<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 July 31, 2000
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 (I.R.S. 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 September 10, 2000 was
7,836,846.
<PAGE>
Part I Financial Information
Item I Financial Statements
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31
2000 2000
-------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 1,593,745 $ 3,415,793
Accounts receivable, net of allowance for doubtful accounts
of $41,501 and $188,624 217,844 686,418
Inventories, net of obsolescence reserve of $295,448 and $161,370 167,385 436,947
Prepaid expenses and other current assets 436,563 309,951
------------ ------------
TOTAL CURRENT ASSETS 2,415,537 4,849,109
PROPERTY AND EQUIPMENT, net 3,887,231 4,098,355
INTANGIBLE ASSETS, net 969,480 1,175,637
DEPOSITS AND OTHER ASSETS 615,430 605,955
------------ ------------
TOTAL ASSETS $ 7,887,678 $ 10,729,056
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 31,985 $ 61,892
Accounts payable 1,468,292 1,703,476
Interest payable 427,002 --
Accrued expenses 757,275 988,398
Unpaid winning tickets 319,104 1,888,424
Other current liabilities 1,145,685 1,154,995
Net liabilities of business held for sale 354,409 --
----------- ------------
TOTAL CURRENT LIABILITIES 4,503,752 5,797,185
LONG-TERM DEBT, less current portion 1,816,517 1,816,517
MINORITY INTEREST -- (105,801)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock - 10% cumulative; $100 par value;
authorized: 25,000,000 shares; issued and
outstanding: 15,162 and 15,424 shares 1,516,200 1,542,400
Common Stock - $.01 par value; authorized: 25,000,000 shares;
issued and outstanding: 7,836,846 and 7,824,513 shares 78,980 78,857
Shares to be issued in settlement of litigation - 239,819 shares 2,549,276 3,587,625
Additional paid-in capital 11,833,240 10,709,223
Accumulated deficit (14,082,794) (12,369,457)
Less: treasury stock; at cost: 61,100 shares (327,493) (327,493)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 1,567,409 3,221,155
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,887,678 $ 10,729,056
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES $ 1,904,451 $ 2,256,484
OPERATING COSTS AND EXPENSES:
Direct costs 2,068,185 2,037,817
Research and development 249,172 191,862
Selling, general and administrative 696,616 768,941
Depreciation and amortization 206,395 207,306
-------------- -------------
TOTAL OPERATING COSTS AND EXPENSES 3,220,368 3,205,926
-------------- -------------
OPERATING LOSS (1,315,917) (949,442)
OTHER INCOME (EXPENSE):
Interest income 8,561 3,023
Other income (expense) (62,566) 1,319
Minority interest (1,495) (1,354)
Interest expense (465,256) (39,974)
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (520,756) (36,986)
------------- -------------
LOSS BEFORE UNUSUAL OR INFREQUENT ITEMS (1,836,673) (986,428)
UNUSUAL OR INFREQUENT ITEMS:
LITIGATION SETTLEMENT 899,997 --
------------- -------------
LOSS FROM CONTINUING OPERATIONS (936,676) (986,428)
------------- -------------
DISCONTINUED OPERATIONS:
GAIN ON SALE OF HOTEL, FOOD AND BEVERAGE OPERATIONS -- 341,403
EXCESS OPERATING LOSS RESERVE -- 213,465
------------- -------------
INCOME FROM DISCONTINUED OPERATIONS -- 554,868
------------- -------------
NET LOSS (936,676) (431,560)
PREFERRED STOCK DIVIDEND REQUIREMENTS (38,747) (47,570)
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (975,423) $ (479,130)
============= =============
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (0.12) $ (0.13)
Income from discontinued operations -- $ 0.07
Net loss $ (0.12) $ (0.06)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
AMERICAN WAGERING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES $ 4,917,322 $ 5,266,607
OPERATING COSTS AND EXPENSES:
Direct costs 4,462,562 3,803,402
Research and development 554,470 343,242
Selling, general and administrative 1,436,995 1,395,606
Depreciation and amortization 434,829 395,451
------------- -------------
TOTAL OPERATING COSTS AND EXPENSES 6,888,856 5,937,701
------------- -------------
OPERATING LOSS (1,971,534) (671,094)
OTHER INCOME (EXPENSE):
Interest income 14,975 10,543
Other income (expense) (59,491) 1,319
Minority interest (5,624) 3,669
Interest expense (514,797) (79,453)
------------- -------------
TOTAL OTHER INCOME (EXPENSE) (564,937) (63,922)
------------- -------------
LOSS BEFORE UNUSUAL OR INFREQUENT ITEMS (2,536,471) (735,016)
UNUSUAL OR INFREQUENT ITEMS:
LITIGATION SETTLEMENT 899,997 --
------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,636,474) (735,016)
------------- -------------
DISCONTINUED OPERATIONS:
GAIN ON SALE OF HOTEL, FOOD AND BEVERAGE OPERATIONS -- 341,403
EXCESS OPERATING LOSS RESERVE -- 213,465
------------- -------------
INCOME FROM DISCONTINUED OPERATIONS -- 554,868
-------------- -------------
NET LOSS (1,636,474) (180,148)
PREFERRED STOCK DIVIDEND REQUIREMENTS (76,863) (94,354)
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,713,337) $ (274,502)
============= =============
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (0.21) $ (0.10)
Income from discontinued operations -- $ 0.07
Net loss $ (0.22) $ (0.03)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,636,474) $(274,502)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 434,829 474,633
Gain on sale of discontinued operations -- (341,403)
Discontinued operations -- (342,482)
Minority interest 5,624 (3,669)
Loss on contract termination 67,897 --
Decrease (increase) in assets:
Accounts receivable, net 468,574 (564,828)
Inventories 269,562 194,396
Prepaid expenses and other current assets (126,612) (80,329)
Increase (decrease) in liabilities:
Accounts payable (235,184) 336,287
Interest payable 427,002 --
Accrued expenses (231,123) 313,399
Unpaid winning tickets (1,569,320) (2,171,343)
Other current liabilities 85,147 53,613
Net liabilities of business held for sale 354,409 --
---------- ----------
Total adjustments (49,195) (2,131,726)
---------- ----------
Net cash used in operating activities (1,685,669) (2,406,228)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets -- 3,809,392
Capital expenditures (212,465) (143,083)
Deposits and other assets 123,265 2,374
Decrease in short-term investments -- 207,243
---------- ----------
Net cash (used in) provided by investing activities (89,200) 3,875,926
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercise 85,791 --
Repayment of long-term debt (29,907) (2,412,408)
Redemption of preferred stock (26,200) (150,000)
Preferred stock dividends (76,863) (107,736)
---------- ----------
Net cash used in financing activities (47,179) (2,670,144)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,822,048) (1,200,446)
CASH, beginning of period 3,415,793 3,076,563
---------- ----------
CASH, end of period 1,593,745 1,876,117
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 87,795 $ 200,825
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
AMERICAN WAGERING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND 1999
(Continued)
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Six months ended July 31, 2000 Transactions--
On July 28, 2000 the Company exchanged the assets of AWIHSI for the minority
interest of AWIHSI and AWISSI of $100,177.
Six months ended July 31, 1999 Transactions--
On February 1, 1999 the Company terminated the Mega$ports U.S. joint venture
agreement with IGT. The termination agreement allows the Company to receive
IGT's 50% interest in the joint venture and the Mega$ports(R) trademark. The
Company has agreed under the terms of the agreement to indemnify IGT for all
presently due and future obligations of Mega$ports U.S. 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)
---------
$ --
=========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
AMERICAN WAGERING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JULY 31, 2000
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 the
Company, the stockholders of Leroy's and LHC exchanged their shares in
those companies for shares of the Company. These transactions are
referred to as the "Reorganization".
On August 3, 2000 the Company was notified that it was not in
compliance with all requirements for continued listing on the NASDAQ
National Market Systems. Effective August 4, 2000 the Company's
securities began trading on the OTC Bulletin Board (OTCBB).
Leroy's was incorporated under the laws of the State of Nevada on
November 14, 1977. Through a central computer system located at its Las
Vegas headquarters, Leroy's operates a statewide network of race and
sports wagering facilities in 46 casinos. Leroy's leases the square
footage necessary to conduct its operations at the non-Company owned
gaming establishments. Leroy's operates its main race and sports book
and a 5,600 square foot casino with approximately 65 electronic gaming
devices including slot machines, video poker machines and multi-game
video machines at the Howard Johnson Hotel on 3111 West Tropicana
Boulevard in Las Vegas, Nevada.
The Company also owns and operates Mega$ports (ACT) Pty Ltd.
("Mega$ports (ACT)") located in Canberra, Australia. Mega$ports (ACT)
is the Company's international wagering hub licensed to accept fixed
odds and pari-mutuel interactive wagers on the Internet from patrons
around the world except patrons located in the United States. In
November 1998, Mega$ports (ACT) was issued a fifteen-year sports
betting license from the Bookmakers Licensing Committee in the
Australian Capital Territory ("ACT"). Mega$ports (ACT) began accepting
wagers from non-Internet patrons within Australia in January 1999.
Mega$ports (ACT) received regulatory approval for its Internet
operations from the ACT and began accepting wagers on the Internet in
March 1999. The Company's Internet operations were the subject of a
Nevada Gaming Commission inquiry. On July 27, 2000 the Company reached
a settlement with the Nevada Gaming Commission regarding the
disciplinary complaint filed against the Company. The Company agreed to
pay a fine of $10,000 and has agreed to divest itself of any and all
interests and rights pertaining to the Australian operation. The
divestiture may be accomplished by the sale, spin-off or terminating
the operations of the subsidiary. The divestiture has to be
accomplished by January 27, 2001. The Company has the right to request
not more than three 60-day extensions to complete the divestiture. See
"Legal Proceedings".
The Company owns AWI Keno, Inc. ("AWIK") which designs, installs,
operates and maintains computerized keno systems currently at four
locations.
The Company also owns and operates Computerized Bookmaking Systems,
Inc. ("CBS"). CBS designs, installs and maintains sports and race book
equipment, software and computer systems for the sports betting - North
America industry. In 1994, CBS signed a joint venture agreement with
IGT for the purpose of developing and marketing a pari-mutuel sports
system, known as MEGA$PORTS(R). MEGA$PORTS(R) offered opportunities to
wager on the outcome of individual sports contests, events occurring
within or during the contests, and outcomes of groups of sports
contests. On February 1, 1999, the Mega$ports joint venture agreement
was terminated. In March 2000, the Company ceased ongoing operations of
Mega$ports, U.S. The Mega$ports, U.S. gaming license expired in July
2000.
On July 28, 1998, the Company acquired certain assets from Advanced
Computer Services, Inc. ("ACS"). Two new subsidiaries, AWI Sports
Systems, Inc. ("AWISSI") and AWI Hotel Systems, Inc. ("AWIHSI") were
formed to hold the assets acquired from ACS. On June 8, 2000 in
conjunction with the termination of a consulting agreement, the Company
sold the assets of AWIHSI and acquired the remaining 49% and 20%,
respectively of the shares of AWISSI and AWIHSI that it did not already
own.
<PAGE>
In November 1999, the Company formed Secured Telephone Operating
Platform, Inc. ("STOP") which designs, installs, and operates a
telephone call identification system for its customers. The system
determines the origin of a telephone call and accepts or rejects a call
based on its origination. The system is used in conjunction with
telephone account wagering within the State of Nevada.
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
the Company. On June 30, 1999, the Company finalized the sale of these
operations and entered into a lease with the new owner to continue to
operate the casino for up to two years. The casino serves as the
Company's principal gaming location.
<PAGE>
Period Results Not Indicative of the Full Year
The results of operations for the Three and Six Months ended July 31,
2000 and 1999 are not necessarily indicative of the results to be
expected for the full fiscal year.
The accompanying unaudited consolidated financial statements do not
include all information and disclosures required under generally
accepted accounting principles. However, in the opinion of management,
the accompanying financial statements contain all adjustments
(consisting only of normal recurring adjustments) considered necessary
to present fairly the financial position, results of operations and
cash flows, of the Company for the periods presented. The financial
statements as of and for the years ended January 31, 2000 and 1999 and
the notes thereto included in the Company's Annual Report on Form
10-KSB should be read in conjunction with these interim financial
statements.
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" 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 Three and Six
Months ending July 31, 2000 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 losses incurred by the Company for the
three and six months then ended.
There were no dilutive securities for the period ended July 31, 1999.
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:
<TABLE>
<CAPTION>
Three months Six months
ended July 31, ended July 31,
--------------------- ---------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding (used in the
computation of basic earnings per share) 7,836,846 7,824,513 7,834,940 7,824,513
</TABLE>
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. The financial results for
acquisitions are included in the consolidated financial statements from
the date of acquisition. Investments in 50% or less owned joint
ventures are accounted for under the equity method.
Reclassifications
Certain amounts in the 1999 consolidated financial statements have
been reclassified to conform with the 2000 presentation. These
reclassifications had no effect on the Company's net income.
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.
<PAGE>
Revenues of the Company wagering segment is seasonal with approximately
59% of its revenues derived between September and January. The Company
is currently entering its most active wagering season. The Company
takes financial risks on the outcome of various sporting events. There
is no assurance that the outcome of the sporting events will be
favorable and that the Company can derive sufficient cash flow during
its most active wagering season or from its other segments to sustain
operations during its lower activity period.
The Company has expanded its sports wagering activities to Australia
and is exploring other jurisdictions outside of the United States to
expand its keno business line. The level of customer acceptance for the
Company's keno products in these new jurisdictions is undetermined.
Establishing these operations may require initial investments of
several hundred thousand dollars.
If the Company cannot generate sufficient cash flow from operations to
meet its operating requirements and/or the required investments, 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.
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. If it were determined that the Nevada Act was
violated by the Company or its subsidiaries the gaming licenses or
registration held by the Company and it subsidiaries could be limited,
conditioned, suspended or revoked subject to compliance with certain
statutory and regulatory procedures. Limitation, conditioning or
suspension or revocation of any gaming license may have a material
effect on the Company's gaming operations.
On March 22, 2000 legislation entitled the "Amateur Sports Integrity
Act" was introduced in Congress. The general purpose of the proposed
legislation is to prohibit wagering on games and performances at the
Summer and Winter Olympics and on high school and college games. On
September 13, 2000 the House Judiciary Committee voted 19-9 in favor of
banning wagering on college games. In order for the proposal to become
law it will have to be voted on and passed by the full House and Senate
and forwarded to the President for signature. Leroy's currently accepts
wagers on the Olympic and college games. Leroy's estimates that
wagering on college sports represents approximately 26% of its
revenues. The passage of such legislation will have a material adverse
affect upon the Company's wagering operations.
In December, 1999 The Australian government released its Productivity
Commissions report on Australia's Gambling Industries. The report made
certain recommendations including regulation of online casinos.
Following this report, the Senate Select Committee on Information
Technologies issued a report entitled "NETBETS" a review of online
gambling in Australia. The Committee made a series of proposals to
reduce online gambling. One such proposal was to limit the expansion of
online casinos with a moratorium on the issuance of online gaming
licenses until consumer protection policies are implemented. The
federal government is pursuing a total ban on Internet gambling.
However, the states and territories in Australia are opposed to any
limitations on issuing new online gaming licenses.
At this time, the Company is unable to determine the effect, if any, of
the outcome of the implementation of the recommendations made in these
reports or whether the government will be successful in banning online
gaming. If the federal government is successful in banning online
gaming, such ban may have a material adverse effect on the operations
of Mega$ports (ACT).
On December 16, 1999, the Nevada State Gaming Control Board ("Board")
filed a complaint for disciplinary action against American Wagering,
Inc. relating to the operation of Mega$ports (ACT). The complaint
alleges the Company, as a company registered with the Nevada Gaming
Commission, engaged in an unsuitable method of operation due to the
fact that Mega$ports (ACT) accepted a series of wagers from a patron
who was physically located in Las Vegas, Nevada. The Board further
alleges that the acceptance of these wagers is a violation of both
federal and Nevada State laws that prohibit Internet sports wagering.
On July 27, 2000 the Company reached a settlement with the Nevada
Gaming Commission regarding the disciplinary complaint filed against
the Company. The Company in the settlement neither admitted nor denied
the allegations. The Company agreed to pay a fine of $10,000 and has
agreed to divest itself of any and all interests and rights pertaining
to the Australian operation. The divestiture may be accomplished by the
sale, spin-off or terminating the operations of the subsidiary. The
divestiture has to be accomplished by January 27, 2001. The Company has
the right to request not more than three 60-day extensions to complete
the divestiture. "See Legal Proceedings."
<PAGE>
2. Net Liabilities of Business Held for Sale
On July 27, 2000 the Company reached a settlement with the Nevada
Gaming Commission regarding a disciplinary complaint filed against the
Company. The Company agreed to pay a fine of $10,000 and divest itself
of any and all interests and rights pertaining to Mega$ports (ACT). The
Company is currently soliciting offers for the sale of Mega$ports
(ACT). As such, the Company has classified the net liabilities of
Mega$ports (ACT) as held for sale. The divestiture is required to be
accomplished by January 27, 2001.
Included in the net loss for the three and six months ended July 31,
2000 were net losses of $198,391 and $385,333, respectively which were
incurred by Mega$ports (ACT) operations. Additionally, the net loss
included for the three and six months ended July 31, 1999 of Mega$ports
(ACT) operations were net losses of $333,439 and $402,007,
respectively.
The components of the Net Liabilities of Business Held for Sale are:
Cash $ 225,113
Property and Equipment, net 94,457
Future Bets and Patron Deposits (616,997)
Other Liabilities (56,982)
---------
Net Liabilities $(354,409)
=========
3. Business Segments
The Company's primary operations are reported in the following four
segments: wagering, casino, systems, and keno.
The wagering segment consists of Leroy's, the licensed bookmaking
operations with the largest number of sports books in the State of
Nevada. As of July 31, 2000, in addition to its main location, the
Company operated 45 race and sports books located within licensed
gaming establishments owned by other companies throughout the State of
Nevada. Leroy's leases the square footage necessary to conduct its
operations at non-Company owned establishments. Additionally, the
wagering segment consists of Mega$ports U.S. and Mega$ports (ACT)
operations. Mega$ports (ACT) is the Company's international wagering
hub for Internet sports wagering. The financial records of Mega$ports
(ACT) are maintained in Australia. Mega$ports U.S. which offered a
pari-mutuel sports wagering system in the State of Nevada ceased
operations in March 2000. The Mega$ports, U.S. gaming license expired
in July 2000.
<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 and STOP,
designs, sells, installs and maintains equipment, software and computer
systems to the sports betting and hotel industries. In June, 2000 the
Company sold the assets of AWIHSI and acquired the remaining 49% and
20%, respectively of the shares of AWISSI and AWIHSI that it did not
already own.
The keno segment develops, sells, operates and services stand alone
linked progressive keno games using state-of-the-art graphical
interfaces.
In accordance with Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information",
the following summarizes the segment information for the Company:
<TABLE>
<CAPTION>
Three Months
Ended
July 31 Wagering Casino Systems Keno Corporate Total
---------- ---------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 2000 $1,069,247 $148,151 $ 623,070 $ 63,983 $ -- $1,904,451
1999 726,817 167,884 1,361,783 -- -- 2,256,484
Research and 2000 -- -- 249,172 -- -- 249,172
Development 1999 -- -- 191,862 -- -- 191,862
Operating 2000 (115,262) (81,795) (295,723) (267,047) (556,090) (1,315,917)
Income (Loss)* 1999 (662,621) 48,107 205,009 (95,578) (444,359) (949,442)
Capital 2000 1,680 -- 5,743 17,083 1,429 25,935
Expenditures 1999 94,190 2,712 (15,250) 42,480 10,000 134,132
Depreciation 2000 70,406 2,082 86,254 40,130 7,523 206,395
and Amortization 1999 95,300 (433) 104,525 -- 7,914 207,306
Identifiable 2000 1,582,034 291,481 4,322,263 1,006,307 685,593 7,887,678
Assets January 31, 2000 3,943,317 277,607 5,070,162 931,046 506,924 10,729,056
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
July 31 Wagering Casino Systems Keno Corporate Total
---------- ---------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 2000 $2,470,398 $ 317,573 $1,988,911 $ 140,440 -- $ 4,917,322
1999 2,524,079 366,964 2,375,564 -- $ -- 5,266,607
Research and 2000 -- -- 554,470 -- -- 554,470
Development 1999 -- -- 343,242 -- -- 343,242
Operating 2000 (193,560) (32,964) (41,509) (581,822) (1,121,679) (1,971,534)
Income (Loss)* 1999 (178,162) 125,093 401,462 (162,502) (856,985) (671,094)
Capital 2000 29,999 -- 18,477 163,146 843 212,465
Expenditures 1999 98,715 2,712 (13,927) 42,480 13,103 143,083
Depreciation 2000 140,667 4,165 173,592 101,420 14,985 434,829
and Amortization 1999 163,558 3,643 202,239 -- 26,011 395,451
Identifiable 2000 1,582,034 291,481 4,322,263 1,006,307 685,593 7,887,678
Assets January 31, 2000 3,943,317 277,607 5,070,162 931,046 506,924 10,729,056
</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 net operating income.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Fiscal Quarter ended July 31, 2000 compared to the Fiscal Quarter ended July 31,
1999.
Revenues for the Fiscal Quarter ended July 31, 2000, Second Quarter of
Fiscal 2001, were $1,904,451, a decrease of $352,033 or 15.6% from revenues of
$2,256,484 for the Fiscal Quarter ended July 31, 1999, Second Quarter of Fiscal
2000. The decrease was principally attributed to a decrease in Systems revenues
of $738,713 and Casino revenue of $19,733 which were offset by an increase in
wagering revenues of $342,430 and Keno revenues of $63,983. Operating loss of
$1,315,917 for the Second Quarter of Fiscal 2001 increased by $366,475 or 38.6%
compared to operating loss of $949,442 for the Second Quarter of Fiscal 2000.
The increase was principally attributed to increased costs for operating Keno
and Mega$ports (ACT) for the entire year and increased operating costs at the
Casino. Offsetting the operating loss was the absence of losses associated with
the ceased operations of Mega$ports U.S.
Wagering operations
Revenues from wagering operations were $1,069,247 for the Second
Quarter of Fiscal 2001, an increase of $342,430 or 47.1% from revenues of
$726,817 for the Second Quarter of Fiscal 2000. The increase was due to a 63.3%
increase in net win percentage (handle less paid-outs, divided by handle)
between quarters. The net win percentage was 4.9% for the Second Quarter of
Fiscal 2001 compared to 3.0% for the Second Quarter of Fiscal 2000. Handle of
$21,400,303 for the Second Quarter of Fiscal 2001 decreased by $2,828,947 from
handle of $24,229,250 for the Second Quarter of Fiscal 2000. An increase or
decrease in handle is not necessarily indicative of an increase or decrease in
revenues or profits. Operating costs of $1,184,509 for the Second Quarter of
Fiscal 2001 decreased by $204,929 from operating costs of $1,389,438 for the
Second Quarter of Fiscal 2000 primarily due to the absence of costs associated
with the ceased operations of Mega$ports U.S. during the Second Quarter of
Fiscal 2001.
Casino Operations
Revenues from Casino operations were $148,151 for the Second Quarter of
Fiscal 2001, a decrease of $19,733 or 11.8% from revenues of $167,884 for the
Second Quarter of Fiscal 2000. The decrease was principally attributed to
decreased slot play of local customers. Operating costs of $229,946 increased
$110,169 or 92.0% from operating costs of $119,777 for the Second Quarter of
Fiscal 2000. The increase is primarily due to increased rent which was
previously allocated to the wagering segment.
System Operations
Revenues from Systems operations were $623,070 for the Second Quarter
of Fiscal 2001, a decrease of $738,713 or 54.2% from revenues of $1,361,783 for
the Second Quarter of Fiscal 2000. Decreased revenues of $739,411 from CBS
operations were attributed to decreased equipment sales. AWISSI and AWIHSI,
which began operations in July 1998 generated revenues of $54,751 primarily from
recurring maintenance billings for the Second Quarter of Fiscal 2001. Operating
costs of $918,793 for the Second Quarter of Fiscal 2001 decreased by $237,981 or
20.6% from operating costs of $1,156,774 for the Second Quarter of Fiscal 2000
mainly due to lower equipment sales.
Keno Operations
Keno began operations in August 1999. During the Second Quarter of
Fiscal 2001 Keno generated revenue from commissions of $63,983 and incurred
costs of $331,030 which included location operating costs, labor, marketing and
professional services.
Direct Costs
Direct costs of $2,068,185 for the Second Quarter of Fiscal 2001
increased by $30,368 or 1.5% from direct costs of $2,037,817 for the Second
Quarter of Fiscal 2000 principally due to costs associated with Keno which was
fully operational for the Second Quarter of Fiscal 2001.
<PAGE>
Research and Development Costs
Research and development costs of $249,172 for the Second Quarter of
Fiscal 2001 increased by $57,310 or 29.9% from research and development costs
of $191,862 for the Second Quarter of Fiscal 2000 due principally to increased
labor costs associated with new product development.
Selling, General and Administrative Costs
Selling, general and administrative costs of $696,616 for the Second
Quarter of Fiscal 2001 decreased $72,535 or 9.4% from $768,941 for the Second
Quarter of Fiscal 2000 primarily due to the Company's effort to reduce
expenditures.
Unusual or Infrequent Items
In July, 2000 the Company settled it's litigation with Autotote
Corporation. As a result of the settlement the Company received proceeds of
$540,000 and was relieved of it's obligation to pay accrued royalties of
$359,997.
Net Loss
Net loss for the Second Quarter of Fiscal 2001 of $936,676 increased
$505,116 or 117.0% from a net loss of $431,560 for the Second Quarter of Fiscal
2000. The unfavorable variance was principally due to the interest accrual on
the Racusin settlement. See "Legal Proceedings".
<PAGE>
Six Months ended July 31, 2000 compared to the Six Months ended July 31,
1999.
Revenues for the Six Months ended July 31, 2000, were $4,917,322, a
decrease of $349,285 or 6.6% from revenues of $5,266,607 for the Six Months
ended July 31, 1999. The decrease was attributed to a decrease in Systems
revenues of $386,653 and Casino revenue of $49,391 and Wagering revenues of
$53,681 which were offset by an increase due to the addition of Keno revenues of
$140,440. Operating loss of $1,971,534 for the Six Months ended July 31, 2000
increased by $1,300,440 or 193.8% compared to operating loss of $671,094 for the
Six Months ended July 31, 1999. This increase was primarily attributed to the
loss incurred by Keno operations and Mega$ports (ACT) which were fully
operational for the Six Months ended July 31, 2000.
Wagering operations
Revenues from wagering operations were $2,470,398 for the Six Months
ended July 31, 2000, a decrease of $53,681 or 2.1% from revenues of $2,524,079
for the Six Months ended July 31, 1999. The decrease was due to a 1.9% decrease
in net win percentage (handle less paid-outs, divided by handle) between
quarters. The net win percentage was 5.1% for the Six Months ended July 31, 2000
compared to 5.2% for the Six Months ended July 31, 1999. Handle of $47,308,454
for the Six Months ended July 31, 2000 increased by $285,864 from handle of
$47,022,590 for the Six Months ended July 31, 1999. An increase or decrease in
handle is not necessarily indicative of an increase or decrease in revenues or
profits. Operating costs of $2,663,958 for the Six Months ended July 31, 2000
decreased by $38,283 from operating costs of $2,702,241 for the Six Months ended
July 31, 1999 primarily due to the reduction of costs associated with the ceased
operations of Mega$ports U.S. for the Six Months ended July 31, 2000.
Casino Operations
Revenues from Casino operations were $317,573 for the Six Months ended
July 31, 2000, a decrease of $49,391 or 13.5% from revenues of $366,964 for the
Six Months ended July 31, 1999. The decrease was principally attributed to
decreased slot play of local customers. Operating costs of $350,537 for the Six
Months ended July 31, 2000 increased $108,666 or 44.9% from operating costs of
$241,871 for the Six Months ended July 31, 1999. The increase is primarily
attributable to rent expense which was previously allocated to the Wagering
Segment.
System Operations
Revenues from Systems operations were $1,988,911 for the Six Months
ended July 31, 2000, a decrease of $386,653 or 16.3% from revenues of $2,375,564
for the Six Months ended July 31, 1999. Decreased revenues of $360,297 from CBS
operations were attributed to decreased equipment sales. AWISSI and AWIHSI,
which began operations in July 1998 and are partly owned, generated revenues of
$110,364 primarily from recurring maintenance billings for the Six Months ended
July 31, 2000. Operating costs of $2,030,420 for the Six Months ended July 31,
2000 increased by $56,318 or 2.9% from operating costs of $1,974,102 for the Six
Months ended July 31, 1999 mainly due to costs associated with STOP which was
fully operational for the Six Months ended July 31, 2000.
Keno Operations
Keno began operations in August 1999. During the Six Months ended July
31, 2000 Keno generated revenue from commissions of $140,440 and incurred costs
of $722,262 which includes location operating costs, labor, marketing and
professional services.
Direct Costs
Direct costs of $4,462,562 for the Six Months ended July 31, 2000
increased by $659,160 or 17.3% from direct costs of $3,803,402 for the Six
Months ended July 31, 1999 principally due to costs associated with Keno and
MegaSports (ACT) which were fully operational for the Six Months ended July 31,
2000.
<PAGE>
Research and Development Costs
Research and development costs of $554,470 for the Six Months ended
July 31, 2000 increased by $211,228 or 61.5% from research and development
costs of $343,242 for the Six Months ended July 31, 1999 due principally to
increased labor costs associated with new product development.
Selling, General and Administrative Costs
Selling, general and administrative costs of $1,436,995 for the Six
Months ended July 31, 2000 increased $41,389 or 3.0% from $1,395,606 for the Six
Months ended July 31, 1999 primarily due to increased legal costs incurred in
the corporate segment.
Unusual or Infrequent Items
In July, 2000 the Company settled it's litigation with Autotote
Corporation. As a result of the settlement the Company received proceeds of
$540,000 and was relieved of it's obligation to pay accrued royalties of
$359,997.
Net Loss
Net loss for the Six Months ended July 31, 2000 of $1,636,474 increased
$1,456,326 or 808.4% from $180,148 for the Six Months ended July 31, 1999. The
unfavorable variance was due to the additional costs associated with operating
Keno and Mega$ports (ACT) which were fully operational for the Six Months ended
July 31, 2000 and the interest accrued on the Racusin settlement. "See Legal
Proceedings".
Liquidity and Capital Resources
Working capital decreased $1,140,139 from January 31, 2000. Cash used
in operating activities was $1,685,669 for the Six Months ended July 31, 2000
compared to cash used in operating activities of $2,406,228 for the Six Months
ended July 31, 1999. Net cash used in investing activities was $89,200 for the
Six Months ended July 31, 2000 compared to cash provided by investing activities
of $3,875,926 for the Six Months ended July 31, 1999. Net cash used in financing
activities amounted to $47,179 for the Six Months ended July 31, 2000 compared
to net cash used in financing activities of $2,670,144 for the Six Months ended
July 31, 1999.
Revenues of the Company wagering segment is seasonal with approximately
59% of its revenues derived between September and January. The Company is
currently entering its most active wagering season. The Company takes financial
risks on the outcome of various sporting events. There is no assurance that the
outcome of the sporting events will be favorable and that the Company can derive
sufficient cash flow during its most active wagering season or from its other
segments to sustain operations during its lower activity period.
While management believes that the Company will be able to satisfy its
operating cash requirements for at least the next 12 months from existing cash
balances and anticipated cash flows, this requirement may necessitate
curtailment of certain capital expenditures and reduction in staffing levels.
The uncertainty created by proposed legislation, which could ban wagering on
amateur athletic events may require the Company to research the source of its
future revenue growth. As described in the Company's annual report on Form
10-KSB for the year ended January 31, 2000, the Company continues to review
various programs in fiscal year 2001 aimed at building cash liquidity which can
be used to fund working capital requirements.
The Company is exploring other jurisdictions to expand its keno
business lines. The level of customer acceptance for the Company's Keno products
in these new jurisdictions is undetermined. Establishing these operations may
require initial investments of several hundred thousand dollars.
If the Company cannot generate sufficient cash flow from its operations
to meet its operating requirements and/or the required investments, 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.
<PAGE>
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).
<PAGE>
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - In addition to the descriptions set forth
below please see the description of these legal proceedings set
forth in the Registrant's Form 10-KSB for the year ended January
31, 2000.
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 2 written agreements between Leroy's
and Michael Racusin, d.b.a. M. Racusin & Company ("Racusin"),
were 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 provided that Leroy's would 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".
In February 2000 a jury verdict was rendered. The jury found
that; (i) Leroy's breached its contract with Racusin; (ii) as a
result of that breach, Racusin was entitled to receive stock in
Leroy's in the amount equal to 4.5% of $45,000,000 plus $150,000
in cash; and (iii) American Wagering is the later ego of Leroy's.
On July 12, 2000 a judgement was entered by the Court as follows:
1. Racusin should receive $150,000 plus interest totaling
$170,251. This sum shall be set off against the $756,340
previously paid by the Company on September 5, 1997.
2. Racusin shall receive 239,819 shares of common stock in the
Company. The shares are net of 97,681 shares, which the
Company is entitled to set off for the amount of $589,089
previously paid to Racusin. Racusin shall receive pre
judgement interest on the 239,819 shares.
3. Racusin shall recover his costs of the suit.
The Company has filed an appeal of the judgement.
The Company has reserved 229,819 shares of Common Stock and has
accrued $427,000 in interest awarded in the Judgement.
Autotote Systems, Inc.
On March 3, 1998, the Company and CBS filed a Complaint in the
United States District Court for the District of Nevada, against
Autotote Corporation and Autotote Systems, Inc. seeking to enjoin
certain actions of Autotote and asking for monetary damages for
the alleged breach by Autotote 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 of CBS' copyright interest in, and the
misappropriation and conversion of, CBS' Race and Sports Book
Software.
On April 15, 1998, Autotote filed a counterclaim against the
Company and CBS with the United States District Court for the
District of Nevada, asking that the Agreements be rescinded and
for compensatory damages in excess of $75,000 plus interest, and
punitive damages.
On July 18, 2000, the parties executed a settlement agreement
under which the Company and CBS received $540,000 in settlement
of their claims against Autotote and was relieved of its
obligation to pay accrued royalty payments of $359,997, and the
counterclaims of Autotote were dismissed with prejudice.
Internet Operation Investigation
On December 16, 1999 the Nevada State Gaming Control Board
("Board") filed a complaint for disciplinary action against
American Wagering, Inc., referred to as State Gaming Control
Board v. American Wagering, Inc. d.b.a. Mega$ports Pty, Ltd. Case
No. 99-27 ("complaint"), related to the operation of Mega$sports
Pty, Ltd., ("Mega$ports (ACT)"). The complaint contained 13
separate counts against the Company. The complaint alleged the
Company, as a Company registered with the Nevada Gaming
Commission, engaged in an unsuitable method of operation due to
the fact that Mega$ports (ACT) accepted a series of wagers from a
patron who was physically located in Las Vegas, Nevada. The Board
further alleged that the acceptance of these wagers was a
violation of both federal and Nevada State laws that prohibit
Internet sports wagering.
<PAGE>
On July 27, 2000 the Company entered into a settlement of the
complaint with the Board which was approved by the Nevada Gaming
Commission. The Company neither admitted nor denied the
allegations. The Company agreed to pay a fine of $10,000 and has
agreed to divest itself of any and all interests and rights
pertaining to Mega$ports (ACT). The divestiture may be
accomplished by sale, spin off or termination of the operations
of Mega$ports (ACT). The divestiture is to be accomplished by
January 27, 2001. The Company has the right to request not more
than three 60-day extension periods to complete the divestiture.
The Company is soliciting offers for the sale of Mega$ports (ACT)
and has received inquires from interested parties. The Company is
evaluating its various alternatives.
<PAGE>
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 July
31, 2000:
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: September 14, 2000 By: /s/ Robert D. Ciunci
----------------------------
Robert D. Ciunci
Executive Vice President and
Chief Financial Officer
