<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number: 000-20685
-----------------------------------
American Wagering, Inc.
-------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0344658
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
675 Grier Drive, Las Vegas, Nevada 89119
-------------------------------------------------------------
(Address of principal executive office)
(702) 735-0101
---------------------------------------------------------
(Issuer's telephone number)
----------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last year)
Check whether the issuer (1) filed reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
------- ------
The number of shares of Common Stock outstanding as of June 10, 1999 was
7,824,513.
<PAGE>
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS April 30, January 31,
1999 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,289,061 $ 3,076,563
Short-term investments 373,101 483,671
Accounts receivable, net of allowance for doubtful accounts
of $78,295 and $78,295 452,612 172,046
Inventories, net of obsolescence reserve of $56,825 and $56,825 680,416 724,386
Prepaid expenses and other current assets 579,482 544,212
----------- -----------
TOTAL CURRENT ASSETS 3,374,672 5,000,878
PROPERTY AND EQUIPMENT, net 3,974,241 4,063,042
INTANGIBLE ASSETS, net 1,182,235 1,238,890
DEPOSITS AND OTHER ASSETS 426,249 388,765
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 1,060,978 1,074,295
----------- -----------
TOTAL ASSETS $10,018,375 $11,765,870
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 48,515 $ 57,913
Accounts payable 463,918 678,067
Accrued expenses 652,827 718,932
Unpaid winning tickets 525,793 2,548,181
Other current liabilities 1,269,257 707,612
Net current liabilities of discontinued operations 378,195 616,644
----------- -----------
TOTAL CURRENT LIABILITIES 3,338,505 5,327,349
----------- -----------
LONG-TERM DEBT:
Long-term debt, less current portion 1,874,199 1,879,237
----------- -----------
TOTAL LONG-TERM DEBT 1,874,199 1,879,237
----------- -----------
MINORITY INTEREST (8,403) (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 shares 1,892,400 1,892,400
Common stock -- $.01 par value; authorized
25,000,000 shares; issued and outstanding: 7,885,613 shares 78,857 78,857
Additional paid-in capital 14,296,848 14,296,848
Accumulated deficit (11,126,538) (11,377,948)
Less: treasury stock; at cost: 61,100 shares (327,493) (327,493)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,814,074 4,562,664
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,018,375 $11,765,870
=========== ===========
</TABLE>
Note: The consolidated balance sheet at January 31, 1999 has been derived
from the audited financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
AMERICAN WAGERING, INC
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
REVENUES $ 3,010,123 $ 2,335,368
OPERATING COSTS AND EXPENSES:
Direct costs 1,765,585 1,364,998
Research and development 151,381 139,272
Selling, general and administrative 579,881 491,445
Depreciation and amortization 188,145 164,296
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 2,684,992 2,160,011
----------- -----------
OPERATING INCOME 325,131 175,357
OTHER INCOME (EXPENSE):
Interest income 7,520 65,401
Other income -- 83,459
Minority Interest 5,023 --
Equity in loss from joint venture -- (110,315)
Interest expense (70,494) (101,125)
----------- -----------
TOTAL OTHER EXPENSE (57,951) (62,580)
----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 267,180 112,777
PROVISION (BENEFIT) FOR INCOME TAXES -- --
----------- -----------
INCOME FROM CONTINUING OPERATIONS 267,180 112,777
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations -- --
----------- -----------
NET INCOME 267,180 112,777
PREFERRED STOCK DIVIDEND REQUIREMENTS (15,770) --
----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 251,410 $ 112,777
=========== ===========
INCOME PER SHARE OF COMMON STOCK
Income from continuing operations
Basic $ 0.03 $ 0.01
Diluted $ 0.03 $ 0.01
Income (loss)from continuing operations
Basic $ 0.00 $ 0.00
Diluted $ 0.00 $ 0.00
Net income
Basic $ 0.03 $ 0.01
Diluted $ 0.03 $ 0.01
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 251,410 $ 112,777
Adjustments to reconcile net income to cash
used in operating activities:
Depreciation and amortization 236,155 220,163
Equity in loss from investment in
joint venture -- 110,315
Discontinued operations (145,223) --
Minority interest (5,023) --
Provision for doubtful accounts -- (14,292)
Decrease (increase) in assets:
Accounts receivable (168,122) 171,484
Inventories 42,638 135,042
Prepaid expenses and other current assets (122,175) (159,582)
Increase (decrease) in liabilities:
Accounts payable 59,072 (871,876)
Accrued expenses (314,369) (419,897)
Unpaid winning tickets (2,022,388) (886,264)
Other current liabilities 344,911 447,828
----------- -----------
Total adjustments (2,094,524) (1,267,080)
----------- -----------
Net cash used in operating activities (1,843,114) (1,154,303)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,865) (38,531)
Deposits and other assets (33,580) (212,388)
Proceeds from sale of assets 40,000 --
Increase in investment in joint venture -- (137,896)
Decrease in short-term investments 110,570 2,605,490
----------- -----------
Net cash provided by investing activities 94,125 2,216,675
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt (38,513) (529,557)
Purchase of treasury stock -- (197,486)
----------- -----------
Net cash used in financing activities (38,513) (727,043)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,787,502) 335,329
CASH AND CASH EQUIVALENTS, beginning of period $ 3,076,563 $ 2,092,894
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,289,061 $ 2,428,223
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 142,112 $ 172,042
=========== ===========
</TABLE>
(Continued)
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
(Continued)
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Three Months Ended April 30, 1999 Transactions--
On February 1, 1999 the Company terminated the Mega$ports joint venture
agreement with IGT. The termination agreement allows the Company to receive
IGT's 50% interest in the joint venture and the Mega$ports(R) trademark. The
Company has agreed to indemnify IGT for all presently due and 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. The assets acquired and the
assumption of debt were as follows:
Cash $ 4,262
Other current assets 168,463
Property and equipment 70,290
Current liabilities (243,015)
----------
$ ----
==========
Three Months ended April 30, 1998 Transactions--None
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
AMERICAN WAGERING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED APRIL 30, 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").
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$PORTS(R)
6
<PAGE>
offers opportunities to wager on the outcome of individual sports contests,
events occurring within or during the contests, and outcomes of groups of
sports contests. In December 1998, the Company entered into an agreement with
IGT to terminate the Mega$ports joint venture agreement. (See Note 3).
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.
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 three months ended April 30, 1999 and 1998 the results of the
hotel, food and beverage operations have been accounted for as discontinued
operations (See Note 3). 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 $128,489 and $130,295 and amortization expense of $59,656 and $34,001 for
the three months ended April 30, 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
$431,063 and $371,407 at April 30, 1999 and January 31, 1999, 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.
7
<PAGE>
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.
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:
Three months ended April 30,
----------------------------
1999 1998
------ ------
Weighted-average common shares
outstanding (used in the computation
of basic earnings per share).......... 7,824,513 7,833,445
Potential dilution from the assumed
exercise of common stock options...... 252,967 218,534
--------- ---------
Weighted-average common and common
stock equivalent shares (used in the
computation of diluted earnings per
share)................................ 8,077,480 8,051,979
========= =========
8
<PAGE>
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.
The provision for federal income taxes and utilization of net operating loss
carryforwards is below. On January 31, 1999 the Company had $2,431,715 of tax
operating loss carryforwards available to reduce future taxable income, of
which $2,044,735 will expire in 2013 and $386,980 will expire in 2014.
Three Months ended
April 30, 1999
------------------
Income from continuing operations
before provision for income taxes $ 267,180
Provision for income taxes 93,513
Net operating loss carryforwards (93,513)
---------
Net provision for income taxes --
---------
Income from continuing operations $ 267,180
=========
9
<PAGE>
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.
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.
2. Investment in Joint Venture
The Company, through its wholly owned subsidiary CBS, was involved in a joint
venture with IGT. CBS and IGT each owned a fifty percent interest in the
joint venture company named Mega$ports, Inc., a Nevada corporation
("Mega$ports (US)"). 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$ports. The transfer
of IGT's shares in the joint venture is subject to the approval of the Nevada
Gaming Commission. In the Company's accompanying consolidated financial
statements for and as of the three months ended April 30, 1999, the results
of Mega$ports, Inc. operations have been accounted for as a wholly owned
subsidiary. Mega$ports (US), 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.
3. 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 three months ended April 30, 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 entered into an agreement to sell the Hotel operation on May 1,
1999, the agreement is contingent upon the buyer receiving a firm financing
commitment by June 15, 1999. The Company has been notified the purchaser's
lending institution loan committee will not review the loan application until
June 21, 1999. The Company believes that the purchase agreement will be
modified to extend the contingency date until June 22, 1999.
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
$2,358,284 as of April 30, 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
$504,877 through from February 1, 1998 through April 30, 1999.
These operations had revenues of $880,000 and $815,000 for the three months
ended April 30, 1999 and 1998, respectively. Operating losses for these same
periods were $21,000 and $77,000, respectively. Identifiable assets of the
hotel, food and beverage operations were approximately $3.8 million and $3.7
million as of April 30, 1999 and January 31, 1999, respectively.
The components of assets and liabilities of discontinued operations included
in the accompanying consolidated balance sheets are as follows:
10
<PAGE>
April 30, January 31,
1999 1999
----------- -----------
Current assets $ 418,370 $ 274,119
Accounts payable, accrued expenses and other (796,565) (890,763)
----------- -----------
Net current liabilities $ (378,195) $ (616,644)
=========== ===========
Property, plant and equipment, net $ 3,348,571 $ 3,383,376
Non-current liabilities (2,287,593) (2,309,081)
----------- -----------
Net long term assets $ 1,060,978 $ 1,074,295
=========== ===========
The condensed statements of operations relating to the discontinued
operations are presented below:
Three months ended April 30,
1999 1998
----------- -----------
Revenues $ 879,941 $ 814,847
Costs and expenses 956,285 1,040,017
----------- -----------
Loss before income taxes (76,344) (225,170)
Provision (benefit) for income taxes -- --
----------- -----------
Net (loss) $ (76,344) $ (225,170)
=========== ===========
Losses incurred during the three months ended April 30, 1999 have been
charged against previously established reserves.
4. 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.
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 April
30, 1999, in addition to its main location, the Company operated 46 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 and Mega$ports, Inc., a Nevada Corporation,
("Mega$ports (US)") offering 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.
11
<PAGE>
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.
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>
Three Months
Ended .
April 30, Wagering Casino Systems Keno Corporate Total
----------- -------- ------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 1999 $1,797,261 $199,080 $1,013,782 $ --- $ --- $ 3,010,123
1998 1,314,091 147,062 874,215 --- --- 2,335,368
Research and 1999 --- --- 151,381 --- --- 151,381
Development 1998 --- --- 139,272 --- --- 139,272
Operating 1999 483,866 76,986 197,045 (66,924) (365,842) 325,131
Income (Loss)* 1998 257,540 23,285 237,316 --- (342,784) 175,357
Capital 1999 4,425 --- 1,323 --- 3,103 8,951
Expenditures 1998 6,067 --- 8,934 --- 16,634 31,635
Depreciation and 1999 68,258 4,076 97,714 --- 18,097 188,145
Amortization 1998 74,692 5,624 72,289 --- 11,691 164,296
Identifiable 1999 2,718,155 168,974 5,187,981 331,067 551,220 8,957,397
Assets January 31, 1999 4,052,879 301,738 5,343,561 317,067 676,330 10,691,575
</TABLE>
* 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.
Comparative financial data for the hotel, food and beverage operations,
reported as discontinued operations, is as follows:
Three Months
Ended Hotel, Food
April 30, & Beverage
----------- ----------
Revenues 1999 $ 879,941
1998 814,847
Operating 1999 (20,633)
Income (Loss)* 1998 (76,895)
Capital 1999 13,914
Expenditures 1998 6,896
Depreciation and 1999 48,718
Amortization 1998 55,867
Identifiable 1999 3,766,942
Assets 1998 3,657,494
12
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Three Months ended April 30, 1999 compared to the Three Months ended April 30,
1998.
Revenues for the Three Months ended April 30, 1999, were $3,010,000, an
increase of $675,000 or 28.9% from revenues of $2,335,000 for the Three Months
ended April 30,1998. The increase was principally attributed to additional
Wagering revenues of $483,000, additional Systems revenues of $140,000 and
additional Casino revenues of $52,000. Operating income of $325,000 for the
Three Months ended April 30, 1999 increased by $150,000 or 85.8% compared to
$175,000 for the Three Months ended April 30, 1998. This improvement was
primarily due to increased Wagering revenues. In addition operating income was
impacted favorably by the increased revenues of the Casino. Offsetting the
improvement in operating income fiscal quarters was an operating loss at
Mega$ports (US) of $190,000, Mega$ports (ACT) of $69,000 and AWI Keno, Inc.
start up costs of $67,000.
Wagering Operations
Revenues from Sports book wagering were $1,781,000 for the Three Months
ended April 30, 1999, an increase of $467,000 or 35.6% from revenues of
$1,314,000 for the Three Months ended April 30, 1998. The increase was due to a
13.1% increase in Handle (the total amount wagered at the Company's sports and
race books) and a 24.2% increase in net win percentage (revenues divided by
handle) between years. The net win percentage was 7.6% for the Three Months
ended April 30, 1999 compared to 6.2% for the Three Months ended April 30, 1998.
Handle of $22,793,000 for the Three Months ended April 30, 1999 increased by
$2,624,000 from Handle of $20,169,000 for the Three Months ended April 30, 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. Operating costs of $1,314,000 for
the Three Months ended April 30, 1999 increased by $257,000 from operating costs
of $1,057,000 for the Three Months ended April 30, 1998. The increase in costs
with no offsetting increase in revenues is principally attributed to the
operations of Mega$ports (US) which became a wholly owned subsidiary during the
Three Months ended April 30, 1999.
Casino Operations
Revenues from Casino operations were $199,000 for the Three Months
ended April 30, 1999, an increase of $52,000 or 35.4% from revenues of $147,000
for the Three Months ended April 30, 1998. The increase was principally
attributed to increased slot play of local customers. Operating costs remained
flat between fiscal quarters.
13
<PAGE>
Systems Operations
Revenues from Systems operations were $1,014,000 for the Three Months
ended April 30, 1999, an increase of $140,000 or 16.0% from revenues of $874,000
for the Three Months ended April 30, 1998. Increased revenues of $54,000 from
CBS operations were atttributed to increased equipment and ticket paper sales.
Sports Systems and Hotel Systems, which began operations in July 1998 and are
partly owned, generated revenues of $86,000 primarily from recurring maintenance
billings. Operating costs combined of $719,000 for the Three Months ended April
30, 1999 increased by $155,000 or 27.5% from operating costs of $564,000 for the
Three Months ended April 30, 1998. The increase is principally attributed to
Sports and Hotel Systems which began operations during the Second Quarter of
Fiscal 1999.
Keno Operations
Keno was formed in June 1998 and the Company estimates it will begin
operations in June 1999. During the Three Months ended April 30, 1999, Keno
incurred costs of $67,000 including labor and fringes, marketing, professional
services, travel and legal expenses.
Direct Costs
Direct costs of $1,766,000 for the Three Months ended April 30, 1999
increased by $401,000 or 29.4% from direct costs of $1,365,000 for the Three
Months ended April 30, 1998 due principally to the new companies which were not
operating during the prior fiscal quarter.
Research and Development Costs
Research and development costs of $151,000 for the Three Months ended
April 30, 1999 increased by $12,000 or 8.6% from research and development costs
of $139,000 for the Three Months ended April 30, 1998 due principally to
increased labor costs associated with new product development.
Selling, General and Administrative Costs
Selling, general and administrative costs of $580,000 for the Three
Months ended April 30, 1999 increased by $89,000 or 18.2% from selling, general
and administrative costs of $491,000 for the Three Months ended April 30, 1998.
The increase is due principally to AWI Keno start up costs and Mega$ports (US)
operations.
Depreciation and Amortization
Depreciation and amortization was $188,000 for the Fiscal Year ended
1999, an increase of $24,000 or 14.6% from depreciation and amortization of
$164,000 for the Fiscal Year ended 1998. Amortization expense increased by
$26,000 due to the acquisition of intangible assets of ACS. Depreciation expense
remained flat between fiscal quarters.
Interest and Other Income
Interest and Other Income of $8,000 for Fiscal Year ended 1999,
decreased by $140,000 or 94.6% from interest and other income of $148,000 in the
Fiscal Year ended 1998. The reduction is principally due to a decrease in income
derived from short-term investments.
14
<PAGE>
Interest Expense
Interest Expense of $70,000 for Fiscal Year ended 1999 decreased by
$31,000 or 30.7% from interest expense of $101,000 in the Fiscal Year ended
1998. The decrease is principally due to the interest paid in connection with
the Racusin litigation and shareholder notes during the Three Months ended April
30, 1998.
Equity in Loss from Joint Venture
The equity in loss from Mega$ports (US) joint venture was $110,000 for
the Three Months ended April 30, 1998. In December 1998, the Company entered
into an agreement with IGT to terminate the Mega$ports joint venture agreement.
In the Company's accompanying consolidated financial statements for and as of
the three months ended April 30, 1999, the results of Mega$ports, Inc.
operations have been accounted for as a wholly owned subsidiary.
Net Income from Continuing Operations
The net income from continuing operations of $267,000 for Three Months
ended April 30,1999, increased by $154,000 or 136.3% from $113,000 in the Three
Months ended April 30, 1998. The increase between fiscal quarters was
principally due to the increased revenues in the Sports book Wagering
operations.
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 Three Months
ended April 30, 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 $880,000 for the Three Months ended April
30, 1999 increased by $65,000 as compared to revenues of $815,000 for the Three
Months ended April 30, 1998. Operating costs associated with hotel, food and
beverage operations were $900,000 for the Three Months ended April 30, 1999, an
increase of $8,000 or 0.9% as compared to costs of $892,000 for the Three Months
ended April 30, 1998.
Liquidity and Capital Resources
As of April 30, 1999, working capital was $36,000. Cash used in
operating activities was $1,843,000 for the Three Months ended April 30, 1999
compared to cash used in operating activities of $1,154,000 for the Three Months
ended April 30, 1998. Net cash provided by investing activities was $94,000 for
the Three Months ended April 30, 1999 compared to cash provided by investing
activities of $2,217,000 for the Three Months ended April 30, 1998. The decrease
is principally attributed to the liquidation of short-term investments during
the prior fiscal quarter. Net cash used in financing activities amounted to
$34,000 for the Three Months ended April 30, 1999 compared to net cash used in
financing activities of $727,000 for the Three Months ended April 30, 1998. This
decrease is principally due to the repayment of long-term debt during the Three
Months ended April 30, 1998. The Company paid $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.
15
<PAGE>
Management believes that the Company will be able to satisfy its
operating cash requirements through the end of its current fiscal year 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.
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 continuing to be made of the third
16
<PAGE>
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).
17
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - See the description of these legal
proceedings set forth in the Registrant's Form 10-KSB for the
year ended January 31, 1999.
Item 2. CHANGES IN SECURITIES - NON APPLICABLE
Item.3. DEFAULTS UPON SENIOR SECURITIES - NON APPLICABLE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
NON APPLICABLE
Item 5. OTHER INFORMATION - NON APPLICABLE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - Financial Data Schedule
Number Description Method of Filing
- ------ ----------- ----------------
27 Financial Data Schedule Filed Herewith
(b)The following report on form 8-K was filed during the quarter ended April 30,
1999:
NONE
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN WAGERING, INC.
(Registrant)
Date: June 14, 1999 By: /s/ Robert D. Ciunci
----------------------------
Robert D. Ciunci
Executive Vice President and
Chief Financial Officer
<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> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 1,289,061
<SECURITIES> 373,101
<RECEIVABLES> 530,907
<ALLOWANCES> (78,295)
<INVENTORY> 680,416
<CURRENT-ASSETS> 579,482
<PP&E> 6,002,402
<DEPRECIATION> (2,028,161)
<TOTAL-ASSETS> 10,018,375
<CURRENT-LIABILITIES> 3,338,505
<BONDS> 1,874,199
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1,892,400
<COMMON> 78,857
<OTHER-SE> 2,842,817
<TOTAL-LIABILITY-AND-EQUITY> 10,018,375
<SALES> 3,010,123
<TOTAL-REVENUES> 3,010,123
<CGS> 1,765,585
<TOTAL-COSTS> 2,684,992
<OTHER-EXPENSES> 128,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,494
<INCOME-PRETAX> 267,180
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<NET-INCOME> 267,180
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