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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, 1999.
Commission File No. 000-20685
AMERICAN WAGERING, INC.
(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, 1999 were
$9,891,818.
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 22, 1999
computed by reference to the closing price for the registrant's Common Stock as
quoted by the National Market System of NASDAQ on such date, was approximately
$17,366,872.
The number of shares of the issuer's Common Stock outstanding as of April 22,
1999 was 7,824,513.
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PART I
Item 1. Business
In August 1995, American Wagering Inc., a Nevada corporation, (the
"Company"), was formed as the holding company for Leroy's Horse and Sports Place
("Leroy's") and Leroy's Hotel Corporation ("LHC"). Immediately prior to the
closing of the initial public offering by American Wagering, Inc., the
stockholders of Leroy's and LHC exchanged their shares in those companies for
shares of American Wagering, Inc. These transactions are referred to as the
"Reorganization."
Leroy's was incorporated under the laws of the State of Nevada on November
14, 1977. Leroy's, through a central computer system located at its Las Vegas,
Nevada headquarters, operates a statewide network of sports and race wagering
facilities in 46 casinos. The Company offers a "turn-key" sports wagering
operation that allows casinos to satisfy their patrons' desires for sports
wagering without bearing the risk and overhead associated with running the
operation. By combining volume from a number of locations, the Company believes
it more effectively hedges risks and more efficiently covers fixed overhead. In
addition, since its sports book operation is its primary business, the Company
believes it responds more quickly to customer requests, such as providing faster
pay off on winning tickets presented other than in person, than do many casinos,
which operate sports books as an ancillary part of their businesses.
The Company also owns and operates Mega$ports (ACT) Pty Ltd. ("Mega$ports
(ACT)") located in Canberra, Australia. Mega$ports (ACT) is the Company's
international wagering hub licensed to accept both fixed odds and pari-mutuel
interactive wagers on the Internet from patrons around the world except the
United States. In November 1998, the Company was issued a 15 year Sports Betting
license from the Bookmakers Licensing Committee ("BLC") in the Australian
Capital Territory ("ACT"). The Company began accepting wagers from non-Internet
patrons within Australia in January 1999. The Company received regulatory
approval for its Internet operations from the ACT and began accepting wagers on
the Internet in March 1999. The Company believes it is the first Nevada licensed
company to start an online gaming site.
The Company owns AWI Keno, Inc. ("AWIK") which designs, installs, operates
and maintains computerized keno systems. On April 29, 1999, AWIK received Nevada
Gaming Commission approval to operate a statewide inter-casino linked system
keno game. AWIK plans to offer keno players the first statewide progressive keno
game. AWIK estimates it will begin operations in June 1999, although there can
be no assurance in that regard.
LHC owns and operates a 150 room Howard Johnson's hotel (the "Hotel")
located in Las Vegas, Nevada and, through its wholly owned subsidiary B-P Food
Corporation, an International House of Pancakes restaurant adjacent to the
Hotel. Leroy's operates its main race and sports book on the premises of the
Hotel. Additionally, Leroy's operates a 5,600 square foot casino containing
approximately 65 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
that owned and operated the Hotel/Casino. 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 Leroy's for approximately $1.1 million. In
February 1996, the stockholders of Leroy's 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 purchased the remaining fifty-percent interest in BSRB Resort Hotels and
B-P-Gaming Corporation ("B-P") for $3,601,000 in cash and the assumption of
certain liabilities and B-P Gaming was subsequently dissolved.
On April 22, 1998, the Company determined it would concentrate its business
efforts on its core competency, sports wagering, and began seeking a qualified
buyer for the hotel, food and beverage segment of American wagering, Inc. In the
accompanying consolidated financial statements as of, and for the twelve months
ended, January 31, 1999 and 1998 the results of the hotel, food and beverage
operations have been accounted for as discontinued operations (See Note 2). In
conjunction with the sale of the Hotel facility, the Company intends to
leaseback and continue to operate the Casino for up to two years. The ground
lease between the Company and the owner of the land underlying the Hotel/Casino
is the subject of certain litigation. See "Hotel/Casino Operation," and "Legal
Proceedings."
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In October 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. The Company paid $3 million in cash to AC and guaranteed CBS's obligation
under its mortgage (in the principal amount of approximately $2 million as of
such date) on the real estate and building located at 675 Grier Drive, Las
Vegas, Nevada where the Company currently maintains its corporate offices. CBS
designs, sells, installs and maintains sports and race book equipment, software
and computer systems for the sports betting industry. In 1994, CBS signed a
joint venture agreement with IGT-North America, a subsidiary of International
Game Technology ("IGT") for the purpose of developing and marketing a
pari-mutuel sports system, known as MEGA$PORTS(R). MEGA$PORTS(R) offers
opportunities to wager on the outcome of individual sports contests, events
occurring within or during the contests, and outcomes of groups of sports
contests. Mega$ports, Inc. received its license from the Nevada Gaming
Commission in June 1997 and began operation in July 1997. In December 1998, the
Company entered into an agreement with IGT to terminate the Mega$ports joint
venture agreement. The termination agreement allows the Company to receive IGT's
50% interest in the joint venture and the Mega$ports(R) trademark. The Company
has agreed to indemnify IGT for all presently due or future obligations of
Mega$ports. The transfer of IGT's shares in the joint venture is subject to the
approval of the Nevada Gaming Commission.
On July 28, 1998, the Company acquired certain assets from Advanced
Computer Services, Inc. ("ACS") including software and customer lists pursuant
to an Asset Purchase Agreement between the Company and ACS. The Company paid ACS
$500,000 in cash and $250,000 in the Company's common stock. The Company's two
new subsidiaries, AWI Sports Systems, Inc. ("AWISSI") and AWI Hotel Systems,
Inc. ("AWIHSI") acquired the Nevada Sports wagering software and Hotel systems
software, respectively from ACS. The Company owns 80% of AWISSI and 51% of
AWIHSI. The sole shareholder of ACS owns the remaining 20% of AWISSI and 49% of
AWIHSI. The Company and ACS also settled certain litigation between them. AWISSI
and AWIHSI assumed certain contractual obligations of ACS, including all
customer contracts.
Las Vegas Metropolitan Market
The Company's primary market for sports books, the Hotel/Casino and keno
operations is the "Las Vegas" metropolitan area (hereinafter "Las Vegas").
Currently, the Las Vegas gaming market is comprised of 100 casinos with an
aggregate of approximately 94 sports books and 78 keno parlors. The Company
currently operates 22 of its 46 sports books in Las Vegas. The Las Vegas gaming
market attracts both local residents and Las Vegas visitors. Las Vegas'
population was approximately 1.25 million in 1998, an increase of 4% from the
prior year. 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 by 78% from approximately 17.2 million in
1988 to approximately 30.6 million in 1998. 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 sites, having hosted approximately 4,000 conventions in 1998 up 7%
from the prior year, which were attended by more than 3.3 million people who it
is estimated spent $4.3 billion, excluding gaming activity.
From 1989 to 1998, gaming revenues for Clark County (which consists
principally of Las Vegas) have increased 88% from approximately $3.4 billion to
approximately $6.4 billion. During the twelve months ended January 31, 1999,
gaming revenues generated from sports books and keno parlors in Clark County
were approximately $88 million and $63 million, respectively. The Clark County
gaming market has historically achieved significant growth despite adverse
economic, regulatory and competitive events during the past decade, including
the expansion of gaming in other jurisdictions across the United States.
The number of hotel and motel rooms in Las Vegas has increased by
approximately 80% from 61,000 in 1988 to approximately 110,000 in 1998. Despite
the significant increase in the supply of rooms, Las Vegas's hotel/motel
occupancy rate exceeded 86% for the last two years. The Las Vegas Convention and
Visitors Authority forecasts the supply of rooms available in Las Vegas to
increase by approximately 15% or 16,631 rooms by the year 2000.
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Reno Area Market
The market for 12 of the Company's sports books is the Reno area gaming
market. The Company also plans on operating its inter-casino linked keno system
at selected casino locations in the Reno area. Reno is the second largest city
in Nevada with an area population of approximately 228,000 in 1998. Reno is
located at the base of the Sierra Nevada Mountains along Interstate 80
approximately 135 miles east of Sacramento, California. The Reno area is a
popular resort spot, which attracts tourists by offering gaming as well as
numerous other summer and winter recreational activities. The greater Reno area
attracted a total of 5.1 million visitors in 1998. Currently, the Reno area
gaming market is comprised of 51 casinos with an aggregate of approximately 22
sports books and 23 keno parlors.
World-Wide Market
Mega$ports (ACT) operates from Canberra, Australia and through the Internet
is accepting wagers from every country in the world except the United States.
There are currently over 140 web sites that offer some type of online gambling.
With the popularity of online gambling increasing, the Company believes it may
be able to access a larger wagering market through the more cost efficient
Internet. The convenience of placing wagers using one's personal computer may
allow sports books to tap into the traditional gambling market. Industry
estimates for online gambling revenues of all types are expected to exceed $900
million in 1999, $2 billion in 2000 and $10 billion by 2002.
Sports Wagering
Sports wagering is legal in the State of Nevada, and in numerous foreign
countries, including Canada, Mexico and Australia. Sports wagering at Nevada's
sports books increased from approximately $290 million in 1980 to $2.3 billion
in 1998. During that same period, the number of sports books increased from 24
to 145 in Nevada. With the advent of cable and satellite television, both
commercially and privately, 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. With the popularity and
accessibility of computers, bettors in locations where such betting is permitted
now have an additional medium from which to wager on sporting events. Online
sports betting has been around for approximately 20 years but very few people
had access to a computer. The Company believes that the dynamic growth in home
computing combined with the convenience of betting online will continue to grow
the sports betting industry.
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 a 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 exhaust their bankroll
after an indefinite period of play. In pari-mutuel wagering, which is offered by
Mega$ports(R) and also used by major North American horse racing tracks and jai
alai establishments, 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 gross revenues are directly related
to the amount wagered (the "handle").
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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 was 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.
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 in a pari-mutuel system), 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 principal 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, the
Company believes that 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.
Wagering - Sports Book Operation
Leroy's retains its main sports book license at the Hotel/Casino and
operates 45 other sports books in major metropolitan areas in Nevada (of which
22 are located in the Las Vegas area and 12 in the Reno area with 12 others
located throughout the State of Nevada, including the cities of Laughlin,
Mesquite, Elko and Jackpot). Leroy's operates sportsbooks in hotels and casinos,
such as the Riviera Hotel and Casino, the Tropicana Hotel and Casino, the Four
Queens Hotel and Casino, the Stratosphere Hotel and Casino in the Las Vegas
area, and the Carson Valley Inn and Casino, the Bonanza Hotel and Casino and the
Rail City Hotel and Casino in the Reno area. Under Nevada gaming law, the
Company is permitted to own and operate sports books located on the premises of
other non-restricted gaming operations. The Company currently owns and operates
46 sports books out of a total of 145 sports books operating in Nevada. The
remaining sports books in the state are operated primarily by the casinos in
which they reside.
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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. Generally, at its sports book
locations the Company pays the casinos a flat monthly rental for casino space,
although in some instances there are participation agreements with the casinos.
The typical sports book location for the Company encompasses approximately
300 square feet, contains a board displaying the odds, television monitors
showing sporting events, betting stations, ticket sellers and cashiers. 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. The ticket is then distributed to the
customer with the Company simultaneously recording the wager. Personnel at the
Company's main office 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 38% of the
amount bet (the "handle") at the Company's locations with professional and
college basketball games at 25% and professional baseball games next at about
28%. As a result, the Company's business historically has been seasonal in
nature with approximately 55% of its handle arising during the months of
September through January. The Company's revenues consist of football game
wagering of 37%, basketball wagering of 27% and baseball wagering of 14%, with
the remaining 22% representing all other sports wagering, including such sports
as hockey and boxing. 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 racetracks at which the races occur. The Company has only
offered race wagering for a few major events, such as, the Triple Crown and the
Breeders Cup.
In December 1997, the Company joined the Nevada Pari-mutuel Association to
allow pari-mutuel race wagering at its home location, at the Hotel/Casino. The
Company, in association with a disseminator, currently offers pari-mutuel
wagering on events at racetracks throughout the country including Santa Anita in
California and Aqueduct in New York.
Wagering - Internet Operations
In November 1998, the Company was issued a 15 year Sports Betting license
from the Australian Capital Territory ("ACT") Bookmakers Licensing Committee
("BLC"). The Company began accepting wagers from non-Internet patrons within
Australia in January 1999. The Company received regulatory approval for its
Internet operations from the ACT and began accepting wagers on the Internet in
March 1999. The Company believes that it is the first Nevada licensed company to
start an online gaming site. The Company is now able to bring its over 20 years
of bookmaking expertise to the international market through the Internet.
Mega$ports (ACT) utilizes an accessible network with a user-friendly sports
betting software system to allow Internet wagering by patrons. The online system
permits high-speed access with secure, encrypted technology and allows
instantaneously updated betting lines and account information 7 days a week, 24
hours a day. The system has various patron safeguards that are required by ACT
regulations. Customers can begin wagering with Mega$ports (ACT) only after
meeting registration and login requirements which verify the patron's country of
residence and age and confirm the physical location of the transmission of the
wager. The system will not accept any wagers from jurisdictions that prohibit
sports betting or Internet wagering, such as the United States. Once bettors
meet registration requirements and establish an account they can begin wagering
immediately using their computers. Patrons can wager on all authorized events
including all professional and college sports, golf, auto racing, International
and World Cup Soccer, Formula One Racing, Academy Awards and other events. In
March 1999, the Company was approved to provide for three years exclusive sports
betting services at Bruce Stadium in Canberra Australia. Mega$ports (ACT) will
be the sole bookmaker at the stadium for all events conducted there, including
the Sydney 2000 Olympics.
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Systems Operations
CBS designs, installs and maintains computerized sports and race wagering
systems throughout the State of Nevada, including the MEGA$PORTS(R) product for
pari-mutuel sports wagering. CBS also installs and maintains race and sports
wagering systems and hotel systems on behalf of AWISSI and AWIHSI (CBS, AWISSI
and AWIHSI are collectively know as "Systems"). Systems is the leading provider
of race and sports wagering systems in the State of Nevada, including major
casinos along the Las Vegas Strip.
Systems provides sports wagering systems and services to virtually all of
the sports and race books in Nevada that are not operated by Leroy's and at all
of Leroy's sports books. Casinos and other sports wagering facilities generally
purchase the computerized wagering system and enter into an agreement for repair
and maintenance of the system and software support. Operating revenues consist
of sports wagering equipment sales and maintenance contract revenues from
wagering systems contracts. Systems sells its sports wagering systems to casinos
under purchase agreements and provides training for the system operators and
sell/cash terminal clerks. Systems does not provide the operations and
supervisory personnel necessary to operate the system.
In October 1996 when the Company acquired all of the outstanding shares of
CBS from Autotote Corporation ("AC") and the right to use certain software owned
by AC and Autotote Systems, Inc. ("ASI"), certain agreements were executed.
These agreements are the subject of certain litigation between the Company and
AC and ASI. (See "Legal Proceedings")
In December 1998, the Company entered into an agreement with IGT to
terminate the Mega$ports joint venture agreement. The termination agreement
allows for the Company to receive IGT's 50% interest in the joint venture and
the Mega$ports(R) trademark. The Company has agreed to indemnify IGT for all
presently due or future obligations of Mega$ports. The transfer of IGT's shares
in the joint venture is subject to the approval of the Nevada Gaming Commission.
MEGA$PORTS(R) allows bettors to wager on the outcome of individual sports
contests, events occurring within or during the contests, and outcomes of groups
of sports contests. The MEGA$PORTS(R) pari-mutuel wagering system currently
consists of a central computer, communications equipment and terminals.
Mega$ports, Inc. received its license from the Nevada Gaming Authorities in June
1997 and began operation in July 1997. CBS recorded an equity in loss from joint
venture of $785,516 and $1,791,828 for the fiscal years ended January 31, 1999
and 1998, respectively. The Mega$ports(R) product is currently offered at 62
sports books throughout Nevada, including 44 Leroy's locations.
Casino Operations
Within the Hotel facility, there is approximately 5,600 square feet of
casino space containing 65 electronic gaming devices, including 18 slot
machines, 35 video poker machines and 12 multi-game video machines.
Keno Operations
AWI Keno, Inc. ("AWIK") was formed during the second quarter of Fiscal 1999
and is in its start up phase. AWIK designs, installs, operates and maintains
computerized keno systems. On April 29, 1999, AWIK received Nevada Gaming
Commission approval to operate a statewide inter-casino linked system keno game.
AWIK is currently developing THE GAME(TM) offering keno players the first
statewide progressive keno game. THE GAME(TM) will be an interactive system with
high-tech video graphics and animation that would be linked between casinos
throughout the State of Nevada. THE GAME(TM) is a state-of-the-art UNIX-based
computer system that is already being used to link over 1000 terminals in
Australia. THE GAME(TM) would pay out progressive jackpots starting at $1
million. AWIK's inter-casino linked system would offer casinos a risk-free keno
operation as AWIK would operate the keno game for the casino and the casino
would receive a percentage of the play from AWIK. The Company will operate the
keno game at selected locations for the required test period.
Hotel, Food and Beverage Operations
LHC 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 casino and a race and sports
book on the premises. 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. On April 22, 1998, the
Company determined it would concentrate its business efforts on its core
competency, sports wagering, and began seeking a qualified buyer for the hotel,
food and beverage segment of American Wagering, Inc. In conjunction with the
sale of the Hotel facility, the Company intends to leaseback and continue to
operate the Casino for up to two years. In the Company's accompanying
consolidated financial statements as of and for fiscal years ended January
31, 1999 and 1998, the results of the Hotel, food and beverage operations have
been accounted for as discontinued operations.
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The Hotel, food and beverage operations currently consist of a 150-room
franchised Howard Johnson's hotel, 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, a gaming
device participation agreement with Jackpot Enterprises, Inc., and a ground
lease with the owner of the parcel on which the building is located. 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 7.5%
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 ground lease obligates the Company to pay a base rent amount of
$6,000 for the Hotel in addition to a calculated rent overage amount based on
excess occupancy over a specified level and 5% of all casino gross gaming
revenues to the landlord. The ground lease between the Company and the owner of
the land underlying the Hotel/Casino is the subject of certain litigation. See
"Strategy -- Discontinued Operations" and "Legal Proceedings."
From 1992 through 1998, the Hotel/Casino's occupancy rate has averaged
approximately 73%. 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 are
generated from the overflow of 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 companies 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.
Strategy
Wagering - Sports Book Operations
In Nevada, the Company's strategy in the operation of its sports books is
to continue to expand upon its current base of 46 locations, a net increase of
five locations during the fiscal year ended January 31, 1999. The Company,
through its Systems operation, is developing a new self-service sports wagering
terminal. This new terminal would allow patrons to place wagers on their own
without the assistance of an employee. Patrons will be able to wager 24 hours a
day on all available events. This terminal would allow the Company to enter into
the smaller casino market where the labor costs are currently prohibitive. The
Company would also be able to achieve improved efficiency at larger casinos by
installing the new terminal. The Company expects completion of the development
of such terminal, regulatory approval thereof and the first installations by the
end of the 1999, although there can be no assurance in that regard.
The Company will continue to present 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. The Company will continue to utilize its computer and communication
expertise and equipment, by operating its satellite locations from one central
hub, thereby reducing the overhead that each individual location would have in
personnel and equipment. The Company believes that as televised sporting events
continue to proliferate, sports betting will continue to grow and it can
capitalize on such growth.
Wagering - Internet Operations
Outside of the United States, the Company will market Mega$ports (ACT)
fixed odds Internet wagering and the Mega$ports(R) pari-mutuel sports wagering
products. With the continued growth of online gambling, the Company believes it
is well positioned to take advantage of a larger wagering market with lower
operating costs. The Internet opens new wagering markets and allows the Company
to offer events such as International and World Cup Soccer, Formula One Racing,
the Olympics, Rugby, Cricket, Academy Awards and others. Pari-mutuel wagering
via the Internet provides the potential for larger wagering pools.
The Company maintains a website at http://www.americanwagering.com. The
Company accepts wagers through the Internet, exclusively from outside the United
States, at its Australian subsidiary, Mega$ports (ACT) Pty Ltd. at
http://www.megasports.com.au.
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Keno Operation
The Company's business strategy is to offer a wide area inter-casino linked
keno system in the State of Nevada known as the GAME(TM). On April 29,1999, the
Company received Nevada Gaming Commission approval to operate the statewide
system. The Company estimates it will begin operations at selected locations
throughout Nevada in June 1999 although there can be no assurance in that
regard. THE GAME(TM) is an interactive system with high-tech video graphics and
animation. THE GAME(TM) would pay out progressive jackpots starting at $1
million. The Company would offer casinos a risk-free keno operation as the
Company would operate the keno game for the casino and the casino would receive
a percentage of the play from the Company.
Systems Operations
The Company's business strategy is to continue to develop, distribute, and
support state of the art race and sports wagering systems to its customers. In
addition to its new self-service sports wagering terminal, the Company, upon
regulatory approval, intends to distribute a self-service terminal station that
would allow players to place wagers on race and sports events, watch live videos
of race and sport events and to play any one of a number of video slot games,
keno or other games. This new terminal would allow race and sports books to be
open 24 hours a day, seven days a week. The Company's products are capable of
concurrently operating race and sports books and MEGA$PORTS(R) from a single
system. The advantages of such terminals include multiple data applications over
a single communication line and lower overall costs for each product.
In December 1998, the Company entered into an agreement with IGT to
terminate the Mega$ports joint venture agreement. The termination agreement
allows the Company to receive IGT's 50% interest in the joint venture and the
Mega$ports(R) trademark. The Company has agreed to indemnify IGT for all
presently due or future obligations of Mega$ports. The transfer of IGT's shares
in the joint venture is subject to the approval of the Nevada Gaming Commission.
Upon approval, Mega$ports will become a wholly owned subsidiary of the Company.
The Company will continue to distribute and maintain MEGA$PORTS(R), which offers
opportunities for sports wagering by creating pari-mutuel pools on sporting
events.
MEGA$PORTS(R) combines the interest of sporting events with the potential
for larger pari-mutuel payoffs. This allows customers two distinct types of
wagering. Daily wagering called "Mega-Picks", 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 serves as an opportunity to
accept wagers. Weekly multiple proposition, such as Mega$ports Pick "22" and
Pick "10" MEGACARDS(R) invite customers to pick all professional football
winners, all professional basketball winners, or a combination of winners
ranging between 14-22 events over a specified time period. Mega$ports Pick "22"
jackpots begin at $1,000,000 and increased progressively as tickets are sold.
In the past, pari-mutuel wagering systems have been used exclusively for
race wagering. For sports bettors, the concept of pari-mutuel sports wagering is
vastly different when compared to types of wagers offered by traditional sports
books. The acceptance, by bettors, of pari-mutuel sports wagering in the state
of Nevada has been slower than anticipated. The Company believes that continued
exposure of Mega$ports products to the sports wagering market will prompt
greater acceptance and allow bettors to enjoy new ways to wager on sporting
events. A cost reduction program and the restructuring of Mega$ports during the
Fiscal Year ended January 31, 1999 was completed. There can be no assurance that
the increased acceptance of pari-mutuel sports wagering by the public or the
reduction of costs of Mega$ports will result in the profitability of Mega$ports.
Casino Operations
In conjunction with the sale of the Hotel, the Company intends to leaseback
and continue to operate the casino for up to two years. The casino will serve as
the Company's principal gaming location due to licensing requirements. The
Company will continue to offer promotions in an attempt to gain increased play
of local customers.
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Discontinued Operations
On April 22, 1998, the Company determined it would concentrate its business
efforts on its core competency, sports wagering, and began seeking a qualified
buyer for the hotel, food and beverage segment of American wagering, Inc. In the
Company's accompanying consolidated financial statements as of and for the
fiscal years ended January 31, 1999 and 1998, the results of the hotel, food and
beverage operations have been accounted for as discontinued operations. In
conjunction with the sale of the Hotel facility, the Company intends to
leaseback and continue to operate the casino for up to two years. The ground
lease between the Company and the owner of the land underlying the Hotel/Casino
is the subject of certain litigation. (See "Legal Proceedings").
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, 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 minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the 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 46 non-restricted 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
engage in gaming activities in Nevada.
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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 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.
A 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 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.
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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 right conferred through securities held by that
person, (iii) pays remuneration in any form to that person for services rendered
or otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities 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 Commission
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.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses, 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 indicate 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.
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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 to pay the expenses of
investigation by the Board of his participation in such foreign gaming. Due to
the Company's establishment of its Internet wagering operation in Australia, the
Company has filed the appropriate foreign gaming reports and has established the
required revolving fund. 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. Recent changes in the Nevada Gaming Control Act would allow the
Company to seek a determination of suitability of any associate or activity
associated with the foreign gaming opportunity prior to engaging in that
activity.
Interstate Sports Wagering
Sports wagering is legal in Nevada, and numerous foreign jurisdictions,
including Canada, Mexico and Australia. 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
jurisdictions wherein such betting or wagering is legal. Nevada has amended the
Nevada Gaming Control Act to allow licensed race and sports books in Nevada to
accept interstate pari-mutuel wagers from other jurisdictions in which
pari-mutuel 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
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. Since its introduction the bill has been
amended several times. However, the general prohibitions of the draft
legislation 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 pari-mutuel wagering
opportunities would be adversely impacted. The Company does not accept wagers
through the Internet from persons in the United States.
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Australia
The Company's wholly owned subsidiary Mega$ports (ACT) Pty
Limited("Mega$ports ACT") is incorporated in the Australian Capital Territory
("ACT") pursuant to the laws of Australia as a company limited by shares.
Mega$ports ACT is subject to the Corporations Law of Australia (a Federal law)
and is regulated by the Australian Securities Commission insofar as its
obligations as a company are concerned. The Bookmakers Act of the ACT provides
the regulatory regime for licensed bookmakers. Mega$ports ACT hold Sports
Betting license number 5 issued by the Bookmakers Licensing Committee ("BLC").
The BLC is established and governed by Division 2 of Part II of the Bookmakers
Act. Sports betting is governed by Part IIIA of the Bookmakers Act. A
Determination is subordinate legislation which is governed by the Subordinate
Laws Act of the ACT. The BLC is the authority which issues licenses. It must be
satisfied that the Directors and shareholders holding more than 5% satisfy the
Suitability Requirements specified in the Act. The Directors of Mega$ports have
satisfied the BLC of their suitability. They must, however continue to satisfy
these requirements. If not, the license will be cancelled. The Bookmakers Act
provides for the method of operations that a licensed bookmaker must adhere to.
These include: (1) the acceptance of wagers only in venues approved by the
Minister for Sport, (2) the Minister of Sport determines the rules for sports
betting,(3) the Minister of Sport determines the maximum number of licenses to
be issued, (4) a sports betting license may only be granted to a company if one
director holds a bookmakers license and (5) the period of the license may not
exceed 15 years.
The Minister of Sport is empowered by the Bookmakers Act to make
Determinations which have the status and force of law. Since the commencement of
the Act, the Minister has made a number of Determinations. Each Determination
made by the Minister has the status of subordinate legislation. A Determination
becomes law when it is published in the Government Gazette. A Determination is
subject to disallowance by the Assembly.
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 145 sports books in Nevada, of which the Company owns and operates 46.
Virtually all of the major casinos in Nevada have sports and race books and keno
parlors, some of which are larger and offer more amenities than the Company's
locations and some casinos operate sports books at other casinos. There are
currently approximately 130 keno parlor locations throughout the State. The
Company's inter-casino linked keno system will compete with other distributors
of keno systems in Nevada, other keno system games and other casino-linked
games, including progressive slot machines. Some of these competitors are larger
and have greater access to capital resources than the Company. In the
international market, there are over 140 web sites, that offer some type of
gambling. Mega$ports (ACT) will be competing for sports wagers with many of
them. Online sports wagering has been in existence for over 20 years in Europe,
the Carribean, Australia and other jurisdictions outside the United States. 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 expanded to 110,000 rooms in 1998, a significant increase that will
further increase competition. The Hotel/Casino directly competes with a number
of other operations targeted to local residents as well as with gaming
facilities not related to hotels.
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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
Mesquite, 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 the Company's 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 293 full and part-time employees, 151 of
which are employees of Leroy's, 86 of which are employees of LHC, 43 of which
are employees of CBS and 13 are employed by the Company. 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.
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. 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 at 675 Grier Drive,
Las Vegas, Nevada, which is owned by the Company's subsidiary, CBS. CBS is a
debtor under a loan of which approximately $1.9 million is outstanding as of
January 31, 1999. The loan accrues interest at an 8% annual 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 license at the
Hotel/Casino and operates 45 other sports books at locations in major
metropolitan areas in Nevada (of which 22 are located in the Las Vegas area and
12 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 to
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 $426,000 and $456,000 for the years ended January
31, 1999 and 1998, respectively.
LHC leases the real property on which the Hotel/Casino is located pursuant
to an 80-year ground lease of which 60 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." LHC also is
the debtor under a loan, of which approximately $2.4 million of principal is
outstanding as of January 31, 1999. The loan accrues interest at a current
annual rate of 9.5%, is due in full on 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 was the Company's position that Racusin cannot evidence that there has been a
defacto merger between the Company and Leroy's.
On August 1, 1997, the U.S. District Court of Nevada orally issued a
declaratory judgement with respect to the lawsuit. The District Court held that
pursuant to the terms of the agreements, Racusin was entitled to receive from
the Company a commission, as adjusted, of $648,375, plus prejudgment interest of
$87,535 through September 5, 1997. The District Court's holding indicated that
Racusin was entitled to the commission because he served as a finder to the
Company for the underwriter of the Company's initial public offering in May,
1996, which enabled the Company to make a public sale of Leroy's assets. On
September 5, 1997, the Company tendered the entire judgement of $735,910 which
included interest to Racusin. As the payment to Racusin represented a cost of
the Company's initial public offering, the entire amount paid to Racusin reduced
its paid-in capital. The declaratory judgement of the District Court is not
final. On September 19, 1997, Racusin filed a Notice of Appeal with the Court of
Appeals. On March 16, 1999, the Court of Appeals vacated the District Court's
decision and ordered that a jury trial be conducted.
Ground Lease
On March 31, 1997, James A. Rissler and Patricia R. Rissler ("Landlord")
pursuant to the ground lease between LHC 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. The
Landlord requested 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 LHC to the
Landlord under the Lease. The specific language of the Lease provides that LHC
(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 LHC) to LHC, or (ii) the gross gaming revenue received in or on the
premises, whichever is applicable, or if both are applicable, whichever is
greater.
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. Pursuant to the
original complaint, the Landlord requested approximately $12,500 of additional
rent that is due from July 1996 through December 1997 and future additional rent
as it may come due pursuant to the Landlord's calculation. The Landlord further
claims that additional rent of $7,624 is owed related to hotel room sales
revenues from non-taxed entities.
The Company believes that the Landlord is only entitled to receive 5% of
the gross gaming revenues received by LHC. The Landlord has been paid 5% of the
gross gaming revenues received by LHC and its predecessors without objection for
the past 18 years under the Lease. The Company believes that the Landlord 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 $16,500 for the
Landlord's attorney's fees and the Company disputes it is required to reimburse
the Landlord for such fees.
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On March 17, 1998 the court held that the Landlord is entitled to be paid
from LHC 5% of the gross gaming revenues received by all gaming operators at the
Hotel/Casino and ordered LHC to pay $36,523. The Company filed an appeal to this
order with the Nevada Supreme Court. The appeal is pending.
Autotote Systems, Inc.
On March 3, 1998, AWI and Computerized Bookmaking Systems ("CBS") filed a
Motion for Preliminary Injunction in the United States District Court for the
District of Nevada, against Autotote Corporation and Autotote Systems, Inc.
(collectively "Autotote") seeking to enjoin Autotote from reproducing or
installing any part of the CBS Race and Sports Book Software ("CBS Software") in
terminals used outside of Mexico; using or permitting the use of the CBS
software, including the source code therefore, and employing or hiring James
Connolly ("Connolly") for a period of five years from the date of the closing in
the Autotote/CBS stock transfer agreement. In addition AWI and CBS asked for
damages for the alleged breach by Autotote and ASI of certain provisions of a
Stock Transfer Agreement, a Technology Cross License Agreement, a
Distributorship Agreement, and the International Cooperation Agreement all of
which were executed by the parties on October 25, 1996 (collectively the
"Agreements") and for the infringement by Autotote and ASI of CBS' copyright
interest in, and the misappropriation and conversion of CBS' race and sports
book software. On March 3, 1998 Judge Howard McKibben entered a temporary
restraining order granting the requested relief until March 13, 1998. On March
13, 1998, a preliminary injunction hearing was held before Judge McKibben during
which the parties stipulated, and the court subsequently ordered the following:
there would be (1) no sale or transfer of the CBS Software by Autotote, (2) no
sale or transfer of a derivative work of such software by Autotote without ten
(10) days prior notice to AWI, in writing identifying the transferee, the date
of the transfer and the functionality of the derivative work, (3) no transfer by
Autotote of the CBS Software or source code, nor would Autotote copy or modify
the CBS Software or source code, except to the extent permitted by contract, and
(4) a diligent effort shall be made by Autotote to retrieve any CBS software
which has been transferred pursuant to the terms of the contract. Based upon the
foregoing, the judge denied the motion for preliminary injunction without
prejudice, and indicated that AWI could renew the motion in the event Autotote
attempted to copy or modify the CBS software.
On April 15, 1998, Autotote and ASI filed a counterclaim against AWI and
CBS with the United States District Court for the District of Nevada, asking
that the Agreements be rescinded on the grounds that there was a failure of
consideration, failure of meeting of the minds, mutual mistake, lack of an
intent to perform and impossibility of performance. In addition, Autotote and
ASI asked the Court to award damages for AWI and CBS' alleged breach of certain
of the Agreements, and for fraud, intentional interference with contractual
relations, negligent interference with contractual relations, intentional
interference with prospective economic advantage, false light and libel.
Autotote and ASI requested the Court to award compensatory damages in excess of
$75,000 plus interest, and punitive damages. This litigation is now in the
discovery phase. The parties have reached a tentative settlement agreement.
Settlement documents have been drafted, but have not yet been executed. This
litigation has been suspended pending the potential settlement of this matter.
Imagineering Systems, Inc.
In September, 1997, the Company and the individual shareholders of
Imagineering Systems, Inc. ("ISI") entered into a purchase agreement pursuant to
which the Company would acquire all of the shares of ISI. While the Company was
conducting its due diligence investigation on the proposed transaction, the
Company loaned ISI $76,583 to fund cash shortfalls of ISI. The acquisition of
ISI was not completed and ISI failed to repay the loans made by the Company. The
Company did not complete the acquisition because of material misrepresentations
and omissions of facts made by the shareholders. On October 21, 1998, ISI filed
a civil complaint against the Company in the Second Judicial District in Washoe
County, Nevada claiming, among other things, breach of contract, breach of
prospective economic advantage, and breach of fiduciary duty. On November 9,
1998, the Company brought an action in Clark County Court against ISI to recover
such loans. The Second Judicial District granted the demand of the Company for
venue to be transferred to Clark County and the parties agreed that the Washoe
matter would be dismissed and those causes asserted as a Counterclaim to the
Company's complaint. ISI has recently served its Answer and Counterclaim and
discovery will commence shortly.
Other
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. The Company maintains insurance coverage's including
property, workers' compensation and general liability insurance which is
considered adequate for the size of the Company and the nature of its business.
Management does not believe the outcome of above described proceedings will have
a material adverse effect on the Company's financial position or results of
operations.
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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 inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
Quarter Ended High Low
- ----------------- ------ -----
April 30, 1998 7 1/4 4 7/8
July 31, 1998 7 1/4 4 1/2
October 31, 1998 5 7/16 3 3/4
January 31, 1999 10 1/2 4 1/4
Quarter Ended High Low
- ----------------- ------ -----
April 30, 1997 11 3/4 7 1/2
July 31, 1997 12 5/8 7 3/4
October 31, 1997 11 7 3/4
January 31, 1998 9 3/8 5
The approximate number of record holders of shares of the common stock of
the Company outstanding as of April 22, 1999 was 52. No cash dividends have been
declared or paid on the Company's common stock.
On July 28, 1998, the Company acquired certain assets from Advanced
Computer Services, Inc. ("ACS") including software and customer lists pursuant
to an Asset Purchase Agreement between the Company and ACS. The Company paid
$500,000 in cash to ACS and agreed to pay the remaining purchase price of
$250,000 in the Company's common stock upon satisfaction of certain conditions.
On December 30, 1998, the Company issued 44,780 shares of the Company's common
stock to the principal of ACS at a price of $5.58 per share in satisfaction of
the $250,000 obligation. Such sale of common stock was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, because the common
stock was sold to a single person whom the Company believed was a sophisticated
investor and who was purchasing for investment without a view to further
distribution.
On December 9, 1998, the Company sold an aggregate of 18,924 shares of its
Series A Preferred Stock at $100 per share to Victor Salerno, the President,
Chief Executive Officer and a director of the Company, and Judith Salerno in
full payment of $1,892,400 of the Company's outstanding shareholder notes. See
"Certain Transactions." Such sale of preferred stock was exempt from
registration under Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended, because the preferred stock was sold to two accredited
investors who purchased for investment in a transaction which otherwise
satisfied the requirements of Rule 506.
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Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Fiscal Year ended January 31, 1999 compared to the Fiscal Year ended January 31,
1998.
Revenues for the Fiscal Year ended January 31, 1999, were $9,892,000, an
increase of $591,000 or 6.4% from revenues of $9,301,000 for the Fiscal Year
ended January 31,1998. The increase was principally attributed to additional
Wagering revenues of $323,000, additional Systems revenues of $196,000 and
additional Casino revenues of $72,000. Operating income before depreciation and
amortization was $173,000 for the Fiscal Year ended January 31, 1999. Operating
income before depreciation and amortization increased by $859,000 or 125.1% for
the Fiscal Year ended January 31, 1999 compared to a loss of $687,000 for the
Fiscal Year ended January 31, 1998. This improvement was primarily due to
increased Sports book revenues of $323,000 and lower Sports book costs of
$893,000 including a reduction in marketing expenses of $603,000. In addition
Operating income before depreciation and amortization was impacted favorably by
the operating results of the Casino of $143,000 and Systems operations of
$21,000. Offsetting the improvement in Operating income before depreciation and
amortization between fiscal years was combined start up costs of $318,000
related to Keno and Mega$ports Australia and increased corporate costs of
$81,000.
Wagering Operations
Revenues from Sports book wagering were $6,090,000 for the Fiscal Year
ended January 31, 1999, an increase of $323,000 or 5.6% from revenues of
$5,767,000 for the Fiscal Year ended January 31, 1998. The increase was due to a
15.8% increase in Handle (the total amount wagered at the Company's sports and
race books) and relatively no change in net win percentage (revenues divided by
handle) between years. Handle of $108,412,000 for the Fiscal Year ended January
31, 1999 increased by $14,791,000 from Handle of $93,621,000 for the Fiscal Year
ended January 31, 1998. The increase in Handle was due primarily to a net
increase of five sports book locations. An increase or decrease in handle is not
necessarily indicative of an increase or decrease in revenues or profits.
Pari-mutuel wagering revenues increased by $133,000 from the prior fiscal year
as wagering volume increased. Operating costs decreased by $817,000 due
primarily to a reduction in marketing costs of $575,000 and legal costs and
repair and maintenance expenses of $183,000. Mega$ports (ACT) incurred $101,000
in start up costs.
Casino Operations
Revenues from Casino operations were $644,000 for the Fiscal Year ended
January 31, 1999, an increase of $72,000 or 12.6% from revenues of $572,000 for
the Fiscal Year ended January 31, 1998. The increase was principally attributed
to increased slot play of local customers. Operating costs decreased by $71,000
or 12.4% for the Fiscal Year ended January 31, 1999 compared to the Fiscal Year
ended January 31, 1998. The decrease is due to lower legal and labor costs.
Systems Operations
Revenues from Systems operations were $3,158,000 for the Fiscal Year ended
January 31, 1999, an increase of $196,000 or 6.6% from revenues of $2,962,000
for the Fiscal Year ended January 31, 1998. The increase was principally
attributed to increased sales of Sports and Hotel Systems. Sports Systems and
Hotel Systems, which began operations in July 1998 and are partly owned,
generated revenues of $227,000 and incurred operating costs of $147,000 during
the Fiscal Year ended January 31, 1999. Revenues from CBS decreased by $32,000
between fiscal years due primarily to lower maintenance contract revenues. CBS
operating costs increased by $112,000 or 4.7% compared to the prior fiscal year
due to increases in labor related costs, legal costs and spare parts costs.
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<PAGE>
Keno Operations
Keno was formed in June 1998 and the Company estimates it will begin
operations in June 1999. During the Fiscal Year ended January 31, 1999, Keno
incurred costs of $217,000 including labor and fringes, marketing, professional
services, travel and legal expenses.
Direct Costs
Direct costs of $6,318,000 for the Fiscal Year ended January 31, 1999
decreased by $492,000 or 7.2% from direct costs of $6,810,000 for the Fiscal
Year ended January 31, 1998 due principally to reduced marketing costs.
Research and Development Costs
Research and development costs of $575,000 for the Fiscal Year ended
January 31, 1999 decreased by $19,000 or 3.2% from research and development
costs of $594,000 for the Fiscal Year ended January 31, 1998 due principally to
reduced outside development costs associated with a new wagering terminal.
Selling, General and Administrative Costs
Selling, general and administrative costs of $2,827,000 for the Fiscal Year
ended January 31, 1999 increased by $245,000 or 9.5% from selling, general and
administrative costs of $2,582,000 for the Fiscal Year ended January 31, 1998.
The increase is due principally to higher labor related costs, professional
services and costs associated with the terminated acquisition of Imagineering
Systems, Inc.
Restructuring Expenses
Restructuring expenses were $489,000 for the Fiscal Year ended 1998.
Restructing expenses in fiscal 1998 included the write-off of the Mega$ports(R)
joint venture investment balance of $461,000 and severance payments related to
the reduction of personnel of $25,000.
Impairment Loss for Long-Lived Assets
The impairment loss for long-lived assets was $3,354,000 for the Fiscal
Year ended 1998. The charge was principally attributed to the impairment loss
for long-lived assets related to the hotel, food and beverage operations which
are being held for sale.
Depreciation and Amortization
Depreciation and amortization was $766,000 for the Fiscal Year ended 1999,
an increase of $108,000 or 16.4% from depreciation and amortization of $658,000
for the Fiscal Year ended 1998. Amortization expense increased by $40,000 due to
the acquisition of intangible assets of ACS. Depreciation expense increased by
$68,000 due primarily to new capital equipment purchases by Wagering operations
to support new sports book locations.
Interest and Other Income
Interest and Other Income of $126,000 for Fiscal Year ended 1999, decreased
by $295,000 or 70.1% from interest and other income of $421,000 in the Fiscal
Year ended 1998. The reduction is principally due to a decrease in short-term
investment income.
Interest Expense
Interest Expense of $322,000 for Fiscal Year ended 1999 decreased by
$129,000 or 28.7% from interest expense of $451,000 in the Fiscal Year ended
1998. The decrease is principally due to the interest paid in connection with
the Racusin litigation during the Fiscal Year ended January 31, 1998.
Equity in Loss from Joint Venture
Equity in loss from joint venture of $786,000 for Fiscal Year ended 1999,
decreased by $1,006,000 or 56.1% from $1,792,000 in the Fiscal Year ended 1998.
The decrease between fiscal years was principally due to the restructuring of
the Mega$ports joint venture to match current business activity resulting in
reductions in marketing and labor costs.
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<PAGE>
Net loss from Continuing Operations
The net loss from continuing operations of $1,571,000 for Fiscal Year ended
1999, decreased by $5,408,000 or 77.5% from $6,979,000 in the Fiscal Year ended
1998. The decrease between fiscal years was principally due to an increase in
revenues and decreases in the equity in loss from joint venture, impairment of
long-lived assets, restructuring, and direct costs.
Discontinued Operations
Hotel, Food and Beverage Operations
On April 22, 1998, the Company determined it would concentrate its business
efforts on its core competency, sports wagering, and began seeking a qualified
buyer for the hotel, food and beverage segment of American wagering, Inc. In
conjunction with the sale of the Hotel, the Company intends to leaseback and
continue to operate the casino for up to two years. In the Company's
accompanying consolidated financial statements for and as of the fiscal years
ended January 31, 1999 and 1998, the results of the hotel, food and beverage
operations have been accounted for as discontinued operations. Revenues from
hotel, food and beverage operations of $3,304,000 for the Fiscal Year ended 1999
decreased by $4,000 as compared to revenues of $3,308,000 for the Fiscal Year
ended 1998. Operating costs associated with hotel, food and beverage operations
were $3,305,000 for the Fiscal Year ended 1999, a decrease of $364,000 or 10.0%
as compared to costs of $3,669,000 for the Fiscal Year ended 1998. The decrease
in operating costs is principally attributed to reduced marketing and labor
related costs.
Liquidity and Capital Resources
As of January 31, 1999, there was a deficit in working capital of $326,000.
Cash used in operating activities was $201,000 for the Fiscal Year ended 1999
compared to cash used in operating activities of $439,000 for the Fiscal Year
ended 1998. Net cash provided by investing activities was $2,682,000 for the
Fiscal Year ended 1999 compared to cash provided by investing activities of
$197,000 for the Fiscal Year ended 1998. The increase is principally attributed
to the liquidation of short-term investments. Net cash used in financing
activities amounted to $1,497,000 for the Fiscal Year ended January 31, 1999
compared to net cash used in financing activities of $941,000 for the Fiscal
Year ended January 31, 1998. This increase is principally due to the repayment
of long-term debt. The Company paid $541,000 in shareholder notes and $480,000
for the balance of a note due to Pioneer Citizens Bank of Nevada which was
borrowed in March 1995 and loaned to LHC to acquire the initial 50% of the
Hotel/Casino. The Company also purchased 61,100 shares of its common stock for
an aggregate amount of $327,000 to be held in treasury.
Prior to the Reorganization, Leroy's was an S Corporation under the
Internal Revenue Code. 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,
$2,433,124 was loaned back to Leroy's by the original stockholders and $558,000
was contributed as capital to Leroy's by such stockholders. Of the $2,433,124
outstanding on January 31, 1998, $540,700 in the aggregate was repayable to
Michael Merillat, Robert Ciunci, Robert Barengo, and Michael Roxborough pursuant
to restated stockholder notes maturing on May 1, 1998 and bearing interest at an
annual rate of prime plus 1/2%. Of the remaining balance, $946,212 was due and
payable to Victor Salerno on November 1, 1998 and $946,212 to Judith Salerno on
May 1,1999 pursuant to restated stockholder notes bearing interest at an annual
rate of prime plus 1/2%. On May 1, 1998, $540,700 in the aggregate was paid by
the Company to Michael Merillat, Robert Ciunci, Robert Barengo, and Michael
Roxborough pursuant to the restated stockholder notes. On December 9, 1998, the
Company redeemed its shareholder notes of $1,892,424 in the aggregate for 18,924
shares of Series A Preferred Stock at $100 per share. The holders of the Series
A Preferred Stock are entitled to receive, upon declaration by the Board of
Directors, cumulative cash dividends at the annual rate per share of 10%. Such
dividends are payable in equal quarterly installments on each March 31, June 30,
September 30 and December 31, commencing with December 31, 1998. The Series A
Preferred Stock is not convertible but is redeemable, in whole or (on a pro rata
basis) in part, at any time at the option of the Company, by resolution of the
Board of Directors. The holders of Series A Preferred Stock are not entitled to
vote (on a cumulative basis or otherwise) as a class or with the Common Stock
upon any matters submitted to shareholders for a vote, except as otherwise
mandated under Nevada law.
In March 1995 Leroy's borrowed approximately $1,200,000 from Pioneer
Citizen's Bank of Nevada, which was loaned to LHC to acquire the initial 50% in
the Hotel/Casino. The loan was repaid on March 31, 1998.
LHC, reported as part of the discontinued operations, is a debtor under a
loan (outstanding principal of $2,364,000 as of January 31, 1999) 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 annual interest
rate on the loan is 9.5%. Leroy's has guaranteed payment of all indebtedness
under the loan.
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<PAGE>
CBS is a debtor under a loan (outstanding principal of $1,937,000 as of
January 31, 1999) 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 interest at an annual rate of 8% and
is due September 2015. The Company has guaranteed CBS' obligations under the
loan.
On March 17, 1998, the Company's Board of Directors approved a program to
repurchase up to 250,000 shares of the Company's common stock from time to time
in the open market. As at January 31, 1999, 61,100 shares had been repurchased
pursuant to this program. The timing and amount of future share repurchases, if
any, will depend on various factors, including market conditions, available
alternative investments and the Company's financial position.
Management believes that the Company will be able to satisfy its
operating cash requirements for at least the next twelve months from existing
cash balances and anticipated cash flows.
The Company has expanded its sports wagering activities to Australia and
is exploring other jurisdictions outside of the United States to expand its
sports wagering and keno business lines. The level of customer acceptance for
the Company's sports wagering and keno products in these new jurisdictions is
undetermined. Establishing these operations may require initial investments of
several hundred thousand dollars. If the required investments cannot be funded
through current operations, the Company would have to obtain additional debt or
equity funding. There can be no assurance that the Company would be able to
complete such debt or equity funding or do so on terms satisfactory to the
Company.
National Gambling Impact Study Commission
Congress has created the National Gambling Impact Study Commission
comprised of nine individuals appointed by the President. The general duty of
the Commission is to conduct a comprehensive legal and factual study of the
gambling industry in the United States, to review 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. It is not possible to predict the future impact of the Commission on
the Company and its operations as the Commission could propose legislation and
actions that may materially adversely affect the Company's business.
Recently Issued Accounting Standards
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." ("SFAS 131".)
Year 2000
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. This is generally referred to as the Year 2000 issue. If this
situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
The Company utilizes computer systems in virtually all aspects of its
business. In particular, Year 2000 problems in wagering systems at the
properties in which the Company or its customers utilize computer systems could
disrupt operations at the affected properties and may have a material adverse
impact on the Company's operating results. The Company is also exposed to the
risk that one or more of its suppliers could experience Year 2000 problems that
impact the ability of such suppliers to provide goods and services. Though this
is not considered as significant a risk with respect to the suppliers of goods,
due to the availability of alternative suppliers, the disruption of certain
services, such as utilities or telephone communications, could, depending on the
extent of the disruption, have a material adverse impact on the Company's
operations. Computers on occasion fail, irrespective of the Year 2000 issue. For
this reason, where appropriate, the Company maintains paper and magnetic
back-ups daily and the Company's employees are trained in the restoration and
use of these back-ups.
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<PAGE>
The Company has established a compliance program to assess the impact and
formulate corrective actions regarding the Year 2000 issue. Where important to
the Company's business, inquiries are being made of the third parties with whom
the Company does significant business, such as vendors and suppliers, as to
their Year 2000 readiness, and if a third party Year 2000 problem is detected,
alternatives are being developed. The Company believes that a substantial
majority of its systems are currently Year 2000 compliant. The Company has
completed the process of assessing both the internal readiness of its computer
systems and the compliance of its currently offered computer products and
software to customers for handling the year 2000 problem. The Company has
started installations of customer upgrades to address the compliance of its
computer products and software. It is the Company's goal to have all currently
offered systems Year 2000 compliant by the end of the third quarter. All
existing installations of currently offered systems will be upgraded, if
necessary, to meet Year 2000 compliance as part of the existing maintenance
contract requirements. The Company does not intend to assess the readiness of
non-current products that are not currently offered to customers. The Company
has contacted its customers that are operating non-current systems and
communicated to them that the systems they are using are not Year 2000 compliant
and that the Company does not intend to upgrade these systems. The Company has
offered these customers solutions which include the purchase of a new system
which is Year 2000 compliant. The Company has not yet developed a comprehensive
contingency plan, although as previously mentioned all critical systems are
currently backed up daily and can be restored if necessary. The Company will
continue to assess the need for a comprehensive contingency plan as
implementation of its corrective action plan continues.
The Company expects the entire process will cost no more than $100,000. The
Company does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition. However,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
Forward-Looking Statements
Certain information included in this report and other materials filed or to
be filed by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or written statements made or to be made
by the Company) contains statements that are forward-looking within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements include information
relating to current expansion projects, plans for future expansion projects and
other business development activities as well as other capital spending,
financing sources, Year 2000 compliance and the effects of regulation (including
gaming and tax regulation) and competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, those
relating to the Company taking financial risks on the outcome of sports events
as a principal betting against its patrons, domestic or global economic
conditions, changes in federal or state tax laws or the administration of such
laws, changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions) and applications for licenses and approvals
under applicable laws and regulations (including gaming laws and regulations).
Item 7. Financial Statements
Report of Independent Public Accountants. 28
Consolidated Balance Sheets as of January 31, 1999 and 1998. 29
Consolidated Statements of Operations for the years ended
January 31, 1999, and 1998. 30
Consolidated Statements of Stockholders' Equity for the years
ended January 31, 1999, and 1998. 31
Consolidated Statements of Cash Flows for the years ended
January 31, 1999, and 1998. 32
Notes to Consolidated Financial Statements. 34-50
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
-22-
<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........... 55 President, Chief Executive Officer and
Director
Robert D. Ciunci............ 52 Chief Operating Officer, Chief Financial
Officer, Executive Vice President and
Director
Michael Merillat............ 48 Vice President, Secretary and Director
Robert R. Barengo........... 57 Director
Philip P. Hannifin.......... 64 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 former
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 racetracks 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, and a Director. Mr.
Merillat is the former 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 Corporation and the Riviera Hotel and Casino since 1992.
Since 1993, Mr. Barengo has been 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. Since 1993, Mr. Barengo
has been Chairman of the Nevada Dairy Commission. Mr. Barengo is a member of the
Audit, Compensation, Stock Option and Compliance Committee of the Company's
Board of Directors.
Philip P. Hannifin has been a Director of the Company since June 24, 1998.
Mr. Hannifin was a director of the Riviera Holdings Corporation and the Riviera
Operating Company from February 1993 until June 1998. Mr. Hannifin was a
Director from 1986 to 1995 and since 1991 has been an Executive Vice-President
of Fitzgerald's Reno, Inc. (a casino/hotel operator). From 1987 to 1990, Mr.
Hannifin was a Director and Executive Vice-President of MGM Grand, Inc. (a
casino/hotel operator). From January 1971 to September 1977, Mr. Hannifin was
chairman of the Nevada Gaming Control Board. Mr. Hannifin is a member of the
Audit, Compensation and Stock Option Committees of the Company's Board of
Directors.
-23-
<PAGE>
Item 10. Executive Compensation
The following table sets forth certain information covering the
compensation paid or accrued by the Company during the fiscal years indicated to
its Chief Executive Officer and to its most highly compensated executive officer
whose annual salary and bonus exceeded $100,000 during the fiscal year ended
January 31, 1999 ("named executive officer"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long term
------------------- Compensation
Awards
Name and Fiscal Year Ended Number of Securities
Principal Position January 31, Salary Bonus ($) Underlying Options(1)
- ------------------ ---------- ------ --------- ---------------------
<S> <C> <C> <C> <C>
Victor J. Salerno 1999 $200,000 0 0
President and Chief 1998 $200,000 9,391 0
Executive Officer 1997 $208,000 39,604 0
Robert D. Ciunci 1999 $134,154 0 0
Chief Operating Officer, 1998 $110,000 6,261 0
Chief Financial Officer & 1997 $110,000 31,262 50,000
Executive Vice President
</TABLE>
1. Represents options granted under the Company's 1995 Stock Option Plan.
Mr. Salerno and Mr. Ciunci were not granted options during the fiscal years
ended January 31, 1999 and January 31, 1998.
The following table sets forth the number of exercisable and unexercisable
options as of January 31, 1999, and the value of such options for the Chief
Executive Officer and the named executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- - ------------------------------------------------------------------------------------------------------------
Number of Securities Value of
Underlying Unexercised
Unexercised Options In-The-Money
Shares At Fiscal Year end (#) Options at FY End ($)
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/$157,600
Ciunci
</TABLE>
(1) Options become exercisable on August 22, 1999 and expire on August 22,
2004.
-24-
<PAGE>
Director's Compensation
Directors who are not employees or consultants of the Company receive a fee
of $2,000 plus travel expenses for each Board meeting they attend.
During the fiscal year ended January 31, 1999, 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 $6.56 per share
were granted to Messrs. Barengo and Hannifin. These options are fully
exercisable on January 31, 2000 and expire on January 31, 2009. On June 24,
1998, as compensation for services as a director to be performed for the Company
for the year ended January 31, 1999, the Company granted Mr. Hannifin options
to purchase 2000 shares of the Company's Common Stock, at an exercise price of
$5.89 per share, the fair market value of the Common Stock on the grant date.
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
automatically renews 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. On June 11, 1998, Mr. Ciunci's employment agreement was amended to
increase his base salary.
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 is 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 $150,000 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 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.
-25-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, at April 22, 1999, 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 22, 1999, such as upon the exercise of options or
warrants.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage
- ---------------- ---------------- ----------
<S> <C> <C>
Victor J. Salerno 1,949,600 24.92%
675 Grier Drive
Las Vegas, Nevada 89119
Robert D. Ciunci 109,600(2) 1.40%
675 Grier Drive
Las Vegas, Nevada 89119
Michael Merillat 210,000(2) 2.68%
675 Grier Drive
Las Vegas, Nevada 89119
Robert Barengo 525,800(1) 6.72%
675 Grier Drive
Las Vegas, Nevada 89119
Philip P. Hannifin --(3) --
675 Grier Drive
Las Vegas, Nevada 89119
Judy Salerno 1,942,500 24.83%
675 Grier Drive
Las Vegas, Nevada 89119
All directors and executive officers 2,795,000 35.72%
as a group (5 persons)
</TABLE>
(1) Includes 525,000 shares held jointly with Mr. Barengo's wife. Includes 400
shares which may only be issued upon the exercise of stock options after
January 31, 1998 and 400 shares which may only be issued upon the exercise
of stock options after January 31, 1999 but does not include 400 shares
which may only be issued upon the exercise of stock options after January
31, 2000.
(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 2,000 shares which may only be issued upon exercise of
stock options after June 24, 1999 or 300 shares which may only be issued
upon the exercise of stock options after January 31, 2000.
-26-
<PAGE>
Item 12. Certain Transactions
Prior to the Reorganization, Leroy's was an S Corporation under the
Internal Revenue Code. 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,
$2,433,124 was loaned back to Leroy's by the original stockholders and $558,000
was contributed as capital to Leroy's by such stockholders. Of the $2,433,124
outstanding on January 31, 1998, $540,700 in the aggregate was repayable to
Michael Merillat, Robert Ciunci, Robert Barengo, and Michael Roxborough pursuant
to restated stockholder notes maturing on May 1, 1998 and bearing interest at an
annual rate of prime plus 1/2%. Of the remaining balance, $946,212 was due and
payable to Victor Salerno on November 1, 1998 and $946,212 to Judith Salerno on
May 1,1999 pursuant to restated stockholder notes bearing interest at an annual
rate of prime plus 1/2%. On May 1, 1998, $540,700 in the aggregate was paid by
the Company to Michael Merillat, Robert Ciunci, Robert Barengo, and Michael
Roxborough pursuant to the restated stockholder notes. On December 9, 1998, the
Company redeemed its shareholder notes of $1,892,424 in the aggregate for 18,924
shares of Series A Preferred Stock at $100 per share. The holders of the Series
A Preferred Stock are entitled to receive, upon declaration by the Board of
Directors, cumulative cash dividends at the annual rate per share of 10%. Such
dividends are payable in equal quarterly installments on each March 31, June 30,
September 30 and December 31, commencing with December 31, 1998. The Series A
Preferred Stock is not convertible but is redeemable, in whole or (on a pro rata
basis) in part, at any time at the option of the Company, by resolution of the
Board of Directors. The holders of Series A Preferred Stock are not entitled to
vote (on a cumulative basis or otherwise) as a class or with the Common Stock
upon any matters submitted to shareholders for a vote, except as otherwise
mandated under Nevada law.
In conjunction with the Reorganization, Leroy's, LHC 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 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.
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 $211,259 and $158,654 for the years
ended January 31, 1999 and 1998, respectively.
CBS leases 2,000 square feet of office space to MEGA$PORTS, Inc. in the
building owned by CBS. Lease payments made were $59,100 and $59,100 for the
years ended January 31, 1999 and 1998, respectively.
CBS leases 3,735 square feet of office space to a company of which Michael
Roxborough, a former board member was an employee, in the building owned by CBS.
Mr. Roxborough was a member of the Board of Directors of the Company until March
11, 1998 and was a 5% owner of the Company until June 1998. Lease payments made
to CBS were $116,972 and $97,640 for the years ended January 31, 1999 and 1998,
respectively.
Mega$ports paid fees for odds-making services to a company where a Michael
Roxborough, a former board member was an employee, in the building owned by CBS.
Odds-making fees paid were $74,000 and $74,750 for the fiscal years ended
January 31, 1999 and 1998, respectively.
Leroy's paid fees for odds-making services to a company where a Michael
Roxborough, a former board member was an employee, in the building owned by CBS.
Odds-making fees paid were $19,200 and $19,829 for the fiscal years ended
January 31, 1999 and 1998, respectively.
-27-
<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, 1999
and 1998 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 31,1999 and 1998 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 29, 1999
-28-
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,076,563 $ 2,092,894
Short-term investments 483,671 5,409,723
Accounts receivable, net of allowance for doubtful accounts
of $78,295 and $55,678 172,046 333,660
Inventories, net of obsolescence reserve of $56,825 and $188,225 724,386 557,439
Prepaid expenses and other current assets 544,212 451,347
----------- ----------
TOTAL CURRENT ASSETS 5,000,878 8,845,063
PROPERTY AND EQUIPMENT, net 4,063,042 3,885,390
INTANGIBLE ASSETS, net 1,238,890 628,184
DEPOSITS AND OTHER ASSETS 388,765 280,157
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 1,074,295 1,153,146
----------- ----------
TOTAL ASSETS $ 11,765,870 $ 14,791,940
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 57,913 $ 549,254
Accounts payable 678,067 1,476,892
Accrued expenses 718,932 860,710
Unpaid winning tickets 2,548,181 1,441,041
Shareholder notes payable --- 1,486,912
Other current liabilities 707,612 583,090
Net current liabilities of discontinued operations 616,644 1,158,649
---------- ----------
TOTAL CURRENT LIABILITIERS 5,327,349 7,556,548
---------- ----------
LONG-TERM DEBT:
Shareholder notes payable --- 946,212
Long-term debt, less current portion 1,879,237 1,942,239
---------- ----------
TOTAL LONG-TERM DEBT 1,879,237 2,888,451
---------- ----------
MINORITY INTEREST (3,380) ---
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock - 10% cumulative;$.01 par value; authorized
25,000,000 shares; issued and outstanding: 18,924 and 0 shares 1,892,400 ---
Common stock -- $.01 par value; authorized
25,000,000 shares; issued and outstanding: 7,885,613 and 7,840,833 78,857 78,408
Additional paid-in capital 14,296,848 14,047,296
Accumulated deficit (11,377,948) (9,778,763)
Less: treasury stock; at cost: 61,100 and 0 shares (327,493) ---
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 4,562,664 4,346,941
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,765,870 $ 14,791,940
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-29-
<PAGE>
AMERICAN WAGERING, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
REVENUES $ 9,891,818 $ 9,300,503
OPERATING COSTS AND EXPENSES:
Direct costs 6,317,843 6,810,336
Research and development 574,524 594,314
Selling, general and administrative 2,826,672 2,582,411
Restructuring Expenses --- 489,232
Impairment of long-lived assets --- 3,353,614
Depreciation and amortization 765,889 658,216
------------- -------------
TOTAL OPERATING COSTS AND EXPENSES 10,484,928 14,488,123
------------- -------------
OPERATING LOSS (593,110) (5,187,620)
OTHER INCOME (EXPENSE):
Interest income 125,281 408,333
Other income 700 12,301
Minority Interest 3,380 ---
Equity in loss from joint venture (785,516) (1,791,828)
Interest expense (321,533) (450,841)
------------ -------------
TOTAL OTHER EXPENSE (977,688) (1,822,035)
------------ -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (1,570,798) (7,009,655)
PROVISION (BENEFIT) FOR INCOME TAXES --- (30,773)
------------ -------------
LOSS FROM CONTINUING OPERATIONS (1,570,798) (6,978,882)
DISCONTINUED OPERATIONS:
Loss from discontinued operations --- (1,004,996)
Loss on disposal of discontinued operations --- (861,606)
------------ -------------
--- (1,866,602)
------------ -------------
NET LOSS (1,570,798) (8,845,484)
PREFERRED STOCK DIVIDEND REQUIREMENTS (28,387) ---
------------ -------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(1,599,185) $(8,845,484)
============= =============
.
BASIC AND DILUTED LOSS PER SHARE
Loss from continuing operations $ (0.21) $ (0.89)
============= =============
Loss from discontinued operations $ --- $ (0.24)
============= =============
Net loss $ (0.21) $ (1.13)
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-30-
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
----------------- -------------- ----------------
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, 1997 -- $ -- 7,837,500 $ 78,375 -- $ -- $ 14,686,208 $ (933,279) $13,831,304
Stock Options
Exercised -- -- 3,333 33 -- -- 27,463 -- 27,496
Cost of Initial
Public Offering -- -- -- -- -- -- (666,375) -- (666,375)
Net Loss -- -- -- -- -- -- -- (8,845,484) (8,845,484)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January
31, 1998 -- $ -- 7,840,833 $ 78,408 -- $ -- $ 14,047,296 $ (9,778,763) $4,346,941
Issuance of
Preferred stock 18,924 1,892,400 -- -- -- -- -- -- 1,892,400
Purchase of
Treasury stock -- -- -- -- (61,100) (327,493) -- -- (327,493)
Stock Issued
in Connection with
Acquisition -- -- 44,780 449 -- -- 249,552 -- 250,000
Net Loss -- -- -- -- -- -- -- (1,599,185) (1,599,185)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January
31, 1999 18,924 $1,892,400 7,885,613 $ 78,857 (61,100) $(327,493) $ 14,296,848 $ (11,377,948) $4,562,664
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-31-
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,599,185) $(8,845,484)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 955,734 972,662
Equity in loss from investment in
joint venture 785,516 1,791,828
Impairment of long-lived assets --- 3,353,614
Discontinued operations --- 861,606
Minority interest (3,380) ---
Valuation/Restructuring reserve --- 461,043
Interest earned from short-term investments --- (327,547)
Provision for doubtful accounts 39,838 (60,461)
Decrease (increase) in assets:
Accounts receivable 111,756 6,063
Inventories (162,550) (272,841)
Prepaid expenses and other current assets 124,235 (136,911)
Increase (decrease) in liabilities:
Accounts payable (1,068,442) 877,523
Accrued expenses (628,965) 307,720
Unpaid winning tickets 1,107,140 513,174
Other current liabilities 137,062 58,989
----------- -----------
Total adjustments 1,397,943 8,406,462
----------- -----------
Net cash used in operating activities (201,241) (439,022)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (777,849) (1,055,831)
Deposits and other assets (143,397) 325,021
Contributions to joint venture --- (2,630,860)
Proceeds from joint venture partner --- 1,401,387
Increase in investment in joint venture (785,517) ---
(Increase) decrease in short-term investments 4,926,053 2,071,830
Purchase assets of ACS (537,053) ---
Other --- 85,111
----------- -----------
Net cash provided by investing activities 2,682,237 196,658
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in long-term debt (1,169,834) (302,505)
Net proceeds from issuance of common stock --- 27,496
Initial public offering cost --- (666,375)
Purchase of treasury stock (327,493) ---
----------- -----------
Net cash used in financing activities (1,497,327) (941,384)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 983,669 (1,183,748)
CASH AND CASH EQUIVALENTS, beginning of period 2,092,894 3,276,642
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,076,563 $ 2,092,894
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 594,826 $ 768,321
=========== ===========
Cash paid (refunded) for income taxes $ (136,000) $ 136,000
=========== ===========
</TABLE>
(Continued)
The accompanying notes are an integral part of these
consolidated financial statements.
-32-
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998
(Continued)
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Fiscal Year ended January 31, 1999 Transactions--
Redemption of shareholder notes totaling $1,892,424 for 18,924 shares of Series
A Preferred Stock.
Issuance of $250,000 in Common Stock for ACS acquisition.
Fiscal Year ended January 31, 1998 Transactions--None
The accompanying notes are an integral part of these
consolidated financial statements.
-33-
<PAGE>
AMERICAN WAGERING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
1. Summary of Business and Significant Accounting Policies
Summary of Business
In August 1995, American Wagering Inc., a Nevada corporation, (the
"Company") was formed as the holding company for Leroy's Horse and
Sports Place ("Leroy's") and Leroy's Hotel Corporation ("LHC").
Immediately prior to the closing of the initial public offering by
American Wagering, Inc., the stockholders of Leroy's and LHC exchanged
their shares in those companies for shares of American Wagering, Inc.
These transactions are referred to as the "Reorganization."
Leroy's was incorporated under the laws of the State of Nevada on
November 14, 1977. The Company operates its main race and sports book
located on the premises of LHC in Las Vegas, Nevada. Leroy's, through a
central computer system located at its Las Vegas, Nevada headquarters,
operates a statewide network of sports and race wagering facilities in
46 casinos. The Company leases the square footage necessary to conduct
its operations at the non-Company owned gaming establishments.
The Company also owns and operates Mega$ports (ACT) Pty Ltd.
("Mega$ports (ACT)") located in Canberra, Australia. Mega$ports (ACT)
is the Company's international wagering hub licensed to accept fixed
odds and pari-mutuel interactive wagers on the Internet from patrons
around the world except the United States. In November 1998, the
Company was issued a 15 year Sports Betting license from the Bookmakers
Licensing Committee ("BLC") in the Australian Capital Territory
("ACT"). The Company began accepting wagers from non-Internet patrons
within Australia in January 1999. The Company received regulatory
approval for its Internet operations from the ACT and began accepting
wagers on the Internet in March 1999. The Company believes it is the
first Nevada licensed company to start an online gaming site.
The Company owns AWI Keno, Inc. ("AWIK") which designs, installs,
operates and maintains computerized keno systems and plans to offer
keno players the first state wide progressive keno game. On April 29,
1999 the Company received licensing approval from the Nevada Gaming
Commission to operate a statewide inter-casino linked system keno game.
The Company estimates it will begin operations at selected locations in
June 1999 although there can be no assurance in that regard.
LHC owns and operates a 150 room Howard Johnson's hotel (the "Hotel")
located in Las Vegas, Nevada, and, through its wholly owned subsidiary
B-P Food Corporation, an International House of Pancakes restaurant.
Leroy's operates its main race and sports book on the premises of the
Hotel. Additionally, Leroy's operates a 5,600 square foot casino
containing approximately 65 electronic gaming devices including slot
machines, video poker machines and multi-game video machines adjacent
to the Hotel and restaurant (collectively the "Hotel/Casino").
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The Company also owns and operates Computerized Bookmaking Systems,
Inc. ("CBS"). CBS designs, installs and maintains sports and race book
equipment, software and computer systems for the sports betting
industry. In 1994, CBS signed a joint venture agreement with IGT for
the purpose of developing and marketing a pari-mutuel sports system,
known as MEGA$PORTS(R). MEGA$PORTS(R) offers opportunities to wager on
the outcome of individual sports contests, events occurring within or
during the contests, and outcomes of groups of sports contests. In
December 1998, the Company entered into an agreement with IGT to
terminate the Mega$ports joint venture agreement. (See Note 4).
On July 28, 1998, the Company acquired certain assets from Advanced
Computer Services, Inc. ("ACS"). Two new subsidiaries, AWI Sports
Systems, Inc. and AWI Hotel Systems, Inc. were formed to hold the
assets acquired from ACS. (See Note 15).
On April 22, 1998, the Company determined it would concentrate its
business efforts on its core competency, sports wagering, and began
seeking a qualified buyer for the hotel, food and beverage segment of
American Wagering, Inc. In the accompanying consolidated financial
statements as of, and for the twelve months ended January 31, 1999 and
1998 the results of the hotel, food and beverage operations have been
accounted for as discontinued operations (See Note 2). In conjunction
with the sale of the Hotel, the Company intends to leaseback and
continue to operate the casino for up to two years.
Restricted Cash and Short Term Investments
The Company has approximately $65,000 in restricted cash related to its
Australian operations which is required by local regulatory
requirements.
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.
Inventories
Inventories are stated at the lower of cost (based on the first-in,
first-out method) or market.
Depreciation and Amortization
Property and equipment are depreciated by use of both the straight line
and accelerated methods. The Company recorded a charge for depreciation
expense of $573,699 and $506,420 and amortization expense of $192,189
and $151,796 for the fiscal years ended January 31, 1999 and 1998,
respectively.
Intangible Assets
Intangible assets include the excess of the cost over the fair market
value of net assets of acquired companies. Such costs are being
amortized over the periods expected to be benefited or approximately 25
years. Other intangible assets acquired including software and rights
for manufacturing and distribution are being amortized over 7 years.
Accumulated amortization was $371,407 and $195,050 at January 31, 1999
and 1998, respectively.
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 analyses necessarily involve significant management judgment to
evaluate the capacity of an acquired business to perform within
projections.
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Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long- Lived Assets and for Long-Lived Assets to be
Disposed Of." ("SFAS No. 121") SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles, including goodwill, to be
held and used by an entity, be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
asset(s) may not be recoverable. The continued negative cash flow from
the hotel, food and beverage operations resulted in an impairment loss
of $3,354,000 for fiscal year ended January 31, 1998 (See Note No. 6)
which is included in the Statement of Operations as Impairment of
long-lived assets.
Revenue Recognition
With respect to the Wagering segment, which includes sports book and
Internet operations, in accordance with industry practice, the Company
recognizes fixed odds 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. The Company recognizes pari-mutuel race and
sports wagering revenues as commissions earned as a percentage of the
total amount wagered. Wagering revenues are recognized based on the
results of a completed 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.
Research and Development
The Company expenses all costs associated with the research and
development of computerized software as incurred.
Advertising
The Company expenses all costs associated with advertising as incurred.
Earnings per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 -"Earnings Per Share" ("SFAS No. 128")
which became effective for periods ending after December 15, 1997 and
replaces historically reported earnings per share with "basic", or
undiluted, earnings per share and "diluted" earnings per share. Basic
earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, while diluted
earnings per share reflects the additional dilution for all potentially
dilutive securities, such as stock options.
In accordance with SFAS No. 128, if potential shares outstanding would
have an anti-dilutive effect on the diluted earnings per share
calculation, then the shares are not included in the diluted earnings
per share calculation. Options outstanding during the fiscal years
ending January 31, 1999 and 1998 under the Company's Employee stock
option plan and its Directors stock option plan were not included in
the computation of diluted earnings per share because they were
anti-dilutive with regard to the loss incurred by the Company in 1999
and 1998. Had the Company shown the effects of dilution, the options
would have added an additional 253,000 and 220,000 shares to the
weighted average shares outstanding for the years ended January 31,
1999 and 1998, respectively.
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The weighted-average number of common and common equivalent shares used
in the calculation of basic and diluted earnings per share consisted of
the following:
Year ended January 31,
----------------------
1999 1998
---- ----
Weighted-average common shares
outstanding (used in the computation
of basic earnings per share).......... 7,800,002 7,840,833
Potential dilution from the assumed
exercise of common stock options...... -- --
--------- ---------
Weighted-average common and common
stock equivalent shares (used in the
computation of diluted earnings per
share)................................ 7,800,002 7,840,833
========= =========
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 sports book
operator is betting as a principal against its patrons. Therefore, if
the "book" of wagers placed on an event is not balanced, the sports
book operator is significantly at risk for the outcome of a sporting
event. Although sports book 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 sports book. 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
inter-company 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.
Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation. These
reclassifications had no effect on the Company's net income (loss).
Income Taxes
The Company records income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
("SFAS No. 109") 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. The Company also derives a portion of its revenues
from its Internet operations in Australia which is susceptible to
regulatory or economic changes which may impact the Internet or the
gaming industry outside of the United States.
Approximately 37% and 36% of total handle (total amount wagered in race
and sports events) and 37% of Leroy's total revenues is related to
professional football for the years ending January 31,1999 and 1998
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.
The Company has expanded its sports wagering activities to Australia
and is exploring other jurisdictions outside of the United States to
expand its sports wagering and keno business lines. The level of
customer acceptance for the Company's sports wagering and keno products
in these new jurisdictions is undertermined. Establishing these
operations may require initial investments of several hundred thousand
dollars. If the required investments cannot be funded through current
operations, the Company would have to obtain additional debt or equity
funding. There can be no assurance that the Company would be able to
complete such debt or equity funding or do so on terms satisfactory to
the Company.
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2. Inventories
Inventories consisted of the following as of January 31,1999 and 1998:
1999 1998
------ ------
Raw materials and spare parts $ 61,391 $ 143,924
Work in process 220,365 158,610
Finished goods 499,455 443,130
-------- --------
781,211 745,664
Less: Obsolescence reserve (56,825) (188,225)
-------- --------
$ 724,386 $ 557,439
========= =========
3. Property and Equipment
Property and equipment are stated at cost and consist of the following
as of January 31, 1999 and 1998:
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Life
-------- -------- ------------
<S> <C> <C> <C>
Land $ 575,000 $ 575,000
Building/Improvements 2,139,919 2,138,569 39 years
Furniture/Fixtures 430,796 372,569 5-10 years
Equipment 2,638,430 1,957,846 5-20 years
Other 149,293 138,102 5-10 years
----------- -----------
5,933,438 5,182,086
Less: Accumulated depreciation (1,870,396) (1,296,696)
----------- -----------
$ 4,063,042 $ 3,885,390
=========== ===========
</TABLE>
4. Investment in Joint Venture
The Company, through its wholly owned subsidiary CBS, was involved in a
joint venture with IGT. CBS and IGT each own a fifty percent interest
in the joint venture company named Mega$ports, Inc., a Nevada
corporation ("Mega$ports"). In December 1998, the Company entered into
an agreement with IGT to terminate the Mega$ports joint venture
agreement. The termination agreement allows the Company to receive
IGT's 50% interest in the joint venture and the Mega$ports(R)
trademark. The Company has agreed to indemnify IGT for all presently
due or future obligations of Mega$ports. The transfer of IGT's shares
in the joint venture is subject to the approval of the Nevada Gaming
Commission. Mega$ports, an enterprise which began operations in July
1997, is engaged in the design, manufacture and distribution of a
pari-mutuel sport wagering system. The Company's original investment in
joint venture balance consisted of contributions of property and
equipment, programming services and cash contributions for operations.
Due to the equity in losses from the joint venture the investment
balance has been reduced to zero. The equity in loss in joint venture
was $785,516 and $1,791,828 for the fiscal years ended January 31, 1999
and 1998, respectively.
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5. Deposits and Other Assets
Deposits and other assets consisted of the following at January 31,
1999 and 1998:
1999 1998
---- ----
Loan fees $ 80,798 $ 85,705
Gaming license fees 146,732 72,552
Due from affiliate --- 46,355
Note receivable, long-term 114,981 ---
Deposits 37,682 39,179
Other 8,572 36,366
-------- --------
$388,765 $280,157
======== ========
Loan fees associated with the building mortgages have been capitalized
and are being amortized over the related term of the mortgages and are
net of accumulated amortization of $16,318 and $11,411 at January 31,
1999 and 1998, respectively. Gaming license fees relate to
investigation fees. These fees are being amortized over 5 years.
6. Discontinued Operations
On April 22, 1998, the Company determined it would concentrate its
business efforts on its core competency, sports wagering, and began
seeking a qualified buyer for the hotel, food and beverage segment of
American Wagering, Inc. In the Company's accompanying consolidated
financial statements for and as of the fiscal years ended January 31,
1999 and 1998, the results of the hotel, food and beverage operations
have been accounted for as discontinued operations. In conjunction with
the sale of the Hotel, the Company intends to leaseback and continue to
operate the casino for up to two years. The casino will serve as the
Company's principal gaming location.
The Company is a debtor under a loan, secured by a deed of trust,
related to the hotel facility. The loan has an outstanding principal
amount of $2,364,000 as of January 31, 1999, bears a variable annual
interest rate and matures on April 5, 2001. The current annual interest
rate on the loan is 9.5%.
The Company recorded a reserve during the fiscal year ended January 31,
1998 for the estimated loss on the disposal of this segment which
totaled $862,000 consisting of an estimated loss on the sale of the
business of $246,000 and a provision of $616,000 for anticipated
operating losses during the phase out period. The Company incurred
losses from this segment of $428,532 for the fiscal year ended January
31, 1999.
These operations had revenues of $3.3 million for the years ended
January 31, 1999 and 1998. Operating losses for these same periods were
$191,000 and $675,000, respectively. Identifiable assets of the hotel,
food and beverage operations were approximately $3.7 million as of
January 31, 1999 and 1998.
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The components of assets and liabilities of discontinued operations
included in the accompanying consolidated balance sheets are as
follows:
January, 31
1999 1998
---- ----
Current assets $ 274,119 $ 162,878
Accounts payable, accrued expenses and other (890,763) (1,321,527)
----------- -----------
Net current liabilities $ (616,644) $(1,158,649)
=========== ===========
Property, plant and equipment, net $ 3,383,376 $ 3,546,725
Non-current liabilities (2,309,081) (2,393,579)
----------- -----------
Net long term assets $ 1,074,295 $ 1,153,146
=========== ===========
The condensed statements of operations relating to the discontinued
operations are presented below:
For the years ended January 31,
1999 1998
---- ----
Revenues $ 3,303,859 $ 3,307,676
Costs and expenses 3,732,391 4,312,673
----------- -----------
Loss before income taxes (428,532) (1,004,997)
Provision (benefit) for income taxes -- --
----------- -----------
Net (loss) $ (428,532) $(1,004,997)
=========== ===========
Losses incurred in the fiscal year ended January 31, 1999 have been
charged against previously established reserves.
7. Accrued Expenses
Accrued expenses consisted of the following at January 31, 1999 and
1998:
1999 1998
-------- --------
Payroll and vacation $271,391 $359,839
Royalty 126,350 67,072
Restructuring charges --- 65,696
Legal and accounting 244,661 158,013
Other 76,530 210,090
-------- --------
$718,932 $860,710
======== ========
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8. Shareholder Notes Payable
On January 31, 1998, the outstanding aggregate principal balance of the
shareholder notes was $2,433,124. Of the $2,433,124 outstanding,
$540,700 in the aggregate was paid on May 1, 1998. Of the remaining
balance, $946,212 was due and payable on November 1, 1998 and $946,212
was due and payable on May 1,1999 pursuant to restated shareholder
notes bearing interest at an annual rate of prime plus 1/2%. On
December 9, 1998, the Company redeemed its shareholder notes of
$1,892,424 in the aggregate for 18,924 shares of Series A Preferred
Stock at $100 per share. The holders of the Series A Preferred Stock
are entitled to receive, upon declaration by the Board of Directors,
cumulative cash dividends at the annual rate per share of 10%. Such
dividends are payable in equal quarterly installments on each March 31,
June 30, September 30 and December 31, commencing with December 31,
1998. The Series A Preferred Stock is not convertible but is
redeemable, in whole or (on a pro rata basis) in part, at any time at
the option of the Company, by resolution of the Board of Directors. The
holders of Series A Preferred Stock are not entitled to vote (on a
cumulative basis or otherwise) as a class or with the Common Stock upon
any matters submitted to shareholders for a vote, except as otherwise
mandated under Nevada law.
9. Long-term Debt
Long term debt consist of the following at January 31, 1999 and 1998:
1999 1998
---- ----
Mortgage payable, monthly payments
of principal and interest of $17,565,
interest is at 8%, secured by land
and building, maturing April 2015. $ 1,937,150 $ 1,990,641
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. -0- 500,852
----------- -----------
1,937,150 2,491,493
Less current portion (57,913) (549,254)
----------- -----------
$ 1,879,237 $ 1,942,239
=========== ===========
As of January 31, 1999, annual maturities of total long-term debt are
as follows:
Year Ending
January 31,
-----------
2000 57,913
2001 62,706
2002 67,911
2003 73,548
2004 79,652
Thereafter 1,595,420
------------
$ 1,937,150
============
Interest expense recognized on the above mortgage was $157,298 and
$150,219 and on the above note was $6,747 and $58,313 for the fiscal
years ended January 31, 1999 and 1998, respectively.
10. Income Taxes
The provision (benefit) for federal income taxes consisted of the
following:
January 31, January 31,
1999 1998
----------- -----------
Current $ -- $(130,978)
Deferred -- 100,205
--------- --------
$ -- $ (30,773)
========= =========
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The tax effect of significant temporary differences representing
deferred tax assets and liabilities for the Company is as follows:
January 31, January 31,
1999 1998
----------- -----------
Deferred Tax Assets
Current:
Net operating loss carried forward $ 826,783 $ 689,905
Write down of investment 2,016,525 1,749,450
Restructuring charges 468,778 467,507
Bad debt reserve 73,990 45,900
Amortization 20,091 28,955
Other 50,882 61,628
---------- ----------
Total Current 3,457,049 3,026,464
Deferred Tax Liabilities - Long-term:
Depreciation (24,217) (17,619)
---------- ---------
$3,432,832 $3,008,845
Valuation allowance (3,432,832) (3,008,845)
---------- ---------
$ -- $ --
========== ==========
On January 31, 1999 and 1998, the Company recorded a valuation
allowance of $3,432,832 and $3,008,845, respectively. The provisions
for income taxes differs from that computed at the federal statutory
corporate tax rate as follows:
January 31, January 31,
1999 1998
---- ----
Federal Statutory rate 34% (34%)
Valuation allowance 34 33
------------- -------------
Effective tax rate --% (1%)
============= =============
At January 31, 1999 the Company had tax net operating loss carry
forwards of $2,431,715, of which $2,044,735 will expire in 2013 and
$386,980 will expire in 2014.
11. Commitments and Contingencies
Leases
The Company subleases a 5,969 square feet of the building where its
principal offices are located to a non-affiliated company. The lease has
a five year term and expires on February 28, 2002. Rental revenue
recognized under this lease was $116,972 and $97,640 for the fiscal
years ended January 31, 1999 and 1998, respectively.
As of January 31, 1999, Leroy's had sports book operating leases at
various non-Company owned locations. Total rental expense for these
leases was approximately $426,000 and $456,000 for the years ended
January 31, 1999 and 1998, respectively. These lease terms generally
vary from one to six years depending on the location, with one on a
month to month basis. After the initial lease term, the leases renew
automatically at the discretion of both parties. At certain of the
Leroy's race and sports book locations the Company is not required to
pay rent.
Under leases for three of the Leroy'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
$241,000 and $293,000 for the years ended January 31, 1999 and 1998,
respectively.
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At January 31, 1999, future minimum rental payments under non-cancelable
leases are as follows:
January 31,
-----------
2000 152,865
2001 65,919
2002 -0-
2003 -0-
2004 -0-
Thereafter -0-
--------
$218,784
========
The above disclosure of future minimum lease payments under
non-cancelable leases exclude payments of approximately $7,000 per month
owed under the ground lease associated with the discontinued operations.
(See Note 6).
Litigation
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 was the Company's
position that Racusin cannot evidence that there has been a defacto
merger between the Company and Leroy's.
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On August 1, 1997, the U.S. District Court of Nevada orally issued a
declaratory judgement with respect to the lawsuit. The District Court
held that pursuant to the terms of the agreements, Racusin was entitled
to receive from the Company a commission, as adjusted, of $648,375, plus
prejudgment interest of $87,535 through September 5, 1997. The District
Court's holding indicated that Racusin was entitled to the commission
because he served as a finder to the Company for the underwriter of the
Company's initial public offering in May, 1996, which enabled the
Company to make a public sale of Leroy's assets. On September 5, 1997,
the Company tendered the entire judgement of $735,910 which included
interest to Racusin. As the payment to Racusin represented a cost of the
Company's initial public offering, the entire amount paid to Racusin
reduced its paid-in capital. The declaratory judgement of the District
Court is not final. On September 19, 1997, Racusin filed a Notice of
Appeal with the Court of Appeals. On March 16, 1999, the Court of
Appeals vacated the District Court's decision and ordered that a jury
trial be conducted.
Ground Lease
On March 31, 1997, James A. Rissler and Patricia R. Rissler ("Landlord")
pursuant to the ground lease between LHC 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. The Landlord requested 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 LHC to the Landlord under the Lease. The
specific language of the Lease provides that LHC (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 LHC) to LHC, or (ii) the gross gaming revenue received in or on the
premises, whichever is applicable, or if both are applicable, whichever
is greater.
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. Pursuant to the original complaint, the Landlord requested
approximately $12,500 of additional rent that is due from July 1996
through December 1997 and future additional rent as it may come due
pursuant to the Landlord's calculation. The Landlord further claims that
additional rent of $7,624 is owed related to hotel room sales revenues
from non-taxed entities.
The Company believes that the Landlord is only entitled to receive 5% of
the gross gaming revenues received by LHC. The Landlord has been paid 5%
of the gross gaming revenues received by LHC and its predecessors
without objection for the past 18 years under the Lease. The Company
believes that the Landlord 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 $16,500 for the
Landlord's attorney's fees and the Company disputes it is required to
reimburse the Landlord for such fees.
On March 17, 1998 the court held that the Landlord is entitled to be
paid from LHC 5% of the gross gaming revenues received by all gaming
operators at the Hotel/Casino and ordered LHC to pay $36,523. The
Company filed an appeal to this order with the Nevada Supreme Court. The
appeal is pending.
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Autotote Systems, Inc.
On March 3, 1998, AWI and Computerized Bookmaking Systems ("CBS") filed
a Motion for Preliminary Injunction in the United States District Court
for the District of Nevada, against Autotote Corporation and Autotote
Systems, Inc. (collectively "Autotote") seeking to enjoin Autotote from
reproducing or installing any part of the CBS Race and Sports Book
Software ("CBS Software") in terminals used outside of Mexico; using or
permitting the use of the CBS software, including the source code
therefore, and employing or hiring James Connolly ("Connolly") for a
period of five years from the date of the closing in the Autotote/CBS
stock transfer agreement. In addition AWI and CBS asked for damages for
the alleged breach by Autotote and ASI of certain provisions of a Stock
Transfer Agreement, a Technology Cross License Agreement, a
Distributorship Agreement, and the International Cooperation Agreement
all of which were executed by the parties on October 25, 1996
(collectively the "Agreements") and for the infringement by Autotote and
ASI of CBS' copyright interest in, and the misappropriation and
conversion of CBS' race and sports book software. On March 3, 1998 Judge
Howard McKibben entered a temporary restraining order granting the
requested relief until March 13, 1998. On March 13, 1998, a preliminary
injunction hearing was held before Judge McKibben during which the
parties stipulated, and the court subsequently ordered the following:
there would be (1) no sale or transfer of the CBS Software by Autotote,
(2) no sale or transfer of a derivative work of such software by
Autotote without ten (10) days prior notice to AWI, in writing
identifying the transferee, the date of the transfer and the
functionality of the derivative work, (3) no transfer by Autotote of the
CBS Software or source code, nor would Autotote copy or modify the CBS
Software or source code, except to the extent permitted by contract, and
(4) a diligent effort shall be made by Autotote to retrieve any CBS
software which has been transferred pursuant to the terms of the
contract. Based upon the foregoing, the judge denied the motion for
preliminary injunction without prejudice, and indicated that AWI could
renew the motion in the event Autotote attempted to copy or modify the
CBS software.
On April 15, 1998, Autotote and ASI filed a counterclaim against AWI and
CBS with the United States District Court for the District of Nevada,
asking that the Agreements be rescinded on the grounds that there was a
failure of consideration, failure of meeting of the minds, mutual
mistake, lack of an intent to perform and impossibility of performance.
In addition, Autotote and ASI asked the Court to award damages for AWI
and CBS' alleged breach of certain of the Agreements, and for fraud,
negligent interference with contractual relations, intentional
interference with contractual relations, international interference with
prospective economic advantage, false light and libel. Autotote and ASI
requested the Court to award compensatory damages in excess of $75,000
plus interest, and punitive damages. This litigation is now in the
discovery phase. The parties have reached a tentative settlement
agreement. Settlement documents have been drafted, but have not yet been
executed. This litigation has been suspended pending the potential
settlement of this matter.
-45-
<PAGE>
Imagineering Systems, Inc.
In September, 1997, the Company and the individual shareholders of
Imagineering Systems, Inc. ("ISI") entered into a purchase agreement
pursuant to which the Company would acquire all of the shares of ISI.
While the Company was conducting its due diligence investigation on the
proposed transaction, the Company loaned ISI $76,583 to fund cash
shortfalls of ISI. The acquisition of ISI was not completed and ISI
failed to repay the loans made by the Company. The Company did not
complete the acquisition because of material misrepresentations and
omissions of facts made by the shareholders. On October 21, 1998, ISI
filed a civil complaint against the Company in the Second Judicial
District in Washoe County, Nevada claiming, among other things, breach
of contract, breach of prospective economic advantage, and breach of
fiduciary duty. On November 9, 1998, the Company brought an action in
Clark County Court against ISI to recover such loans. The Second
Judicial District granted the demand of the Company for venue to be
transferred to Clark County and the parties agreed that the Washoe
matter would be dismissed and those causes asserted as a Counterclaim
to the Company's complaint. ISI has recently served its Answer and
Counterclaim and discovery will commence shortly.
Other
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. The Company maintains insurance
coverage's including property, workers' compensation and general
liability insurance which is considered adequate for the size of the
Company and the nature of its business. Management does not believe the
outcome of above described proceedings will have a material adverse
effect on the Company's financial position or results of operations.
The Company has employment agreements with certain of its senior
executives that were executed in August 1995 for an initial term of
five years. 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 termination benefits that
include the payment of the executive's annual base salary, performance
bonus and all other benefits under the agreement for the remainder of
the then outstanding term. In the case of death, the Company has agreed
to pay the termination benefits for up to one year.
12. Capital Stock and Stock Options
The Company's Board of Directors approved a program to repurchase up to
250,000 shares of the Company's common stock from time to time in the
open market. As at April 28, 1999, 61,100 shares had been repurchased
pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors, including market
conditions, available alternative investments and the Company's
financial position.
On December 9, 1998, the Company redeemed its shareholder notes of
$1,892,424 in the aggregate for Series A Preferred Stock. The Series A
Preferred Stock is fixed at 18,924 shares at $100 per share. The holders
of the Series A Preferred Stock shall be entitled to receive, upon
declaration of the Board of Directors, cumulative cash dividends at the
annual rate per share of 10%. Such dividends shall be payable in equal
quarterly payments on each March 31, June 30, September 30 and December
31, commencing with December 31, 1998. The Series A Preferred Stock
shall be redeemable, in whole or (on a pro rata basis) in part, at any
time at the option of the Corporation, by resolution of the Board of
Directors. The holders of Series A Preferred Stock shall not be entitled
to vote (on a cumulative basis or otherwise) as a class or with the
Common Stock upon any matters submitted to shareholders for a vote,
except as otherwise mandated under Nevada law.
On January 31, 1999, the Company had in effect stock option plans under
which options may be granted to employees and directors of the Company.
Under these plans the Company has authorized 575,000 and 20,000 shares,
respectively. 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 for the employees plan and 10 years for the
directors plan. Options granted under the plans generally become
exercisable on a single date from three to five years from the date of
grant.
-46-
<PAGE>
Summarized information for the stock option plans is as follows:
<TABLE>
<CAPTION>
Employee Director
------------------------------------------- -----------------------------------
1999 1998 1999 1998
-------------------- ----------------- ---------------- -----------------
Wtd Avg Wtd Avg Wtd Avg Wtd Avg
Exercise Exercise Exercise Exercise
Number Price Number Price Number Price Number Price
------ ----- ------ ----- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at the Beginning of the year 218,967 $ 7.95 174,900 $ 7.58 1,400 $ 8.72 700 $10.75
Granted 66,400 5.06 48,900 9.25 2,700 6.06 700 6.69
Exercised ---- ---- (3,333) 8.25 ---- ---- ---- ----
Forfeited (36,500) 9.04 (1,500) 6.88 ---- ---- ---- ----
Expired ---- ---- ---- ---- ---- ---- ---- ----
------- ------ ------- ------- ----- ------ ----- ------
Outstanding at the end of the year 248,867 $ 7.02 218,967 $ 7.95 4,100 $ 6.97 1,400 $ 8.72
======= ====== ======= ======= ====== ====== ===== ======
Exercisable at the end of the year 116,445 $ 7.35 54,467 $ 7.58 1,400 $ 8.72 700 $10.75
======= ====== ======= ======= ===== ====== ===== ======
Weighted average fair value of options
granted on grant date $ 3.85 $ 4.31 $ 2.39 $ 4.00
====== ======= ====== ======
Options available for grant at the end
of the year 319,467 349,367 15,900 18,600
======= ======= ====== ======
</TABLE>
The following table summarizes information about stock options
outstanding at January 31,1999:
<TABLE>
<CAPTION>
Detail composition of options outstanding
January 31, 1999
Average
Contractual
Options Exercise Life Remaining Options
Outstanding Price YRS) Exercisable
------------------- ---------------- ----------------- --------------------
<S> <C> <C> <C>
6,667 $ 8.25 1.56 4,445
24,000 9.88 2.41 16,000
30,000 8.13 2.49 20,000
106,200 6.88 2.48 70,800
15,600 9.25 1.00 5,200
66,400 5.06 4.55 --
700 10.75 8.11 700
700 6.69 9.13 700
2,000 5.89 10.00 --
700 6.56 10.00 --
-------- -------
252,967 117,845
======== =======
</TABLE>
-47-
<PAGE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 - Accounting for
Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 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 (loss)
and net income (loss) 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, 1999 and 1998.
<TABLE>
<CAPTION>
Year ended Year ended
January 31, 1999 January 31, 1998
----------------- ----------------
<S> <C> <C>
Net loss
As reported $(1,599,185) $(8,845,484)
Pro forma (1,914,126) (9,160,790)
Net loss per share
Basic
As reported (0.21) (1.13)
Pro forma (0.25) (1.17)
Diluted
As reported (0.21) (1.13)
Pro forma (0.25) (1.17)
Weighted-average assumptions
Expected stock price volatility 139.99% 40.94%
Risk-free interest rate 5.55% 6.50%
Expected option lives 5 years 3.6 years
Estimated fair value of options granted $ 4.58 $ 3.62
</TABLE>
-48-
<PAGE>
13. Business Segments
The Company's primary operations are reported in the following four
segments: Wagering, Casino, Systems, and Keno. The Hotel, Food and
Beverage business segment has been presented as discontinued operations
in the accompanying consolidated financial statements (See Note 2).
The Wagering segment consists of Leroy's, the licensed bookmaking
operations with the largest number of sports books in the state of
Nevada. As at January 31, 1999, in addition to its main location, the
Company operated 45 race and sports books located within licensed gaming
establishments owned by other companies throughout the state of Nevada.
Leroy's leases the square footage necessary to conduct its operations at
non-Company owned establishments. Additionally, the Wagering segment
consists of Mega$ports (ACT) Australia operations. Mega$ports (ACT) is
the Company's international wagering hub for Internet sports wagering.
The Casino segment includes a 5,600 square foot casino within the Howard
Johnson Hotel containing approximately 65 electronic gaming devices
including slot machines, video poker machines and multi-game video
machines.
The Systems segment, consisting of CBS, AWISSI and AWIHSI, designs,
sells, installs and maintains equipment, software and computer systems
to the sports betting and hotel industries. CBS is a 50% partner in the
joint venture, Mega$ports, a Nevada Corporation. Mega$ports offers a
pari-mutuel sports wagering system in the state of Nevada. The Company
has terminated the joint venture agreement and upon regulatory approval
will have 100% control over the operation.
The Keno segment develops, sells, operates and services stand alone
linked progressive keno games using state-of-the-art graphical
interfaces. Keno is currently in its startup phase and has primarily
incurred labor and marketing expenses.
The following summarizes the segment information for the Company:
<TABLE>
<CAPTION>
Years
Ended .
January 31, Wagering Casino Systems Keno Corporate Total
----------- -------- ------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 1999 $6,090,267 $643,711 $3,157,840 $ --- $ --- $ 9,891,818
1998 5,766,549 571,702 2,962,252 --- --- 9,300,503
Research and 1999 --- --- 574,524 --- --- 574,524
Development 1998 --- --- 594,319 --- --- 594,319
Operating 1999 1,134,483 116,499 127,429 (217,055) (1,754,466) (593,110)
Income (Loss)* 1998 11,479 (20,205) (244,408) --- (1,580,872) (1,834,006)
Capital 1999 328,655 --- 116,525 243,522 62,650 751,352
Expenditures 1998 647,228 --- 43,423 141,834 --- 832,485
Depreciation and 1999 324,967 22,497 354,722 155 63,548 765,889
Amortization 1998 278,946 16,005 327,045 --- 36,220 658,216
Identifiable 1999 4,052,879 301,738 5,343,561 317,067 676,330 10,691,575
Assets 1998 2,974,576 336,910 4,564,546 5,762,762 --- 13,638,794
* Operating income (loss) does not include the allocation of corporate management fees. The management fees are
equal to 9.5% of each operating Company's gross operating revenues.
</TABLE>
-49-
<PAGE>
Comparative financial data for the hotel, food and beverage operations,
reported as discontinued operations, is as follows:
Years
Ended Hotel, Food
January 31, & Beverage
----------- ----------
Revenues 1999 $3,303,859
1998 3,307,677
Operating 1999 (190,634)
Income (Loss)* 1998 (675,421)
Capital 1999 26,497
Expenditures 1998 223,345
Depreciation and 1999 189,849
Amortization 1998 314,446
Identifiable 1999 3,657,494
Assets 1998 3,909,602
14. Related Party Transactions
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 $211,259 and $193,888 for the years ended January 31, 1999 and
1998, respectively.
CBS leases space to Mega$ports, Inc. for its corporate offices in the
building owned by CBS. Lease payments invoiced were $59,100 and $59,100
for the years ended January 31, 1999 and 1998 respectively.
CBS leases 3,735 square feet of office space to a company of which
Michael Roxborough, a former board member was an employee, in the
building owned by CBS. Mr. Roxborough was a member of the Board of
Directors of the Company until March 11, 1998 and was a 5% owner of the
Company until June 1998. Lease payments made to CBS were $116,972 and
$97,640 for the years ended January 31, 1999 and 1998, respectively.
Mega$ports paid fees for odds-making services to a company where a
Michael Roxborough, a former board member was an employee, in the
building owned by CBS. Odds-making fees paid were $74,000 and $74,750
for the fiscal years ended January 31, 1999 and 1998, respectively.
Leroy's paid fees for odds-making services to a company where a Michael
Roxborough, a former board member was an employee, in the building owned
by CBS. Odds-making fees paid were $19,200 and $19,829 for the fiscal
years ended January 31, 1999 and 1998, respectively.
15. Acquisitions
On July 28, 1998, the Company acquired, in a transaction accounted for
as a purchase, certain assets from Advanced Computer Services, Inc.
("ACS") including software and customer lists pursuant to an Asset
Purchase Agreement between the Company and ACS. The Company paid ACS
$500,000 in cash and issued 44,780 shares of the Company's common
stock at a price of $5.58 per share. The Company's two new
subsidiaries, AWI Sports Systems, Inc. ("AWISSI") and AWI Hotel
Systems, Inc. ("AWIHSI") acquired the Nevada Sports wagering software
and Hotel systems software, respectively from ACS. The Company owns 80%
of AWISSI and 51% of AWIHSI. The sole shareholder of ACS owns the
remaining 20% of AWISSI and 49% of AWIHSI. The Company and ACS also
settled certain litigation between them. AWISSI and AWIHSI will assume
certain contractual obligations of ACS, including all customer
contracts. Support of the customer base is currently provided through
CBS.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits are listed in the Index to Exhibits on pages 52 through 54.
(b) Reports on Form 8-K
On December 10, 1998 the Company filed a Form 8-K with respect to Items
1, 6, 7 and 12.
-50-
<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.
Signature Title Date
--------- ----- ----
/s/ Victor Salerno President; Chief Executive April 30, 1999
- -------------------------------- Officer; Director
Victor Salerno
/s/ Robert D. Ciunci Chief Financial Officer April 30, 1999
- -------------------------------- (Principal Financial and
Robert D. Ciunci Accounting Officer);
Director
/s/ Robert R. Barengo Director April 30, 1999
- --------------------------------
Robert R. Barengo
/s/ Michael S. Merillat Director April 30, 1999
- --------------------------------
Michael S. Merillat
/s/ Philip P. Hannifin Director April 30, 1999
- --------------------------------
Philip P. Hannifin
-51-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Incorporated by Reference to
- ------ ----------------------------------------------------- ----------------------------
<S> <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 Exhibit 3.2 to Registration Form 10-KSB
for Fiscal Year Ended January 31, 1997
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 Exhibit 10.1 to Registration
Victor Salerno dated as of August 1, 1995 Statement on Form SB-2, File No. 33-80431
10.2 Employment Agreement between the Registrant and Exhibit 10.2 to Registration
Robert 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 Exhibit 10.5 to Registration
Desert Associates LLP and Leroy's Hotel Corporation Statement on Form SB-2, File No. 33-80431
dated November 3, 1995
10.5.1 Amendment No. 1 to Purchase Agreement among R. Exhibit 10.5.1 to Registration
Paul Bruyea, Painted Desert Limited Partnership Statement on Form SB-2, File No. 33-80431
and Leroy's Hotel Corporation dated February 1, 1996
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
10.7 Form of Promissory Note made by Leroy's Horse and Exhibit 10.7 to Registration
Sports Place ("Leroy's") in favor of each Original Statement on Form S13-2, File No. 33-80431
Stockholder
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Incorporated by Reference to
- ------ ----------------------------------------------------- ----------------------------
<S> <C>
10.7.1 Restated Promissory Note by Leroy's in favor of Exhibit 10.7.1 to Registration Form
Victor Salerno 10-KSB for Fiscal Year Ended January 31, 1997
10.7.2 Restated Prornissory Note by Leroy's in favor Of Exhibit 10.7.2 to Registration Form
Judith Salemo 10-KSB for Fiscal Year Ended January 31, 1997
10.7.3 Restated Promissory Note by Leroy's in favor of Exhibit 10.7.3 to Registration Form
Michael Merillat 10-KSB for Fiscal Year Ended January 31, 1997
10.7.4 Restated Promissory Note by Leroy's in favor of Exhibit 10.7.4 to Registration Form
Michael Roxborough 10-KSB for Fiscal Year Ended January 31, 1997
10.7.5 Restated Promissory Note by Leroy's in favor of Exhibit 10.7.5 to Registration Form
Robert Ciunci 10-KSB for Fiscal Year Ended January 31, 1997
10.7.6 Restated Promissory Note by Leroy's in favor of Exhibit 10.7.6 to Registration Form
Robert Barengo 10-KSB for Fiscal Year Ended January 31, 1997
10.8 Form of Management Agreement between Registrant Exhibit 10.8 to Registration
and each Subsidiary Statement on Form SB-2, File No. 33-80431
10.9 Form of Tax Indemnity Agreement among Leroy's Exhibit 10.9 to Registration
Horse and Sports Place, Inc., Leroy's Hotel Statement on Form SB-2, File No. 33-80431
Corporation, B-P Gaming Corporation and the
Original Stockholders
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 Exhibit 10.11 to Registrant's
International, Inc. And Leroy's Hotel Corporation, Form 10-KSB for Fiscal Year dated
dated May 9, 1996 January 31, 1997
10.12 International House of Pancakes Franchise Agreement Exhibit 10.12 to Registration
between B-P Food Corporation and International, Statement on Form SB-2, File No. 33-80431
House of Pancakes Inc. dated February 19, 1980
10.13 Indenture of Lease between Bruyea Pond Las Vegas Exhibit 10.13 to Registration
and James A. Rissler, Florence Theis, and 0.J. Tomson, Statement on Form SB-2, File No. 33-80431
dated February 1, 1978, as amended, for ground lease of
3111 West Tropicana Avenue, Las Vegas, Nevada
</TABLE>
-53-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Incorporated by Reference to
- ------ ----------------------------------------------------- ----------------------------
<S> <C>
10.14 Deed of Trust, Assignment of Rents and Security Exhibit 10.14 to Registration
Agreement of Bruyea Pond Las Vegas ("BPLV") Statement on Form SB-2, File No. 33-80431
to Crocker National Bank dated June 27, 1979
10.15 Tri-Party Agreement between Crocker National Bank, Exhibit 10.15 to Registration
Eastern 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 Exhibit 10.16 to Registration
Eastern Savings Bank, predecessor to Apple Bank Statement on Form SB-2, File No. 33-80431
For Savings, dated May 21, 1981
10.17 Business Loan Agreement between Leroy's Horse and Exhibit 10.17 to Registration
Sports Place, Inc. and Pioneer Citizens Bank of Nevada, Statement on Form SB-2, File No. 33-80431
dated March 30,1995.
10.18.1 Stock Transfer Agreement between the Registrant and Exhibit 2.1 to Registration Form 8-K
Autotote Corporation dated October 25,1996 filed November 8, 1996
10.18.2 Technology Cross-License Agreement among Autotote Exhibit 2.2 to Registration Form 8-K
CBS Inc., Autotote Corporation and Autotote Systems, filed November 8, 1996
Inc. dated October 25, 1996
10.19 Stock Purchase Agreement between Messrs. Salerno Exhibit 10.19 to Registration
and Ciunci dated December 12, 1994 Statement on Form SB-2, File No. 33-80431
10.24 Form of Indemnification Agreement between the Exhibit 10.24 to Registration
Registrant and each of its directors Statement on Form SB-2, File No. 33-80431
10.25 Absolute Assignment of Leases and Rents between Exhibit 10.25 to Registration Form 10-KSB
Autotote CBS, Inc. and Standard Life and Accident for Fiscal Year Ended January 31, 1997
Insurance Company dated August 31, 1995
10.26 Deed of Trust, Security Agreement and Financing Exhibit 10.26 to Registration Form 10-KSB
Statement between Autotote CBS, Inc. and Jerry for Fiscal Year Ended January 31, 1997
L. Adams, Trustee, as Trustee, for the benefit of
Standard Life and Accident Insurance Company dated
August 31, 1995
10.27 Certificate of Designations, Preferences and Rights Exhibit 3.1.1 to Registrant's Form 8-K
of Series A Preferred Stock of American Wagering, Inc. filed December 10, 1998
21.1 Subsidiaries Filed herewith
23.1 Consent of Arthur Andersen LLP, the Registrant's Filed herewith
Independent Certified Public Accountants
27 Financial Data Schedule Filed herewith
</TABLE>
-54-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Direct Subsidiaries
Leroy's Horse and Sports Place ("Leroy's")
Leroy's Hotel Corporation ("LHC")
Computerized Bookmaking Systems, Inc. ("CBS")
American Wagering Management Company, Inc.
AWI Keno, Inc. ("AWIK")
Mega$ports (ACT) Pty Ltd.
Indirect Subsidiaries
B-P Food Corporation (wholly-owned subsidiary of LHC)
AWI Sports Systems, Inc. (80% ownership by registrant)
AWI Hotel Systems, Inc. (51% ownership by registrant)
Mega$ports, Inc. (50% ownership by CBS)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated April 29, 1999, included in this Annual Report
on Form l0-KSB, into the Company's previously filed Registration Statement on
Form S-8 (File No. 333-27395).
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
April 29, 1999
<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-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 3,076,563
<SECURITIES> 483,671
<RECEIVABLES> 250,341
<ALLOWANCES> (78,295)
<INVENTORY> 724,376
<CURRENT-ASSETS> 544,212
<PP&E> 5,933,438
<DEPRECIATION> (1,870,396)
<TOTAL-ASSETS> 11,765,870
<CURRENT-LIABILITIES> 5,327,349
<BONDS> 1,879,237
0
1,892,400
<COMMON> 78,857
<OTHER-SE> 2,591,407
<TOTAL-LIABILITY-AND-EQUITY> 11,765,870
<SALES> 9,891,818
<TOTAL-REVENUES> 9,891,818
<CGS> 6,317,843
<TOTAL-COSTS> 10,484,928
<OTHER-EXPENSES> 656,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321,533
<INCOME-PRETAX> (1,570,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,570,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,599,185)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
