and administrative expenses of $1,163,000 for the Fiscal year ended
January 31, 1997, of which $1,036,000 are Hotel, Food and Beverage expenses and
$127,000 are Casino expenses. Since the acquisition, the Hotel/Casino has
incurred repairs and maintenance expenses of $97,000 on the building and
equipment. The acquisition of CBS, which occurred during the Third Quarter of
Fiscal 1997, contributed to an increase in the selling, general and
administrative expenses of $305,000 for the Fiscal year ended January 31, 1997.
Remaining selling, general and administrative expenses were $1,984,000 for the
Fiscal year ended January 31, 1997, an increase of $198,000 or 11.1% as compared
to selling, general and administrative expenses of $1,786,000 for the Fiscal
year ended January 31, 1996. The increase in remaining selling, general and
administrative expenses was primarily attributed to higher labor related costs,
rent, and taxes and licenses expenses for the Fiscal year ended January 31, 1997
compared to Fiscal year ended January 31, 1996. The increase in labor costs
relates to the reclassification of corporate level administrative personnel
during the Fiscal year ended January 31, 1997. The increase in rent and taxes
and licenses were attributed to the addition of new sportsbooks during the
Fiscal year ended January 3, 1997. Selling, general and administrative expenses
were 38.7% of revenues for the Fiscal year ended January 31, 1997 compared to
32.8% for the Fiscal year ended January 31, 1996. The increase in selling,
general and administrative expenses as a percentage of revenue for the Fiscal
year ended January 31, 1997 was principally due to the acquisition of the
Hotel/Casino and CBS.
Depreciation and amortization was $465,000 for the Fiscal year
ended January 31, 1997, an increase of $320,000 or 220.7% from depreciation and
amortization of $145,000 for the Fiscal year ended January 31, 1996. The
increase was primarily due to amortization expense attributed to goodwill and
other intangible assets associated with the acquisition of the Hotel/Casino and
CBS, respectively. The increase in depreciation expense was due to the
acquisition of capital equipment associated with the acquisition of the
Hotel/Casino and CBS and the additional expense associated with new capital
equipment purchases.
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<PAGE>
Restructuring expenses were $175,000 for the Fiscal year ended
January 31, 1997. These expenses relate to the suspended Hotel/Casino renovation
project. See "Legal Proceedings." A reserve has been recorded for items
including, the termination of certain agreements, severance payments to
employees and the abandonment of capital equipment.
Other income (expense) was $12,000 for the Fiscal year ended
January 31, 1997, a decrease of $46,000, or 79.3%, from other income (expense)
in the Fiscal year ended January 31, 1996 of $58,000. The decrease in other
income (expense) was principally due to interest expense of $444,000 on the
long-term debt of the Hotel/Casino and CBS and loss on asset disposal of
$26,000. Partly offsetting these unfavorable items were the earnings of $317,000
from the investments of the net proceeds from the initial public offering of the
Company's common stock, other interest income of $58,000 and equity in earnings
of $68,000 from the partnership investment in the former owner of the
Hotel/Casino.
Net income before income taxes for the Fiscal year ended
January 31, 1997 of $154,000 varied unfavorably by $638,000 or 80.6% compared to
the net earnings before income taxes of $792,000 for Fiscal year ended January
31, 1996. Net earnings from horse and sports wagering operations of $724,000 for
the Fiscal year ended January 31, 1997 varied unfavorably by approximately
$237,000 as compared to the net earnings of $961,000 for the Fiscal year ended
January 31, 1996 principally due to reduced revenues and increased expenses. The
net loss from the Hotel, Food and Beverage operations since the acquisition date
was approximately $627,000 which includes a restructuring charge of $172,000.
The net income from the Casino operations since the acquisition date was
approximately $95,000. The net loss from CBS operations since the acquisition
date was approximately $38,000. Partly offsetting these losses were earnings of
$317,000 from temporary investments of the proceeds from the initial public
offering of the Company's common stock.
Liquidity and Capital Resources
As of January 31, 1997, working capital was $8,148,000
reflecting the net proceeds from the Company's initial public offering and the
exercise of the underwriters over-allotment option during the Second Quarter of
Fiscal 1997.
In March 1995 Leroy's borrowed approximately $1,200,000 from
Pioneer Citizen's Bank of Nevada, which was loaned to the Hotel Operator to
acquire the initial 50% in the Hotel/Casino. As of January 31, 1997 the
outstanding principal on the loan was $757,956. The loan is repayable on March
30, 1988 and bears an annual interest rate determined by the lender's prime
rate. The current rate is 8.75%.
The Hotel Operator is a debtor under a loan (outstanding
principal of $2,471,862 as of January 31, 1997) from American Bank of Commerce
("Bank") secured by a deed of trust, assignment of rents and security agreement
with respect to the Hotel/Casino. The loan bears a variable annual interest rate
and matures on April 5, 2001. The current and annual
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<PAGE>
interest rate on the loan is 10.25%. Leroy's has guaranteed to the Bank all
indebtedness under the loan.
CBS is a debtor under a loan (outstanding principal of
$2,036,043 as of January 31, 1997) from Standard Life and Accident Insurance
Company secured by a deed of trust and assignment of rents and leases with
respect to the Company's corporate office building. The loan bears an annual
interest rate of 8% and is due September 2015. The Company has guaranteed CBS'
obligations under the loan.
Cash provided by operating activities was $1,222,000. Net
investing activities amounted to $14,238,000 reflecting the purchase of
property, plant and equipment, construction in progress, short-term investments,
the purchase of the remaining fifty percent interest in the Hotel/Casino, the
investment in a joint venture and the purchase of CBS. Net cash provided from
financing activities amounted to $12,494,000 including the net proceeds from the
Company's initial public offering of $13,711,000, issuance of stockholder notes
of $2,433,000 and contributions from stockholders of $558,000, partly offset by
distributions to stockholders of $3,649,000 and a decrease in long-term debt of
$560,000.
Leroy's, was an S Corporation under the Internal Revenue Code.
From inception through February 29, 1996, Leroy's made cash distributions of
approximately $4,400,000 in aggregate to its stockholders. On March 21, 1996,
Leroy's made cash distributions to its stockholders in the aggregate amount of
$3,000,000 representing undistributed earnings as of January 31, 1996, on which
the stockholders had previously paid federal income taxes. Of the $3,000,000
distributed, approximately $2,400,000 was loaned back to Leroy's by the
stockholders and $558,000 was contributed as capital to Leroy's by the
stockholders. The loans are repayable pursuant to stockholder notes maturing on
May 1, 1998 and bear interest at prime rate at each fiscal quarter ending date.
On May 15, 1996, the Company completed an initial public
offering of 2,250,000 shares (337,500 shares were sold on June 28, 1996 at $6.00
a share upon the exercise of the underwriters option) of its common stock at
$6.00 per share. Simultaneous with the completion of the initial public
offering, the Company completed the purchase of the remaining fifty percent
interest in the 150 room hotel/casino complex located at 3111 W. Tropicana Ave.
in Las Vegas, Nevada. The balance of the proceeds are planned to be used to
renovate and expand the hotel/casino into a sports theme hotel/casino, to
support the Company's growth and expansion strategy and for general corporate
purposes. The renovation plans have been suspended until a dispute between the
Company and the owner of the land underlying the Hotel/Casino concerning the
ground lease for the land is resolved. See "Legal Proceedings."
Management believes that the Company will be able to satisfy
its cash requirements for at least the next twelve months without having to
raise additional funds.
Congress has created a national gaming study commission to be
comprised of nine individuals appointed by Congress and the President. The
commission generally would
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<PAGE>
have the duty to conduct a comprehensive legal and factual study of gambling in
the United States and existing Federal, State and local policy and practices
with respect to the legalization or prohibition of gambling activities, to
formulate and propose changes in such policies and practices and to recommend
legislation and administrative actions for such changes. Although as many as six
members of the Commission have been appointed, President Clinton has yet to make
the final appointment of the remaining three members. It is not possible to
predict the future impact of the Commission on the Company and its operations as
the Commission, when constituted, could propose legislation and actions that
would materially adversely affect the Company's business.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Statements contained in this document which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of the Company, the occurrence of which
involve certain risks and uncertainties, including that Leroy's takes financial
risks on the outcome of sporting events as a principal betting against its
patrons and uncertainties detailed in the Company's filings with the Securities
and Exchange Commission.
Item 7. Financial Statements
Report of Independent Public Accountants.
Consolidated Balance Sheets as of January 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended
January 31, 1997, and 1996.
Consolidated Statements of Stockholders' Equity for the years
ended January 31, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended
January 31, 1997, and 1996.
Notes to Consolidated Financial Statements.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
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<PAGE>
Part III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The directors and executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Victor J. Salerno........... 53 President, Chief Executive Officer and
Director
Robert D. Ciunci............ 50 Chief Operating Officer, Chief Financial
Officer, Executive Vice President and
Director
Michael Merillat............ 46 Vice President, Secretary and Director
Robert R. Barengo........... 55 Director
Michael Roxborough.......... 46 Director
Victor J. Salerno has been President, Chief Executive Officer
and a Director of the Company since its inception. Mr. Salerno has been the
President, Chief Executive Officer and a Director of Leroy's since September
1979. Mr. Salerno served as an Executive Vice President and Director of Autotote
CBS Corporation, a company that designs and installs computer systems for the
sports betting business, from April 1989 until March 1, 1996. He is a past
president of the Nevada Association of Race and Sports Operators. Mr. Salerno is
the brother in-law of Mr. Merillat.
Robert D. Ciunci has been Executive Vice President, Chief
Financial Officer and a Director of the Company since its inception and became
the Chief Operating Officer of the Company on March 7, 1997. Mr. Ciunci has been
the Chief Financial Officer of Leroy's since August 1, 1995. From 1981 to June
1995 he was employed by Autotote Corporation, a company that provides
computerized wagering systems to race tracks and off track race wagering
establishments, as its Vice President Finance, Secretary and Treasurer. He holds
a master's degree in business administration and has been a certified public
accountant since 1971.
Michael Merillat has been Vice President, Secretary and a
Director of the Company since its inception. Mr. Merillat has been employed by
Leroy's since September 1978, currently as Vice President, Secretary, a Director
and race manager. Mr. Merillat is the brother-in-law of Mr. Salerno.
Robert R. Barengo has been a Director of the Company since its
inception. Mr. Barengo has been a Director of Leroy's since February 1992. He
has been an attorney in private practice since 1972. Mr. Barengo was Speaker Pro
Tempore and Speaker of Nevada's Assembly from 1978 to 1983. Mr. Barengo has been
a director of the Riviera Holdings
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<PAGE>
Corporation and the Riviera Hotel and Casino since 1992. Since 1993, Mr. Barengo
has also been and continues to be at present President and the sole shareholder
of Silver State Disseminators Company, a company licensed by Nevada gaming
authorities to disseminate racing information in the State of Nevada. Mr.
Barengo has also been since 1993 and continues to be at present Chairman of the
Nevada Dairy Commission. Mr. Barengo is a member of the Audit Committee of the
Company's Board of Directors.
Michael Roxborough has been a director of the Company since
its inception. Mr. Roxborough has been a director of Leroy's since September
1992. Since 1982, he has been the president of Las Vegas Sports Consultants,
Inc., a provider of odds and point spreads to legal sports bookmaking operators
including the Company, in the United States, Canada, Mexico, England, Ireland
and Australia. Mr. Roxborough is a member of the Audit Committee of the
Company's Board of Directors.
Item 10. Executive Compensation
The following table sets forth certain information covering the compensation
paid or accrued by the Company during the fiscal year indicated to its Chief
Executive Officer and to its most highly compensated executive officer whose
annual salary and bonus exceeded $100,000 during the fiscal year ended January
31, 1997 ("named executive officer"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long term
----------------------- Compensation
Awards
---------------------
Fiscal Year Ended Number of Securities
Name and Principal Position January 31 Salary Bonus ($) Underlying Options(1)
- ---------------------------- ----------- ------ --------- ---------------------
<S> <C> <C> <C> <C>
Victor J. Salerno 1997 208,000 39,604 0
President and Chief
Executive Officer
Robert D. Ciunci 1997 110,000 31,262 50,000
Chief Operating Officer,
Chief Financial Officer &
Executive Vice President
</TABLE>
1. Represents options granted under the Company's 1995 Stock Option Plan.
Mr. Salerno was not granted options during the fiscal year ended
January 31, 1997.
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<PAGE>
The following table sets forth the number of securities underlying options, the
exercise price and the expiration date for stock options granted to the Chief
Executive Officer and the named executive officer who received options during
the fiscal year ended January 31, 1997.
Option Grants in Fiscal Year ended January 31, 1997
Individual Grants
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted Exercise
Underlying to Employees in Price Expiration
Name Options Granted Fiscal Year ($/share) Date (1)
---- --------------- ------------------ --------- ----------
<S> <C> <C> <C> <C>
Victor J. Salerno 0 0 N/A N/A
Robert D. Ciunci 50,000 28.6% $6.8750 08/22/04
</TABLE>
1. Options become exercisable three years after grant date, beginning on
August 22, 1999, and expire on August 22, 2004.
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<PAGE>
The following table sets forth the number of exercisable and unexercisable
options as of January 31, 1997, and the value of such options for the Chief
Executive Officer and the named executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------
Number of Securities Value of
Underlying Unexercised
Unexercised Options In-The-Money
Shares At Fiscal Year end (#) Options at FY End ($)
Acquired or Value
Name Exercised (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Victor J. 0 0 0/0 0/0
Salerno
Robert D. 0 0 0/50,000(1) 0/$198,100
Ciunci
</TABLE>
(1) Options become exercisable on August 22, 1999 and expire on
August 22, 2004.
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<PAGE>
Director's Compensation
Directors who are not employees or consultants of the Company receive a fee of
$200 plus traveling expenses for each Board meeting they attend.
During the fiscal year ended January 31, 1997, pursuant to the Company's
Directors' Stock Option Plan, options to purchase, respectively, 400 and 300
shares of the Company's common stock at an exercise price of $10.75 per share
were granted to Messrs. Barengo and Roxborough. These options are fully
exercisable on January 31, 1998 and expire on January 31, 2007.
In the year ended January 31, 1997, the Company paid $16,800
to Las Vegas Sports Consultants, Inc. for certain consulting services. Mr.
Roxborough is the President of Las Vegas Sports Consultants, Inc.
Employment Agreements
On May 10, 1996, the Company entered into employment
agreements with Victor Salerno and Robert Ciunci. Each agreement has a five-year
initial term and shall automatically renew for one-year periods unless either
party gives the other sixty (60) days written notice to terminate prior to the
expiration of the current term.
Pursuant to his employment agreement, Mr. Salerno is employed
as the President and Chief Executive Officer of the Company for a base salary of
$200,000 per year ("Base Salary"). In addition, Mr. Salerno will be entitled to
receive a performance bonus each calendar year ("Performance Bonus") equal to 5%
of the Company's Pre-Tax Earnings (as defined in the agreement) for the prior
fiscal year. In the event the agreement is terminated by the Company in
violation thereof, the Company has agreed to pay as termination benefits to Mr.
Salerno a continuation of his Base Salary, Performance Bonus and all other
benefits under the agreement for the remainder of the then outstanding term. In
the event Mr. Salerno dies or becomes disabled (as defined in the agreement),
the Company has agreed to pay the termination benefits for up to one year. Mr.
Salerno is entitled to participate in the Company's benefit plans available to
the Company's officers and employees generally.
Pursuant to his employment agreement, Mr. Ciunci is employed
as the Chief Financial Officer and Executive Vice President of the Company for a
base salary ("Base Salary") of $110,000 per year plus a performance bonus
("Performance Bonus") each calendar year equal to 3% of the Company's Pre-Tax
Earnings (as defined in the agreement) for the prior fiscal year. In the event
the agreement is terminated by the Company in violation thereof or there is a
"Change of Control" or "Constructive Termination," the Company has agreed to pay
to Mr. Ciunci, as termination benefits, a continuation of his Base Salary,
Performance Bonus and all other benefits under the agreement for the remainder
of the then outstanding term. A Change of Control occurs when a substantial
portion of the assets of the Company is transferred, exchanged or sold to a
non-affiliated third party or any person other than Mr. Salerno becomes the
owner of securities of the Company representing 35% or more of the combined
voting power of the Company's securities
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<PAGE>
then outstanding. A Constructive Termination occurs when Mr. Ciunci is not
re-appointed or re-elected to the position of Executive Vice President and Chief
Financial Officer or if there is a change of his duties inconsistent with such
offices. In the event Mr. Ciunci dies or becomes disabled (as defined in the
agreement), the Company has agreed to pay the termination benefits for up to one
year. Mr. Ciunci is entitled to participate in the Company's benefit plans
available to the Company's officers and employees generally.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, at April 15, 1997, the number
and percentage of shares of Common Stock which, according to information
supplied to the Company, are beneficially owned by: (i) each person who is a
beneficial owner of more than 5% of the Common Stock; (ii) each of the
directors, and named executive officers of the Company individually; and (iii)
all current directors and executive officers of the Company as a group. Under
rules adopted by the Securities and Exchange Commission, a person is deemed to
be a beneficial owner of Common Stock with respect to which he has or shares
voting power (which includes the power to vote or to direct the voting of the
security), or investment power (which includes the power to dispose of, or to
direct the disposition of, the security). A person is also deemed to be the
beneficial owner of shares with respect to which he could obtain voting or
investment power within 60 days of April 15,1997, such as upon the exercise of
options or warrants.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
<S> <C> <C>
Robert Barengo 525,000(1) 6.70%
675 Grier Drive
Las Vegas, Nevada 89119
Robert D. Ciunci 105,000(2) 1.34%
675 Grier Drive
Las Vegas, Nevada 89119
Michael Merillat 210,000(3) 2.68%
675 Grier Drive
Las Vegas, Nevada 89119
Michael Roxborough 519,600(4) 6.63%
675 Grier Drive
Las Vegas, Nevada 89119
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Victor J. Salerno 3,885,000 49.57%
675 Grier Drive
Las Vegas, Nevada 89119
All directors and executive officers 5,244,600 66.92%
as a group (5 persons)
</TABLE>
(1) Includes 525,000 shares held jointly with Mr. Barengo's wife. Does not
include 400 shares which may only be issued upon the exercise of stock
options after January 31, 1998.
(2) Does not include 50,000 shares which may only be issued upon exercise
of stock options after August 22, 1999.
(3) Does not include 50,000 shares which may only be issued upon exercise
of stock options after August 22, 1999.
(4) Does not include 300 shares which may only be issued upon exercise of
stock options after January 31, 1998.
Item 12. Certain Transactions
Prior to the Reorganization, Leroy's, the Hotel Operator and
B-P were S Corporations under the Internal Revenue Code. From inception through
February 29, 1996 Leroy's made cash distributions of approximately $4.4 million
in the aggregate to the Original Stockholders. On March 21, 1996 Leroy's made
cash distributions to the Original Stockholders in the aggregate amount of $3.0
million representing undistributed income through January 31, 1996 on which such
stockholders had previously paid federal income taxes. Of the $3.0 million
distributed approximately $2.4 million was loaned back to Leroy's by the
Original Stockholders and $558,000 was contributed as capital to Leroy's by such
stockholders. The loans are repayable pursuant to restated stockholder notes
maturing on May 1, 1998 and bearing interest at a current annual rate of 8.25%.
In addition, B-P made cash distributions to its stockholders for the year ended
December 31, 1995 and Leroy's, the Hotel Operator and B-P made cash
distributions for the short tax year ended May 10, 1996 for the taxable income
of such companies for such periods. Such distributions eliminate Leroy's, the
Hotel Operator's and B-P's accumulated earnings through the date of termination
of the S Corporation status of such corporations.
In conjunction with the Reorganization, Leroy's, the Hotel
Operator and B-P and the Original Stockholders entered into an agreement on May
10, 1996 which provides that if Leroy's, the Hotel Operator or B-P obtain a tax
benefit to the detriment of such stockholders for any tax period, on or prior to
the effective date of the Reorganization, the affected company shall pay to the
stockholders the tax benefit actually derived up to the amount of the tax
detriment
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<PAGE>
actually incurred. In addition, for up to $200,000 in the aggregate, such
companies have agreed to pay to such stockholders any increased tax liability of
such stockholders attributable to a determination by a court of competent
jurisdiction or a federal taxing authority that with respect to the federal tax
returns of such companies for taxable years prior to May 10, 1996, the tax
liability of such companies shall be increased.
The Company provides managerial and related services to
Leroy's, CBS and the Hotel Operator ("Operating Companies"). The Company
provides executive and administrative services in exchange for a management fee
equal to 9.5% of each Operating Company's gross operating revenues (including
promotional allowances). During the year ended January 31, 1997, the Operating
Companies paid the Company an aggregate of $541,282.
The Company and the Operating Companies entered into a
consolidated income tax return tax sharing agreement on May 10, 1996. In
general, the agreement provides that in conjunction with the filing of a
consolidated federal income tax return with the Internal Revenue Service each of
the Operating Companies will pay to the Company an amount equal to the federal
income tax liability that such company would have paid if it were filing its own
separate federal income tax return.
Pursuant to a stock purchase agreement, dated December 12,
1994, between Victor Salerno and Robert Ciunci, Mr. Salerno sold to Mr. Ciunci
shares of stock of Leroy's constituting two percent of the outstanding shares of
Leroy's for $100,000. The payment for such shares by Mr. Ciunci was required to
be made after the receipt of the Nevada Gaming Commission's approval of such
sale. The Nevada Gaming Commission approved the sale on February 22, 1996.
In 1995, in connection with the purchase of the initial 50%
interests in the Partnership and B-P, Leroy's made a $200,000 deposit on behalf
of Messrs. Salerno, Merillat, Barengo and Roxborough, for the purchase of such
50% interests. Such individuals transferred their right to purchase the
Partnership to the Hotel Operator for which the Hotel Operator assumed such
individuals' obligations to repay Leroy's.
Mr. Barengo is a director of the Riviera Hotel and Casino (the
"Riviera"), at which the Company maintains one of its satellite sports book
operations pursuant to a renewable one month lease for which the Company leases
200 square feet. The Company paid the Riviera rent of $158,654 and $141,883 for
the years ended January 31, 1997 and 1996.
CBS leases 2,000 square feet of office space to MEGA$PORTS,
Inc. in the building owned by CBS. Lease payments invoiced were $14,775
for the year ended January 31, 1997.
CBS leases 3,735 square feet of office space to Las Vegas
Sports Consultants, Inc., a company of which Mr. Roxborough is President, in the
building owned by CBS. Lease payments received by CBS were $16,470 for the year
ended January 31, 1997.
-36-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
American Wagering, Inc.:
We have audited the accompanying consolidated balance sheets of
AMERICAN WAGERING, INC. (a Nevada corporation) and subsidiaries as of January
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Wagering,
Inc. and subsidiaries as of January 31, 1997 and 1996 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
April 4, 1997
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED BALANCE SHEETS
As of January 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,416,412 $ 3,938,582
Short-term investments 7,154,007 --
Accounts receivable, net of allowance for doubtful accounts
of $152,445 409,141 --
Inventory 300,334 --
Prepaid expenses and other current assets 392,678 459,414
------------ ------------
11,672,572 4,397,996
PROPERTY AND EQUIPMENT, net 8,710,404 420,992
INVESTMENT IN JOINT VENTURE AND PARTNERSHIP 134,599 1,331,844
INTANGIBLE ASSETS, net 1,424,933 --
EXCESS OF COST OVER FAIR MARKET VALUE
OF NET ASSETS ACQUIRED, net 2,144,474 --
DEPOSITS AND OTHER ASSETS 633,175 88,977
------------ ------------
$ 24,720,157 $ 6,239,809
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 383,673 $ 236,365
Accounts payable 922,206 287,640
Accrued expenses 687,914 207,536
Unpaid winning tickets 927,866 1,006,056
Other current liabilities 602,659 656,157
------------ ------------
3,524,318 2,393,754
LONG-TERM DEBT
Stockholder notes payable 2,433,124 --
Long-term debt, less current portion 4,931,411 757,956
------------ ------------
7,364,535 757,956
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value; authorized
25,000,000 shares; issued and outstanding: none -- --
Common stock -- $.01 par value; authorized
25,000,000 shares; issued and outstanding: 7,837,500
and 5,250,000 shares 78,375 50,251
Additional paid-in capital 14,686,208 445,006
Retained earnings (deficit) (933,279) 2,592,842
------------ ------------
13,831,304 3,088,099
------------ ------------
$ 24,720,157 $ 6,239,809
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
REVENUES $9,030,231 $5,577,477
OPERATING COSTS AND EXPENSES:
<S> <C> <C>
Direct costs 4,629,355 2,868,568
Research and development 124,459 --
Selling, general and administrative 3,494,858 1,829,427
Restructuring charge 175,433 --
Depreciation and amortization 464,933 145,427
---------- ----------
Total operating costs and expenses 8,889,038 4,843,422
---------- ----------
OPERATING INCOME 141,193 734,055
OTHER INCOME (EXPENSE):
Interest income 375,224 68,978
Other income 13,466 57,141
Interest expense (444,251) (82,626)
Equity in unconsolidated subsidiary 68,041 14,528
---------- ----------
Total other income (expense) 12,480 58,021
INCOME BEFORE PROVISION FOR INCOME TAXES 153,673 792,076
PROVISION FOR INCOME TAXES 30,773
PROFORMA PROVISION FOR INCOME TAXES (UNAUDITED) 269,306
---------- ----------
NET INCOME $ 122,900
========== ==========
EARNINGS PER SHARE $ 0.02
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,142,432
========== ==========
PROFORMA NET INCOME (UNAUDITED) $ 101,424 $ 522,770
========== ==========
PROFORMA EARNINGS PER SHARE (UNAUDITED) $ 0.01 $ 0.10
========== ==========
PROFORMA WEIGHTED AVERAGE SHARES OUTSTANDING (UNAUDITED) 5,250,000
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------------------
Leroy's Horse Leroy's Hotel American
and Sports Place Corporation Wagering, Inc. Retained
------------------ ------------------ ------------------- Additional Earnings
No. of No. of No. of Paid-In (Accumulated Total
Shares Balance Shares Balance Shares Balance Capital Deficit) Equity
------ ------- ------ ------- ------ ------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE
January
31, 1995 1,800 $50,000 --- $ --- --- $ --- $445,006 $3,500,766 $3,995,772
Formation
of New
Companies --- --- 25,000 250 100 1 --- --- 251
Distribution --- --- --- --- --- --- --- (1,700,000) (1,700,000)
Income before
taxes --- --- --- --- --- --- --- 792,076 792,076
----- ------- ------- ------- ------ ------ --------- ---------- ----------
BALANCE
January
31, 1996 1,800 $50,000 25,000 250 100 1 445,006 2,592,842 3,088,099
Contributions --- --- --- --- --- --- 558,000 --- 558,000
Distributions --- --- --- --- --- --- --- (3,649,021) (3,649,021)
Reorganization (1,800) (50,000) (25,000) (250) 5,249,900 52,499 (2,249) --- ---
Proceeds from
Offering --- --- --- 2,587,500 25,875 13,685,451 --- 13,711,326
Net
Income --- --- --- --- --- --- --- 122,900 122,900
----- ------- ------- ------- ------ ------ --------- ---------- ----------
BALANCE
January
31, 1997 --- $ --- --- $ --- 7,837,500 $ 78,375 $14,686,208 ($933,279) $13,831,304
===== ======= ======= ======= ========= ======== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 122,900 $ 522,770
------------ ------------
Adjustments to reconcile net income to cash provided by operating activities:
Pro forma income taxes (unaudited) -- 269,306
Depreciation and amortization 464,933 145,427
Equity in earnings from investment in partnership (68,041) (14,528)
Provision for doubtful accounts 139,917 --
Changes in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (534,141) --
Inventory (142,784) --
Prepaid expenses and other current assets 948,995 (59,386)
Increase (decrease) in liabilities:
Accounts payable 601,140 --
Accrued expenses (178,988) 455,569
Unpaid winning tickets (78,190) (5,193)
Other current liabilities (53,498) 224,988
------------ ------------
Total adjustments 1,099,343 1,016,183
------------ ------------
Net cash provided by operating activities 1,222,243 1,538,953
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (754,537) (298,804)
Proceeds from sale of property and equipment -- 150,000
Deposits and other assets (294,899) (66,487)
Purchase of short-term investments (7,154,007) --
Purchase of remaining 50% interest in partnership, net of cash acquired (3,041,592) --
Purchase of CBS, net of cash acquired (2,993,176) --
Proceeds from distribution of investee partnership -- 10,000
------------ ------------
Net cash used in investing activities (14,238,211) (205,291)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (559,631) (180,196)
Proceeds from Stockholder notes 2,433,124 --
Net proceeds from issuance of common stock 13,711,326 --
Contributions from stockholders 558,000 --
Distributions to stockholders (3,649,021) (1,700,000)
------------ ------------
Net cash provided by (used in) financing activities 12,493,798 (1,880,196)
------------ ------------
NET DECREASE IN CASH (522,170) (546,534)
CASH, beginning of period 3,938,582 4,485,116
============ ============
CASH, end of period $ 3,416,412 $ 3,938,582
============ ============
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
(Continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the years ended January 31, 1997 and 1996 was
$444,251 and $82,625, respectively.
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
January 31, 1996 Transactions -
Investment in partnership financed with debt
($1,174,517) and assignment of stockholder receivables ($200,000).
January 31, 1997 Transactions -
In May, 1996 LHC purchased the remaining 50% of
BSRB Resort Hotels. The elimination of the investment in partnership, the assets
acquired and the assumption of debt are as follows:
Cash $617,276
Other current assets 311,695
Property and equipment 4,740,000
Deposits and other assets 48,503
Excess of cost over fair
market value of net
assets acquired 2,227,883
Accrued expenses (342,803)
Note Payable (2,543,801)
Elimination of investment
in partnership (1,399,885)
----------
$3,658,868
==========
In October, 1996 the Company purchased all of the capital stock of Autotote CBS
for $3 million and incurred $155,707 in legal and accounting fees associated
with the purchase. In conjunction with the acquisition, assets and liabilities
were as follows:
Cash $ 162,531
Inventory 157,550
Other current assets 585,482
Property and equipment 3,115,802
Investments 134,599
Deposits and other assets 208,045
Intangible assets 1,478,281
Accrued expenses (349,990)
Note Payable (2,336,593)
-----------
$ 3,155,707
===========
Purchase of vehicles financed with debt ($41,564)
Payment of insurance premiums financed with debt ($32,586)
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AMERICAN WAGERING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
1. Summary of Business and Significant Accounting Policies
Summary of Business
In August, 1995, American Wagering Inc., a Nevada corporation, (the
"Company") was formed to be a holding company, for Leroy's Horse and
Sports Place ("LHSP") and Leroy's Hotel Corporation ("LHC").
Immediately prior to the closing of the initial public offering by
American Wagering, Inc., the stockholders of LHSP and LHC exchanged
their shares in those companies for shares of American Wagering, Inc.
These transactions are referred to as the "Reorganization."
LHSP was incorporated under the laws of the State of Nevada on November
14, 1977. The Company operates its main race and sportsbook located on
the premises of LHC in Las Vegas, Nevada. In addition, LHSP operates
sports books throughout the state of Nevada in licensed gaming
establishments not owned by LHSP. The Company leases the square footage
necessary to conduct its operations at the non-Company owned gaming
establishments. As of January 31, 1997 and 1996 the Company had 38 and
35 locations, respectively.
LHC owns and operates a 150 room Howard Johnsons hotel (the "Hotel")
and, through its wholly owned subsidiary B-P Food Corporation, an
International House of Pancakes restaurant located in Las Vegas,
Nevada. Additionally, LHSP operates a 5,600 square foot casino
containing approximately 70 electronic gaming devices including slot
machines, video poker machines and multi-game video machines adjacent
to the Hotel and restaurant (collectively the "Hotel/Casino").
In March, 1995, LHC purchased fifty percent interests in certain
entities which owned and operated the Hotel/casino located in Las
Vegas, Nevada. The related entities were BSRB Resort Hotels (a Nevada
general partnership) and B-P Food Corporation (a Nevada corporation
which was wholly owned by BSRB Resort Hotels). The purchase was
financed by a bank note executed by LHSP for approximately $1.1
million.
In February, 1996, the stockholders of LHSP purchased a fifty percent
interest in the stock of B-P Gaming Corporation (a Nevada corporation),
which was contributed to the Company in connection with the
Reorganization.
On May 15, 1996, the Company completed an initial public offering of
common stock. The initial public offering price was $6.00 per share,
with 2,250,000 common shares being offered. In June, 1996 the
underwriter exercised its over-allotment option to purchase an
additional 337,500 shares at $6.00 per share.
On May 15, 1996, the Company purchased the remaining fifty percent
interest in BSRB Resort Hotels and BP-Gaming Corporation ("B-P") for
$3,601,000 in cash and the assumption of certain liabilities.
On October 25, 1996, the Company acquired from Autotote Corporation
("AC"), all of the shares of capital stock of Autotote CBS, Inc.
(subsequently renamed Computerized Bookmaking Systems, Inc.("CBS"),
along with certain software and licensing rights) pursuant to a Stock
Transfer Agreement between the Company and AC. In consideration the
Company paid $3 million in cash to AC and agreed to guarantee, pursuant
to a Guaranty Agreement, CBS's obligation under its current mortgage of
approximately $2 million on the real estate and building in Las Vegas,
Nevada where the Company currently maintains its corporate offices.
CBS, designs, installs and maintains sports and race book equipment,
software and computer systems for the sports betting industry. CBS is
also 50% partner in a joint venture that owns and operates MegaSports,
Inc. ("MegaSports") which is developing software for parimutuel sports
wagering.
<PAGE>
Short Term Investments
Short-term investments consist of liquid investments, such as treasury
bills, with a maturity of six months or less and are carried at cost
adjusted for discount amortization.
Inventory
Inventories are stated at the lower of cost (based on the first-in,
first-out method) or market. Costs capitalized as inventory include
direct labor and materials.
Depreciation and Amortization
Property and equipment are depreciated by use of the straight line
method for financial reporting purposes and accelerated methods for
income tax purposes over the estimated useful lives of the assets.
The excess of the cost over the fair market value of net assets of
acquired companies has been capitalized and is being amortized over the
periods expected to be benefited, or approximately 25 years.
Accumulated amortization was $64,894 at January 31, 1997. Other
intangible assets acquired including software and rights for
manufacturing and distribution are being amortized over 7 years.
Accumulated amortization was $53,348 at January 31, 1997.
The realizability of intangible assets is evaluated periodically as
events or circumstances warrant. Such evaluations are based on various
analyses, including cash flow and profitability projections that
incorporate, as applicable, the impact on existing Company business.
The analysis necessarily involves significant management judgment to
evaluate the capacity of an acquired business to perform within
projections.
Revenue Recognition
With respect to the casino segment, in accordance with industry
practice, the Company recognizes race and sports wagering revenues as
the net win from such wagering activities, which is the difference
between gaming wins and losses. Wagers received on future race and
sporting events are reflected as a liability and are not recognized as
revenues until the event has taken place. Sports wagering revenues are
recognized based on the results of a completed sporting event. With
respect to the Systems segment, the Company recognizes revenue when the
software and hardware are installed at the customer location.
Maintenance fee revenue is recognized as the services are provided.
Earnings Per Share and Pro Forma Earnings Per Share
The earnings per share calculation for the fiscal year ended January
31, 1997 is based on the weighted average number of shares of common
stock outstanding during the period and the dilutive effect of stock
options granted. The number of outstanding shares of common stock were
5,250,000 through the initial public offering, 7,500,000 after the
initial public offering on May 15, 1996 and 7,837,500 after the
underwriter exercised its over-allotment option on June 28, 1996. The
number of stock options granted were 174,900.
<PAGE>
The proforma earnings per share calculation for the fiscal year ended
January 31, 1996 is computed on the basis of the number of shares of
common stock outstanding during fiscal year 1996, restated for the
Reorganization. The proforma income taxes presented for both years
assumes that the Company would have incurred federal income taxes as a
C corporation for the entire year at a 34 percent statutory rate.
1997 1996
---- ----
Income before provision for income taxes $153,673 $792,076
Provision for income taxes 30,773 ---
Proforma provision for income taxes 21,476 269,306
-------- --------
Proforma net income $101,424 $522,770
======== ========
Proforma weighted average
(Common Shares Outstanding) 7,142,432 5,250,000
========= =========
Proforma earnings per share $ 0.01 $ 0.10
========= =========
Use of Estimates
Financial statements prepared in accordance with generally accepted
accounting principles require the use of management estimates. The most
significant estimates with regard to these financial statements relate
to setting and adjusting lines on sporting events. The sportsbook
operator is betting as a principal against its patrons. Therefore, if
the "book" of wagers placed on an event is not balanced, the sportsbook
operator is significantly at risk for the outcome of a sporting event.
Although sportsbook operators attempt to keep the book in balance by
adjusting the betting line, the risk of a non-balanced book is inherent
in the operation of a sportsbook. To the extent that a book on a
particular event is not balanced, the book-making operation, like its
patrons, is gambling on the outcome of an event.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The financial results
for acquisitions are included in the consolidated financial statements
from the date of acquisition. Investments in 50% or less owned joint
ventures are accounted for under the equity method.
<PAGE>
Reclassifications
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation. These
reclassifications had no effect on the Company's net income.
Income Taxes
In connection with the Reorganization, the S corporation status of LHSP
and LHC terminated. The Company records income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income
taxes are calculated using the asset and liability method. Under the
asset and liability method, deferred income taxes are measured using
enacted statutory tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered
or settled.
Concentration of Risk
The Company derives a substantial portion of its revenues from a
limited number of licensed race and sports books in the State of
Nevada. Limitations on the scope of operations at such licensed race
and sports books due to statutory or regulatory changes or
deterioration in the general economic conditions which impact the
gaming industry in Nevada could adversely affect the Company's
operating results.
Approximately 26% and 31% of total handle (total amount wagered in race
and sports events) and 29% and 19% of LHSP total revenues is related to
professional football for the years ending January 31, 1997 and 1996,
respectively. If the professional football season was interrupted due
to strikes or other factors this may have a significant impact on the
financial results of the Company.
2. Inventory
Inventory consisted of the following as of January 31, 1997:
1997
----
Raw materials and spare parts $ 15,801
Work in process 4,267
Finished goods 264,532
Supplies 15,734
----------
$ 300,334
===========
<PAGE>
3. Property and Equipment
Property and equipment are stated at cost and consist of the following
as of January 31, 1997 and 1996:
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Life
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 575,000 $ -
Buildings 6,771,263 - 39 years
Furniture and fixtures 729,888 131,366 5-10 years
Equipment 1,254,691 757,641 5-20 years
Other 224,343 243,181 5-10 years
Construction in progress 143,382 -
------------ --------------
9,698,567 1,132,188
Less: Accumulated depreciation (988,163) (711,196)
------------ -------------
$ 8,710,404 $ 420,992
============ =============
</TABLE>
4. Investment in Joint Venture and Partnership
Investment in Partnership
In March, 1995, LHC purchased fifty percent interests in certain
entities which owned and operated the Hotel/casino located in Las
Vegas, Nevada. The related entities were BSRB Resort Hotels (a Nevada
general partnership) and B-P Food Corporation (a Nevada corporation
which was wholly owned by BSRB Resort Hotels). The purchase was
financed by a bank note incurred by LHSP for approximately $1.1
million. The purchase price of the 50% interest in BSRB Resort Hotels
was approximately $1.4 million. On May 15, 1996, the Company acquired
the remaining fifty percent interest in BSRB Resort Hotels. The excess
of the purchase price over the fair market value of the net assets
acquired is being amortized over 25 years. In February, 1996, the
stockholders of LHSP purchased a fifty percent interest in the stock of
B-P, which was contributed to the Company in connection with the
Reorganization. The remaining fifty percent interest in B-P was also
acquired by the Company on May 15, 1996.
Summarized, combined financial information for BSRB Resort Hotels and
B-P for the period from January 1, 1996 to May 15, 1996 is as follows:
Revenues $ 1,597,000
Operating Income $ 339,000
Net Income $ 136,000
Investment in Joint Venture
The Company, through the acquisition of CBS on October 24, 1996, is
involved in a joint venture with IGT-North America ("IGT"). CBS and IGT
each own a fifty percent interest in the joint venture company named
MegaSports, Inc., a Nevada corporation ("MegaSports"). MegaSports is an
enterprise in the development stage and is engaged in the design,
manufacture and distribution of a pari-mutuel sport wagering system.
The Company's investment in joint venture balance has arisen primarily
through contributions of property and equipment.
In February 1997, the Company received a reimbursement of $500,000 from
IGT for previous start-up costs incurred by CBS related to the
MegaSports investment in joint venture.
<PAGE>
5. Deposits and Other Assets
Deposits and other assets consisted of the following at January 31,
1997 and 1996:
1997 1996
-------- --------
Loan fees, net $ 121,241 $ -
Gaming and franchise fees 113,608 -
Deferred tax benefit 100,205 -
Rent receivable - MegaSports 86,187 -
Note receivable 84,380 -
Deposits 50,296 88,977
Other 77,258 -
----------- -----------
$ 633,175 $ 88,977
=========== ===========
Loan fees associated with the building mortgages have been capitalized
and are being amortized over the related term of the mortgages and is
net of accumulated amortization of $11,755 at January 31, 1997. Gaming
and franchise fees related to gaming license and franchise agreements
are being amortized over the life of the related agreements.
6. Accrued Expenses
Accrued expenses consisted of the following at January 31, 1997 and
1996:
1997 1996
------- --------
Payroll, bonus and vacation $ 422,656 $ 172,536
Restructuring charges 175,433 -
Other 89,825 35,000
------------- ------------
$ 687,914 $ 207,536
============= ============
Restructuring charges are attributed to costs associated with the
closing of the Hotel/casino for renovations.
7. Shareholder Notes Payable
On March 21, 1996 LHSP made cash distributions to the origninal
shareholders in the aggregate amount of $3 million representing
undistributed earnings through January 31, 1996 on which the
shareholders had previously paid federal income taxes. Of the $3
million distributed, $2,433,124 was loaned back to LHSP by the original
shareholders. As of January 31, 1997, the outstanding aggregate
principle balance of the shareholder notes was $2,433,124. These notes
were originally due April 1, 1997 but have been extended 13 months from
the original date of maturity to May 1, 1998. Interest accrues
quarterly at the prime rate (8.25% at January 31, 1997). The notes are
unsecured.
<PAGE>
8. Long-term Debt
Long term debt consist of the following at January 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable to a bank, monthly payments of principal and interest of
$24,895, interest is at base rate (8.5% at January 31, 1997) plus
1.75%, secured by Deed of Trust, maturing April 2001. $ 2,471,862 $ -
Mortgage payable, monthly payments of principal and interest of
$17,565, interest is at 8%, secured by building which serves as
corporate headquarters, maturing September 2015. 2,036,043 -
Note payable to a bank, monthly payments of principal and interest of
$26,272, interest is at prime (8.25% at January 31, 1997) plus 0.5%,
unsecured, maturing March 1998. 757,956 994,321
Note payable to a finance company, monthly payments of principal and
interest of $3,758, interest is at 9.0%, unsecured, maturing August
1997. 25,345 -
Note payable to a bank, monthly payments of principal and interest of
$404, interest is at 9.5%, secured by a vehicle, maturing December
1999. 12,130 -
Note payable to a bank, monthly payments of principal and interest of
$467, interest is at 8.9%, secured by a vehicle, maturing May 1999. 11,748 -
------------ -----------
5,315,084 994,321
Less current portion (383,673) (236,365)
------------- ------------
$ 4,931,411 $ 757,956
============= ============
</TABLE>
As of January 31, 1997, annual maturities of total long-term debt are
as follows:
Year Ending
January 31,
-----------
1998 $ 383,673
1999 615,199
2000 121,519
2001 126,687
2002 2,320,742
Thereafter 1,747,264
----------
$5,315,084
==========
In December 1996, LHSP obtained three irrevocable letters of credit
("ILOC") with a bank totaling $1,575,000 which replace the bonds used
in the prior year to meet certain reserve requirements of the Nevada
Gaming Commission imposed on race books and sports pools. Under the
terms of the ILOC, LHSP pays an annual commitment fee of 0.85% of the
total ILOC available. The commitment fee expense was $9,337 for the
year ended January 31, 1997. The ILOC are renewed quarterly and expire
in July 1997.
<PAGE>
9. Income Taxes
The provision (benefit) for federal income taxes consisted of the
following:
January 31,
1997
-----------
Current $ 130,978
Deferred (100,205)
---------------
$ 30,773
===============
The tax effect of significant temporary differences representing
deferred tax assets and liabilities for the Company is as follows:
January 31,
1997
------------
Deferred Tax Assets:
Restructuring charges 59,647
Bad debt reserve 45,900
Amortization 8,295
--------------
113,842
Deferred Tax Liabilities:
Depreciation (13,637)
--------------
$ 100,205
==============
The Company did not record a valuation allowance at January 31, 1997
relating to recorded tax benefits because in managements opinion all
benefits are likely to be realized.
The provision for income taxes differs from that computed at the
federal statutory corporate tax rate as follows:
Federal Statutory rate 34%
Tax benefit of S Corporation
earnings (16)
Other 2
----
Effective tax rate 20%
====
The accompanying statement of operations for the fiscal year ended
January 31, 1996 includes an unaudited pro forma provision for income
taxes, using a tax rate of 34 percent, to reflect the estimated tax
expense of the Company as if they had been subject to federal income
taxes for the period.
10. Commitments and Contingencies
Leases
As of January 31, 1997 the Company had operating leases at various
non-Company owned locations. Total rental expense for these leases was
approximately $479,000 and $503,000 for the years ended January 31,
1997 and 1996, respectively. These lease terms vary from one to six
years depending on the location.
Under leases for three of the Company's operating locations rent is
based on a percentage of income above specified thresholds. Rent
expense for these locations, which is included in the total rent
expense above, was $225,000 and $188,000 for the years ended January
31, 1997 and 1996, respectively.
At January 31, 1997, future minimum rental payments under
non-cancelable leases are as follows:
January 31,
-----------
1998 $ 210,041
1999 135,116
2000 91,996
2001 83,764
2002 72,150
Thereafter 3,960,000
-------------
$ 4,553,067
=============
<PAGE>
Litigation
In August, 1995 LHSP filed a complaint in the District Court of Clark
County, Nevada, requesting the court declare relief from two written
agreements between LHSP and an individual. The agreements provide for
fees or stock in LHSP to be paid to the individual in the event of an
initial public offering of LHSP. The individual has answered the
complaint, and the case is currently in the discovery process. Although
the Company believes the agreements are unenforceable, and intends to
vigorously pursue this action, the outcome cannot be reasonably
determined at this time. An unfavorable outcome may have a significant
impact on the Company's financial position and may result in the
dilution of stock value.
On March 31, 1997 the owner of the land under which the Hotel/Casino
stands, filed a complaint in the District Court of Clark County,
Nevada, claiming additional rents under the terms of the ground lease.
The Company believes the payments are consistent with previous payments
under the lease made by the Company's predecessors and intends to
vigorously fight the action.
As a result of this dispute, the Company has suspended its expansion
plans for the Hotel/Casino. To the extent that a court determines that
the Landlord is entitled to 5% of the gross gaming revenues received by
all gaming operators at the Hotel/Casino, the reinstitution of the
renovation and expansion of the Hotel/Casino and the profitability of
the Hotel/Casino may be impacted. The Company is considering other
plans for the operation of the Hotel/Casino in the event a
determination by the Court in this lawsuit is made which is adverse to
the Company.
The Company is also party to other legal proceedings, most of which
relate to routine matters incidental to its business. Management does
not believe the outcome of such proceedings will have a material
adverse effect on the Company's financial position or results of
operations.
11. Stock Options
The Board of Directors has authorized 375,000 shares of Common Stock
under the 1995 Stock Option Plan and Directors' Stock Option Plan which
may be granted to employees and directors of the Company. Options
granted under the plans have an exercise price equal to the market
price of the Company's common stock on the date of grant and a term of
5 years. Options granted under the plans generally become exercisable
on a single date from three to five years from the date of grant.
Summarized information for the stock option plans is as follows:
<TABLE>
<CAPTION>
Year ended January 31, 1997
----------------------------
Weighted-
Average
Options Exercise Price
------- --------------
<S> <C> <C>
Granted 174,900 $ 7.58
------------------------
Outstanding at the end of the year 174,900 $ 7.58
========================
Options exercisable at the end of the year -
========
Options available for grant at the end of
the year 200,100
========
</TABLE>
<PAGE>
The following table summarizes information about stock options
outstanding at January 31, 1997:
<TABLE>
<CAPTION>
Weighted-Average
Range of Number Remaining Contractual Weighted-Average
Exercise Prices Outstanding Life Exercise Price
------------------------- ------------ --------------------- ----------------
<S> <C> <C> <C>
$6.88 to $9.88 174,900 4.6 years $7.58
</TABLE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation". SFAS No. 123 is effective
for fiscal years beginning after December 15, 1995 and provides, among
other things, that companies may elect to account for employee stock
options using a fair value-based method or continue to apply the
intrinsic value-based method prescribed by Accounting Principal Board
Opinion No. 25 ("APB 25").
Under SFAS No. 123, all employee stock option grants are considered
compensatory. Compensation cost is measured at the date of grant based
on the estimated fair value of the options determined using an option
pricing model. The model takes into account the stock price at the
grant date, the exercise price, the expected life of the option, the
volatility of the stock, expected dividends on the stock and the
risk-free interest rate over the expected life of the option. Under APB
25, generally only stock options that have intrinsic value at the date
of grant are considered compensatory. Intrinsic value represents the
excess, if any, of the market price of the stock at the grant date over
the exercise price of the options. Under both methods, compensation
cost is charged to earnings over the period the options become
exercisable.
The Company has elected to continue to account for employee stock
options under APB 25. Accordingly, no material compensation cost has
been recognized.
The following table discloses the Company's pro forma net income and
net income per share assuming compensation cost for employee stock
options had been determined consistent with SFAS No. 123. The table
also discloses the weighted-average assumptions used in estimating the
fair value of each option grant on the date of grant using the
Black-Scholes option pricing model, and the estimated weighted-average
fair value of the options granted. The model assumes no expected future
dividend payments on the Company's common stock for the options granted
during the fiscal year ended January 31, 1997.
Year Ended
January 31, 1997
----------------
Net income
As reported $ 122,900
Pro forma 35,920
Net income per share
As reported .02
Pro forma .01
Weighted-average assumptions
Expected stock price volatility 60.00%
Risk-free interest rate 6.50%
Expected option lives 4.6 years
Estimated fair value of options granted $ 4.38
<PAGE>
12. Business Segment Reporting
The Company's primary operations are reported in the following four
segments: Horse and Sports Wagering, Hotel, Food and Beverage, Casino
and Computerized Bookmaking Systems ("Systems").
The Horse and Sports Wagering segment consists of licensed bookmaking
operations with the largest number of sportsbooks in the state of
Nevada. In addition to its main location, the Company operates 37 race
and sports books located within licensed gaming establishments owned by
other companies throughout the state of Nevada.
The Hotel, Food and Beverage segment owns and operates a 150 room
Howard Johnson Hotel and, through its wholly owned subsidiary, an
adjacent International House of Pancakes restaurant located in Las
Vegas, Nevada.
The Casino segment includes a 5,600 square foot casino within the
Howard Johnson Hotel containing approximately 74 electronic gaming
devices including slot machines, video poker machines and multi-game
video machines.
The Computerized Bookmaking Systems segment designs, installs and
maintains race and sports book equipment, software and computer systems
to the sports betting industry.
The following summarizes the segment information for the Company:
<TABLE>
<CAPTION>
Years Horse and Hotel,
Ended Sports Food and
January 31, Wagering Beverage Casino Systems Corporate Total
----------- --------- -------- ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 1997 $5,182,035 $ 2,560,116 $ 372,007 $ 914,677 $ 1,396 $ 9,030,231
1996 5,551,683 17,296 8,498 - - 5,577,477
Operating 1997 653,532 (463,596) 94,734 (3,927) (139,550) 141,193
Income (Loss) 1996 1,025,931 (90,516) - - (201,360) 734,055
Capital 1997 221,663 477,569 51,735 3,570 - 754,537
Expenditures 1996 298,804 - - - - 298,804
Depreciation and 1997 145,305 209,078 11,050 99,500 - 464,933
Amortization 1996 98,227 47,200 - - - 145,427
Indentifiable 1997 3,633,668 7,672,444 350,153 5,781,141 7,282,751 24,720,157
Assets 1996 4,841,383 1,398,425 - - 1 6,239,809
</TABLE>
13. Related Parties
CBS leases space to MegaSports, Inc. for its corporate offices in the
building owned by CBS. Lease payments invoiced were $14,775 for the
year ended January 31, 1997.
CBS leases space in the building it owns to a company where a
shareholder and board member is an employee. Lease payments received by
CBS were $16,470 for the year ended January 31, 1997.
A shareholder and board member of the Company is also a board member of
a company which owns a gaming establishment in which LHSP leases space
for a sports book operation. Lease payments made to this establishment
were $158,654 and $141,883 for the years ended January 31, 1997 and
1996, respectively.
LHSP paid fees for odds-making services to a company where a
shareholder and board member is an employee. These fees, included in
direct costs, were $16,800 and $16,091 for the years ended January 31,
1997 and 1996, respectively.
In conjunction with the Reorganization, LHSP, LHC and B-P and the
Original Stockholders entered into an agreement on May 10, 1996 which
provides that if Leroy's, LHC or B-P obtain a tax benefit to the
detriment of such stockholders for any tax period, on or prior to the
effective date of the Reorganization, the affected company shall pay to
the stockholders the tax benefit actually derived up to the amount of
the tax detriment actually incurred. In addition, for up to $200,000 in
the aggregate, such companies have agreed to pay to such stockholders
any increased tax liability of such stockholders attributable to a
determination by a court of competent jurisdication or a fedeal taxing
authority that with respect to the federal tax returns of such
companies for taxable years prior to May 10, 1996, the tax liability of
such companies shall be increased.
<PAGE>
14. Acquisition
On October 25, 1996, the Company purchased CBS for $3,000,000 in cash
and agreed to guarantee, pursuant to a Guarantee Agreement, CBS's
obligation under its current mortgage of approximately $2,000,000 on
the real estate and building in Las Vegas, Nevada where the Company
currently maintains its corporate offices. In addition, the Company had
incurred costs of $155,707 in connection with the acquisition. CBS is
the dominant provider of sports and race book equipment and software in
the state of Nevada, including all major casinos along the Las Vegas
strip. The accompanying statements of operations includes the
operations of CBS from the date of acquisition. The acquisition of CBS
has been accounted for as a purchase. Unaudited proforma condensed
consolidated financial information for the Company assuming the
acquisition of CBS had occurred as of February 1, 1996 is as follows:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Revenues $ 12,113,000
Operating income $ 424,000
Net income before Income taxes $ 333,000
Net income $ 302,000
</TABLE>
The unaudited proforma amounts reflect the Company's actual results
combined with CBS's actual results for the periods presented, adjusted
to reflect additional depreciation and amortization expense arising
from the purchase and associated income tax impacts at the federal
statutory rate of 34 percent.
The purchase price allocation for CBS is based on initial estimates
obtained by the Company of the fair value of the assets and liabilities
acquired. The final allocation will be based on additional assessments
of asset and liability values.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits are listed in the Index to Exhibits on pages 39
through 41.
(b) Reports on Form 8-K
On November 8, 1996 the Company filed a Form 8-K with respect
to items 2 and 7 and on January 7, 1997, the Company filed an amendment to such
8-K which contained the following financial statements:
1. The balance sheets of CBS as of October 31, 1995 and
as of October 24, 1996, and the related statements of
income, stockholders' equity and cash flows for the
year ended October 31, 1995 and for the period from
November 1, 1995 to October 24, 1996, together with
the related notes and audit report of Arthur Andersen
LLP.
2. Unaudited pro forma financial statements which
include:
Introduction to pro forma financial statements; pro
forma condensed statement of income of the Company
for the nine month period ended October 31, 1996; pro
forma condensed statement of income of the Company
for the year ended January 31, 1996; and notes to pro
forma financial statements.
-37-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN WAGERING, INC.
By: /s/ Victor Salerno
-------------------------------------
Victor Salerno, President and Chief
Executive Officer
In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Victor Salerno President; Chief Executive April 30, 1997
- ---------------------------------- Officer; Director
Victor Salerno
/s/ Robert R. Barengo Director April 30, 1997
- ----------------------------------
Robert R. Barengo
/s/ Michael Roxborough Director April 30, 1997
- ----------------------------------
Michael Roxborough
/s/ Michael S. Merillat Director April 30, 1997
- ----------------------------------
Michael S. Merillat
/s/ Robert D. Ciunci Chief Financial Officer April 30, 1997
- ---------------------------------- (Principal Financial and
Robert D. Ciunci Accounting Officer);
Director
</TABLE>
-38-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Incorporated by Reference to
- ------- ----------- ----------------------------
Number
- ------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Exhibit 3.1 to Registration
Registrant Statement on Form SB-2, File No.
33-80431
3.2 By-Laws of the Registrant Filed herewith
4.1 Form of Common Stock Certificate Exhibit 4.1 to Registration
Statement on Form SB-2, File No.
33-80431
4.2 Form of Underwriters' Warrant to Purchase Shares Exhibit 4.2 to Registration
Statement on Form SB-2, File No.
33-80431
10.1 Employment Agreement between the Registrant and Victor Exhibit 10.1 to Registration
Salerno dated as of August 1, 1995 Statement on Form SB-2, File No.
33-80431
10.2 Employment Agreement between the Registrant and Robert Exhibit 10.2 to Registration
Ciunci dated as of August 1, 1995 Statement on Form SB-2, File No.
33-80431
10.3 Registrant's 1995 Stock Option Plan Exhibit 10.3 to Registration
Statement on Form SB-2, File No.
33-80431
10.4 Directors' Stock Option Plan Exhibit 10.4 to Registration
Statement on Form SB-2, File No.
33-80431
10.5 Purchase Agreement between R. Paul Bruyea, Painted Desert Exhibit 10.5 to Registration
Associates LLP and Leroy's Hotel Corporation dated Statement on Form SB-2, File No.
November 3, 1995 33-80431
10.5.1 Amendment No. 1 to Purchase Agreement among R. Paul Exhibit 10.5.1 to Registration
Bruyea, Painted Desert Limited Partnership and Leroy's Hotel Statement on Form SB-2, File No.
Corporation dated February 1, 1996 33-80431
10.6 Form of Agreement and Plan of Reorganization among Exhibit 10.6 to Registration
Registrant and Subsidiaries Statement on Form SB-2, File No.
33-80431
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Incorporated by Reference to
- ------- ----------- ----------------------------
Number
- ------
<S> <C> <C>
10.7 Form of Promissory Note made by Leroy's Horse and Sports Exhibit 10.7 to Registration
Place, Inc. in favor of each Original Stockholder Statement on Form SB-2, File No.
33-80431
10.8 Form of Management Agreement between Registrant and each Exhibit 10.8 to Registration
Subsidiary Statement on Form SB-2, File No.
33-80431
10.9 Form of Tax Indemnity Agreement among Leroy's Horse and Exhibit 10.9 to Registration
Sports Place, Inc., Leroy's Hotel Corporation, B-P Gaming Statement on Form SB-2, File No.
Corporation and the Original Stockholders 33-80431
10.10 Form of Consolidated Income Tax Return Tax Sharing Exhibit 10.10 to Registration
Agreement among Registrant and its Subsidiaries Statement on Form SB-2, File No.
33-80431
10.11 License Agreement between Howard Johnson International, Filed herewith
Inc. And Leroy's Hotel Corporation, dated May 9, 1996
10.12 International House of Pancakes Franchise Agreement between Exhibit 10.12 to Registration
B-P Food Corporation and International House of Pancakes, Statement on Form SB-2, File No.
Inc. dated February 19, 1980 33-80431
10.13 Indenture of Lease between Bruyea Pond Las Vegas and Exhibit 10.13 to Registration
James A. Rissler, Florence Theis, and O.J. Tomson, dated Statement on Form SB-2, File No.
February 1, 1978, as amended, for ground lease of 3111 West 33-80431
Tropicana Avenue, Las Vegas, Nevada
10.14 Deed of Trust, Assignment of Rents and Security Agreement Exhibit 10.14 to Registration
of Bruyea Pond Las Vegas ("BPLV") to Crocker National Statement on Form SB-2, File No.
Bank dated June 27, 1979 33-80431
10.15 Tri-Party Agreement between Crocker National Bank, Eastern Exhibit 10.15 to Registration
Savings Bank and BPLV dated July 2, 1979 Statement on Form SB-2, File No.
33-80431
10.16 Assignment of BPLV's Interest in Ground Lease to Eastern Exhibit 10.16 to Registration
Savings Bank, predecessor to Apple Bank For Savings, dated Statement on Form SB-2, File No.
May 21, 1981 33-80431
10.17 Business Loan Agreement between Leroy's Horse and Sports Exhibit 10.17 to Registration
Place, Inc. and Pioneer Citizens Bank of Nevada, dated Statement on Form SB-2, File No.
March 30, 1995. 33-80431
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Incorporated by Reference to
- ------- ----------- ----------------------------
Number
- ------
<S> <C> <C>
10.18 Stock Purchase Agreement between Messrs. Salerno and Exhibit 10.18 to Registration
Vacarro dated December 12, 1994 Statement on Form SB-2, File No.
33-80431
10.19 Stock Purchase Agreement between Messrs. Salerno and Exhibit 10.19 to Registration
Ciunci dated December 12, 1994 Statement on Form SB-2, File No.
33-80431
10.24 Form of Indemnification Agreement between the Registrant Exhibit 10.24 to Registration
and each of its directors Statement on Form SB-2, File No.
33-80431
10.25 Absolute Assignment of Leases and Rents between Autotote Filed herewith
CBS, Inc. and Standard Life and Accident Insurance Company
dated August 31, 1995
10.26 Deed of Trust, Security Agreement and Financing Statement Filed herewith
between Autotote CBS, Inc. and Jerry L. Adams, Trustee, as
Trustee, for the benefit of Standard Life and Accident
Insurance Company dated August 31, 1995
15.1 Letter Concerning Unaudited Interim Financial Information of Exhibit 15.1 to Registration
Arthur Andersen LLP. Statement on Form SB-2, File No.
33-80431
21.1 Subsidiaries Filed herewith
23.1 Consent of Arthur Andersen LLP, the Registrant's Independent Exhibit 23.1 to Registration
Certified Public Accountants Statement on Form SB-2, File No.
33-80431
27 Financial Data Schedule Filed herewith
</TABLE>
-41-
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
AMERICAN WAGERING, INC.
ARTICLE I
MEETING OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders of the corporation
shall be held at its office in the City of Las Vegas at 2:00 p.m. in the offices
of the corporation on a day in the first eight (8) months of each year to be
fixed by the Board of Directors, except that for good and sufficient reason, the
meeting may be postponed by the Board of Directors for any period of time not to
exceed sixty (60) days beyond the fixed date, for the purpose of electing
directors of the corporation and for the transaction of such other business as
may be brought before the meeting in accordance with these By-laws.
At least ten (10) days' written notice specifying and
confirming the date, time and place of the annual meeting of stockholders shall
be mailed (by depositing same in the U.S. mail), addressed to each of the
stockholders of record at the time of issuing the notice (unless a different
record date is specified pursuant to the Nevada Revised Statutes (the "N.R.S."))
at his, her, or its address last known, as the same appears on the books of the
corporation.
At the annual meeting of stockholders only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
brought before such annual meeting (i) by, or at the direction of, the Board of
Directors or (ii) by any stockholder of the corporation who complies with the
notice procedures set forth in this Section of these By-laws. For a proposal to
be properly brought before an annual meeting of stockholders by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the registered office of the
corporation not less than sixty (60) days nor more than ninety (90) days prior
to the scheduled annual meeting, without regard to any postponements, deferrals
or adjournments of that meeting to a later date; provided however, that if less
than seventy (70) days' notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, notice by the stockholder to be
timely must be so delivered or mailed and received, as specified above, not
later than the close of business on the tenth (10th) day following the earlier
of the day on which such notice of the date of the scheduled annual meeting was
mailed or the day on which such public disclosure was made. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (i) a brief description of the
proposal desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address, as
they appear on the corporation's books, of the stockholder proposing such
business and any other stockholders known by such stockholder to be supporting
such proposal, (iii) the class and number of shares of the corporation's stock
which are beneficially owned by the stockholder on the date of such stockholder
notice and by any other stockholder known by such stockholder to be supporting
such proposal on the date of such stockholder notice, and (iv) any financial
interest of the stockholder in such proposal.
- 1 -
<PAGE>
If the presiding officer of the annual meeting determines that
a stockholder proposal was not made in accordance with terms of this Section, he
or she shall so declare at the annual meeting and any such proposal shall not be
acted upon at the annual meeting.
This section shall not prevent the consideration and approval
or disapproval at the annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.
SECTION 2. Special meetings of the stockholders may be held at the
office of the corporation in the State of Nevada, or elsewhere, whenever called
by the President, or by the Board of Directors, or by vote of, or by an
instrument in writing signed by the holders of at least two thirds (2/3) of the
issued and outstanding shares of capital stock of the corporation. At least ten
(10) but not more than sixty (60) days' written notice of such meeting,
specifying the date, time and place of such meeting, and the objects and
purposes for calling the same, shall be deposited in the U.S. mail and addressed
to each of the stockholders of record at the time of issuing the notice (unless
a different record date is specified pursuant to N.R.S.), at his, her, or its
address last known, as the same appears on the books of the corporation.
If all the stockholders of the corporation shall waive notice
of a meeting, no notice of such meeting shall be required, and whenever all of
the stockholders shall meet in person or by proxy, such meeting shall be valid
for all purposes without call or notice, and at such meeting any corporate
action may be taken.
SECTION 3. The written certificate of the President or the officer or
officers calling any meeting on behalf of the President or on behalf of the
Board of Directors, which certificate sets forth the substance of the notice,
and the time and place of the mailing of the same to the several stockholders,
and the respective addresses to which the same were mailed, shall be prima facie
evidence of the manner and fact of the calling and giving of such notice.
If the address of any stockholder does not appear on the books
of the corporation, it will be sufficient to address any notice to such
stockholder at the registered office of the corporation.
SECTION 4. All lawful business to be transacted by the stockholders of
the corporation may be transacted at any special meeting or at any adjournment
thereof, provided that such meeting is either called in accordance with ARTICLE
I, SECTION 2 hereof or is attended in person or by proxy by all of the
stockholders of the corporation. Only such business, however, shall be acted
upon at any special meeting of the stockholders as shall have been specified in
the notice calling such meeting, but at any stockholders' meeting which is
attended by all of the stockholders of the corporation, either in person or by
proxy, any lawful business may be transacted, and such meeting shall he valid
for all purposes.
- 2 -
<PAGE>
SECTION 5. At the stockholders' meetings, the holders of two thirds
(2/3) of the entire issued and outstanding capital stock of the corporation
shall constitute a quorum for all purposes of such meetings.
If the holders of the amount of stock necessary to constitute
a quorum shall fail to attend, in person or by proxy, at the time and place
fixed by these By-Laws for any annual meeting, or fixed by a notice as above
provided for a special meeting, a majority in interest of the stockholders
present in person or by proxy may adjourn from time to time without notice other
than by announcement at the meeting, until holders of the amount of stock
requisite to constitute a quorum shall attend. At any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might have
been transacted as originally called.
SECTION 6. At each meeting of the stockholders, every stockholder shall
be entitled to vote in person or by his or her duly authorized proxy appointed
by instrument in writing subscribed by such stockholder or by his or her duly
authorized attorney. Each stockholder shall have one vote for each share of
outstanding stock registered in his, her, or its name on the books of the
corporation, ten (10) days preceding the day of such meeting. Votes on all
matters shall be cast by stockholders or their duly authorized proxies by
written ballot on forms prescribed or approved by the Board of Directors.
Stockholders may participate in a meeting of stockholders by means of a
telephone conference or similar method of communication by which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at the meeting; provided, however, stockholder
votes may only be cast as provided above in this ARTICLE I, SECTION 6.
At each meeting of the stockholders, a full, true, and
complete list, in alphabetical order, of all the stockholders entitled to vote
at such meeting, indicating the number of shares held by each, certified by the
Secretary of the corporation, shall be furnished, which list shall be prepared
at least ten (10) days before such meeting, and shall be open to the inspection
of the stockholders, or their agents or proxies, at the place where such meeting
is to be held, and for ten (10) days prior thereto. Only the persons in whose
names shares of stock are registered on the books of the corporation for ten
(10) days preceding the date of such meeting, as evidenced by the list of
stockholders, shall be entitled to vote at such meeting. Proxies and powers of
attorney to vote must be filed w1th the Secretary of the corporation before any
meeting of the stockholders, or they cannot be used at, or for purposes of, such
meeting.
SECTION 7. At each meeting of the stockholders, the polls shall be
opened and closed; the proxies and ballots sha11 be issued, received, and taken
charge of, for the purpose of the meeting, and all questions touching the
qualifications of voters and the validity of proxies, and the acceptance or
rejection of votes, shall be decided by two (2) inspectors. Such inspectors
shall be appointed at the meeting by the presiding officer of the meeting.
SECTION 8. At each meeting of the stockholders, the regular order of
business shall be as follows:
a. Reading and approval of the Minutes of the previous
meeting or meetings;
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b. Reports of the Board of Directors, President,
Treasurer, and Secretary of the corporation in the
order named;
c. Reports of Committees;
d. Election of Directors;
e. Unfinished Business;
f. New Business;
g. Adjournment.
SECTION 9. Any action which may be taken by the vote of stockholders at
a meeting may be taken without a meeting if authorized by the written consent of
stockholders holding at least two thirds (2/3) of the issued and outstanding
voting stock of the corporation, except that if any greater proportion of voting
power is required for such an action at a meeting, then that greater proportion
of written consents is required. In no instance where action is authorized by
written consent need a meeting of stockholders be called or noticed.
ARTICLE II
DIRECTORS AND THEIR MEETINGS
SECTION 1. The Board of Directors of the corporation shall consist of
six (6) persons. The size of the Board of Directors may from time to time be
increased or decreased by an amendment to these By-Laws: provided, however, the
size of the Board of Directors shall in no event be reduced to less than three
(3) persons. Except as otherwise required by law, any vacancy on the Board of
Directors that results from an increase in the number of directors shall be
filled only by a majority of the Board of Directors then in office, provided
that a quorum is present, and any other vacancy occurring in the Board of
Directors shall be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy not resulting from an increase in the number of directors shall
have the same remaining term as that of his or her predecessor.
SECTION 2. Meetings of the Board of Directors may be held at the
registered office of the corporation in the State of Nevada, or elsewhere, at
such place or places as the Board of Directors may, from time to time,
determine.
SECTION 3. The election of members of the Board of Directors shall take
place at the annual meeting of the stockholders of the corporation (or by
written consent of the stockholders in lieu of such annual meeting); provided,
however, that the directors may be elected at any special meeting of the
stockholders which is called and held for that purpose. Regular meetings of the
Board of Directors shall be held at the office of the corporation in the City of
Las Vegas, County of Clark, State of Nevada, or elsewhere in the discretion of
the Board of Directors, on the ___ day of each calendar month or as often as
otherwise determined to be necessary or appropriate in the
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discretion of the Board of Directors. Notice of such regular meetings shall be
sent to each director by the Secretary at least one (1) day previous to the day
fixed for such meetings, but no regular meeting or the votes held at such
meeting shall be held void or invalid if such notice is not given, provided the
meeting is duly held at the time and place fixed by these By-Laws for holding
such regular meetings.
Special meetings of the Board of Directors may be held on the
call of the President or Secretary, on at least one (1) day's notice by
telephone, personal or courier delivery, mail, facsimile or telegraph or orally
in person. Such notice shall specify the date, time and place of such meeting,
and the objects and purposes for calling such meeting.
At any regular meeting of the Board of Directors any and all
business may be transacted. At any special meeting of the Board of Directors,
only such business may be transacted as shall have been specified in the notice
calling such meeting.
Any meeting of the Board of Directors, no matter where held,
at which all of the members are present even though without notice, or notice of
which meeting shall have been waived by all absentees, provided a quorum is
present, shall be valid for all purposes unless otherwise indicated in the
notice calling the meeting or in the waiver of notice.
SECTION 4. A majority of the Board of Directors in office shall
constitute a quorum for the transaction of business, but if at any meeting of
the Board of Directors there be less than a quorum present, a majority of those
present may adjourn from time to time, until a quorum shall be present, and no
notice of such adjournment shall be required. The Board of Directors may
prescribe rules not in conflict with these By-Laws or the Articles of
Incorporation for the conduct of its business.
SECTION 5. A director need not be a stockholder of the corporation.
SECTION 6. The directors shall be allowed and paid all necessary
expenses incurred in attending any meeting of the Board of Directors.
Compensation of directors shall be fixed by the Board of Directors.
SECTION 7. The Board of Directors shall make a report to the
stockholders at the annual meetings of the stockholders of the condition of the
corporation, and shall, at request, furnish each of the stockholders with a true
copy thereof.
The Board of Directors in its discretion may submit any
contract or act for approval or ratification at any meeting of the stockholders
called for the purpose of considering any such contract or act, which, if
approved, or ratified by the vote of the holders of a majority of the capital
stock of the corporation represented in person or by proxy, shall be valid and
binding upon the corporation and upon all the stockholders thereof, as if it had
been approved or ratified by every stockholder of the corporation.
SECTION 8. The Board of Directors shall have full control over the
affairs of the corporation, except as otherwise provided by applicable law or by
the Articles of Incorporation of
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the corporation. The Board of Directors may, from time to time, delegate any of
the powers of the Board of Directors, in the course of the current business of
the corporation, to any standing or special committee of the Board of Directors.
Each such standing or special committee must include at least one (1) member of
the Board of Directors.
SECTION 9. The regular order of business at meetings of the Board of
Directors shall be as follows:
a. Reading and approval of the minutes of the previous
meeting or meetings;
b. Reports of officers and committee members;
c. Election of officers;
d. Unfinished business;
e. New business;
f. Adjournment.
SECTION 10. Any action required or permitted to be taken at any meeting
of the Board of Directors or of any committee thereof may be taken without a
meeting if, before or after the action, a written consent thereto is signed by
all the members of the Board of Directors or of such committee. Such written
consent shall be filed with the minutes of proceedings of the Board of Directors
or committee.
SECTION 11. Members of the Board of Directors, or of any committee
designated by the Board of Directors, may participate in a meeting of the Board
of Directors, or committee by means of a conference telephone network or a
similar communications method by which all persons participating in the meeting
can hear each other. Participation in a meeting pursuant to this Section
constitutes presence in person at such meeting.
ARTICLE III
OFFICERS AND THEIR DUTIES
SECTION 1. The Board of Directors shall elect a President, Vice
President, a Secretary, and a Chief Financial Officer, to hold office for one
(1) year terms, and until their successors are elected and qualify.
Any vacancy in any of said offices may be filled by the Board
of Directors.
The Board of Directors may from time to time, by resolution,
appoint such additional Vice Presidents and additional Assistant Secretaries,
Assistant Treasurers, and Transfer Agents of the corporation as it may deem
advisable; prescribe their duties, and fix their compensation, and all such
appointed officers shall be subject to removal at any time by the Board
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of Directors. All officers, agents, and factors of the corporation shall be
chosen and appointed in such manner and shall hold their office for such terms
as the Board of Directors may by resolution prescribe, except as otherwise
provided herein.
SECTION 2. The President shall be the Chief Executive Officer of the
corporation and shall have duty of supervision, control, and management of the
day-to-day operation of the corporation, subject only to directions from the
Board of Directors with regard to the affairs of the corporation. The President
shall further have the full power to execute any and all documents for and on
behalf of the corporation, other than as specifically limited by the Board of
Directors of the corporation, including, but not limited to, the power to enter
into leases of real property, equipment, furniture, furnishings, to hire and
fire all personnel, to set and establish operational manuals and policies, to
enter into contracts as may be necessary for the day-to-day operations, to
establish lines of credit for the corporation, and to establish accounts payable
thereof. The President shall be a member of the Board of Directors, and shall be
a member and the Chairman of any Executive Committee of the Board that may be
established. The President shall preside at all meetings of the Board of
Directors and at all meetings of the stockholders and shall sign the
Certificates of Stock issued by the corporation; further, the President shall
perform any and all other duties as shall be prescribed by the Board of
Directors.
SECTION 3. The Vice President shall be vested with all the powers and
shall perform all the duties of the President in his or her absence or inability
to act, including the signing of the Certificates of Stock issued by the
corporation, and he or she shall so perform such other duties as shall be
prescribed by the Board of Directors.
SECTION 4. The Chief Financial Officer shall be the Treasurer of the
corporation and shall have custody of all the funds and securities of the
corporation. When necessary or proper, he or she shall endorse for collection,
on behalf of the corporation, checks, notes, and other obligations; he or she
shall deposit all monies to the credit of the corporation in such bank or banks
or other depository as the Board of Directors may designate; he or she shall
sign all receipts and vouchers for payments made by the corporation, except as
herein otherwise provided. He or she shall sign with the President all bills of
exchange and promissory notes of the corporation; he or she shall have the care
and custody of the stocks, bonds, certificates, vouchers, evidence of debts,
securities, and such other property belonging to the corporation as the Board of
Directors shall designate; he or she shall sign all papers required by law or by
these By-Laws or the Board of Directors to be signed by the Chief Financial
Officer or Treasurer. Whenever required by the Board of Directors, he or she
shall render a statement of his or her cash account; he or she shall enter
regularly in the books of the corporation (to be kept by him or her for this
purpose) full and accurate accounts of all monies received and paid by him or
her on account of the corporation. He or she shall at all reasonable times
exhibit the books of account to any directors of the corporation during business
hours, and he or she shall perform all acts incident to the position of Chief
Financial Officer or Treasurer, subject to control of the Board of Directors.
The Chief Financial Officer shall, if required by the Board of
Directors, give bond to the corporation conditioned for the faithful performance
of all his or her duties as Chief Financial Officer in such sum, and with such
security as shall be approved by the Board of Directors, with expense of such
bond to be borne by the corporation.
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SECTION 5. The Board of Directors may appoint an Assistant Treasurer
who shall have such powers and perform such duties as may be prescribed for him
or her by the Chief Financial Officer of the corporation or by the Board of
Directors, and the Board of Directors shall require the Assistant Treasurer to
give a bond to the corporation in such sum and with such security as it shall
approve, as conditioned for the faithful performance of his or her duties as
Assistant Treasurer, with the expense of such bond to be borne by the
corporation.
SECTION 6. The Secretary shall keep the minutes of all meetings of the
Board of Directors and the minutes of all meetings of the stockholders and of
the Executive Committee (if any) in books provided for that purpose. He or she
shall attend to the giving and serving of all notices of the corporation; he or
she may sign with the President or Vice President, in the name of the
corporation, all contracts authorized by the Board of Directors or Executive
Committee; he or she shall affix the corporate seal of the corporation thereto
when so authorized by the Board of Directors or Executive Committee; he or she
shall have the custody of the corporate seal of the corporation; he or she shall
affix the corporate seal to all Certificates of Stock duly issued by the
corporation; he or she shall have charge of Stock Certificate Books, Transfer
Books, and Stock Ledgers, and such other books and papers as the Board of
Directors or the Executive Committee may direct, all of which shall at all
reasonable times be open to the examination of any director upon application at
the office of the corporation during business hours, and he or she shall, in
general, perform all duties incident to the office of Secretary.
SECTION 7. The Board of Directors may appoint an Assistant Secretary
who shall have such powers and perform such duties as may be prescribed by the
Secretary of the corporation or by the Board of Directors.
SECTION 8. Un1ess otherwise ordered by the Board of Directors, the
President shall have full power and authority on behalf of the corporation to
attend, and to act and to vote at, any meetings of the stockholders of any
corporation in which the corporation may hold stock, and at any such meetings,
shall possess and may exercise any and all rights and powers incident to the
ownership of such stock, and which as the owner thereof, the corporation might
have possessed and exercised if present. The Board of Directors, by resolution,
from time to time, may confer like powers on any person or persons in place of
the President.
ARTICLE IV
INDEMNIFICATION OF CORPORATE AGENTS;
PURCHASE OF LIABILITY INSURANCE
SECTION 1. Indemnification of Agents of the Corporation; Purchase of
Liability Insurance.
(a) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative, except an action by or in the right of the corporation, by
reason of the fact that he or she is or was a director, officer, employee, or
agent of
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the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses, including attorney fees,
judgments, fines, and amounts paid in settlement, actually and reasonably
incurred by him or her in connection with the action, suit, or proceeding, if he
or she acted in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the corporation, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent does not, of itself, create a presumption that the
person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and
that, with respect to any criminal action or proceeding, he or she had
reasonable cause to believe that his or her conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses, including amounts paid in settlement and attorney fees, actually and
reasonably incurred by him or her in connection with the defense or settlement
of the action or suit, if he or she acted in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
corporation. However, indemnification shall not he made for any claim, issue, or
matter as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the Court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnify for such expenses as the court deems proper.
(c) To the extent that a director, officer, employee, or agent
of the corporation has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to in subsection (a) or (b), or in
defense of any claim, issue, or matter therein, he or she shall be indemnified
by the corporation against expenses, including attorney fees, actually and
reasonably incurred by him or her in connection with the defense.
(d) Any indemnification under subsection (a) or (b), unless
ordered by a court or advanced pursuant to subsection (e), shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in the
circumstances. The determination shall be made: (i) by the stockholders; (ii) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to the action, suit, or proceeding; or (iii) if a majority
vote of a quorum consisting of directors who were not parties to the action,
suit or proceeding cannot be obtained, by independent legal counsel in written
opinion.
(e) The expenses of officers and directors incurred in
defending a civil or criminal action, suit, or proceeding shall be paid by the
corporation as they are incurred and in
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advance of the final deposition of the action, suit, or proceeding, upon receipt
of an undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that he or
she is not entitled to be indemnified by the corporation. The provisions of this
subjection (e) do not affect any rights to advancement of expenses to which
corporate personnel other than directors or officers may be entitled under any
contract or otherwise by law.
(f) The indemnification and advancement of expenses authorized
in or ordered by a court pursuant to this ARTICLE IV (i) does not exclude any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under the Articles of Incorporation, the By-Laws, or
any agreement, vote of stockholders or disinterested directors or otherwise, for
either an action in his or her official capacity or an action in another
capacity while holding his or her office, except that indemnification, unless
ordered by a court pursuant to subsection (b) or for the advancement of expenses
made pursuant to subsection (e), shall not be made to or on behalf of any
director or officer if a final adjudication establishes that his or her acts or
omissions involved intentional misconduct, fraud, or a knowing violation of the
law and were material to the cause of action and (ii) continues for a person who
has ceased to be a director, officer, employee, or agent and inures to the
benefit of the heirs, executors, and administrators of such a person.
(g) The corporation may purchase and maintain insurance or
make other financial arrangements on behalf of any person who is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise, for
any liability asserted against him or her and liability and expenses incurred by
him or her in his or her capacity as a director, officer, employee, or agent, or
arising out of his or her status as such, whether or not the corporation has the
authority to indemnify him or her against such liability and expenses. The other
financial arrangements made by the corporation may include any now or hereafter
permitted by applicable law.
(h) In the event that the N.R.S. shall hereafter permit or
authorize indemnification by the corporation of the directors, officers,
employees, or agents of the corporation for any reason or purpose or in any
manner not otherwise provided for in this ARTICLE IV, then such directors,
officers, employees, and agents shall be entitled to such indemnification by
making written demand therefor upon the corporation, it being the intention of
this ARTICLE IV at a1l times to provide the most comprehensible indemnification
coverage to the corporation's directors, officers, employees, and agents as may
now or hereafter be permitted by the N.R.S.
(i) The foregoing indemnification provisions shall inure to
the benefit of all present and future directors, officers, employees, and agents
of the corporation and all persons now or hereafter serving at the request of
the corporation as directors, officers, employees, or agents of another
corporation, partnership, joint venture, trust, or other enterprise and their
heirs, executors, and administrators, and shall be applicable to all acts or
omissions to act of any such persons, whether such acts or omissions to act are
alleged to have or actually occurred prior to or subsequent to the adoption of
this ARTICLE IV.
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SECTION 2. Vested Rights. Neither the amendment nor repeal of this
ARTICLE IV, nor the adoption of any provision of the Articles of Incorporation
or the By-Laws or of any statute inconsistent with this ARTICLE IV, shall
adversely affect any right or protection of a director, officer, employee, or
agent of the corporation existing at the time of such amendment, repeal, or
adoption of such inconsistent provision.
ARTICLE V
CAPITAL STOCK
SECTION 1. The capital stock of the corporation shall be issued in such
manner and at such times and upon such conditions as shall be prescribed by the
Board of Directors.
SECTION 2. Ownership of stock in the corporation shall be evidenced by
Certificates of Stock in such forms as shall be prescribed by the Board of
Directors, and shall be under the seal of the corporation and signed by the
President or Vice President and also by the Secretary or by an Assistant
Secretary.
All certificates shall be consecutively numbered; the name of
the person owning the shares represented thereby with the number of such shares
and the date of issue shall be entered on the corporation's books.
No certificate shall be valid unless it is signed by the
President or Vice President and by the Secretary or Assistant Secretary.
All certificates surrendered to the corporation shall be
canceled and no new certificate shall be issued until the former certificate for
the same number of shares shall have been surrendered or canceled.
SECTION 3. No transfer of stock shall be valid as against the
corporation except on surrender and cancellation of the former certificate,
accompanied by an assignment or transfer by the owner thereof, made either in
person or under assignment, and a new certificate shall be issued therefor.
Whenever any transfer shall be expressed as made for
collateral security and not absolutely, the same shall be expressed in the entry
of said transfer on the books of the corporation.
SECTION 4. The Board of Directors shall have power and authority to
make all such rules and regulations not inconsistent herewith as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of the capital stock of the corporation.
The Board of Directors may appoint a Transfer Agent and a
Registrar of Transfers and may require all stock certificates to bear the
signature of such Transfer Agent and such Registrar of Transfer.
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SECTION 5. The Stock Transfer Books shall be closed for all meetings of
the stockholders for the period of ten (10) days prior to such meetings and
shall be closed for the payment of dividends during such periods as from time to
time maY be fixed by the Board of Directors, and during such periods no stock
shall be transferable.
SECTION 6. Any person or persons applying for a Certificate of Stock in
lieu of one alleged to have been lost or destroyed, shall make affidavit of
affirmation of that fact, and shall deposit with the corporation such affidavit.
Whereupon, at the end of six (6) months after the deposit of said affidavit and
upon such person or persons giving Bond of Indemnity to the corporation with
surety to be approved by the Board of Directors in double the current value of
stock against any damage, loss or inconvenience to the corporation, which may or
can arise in consequence of a new or duplicate certificate being issued in lieu
of the one lost or missing, the Board of Directors may cause to be issued to
such person or persons a new certificate, or a duplicate of the certificate so
lost or destroyed. The Board of Directors may, in its discretion, refuse to
issue such new or duplicate certificate save upon the order of a court of law
having jurisdiction in such matter, anything herein to the contrary
notwithstanding.
ARTICLE VI
OFFICES AND BOOKS
SECTION 1. The registered office of the corporation shall be at Gordon
& Silver, Esq., 3800 Howard Hughes Parkway, 14th Floor, Las Vegas, Nevada
89109, and the corporation may have a registered office in any other state or
territory as the Board of Directors may designate.
SECTION 2. A stock ledger or a duplicate stock ledger, revised
annually, containing the names, alphabetically arranged, of all persons who are
stockholders of the corporation, showing their places of residence, if known,
and the number of shares held by them respectively, and a copy of the By-Laws
and Articles of Incorporation (and all amendments thereto) of the corporation
(certified by the Nevada Secretary of State) shall be kept at its registered
office in the County of Clark, State of Nevada, for the inspection of all who
are authorized or have the right to see the same, and for the transfer of stock.
All other books of the corporation shall be kept at such places as may he
prescribed by the Board of Directors.
ARTICLE VII
MISCELLANEOUS
SECTION 1. The Board of Directors shall have power to reserve over and
above the capital stock paid in, such an amount in its discretion as it may deem
advisable to fix as a reserve fund, and may, from time to time, declare
dividends from the accumulated profits of the corporation in excess of the
amounts so reserved (if any) and pay the same to the stockholders of the
corporation, and may also, if it deems the same advisable, declare stock
dividends of the unissued capital stock of the corporation.
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SECTION 2. Unless otherwise ordered by the Board of Directors, all
agreements and contracts shall be signed by an officer of the corporation.
SECTION 3. All monies of the corporation shall be deposited when and as
received in such bank or banks or other depository as may from time to time be
designated by the Board of Directors, and such deposits shall be made in the
name of the corporation.
SECTION 4. No note, draft, acceptance, endorsement, or other evidence
of indebtedness shall be valid against the corporation unless the same shall be
signed by an officer of the corporation.
SECTION 5. No loan or advance of money shall be made by the corporation
to any stockholder or officer therein, unless the Board of Directors shall
otherwise authorize.
SECTION 6. No director or officer of the corporation shall be entitled
to any salary or compensation for any services performed for the corporation,
unless such salary or compensation shall he fixed by resolution of the Board of
Directors.
SECTION 7. The corporation may take, acquire, hold, mortgage, sell, or
otherwise deal in stocks or bonds or securities of any other corporation, if and
as often as the Board of Directors shall so elect.
SECTION 8. The Board of Directors shall have power to authorize and
cause to be executed, mortgages and liens, without limit as to amount upon the
property and franchise of the corporation. Upon the affirmative vote, either in
person or by proxy, of the holders of a majority of the capital stock issued and
outstanding, but only upon such vote, the Board of Directors shall have the
authority to dispose in any manner of all or substantially all assets of this
corporation.
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ARTICLE VIII
AMENDMENT OF BY-LAWS
Except as provided in the Articles of Incorporation, amendments and
changes of these By-Laws may be made at any regular or special meeting of the
Board of Directors by a majority vote of not less than all of the entire Board,
or may be made by a vote of, or a consent in writing by the holders of eighty
percent (80%) of the issued and outstanding shares of capital stock.
KNOW ALL MEN BY THESE PRESENTS: That I, the undersigned, being the
Secretary of the above-named corporation, do hereby acknowledge that the
foregoing By-Laws are the duly adopted By-Laws of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand this 13th day of
November, 1995.
/s/ Michael Merillat
---------------------------
Michael Merillat, Secretary
<PAGE>
Location: Las Vegas, Nevada
Entity No. 19454
Unit No.: 1140
HOWARD JOHNSON INTERNATIONAL, INC.
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement"), dated May 9, 1996, is between
HOWARD JOHNSON INTERNATIONAL, INC. a Delaware corporation ("we", "our" or
"us"), and LEROY'S HOTEL CORPORATION, A SUBSIDIARY OF AMERICAN WAGERING,
INC., a Nevada corporation ("you"). The definitions of capitalized terms are
found in Appendix A. In consideration of the following mutual promises, the
parties agree as follows:
This transaction involves the transfer of an existing Chain Facility at the
Location first granted to Bruyea-Pond Las Vegas, a general partnership
("Prior Licensee") in a License Agreement with us dated October 8, 1990 (the
"Prior Agreement"). You assume and obligate yourself to peform any and all
of the obligations (financial and otherwise) of the Prior Licensee under the
Prior Agreement that is not paid or performed as of the date of this
Agreement, including without limitation, the obligation to pay any unpaid
Royalties, Marketing Contributions, Room Sales Charges or other amounts due
us and to correct any uncured defaults other than as expressly superseded by
this Agreement.
1. License. We have the exclusive right to license and franchise to you the
distinctive "Howard Johnson" System for providing transient guest lodging
services. We grant to you and you accept the License, effective and
commencing on the Opening Date and ending on the earliest to occur of the
Term's expiration, a Transfer or a Termination. You will call the Facility a
"Howard Johnson [Inn][Hotel][Plaza Hotel]." You may adopt additional or
secondary designations for the Facility with our prior written consent,
which we may withhold, condition, or withdraw on written notice in our sole
discretion.
2. International Operators Council, Inc. You are automatically a member of
the INOC and are entitled to vote at its meetings on the basis of one Chain
Facility, one vote. The purpose of the INOC will be to consider, discuss,
and make recommendations on common issues relating to the operation of Chain
Facilities. We will seek the advice and counsel of the INOC Board of
Directors and its various committees. We will assist the INOC to function in
a manner consistent with the best interests of the Chain, and to adopt its
governing rules to be consistent with the best interests of the Chain.
3. Your Improvement and Operating Obligations. Your obligations to improve,
operate and maintain the Facility are:
3.1 Improvements. You must select and acquire the Location and acquire,
equip and supply the Facility in accordance with System Standards for
entering conversion facilities. You must
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begin improvement of the Facility no later than thirty (30) days after the
Effective Date. The Facility must score 400 points (or equivalent) within
ninety (90) days after the Effective Date and 425 points (or equivalent)
within nine months after the Effective Date. All improvements will comply
with System Standards, any Approved Plans, Schedule B and any Punch List
attached to this Agreement. Your general contractor or you must carry the
insurance required under this Agreement during renovation. If you do not
commence or complete the improvement of the Facility by the dates specified
in this Section 3.1, or the Facility does not meet the post-transfer
quality assurance inspection standard, or complete the post-transfer
improvements specified in the Punch List after the Effective Date, then we
may, in our sole discretion; terminate this Agreement by giving written
notice to you. Time is of the essence for the Improvement Obligation. We
may, however, in our sole discretion, grant one or more extensions of time
to perform any phase of the Improvement Obligation. The grant of an
extension will not waive any other default existing at the time the
extension is granted.
3.2 Improvement Plans. You will create plans and specifications for the work
described in Section 3.1 (based upon the System Standards and this
Agreement) if we so request and submit them for our approval before starting
improvement of the Location. We will not unreasonably withhold or delay our
approval, which is intended only to test compliance with System Standards,
and not to detect errors or omissions in the work of your architects,
engineers, contractors or the like. Our review does not cover technical,
architectural or engineering factors, or compliance with federal, state or
local laws, regulations or code requirements. We will not be liable to your
lenders, contractors, employees, guests, others or you on account of our
review or approval of your plans, drawings or specifications, or our
inspection of the Facility before, during or after renovation or
construction. Any material variation from the Approved Plans requires our
prior written approval. You will promptly provide us with copies of permits,
job progress reports, and other information as we may reasonably request. We
may inspect the work while in progress without prior notice.
3.3 Opening. You may continue to identify the Facility as part of the System
prior to completing the Improvement Obligation.
3.4 Operation. You will operate and maintain the Facility continuously after
the Opening Date on a year-round basis as required by System Standards and
offer transient guest lodging and other related services of the Facility
(including those specified on Schedule B) to the public in compliance with
the law and System Standards. You will keep the Facility in a clean, neat,
and sanitary condition. You will clean, repair, replace, renovate,
refurbish, paint, and redecorate the Facility and its FF&E as and when
needed to comply with System Standards. The Facility will be managed by
either a management company or an individual manager with significant
training and experience in general management of similar lodging facilities.
The Facility will accept payment from guests by all credit and debit cards
we designate in the System Standards Manual. You may add to or discontinue
the amenities, services and facilities described in Schedule B, or lease or
subcontract any service or portion of the Facility, only with our prior
written consent which we will not unreasonably withhold or delay. Your front
desk operation,
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telephone system, parking lot, swimming pool and other guest service
facilities may not be shared with or used by guests of another lodging or
housing facility.
3.5 Training. You (or a person with executive authority if you are an
entity) or the Facility's general manager will attend the training programs
described in Section 4.1 we designate as mandatory for licensees or general
managers, respectively. You will train or cause the training of all Facility
personnel as and when required by System Standards and this Agreement. You
will pay for all travel, lodging, meals and compensation expenses of the
people you send for training programs, the cost of training materials and
other reasonable charges we may impose for training under Section 4.1, and
all travel, lodging, meal and facility and equipment rental expenses of our
representatives if training is provided at the Facility.
3.6 Marketing.
3.6.1 You will participate in System marketing programs, including the
Directory and the Reservation System. You will obtain and maintain the
computer and communications service and equipment we specify to participate
in the Reservation System. You will comply with our rules and standards for
participation, and will honor reservations and commitments to guests and
travel industry participants. You may implement, at your option and expense,
your own local advertising. Your advertising materials must use the Marks
correctly, and must comply with System Standards or be approved in writing
by us prior to publication. You will stop using any non-conforming,
out-dated or misleading advertising materials if we so request.
3.6.2 You may participate in any regional marketing training or management
alliance or cooperative of Chain licensees formed to serve the Chain
Facilities in your area. We may assist the cooperative collect
contributions. You may be excluded from cooperative programs and benefits if
you don't participate in all cooperative programs according to their terms,
including making payments and contributions when due.
3.6.3 You will participate in marketing programs approved by the INOC Board
of Directors. These may require you to contribute available guest room
nights to an exchange program for which the Chain receives media placements
or other promotional consideration.
3.7 Governmental Matters. You will obtain as and when needed all
governmental permits, licenses and consents required by law to construct,
acquire, renovate, operate and maintain the Facility and to offer all
services you advertise or promote. You will pay when due or properly contest
all federal, state and local payroll, withholding, unemployment, beverage,
permit, license, property, ad valorem and other taxes, assessments, fees,
charges, penalties and interest, and will file when due all governmental
returns, notices and other filings.
3.8 Inspections and Audits. You will permit our representatives to perform
quality assurance inspections of the Facility and audit your financial and
operating books and records (including tax returns) relating to the Facility
and any related business, with or without prior notice of the inspection or
audit. The inspections and audits will commence during normal business
hours,
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although we may observe Facility operation and accounting activity at any
time. You, the Facility staff and your other agents and employees will
cooperate with our inspectors and auditors in the performance of their
duties. You will pay us any underpayment of, and we will pay you or credit
your Recurring Fee account for any overpayment of, Recurring Fees discovered
by an audit. You will pay the reasonable travel, lodging and meal expenses
of our reinspection or audit and any reinspection fee we may impose if the
Facility does not pass an inspection, you refuse to cooperate with our
auditors or inspectors, or the audit reveals that you paid us less than 97%
of the correct amount of Recurring Fees. We may publish or disclose the
results of quality assurance inspections.
3.9 Reports and Accounting. You will prepare and submit timely monthly
reports containing the information we require about the Facility's
performance during the preceding month. You will prepare and submit other
reports and information about the Facility as we may reasonably request from
time to time or in the System Standards Manual. You will maintain accounting
books and records in accordance with generally accepted accounting
principles and the American Hotel & Motel Association Uniform System of
Accounts for Hotels, as amended, subject to this Agreement and other
reasonable accounting standards we may specify from time to time. You will
prepare and submit to us if we so request your annual and semi-annual
financial statements. We do not require that your financial statements be
independently audited, but you will send us a copy of your audited
statements if you have them audited and we ask for them.
3.10 Insurance. You will obtain and maintain during the Term of this
Agreement the insurance coverage required under the System Standards Manual
from insurers meeting the standards established in the Manual. Unless we
instruct you otherwise, your liability insurance policies will name Howard
Johnson International, Inc. and HFS Incorporated as additional insureds.
3.11 Conferences. You or your representative and your general manager will
attend each annual Chain conference and pay the Conference Fee we set for
the Chain licensees, if and when we or the INOC Board of Directors hold an
annual Chain conference. Mandatory recurrent training for licensees and
general managers described in Section 4.1.3 may be held at a conference. The
Fee we set will be the same for all Chain Facilities that we license in the
United States. You will receive reasonable notice of a Chain conference. You
will pay one Conference Fee for all of the Chain Facilities you own.
3.12 Purchasing. You will purchase or obtain certain items we designate as
proprietary or that bear Marks from suppliers we approve. You may purchase
any other items for the Facility from any competent source you select, so
long as the items meet or exceed System Standards.
3.13 Good Will. You will use reasonable efforts to protect, maintain and
promote the name "Howard Johnson" and its distinguishing characteristics,
and the other Marks. You will not permit or allow your officers, directors,
principals, employees, representatives, or guests of the Facility to engage
in, conduct which is unlawful or damaging to the good will or public image
of the Chain or System. You will participate in Chain-wide guest service and
satisfaction guaranty programs we require in good faith for all Chain
Facilities. You will follow System
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Standards for identification of the Facility and for you to avoid confusion
on the part of guests, creditors, lenders, investors and the public as to
your ownership and operation of the Facility, and the identity of your
owners.
3.14 Facility Modifications. You may materially modify, diminish or expand
the Facility (or change its interior design, layout, FF&E, or facilities)
only after you receive our prior written consent, which we will not
unreasonably withhold or delay. You will pay our Rooms Addition Fee then in
effect for each guest room you add to the Facility. If we so request, you
will obtain our prior written approval of the plans and specifications for
any material modification, which we will not unreasonably withhold or delay.
You will not open to the public any material modification until we inspect
it for compliance with the Approved Plans and System Standards.
3.15 Courtesy Lodging. You will provide lodging at the "Employee Rate"
established in the System Standards Manual from time to time (but only to
the extent that adequate room vacancies exist) to our representatives
traveling on business, but not more than three standard guest rooms at the
same time.
3.16 Minor Renovations. Beginning three years after the Opening Date, we may
issue a "Minor Renovation Notice" to you that will specify reasonable
Facility upgrading and renovation requirements (a "Minor Renovation") to be
commenced no sooner than 60 days after the notice is issued, having an
aggregate cost for labor, FF&E and materials estimated by us to be not more
than the Minor Renovation Ceiling Amount. You will perform the Minor
Renovations as and when the Minor Renovation Notice requires. We will not
issue a Minor Renovation Notice within three years after the date of a prior
Minor Renovation Notice, or if the three most recent quality assurance
inspection scores of the Facility averaged at least 425 points or equivalent
and the most recent quality assurance inspection score for the Facility was
at least 400 points or equivalent when the Facility is otherwise eligible
for a Minor Renovation.
4. Our Operating and Service Obligations. We will provide you with the
following services and assistance:
4.1 Training. We will offer hospitality management training, property
opening training, recurrent training and supplemental training.
4.1.1 Management Training. Between 60 days before and six months after the
projected Opening Date, we will offer at a location in the United States we
designate, and the Facility general manager must complete a training program
to our satisfaction. The training program will not exceed two weeks in
duration and will cover such topics as System Standards, services available
from us, and operating a Chain Facility. We may charge you a reasonable fee
for the ancillary services of lodging, materials, meals, and local
transportation for each manager trainee. Any replacement general manager of
the Facility must complete the training program within the time specified in
the System Standards Manual. No tuition will be charged for your first
participation in this training but you must pay for your representative's
travel, compensation and
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benefits, and for any ancillary services not provided by us. We may charge
you reasonable tuition and fees for ancillary services for training for
replacement general managers.
4.1.2 Property Opening Training. We will provide at the Facility or another
agreed location a "Property Training Program" (at our discretion as to
length and scheduling) to assist you in opening the Facility. There is no
charge for the Property Training Program other than for the reasonable
expenses for travel, room, board and other out-of-pocket costs of our
representatives.
4.1.3 Recurrent Training. We may provide additional training for you and the
Facility's general manager if we determine that additional mandatory
training for licensees and general managers is necessary in the future.
Training will be held in our U.S. training center or other locations. You
will pay for your representative's travel, lodging, meals, incidental
expenses, compensation and benefits for this training directly or through an
ancillary services fee to us. This training may be held in conjunction with
a Chain conference.
4.1.4 Supplemental Training. We may offer optional training programs without
charge or for tuition. We may offer or sell to you video tapes, computer
discs or other on-site training aids and materials, or require you to buy
them at reasonable prices.
4.1.5 We may charge you a reasonable cancellation fee if you cancel your
training program commitments or reservations within 30 days (or such shorter
period as we may specify) before the start of any training program at which
you or your representative has a reservation. We may charge you tuition for
your representatives to attend mandatory sessions other than those people we
require to attend the training and fees for instructional materials.
4.2 Reservation System. We will operate and maintain (directly or by
subcontracting with an affiliate or one or more third parties) a
computerized Reservation System or such technological substitute(s) as we
determine, in our discretion. We will use the Room Sales Charge for the
acquisition, development, support, equipping, maintenance, improvement and
operation of the Reservation System. We will provide software maintenance
for the software we license to you to connect to the Reservation System if
your Recurring Fee payments are up to date. The Facility will participate in
the Reservation System, commencing with the Opening Date for the balance of
the Term. We have the right to provide reservation services to lodging
facilities other than Chain Facilities or to other parties. We will not
offer callers to our general consumer toll free reservation telephone number
in the United States the opportunity to make reservations for other lodging
chains. We may use Room Sales Charges we collect to reimburse our reasonable
direct and indirect costs, overhead or other expenses of operating the
Reservation System.
4.3 Marketing.
4.3.1 We will promote public awareness and usage of Chain Facilities by
implementing advertising, promotion, publicity, market research and other
marketing programs, training
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programs and related activities, and the production and distribution of
Chain publications and directories of hotels. We will determine in our
discretion, after consultation with and the approval of the INOC Board of
Directors: (i) The nature and type of media placement; (ii) The allocation
(if any) among international, national, regional and local markets; and
(iii) The nature and type of advertising copy, other materials and programs.
We or an affiliate may be reimbursed for the reasonable direct and indirect
costs, overhead or other expenses of providing marketing services. We are
not obligated to supplement or advance funds available from System licensees
to pay for marketing activities. We do not promise that the Facility or you
will benefit directly or proportionately from marketing activities.
4.3.2 We may, at our discretion, implement special international, national,
regional or local promotional programs (which may or may not include the
Facility) and may make available to you (to use at your option) media
advertising copy and other marketing materials for prices which reasonably
cover the materials' direct and indirect costs. We may require your
participation in marketing programs approved by the INOC Board of Directors,
and administer those programs on behalf of the INOC.
4.3.3 We will publish the Chain Directory. We will include the Facility in
the Chain Directory after it opens if you submit the information we request
on time, and you are not in default under this Agreement at the time we must
arrange for publication. We will supply Directories to you for display at
locations specified in the System Standards Manual or policy statements. We
may assess you a reasonable charge for the direct and indirect expenses
(including overhead) of producing and delivering the Directories.
4.3.4 We may use Marketing Contributions we collect to reimburse our
reasonable direct and indirect costs, overhead and other expenses of
providing marketing, training and related services.
4.4 Purchasing. We may offer optional assistance to you with purchasing
items used at or in the Facility. Our affiliates may offer this service on
our behalf. We may restrict the vendors authorized to sell proprietary or
Mark-bearing items in order to control quality, provide for consistent
service or obtain volume discounts. We will maintain and provide to you
lists of suppliers approved to furnish Mark-bearing items, or whose products
conform to System Standards.
4.5 The System. We will control and establish requirements for all aspects
of the System. We may, in our discretion, change, delete from or add to the
System, including any of the Marks or System Standards, in response to
changing market conditions. We may, in our discretion, permit deviations
from System Standards, based on local conditions and our assessment of the
circumstances. We may change the designation standards for the Chain and
then require that you change the designation of the Facility and related
presentation of that designation wherever it appears.
4.6 Consultations and Standards Compliance. We will assist you to understand
your obligations under System Standards by telephone, mail, during quality
assurance inspections,
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through the System Standards Manual, at training sessions and during
conferences and meetings we conduct. We will provide telephone and mail
consultation on Facility operation and marketing through our
representatives.
4.7 System Standards Manual and Other Publications. We will specify System
Standards in the System Standards Manual, policy statements or other
publications. We will lend you one copy of the System Standards Manual
promptly after we sign this Agreement. We will send you any System Standards
Manual revisions and/or supplements as and when issued. We will send you all
other publications for Chain licensees and all separate policy statements in
effect from time to time.
4.8 Inspections and Audits. We have the unlimited right to conduct
unannounced quality assurance inspections of the Facility and its
operations, records and Mark usage to test the Facility's compliance with
System Standards and this Agreement, and the audits described in Section
3.8. We have the unlimited right to reinspect if the Facility does not
achieve the score required on an inspection. We may impose a reinspection
fee and will charge you for our reasonable costs of travel, lodging and
meals for any reinspection, or for an audit if you pay less than 97% of the
correct amount of Recurring Fees. Our inspections are solely for the
purposes of checking compliance with System Standards.
5. Term. The Term begins on the Effective Date and expires on the day prior
to the fifteenth anniversary of the Opening Date. Some of your duties and
obligations will survive termination or expiration of this Agreement. You
will execute and deliver to us with this Agreement a notarized Declaration
of License Agreement in recordable form. We will countersign and return one
copy of the Declaration to you. We may, at our option, record the
Declaration in the real property records of the county where the Facility is
located. The Declaration will be released at your request and expense when
this Agreement terminates or expires and you perform your post-termination
obligations. NEITHER PARTY HAS RENEWAL RIGHTS OR OPTIONS.
6. Application and Initial Fees. We have received from you a non-refundable
Application Fee of $1,000.00. You will pay us a non-refundable Initial Fee
in the amount of $34,000.00, when you sign this Agreement, which is fully
earned when we sign this Agreement.
7. Recurring Fees, Taxes and Interest.
7.1 You will pay us certain "Recurring Fees" in U.S. dollars (or such other
currency as we may direct if the Facility is outside the United States) ten
days after the month in which they accrue, without billing or demand.
Recurring Fees include the following:
7.1.1 A "Royalty" equal to four percent (4.0%) of Gross Room Revenues of the
Facility accruing during the calendar month, accrues from the earlier of the
Opening Date or the date you identify the Facility as a Chain Facility or
operate it under a Mark until the end of the Term.
7.1.2 A "Marketing Contribution" as set forth in Schedule C for advertising,
promotion, training and other related services and programs, accrues from
the Opening Date until the end of the Term. We may increase or adjust the
Marketing Contribution from time to time if either approved by the Board of
Directors of the INOC or a successor sanctioned as such by us or
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approved by a majority vote (which shall be counted on the basis of one
Chain Facility, one vote) of INOC members in good standing, present and
voting at a general membership meeting or at a special meeting called for
the purpose of considering the change in the Contribution by the INOC Board
of Directors and upon at least 15 days' notice from us.
7.1.3 A "Room Sales Charge" as set forth in Schedule C as well as such other
Reservation System Charges as we establish from time to time, accrues from
the Opening Date until the end of the Term. We may increase or adjust such
Room Sales Charge on a Chain-wide basis, upon 60 days written notice to
Licensees, to cover costs (including reasonable direct or indirect overhead
costs) related to such services and programs or the cost of additional
services or programs. You will also pay or reimburse us for travel agent and
general sales agent commissions paid for certain reservations at the
Facility and a "GDS Fee" levied to pay for reservations for the Facility
originated or processed through the Global Distribution System and other
reservation systems and networks. We may charge a reasonable service fee for
this service. We may charge Facilities using the Reservation System outside
the United States for reservation service using a different formula.
7.2 You will pay to us "Taxes" equal to any federal, state or local sales,
gross receipts, use, value added, excise or similar taxes assessed against
us on the Recurring Fees by the jurisdictions where the Facility is located,
but not including any income tax, franchise or other tax for our privilege
of doing business in your State. You will pay Taxes to us when due.
7.3 "Interest" is payable when you receive our invoice on any past due
amount payable to us under this Agreement at the rate of 1.5% per month or
the maximum rate permitted by applicable law, whichever is less, accruing
from the due date until the amount is paid.
7.4 If a transfer occurs, your transferee or you will pay us our then
current Application Fee and a "Relicense Fee" equal to the Initial Fee we
would then charge a new licensee for the Facility.
8. Indemnifications.
8.1 Independent of your obligation to procure and maintain insurance, you
will indemnify, defend and hold the Indemnitees harmless, to the fullest
extent permitted by law, from and against all Losses and Expenses, incurred
by any Indemnitee for any investigation, claim, action, suit, demand,
administrative or alternative dispute resolution proceeding, relating to or
arising out of any transaction, occurrence or service at, or involving the
operation of the Facility, any breach or violation of any contract or any
law, regulation or ruling by, or any act, error or omission (active or
passive) of, you, any party associated or affiliated with you or any of the
owners, officers, directors, employees, agents or contractors of you or your
affiliates, including when the active or passive negligence of any
Indemnitee is alleged or proven. You have no obligation to indemnify an
Indemnitee for damages to compensate for property damage or personal injury
if a court of competent jurisdiction makes a final decision not subject to
further appeal that the Indemnitee engaged in willful misconduct or
intentionally caused such property damage or bodily injury. This exclusion
from the obligation to indemnify shall not, however, apply if the property
damage or bodily injury resulted from the use of reasonable force by the
Indemnitee to protect persons or property.
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8.2 You will respond promptly to any matter described in the preceding
paragraph, and defend the Indemnitee. You will reimburse the Indemnitee for
all costs of defending the matter, including attorneys' fees, incurred by
the Indemnitee if your insurer or you do not assume defense of the
Indemnitee promptly when requested. We must approve any resolution or course
of action in a matter that could directly or indirectly have any adverse
effect on us or the Chain, or could serve as a precedent for other matters.
8.3 We will indemnify, defend and hold you harmless, to the fullest extent
permitted by law, from and against all Losses and Expenses incurred by you
in any action or claim arising from your proper use of the System alleging
that your use of the System and any property we license to you is an
infringement of a third party's rights to any trade secret, patent,
copyright, trademark, service mark or trade name. You will promptly notify
us in writing when you become aware of any alleged infringement or an action
is filed against you. You will cooperate with our defense and resolution of
the claim. We may resolve the matter by obtaining a license of the property
for you at our expense, or by requiring that you discontinue using the
infringing property or modify your use to avoid infringing the rights of
others.
9. Your Assignments, Transfers and Conveyances.
9.1 Transfer of the Facility. This Agreement is personal to you (and your
owners if you are an entity). We are relying on your experience, skill and
financial resources (and that of your owners and the guarantors, if any) to
sign this Agreement with you. You may finance the Facility and grant a lien,
security interest or encumbrance on it without notice to us or our consent.
If a Transfer is to occur, the transferee or you must comply with Section
9.3. Your License terminates when the Transfer occurs. If the transferee
does not sign a replacement license agreement with us before you give the
transferee ownership or possession of the Facility, then the License
terminates when you transfer ownership or possession of the Facility. The
transferee may not operate the Facility under the System, and you are
responsible for performing the post-termination obligations in Section 13.
You and your owners may, only with our prior written consent and after you
comply with Sections 9.3 and 9.6, assign, pledge, transfer, delegate or
grant a security interest in all or any of your rights, benefits and
obligations under this Agreement, as security or otherwise. Transactions
involving Equity Interests that are not Equity Transfers do not require our
consent and are not Transfers.
9.2 Public Offerings and Registered Securities. You may engage the first
registered public offering of your Equity Interests only after you pay us a
public offering fee equal to $15,000. Your Equity Interests (or those of a
person, parent, subsidiary, sibling or affiliate entity, directly or
indirectly effectively controlling you), are freely transferable without the
application of this Section if they are, on the Effective Date, or after the
public offering fee is paid, they become, registered under the federal
Securities Act of 1933, as amended, or a class of securities registered
under the Securities Exchange Act of 1934, as amended, or listed for trading
on a national securities exchange or the automated quotation system of the
National Association of Securities Dealers, Inc. (or any successor system),
provided that any tender offer for at least a majority of your Equity
Interests will be an Equity Transfer subject to Section 9.1.
9.3 Conditions. We may, to the extent permitted by applicable law, condition
and withhold our consent to a Transfer when required under this Section 9
until the transferee and you meet certain conditions. If a Transfer is to
occur, the transferee (or you, if an Equity Transfer is
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involved) must first complete and submit our Application, qualify to be a
licensee in our sole discretion, given the circumstances of the proposed
Transfer, provide the same supporting documents as a new license applicant,
pay the Application and Relicense Fees then in effect, sign the form of
License Agreement we then offer in conversion transactions and agree to
renovate the Facility as if it were an existing facility of similar age and
condition converting to the System, as we reasonably determine. We will
provide a Punch List of improvements we will require after the transferee's
Application is submitted to us. We must also receive general releases from
you and each of your owners, and payment of all amounts then owed to us and
our affiliates by you, your owners, your affiliates, the transferee, its
owners and affiliates, under this Agreement or otherwise. Our consent to the
transaction will not be effective until these conditions are satisfied.
9.4 Permitted Transferee Transactions. You may transfer an Equity Interest
or effect an Equity Transfer to a Permitted Transferee without obtaining our
consent, renovating the Facility or paying a Relicense Fee or Application
Fee. No Transfer will be deemed to occur. You also must not be in default
and you must comply with the application and notice procedures specified in
Sections 9.3 and 9.6. Each Permitted Transferee must first agree in writing
to be bound by this Agreement, or at our option, execute the License
Agreement form then offered prospective licensees. No transfer to a
Permitted Transferee shall release a living transferor from liability under
this Agreement or any guarantor under any Guaranty of this Agreement. You
must comply with this Section if you transfer the Facility to a Permitted
Transferee. A transfer resulting from a death may occur even if you are in
default under this Agreement.
9.5 Attempted Transfers. Any transaction requiring our consent under this
Section 9 in which our consent is not first obtained shall be void, as
between you and us. You will continue to be liable for payment and
performance of your obligations under this Agreement until we terminate this
Agreement, all your financial obligations to us are paid and all System
identification is removed from the Facility.
9.6 Notice of Transfers. You will give us at least 30 days prior written
notice of any proposed Transfer or Permitted Transferee transaction. You
will notify us when you sign a contract to Transfer the Facility and 10 days
before you intend to close on the transfer of the Facility. We will respond
to all requests for our consent and notices of Permitted Transferee
transactions within a reasonable time not to exceed 30 days. You will notify
us in writing within 30 days after a change in ownership of 25% or more of
your Equity Interests that are not publicly held or that is not an Equity
Transfer, or a change in the ownership of the Facility if you are not its
owner. You will provide us with lists of the names, addresses, and ownership
percentages of your owner(s) at our request.
10. Our Assignments. We may assign, delegate or subcontract all or any part
of our rights and duties under this Agreement, including by operation of
law, without notice and without your consent. We will have no obligations to
you after you are notified that our transferee has assumed our obligations
under this Agreement except those that arose before we assign this
Agreement.
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11. Default and Termination.
11.1 Default. In addition to the makers identified in Section 3.1, you will
be in default under this Agreement if (a) you do not pay us when a payment
is due, (b) you do not perform any of your other obligations when this
Agreement and the System Standards Manual require, or (c) if you otherwise
breach this Agreement. If your default is not cured within ten days after
you receive written notice from us that you have not filed your monthly
report, paid us any amount that is due or breached your obligations
regarding Confidential Information, or within 30 days after you receive
written notice from us of any other default (except as noted below), then we
may terminate this Agreement by written notice to you under Section 11.2. We
will not exercise our right to terminate if you have completely cured your
default, or until any waiting period required by law has elapsed. In the
case of quality assurance default, if you have acted diligently to cure the
default but cannot do so and have entered into a written improvement
agreement with us within 30 days after the failing inspection, you may cure
the default within 90 days after the failing inspection. We may terminate
the License if you do not perform that improvement agreement.
11.2 Termination. We may terminate the License, or this Agreement if the
Opening Date has not occurred, effective when we send written notice to you
or such later date as required by law or as stated in the default notice,
when (1) you do not cure a default as provided in Section 11.1 or we are
authorized to terminate under Section 3.1, (2) you discontinue operating the
Facility as a "Howard Johnson", (3) a guarantor on whom we are relying to
enter into this Agreement dies or becomes incapacitated, (4) you lose
possession or the right to possession of the Facility, (5) you (or any
guarantor) suffer the termination of another license or franchise agreement
with us or one of our affiliates, (6) you intentionally maintain false books
and records or submit a materially false report to us, (7) you (or any
guarantor) generally fail to pay debts as they come due in the ordinary
course of business, (8) you, any guarantor or any of your owners or agents
misstated to us or omitted to tell us a material fact to obtain or maintain
this Agreement with us, (9) you receive two or more notices of default from
us in any one year period (whether or not you cure the defaults), (10) a
violation of Section 9 occurs, or a Transfer occurs before the relicensing
process is completed, (11) you contest in court the ownership or right to
franchise or license all or any part of the System or the validity of any of
the Marks, (12) you, any guarantor or the Facility is subject to any
voluntary or involuntary bankruptcy, liquidation, dissolution, receivership,
assignment, reorganization, moratorium, composition or a similar action or
proceeding that is not dismissed within 60 days after its filing, or (13)
you maintain or operate the Facility in a manner that endangers the health
or safety of the Facility's guests.
11.3 Casualty and Condemnation.
11.3.1 You will notify us promptly after the Facility suffers a Casualty
that prevents you from operating in the normal course of business, with less
than 75% of guest rooms available. You will give us information on the
availability of guest rooms and the Facility's ability to honor advance
reservations. You will tell us in writing within 60 days after the Casualty
whether or not you will restore, rebuild and refurbish the Facility to
conform to System Standards and its condition prior to the Casualty. This
restoration will be completed within 180 days after the Casualty. You may
decide within the 60 days after the Casualty, and if we do not hear from
you, we will assume that you have decided, to terminate this Agreement,
effective as of the date of your notice or 60 days after the Casualty,
whichever comes first. If this Agreement so
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terminates, you will pay all amounts accrued prior to termination and follow
the post-termination requirements in Section 13. You will not be obligated
to pay Liquidated Damages if the Facility will no longer be used as an
extended stay or transient lodging facility after the Casualty.
11.3.2 You will notify us in writing within 10 days after you receive notice
of any proposed Condemnation of the Facility, and within 10 days after
receiving notice of the Condemnation date. This Agreement will terminate on
the date the Facility or a substantial portion is conveyed to or taken over
by the condemning authority.
11.4 Our Other Remedies. We may suspend the Facility from the Reservation
System for any default or failure to pay or perform under this Agreement,
discontinue Reservation System referrals to the Facility for the duration of
such suspension, and may divert previously made reservations to other Chain
Facilities after giving notice of non-performance, non-payment or default.
We may deduct points under our quality assurance inspection program for your
failure to comply with this Agreement or System Standards. Reservation
service will be restored after you have fully cured any and all defaults and
failures to pay and perform. We may omit the Facility from the Directory if
you are in default on the date we must determine which Chain Facilities are
included in the Directory. You recognize that any use of the System not in
accord with this Agreement will cause us irreparable harm for which there is
no adequate remedy at law, entitling us to injunctive and other relief. We
may litigate to collect amounts due under this Agreement without first
issuing a default or termination notice. Our consent or approval may be
withheld if needed while you are in default under this Agreement or may be
conditioned on the cure of all your defaults.
11.5 Your Remedies. If we fail to issue our approval or consent as and when
required under this Agreement within a reasonable time of not less than 30
days after we receive all of the information we request, and you believe our
refusal to approve or consent is wrongful, you may bring a legal action
against us to compel us to issue our approval or consent to the obligation.
To the extent permitted by applicable law, this action shall be your
exclusive remedy. We shall not be responsible for direct, indirect, special,
consequential or exemplary damages, including, but not limited to, lost
profits or revenues.
12. Liquidated Damages.
12.1 Generally. If we terminate the License under Section 11.2, or you
terminate this Agreement (except under Section 11.3 or as a result of our
default which we do not cure within a reasonable time after written notice),
you will pay us within 30 days following the date of termination, as
Liquidated Damages, an amount equal to the sum of accrued Royalties,
Marketing Contributions and Room Sales Charges during the immediately
preceding 24 full calendar months (or the number of months remaining in the
unexpired Term at the date of termination, whichever is less). If the
Facility has been open for less than 24 months, then the amount shall be the
average monthly Royalties, Marketing Contributions and Room Sales Charges
since the Opening Date multiplied by 24. You will also pay any applicable
Taxes assessed on such payment. Liquidated Damages will not be less than the
product of $2,000.00 multiplied by the number of guest rooms in the
Facility. If we terminate this Agreement under Section 3 before the Opening
Date, you will pay us within 10 days after you receive our notice of
termination Liquidated Damages equal to one-half the amount payable for
termination under Section 11.2. Liquidated Damages are paid in place of our
claims for lost future Recurring Fees
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under this Agreement. Our right to receive other amounts due under this
Agreement is not affected.
12.2 Condemnation Payments. In the event a Condemnation is to occur, you
will pay us the fees set forth in Section 7 for a period of one year after
we receive the initial notice of condemnation described in Section 11.3.2,
or until the Condemnation occurs, whichever is longer. You will pay us
Liquidated Damages equal to the average daily Recurring Fees for the one
year period preceding the date of your condemnation notice to us multiplied
by the number of days remaining in the one year notice period if the
Condemnation is completed before the one year notice period expires. This
payment will be made within 30 days after Condemnation is completed (when
you close the Facility or you deliver it to the condemning authority). If
the Condemnation is completed after the one year notice period expires you
will pay no Liquidated Damages, but the fees set forth in Section 7 must be
paid when due until Condemnation is completed.
13. Your Duties At and After Termination. When the License or this Agreement
terminates for any reason whatsoever:
13.1 System Usage Ceases. You will immediately stop using the System to
operate and identify the Facility. You will remove all signage and other
items bearing any Marks and follow the other steps detailed in the System
Standards Manual for changing the identification of the Facility. You will
promptly paint over or remove the Facility's distinctive System trade dress,
color schemes and architectural features.
13.2 Other Duties. You will pay all amounts owed to us under this Agreement
within 10 days after termination. You will owe us Recurring Fees on Gross
Room Revenues accruing while the Facility is identified as a "Howard
Johnson", including Room Sales Charges for so long as the Facility receives
service from the Reservation System. We may immediately remove the Facility
from the Reservation System and divert reservations as authorized in Section
11.4. We may also, to the extent permitted by applicable law, and without
prior notice enter the Facility and any other parcels, remove software
(including archive and back-up copies) for accessing the Reservation System,
all copies of the System Standards Manual, Confidential Information,
equipment and all other personal property of ours, and paint over or remove
and purchase for $10.00, all or part of any interior or exterior
Mark-bearing signage (or signage face plates), including billboards, whether
or not located at the Facility, that you have not removed or obliterated
within five days after termination. You will promptly pay or reimburse us
for our cost of removing such items, net of the $10.00 purchase price for
signage. We will exercise reasonable care in removing or painting over
signage. We will have no obligation or liability to restore the Facility to
its condition prior to removing the signage. We shall have the right, but
not the obligation, to purchase some or all of the Facility's Mark-bearing
FF&E and supplies at the lower of their cost or net book value, with the
right to set off their aggregate purchase price against any sums then owed
us by you.
13.3 Advance Reservations. The Facility will honor any advance reservations,
including group bookings, made for the Facility prior to termination at the
rates and on the terms established when the reservations are made and pay
when due all related travel agent commissions.
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13.4 Survival of Certain Provisions. Sections 3.8, 3.9, 3.13, 7, 8, 11.4, 12,
13, 15, 16 and 17 survive termination of the License and this Agreement, whether
termination is initiated by you or us, even if termination is wrongful.
14. Your Representations and Warranties. You expressly represent and warrant to
us as follows:
14.1 Quiet Enjoyment and Financing. You own, or will own prior to commencing
improvement, or lease, the Location and the Facility. You will be entitled to
possession of the Location and the Facility during the entire Term without
restrictions that would interfere with your performance under this Agreement,
subject to the reasonable requirements of any financing secured by the
Facility. You have, when you sign this Agreement, and will maintain during the
Term, adequate financial liquidity and financial resources to perform your
obligations under this Agreement.
14.2 This Transaction. You have received, at least 10 business days prior to
execution of this Agreement and making any payment to us, our current Uniform
Franchise Offering Circular for prospective licensees. Neither we nor any person
acting on our behalf has made any oral or written representation or promise to
you that is not written in this Agreement on which you are relying to enter into
this Agreement. You release any claim against us or our agents based on any oral
or written representation or promise not stated in this Agreement. You and the
persons signing this Agreement for you have full power and authority and have
been duly authorized, to enter into and perform or cause performance of your
obligations under this Agreement. You have obtained all necessary approvals of
your owners, Board of Directors and lenders. Your execution, delivery and
performance of this Agreement will not violate, create a default under or breach
of any charter, bylaws, agreement or other contract, license, permit,
indebtedness, certificate, order, decree or security instrument to which you or
any of your principal owners is a party or is subject or to which the Facility
is subject. Neither you nor the Facility is the subject of any current or
pending merger, sale, dissolution, receivership, bankruptcy, foreclosure,
reorganization, insolvency, or similar action or proceeding on the date you
execute this Agreement and was not within the three years preceding such date,
except as disclosed in the Application. You will submit to us the documents
about the Facility, you, your owners and your finances that we request in the
License Application (or after our review of your initial submissions) before or
within 30 days after you sign this Agreement.
14.3 No Misrepresentations or Implied Covenants. All written information you
submit to us about the Facility, you, your owners, any guarantor, or the
finances of any such person or entity, was or will be at the time delivered and
when you sign this Agreement, true, accurate and complete, and such information
contains no misrepresentation of a material fact, and does not omit any material
fact necessary to make the information disclosed not misleading under the
circumstances. There are no express or implied covenants or warranties, oral or
written, between we and you except as expressly stated in this Agreement.
15. Proprietary Rights.
15.1 Marks and System. You will not acquire any interest in or right to use
the System or Marks except under this Agreement. You will not apply for
governmental registration of the
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Marks, or use the Marks or our corporate name in your legal name, but you may
use a Mark for an assumed business or trade name filing.
15.2 Inurements. All present and future distinguishing characteristics,
improvements and additions to or associated with the System by us, you or
others, and all present and future service marks, trademarks, copyrights,
service mark and trademark registrations used and to be used as part of the
System, and the associated good will, shall be our property and will inure to
our benefit. No good will shall attach to any secondary designator that you use.
15.3 Other Locations and Systems. We and our affiliates each reserve the right
to own, in whole or in part, and manage, operate, use, lease, finance, sublease,
franchise, license (as licensor or licensee), provide services to or joint
venture (i) distinctive separate lodging or food and beverage marks and other
intellectual property which are not part of the System, and to enter into
separate agreements with you or others (for separate charges) for use of any
such other marks or propriotary rights, (ii) other lodging, food and beverage
facilities, or businesses, under the System utilizing modified System Standards,
and (iii) a Chain Facility at or for any location other than the Location. There
are no territorial rights or agreements between the parties. You acknowledge
that we are affiliated with or in the future may become affiliated with other
lodging providers or franchise systems that operate under names or marks other
than the Marks. We and our affiliates may use or benefit from common hardware,
software, communications equipment and services and administrative systems for
reservations, franchise application procedures or committees, marketing and
advertising programs, personnel, central purchasing, approved supplier lists,
franchise sales personnel (or independent franchise sales representatives), etc.
15.4 Confidential Information. You will take all appropriate actions to preserve
the confidentiality of all Confidential Information. Access to Confidential
Information should be limited to persons who need the Confidential Information
to perform their jobs and are subject to your general policy on maintaining
confidentiality as a condition of employment or who have first signed a
confidentiality agreement. You will not permit copying of Confidential
Information (including, as to computer software, any translation, decompiling,
decoding, modification or other alteration of the source code of such software).
You will use Confidential Information only for the Facility and to perform under
this Agreement. Upon termination (or earlier, as we may request), you shall
return to us all originals and copies of the System Standards Manual, poiicy
statements and Confidential Information "fixed in any tangible medium
of expression," within the meaning of the U.S. Copyright Act, as amended. Your
obligations under this subsection commence when you sign this Agreement and
continue for trade secrets (including computer software we license to you) as
long as they remain secret and for other Confidential Information, for as long
as we continue to use the information in confidence, even if edited or revised,
plus three years. We will respond promptly and in good faith to your inquiry
about continued protection of any Confidential Information.
15.5 Litigation. You will promptly notify us of (i) any adverse or infringing
uses of the Marks (or names or symbols confusingly similar), Confidential
Information or other System intellectual property, and (ii) or any threatened or
pending litigation related to the System against (or naming as a party) you or
us of which you become aware. We alone handle disputes with third parties use of
all or any part of the System. You will cooperate with our efforts to resolve
these disputes. We need not initiate suit against imitators or infringers who do
not have a
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material adverse impact on the Facility, or any other suit or proceeding to
enforce or protect the System in a matter we do not believe to be material.
16. Relationship of Parties.
16.1 Independence. You are an independent contractor. You are not our legal
representative or agent, and you have no power to obligate us for any purpose
whatsoever. We and you have a business relationship based entirely on and
circumscribed by this Agreement. No partnership, joint venture, agency,
fiduciary or employment relationship is intended or created by reason of this
Agreement. You will exercise full and complete control over and have full
responsibility for your contracts, daily operations, labor relations, employment
practices and policies, including, but not limited to, the recruitment,
selection, hiring, disciplining, firing, compensation, work rules and schedules
of your employees.
16.2 Joint Status. If you comprise two or more persons or entities
(notwithstanding any agreement, arrangement or understanding between or among
such persons or entities) the rights, privileges and benefits of this Agreement
may only be exercised and enjoyed jointly. The liabilities and responsibilities
under this Agreement will be the joint and several obligations of all such
persons or entities.
17. Legal Matters.
17.1 Partial Invalidity. If all or any part of a provision of this Agreement
violates the law of your state (if it applies), such provision or part will not
be given effect. If all or any part of a provision of this Agreement is declared
unenforceable, for any reason, or is not given effect by reason of the prior
sentence, the remainder of the Agreement shall not be affected. However, if in
our judgement the invalidity or ineffectiveness of such provision or part
substantially impairs the value of this Agreement to us, then we may at any time
terminate this Agreement by written notice to you without penalty or
compensation owed by either party.
17.2 Waivers, Modifications and Approvals. If we allow you to deviate from this
Agreement, we may insist on strict compliance at any time after written notice.
Our silence or inaction will not be or establish a waiver, consent, course of
dealing, implied modification or estoppel. All modifications, waivers, approvals
and consents of or under this Agreement by us must be in writing and signed by
our authorized representative to be effective.
17.3 Notices. Notices will be effective if in writing and delivered by facsimile
transmission with confirmation original sent by first class mail, postage
prepaid, by delivery service, with proof of delivery, or by first class, prepaid
certified or registered mail, return receipt requested, to the appropriate party
at its address stated below or as may be otherwise designated by notice. Notices
shall be deemed given on the date delivered or date of attempted delivery, if
refused.
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Your name: LEROY'S HOTEL CORPORATION OF AMERICAN WAGERING, INC.:
Your address: 675 Grier Drive, Las Vegas, Nevada 89119, Attention: Robert Ciunci
Your fax No: 707-735-0142
Howard Johnson International, Inc.:
Our address: 339 Jefferson Road, P.O. Box 278, Parsippany, New Jersey
07054-0278, Attention: Vice President-Franchise Compliance; Fax No.(201)
428-9579
17.4 Remedies. Remedies specified in this Agreement are cumulative and do not
exclude any remedies available at law or in equity. The non-prevailing party
will pay all costs and expenses, including reasonable attorneys' fees, incurred
by the prevailing party to enforce this Agreement or collect amounts owed under
this Agreement. You consent and waive your objection to the non-exclusive
personal jurisdiction of and venue in the New Jersey state courts situated in
Morris County, New Jersey and the United States District Court for the District
of New Jersey for all cases and controversies under this Agreement or between we
and you.
17.5 Miscellaneous. This Agreement will be governed by and construed under the
laws of the State of New Jersev. The New Jersey Franchise Practices Act will not
apply to any Facility located outside the State of New Jersey. This Agreement is
exclusively for the benefit of the parties. There are no third party
beneficiaries. No agreement between us and anyone else is for your benefit. The
section headings in this Agreement are for convenience of reference only. We may
unilaterally revise Schedule C under this Agreement. This Agreement, together
with the exhibits and schedules attached, is the entire agreement (superseding
all prior representations, agreements and understanding, (oral or written) of
the parties about the Facility.
17.6 Waiver of Jury Trial. The parties waive the right to a jury trial in any
action related to this Agreement or the relationship between the licensor, the
licensee, any guarantor, and their respective successors and assigns.
18. Special Stipulations. The following special stipulations apply to this
Agreement and supersede any inconsistent or conflicting provisions. These are
personal to you and are not transferable or assignable except to a Permitted
Transferee.
18.1 Your Additional Termination Right. You may terminate the License without
cause or penalty effective only on the SEVEN year anniversary of the Opening
Date provided you give us at least six (6) months prior written notice of
termination and you are not in default under this Agreement at the time notice
must be given or at the effective date of termination. You will pay no
Liquidated Damages if you comply with the preceding sentence and you perform the
post termination obligations specified in this Agreement within 10 days after
the effective date of termination. Your rights under this Section will
automatically terminate without notice if and as of the date (i) a Termination
occurs, (ii) you fail to cure ary default under this Agreement within the time
permitted, if any, in the notice of default we send you, or (iii) after the
Facility satisfies the Improvement Obligation, the Facility scores less than 425
(or its then equivalent) on a quality assurance inspection and then fails to
achieve a score of at least 425 (or its then equivalent) in a reinspection to be
performed no sooner than 30 days after the initial inspection.
18.2 Our Additional Termination Right. We may terminate the License without
cause or penalty effective only on the SEVEN year anniversary of the Opening
Date provided we give you at
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least six (6) months prior written notice of termination. You will perform the
post termination obligations specified in this Agreement within 10 days after
the effective date of termination. You will pay no Liquidated Damages if we
terminate the License under this Section and you perform the post termination
obligations specified in this Agreement within 10 days after the effective date
of termination.
{SIGNATURE PAGE TO FOLLOW}
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first stated above.
WE:
HOWARD JOHNSON INTERNATIONAL, INC.
By:/s/ Russell A. Moserowitz Attest: /s/
-------------------------- ---------------------------
Russell A. Moserowitz Assistant Secretary
Vice President
Franchise Compliance
YOU, as licensee:
LEROY'S HOTEL CORPORATION, A SUBSIDIARY OF AMERICAN WAGERING, INC.
By:/s/ Robert Ciunci Attest: /s/
---------------------------- ---------------------------
Robert Ciunci
Executive Vice President
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APPENDIX A
DEFINITIONS
Agreement means this License Agreement.
Application Fee means the fee you pay when you submit your Application under
Section 6.
Approved Plans means your plans and specifications for constructing or improving
the Facility initial1y or after opening, as approved by us under Section 3.
Casualty means destruction or significant damage to the Facility by act of God
or other event beyond your reasonable anticipation and control.
Chain means the network of Chain Facilities.
Chain Facility means a lodging facility we own, lease, manage, operate or
authorize another party to operate using the System and identified by the Marks.
Condemnation means the taking of the Facility for public use by a government or
public agency legally authorized to do so, permanently or temporarily, or the
taking of such a substantial portion of the Facility that continued operation
in accordance with the System Standards, or with adequate parking facilities,
is commercially impractical, or if the Facility or a substantial portion is sold
to the condemning authority in lieu of condemnation.
Conference Fee means the fee we charge for your attendance at a conference for
Chain Facilities and their licensees when and if held.
Confidential Information means any trade secrets we own or protect and other
proprietary information not generally known to the lodging industry including
confidential portions of the System Standards Manual or information we otherwise
impart to you and your representatives in confidence. Confidential Information
includes the "Standards of Operation and Design Manual" and all other System
Standards manuals and documentation, including those on the subjects of employee
relations, finance and administration, field operation, purchasing and
marketing, the Reservation System software and applications software.
Declaration means the Declaration of License Agreement you and we sign under
Section 5.
Design Standards mean standards specified in the System Standards Manual from
time to time for design, construction, renovation, modification and improvement
of new or existing Chain Facilities, including all aspects of facility design,
number of rooms, rooms mix and configuration, construction materials,
workmanship, finishes, electrical, mechanical, structural, plumbing, HVAC,
utilities, access, life safety, parking, systems, landscaping, amenities,
interior design and decor and the like for a Chain Facility.
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Directory means the general purpose directory we publish listing the names and
addresses of the Chain Facilities, and at our discretion, other Howard Johnson
facilities located outside the United States, Canada and Mexico.
Effective Date means the date that you first take possession of the Facility.
Equity Interests shall include, without limitation, all forms of equity
ownership of you, including voting stock interests, partnership interests,
limited liability company membership or ownership interests, joint and tenancy
interests, the proprietorship interest, trust beneficiary interests and all
options, warrants, and instruments convertible into such other equity interests.
Equity Transfer means any transaction in which your owners or you sell, assign,
transfer, convey, pledge, or suffer or permit the transfer or assignment of,
any percentage of your Equity Interests that will result in a change in control
of you to persons other than those disclosed on Schedule B, as in effect prior
to the transaction. Unless there are contractual modifications to your owners'
rights, an Equity Transfer of a corporation or limited liability company occurs
when either majority voting rights or beneficial ownership of more than 50% of
the Equity Interests changes. An Equity Transfer of a partnership occurs when a
newly admitted partner will be the managing, sole or controlling general
partner, directly or indirectly through a change in control of the Equity
Interests of an entity general partner. An Equity Transfer of a trust occurs
when either a new trustee with sole investment power is substituted for an
existing trustee, or a majority of the beneficiaries convey their beneficial
interests to persons other than the beneficiaries existing on the Effective
Date. An Equity Transfer does not occur when the Equity Interest ownership among
the owners of Equity Interests on the Effective Date changes without the
admission of new Equity Interest owners. An Equity Transfer occurs when you
merge, consolidate or issue additional Equity Interests in a transaction which
would have the effect of diluting the voting rights or beneficial ownership of
your owners' combined Equity Interests in the surviving entity to less than a
majority.
Facility means the Location, together with all improvements, buildings, common
areas, structures, appurtenances, facilities, entry/exit rights, parking,
amenities, FF&E and related rights, privileges and properties existing at the
Location on the Effective Date or afterwards.
FF&E means furniture, fixtures and equipment.
FF&E Standards means standards specified in the System Standards Manual for FF&E
and supplies to be utilized in a Chain Facility.
Food and Beverage means any restaurant, catering, bar/lounge, entertainment,
room service, retail food or beverage operation, continental breakfast, food or
beverage concessions and similar services offered at the Facility.
Gross Room Revenues means gross revenues attributable to or payable for rentals
of guest rooms at the Facility, including all credit transactions, whether or
not collected, but excluding separate charges to guests for Food and Beverage,
room service, telephone charges, key forfeitures and entertainment; vending
machine receipts; and federal, state and local sales, occupancy and use taxes.
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Improvement Obligation means your obligation to either (i) renovate and upgrade
the Facility, or (ii) construct and complete the Facility, in accordance with
the Approved Plans and System Standards, as described in Section 3.
Indemnitees means us, our direct and indirect parent, subsidiary and sister
corporations, and the respective officers, directors, shareholders, employees,
agents and contractors, and the successors, assigns, personal representatives,
heirs and legatees of all such persons or entities.
Initial Fee means the fee you are to pay for signing this Agreement as stated in
Section 6.
INOC means the International Operators' Council, Inc., a Georgia non-profit
corporation, its successors and assigns as the official organization of Chain
licensees.
License means the non-exclusive license to operate the type of Chain Facility
described in Schedule B only at the Location, using the System and the Mark we
designate in Section 1.
License Year means the one-year period beginning on the Opening Date and each
subsequent anniversary of the Opening Date and ending on the day preceding the
next anniversary of the Opening Date.
Liquidated Damages means the amounts payable under Section 12, set by the
parties because actual damages will be difficult or impossible to ascertain on
the Effective Date and the amount is a reasonable pre-estimate of the damages
that will be incurred and is not a penalty.
Location means the parcel of land situated at, as more fully described in
Schedule A.
Losses and Expenses means all payments or obligations to make payments either
(i) to or for third party claimants by any and all Indemnitees, including guest
refunds, or (ii) incurred by any and all Indemnitees to investigate, respond to
or defend a matter, including without limitation investigation and trial
charges, costs and expenses, attorneys' fees, experts' fees, court costs,
settlement amounts, judgements and costs of collection.
Maintenance Standards means the standards specified frorn time to time in the
System Standards Manual for repair, refurbishment and replacement of FF&E,
finishes, decor, and other capital items and design materials in Chain
Facilities.
Marketing Contribution means the fee you pay to us under Section 7.1.2 and
Schedule C, as amended, for advertising, marketing, training and other services.
Marks means, collectively (i) the service marks associated with the System
published in the System Standards Manual from time to time including, but not
limited to, the name, design and logo for "Howard Johnson" and other marks (U.S.
Reg. Nos. 1,506,553; 714,495; 836,077; 1,506,552; 1,385,515; and 1,530,295) and
(ii) trademarks, trade names, trade dress, logos and derivations, and associated
good will and related intellectual properly interests.
Marks Standards means standards specified in the System Standards Manual for
interior and exterior Mark-bearing signage, advertising materials, china,
linens, utensils, glassware, uniforms, stationary, supplies, and other items,
and the use of such items at the Facility or elsewhere.
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Minor Renovation means the repairs, refurbishing, repainting, and other
redecorating of the interior, exterior, guest rooms, public areas and grounds of
the Facility and replacements of FF&E we may require you to perform under
Section 3.16.
Minor Renovation Ceiling Amount means $3,000.00 per guest room.
Minor Renovation Notice means the written notice from us to you specifying the
Minor Renovation to be performed and the dates for commencement and completion
given under Section 3.16.
Opening Date means the date on which we authorize you to open the Facility for
business identified by the Marks and using the System.
Operations Standards means standards specified in the System Standards Manual
for cleanliness, housekeeping, general maintenance, repairs, concession types,
food and beverage service, vending machines, uniforms, staffing, employee
training, guest services, guest comfort and other aspects of lodging operations.
Permitted Transferee means (i) any entity, natural person(s) or trust receiving
from the personal representative of an owner any or all of the owner's Equity
Interests upon the death of the owner, if no consideration is paid by the
transferee or (ii) the spouse or adult issue of the transferor, if the Equity
Interest transfer is accomplished without consideration or payment, or (iii) any
natural person or trust receiving an Equity Interest if the transfer is from a
guardian or conservator appointed for an incapacitated or incompetent
transferor.
Protected Territory means a one mile radius from the property.
Punch List means the list of upgrades and improvements attached as part of
Schedule B, which you are required to complete under Section 3.
Recurring Fees means fees paid to us on a periodic basis, including without
limitation, Royalties, Marketing Contributors, Room Sales Charges, and other
reservation fees and charges as stated in Section 7.
Relicense Fee means the fee your transferee or you pay to us under Section 7
when a Transfer occurs.
Reservation System or "Central Reservation System" means the system for offering
to interested parties, booking and communicating guest room reservations for
Chain Facilities described in Section 4.2.
Rooms Addition Fee means the fee we charge you for adding guest rooms to the
Facility.
Room Sales Charge means the fees set forth in Section 7.1.3 and Schedule C, as
modified in accordance with this Agreement for reservation services and other
charges.
Royalty means the monthly fee you pay to us for use of the System under Section
7.1. "Royalties" means the aggregate of all amounts owed as a Royalty.
System means the comprehensive system for providing guest lodging facility
services under the Marks as we specify which at present includes only the
following: (a) the Marks; (b) other intellectual property, including
Confidential Information, System Standards Manual and know-
24
<PAGE>
how (c) marketing, advertising, publicity and other promotional materials and
programs; (d) System Standards; (e) training programs and materials; (f) quality
assurance inspection and scoring programs; and (g) the Reservation System.
System Standards means the standards for the participating in the System
published in the System Standards Manual, including but not limited to Design
Standards, FF&E Standards, Marks Standards, Operations Standards, Technology
Standards and Maintenance Standards and any other standards, policies, rules and
procedures we promulgate about System operation and usage.
System Standards Manual means the Standards of Operation and Design Manual, and
any other manual we publish or distribute specifying the System Standards.
Taxes means the amounts payable under Section 7.2 of this Agreement.
Technology Standards means standards specified in the System Standards Manual
for local and long distance telephone communications services, telephone,
telecopy and other communications systems, point of sale terminals and computer
hardware and software for various applications, including, but not limited to,
front desk, rooms management, records maintenance, marketing data, accounting,
budgeting and interfaces with the Reservation System to be maintained at the
Chain Facilities.
Term means the period of time during which this Agreement shall be in effect, as
stated in Section 5.
Termination means a termination of the License under Sections 11.1 or 11.2 or
your termination of the License or this Agreement.
Transfer means (1) an Equity Transfer, (2) you assign, pledge, transfer,
delegate or grant a security interest in all or any of your rights, benefits and
obligations under this Agreement, as security or otherwise without our consent
as specified in Section 9, (3) you assign (other than as collateral secutity for
financing the Facility) your leasehold interest in (if any), lease or sublease
all or any part of the Facility to any third party, (4) you engage in the sale,
conveyance, transfer, or donation of your right, title and interest in and to
the Facility, (5) your lender or secured party forecloses on or takes possession
of your interest in the Facility, directly or indirectly, or (6) a receiver or
trustee is appointed for the Facility or your assets, including the Facility. A
Transfer does not occur when you pledge or encumber the Facility to finance its
acquisition or improvement, you refinance it, or you engage in a Permitted
Transferee transaction.
"You" and "Your" means and refers to the party named as licensee identified in
the first paragraph of this Agreement and its Permitted Transferees.
"We", "Our" and "Us" means and refers to Howard Johnson International, Inc., a
Delaware corporation, its successors and assigns.
25
<PAGE>
Situate in the County of Clark, State of Nevada, being portions of the North
One-Half (N 1/2) of Section 29, Township 21 South, Range 61 East M.D.B.&.M.,
Clark County, Nevada, being more particularly described by metes and bounds as
follows, to wit:
BEGINNING at a point 185.15 feet left of and, at right angles to Highway
Engineer's Station "B" 198+47.45 P.O.T., of Interstate 15, Project I-015-1(6)28;
said point being further described as bearing North 0(degrees)06'00" West, along
the North-South Quarter Section line a distance of 2028.54 feet from the center
of Section 29, Township 21 South, Range 61 East, M.D.B.&.M.; THENCE South
89(degrees) 21'45" West, a distance of 115.85 feet to a point on the Easterly
right of way line of Industrial Road;
THENCE North 39(degrees)05'34" West, along said right of way line, a distance of
559.30 feet to a point;
THENCE North 10(degrees)41'21" East, a distance of 35.48 feet to a point on the
Southerly right of way line of Tropicana Avenue;
THENCE North 88(degrees)57'13" East, along said right of way line, parallel with
and 80.00 feet Southerly of the center line of Tropicana Avenue, a distance of
350.00 feet to a point on the Westerly right of way line of Interstate 15,
Project I-015-1(6)28;
THENCE South 18(degrees)39'03" East, along said right of way line a distance of
444.94 feet to a point;
THENCE South 0(degrees)03'04" East, along said right of way line a distance of
52.14 feet to a point;
THENCE South 89(degrees)21'45" West a distance of 30.33 feet to the POINT OF
BEGINNING.
Subject to the following described easement herein which is reserved for the use
of Clark County, Nevada for a flood control channel, said easement being more
fully described by metes and bounds as follows, to wit:
BEGINNING at a point 185.15 feet left of and, at right angles to Highway
Engineer's Station "B" 198+47.45 P.O.T., of Interstate 15, Project I-015-1(6)28;
said point being further described as bearing North 0(degrees)06'00" West, along
the North-South Quarter Section line a distance of 2028.54 feet from the center
quarter section corner of Section 29, Township 21 South, Range 61 East,
M.D.B.&.M.;
THENCE South 89(degrees)21'45" West, a distance of 115.85 feet to a point on the
Easterly right of way line of Industrial Road;
THENCE North 39(degrees)05'34" West along said right of way line, a distance of
38.30 feet to a point;
THENCE South 78(degrees)31'03" East, a distance of 142.86 feet to the TRUE POINT
OF BEGINNING.
Situate in the County of Clark, State of Nevada, being portions of the North
One-Half (N 1/2) of Section 29, Township 21 South, Range 61 East M.D.B.&.M.,
Clark County, Nevada, being more particularly described by metes and bounds as
follows, to wit:
<PAGE>
PARCELS EX-I-015-CL-037.296 & 037.297
- -------------------------------------
BEGINNING at a point 500.62 feet left of and at right angles to Highway
Engineer's Station "B" 199+36.86 P.O.T., of Interstate 15; said point being
further described as bearing North 8(degrees)26'58" West, a distance of 2169.23
feet from the center quarter section corner of Section 29, Township 21 South,
Range 61 East, M.D.B.&.M.;
THENCE South 39(degrees)05'34" East, along the Westerly right of way line of
Industrial Road, a distance of 154.10 feet to a point;
THENCE South 89(degrees)21'45" West, a distance of 97.03 feet to a point;
THENCE North 0(degrees)04'15" West, a distance of 120.67 feet to the POINT OF
BEGINNING.
Subject to the following described easement herein which is reserved for the use
of Clark County, Nevada for a flood control channel, said easement being more
fully described by metes and bounds as follows, to wit:
BEGINNING at a point 403.17 feet left of and at right angles to Highway
Engineer's Station "B" 198+44.50 P.O.T., of Interstate 15, Project I-015-1(6)28;
said point being further described as bearing North 6(degrees)14'28" West, a
distance of 2038.17 feet from the center quarter section corner of Section 29,
Township 21 South, Range 61 East, M.D.B.&.M.;
THENCE South 89(degrees)21'45" West, a distance of 97.03 feet to a point;
THENCE North 0(degrees)04'15" West, a distance of 30.00 feet to a point;
THENCE North 89(degrees)21'45" East, a distance of 72.91 feet to a point on the
Westerly right of way line of Industrial Road;
THENCE South 39(degrees)05'34" East, along said right of way line a distance of
- --.31 feet to the TRUE POINT OF BEGINNING.
<PAGE>
SCHEDULE B
PART I: YOUR OWNERS:
Name Ownership Percentage Type of Equity Interest
- ---- -------------------- -----------------------
American Wagering 100% member
Incorporated
PART II: THE FACILITY:
Primary designation of Facility: Howard Johnson
Number of approved guest rooms: 150
Parking facilities (number of spaces, description): 150
Other amenities, services and facilities:
PART III: DESCRIPTION AND SCHEDULE OF RENOVATIONS TO BE
COMPLETED AS THE IMPROVEMENT OBLIGATION:
[Punch List to be sent under separate cover.]
<PAGE>
SCHEDULE C
December 1995
A. Marketing Contribution
The Marketing Contribution is 2% of Gross Room Revenues.
We may increase or adjust such Marketing Contribution from time to time if
either approved by the Board of Directors of the INOC or its successor
sanctioned as such by us or approved by a majority vote (which shall be counted
on the basis of one Facility, one vote) of INOC members in good standing,
present and voting at a general membership meeting or at a special meeting
called for that purpose by the Board of Directors upon at least 15 days' notice
from us.
B. Room Sales Charge
The Room Sales Charge is 2.5% of Gross Room Revenues.
Notwithstanding the above, we may change the Room Sales Charge on a
Chain-wide basis, after 60 days written notice to licensees, to cover costs
(including reasonable direct or indirect overhead costs) related to such
services and programs or the cost of additional services or programs.
C. Additional Room Sales Charges
The GDS Fee described in Section 7 is $4.50 per gross reservation
communicated through the Global Distribution System. The travel agent commission
described in Section 7 is 10% of the Gross Room Revenues generated by each
reservation originated by a travel agent, plus our service fee of .75% of
commissionable revenue. The general sales agent commission is 3% of the Gross
Room Revenues generated by each reservation originated in an area served by a
general sales agent.
<PAGE>
GUARANTY
To induce the franchisor, its successors and assigns ("You" or "Your") to
sign the License Agreement (the "Agreement") with the "Licensee" named in the
Agreement, to which this Guaranty is attached, the undersigned corporation, as
well as its affiliates, successor, assigns, subsidiaries, or related entities,
jointly and severally (hereinafter referred to as "We", "Our" or "Us"),
irrevocably and unconditionally (i) warrant to You that the Licensee's
representations and warranties in the Agreement are true and correct as stated,
and (ii) guaranty that the Licensee's obligations under the Agreement, including
any amendments, will be punctually paid and performed.
Upon default by the Licensee and notice from You, We will immediately make
each payment and perform or cause Licensee to perform, each unpaid or
unperformed obligation of Licensee under the Agreement. Without affecting Our
obligations under this Guaranty, You may without notice to Us extend, modify or
release any indebtedness or obligation of Licensee, or settle, adjust or
compromise any claims against Licensee. We waive notice of amendment of the
Agreement. We acknowledge that Section 17 of the Agreement applies to this
Guaranty.
We will be liable to pay under this Guaranty only if at the time We receive
from You any written request that the undersigned pay or perform Licensee's
obligations under the License Agreement, the tangible net worth of Licensee is
less than One Million Dollars ($1,000,000), as determined under generally
accepted accounting principles, as of or at a date within 30 days of the time of
Your request for payment or performance. We must furnish You with the balance
sheet of Licensee certified as accurate by the chief financial and executive
officers of Licensee. You may conclusively presume that Licensee's net worth is
less than One Million Dollars ($1,000,000) if a balance sheet as described above
is not provided to You within 10 days after Our receipt of Your request for
payment or performance.
IN WITNESS WHEREOF, each of Us has signed this Guaranty effective as of the
date of the Agreement.
Witnesses: Guarantors:
AMERICAN WAGERING, INC.
/s/ Sandra /s/ Robert Ciunci (Seal)
- ----------------------------------- --------------------------------
By: Executive Vice President
<PAGE>
Exhibit 10.25
ABSOLUTE ASSIGNMENT OF LEASES AND RENTS
---------------------------------------
STATE OF NEVADA
COUNTY OF CLARK
THIS ABSOLUTE ASSIGNMENT OF LEASES AND RENTS (the "Assignment")is entered
into by and between AUTOTOTE CBS, INC., a Nevada corporation (hereinafter called
"Maker"), and STANDARD LIFE AND ACCIDENT INSURANCE COMPANY, a Texas insurance
corporation (hereinafter called "Noteholder").
FOR AND IN CONSIDERATION of the loan made to Maker by Noteholder as
evidenced by that certain promissory note (hereinafter referred to as the
"Note") dated August 31, 1995 in the principal sum of $2,100,000.00, payable to
the order of Noteholder and executed by Maker, which is described in and secured
by a Deed of Trust, Security Agreement and Financing Statement(hereinafter
called "Deed of Trust") of even date therewith executed by Maker to Noteholder,
covering the property described in Exhibit "A" attached hereto and made a part
hereof, which, together with all buildings, improvements, fixtures and equipment
located thereon owned by Maker, is hereinafter referred to as the "Mortgaged
Property", Maker has GRANTED, TRANSFERRED and ASSIGNED, and by these presents
does GRANT, TRANSFER and ASSIGN unto Noteholder the following:
1. All leases, written or oral, and all agreements for use or occupancy of
any portion of the Mortgaged Property, any and all extensions and renewals of
said leases and agreements and any and all further leases or agreements,
including subleases thereunder, upon or covering use or occupancy of all or any
part of the Mortgaged Property, all such leases, agreements, subleases and
tenancies heretofore mentioned being hereinafter individually referred to as a
"Lease" and collectively referred to as the "Leases" and such lessees,
sublessees and tenants under any Lease being hereinafter individually referred
to as a "Lessee";
2. Any and all guaranties of the performance, payment and/or collection of
any of the Leases (individually referred to as a "Guaranty" and collectively
referred to as "Guaranties") by any grantor, surety or other liable party
thereunder (collectively referred to as a "Guarantor"); and
3. The immediate and continuing right to collect and receive all of the
rents, income, receipts, revenues, issues and profits now due or which may
become due, or to which Maker may now or shall, hereinafter (including during
the period of redemption, if any) become entitled or may demand or claim,
arising or issuing from or out of the Leases or from or out of the Mortgaged
Property, or any part thereof, including but not limited to minimum rents,
additional rents, percentage rents, common area maintenance charges, parking
charges, tax and
<PAGE>
insurance premium contributions, and liquidated damages following default, the
premium payable by any Lessee under any Lease upon the exercise of any
cancellation privilege provided for in any of the Leases, payments from any
Guarantor and all proceeds payable under any policy of insurance covering loss
of rents resulting from untenantability caused by destruction or damage to the
Mortgaged Property, together with any and all rights and claims of any kind
which Maker may have against any Lessee in connection with the Leases or against
any subtenants, occupants or users of the Mortgaged Property, all such monies,
rights and claims in this paragraph described being hereinafter referred to as
the "Rents."
Maker further COVENANTS AND AGREES:
1. To observe, perform and discharge all obligations, covenants and
warranties provided for under the terms of the Leases and Guaranties to be kept,
observed and performed by Maker, and to give prompt notice to Noteholder in the
event Maker fails to observe, perform and discharge same;
2. To notify in writing each Lessee, Guarantor and occupant of the
Mortgaged Property or any part thereof that any security deposits or other
deposits heretofore delivered to Maker have been retained by Maker or assigned
and delivered to Noteholder as the case may be;
3. To enforce or secure, in the name of the Noteholder if Noteholder should
so request, the performance of each and every obligation, term, covenant,
condition and agreement to be performed by (a) any Lessee under the terms of the
Leases and (b) any Guarantor under the terms of the Guaranties;
4. To appear in and defend any action or proceeding arising under,
occurring out of, or in any manner connected with the Leases, the Guaranties or
the obligations, duties or liabilities of Maker and any Lessee thereunder, and,
upon request by Noteholder, to do so in the name and on behalf of Noteholder but
at the expense of the Maker, and to pay all costs and expenses of Noteholder,
including reasonable attorneys' fees, in any action or proceeding in which the
Noteholder may appear;
5. Not to receive or collect any Rents from any Lessee of the Mortgaged
property or any part thereof or from any Guarantor for a period of more than one
(1) month in advance, or pledge, transfer, mortgage or otherwise encumber or
assign future payments of the Rents;
6. Not to waive, excuse, condone, discount, set off, compromise, or in any
manner release or discharge any Guarantor or Lessee of the Mortgaged Property of
and from any obligations,
2
<PAGE>
covenants, conditions and agreements by said Lessee or Guarantor to be kept,
observed and performed, including the obligation to pay rent in the manner and
at the place and time specified in any Lease;
7. Not to cancel, terminate or consent to any surrender of any Lease or any
Guaranty, or materially modify or in any way alter the terms of any Lease or any
Guaranty without, in each such instance, the prior written consent of
Noteholder;
8. To notify each Lessee, Guarantor and occupant of the Mortgaged Property
in writing of the rights granted to Noteholder hereunder, and, immediately upon
receipt of demand from Noteholder, to direct, in writing, each Lessee, Guarantor
and occupant of the Mortgaged Property to pay all Rents then due or to become
due from such Lessee, Guarantor and occupant directly to Noteholder upon such
Lessee's, Guarantor's or occupant's receipt of written notice from Noteholder of
Noteholder's exercise of Noteholder's rights under this Agreement;
9. To provide Noteholder with copies of all notices, complaints, demands
and petitions regarding (a) any actual, potential or alleged default on the part
of the landlord or the tenant under a Lease for which the ground floor area of
the leased premises; equals or exceeds 5,000 square feet or (b) Hazardous
Materials, as such term is defined in the Deed of Trust, sent or received by
Maker immediately upon Maker's sending same or within five (5) days of Maker's
receipt of same, as applicable; and
10. To promptly remit to Noteholder any and all Rents received by Maker
after Maker's receipt from Noteholder of termination of Maker's license to
collect Rents granted herein.
So long as there shall exist no default by Maker in the payment of any
indebtedness and obligations secured hereby or in the observance and performance
of any other obligation, covenant or warranty set forth herein or in the Note,
the Deed of Trust or any other instrument executed by Maker evidencing, securing
or relating to the note (such documents being herein referred to collectively as
the "Loan Documents"), Maker shall have the right under a license granted hereby
(but limited as provided in the following paragraph) to collect, receive and
retain, but not prior to accural, all of the Rents arising from or out of the
Leases.
Upon or at any time after default in the payment of any indebtedness
secured hereby or in the observance or performance of any obligiition, covenant
or warranty set forth herein or in the Loan Documents (an "Event of Default"),
Noteholder, at its option, shall have the right, power and authority to exercise
and enforce any or all of the following rights and remedies: (a) to
3
<PAGE>
terminate the license hereby granted to Maker to collect the Rents as aforesaid,
and, without taking possession of the Mortgaged Property, to, in Noteholder's
own name, demand, collect, receive, sue for, attach and levy the Rents, to give
proper receipts, releases and acquittances therefor, and, after deducting all
necessary and reasonable costs and expenses of collection, including reasonable
attorney's fees, to apply the net proceeds thereof, together with any funds of
Maker deposited with Noteholder, upon any indebtedness secured hereby or
obligation provided for in any of the Loan Documents and in such order as
Noteholder may determine; (b) to declare all sums secured hereby immediately due
and payable and, at Noteholder's option, to exercise all of the rights and
remedies provided for in the Loan Documents or under the terms hereof; and (c)
without any action or proceeding, through any person or by agent, or by the
trustee(s) or successor trustee under the Deed of Trust, or by a receiver to be
appointed by a court, to enter upon, take possession of, manage and operate the
Mortgaged Property, or any part thereof, and irrespective of Maker's possession
of the Mortgaged Property, to make, modify, enforce, cancel or accept surrender
of any of the Leases and Guaranties, to remove and evict any Lessee or other
occupant, to increase or reduce rents, to decorate, clean and make repairs, and
to otherwise do any act or incur any cost or expenses Noteholder shall deem
proper to protect the Leases, Guaranties and the Mortgaged Property, as fully
and to the same extent as Maker could do if in possession, and in such event to
apply any funds so collected to the operation and management of the Mortgaged
Property, but in such order as Noteholder shall deem proper, and including
payment of reasonable management, brokerage and attorney's fees, and then, to
the extent funds are available and to the extent deemed appropriate by
Noteholder, to the maintenance, without interest thereon, of a reserve for
replacement of items on the Mortgaged Property, and then, if any of such funds
remain, to the payment of any indebtedness evidencing, securing or relating to
the terms of the Loan Documents whether or not then due.
The exercise by Noteholder of any of the rights and remedies described
above, including collection of the Rents and application thereof as aforesaid
and/or the entry upon and taking possession of the Mortgaged Property, shall not
cure or waive any Event of Default or waive, modify or affect any notice of
default under the Loan Documents or hereunder, or invalidate any act done
pursuant to such notice, and the enforcement of such right or remedy by
Noteholder, once exercised, shall continue for so long as Noteholder shall
elect, notwithstanding that the collection and application as aforesaid of the
Rents may have cured the original Event of Default. If Noteholder shall
thereafter elect to discontinue the exercise of any such right or remedy, the
same or any other right or remedy hereunder may be reasserted at any time and
from time to time following any subsequent Event of Default.
4
<PAGE>
Notwithstanding the aforesaid license of Maker to collect the Rents
accruing under the Leases prior to an Event of Default, Noteholder shall at all
times be the creditor of each Lessee under the Leases in respect of assignments
for the benefit of creditors, bankruptcy, reorganization, rearrangement,
insolvency, dissolution, or receivership proceedings, with Noteholder having the
option to apply any monies received by the Noteholder as such creditor to
reduction of the principal or interest or other indebtedness evidencing,
securing or relating to the Loan Documents. Notwithstanding the aforesaid
license of Maker to collect rents under the Leases prior to an Event of Default,
Noteholder may collect or receive all payments, premiums and considerations paid
by any Lessee, whether or not pursuant to the terms of any Lease, for the right
to terminate, cancel or modify a Lease, with an option to apply any money so
received by the Noteholder to reduction of the principal or interest or any
other indebtedness evidencing, securing or relating to the Loan Documents in any
order or manner Noteholder elects. Further, Maker covenants and agrees to
immediately pay over to Noteholder any and all sums received by Maker as
creditor in respect to an assignment for the benefit of creditors in
bankruptcy, reorganization, arrangement, insolvency, dissolution or receivership
proceedings, or as payment, premium or other consideration in connection with
the cancellation or modification of any Lease, whereupon Noteholder shall have
the option to apply any funds so received to reduction of the principal or
interest or any other indebtedness evidencing, securing or relating to the Loan
Documents in any order or manner Noteholder elects.
This Assignment shall remain in effect as long as any part of the
indebtedness evidencing, securing or relating to the Loan Documents remains
unpaid, and upon payment in full of said indebtedness, Noteholder shall execute
a release of this Assignment upon request of Maker and at the expense of Maker.
Notwithstanding any law to the contrary, if there is an Event of Default,
and if there is any law requiring Noteholder to take actual possession of the
Mortgaged Property (or some action equivalent thereto, such as securing the
appointment of a receiver) in order for Noteholder to "perfect" or "activate"
its rights and remedies as set forth herein, then to the maximum extent
permitted by law Maker waives the benefits of such law and agrees that such law
shall be satisfied solely by: (1) Noteholder sending Maker written notice that
Noteholder intends to enforce, and is enforcing, its rights in and to the
Mortgaged Property and the rents, revenues, profits, and other items assigned
herein, and (2) Noteholder sending written notice to any or all tenants on the
Mortgaged Property that said tenants should commence making payments under the
Leases directly to Noteholder or its designee.
5
<PAGE>
In case any one or more of the provisions contained in this Agreement shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other
provision hereof, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
This Assignment shall run with the land and shall inure to the benefit of
and bind all parties hereto and their respective heirs, executors,
administrators, successors and assigns.
This Assignment may be executed in multiple counterparts, each of which
shall be an original instrument and which, taken together, constitute one and
the same agreement.
This Assignment shall be interpreted, construed and enforced in accordance
with the internal laws of the State of Nevada, without regard to Nevada law with
respect to conflict of laws.
EXECUTED this the 31st day of August, 1995.
AUTOTOTE CBS, INC.
BY: /s/ Victor Salerno
------------------------------------
NAME: Victor Salerno
-----------------------------------
TITLE: Exec. V.P.
---------------------------------
"MAKER"
STATE OF NEVADA
COUNTY OF CLARK
This instrument was acknowledged before me on 31st of August, 1995 by
Victor Salerno as Executive Vice-President. of AUTOTOTE CBS, INC.
[SEAL]
Susanne Waldahl
-------------------------------------
NOTARY PUBLIC
My commission expires:
6
<PAGE>
LEGAL DESCRIPTION
THAT PORTION OF "HUGHES AIRPORT CENTER UNIT NO. 1" AS SHOWN BY MAP THEREOF ON
FILE IN BOOK 33, PAGE 72 OF PLATS IN THE CLARK COUNTY RECORDER'S OFFICE, CLARK
COUNTY, NEVADA, LYING WITHIN THE NORTHEAST QUARTER (NE 1/4) OF THE NORTHWEST
QUARTER (NW 1/4) OF SECTION 3, TOWNSHIP 22 SOUTH, RANGE 61 EAST, M.D.M., CLARK
COUNTY, NEVADA AND DESCRIBED AS FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE NORTHEAST QUARTER (NE 1/4) OF THE
NORTHWEST QUARTER (NW 1/4) OF SAID SECTION 3; THENCE NORTH 88 (degrees) 18'45"
EAST ALONG THE NORTH LINE OF SAID SECTION 3, A DISTANCE OF 532.63 FEET TO THE
INTERSECTION WITH THE CONTROL LINE OF GRIER DRIVE (75.00 FEET WIDE); THENCE
SOUTH 01 (degrees) 41'15" EAST ALONG SAID CONTROL LINE, 80.00 FEET; THENCE SOUTH
88 (degree) 18'45" WEST, 35.00 FEET TO THE POINT OF BEGINNING ON THE WESTERLY
RIGHT-OF-WAY LINE OF GRIER DRIVE; THENCE SOUTH 01 (degrees) 41'15" EAST ALONG
SAID RIGHT-OF-WAY LINE, 122.35 FEET; THENCE CURVING TO THE LEFT ALONG THE ARC OF
A 300.00 FOOT RADIUS CURVE OF SAID RIGHT- OF-WAY LINE, CONCAVE NORTHEASTERLY,
THROUGH A CENTRAL ANGLE OF 17 (degrees) 25'57", AN ARC LENGTH OF 91.28 FEET TO A
POINT TO WHICH A RADIAL LINE BEARS SOUTH 70 (degrees) 52'48" WEST; THENCE SOUTH
70 52'48" WEST ALONG THE SOUTHWESTERLY PROLONGATION OF SAID RADIAL LINE, 5.00
FEET TO A POINT ON THE NORTHERLY RIGHT-OF-WAY LINE OF TRADE CENTER DRIVE (60.00
FEET WIDE); THENCE WESTERLY ALONG SAID RIGHT-OF-WAY LINE, THE FOLLOWING THREE
(3) COURSES: FROM A TANGENT BEARING SOUTH 19 (degrees) 07'12" EAST, CURVING TO
THE RIGHT ALONG THE ARC OF A 25.00 FOOT RADIUS CURVE, CONCAVE NORTHWESTERLY,
THROUGH A CENTRAL ANGLE OF 80 (degrees) 24'22", AN ARC LENGTH OF 35.08 FEET;
THENCE SOUTH 61 (degrees) 17'10" WEST, 99.12 FEET; THENCE CURVING TO THE RIGHT
ALONG THE ARC OF A 180.00 FOOT RADIUS CURVE, CONCAVE NORTHWESTERLY, THROUGH A
CENTRAL ANGLE OF 35 (degrees) 00'00", AN ARC LENGTH OF 109.96 FEET TO A POINT ON
THE WESTERLY RIGHT-OF-WAY LINE OF TRADE CENTER DRIVE; THENCE DEPARTING SAID
RIGHT-OF-WAY LINE NORTH 83 (degrees) 42'50" WEST, 77.21 FEET; THENCE NORTH
01 (degrees) 41'15" WEST, 325.72 FEET TO A POINT ON THE SOUTHERLY RIGHT-OF-WAY
LINE OF SUNSET ROAD; THENCE NORTH 88 (degrees) 18'45" EAST ALONG SAID RIGHT-OF-
WAY LINE 245.00 FEET; THENCE CURVING TO THE RIGHT ALONG THE ARC OF A 30.00 FOOT
RADIUS CURVE, CONCAVE SOUTHWESTERLY, THROUGH A CENTRAL ANGLE OF 90 (degrees)
00'00", AN ARC LENGTH OF 47.12 FEET TO THE POINT OF BEGINNING.
EXHIBIT "A"
<PAGE>
Exhibit 10.26
STATE OF NEVADA
COUNTY OF CLARK
DEED OF TRUST, SECURITY AGREEMENT AND FINANCING STATEMENT
---------------------------------------------------------
This Deed of Trust, Security Agreement and Financing Statement (hereinafter
termed "Agreement" or "Deed of Trust") is entered into between AUTOTOTE CBS,
INC., a Nevada corporation, whose mailing address is 675 Grier Drive, Las Vegas,
Nevada 89119 (hereinafter termed Maker), and Jerry L. Adams, Trustee
(hereinafter termed "Trustee"), as Trustee, for the benefit of STANDARD LIFE AND
ACCIDENT INSURANCE COMPANY, whose mailing address is Attn: Mortgage and Real
Estate Investment Department, One Moody Plaza, Galveston, Texas 77550
(hereinafter termed "Noteholder").
I. DEFINITIONS
1.1 The term "Indebtedness" shall mean and include:
(1) Any and all sums becoming due and payable pursuant to the Note, as
hereinafter defined;
(2) Any and all other sums becoming due and payable by Maker to Noteholder
including such as may hereafter be borrowed by Maker from Noteholder (it being
contemplated that such future indebtedness may be incurred), and including, but
not limited to, advancements made by Noteholder pursuant to the terms and
conditions of this Agreement or any other instrument securing, executed in
connection with or otherwise relating to the Note; and
(3) All renewals, extensions, modifications, increases, consolidations and
rearrangements of any or all of the obligations of Maker defined herein under
the term Indebtedness, whether or not Maker executes any renewal, extension or
other such agreement.
1.2 The term "Collateral" shall mean and include (a) all of the goods,
articles of personal property, accounts, general intangibles, instruments,
documents, furniture, furnishings, equipment and/or fixtures of every kind and
nature whatever (including without limitation, the items described in subsection
(b) - (d) below) now or hereafter owned by Maker, in or hereafter placed in, or
used or which may become used, in connection with or in the operation of the
Mortgaged Premises, together with all additions thereto, replacements thereof,
substitutions therefor and all proceeds thereof; (b) all rents, rentals,
payments, compensations, revenues, profits, incomes, leases, licenses,
concession agreements, insurance policies, plans and specifications, contract
rights, accounts, escrowed funds, and general intangibles in any way relating to
the Mortgaged Property
<PAGE>
or used or useful in the use, enjoyment, ownership or operation of the
Mortgaged Property; (c) all names, trade names, signs, marks, and trademarks
under which the Mortgaged Property, or any part thereof, is known or operated
and all of Maker's rights to carry on the business of Maker under all such name
or names and any variant or variance thereof; and (d) all deposits, awards,
damages, payments, escrowed monies, insurance proceeds, condemnation awards or
other compensation, and interests, fees, charges or payments accruing on or
received from or to be received on any of the foregoing in any way relating to
the Mortgaged Property, or the ownership, enjoyment or operation of the
Mortgaged Property together with all proceeds of the foregoing described in this
Section 1.2.
1.3 The term "Mortgaged Premises" shall mean and include (a) the real
property situated in the County of Clark, State of Nevada, described in Exhibit
"A" which is attached hereto and incorporated herein for all purposes; together
with all buildings and improvements of every kind and description now or
hereafter erected or placed thereon and all materials now or hereafter placed
thereon intended for construction, reconstruction, alteration and repairs of
such buildings and improvements, all of which materials shall be deemed to be
included as a part of said real property immediately upon the delivery thereof
to said real property; (b) all fixtures now or hereafter owned by Maker and
attached to, contained in or used in connection with said real property, and all
renewals and replacements thereof, including but not limited to (i) all
equipment, apparatus, machinery, motors, elevators, fittings and radiators, (ii)
all plumbing, heating, lighting, ventilating, refrigerating, incinerating,
air-conditioning and sprinkler equipment; (iii) all awnings, storm windows and
doors, mantels, cabinets, computer flooring, rugs, carpeting, linoleum, stoves,
shades, draperies, blinds and water heaters; (iv) such other goods and chattels
and personal property as are usually furnished by landlords in letting an
unfurnished building, or which shall be attached to said buildings and
improvements by nails, screws, bolts, pipe connections, masonry or in any other
manner; and (v) all built-in equipment as may be shown by plans and
specifications.
1.4 The term "Mortgaged Property" shall mean the Mortgaged Premises and
Collateral.
1.5 The term "Note" shall mean that certain Promissory Note of even date
herewith in the principal sum of $2,100,000.00 executed by Maker and payable to
the order of Noteholder, payable with interest in installments as stipulated
therein and providing for the right to declare the unpaid principal balance due
and payable upon the occurrence of an Event of Default and otherwise as provided
therein and providing for the reasonable attorneys' fees, and all notes given in
renewal, extension, modification,
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<PAGE>
increase, consolidation or rearrangement of said Promissory Note or any portion
thereof.
II. CONVEYANCE IN TRUST
-------------------
In consideration of Ten Dollars ($10.00) cash in hand paid, of Noteholder's
advancing or extending to Maker the funds or credit constituting a part of the
Indebtedness, and the mutual covenants contained herein, the receipt and
sufficiency of which are hereby acknowledged, Maker hereby conveys to Trustee
the above-described Mortgaged Property, in trust, with power of sale, for the
purpose of securing the Indebtedness, and the full and complete performance of
each and every obligation, covenant, duty and agreement of Maker contained
herein or in the Note or any other instrument executed by Maker pertaining to
the Note or as security therefor; TO HAVE AND TO HOLD the Mortgaged Property,
together with the rights, privileges and appurtenances thereto belonging unto
the Trustee and his substitutes or successors forever, and Maker is hereby bound
to warrant and forever defend the Mortgaged Property unto the Trustee, his
substitutes or successors and their assigns, against the claims of all persons
claiming any interest in the Mortgaged Property or any part thereof save and
except only these items identified on Exhibit "B" attached hereto and
incorporated herein for all purposes (the "Permitted Exceptions").
III. ADDITIONAL SECURITY
-------------------
As further security for the Indebtedness and the full and complete
performance of each and every obligation, covenant, agreement and duty of Maker
contained herein or contained in any other instrument executed by Maker
pertaining to the Note or the security therefor:
A. Security Interest. Maker hereby grants and conveys to Noteholder a
security interest in and lien on all of the Collateral. This Agreement shall
serve as a Security Agreement created pursuant to Chapter 104 of the Nevada
Revised Statutes, the Nevada Uniform Commercial Code (the "NUCC"), and
Noteholder shall have and may exercise all rights, remedies and powers of a
secured party under the NUCC. Maker hereby represents, warrants and covenants
that (1) other than with respect to liens in favor of Banker's Trust Company
filed as File No. 91-10345 dated November 7, 1991 and File No. 94-05140 dated
May 2, 1994, respectively, in the Nevada Secretary of State's office ("Senior
Encumbrance"), Maker is the owner and holder of the Collateral free and clear of
any adverse claim, security interest or encumbrance, except those created herein
or which have been expressly subordinated to the security interest provided by
this Deed of Trust and by written subordination agreement approved in advance by
Noteholder prior to the date hereof; (2) it will defend the Collateral, and the
priority of the security interest
3
<PAGE>
created herein as a valid first security interest against all claims and demands
of any person at any time claiming the same or any interest therein; (3) there
are no financing statements executed by the Maker, as Debtor, now on file in any
public office except the Senior Encumbrance, those financing statements which
are being released contemporaneously with the delivery of this transaction or
which have been authorized by Noteholder or which have been expressly
subordinated to the security interest provided by this Deed of Trust and by
written subordination agreement approved in advance by Noteholder prior to the
date hereof; (4) it will deliver to Noteholder such other and further
agreements, financing statements and assignments as Noteholder may request and
authorizes Noteholder to file or record such statements in such offices and at
such times as it is deemed by Noteholder to be necessary or desirable.
B. Assignment of Condemnation Awards. To the extent of the full amount of
the Indebtedness secured hereby and of the cost and expenses (including
reasonable attorneys' fees) incurred by Noteholder in the collection of any
award or payment, Maker hereby assigns to Noteholder any and all awards or
payments, including all interest thereon, together with the right to receive the
same, which may be made with respect to the Mortgaged Property as a result of
(a) the exercise of the right of eminent domain, (b) the alteration of the grade
or of any street, or (c) any other injury to or decreased value in the Mortgaged
Property, as well as the right, but not the obligation, to, at Maker's expense,
participate in and make decisions concerning the progress of any proceeding
involving any such award or payment. Maker shall give Noteholder written notice
of any such action or proceeding immediately upon Maker's becoming aware of
same. All such damages, condemnation proceeds and consideration shall be paid
directly and solely to Noteholder whether or not an Event of Default has at such
time occurred, and after first applying said sums to the payment of all costs
and expenses (including reasonable attorneys' fees) incurred by Noteholder in
obtaining such sums, Noteholder may, at its option, apply the balance on the
Indebtedness, in any order and whether or not then due or to the restoration of
the Mortgaged Property, or release the balance to Maker. Said application or
release shall not cure or waive any default.
IV. ABSOLUTE ASSIGNMENT OF RENTS
----------------------------
In further consideration for the indebtedness evidenced by the Note, Maker
hereby absolutely and unconditionally assigns to Noteholder all rents, revenues,
profits and incomes from the Mortgaged Property or any portion thereof.
Provided, however, so long as no Event of Default has occurred, Maker is hereby
granted a license to collect and retain the currently accruing rents, income and
profits from the Mortgaged Property, but in no event
4
<PAGE>
for more than one (1) month in advance of such collection. If an Event of
Default shall occur, however, thereupon, and at any time thereafter such default
is continuing, Noteholder may terminate such license and may, without any
liability to Maker, take or have Trustee take possession and control of the
Mortgaged Property and/or receive and collect all rents, revenues, profits and
income, accrued or accruing thereafter so long as any of the Indebtedness
remains unpaid, applying so much thereof as may be collected first to the
expenses incident to taking possession and/or the collection thereof, and second
to the payment of the Indebtedness other than the Note and then to the amount of
the Note then remaining unpaid, at Noteholder's discretion, either principal or
interest, in any order, and whether then matured or not, paying the balance, if
any, to the Maker. It is intended by Maker and Noteholder that this assignment
of rents constitutes an absolute assignment and not an assignment for additional
security only and that Noteholder shall be entitled to exercise its rights
hereunder whether or not Noteholder is in possession of the Mortgaged Premises
at such time. Maker agrees to fulfill or perform each and every covenant of any
and all leases of the Mortgaged Property so as to keep them at all times in full
force and effect, and not to make any modification, consent to any modification
of, or cancel any lease of all or any part of the Mortgaged Property after the
lease has been executed by Maker and lessee, without the prior written consent
of Noteholder, which consent shall not be unreasonably withheld; the failure to
fulfill or perform any such covenant or the making of or consent to any such
modification or cancellation shall be an Event of Default. Nothing contained in
this Agreement or in any other document securing, evidencing or relating to the
Indebtedness shall preclude Noteholder from taking any action to cure or remedy
any default of the Landlord under any lease of all or any portion of the
Mortgaged Property, or any act, omission or occurrence which but for the passage
of time, the giving of notice, or both, would be a default under any such lease
and any amounts expended by Noteholder in connection with such cure or
remediation including, without limitation, reasonable attorneys fees and
expenses, shall be an advance under and secured by this Agreement and shall be
included in the Indebtedness and shall be paid by Maker to Noteholder on demand.
The preceding sentence shall not be construed to obligate Noteholder to cure any
such actual or potential lease defaults.
V. MAKER'S REPRESENTATIONS AND WARRANTIES
--------------------------------------
In order to induce Noteholder to lend the funds evidenced by the Note, Maker
represents and warrants that:
A. Accurate Loan Information. All information and financial statements
furnished or to be furnished to Noteholder by or on behalf of Maker in
connection with the Indebtedness
5
<PAGE>
secured by this Agreement is or at the time of delivery will be complete and
accurate in all material respects.
B. Valid Title. Maker is the lawful owner of the Mortgaged Property and has
good right and lawful authority to mortgage and pledge the same.
C. Freedom from Encumbrances. The Mortgaged Property is free from any and
all liens and encumbrances save and except only the Permitted Exceptions, and
Maker does warrant and will defend title to the Mortgaged Property against all
claims or demand by third parties whatsoever save and except only the Permitted
Exceptions.
D. Maintenance of Lien Priority. Maker shall take all steps necessary to
preserve and protect the validity and priority of the liens on the Mortgaged
Property created hereby. Maker shall execute, acknowledge and deliver such
additional instruments as Noteholder may deem reasonably necessary in order to
preserve, protect, continue, extend or maintain the liens and security interests
created hereby as first liens on the Mortgaged Property. All costs and expenses
incurred in connection with the protection, preservation, continuation,
extension or maintaining of the security interest and the liens herein created
as valid first and subsisting liens shall be paid by Maker.
E. Value of the Mortgaged Property. The value of the Mortgaged Property, as
established by an appraisal submitted to Maker, is substantially in excess of
the Indebtedness secured hereby. Maker acknowledges but for the Mortgaged
Property having a value in excess of the amount of the Indebtedness, Noteholder
would not make the loan evidenced by the Note and advance the funds hereunder.
Maker agrees that Noteholder shall at all times have the benefit of the
Mortgaged Property as the security for the Indebtedness even though the value
thereof may now or in the future exceed the amount of the Indebtedness secured
hereby.
F. Representations, Warranties and Covenants With Respect to a Corporate
Maker. Maker hereby represents, warrants and covenants that:
(1) It is, and shall continue to be, (a) duly organized and existing under
the laws of the State in which it is incorporated, (b) duly qualified to
transact business in each State where the conduct of its business requires it to
be qualified, and (c) duly authorized to execute and deliver the written
instruments comprising the Indebtedness in this instrument and to observe and
perform its duties thereunder and hereunder.
(2) Its officers executing the instruments comprising part or all of the
Indebtedness are the legally elected, qualified and acting officers of the
corporation and have been expressly
6
<PAGE>
authorized to execute this instrument by resolution of the corporation's Board
of Directors.
(3) It shall not, without Noteholder's prior written consent, which consent
shall not be unreasonably withheld, reorganize or consolidate or merge with any
other corporation.
G. Construction and Materials. Maker hereby warrants, represents and
covenants that:
(1) All persons and entities who have provided labor or materials to or for
the benefit of the Mortgaged Property by, through or under Maker or otherwise at
Maker's direction or request at any time prior to the date of this Agreement
have been paid in full* and, if requested by Noteholder, have provided Maker
with lien waivers or subordination agreements in form and content acceptable to
Noteholder.
H. Hazardous Waste. Maker hereby represents and warrants that, after due and
diligent inquiry, Maker is not aware of any facts or circumstances which may
give rise to any litigation, proceedings, investigations, citations or notices
of violations resulting from the use, presence, generation, manufacture,
storage, discovery or disposition of, on, under or about the Mortgaged Property
or the transport to or from the Mortgaged Property of any Hazardous Materials,
defined below. Maker hereby represents and warrants that the Mortgaged Property
is not in violation of and Maker covenants and agrees not to use or permit the
use of the Mortgaged Property for any purpose which would be in violation of,
any federal, state or local health or environmental statute, regulation,
ordinance or publication which is presently in effect or that may be promulgated
in the future, as such statutes, regulations, ordinances and publications may be
amended from time to time relating to Hazardous Materials, including, without
limitation, with respect to industrial hygiene or to health or environmental
conditions on, under, or about the Mortgaged Property (including, but not
limited to, soil and ground water conditions) or with respect to the owner's or
occupant's thereof. The foregoing representations and warranties shall survive
foreclosure under this Agreement and shall constitute continuing representations
and warranties to Noteholder, its successors and assigns. The term Hazardous
Materials, as used in this Agreement, shall include but not be limited to:
(i) petroleum, petroleum based products and oil;
(ii) asbestos of any form which is or could become friable, urea
formaldehyde foam insulation, transformers or other equipment
which contain dielectric fluid containing levels of
polychlorinated biphenyls (sometimes known as a "pcb");
7
*except for (i) those sums in dispute or retained by the construction lender
of the Mortgaged Property, (ii) those persons or entities who have filed
mechanic's liens against the Mortgaged Property for which indemnity has been
provided by Maker to the title insurer, and (iii) those persons or entities who
have recently completed such labor or provided such materials but have not yet
submitted evidence of same,
<PAGE>
(iii) tanks, whether empty, filled or partially filled
with any substance, material, chemical or other
waste;
(iv) those substances defined as "hazardous waste",
"radioactive waste". "solid waste". "toxic waste",
"pollutant", "hazardous material", "regulated
substance", "hazardous substance". "highly hazardous
substance", "extremely hazardous substance",
"petroleum", "asbestos", or "asbestos containing
material" in Nev. Rev. Stat. ch. 459, Nev. Rev.
Stat. ch. 444, Nev. Rev. Stat. ch. 445, Nev. Rev.
Stat. ch. 590, Nev. Rev. Stat. Sections
618.750-618.850, inclusive, Nev. Rev. Stat. Section
477.045, as now or hereafter amended, or in the
rules, orders and regulations now existing or
hereafter promulgated pursuant thereto, or in the
Uniform Fire Code, as adopted by and now or
hereafter in effect in the State of Nevada;
(iv) any substance, material, chemical or other waste
including, without limitation any explosive,
flammable substances, explosives or radioactive
materials, hazardous or toxic waste, hazardous or
toxic materials, hazardous, toxic or radioactive
substances, contaminants or pollutants and any of
the preceding which are defined as or included in
the definition of "Hazardous Substance," "Hazardous
Waste," "Hazardous Material" or "Toxic Substance" or
other similar or related terms under any applicable
local, state or federal statute, regulation,
ordinance or publication including but not limited
to:
(1) Resource Conservation and Recovery Act of 1976
(commonly referred to as the Solid Waste
Disposal Act), 42 U.S.C. 6901 et seq.
(2) Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42
U.S.C. 9601 et seq.
(3) Clean Air Act, 42 U.S.C. Sections 7401 et seq.
(4) The Water Pollution and Prevention and Control
Act (commonly referred to as the Clean Water
Act) 33 U.S.C. Sections 1251-et seq.
(5) Hazardous Materials Transportation Act, 49
U.S.C. Sections 1801 et seq.
(6) Insecticides and Environmental Pesticide
Control Act (commonly referred to as the
Federal Pesticide Act of 1978) 7 U.S.C. 136 et
seq.
8
<PAGE>
(7) Toxic Substances Control Act, 15 U.S.C. 2601 et
seq.
(8) Safe Drinking Water Act, 42 U.S.C. 300(f) et seq.
as such statutes, regulations, ordinances and
publications may be amended from time to time;
(v) any other material, substance, chemical or other waste,
exposure to which is prohibited, limited or regulated from
time to time by any federal, state or local statute,
regulation, ordinance or publication or may pose a hazard
to the health and/or safety of the occupants of the
Mortgaged Property or any other adjacent or nearby
property.
Maker hereby agrees to indemnify and hold Noteholder, its directors, officers,
employees, and agents, and any successors to Noteholder's interest in the chain
of title to the Mortgaged Property, their directors, officers, employees, and
agents (the "Indemnitees"), from and against any and all liability (i) including
all foreseeable and all unforeseeable consequential damages, directly or
indirectly arising out of the use, presence, generation, storage, transportation
or disposal of Hazardous Materials by Maker, its present or future tenants, any
prior owner, operator or tenant of the Mortgaged Property, or any third party,
and (ii) including, without limitation, the cost of any required or necessary
repair, cleanup or detoxification, claimed, threatened or asserted against any
such Indemnitee arising out of the use, presence, generation, storage,
transportation or disposal of Hazardous Materials on or about the Mortgaged
Property by Maker, its present tenants or any of its future tenants, any prior
owner, operator or tenant of the Mortgaged Property, or any third party during
or prior to Maker's operation or fee ownership of the Mortgaged Property.
Maker's obligations pursuant to the foregoing indemnity shall survive any
termination of the estate created by this Agreement as a result of the exercise
by Noteholder of any default remedies available to it at law or in equity. Maker
acknowledges and agrees that as a condition precedent to making the loan to
Maker evidenced by the Note secured by this Agreement, Noteholder has required
that Maker provide to the Indemnitees the indemnity set forth herein and that
Noteholder would not consummate the loan without this indemnity and that the
indemnity contained herein is a material inducement for Noteholder's agreement
to make the loan. Further, Maker agrees that the foregoing indemnification is
separate, independent of and in addition to its undertakings as Maker under the
Note, as Maker under this Agreement, as Assignor under the Absolute Assignment
of Leases and Rents and any and all other documents, agreements and undertakings
executed by Maker in favor of Noteholder pursuant to the Note. Maker agrees that
a separate action may be brought to enforce the provisions of this
9
<PAGE>
indemnification, whether in lieu of, prior to, or subsequent to a foreclosure
action or a trustee's sale under this Agreement, which shall in no way be deemed
to be an action on the Note or under this Agreement, whether or not Noteholder
would be entitled to a deficiency judgment following a foreclosure sale of the
Mortgaged Property.
VI. ADDITIONAL COVENANTS OF MAKER
As long as any of the Indebtedness remains unpaid, Maker covenants and
agrees that:
A. Payment of Indebtedness. Maker will pay the Indebtedness promptly when
due and payable.
B. Payment of Taxes and Other Assessments. Maker will pay all taxes,
assessments and other governmental, municipal or other public dues, charges,
fines, or impositions imposed or levied upon the Mortgaged Property or on the
interest created by this Agreement, or any tax or excise on rents or other tax,
however described, assessed or levied by any state, federal or local taxing
authority as a substitute, in whole or in part, for taxes assessed or imposed on
the Mortgaged Property or on the interest created by this Agreement, and at
least ten (10) days before said taxes, assessments and other governmental
charges are due will exhibit receipts therefor to Noteholder. If any property
tax or assessment is levied, assessed or imposed on Noteholder as a legal holder
of the Note or any interest in the documents securing, evidencing or relating to
the Note by any governmental authority, then unless all such taxes are paid by
Maker as they become due and payable and in the opinion of General Counsel of
Noteholder, such payment by Maker is lawful and does not place Noteholder in
violation of any law, Noteholder may, at its option, declare the Indebtedness
immediately due and payable.
C. Insurance. Maker shall keep the Mortgaged Property insured against loss
or damage by fire, windstorm, extended coverage perils, flood (in the event any
of the Mortgaged Premises is within a 100-year flood plain and flood insurance
is available pursuant to the United States Flood Disaster Protection Act of 1973
or any similar or successor statute or successor governmental authority),
vandalism, malicious mischief and such other hazards, casualties or other
contingencies and in such amounts (but in no event less than the greater of the
amount of the Indebtedness from time to time secured hereby or the full
replacement value thereof) as from time to time may be required by Noteholder,
and maintain business interruption insurance coverage, in an amount at least
adequate to cover twelve (12) months' principal and interest installments on the
Note and together with twelve (12) months' property taxes and insurance
premiums, with respect to the Mortgaged Property covering the risk of loss due
to the occurrence of any of the foregoing
10
<PAGE>
hazards, in each case and in such amounts, in such manner and in such companies
as the Noteholder may reasonably approve, and all such policies shall contain a
waiver of subrogation and provide that any losses payable thereunder shall
(pursuant to standard mortgagee clauses without contribution, including one
providing that such insurance as to the interest of Noteholder shall not be
invalidated by any act or omission or neglect of Maker, to be attached to each
policy) be payable to Noteholder. Maker shall cause duplicate originals of any
and all such insurance policies to be deposited with Noteholder. Maker will also
carry public liability insurance, in such form, amounts and with such companies
as Noteholder may from time to time reasonably require, with Noteholder included
thereon as a named insured. Any or all of such policies may be provided under a
blanket policy or policies provided such blanket policies allocate the amount of
insurance required hereunder to the Mortgaged Property. Maker shall cause
duplicate originals of any and all such insurance policies to be deposited with
Noteholder, or certificates of the insurers under such policies evidencing same.
At least ten (10) days prior to the date the premiums on each such policy or
policies shall become due and payable, Maker shall furnish to Noteholder
evidence of the payment of such premiums. Each of such policies shall contain an
agreement by the insurer that the same shall not be cancelled or modified
without at least ten (10) days' prior written notice to Noteholder. In the event
of loss under any such policy, Maker shall give immediate written notice to the
insurance carrier and to Noteholder. With respect to all insurance policies
except public liability insurance, Noteholder is hereby authorized, but not
required, on behalf of and at the expense of Maker, whether or not an Event of
Default has then occurred, to make proof of loss, to collect for, adjust or
compromise any losses under any insurance policy on the Mortgaged Property, to
appear in and prosecute any action arising from any of such insurance policies,
and to apply, at Noteholder's option, the loss proceeds (less reasonable
expenses of collection) on the Indebtedness, in any order and whether due or
not, or to the restoration of the Mortgaged Property, or to be released to
Maker, but any such application or release shall not cure or waive any default.
In case of a sale pursuant to the foreclosure provision hereunder, or any
conveyance of all or any part of the Mortgaged Property in extinguishment of the
Indebtedness, complete title to all insurance policies on or related to the
Mortgaged Property, and the unearned premiums of same shall pass to and vest in
the purchaser or grantee of the Mortgaged Property.
D. Escrow for Taxes and Insurance. Maker shall pay, in addition to the
installments payable under the Note, on the same day as such installments are
due and payable, a sum equal to 1/12th of the estimated annual taxes, hazard and
rental insurance premiums, and special assessments, if any, next due on the
Mortgaged Property. If the amount so paid is not sufficient to
11
<PAGE>
pay such taxes, insurance premiums and assessments when due, then Maker will
immediately deposit with Noteholder amounts sufficient to pay the same. Funds
deposited by Maker pursuant to this provision shall be used to pay such taxes,
insurance premiums and assessments when due, provided that Maker has furnished
Noteholder with all tax statements, premium notices and other such notices at
least thirty (30) days prior to the date that any such taxes, premiums and
assessments may be due. If there is a default under the provisions of the Note
or of this Agreement, Noteholder may elect, at any time after default, to apply
the funds accumulated under this provision against the Indebtedness in any
manner or order. No interest shall accrue or be allowed on any payments under
the provisions of this paragraph. Noteholder shall not be required to deposit or
hold monies in an account special or separate from its general funds. Maker
expressly releases Noteholder from any liability to Maker arising out of the
maintenance by Noteholder of an escrow as provided herein or for payment of any
sums out of such escrow except for the gross negligence of Noteholder. Maker
further indemnifies Noteholder against claims arising out of payment of taxes or
insurance premiums where Maker has failed to provide Noteholder with tax
statements and premium notices as required hereby. The maintenance by Noteholder
of an escrow for taxes and insurance shall not relieve Maker of its obligations
under this Agreement respecting taxes and insurance on the Mortgaged Property.
E. Waste, Demolition, Alteration or Replacement. Maker will cause the
Mortgaged Property and every part thereof to be maintained, preserved and kept
in safe and good repair, working order and condition, will not commit or permit
waste thereon, will not remove, demolish or alter the design or structural
character of any building now or hereafter erected on the Mortgaged Premises,
without the prior written consent of Noteholder, and will comply with all laws
and regulations of any governmental authority with reference to the Mortgaged
Property and the manner and use of the same, and will from time to time make all
necessary and proper repairs, renewals, additions and restorations thereto so
that the value and efficient use thereof shall be fully preserved and
maintained. Except in the ordinary course of business, Maker agrees not to
remove any of the fixtures or personal property included in the Mortgaged
Property without the prior written consent of Noteholder and unless immediately
replaced with like property of at least equal value. Maker shall act as
necessary to continue or cause the continuance of such income producing activity
as is presently conducted upon or contemplated for the Mortgaged Property.
F. Inventory of Personal Property. Upon request of Noteholder, Maker shall
deliver to Noteholder an inventory describing and showing the make, model,
serial number and location of all fixtures and personal property from time to
time used in the management, maintenance and operation of the
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Mortgaged Property (other than inventory or property, if any, expressly excluded
from the operation of this Agreement by separate written agreement) with a
certification by Maker that said inventory is a true and complete schedule of
such fixtures and personal property used in the management, maintenance and
operation of the Mortgaged Property and that such items specified in the
inventory constitute all of the fixtures and personal property required in the
management, maintenance and operation of the Mortgaged Property and that such
items are owned by Maker free and clear of security interests, liens,
conditional sales contracts or title retention arrangements, except for
Permitted Exceptions. Maker hereby grants to Noteholder a security interest in
all such items of fixtures and personal property under the terms and conditions
of this Agreement.
G. Financial Statement. Maker will furnish to Noteholder within one hundred
twenty (120) days after the first day of each and every January (the "Financial
Statement Due Date") until the Indebtedness secured hereby has been fully paid,
the annual audited financial statements of Maker covering the operation of the
Mortgaged Property, each such statement prepared in accordance with generally
accepted accounting principles and each such statement prepared and signed by an
independent certified public accountant approved by and acceptable to
Noteholder. The financial statements shall contain the Maker's certification
that, during the period of time covered by the particular statement, (i) no
activity has been conducted upon the Mortgaged Property in violation of any
state, federal or local law, ordinance or regulation pertaining to Hazardous
Materials, industrial hygiene or environmental conditions, and (ii) the
Mortgaged Property complies with the Americans with Disabilities Act.
If Maker does not deliver the financial statements as and when required by
this paragraph, there shall be added to the Indebtedness and Maker agrees to pay
upon demand Two Hundred Dollars ($200.00) for each calendar month or part
thereof following the Financial Statement Due Date until the required financial
statements are delivered to Noteholder.
H. Restrictions upon Sale, Transfer or Mortgaging the Mortgaged Property or
the Interest in Maker. Maker acknowledges that Noteholder is relying on the
credit worthiness and skill of Maker in advancing sums secured hereby. Except
for a natural person's transfer by will or applicable state intestacy laws
(collectively, "Permitted Transfers"): (i) if the Maker should sell, trade,
convey, transfer, mortgage, assign, exchange, pledge or encumber (including,
without limiting these provisions or any similar references in this Agreement,
the granting of a security interest in) all or any part of the Mortgaged
Property, or any interest of Maker therein, absolutely or as security for a debt
or other obligation, whether done in a direct or indirect method
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or enter into any contractual arrangements to do so, or (ii) if a shareholder of
Maker should sell, trade, convey, transfer, mortgage, assign, exchange, pledge
or encumber (including, without limiting these provisions or any similar
references in this Agreement, the granting of a security interest in) more than
30% in the aggregate of its interest in Maker or if such shareholder of Maker
shall otherwise be diluted, or (iii) if Maker shall in any way, voluntarily or
involuntarily be divested of title or of any interest in the Mortgaged Property,
then the Noteholder, at its option, may elect to accelerate the maturity of the
Note and declare the entire amount of the Indebtedness immediately due and
payable whereupon Maker shall have thirty (30) days to pay the full sum of the
Indebtedness including, without limitation, principal and interest, whether or
not any such sale, trade, conveyance, transfer, mortgage, assignment, exchange,
pledge, or encumbrance might diminish the value of the security for the
Indebtedness or increase the likelihood of an Event of Default or increase the
likelihood of the Noteholder having to resort to any other security for the
Indebtedness after default or add or remove liability of any party for payment
or performance of the Indebtedness. Maker further agrees that the foregoing
restriction shall be effective and remain in full force and effect throughout
the term of this Agreement and shall be applicable to Maker, each shareholder of
Maker and their respective heirs, executors, administrators, successors and
assigns. The consent by the Noteholder to any one such sale, trade, conveyance,
transfer, mortgage, assignment, exchange, pledge, or encumbrance (one or more of
the preceding a "Transaction") shall not waive or forfeit the right of
Noteholder to elect to accelerate the Indebtedness to maturity as to any other
Transaction. Maker further covenants and agrees to give written notice to
Noteholder in the event there occurs any Transaction which would violate the
terms and conditions of this provision. The term "Transaction" shall include any
voluntary or involuntary act or omission of Maker. Nothing herein contained
shall prevent Noteholder from accelerating the Note at any time in the event
Maker enters into such a transaction and does not notify Noteholder of same. The
Maker may request Noteholder to waive the right to declare the entire amount of
the Indebtedness immediately due and payable and Noteholder may, in its absolute
discretion, consent or refuse to consent to the Transaction. As a condition of
consenting to the Transaction, Noteholder may, in its absolute discretion, make
one or more of the following requirements:
(1) That the rate of interest contained in the Note be increased to a rate
acceptable to Noteholder;
(2) That a transfer fee in such amount as may be determined by Noteholder,
be paid;
(3) That a principal payment be made against the Note;
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(4) That the proposed transferee execute an assumption agreement or other
document as Noteholder may reasonably require; or
(5) That any other requirement deemed appropriate by Noteholder be
satisfied.
No Transaction pursuant to the foregoing provisions of this Subsection H or
described in Section 8.1(5) below shall in any way release Maker or any other
party liable on any of the Indebtedness or liable under any instrument securing,
evidencing or relating to the Indebtedness from any such liability.
I. Delivery of Substitute Note. Maker will, if the Note is mutilated,
destroyed, lost or stolen, deliver to Noteholder, in substitution therefor, a
new promissory note containing the same terms and conditions as the Note with a
notation thereon of the unpaid principal and accrued but unpaid interest. Maker
shall be furnished with satisfactory evidence of the mutilation, destruction,
loss or theft of the Note, and also such security or indemnity as may be
reasonably requested by Maker; provided, however, that if the original
noteholder named herein is the then noteholder under this Deed of Trust, an
unqualified indemnity from the original noteholder named herein, together with
an affidavit in form and content reasonably acceptable to Maker, shall be deemed
to be satisfactory security or indemnification.
J. Compliance with Covenants, Conditions, Restrictions and Recorded
Documents. Maker shall, and shall cause the Mortgaged Property, to fully and
timely comply with all restrictions covenants, conditions and agreements
benefitting, burdening or imposed on the Mortgaged Property or any portion
thereof or the owner of all or such portion of the Mortgaged Property.
VII. TERMINATION OF TRUST
Upon receipt of written request from Noteholder reciting that all sums
secured hereby have been paid and upon surrender of this Agreement and the Note
secured hereby for cancellation and payment of its fees Trustee shall reconvey
without warranty the property then held hereunder. The recitals in such
reconveyance of any matters of fact shall be conclusive proof of the truth
thereof. The grantee in such reconveyance may be described in general terms as
"the person or persons legally entitled thereto."
VIII. EVENTS OF DEFAULT
8.1 Acts Constituting Default. Maker will be in default under this Agreement
upon the happening of any of the following events or conditions, or the
happening of any other Event of Default as defined elsewhere in this Agreement
(herein collectively referred to as an "Event of Default"):
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(1) Maker fails to make when due any payment of principal or interest under
the Indebtedness, or otherwise breaches any of the provisions contained in the
Note.
(2) Maker fails to keep or perform any of the covenants, conditions or
stipulations contained in this Agreement or in any instruments securing,
evidencing or relating to the Indebtedness other than any event or condition
specified in section 8.1(1), 8.1(3), 8.1(4), 8.1(5), 8.1(6), or 8.1(7).
(3) Any warranty or representation made in this Agreement by Maker is
determined by Noteholder to be untrue in any material respect.
(4) Any person, corporation, or other entity that (a) owns all or any part
of the Mortgaged Property, (b) is liable for the payment of all or any part of
the Indebtedness, or (c) is a guarantor of all or any part of the Indebtedness
(i) admits in writing its inability to pay its debts generally as they become
due, (ii) files a petition or answer in bankruptcy as a Debtor or seeking
reorganization or an arrangement or otherwise to take advantage of any State or
Federal bankruptcy or insolvency law, (iii) makes an assignment for the benefit
of creditors, (iv) files a petition for or consents to the appointment of a
receiver for its assets or any part thereof, or (v) without its consent has a
petition filed in any bankruptcy or insolvency proceeding or an order, decree or
judgment entered by a court of competent jurisdiction appointing a receiver of
the Mortgaged Property or approving a petition filed against it seeking
reorganization or an arrangement of it or its assets or debts under any
bankruptcy or insolvency law and such petition, order, decree or judgment is not
dismissed, vacated, set aside or stayed within sixty (60) days from the date of
entry.
(5) Except for Permitted Transfers, Maker sells, trades, conveys, transfers,
mortgages, assigns, exchanges, pledges or encumbers (including, without limiting
these provisions or any similar references in this Agreement, the granting of a
security interest in) the Mortgaged Property, the Collateral or any portion
thereof or interest therein, or, except for Permitted Transfers, Maker or any
shareholder of Maker sells, trades, conveys, transfers, mortgages, assigns,
exchanges, pledges or encumbers (including, without limiting any of the
provisions of this subparagraph, the granting of a security interest in) more
than 30% in the aggregate of its interest in Maker, or any such event occurs
involuntarily to Maker or such shareholder of Maker, all without the prior
written consent of Noteholder.
(6) The corporate authority and right of Maker to do business in the State
of Nevada is terminated, withdrawn, cancelled or modified.
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(7) Maker's existence as a legal entity for any reason, by operation of law
or otherwise, is modified or terminates.
8.2 Concurrency of Cure Periods. All notice and cure periods provided herein
or in the Note shall run concurrently with any notice or cure periods provided
by law. Without limiting the foregoing, Noteholder or the Trustee shall be
entitled to cause a notice of breach and election to sell to be recorded and
mailed if any event occurs which, with the giving of notice and/or passage of
time, would constitute a default hereunder or an event of default under the Note
or would entitle Noteholder to accelerate the Indebtedness secured hereby and
the recording and mailing to Trustor of such notice of breach and election to
sell shall constitute notice of a failure to perform pursuant hereto or thereto.
IX. RIGHTS OF NOTEHOLDER UPON DEFAULT
9.1 Acceleration of Indebtedness. Upon occurrence of an Event of Default or
at any time thereafter, subject to NRS 107.080, Noteholder may at its option and
without demand or notice to Maker, accelerate the maturity of the Note and
declare the Indebtedness secured hereby immediately due and payable. Unless
otherwise provided herein, Maker hereby waives, to the extent permitted by
applicable law, presentment for payment, protest and demand, notice of protest,
demand, dishonor and default, notice of intent to declare the Indebtedness
immediately due and payable and notice of the declaration that the Indebtedness
is immediately due and payable, and any and all rights Maker may have to a
hearing before any judicial authority prior to the exercise by Noteholder of any
of its rights under this Agreement or any other agreements securing or executed
in connection with the Indebtedness, all to the extent authorized by law.
9.2 Operation of Property. Upon occurrence of an Event of Default and the
expiration of any applicable cure or grace period, if any, or at any time
thereafter, Noteholder may, to the full extent permitted by law, in addition to
all other rights and remedies, forthwith after any such default enter upon and
take possession of the Mortgaged Property, complete any buildings or other
improvements under construction, construct new improvements and make
modifications to any of the foregoing. In connection therewith Noteholder shall
have the power to file any and all notices and obtain any and all permits and
licenses which Noteholder, in its sole and absolute discretion, deems necessary
or appropriate, including but not limited to the filing of notices of completion
and the obtaining of certificates of occupancy. Noteholder shall also have the
right to receive all of the rents, issues and profits of the Mortgaged Property,
overdue, due or to become due, and to apply the same, after payment of all
necessary charges and expenses, including
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attorneys' fees, on account of the indebtedness secured hereby. Noteholder may
do any and all of the foregoing in its own name or in the name of Trustor and
Trustor hereby irrevocably appoints Noteholder as its attorney-in-fact for such
purposes. Noteholder may also, at any time after such default, apply to any
court of competent jurisdiction for the appointment of a receiver and Trustor
agrees that such appointment shall be made upon a prima facie showing of a
claimed default without reference to any offsets or defenses against such
default. Such receiver shall have all the rights and powers provided Noteholder
pursuant to this section or otherwise provided hereunder or by law. Said
receiver may borrow monies and issue certificates therefor. Said certificates
shall be a lien on the Mortgaged Property subordinate only to this Agreement;
provided, however, that should any of said certificates be acquired by
Noteholder the amount thereof shall constitute additional indebtedness secured
hereby. Such receiver may lease all or any portion of the Mortgaged Property on
such terms and for such a term (which may extend beyond the terms of such
receiver's appointment and/or, if Noteholder so consents, sale of the Mortgaged
Property hereunder) as such receiver may deem appropriate in its sole and
absolute discretion. The entering upon and taking possession of the Mortgaged
Property pursuant to this section and the collection of the rents, issues and
profits therefrom shall not cure or waive any default or notice of default
hereunder or invalidate any act of Noteholder pursuant thereto.
9.3 Judicial Proceedings. Upon the occurrence of an Event of Default, and
the expiration of any applicable cure or grace period, if any, or at any time
thereafter, or upon the breach of any covenant, term or condition herein
contained, Noteholder, in lieu of or in addition to causing the Trustee to
exercise the power of sale hereafter given, may proceed by suit for a
foreclosure of its lien on the Mortgaged Property, or to sue Maker for damages
on, arising out of said default or breach, or for specific performance of any
provision contained herein, or to enforce any other appropriate legal or
equitable right.
9.4 Foreclosure Sale.
(1) Procedure. Upon occurrence of an Event of Default, or at any time
thereafter, Noteholder may, subject to NRS 107.080, declare all sums secured
hereby immediately due by delivery to Trustee of a written notice of breach and
election to sell (which notice Trustee shall cause to be recorded and mailed as
required by law) and shall surrender to Trustee this Agreement and the Note.
After three (3) months shall have elapsed following recordation of any such
notice of breach, Trustee shall sell the property subject hereto at such time
and at such place in the State of Nevada as Trustee, in its sole discretion,
shall deem
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best to accomplish the objects of these trusts, having first given notice of
such sale as then required by law. In the conduct of any such sale Trustee may
act itself or through any auctioneer, agent or attorney. The place of sale may
be either in the county in which the property to be sold, or any part thereof,
is situated, or at an office of the Trustee located in the State of Nevada.
(a) Upon the request of Noteholder or if required by law
Trustee shall postpone sale of all or any portion of said
property or interest therein by public announcement at the time
fixed by said notice of sale, and shall thereafter postpone said
sale from time to time by public announcement at the time
previously appointed.
(b) At the time of sale so fixed, Trustee shall sell the
property so advertised or any part thereof or interest therein
either as a whole or in separate parcels, as Noteholder may
determine in its sole and absolute discretion, to the highest
bidder for cash in lawful money of the United States, payable at
time of sale, and shall deliver to such purchaser a deed or
deeds or other appropriate instruments conveying the property so
sold, but without covenant or warranty, express or implied.
Noteholder and Trustee may bid and purchase at such sale. To the
extent of the Indebtedness secured hereby, Noteholder need not
bid for cash at any sale of all or any portion of the Property
pursuant hereto, but the amount of any successful bid by
Noteholder shall be applied in reduction of said Indebtedness.
Trustor hereby agrees, if it is then still in possession, to
surrender, immediately and without demand, possession of said
property to any purchaser.
(c) Noteholder, from time to time before Trustee's sale,
may rescind any notice of breach and election to sell by
executing, delivering and causing Trustee to record a written
notice of such rescission. The exercise by Noteholder of such
right of rescission shall not constitute a waiver of any breach
or default then existing or subsequently occurring, or impair
the right of Noteholder to execute and deliver to Trustee, as
above provided, other notices of breach and election to sell,
nor otherwise affect any term, covenant or condition hereof or
under any obligation secured hereby, or any of the rights,
obligations or remedies of the parties thereunder.
(2) Collateral. on the happening of any Event of Default or at any time
thereafter, Noteholder or Trustee shall have and may exercise with respect to
the Collateral all rights, remedies and powers of a Secured Party under the NUCC
with reference to the Collateral or any other items in which a security interest
has been granted herein, including without limitation the right and power to
sell at public or private sale or sales or otherwise
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dispose of, lease or utilize the Collateral and any part or parts thereof in any
manner to the fullest extent authorized or permitted under the NUCC after
default by Maker without regard to preservation of the Collateral or its value
and without the necessity of a court order, and apply the proceeds thereof first
toward the payment of all costs and expenses and reasonable attorneys' fees
incurred by Noteholder or Trustee, and the balance toward the payment of the
Indebtedness whether or not then due, and in such order or manner as Noteholder
may elect. In the Event of Default, and the expiration of any applicable cure or
grace period, if any, Noteholder shall have, among other rights, the right to
take possession of the Collateral and to enter upon any premises where the same
may be situated for the purpose of repossessing the same, without being guilty
of trespass and without liability for damages occasioned thereby, except for
Noteholder's willful misconduct, and to take any action deemed appropriate or
desirable by Noteholder, at its option and its sole discretion, to repair,
restore or otherwise prepare the Collateral for sale or lease or other use or
disposition as authorized herein. To the extent permitted by law, Maker
expressly waives any notice of sale or any other disposition of the Collateral
and any rights or remedies of Maker or the formalities prescribed by law
relative to the sale or disposition of the Collateral or to the exercise of any
other right or remedy of Noteholder existing after default. To the extent that
such notice is required and cannot be waived, Maker agrees that if such notice
is mailed postage prepaid to Maker at the address shown herein at least five (5)
days before the time of the sale or disposition, such notice shall be deemed
reasonable and shall fully satisfy any requirement for giving said notice.
Maker agrees that Trustee or Noteholder may proceed to sell or dispose of
both the real and personal property covered herein in accordance with the rights
and remedies granted under this Agreement with respect to the real property
covered hereby. Maker hereby grants Noteholder the right, at its option, after
default by Maker to transfer at any time to itself or its nominee the
Collateral or any part thereof and to receive the monies, income, proceeds and
benefits attributable to the same and to hold the same as Collateral or to apply
it on the Indebtedness, whether or not then due, and in such order and manner as
Noteholder may elect. Maker covenants and agrees that all recitals and any
instrument transferring, assigning, leasing or making other disposition of the
Collateral or any part thereof shall be full proof of the matters stated therein
and no other proof shall be required to establish the legal propriety of the
sale or other action taken by Noteholder or Trustee and that all prerequisites
of sale shall be presumed conclusively to have been performed or to have
occurred. All rights to a marshalling of the assets of Maker, including such
rights with respect to the
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Collateral and the Mortgaged Premises, are hereby waived to the extent permitted
by applicable law.
(3) Maker's Warranties After Sale. Maker hereby authorizes and empowers the
Trustee to execute and deliver to the purchaser or purchasers of any of the
Mortgaged Property sold in foreclosure sales good and sufficient deeds of
conveyance thereto by fee simple title, subject to those title exceptions listed
in the Mortgagee Policy of Title Insurance delivered to and approved by
Noteholder in connection with this Agreement and the title of such purchaser or
purchasers when so made by the Trustee, Maker binds itself to warrant and
forever defend.
(4) Application of Proceeds. The proceeds of any and all foreclosure sales
of the Mortgaged Property shall be applied as follows: (i) to the payment of all
necessary actions and expenses incident to the execution of said sale or sales,
including a reasonable fee to the Trustee not exceeding five percent (5%) of the
gross proceeds of the sale or sales of the Mortgaged Property, (ii) to the
payment of the Indebtedness in such order as determined by Noteholder, to the
amount of the accrued interest and principal legally due thereon and all other
sums secured hereby, and to the payment of reasonable attorneys' fees as in the
Note provided, and (iii) the remainder, if any, shall be paid to Maker or such
other person or persons entitled thereto by law.
(5) Multiple Sales. Upon the occurrence of any Event of Default and the
expiration of any applicable cure or grace period, if any, or at any time
thereafter, the Noteholder shall have the option to proceed with foreclosure in
satisfaction of said Event of Default, either through the courts or by directing
the Trustee to proceed with foreclosure as provided for in this Agreement, but
without declaring the whole Indebtedness due, and provided that if any sale is
made because of such Event of Default, such sale may be made subject to the
unmatured part of the Note and Indebtedness secured by this Agreement, and such
sale, if so made, shall not in any manner affect the unmatured part of the
Indebtedness secured by this Agreement, but as to such unmatured part of the
Indebtedness this Agreement shall remain in full force and effect as though no
sale had been made under the provisions of this paragraph. Several sales may be
made under the provisions of this paragraph without exhausting the right of sale
for any remaining part of the Indebtedness whether then matured or unmatured,
the purpose hereof to provide for a foreclosure and sale of the Mortgaged
Property for any matured part of the Indebtedness without exhausting any power
of foreclosure and the power to sell the Mortgaged Property for any other part
of the Indebtedness, whether matured at the time or subsequently maturing.
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(6) Waiver of Appraisement Laws. To the extent permitted by applicable law,
Maker waives the benefit of all laws now existing or hereafter enacted providing
for (i) any appraisement before sale of any portion of the Mortgaged Property
(commonly known as Appraisement Laws), or (ii) any extension of time for the
enforcement of the collection of the Indebtedness or any creation or extension
of a period of redemption from any sale made in collecting the Indebtedness
(commonly known as Stay Laws and Redemption Laws).
(7) Prerequisites of Sales. In case of any foreclosure sale of the Mortgaged
Property, all prerequisites to the sale shall be presumed to have been
performed, and in any conveyance given hereunder, all statements of facts, or
other recitals therein made as to the nonpayment of money secured or as to the
request of the Trustee to enforce this trust, or as to the proper and due
appointment of any substitute trustee, or as to the advertisement of sale, or
time, place and manner of sale, or as to any other preliminary fact or thing,
shall be taken in all courts of law or equity as prima facie evidence that the
facts so stated or recited are true.
XI. USE OF INSURANCE PROCEEDS
11.1 Holding of Proceeds. Notwithstanding the provisions of Article VI,
Section C, any insurance proceeds paid to Noteholder will be first applied in
payment of the reasonable expenses, if any, incurred by Noteholder in the
collection of said insurance proceeds and the balance, if any, will be held and
disbursed by Noteholder in accordance with the following provisions:
A. (1) Should there exist an Event of Default at the time of the casualty or
should there occur at any time thereafter an Event of Default; (2) should either
the tenant of any portion of the Mortgaged Property or the Maker terminate a
lease as a result of said damage, or, whether or not a result of such damages,
at any time prior to the commencement of reconstruction; (3) should any
insurance proceeds be remaining after the completion of all restoration work; or
(4) should Maker fail to comply with the requirements for disbursing the
insurance proceeds, then in any of the said events, Noteholder may, at its
option, apply the insurance proceeds on the Indebtedness, in any order and
whether due or not, or to the restoration of the Mortgaged Property, or to be
released to Maker, but any such application or release shall not cure or waive
any default.
B. If the insurance proceeds have not been disbursed under the provisions of
subparagraph A hereof, or if under subparagraph A Noteholder elects to permit
the insurance proceeds to be used for restoration of the Mortgaged Property, the
proceeds will be held and disbursed as follows:
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(1) Should the insurance proceeds be less than $25,000.00, Maker shall
immediately commence and complete the work of restoring the damaged property and
Noteholder will disburse the portion of the insurance proceeds to pay actual
costs to replace, repair and restore the damaged property to Maker upon (i)
completion of the restoration work to a condition satisfactory to Noteholder,
(ii) submission of a written report by Maker that all restoration work has been
completed, and (iii) receipt by Noteholder of such evidence as Noteholder may
require that all mechanics and materialmen performing work or supplying
materials for the restoration work have been fully paid.
(2) Should the insurance proceeds equal or be in excess of $25,000.00, but
less than $100,000.00, Maker shall cause plans and specifications ("Plans") for
the restoration of the damaged property to be submitted to Noteholder for
approval, which approval shall not be unreasonably withheld. Upon receipt of
Noteholder's approval, Maker shall forthwith commence and complete the
restoration of the damaged property in accordance with the approved Plans.
Noteholder will disburse the portion of the insurance proceeds to pay the actual
costs to repair and restore the damaged property to Maker upon (i) completion of
the restoration work to a condition satisfactory to Noteholder, (ii) submission
of a written report by Maker that all restoration work has been completed, and
(iii) receipt by Noteholder of such evidence as Noteholder may require that all
mechanics and materialmen performing work or supplying materials for the
restoration work have been completely paid.
(3) If the insurance proceeds are equal or in excess of $100,000.00: (a)
Plans for the restoration of the damaged property and a cost estimate will both
be prepared by an architect employed by Maker and acceptable to Noteholder. The
Plans and cost estimates will be submitted to Noteholder for approval, which
approval shall not be unreasonably withheld. Upon receipt of Noteholder's
approval, Maker will promptly commence and diligently pursue the restoration
work in accordance with the approved Plans. (b) If prior to the commencement of,
or at any time during the restoration work, Noteholder shall determine that the
total cost of the restoration work shall exceed the balance of the insurance
proceeds held in its possession, Maker shall immediately pay, in cash, to
Noteholder the amount of such excess costs. Until the amount of said excess
costs is paid to Noteholder, Noteholder shall not be obligated to disburse any
of the insurance proceeds held by it. The insurance proceeds and the amount of
excess costs paid by Maker are hereinafter called "Construction Funds". The
amount of such excess costs paid by Maker shall be disbursed prior to the
disbursement of any of the insurance proceeds held by Noteholder. (c) The
Construction Funds will be made available to Maker as restoration repair work
progresses pursuant to certificates of the architect approved by Noteholder,
submitted not more than
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once every thirty (30) days. There shall be delivered to Noteholder such other
evidences as Noteholder may reasonably request, from time to time, during the
restoration work, as to the progress of the work, the compliance with the
approved Plans, the total cost of restoration work to date of request, the total
cost needed to complete the restoration work, lien waivers or evidence of no
liens against the Mortgaged Property. If at any time during the course of the
restoration work, Noteholder learns of facts concerning the restoration work
which is materially adverse to Noteholder, or payment or nonpayment of mechanics
and materialmen, or inaccuracy of any information furnished with respect to it,
Noteholder may withhold the disbursement of funds until such time as it is
prudent to continue to disburse the Construction Funds or may determine not to
make any further disbursements of the Construction Funds and instead to apply
all such funds remaining to the payment of the Indebtedness then outstanding,
whether due or not at such time and in such order as determined by Noteholder.
C. Noteholder shall not be required to hold any funds received by it
described in this Article X in any account special or separate from Noteholder's
general account. No such funds shall be required to be placed in any interest
bearing account, and any interest earned thereon shall constitute additional
insurance proceeds to be applied as provided in this Agreement.
XI. SPECIAL CONDITIONS
This instrument is expressly made subject to the following special
conditions.
11.1 Successor Trustees. Noteholder may, at any time, by instrument in
writing, appoint a successor or successors to the Trustee named herein or acting
hereunder, which instrument, executed and acknowledged by Noteholder, and
recorded in the office of the County Recorder, Clark County, Nevada, shall be
conclusive proof of the proper substitution of such successor trustee, who shall
have all the estate, powers, duties and trusts in the premises vested in or
conferred on the original trustee. If there be more than one trustee, either may
act alone and execute these trusts upon the request of Noteholder and his acts
shall be deemed to be the acts of all trustees, and the recital in any
conveyance executed by such sole trustee of such requests shall be conclusive
evidence thereof, and of the authority of such sole trustee to act.
11.2 Waiver and Election. The exercise of any right or remedy by Noteholder
shall not be considered as a waiver of any right or remedy nor shall any
acceptance by Noteholder of Maker's partial payment or partial performance of
obligations under the Note or hereunder, nor shall any failure or delay by
Noteholder in exercising any of its rights or remedies as to any Event of
24
<PAGE>
Default which may occur, operate as a waiver by Noteholder of its rights or
remedies with respect to the occurrence of any other or further Event of Default
or to the recurrence of the same Event of Default. The filing of a suit to
foreclose the Deed of Trust granted by this Agreement either on any matured
portion of the Indebtedness or for the whole of the Indebtedness, shall never be
considered an election so as to preclude foreclosure under power of sale after a
dismissal of the suit; nor shall the filing of the necessary notices for
foreclosure, as provided in this Agreement, preclude the exercise by Noteholder
of any other right or remedy including, without limitation, the prosecution of a
later suit thereon.
11.3 Intentionally Omitted.
11.4 Enforceability. If any provision hereof is presently or at any time
becomes invalid or unenforceable, the other provisions hereof shall remain in
full force and effect, and the remaining provisions hereof shall be construed in
favor of the Trustee and the Noteholder to effectuate the provisions hereof.
11.5 Application of Payments. If the lien or liens created by this Agreement
are invalid or unenforceable as to any part of the Indebtedness or if such lien
or liens are invalid or unenforceable as to any part of the Mortgaged Property,
the unsecured or partially unsecured portion of the Indebtedness shall be
completely paid prior to the payment of the remaining and secured or partially
secured portion of the Indebtedness and all payments made on the Indebtedness,
whether voluntary or under foreclosure or other enforcement action or
procedures, shall be considered to have been first paid on and applied to the
full payment of that portion of the Indebtedness which is not secured or not
fully secured by the lien or liens created herein.
11.6 Meaning of Particular Terms. Whenever used, the singular number shall
include the plural, the plural the singular and the use of any gender shall
include all genders. The words "Maker" and "Noteholder" shall include their
heirs, executors, administrators, successors and assigns, and the word "Trustee"
shall include his or her successors and substitute trustees.
11.7 Advances by Noteholder. If Maker shall fail to comply with the
provisions with respect to the securing of insurance, payment of taxes,
assessments, and other charges, the keeping of the Mortgaged Property in repair,
or any other term or covenant herein contained, Noteholder may, but shall not be
obligated to, incur such expenses as deemed necessary by Noteholder, and make
advances to perform such provisions, terms or covenants, and where necessary
enter the Mortgaged Property for the purpose of performing any such term or
covenant. Noteholder is further empowered, but not obligated, to make advances
for any expenditure deemed advisable by Noteholder for the preservation
25
<PAGE>
of the Mortgaged Property or for the continuation of the operation thereof.
Maker agrees to repay all sums so advanced or expended, and all expenses
incurred by Noteholder in connection with the exercise of any of its rights
under this Agreement, upon demand, with interest from the date such advances or
expenditures are made, determined on the same basis as matured principal in the
Note and all sums so advanced or expended, with interest, shall be secured
hereby.
11.8 Release or Extension by Noteholder. Noteholder, without notice, may
release any part of the Mortgaged Property or any person liable for the
Indebtedness without in any way affecting the liens hereof on any part of the
Mortgaged Property not expressly released and may agree in writing with any
party with an interest in the Mortgaged Property to extend the time for payment
of all or any part of the Indebtedness or to waive the prompt and full
performance of any term, condition or covenant of any instrument securing,
evidencing or relating to the Indebtedness.
11.9 Partial Payments. Acceptance by Noteholder of any payment of less than
the amount due on the Indebtedness shall be deemed acceptance on account only
and the failure to pay the entire amount then due shall be and continue to be a
default; and at any time thereafter and until the entire amount due on the
Indebtedness has been paid, Noteholder shall be entitled to exercise all rights
conferred on it by the terms of this Agreement upon the occurrence of an Event
of Default.
11.10 Titles not to be Considered. All section, subsection, paragraph or
other titles contained in this Agreement are for reference purposes only and
this Agreement shall be construed without reference to said titles.
11.11 Construction of Agreement. This Agreement may be construed as a
mortgage, deed of trust, chattel mortgage, conveyance, assignment, security
agreement, pledge, financing statement, hypothecation or contract, or any one or
more of them, in order fully to effectuate the lien hereof and the purposes and
agreements herein set forth.
11.12 Additional Taxes. Maker agrees that if any state, federal or municipal
government, or any of its subdivisions having jurisdiction, shall levy, assess
or charge any tax, assessment or imposition upon this Agreement or the credit or
indebtedness secured hereby or the Note or the interest of Noteholder in the
Mortgaged Premises or upon Noteholder by reason of any of the foregoing
(excepting therefrom any income tax on interest payments on the principal
portion of the Indebtedness secured hereby) then, Maker shall pay all such taxes
to or for Noteholder as they become due and payable, and provided further that
in the event of passage of any law or regulation permitting,
26
<PAGE>
authorizing or requiring the tax, assessment or imposition to be levied,
assessed or charged, which law or regulation prohibits Maker from paying the
tax, assessment or imposition, to or for Noteholder, then all sums hereby
secured shall become immediately due and payable at the option of the
Noteholder. Maker agrees to exhibit to Noteholder at any time upon request,
official receipts showing payment of all taxes, assessments and charges which
Maker is required or elects to pay hereunder. Maker agrees that if the United
States Government or any department or bureau thereof shall at any time require
revenue stamps to be affixed to the Note or this Agreement, Maker will upon
demand pay for stamps in the required amount and deliver them to Noteholder and
Maker agrees to indemnify Noteholder against liability on account of such
revenue stamps, whether such liability arises before or after payment of the
Note and whether or not this Mortgage shall have been released.
11.13 Indemnification. Except for Noteholder's willful misconduct, Maker
agrees to indemnify Noteholder from all loss, damage and expense, including
reasonable attorneys' fees, incurred in connection with any suit or proceeding
in or to which Noteholder may be made a party for the purpose of protecting the
lien of this Deed of Trust.
11.14 Additional Documents. Maker agrees that upon request of Noteholder it
will from time to time execute, acknowledge and deliver all such additional
instruments and further assurances of title and will do or cause to be done all
such further acts and things as may be reasonably necessary fully to effectuate
the intent of this Deed of Trust. The Maker within ten (10) days upon request in
person or by mail will furnish a duly acknowledged written statement setting
forth the amount of the debt secured by this Agreement, the date to which
interest has been paid and stating either that no offsets or defenses exist
against the debt secured hereby, or, if such offsets or defenses are alleged to
exist, the nature thereof.
11.15 Disclosure. Maker agrees to disclose to Noteholder upon request, the
then ownership of the beneficial interest in any trust which then holds legal
title to the Mortgaged Property and shall cause the owner(s) of such beneficial
interest to furnish sufficient evidence to Noteholder for it to determine the
identity of all of the parties which compose such owner(s).
11.16 Subrogation. In the event the Note is given for money advanced in the
payment of a sum owing upon another note or indebtedness, Maker hereby
acknowledges that it has and does hereby request Noteholder to advance the money
necessary to satisfy the present owner of said other note or indebtedness,
whether or not a release or transfer of said other note or indebtedness be
executed by such owner, and Maker hereby contracts and agrees that Noteholder
and Noteholder's assigns be
27
<PAGE>
and they hereby are, subrogated to all the rights, liens, remedies, equities,
superior title and benefits held, owned, possessed or enjoyed at any time by any
owner or holder of said other note or indebtedness, to secure payment to
Noteholder of the Note hereby secured and said other note or indebtedness, and
all liens securing same are hereby extended to the maturity date of the Note
hereby secured to additionally secure such Note.
11.17. Time. Time is of the essence of this Agreement.
11.18. Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be an original instrument and which, taken
together, constitute one and the same agreement.
11.19. Trustee's Acceptance. Trustee accepts these trusts when this Deed of
Trust, duly executed and acknowledged, is made a public record as provided by
law.
11.20. Governing Law. The laws of the State of Nevada shall govern the
validity, construction, performance and effect of this Agreement.
11.21. Statutory Covenants. Where not inconsistent with the above, the
following covenants, Nos. 1; 2 (full replacement value); 3; 4 (Default Rate
under the Note); 5; 6; 7 (a reasonable percentage); 8 and 9 of NRS 107.030 are
hereby adopted and made a part of this Deed of Trust.
EXECUTED this 31st day of August, 1995.
AUTOTOTE CBS, INC., a
Nevada corporation
BY: /s/ Victor Salerno
----------------------------
NAME: Victor Salerno
--------------------------
TITLE: Executive Vice President
-------------------------
"MAKER"
28
<PAGE>
STATE OF NEVADA
COUNTY OF CLARK
This instrument was acknowledged before me on 31st of August 1995 by Victor
Salerno as Executive Vice President of AUTOTOTE CBS, INC., a Nevada corporation.
/s/ Susanne Waldahl
----------------
[SEAL] Susanne Waldahl
My commission expires:
29
<PAGE>
LEGAL DESCRIPTION
THAT PORTION OF "HUGHES AIRPORT CENTER UNIT NO. 1" AS SHOWN BY MAP THEREOF ON
FILE IN BOOK 33, PAGE 72 OF PLATS IN THE CLARK COUNTY RECORDER'S OFFICE, CLARK
COUNTY, NEVADA, LYING WITHIN THE NORTHEAST QUARTER (NE 1/4) OF THE NORTHWEST
QUARTER (NW 1/4) OF SECTION 3, TOWNSHIP 22 SOUTH, RANGE 61 EAST, M.D.M., CLARK
COUNTY, NEVADA AND DESCRIBED AS FOLLOWS:
COMMENCING AT THE NORTHWEST CORNER OF THE NORTHEAST QUARTER (NE 1/4) OF THE
NORTHWEST QUARTER (NW 1/4) OF SAID SECTION 3; THENCE NORTH 88 DEGREES 18'45"
EAST ALONG THE NORTH LINE OF SAID SECTION 3, A DISTANCE OF 532.63 FEET TO THE
INTERSECTION WITH THE CONTROL LINE OF GRIER DRIVE (75.00 FEET WIDE); THENCE
SOUTH 01 DEGREES 41'15" EAST ALONG SAID CONTROL LINE, 80.00 FEET; THENCE SOUTH
88 DEGREES 18'45"" WEST, 35.00 FEET TO THE POINT OF BEGINNING ON THE WESTERLY
RIGT-OF-WAY LINE OF GRIER DRIVE; THENCE SOUTH 01 DEGREES 41'15" EAST ALONG SAID
RIGHT-OF-WAY LINE, 122.35 FEET; THENCE CURVING TO THE LEFT ALONG THE ARC OF A
300.00 FOOT RADIUS CURVE OF SAID RIGHT-OF-WAY LINE, CONCAVE NORTHEASTERLY,
THROUGH A CENTRAL ANGLE OF 17 DEGREES 25'57", AN ARC LENGTH OF 91.28 FEET TO A
POINT TO WHICH A RADIAL LINE BEARS SOUTH 70 DEGREES 52'48" WEST; THENCE SOUTH 70
DEGREES 52'48" WEST ALONG THE SOUTHWESTERLY PROLONGATION OF SAID RADIAL LINE,
5.00 FEET TO A POINT ON THE NORTHERLY RIGHT-OF-WAY LINE OF TRADE CENTER DRIVE
(60.00 FEET WIDE); THENCE WESTERLY ALONG SAID RIGHT-OF-WAY LINE, THE FOLLOWING
THREE (3) COURSES: FROM A TANGENT BEARING SOUTH 19 DEGREES 07'12" EAST, CURVING
TO THE RIGHT ALONG THE ARC OF A 25.00 FOOT RADIUS CURVE, CONCAVE NORTHWESTERLY,
THROUGH A CENTRAL ANGLE OF 80 DEGREES 24'22", AN ARC LENGTH OF 35.08 FEET;
THENCE SOUTH 61 DEGREES 17'10" WEST, 99.12 FEET; THENCE CURVING TO THE RIGHT
ALONG THE ARC OF A 180.00 FOOT RADIUS CURVE, CONCAVE NORTHWESTERLY, THROUGH A
CENTRAL ANGLE OF 35 DEGREES 00'00", AN ARC LENGTH OF 109.96 FEET TO A POINT ON
THE WESTERLY RIGHT-OF-WAY LINE OF TRADE CENTER DRIVE; THENCE DEPARTING SAID
RIGHT-OF-WAY LINE NORTH 83 DEGREES 42'50" WEST, 77.21 FEET; THENCE NORTH
01 DEGREES 41'15" WEST, 325.72 FEET TO A POINT ON THE SOUTHERLY RIGHT-OF-WAY
LINE OF SUNSET ROAD; THENCE NORTH 88 DEGREES 18'45" EAST ALONG SAID RIGHT-OF-WAY
LINE 245.00 FEET; THENCE CURVING TO THE RIGHT ALONG THE ARC OF A 30.00 FOOT
RADIUS CURVE, CONCAVE SOUTHWESTERLY, THROUGH A CENTRAL ANGLE OF 90 DEGREES
00'00", AN ARC LENGTH OF 47.12 FEET TO THE POINT OF BEGINNING.
EXHIBIT "A"
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Direct Subsidiaries
Leroy's Horse and Sports Place, Inc.
Leroy's Hotel Corporation ("Hotel Corporation")
Computerized Bookmaking Systems, Inc. ("CBS")
American Wagering Management Company, Inc.
Indirect Subsidiaries
Mega Sports, Inc. (50% ownership by CBS)
B-P Food Corporation (wholly-owned subsidiary of Hotel Corporation)
-42-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
American Wagering, Inc.
Financial Data Schedule Required under:
Appendix A to Item 601(c) of Regulation S-B
Commercial and Industrial Companies
Article 5 of Regulation S-X
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 3,416,412
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 300,334
<CURRENT-ASSETS> 7,955,826
<PP&E> 8,710,404
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,720,157
<CURRENT-LIABILITIES> 3,524,318
<BONDS> 7,364,535
0
0
<COMMON> 78,375
<OTHER-SE> 13,752,929
<TOTAL-LIABILITY-AND-EQUITY> 24,720,157
<SALES> 0
<TOTAL-REVENUES> 9,030,231
<CGS> 0
<TOTAL-COSTS> 8,889,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 153,673
<INCOME-TAX> 30,773
<INCOME-CONTINUING> 122,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
