UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
___ 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: 0-18864
DEBBIE REYNOLDS HOTEL & CASINO, INC.
(Exact name of Registrant as specified in its charter)
Nevada 88-0335924
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
305 Convention Center Drive
Las Vegas, Nevada 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(702) 734-0711
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes _X_ No ___
(2) Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B, and no disclosure will be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]
The Company's revenues for its most recent fiscal year were $6,421,000. The
aggregate market value of the voting stock held by nonaffiliates (based upon the
average of the bid and
<PAGE>
asked price of these shares on the over-the-counter market) as of March 31, 1997
was approximately $2,272,000.
Class Outstanding at March 31, 1997
Common Stock, $.0001 par value 12,620,207 shares
Documents incorporated by reference: None
Transitional Small Business Disclosure Format:
Yes ___ No _X_
2
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC.
FORM 10-KSB
PART I
Item 1. Description of Business.
(a) Business Development. Debbie Reynolds Hotel & Casino, Inc., formerly
Halter Venture Corporation (the "Company" or the "Registrant") originally was
incorporated on January 10, 1986 under the laws of the State of Texas. From
inception until late 1992, the Company engaged in the business of breeding,
training and racing thoroughbred race horses. The Company acquired SWTV
Production Services, Inc. ("SWTV"), a mobile television production company, on
May 3, 1993 and its operations from that date through March 22, 1994 consisted
solely of the direct operations of SWTV.
Effective March 22, 1994, the Company acquired Maxim Properties Company
("Maxim"), a privately held Colorado corporation, and Debbie Reynolds Management
Company, Inc., formerly Debbie Reynolds Hotel & Casino, Inc. ("DRHC") and
Hamlett Production, Ltd. ("HPL"), both privately held Nevada corporations.
Pursuant to several mergers, HPL Acquisition Corporation, a wholly-owned
subsidiary of the Company, merged with and into DRHC, formerly HPL, the
surviving corporation (the "DRHC Merger"). In addition, MPC Acquisition
Corporation, another wholly-owned subsidiary of the Company, merged with and
into Maxim, the surviving corporation (the "Maxim Merger".) The DRHC Merger and
the Maxim Merger are referred to herein collectively as the "DRHC/Maxim
Mergers." Pursuant to the DRHC/Maxim Mergers, the Company acquired all of the
outstanding securities of DRHC and Maxim in exchange for the issuance of
2,850,833 shares of the Company's Common Stock to the Maxim shareholders and
2,350,833 shares to the DRHC shareholder. In connection with the DRHC/Maxim
Mergers the Company also issued 565,000 shares to others. Prior to the closing
of the mergers, DRHC merged with and into HPL, and HPL changed its name to
Debbie Reynolds Hotel & Casino, Inc.
In connection with the DRHC/Maxim Mergers, the Company divested its
wholly-owned subsidiary, SWTV Production Services, Inc., to the Company's former
President, Lawrence E. Meyers, in exchange for the 2,126,540 shares of Common
Stock of the Company owned by Mr. Meyers which have been canceled by the
Company.
In November 1994, the Company reincorporated in the State of Nevada and
changed its name from Halter Venture Corporation to Debbie Reynolds Hotel &
Casino, Inc. In connection with the reincorporation, the Company's wholly-owned
subsidiary, Debbie Reynolds Hotel & Casino, Inc. changed its name to Debbie
Reynolds Management Company, Inc. ["DRMC"].
The Company's operations consist primarily of the hotel operations of DRMC
and the timeshare operations of Debbie Reynolds Resorts, Inc. ("DRRI"), a
wholly-owned subsidiary of DRMC. DRMC owns and operates the Debbie Reynolds
Hotel & Casino (the "Hotel"), a gift shop, the Hollywood Motion Picture Museum,
a restaurant and bar and a showroom located on Convention Center Drive in Las
Vegas, Nevada. As an accommodation to DRMC, Celebrity Restaurant, Inc., a
company wholly-owned by Ms. Reynolds, leased the restaurant from DRMC until
August 1, 1996 at which time DRMC was granted a liquor license from Clark County
and commenced operating the bar and the restaurant. The Company's operations,
through DRRI, also consist of the sale of timeshare units in the Debbie Reynolds
Hotel. DRRI obtained a permanent timeshare license on June 28, 1994. In
addition, DRMC and its management have pending applications filed for a gaming
license from the Nevada Gaming Authorities; however, there can be no assurance
that such license will be granted. Due to the Company's poor capital structure
and acting on the advice of counsel, the Company requested the Nevada Gaming
3
<PAGE>
Authorities to place a hold on processing its pending gaming applications until
its capital structure substantially improves. Prior to March 31, 1996, the
Company leased space to a third party for the operation of a casino. The Company
served the operator with a termination notice in February 1996, pursuant to the
terms of the lease agreement. Under the lease agreement the Company was losing
money on a monthly basis. The Company requested the operator to cease operations
as of June 30, 1996. On March 31, 1996 the operator discontinued its gaming
operations on the property, removed all of its gaming equipment and subsequently
filed a lawsuit against DRHC. The Company believes that the operator committed
material breaches of the lease agreement. [See Item 3 - Legal Proceedings]
On October 30, 1996 the Company entered into an Agreement for Purchase and Sale
with ILX Incorporated ("ILX") under which ILX would purchase the Debbie Reynolds
Hotel & Casino (the "Hotel"), including all of the Hotel's real and personal
property and the Hotel's timeshare operations (the "ILX Agreement"). ILX is a
publicly-held corporation based in Phoenix, Arizona which principally owns,
operates and markets resort properties in Arizona, Florida, Indiana and Mexico.
On May 15, 1997 ILX elected to cancel and terminate this Agreement. The Company
and ILX continue to negotiate an alternative transaction. There is no guarantee
that an alternative agreement will be reached.
The Company's recurring losses from operations, its working capital
deficiency, its shareholders equity deficiency, its significant debt service
obligations and its default with respect to various agreements raise substantial
doubt about the Company's ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent on its ability to obtain
additional financing to finance its working capital deficit until such time as
cash flows from operations are sufficient to finance the Company's operations,
including the Company's proposed casino operations. The Company may need to seek
protection under the Federal bankruptcy laws in order to complete its plans.
The Company's principal executive offices are located at 305 Convention
Center Drive, Las Vegas, Nevada 89109 and its telephone number is (702)
734-0711.
(b) Business of the Issuer.
(b)(1),(2) Principal Products or Services; Markets and Distribution
Methods.
Background. The Hotel began gaming operations in 1957, under the trade
names "The Royal" and later "The Paddle Wheel Hotel & Casino." Debbie Reynolds
purchased the Paddle Wheel at auction in 1992 and renamed it the "Debbie
Reynolds Hotel & Casino". The Debbie Reynolds Hotel & Casino is located on a
6.13-acre site just off of Las Vegas Boulevard and is located close to the Las
Vegas Convention Center. Las Vegas Boulevard, more commonly known as "The
Strip," is currently the center of gaming activity in Las Vegas.
Hotel. The Debbie Reynolds Hotel includes 193 hotel rooms (of which 43 are
being converted into timeshare units), approximately 6,000 square feet of vacant
casino space which is currently filled with Hollywood memorabilia, the Hollywood
Movie Museum, a 500 seat showroom, a full-service restaurant, a cocktail lounge
and bar, one swimming pool and several hundred parking spaces. The Company
offers its hotel rooms at modest prices (as of March 15, 1997, the average room
rate was approximately $63.53). The Hotel's average occupancy rates were
approximately 82%, 74% and 58% for the 1994, 1995 and 1996 fiscal years,
respectively.
Showroom. Ms. Reynolds' performances in the Company's 500-seat showroom are
the primary draw for the Company's facilities and its timeshare sales. Through
the Company's approximately $1,000,000 renovation, the showroom has
state-of-the-art sound, staging and lighting. When Ms. Reynolds performs, she
performs Monday through Friday in the early
4
<PAGE>
evenings. Generally other Las Vegas acts perform Monday through Saturday after
Ms. Reynolds' show. When Ms. Reynolds is not performing, the showroom attracts
other well-known Las Vegas entertainers. For the year ended December 31, 1996
the showroom averaged 82% occupancy for Ms. Reynolds' show with a ticket price
of $39.95. When Ms. Reynolds does not perform, the showroom averages 30% to 50%
occupancy at ticket prices ranging from $12.95 to $29.95.
Museum. The Debbie Reynolds Hollywood Movie Museum is unique in that it
houses two world class collections of authentic Hollywood movie memorabilia
owned separately by Ms. Reynolds and the Hollywood Motion Picture and Television
Museum, a non-profit organization, "Hollywood". The Museum is a highly technical
multimedia presentation which combines the charm of a historical museum and the
drama of a modern Hollywood screening room. The Museum has five stages,
including three revolving stages, in a surrounding similar to a Hollywood
screening room. The Museum has a walk-through portion where guests are able to
see up close many pieces from Hollywood classics, such as Marilyn Monroe's dress
from the "Seven Year Itch", among many others. Both collections are so extensive
that the Museum is only able to display approximately 10% of the collections at
any one time. The Company acquired the exclusive licenses to display both
extensive collections of movie memorabilia pursuant to license agreements;
however, both Ms. Reynolds License Agreement and Hollywood's License Agreement
have been terminated for default (See below). Both continue on an "at will"
basis terminable at any time. Under Hollywood's License Agreement the Company
also licensed the rights to over 200 film clips from classic Hollywood films,
most of which have received an Academy Award in some category. The Museum has a
seating capacity of 79 people and runs 14 shows a day at an average ticket price
of $7.95. The total costs to complete the Museum were approximately $2,700,000.
See Part III, Item 10. "Executive Compensation," for a description of the
license agreements.
Restaurant and Bar. The restaurant and bar located in the Hotel were
previously operated by Celebrity Restaurants, Inc. ("Celebrity"), a company
wholly-owned by Ms. Reynolds, pursuant to an oral lease agreement which
commenced in August 1994. This lease was undertaken by Celebrity as an
accommodation to the Company because Celebrity held a liquor license and the
Company did not. Under the lease agreement, Celebrity was required to pay the
Company 8% of net income for the lease of the restaurant and bar and DRMC was
obligated to cover the operating cash shortfalls of Celebrity's operations. On
August 1, 1996 DRMC received a liquor license from Clark County and terminated
the oral lease agreement. The restaurant and bar are currently operated by DRMC.
The restaurant seats 150 people and is open for breakfast, lunch and dinner. As
with its hotel accommodations, the food and beverage services provided by the
restaurant and bar are moderately priced. The restaurant operations are not
intended to be a profit center for the Company but the restaurant services are
intended to be an attraction for the timeshare sales, the showroom and the
museum and as a convenience for the hotel guests. See Part III, Item 12.
"Certain Relationships and Related Transactions- Transactions of Debbie Reynolds
Hotel & Casino, Inc. and Hamlett Production, Ltd.
Gift Shop. Hollywood-themed souvenirs, collectibles and logoed merchandise
are currently available in the gift shop. The gift shop occupies approximately
640 square feet of space on the property.
Timeshare. The Company's timeshare operations are conducted through Debbie
Reynolds Resorts, Inc. ("DRRI"), a subsidiary of DRMC. The operations of DRRI
consist of the sale of timeshare units in the Debbie Reynolds Hotel. DRRI
obtained a permanent timeshare license on June 28, 1994 and since then has
aggressively pursued timeshare sales and the conversion of the timeshare units.
Timeshares are sold in units of one week and entitle the purchaser thereof to
use the hotel room for the period of time purchased each year. Each timeshare
room in the hotel has 52 units, representing each week of the year. As of
December 31, 1996, approximately 1,186 (53%) timeshare units have been sold.
Unit prices have ranged
5
<PAGE>
from $6,000 to $10,000 depending upon the size and location of the hotel room. A
minimum of 10% of the unit purchase price must be paid in cash, and the Company
will arrange financing for qualified purchasers. The rooms that are not
converted to timeshare units will continue to be used as hotel rooms. The
Company is in the process of restructuring its timeshare division and currently
is not actively selling timeshare units.
The Company's timeshare units are listed with Interval International, an
internationally-known timeshare network. The Company has a five-star red-room
rating that it has been given by Interval International. The timeshare
renovations include extending the balconies and enclosing them in glass. The
rooms are decorated with new furniture and new color schemes. The cost of
timeshare conversion is approximately $18,500 per room. The Company was
marketing its timeshare units through on-site tours, telemarketing and an off
premises preview center.
Casino. Until March 31, 1996 the gaming operations of the casino were owned
and operated by Jackpot Enterprises, Inc. ("Jackpot"), pursuant to a lease
agreement. Under the lease, Jackpot paid a fixed monthly rent to the Company
based on the number of slot and video poker machines and blackjack tables
located in the casino. Prior to March 31, 1996 the casino consisted of 183 such
machines located in the casino and two blackjack tables. Under the lease the
Company had the option to buy-out the remaining term of the lease based on the
value of the machines and other considerations. . The Company served the
operator with a termination notice in February 1996, pursuant to the terms of
the lease agreement. Under the lease agreement the Company was losing money on a
monthly basis. The Company requested the operator to cease operations as of June
30, 1996. On March 31, 1996 the operator discontinued its gaming operations on
the property, removed all of its gaming equipment and subsequently filed a
lawsuit against DRHC. The Company believes that the operator committed material
breaches of the lease agreement. [See Item 3 - Legal Proceedings]. Since March
31, 1996 there have been no gaming operations on the property.
In connection with the leased casino's gaming activities, the Company
adhered to a policy of stringent controls in compliance with the standards set
by the Nevada Gaming Authorities. See "Regulation and Licensing" under (b)(9)
below.
The Company and its management have pending applications for a gaming
license filed with the Nevada Gaming Authorities; however, there can be no
assurance that such license will be granted. Due to the Company's poor capital
structure and acting on the advice of counsel, the Company requested the Nevada
Gaming Authorities to place a hold on processing its pending gaming applications
until its capital structure substantially improves. If the Company is unable to
secure its own gaming license, the Company will consider entering into another
lease agreement with a licensed casino operator. See "Need for Governmental
Approval" under (b)(8) below.
Consulting Agreements.
During 1995, the Company extended the business consulting agreement with
MBL, an unaffiliated company, under which the consultant agreed to provide the
Company with business and strategic planning consulting services for a total of
12 months in consideration of the issuance a total of 250,000 shares of the
Company's Common Stock under a Registration Statement on Form S-8 filed by the
Company.
During 1995, the Company entered into a business consulting agreement with
Miron Lesham, an unaffiliated person, under which the consultant agreed to
provide the Company with business and strategic planning consulting services
which contract extended for 12 months in
6
<PAGE>
consideration of the issuance of 35,000 shares of the Company's Common Stock
under a Registration Statement on Form S-8 filed by the Company.
During 1995, the Company entered into a business consulting agreement with
Pacific Consulting Group, ("PCG"), an unaffiliated company, under which PCG
agreed to provide the Company with business and strategic planning consulting
services for twelve months in consideration of the issuance of 50,000 shares of
the Company's Common Stock under a Registration Statement on Form S-8 filed by
the Company.
In December 1995, the Company entered into consulting agreements with Peter
Bistrian Consulting, Inc. and Robert C. Brehm Consulting, Inc., ("Consultants"),
unaffiliated companies, under which the consultants agreed to provide the
Company with business, strategic marketing and strategic planning consulting
services for eight months. In consideration for the consulting services, the
Company issued options to purchase up to an aggregate of 750,000 shares of the
Company's common stock over a period of twenty-four months at an exercise price
of $.75 per share. In late 1995 the Company filed a Registration Statement on
Form S-8 registering the 750,000 shares of Common Stock underlying the stock
options issued to the Consultants. The options were exercised by the Consultants
through the issuance of two short-term promissory notes payable to the Company
in the principal amounts of $364,000 and $198,000 (collectively the "Notes").
Subsequent to the issuance of the shares, the Consultants defaulted on the
payments of the Notes. The Company intends to pursue its remedies against the
Consultants, their principals and others with respect to these shares.
In January 1996, the Company entered into a business consulting agreement
with Baron Marney, ("Baron"), an unaffiliated company, under which Baron agreed
to provide the Company with business and strategic planning consulting services
for twelve months in consideration of the issuance of 50,000 shares of the
Company's Common Stock under a Registration Statement on Form S-8 filed by the
Company.
On August 27, 1996, the Company retained Royce Warren as an independent
contractor to render services on an advisory and consultant basis with respect
to various matters relating to future casino operations of the Company.
Compensation and expenses are paid in a flat fee of $2,000 per month.
(b)(3) Status of Publicly-Announced New Product or Services. Not
applicable.
(b)(4) Competition. There is intense competition among companies in the
resort industry, many of which have significantly greater financial resources
than the Company. The Debbie Reynolds Hotel & Casino faces competition from all
other hotels in the Las Vegas area. The Company competes directly with a number
of other operations targeted to local residents. In the event the Company
obtains a gaming license and opens a gaming facility, the Debbie Reynolds Hotel
& Casino's operations will compete generally with gaming operations in other
parts of the State of Nevada, such as Reno, Laughlin and Lake Tahoe, with
facilities in Atlantic City, New Jersey and other parts of the world and with
state-sponsored lotteries, on- and off-track wagering, card parlors, riverboat
and Native American gaming ventures and other forms of legalized gaming. Certain
states have recently legalized, and several other states are currently
considering legalizing, casino gaming in designated areas. Legalized casino
gaming in other states and on Native American reservations represents additional
competition to the Company and could adversely affect the Company's proposed
gaming operations, particularly if such gaming were to occur in areas close to
the Company's operations. The Company competes directly with Grand Flamingo,
Polo Towers, Jockey Club and the Hilton Hotel, all timeshare projects located in
Las Vegas.
7
<PAGE>
The Company's business strategy emphasizes attracting and retaining older,
upper-middle class customers who are familiar with Debbie Reynolds, her
collection of memorabilia and who have a reasonable level of disposable income.
A significant attraction to the Hotel itself is the Hollywood Movie Museum
featuring Ms. Reynolds' extensive collection of movie memorabilia which is one
of the largest of its kind in the world. Also, families attracted by Las Vegas's
new emphasis on theme resorts and attractions may want to spend time at a resort
and museum with an authentic Hollywood theme. The Company believes that Ms.
Reynolds is a significant draw for the showroom, and the Museum, which enables
the Company to attract customers staying at other hotels in Las Vegas to its
facilities.
(b)(5) Raw Materials and Principal Suppliers. Not applicable.
(b)(6) Significant Customers. Not applicable.
(b)(7) Patents and Licenses. The Company previously licensed the exclusive,
perpetual, non-transferable rights to display Ms. Reynolds' and Hollywood's
extensive collection of movie memorabilia and to use the name, photograph,
likeness and signature of Ms. Reynolds for the promotion of the Company and its
operations. Both of these licenses are significant to the Company's business;
however, both of these licenses have been terminated by the respective licensors
and are currently in effect on an "at will" basis terminable at any time. No
assurances can be made that the licensor will not terminate at any time. See
Part III, Item 10, "Executive Compensation" for a description of these licenses.
(b)(8) Need for Governmental Approval. The Company and its affiliates have
obtained all required permits and licenses required to conduct its hotel and
restaurant operations. Debbie Reynolds Resorts, Inc. ("DRRI"), obtained a
permanent timeshare license to conduct its timeshare operations from the Nevada
Real Estate Board on June 28, 1994. Pursuant to Nevada state law and Clark
County ordinances, prior to the Company receiving any gaming revenues, other
than revenues which it might receive under a lease agreement, the Company must
obtain state and county approval for gaming activities. The Company is in the
process of filing the appropriate gaming applications on behalf of the Company
and its officers and directors with the Nevada Gaming Control Board; however,
there can be no assurance that a gaming license will be granted. See (b)(9)
below.
(b)(9) Effect of Governmental Regulations.
As of the date of this report, the Company does not have a gaming license
and no gaming activities are conducted on its properties; however, the following
discussion is included since the Company has pending applications for a gaming
license filed with the Nevada Gaming Authorities. Due to the Company's poor
capital structure and acting on the advice of counsel, the Company requested the
Nevada Gaming Authorities to place a hold on processing its pending gaming
applications until its capital structure substantially improves.
The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, "Nevada Act"); and (ii) various local regulation. Las
Vegas gaming operations are subject to the licensing and regulatory control of
the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming
Control Board ("Nevada Board"), and the Clark County Commission and/or the Clark
County Liquor and Gaming License Board. The Nevada Commission, the Nevada State
Gaming Control Board, the Clark County Commission and/or the Clark County Liquor
Gaming License Board ("CCLGLB") are collectively referred to as the "Nevada
Gaming Authorities."
8
<PAGE>
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
though taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on the Company's proposed gaming
operations.
The Company has pending applications filed with the Nevada Gaming
Authorities for various registrations, approvals, permits and licenses required
in order to engage in gaming activities in Nevada; however, there can be no
assurance that a gaming license will be granted. Due to the Company's poor
capital structure and acting on the advice of counsel, the Company requested the
Nevada Gaming Authorities to place a hold on processing its pending gaming
applications until its capital structure substantially improves. The gaming
license requires the periodic payment of fees and taxes and is not transferable.
The Company, if licensed, will be registered by the Nevada Commission as a
publicly traded corporation ("Registered Corporation") and as such, it will be
required periodically to submit detailed financial and operating reports to the
Nevada Commission and furnish any other information which the Nevada Commission
may require. Individuals may have to obtain licenses and approvals from the
Nevada Gaming Authorities becoming a stockholder of, or receive any percentage
of profits from, the Company.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or its
affiliates or subsidiaries in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee or
its affiliates or subsidiaries. Officers, directors and certain key employees of
the Company must file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company who will be actively and
directly involved in the Company's proposed gaming activities may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company to terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
As a licensee, the Company would be required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by the
Company would need to be reported to, or approved by, the Nevada Commission.
9
<PAGE>
If it were determined that the Nevada Act was violated by the Company, its
gaming licenses could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition, the
Company and the persons involved could be subject to substantial fines for each
separate violation of the Nevada Act at the discretion of the Nevada Commission.
Further, a supervisor could be appointed by the Nevada Commission to operate the
Company's gaming properties and, under certain circumstances, earnings generated
during the supervisor's appointment (except for the reasonable rental value of
the Company's gaming properties) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of any gaming license or the appointment
of a supervisor could (and revocation of any gaming license would) materially
adversely affect the Company's proposed gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than 5% of a company's
voting securities to report the acquisition to the Nevada Commission. The Nevada
Act requires that beneficial owners of more than 10% of a company's voting
securities apply to the Nevada Commission for a finding of suitability within
thirty days after the Chairman of the Nevada Board mails the written notice
requiring such filing. Under certain circumstances, an "institutional investor,"
as defined in the Nevada Act, which acquires more than 10%, but not more than
15%, of a company's voting securities may apply to the Nevada Commission for a
waiver of such finding of suitability if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of a company, any change in a company's corporate charter, bylaws, management,
policies or operations of a company, or any of its gaming affiliates, or any
other action which the Nevada Commission finds to be inconsistent with holding a
company's voting securities for investment purposes only. Activities which are
not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. A company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with a company or its
affiliates or subsidiaries, a company (i) pays that person any dividend or
interest upon voting securities of the Company, (ii) allows that person to
exercise,
10
<PAGE>
directly or indirectly, any voting right conferred through securities held by
that person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities for cash at fair
market value. Additionally, the CCLGLB has taken the position that it has the
authority to approve all persons owning or controlling the stock of any
corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the loss of its approvals, if without the prior approval
of the Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
A gaming licensee is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. A company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require a company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
A Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of a company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission in a variety of
stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environmental for the orderly
11
<PAGE>
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before a company can make exceptional
repurchases of voting securities above the current market price thereof and
before a corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of recapitalization proposed
by a company's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
(b)(10)Research and Development. None.
(b)(11)Compliance with Environmental Laws. Compliance with federal, state
and local provisions regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment will have no material
effect on the capital expenditures, earnings and competitive position of the
Company.
(b)(12)Employees. As of March 31, 1997, the Company employed a total of 103
employees; 85 of whom are full-time employees, including its 2 executive
officers, 10 managers and 9 security personnel. The Company occasionally employs
part-time workers as needed. None of the Company's employees are currently
covered by any collective bargaining agreement, although the International
Alliance Theatrical Stage Employees ("IATSE") is attempting to organize the Star
Theater and Movie Museum stage crew..
Item 2. Description of Properties.
The Debbie Reynolds Hotel & Casino is situated on a 6.13 - acre site just
off of the Las Vegas Strip between the Stardust Hotel and the Las Vegas
Convention Center. It includes 193 hotel rooms (43 of which are licensed for
timeshare sales), approximately 6,000 square feet of vacant casino space, a
500-seat showroom, a 79-seat museum, a full-service restaurant, a
12
<PAGE>
cocktail lounge and bar, one swimming pool and several hundred parking spaces.
These facilities total approximately 210,380 square feet.
As of March 29, 1997 the Company had a total of approximately $7,194,000 in
mortgages encumbering its real and personal property, including the Hotel and
real property located at 305 Convention Center Drive, Las Vegas, Nevada. See
Part II, Item 6 "Management's Discussion and Analysis or Plan of Operations" for
a description of these mortgages.
The Company believes that these facilities are suitable and adequate for
its current needs.
Item 3. Legal Proceedings.
In January 1994, Edward Stambro, an unaffiliated individual, filed a
lawsuit against one of the Company's subsidiaries and others in the District
Court of Clark County, Nevada, alleging breach of brokers agreement. The
Company's subsidiary filed an answer to the allegations on February 28, 1994.
Management and legal counsel for the Company are of the opinion that the
plaintiff's claim is without merit and the Company will prevail in defending the
suit.
On April 28, 1995, Ronald D. Nitzberg and Ron Nitzberg Associates, Inc., an
unaffiliated corporation, filed a lawsuit against the Company and others in the
District Court of Clark County, Nevada, alleging breach of contract, slander and
other claims, relating to his employment with the Company. The plaintiffs seek
damages in the amount of approximately $245,000 and an unspecified amount of
money damages. The Company has filed a counterclaim against the plaintiff
alleging breach of fiduciary duty and breach of contract asking for declaratory
relief from consulting and stock agreements.
On April 14, 1995, Edward S. Coleman filed a lawsuit against the Company
and others in the District Court of Clark County, Nevada, alleging breach of
covenant of good faith and fair dealing based on certain services. The plaintiff
seeks unspecified money damages in excess of $10,000.
On January 26, 1995, American Interval Marketing, Inc., filed a lawsuit in
the District Court of Clark County, Nevada, against the Company and others,
alleging breach of contract and reasonable value of services. The plaintiff
seeks damages of approximately $45,000.
On July 14, 1995, Grand Nevada Hotel Corp., filed a lawsuit in the District
Court of Clark County, Nevada, against the Company, alleging breach of contract
and breach of implied duty of good faith. The plaintiff seeks damages in excess
of $10,000.
On July 27, 1995, Norman Eugene Watson, filed a lawsuit against the Company
and others in the District Court of Clark County, Nevada, alleging breach of
contract, fraud and misrepresentation and other claims. The plaintiff seeks
damages in excess of $10,000.
On August 10, 1995, Fiduciary Trust Company International, as Trustee of
the Taylor-Made Ltd. Defined Benefit Pension Plan, filed a lawsuit in the
District Court of Clark County, Nevada, against the Company and others, alleging
breach of contract and unjust enrichment. The plaintiff seeks damages in excess
of $10,000. The Company is negotiating a settlement with respect to this
lawsuit.
On September 1, 1995, Young Electric Sign Company, filed a lawsuit in the
District Court of Clark County, Nevada, against the Company and others, alleging
breach of contract. The plaintiff is seeking damages in excess of $10,000.
13
<PAGE>
On April 11, 1996 Jackpot Enterprises, Inc., filed a lawsuit in the
District Court of Clark County, Nevada, against the Company and others, alleging
breach of contract, specific judgment, unjust enrichment and breach of the
implied covenant of good faith and fair dealing. The plaintiff is seeking
damages in excess of $10,000.
On April 21, 1997 Maxim Financial Profit Sharing Plan, filed a lawsuit in
the United States District Court, District of Colorado, against the Company and
others, alleging breach of contract, intentional fraud, Securities Violations
and Recission. The plaintiff is seeking damages in excess of $75,000.
In addition to the above mentioned lawsuits, their are numerous other
lawsuits filed against the Company by certain of its vendors and other
creditors. The Company believes that these lawsuits may be satisfied through
payment of the indebtedness to the extent the Company's cash flow permits.
Except as otherwise set forth above, the Company is unable to predict, at
this time, the likelihood of the Company prevailing in the above lawsuits.
However, the Company has recorded a provision for estimated losses from
litigation of $890,000.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
(a)(1) The principal market on which the Registrant's Common Stock is
traded is the over-the-counter market and the Registrant's Common Stock is
quoted on the National Quotation Bureau Inc.'s Electronic Bulletin Board.
(a)(1)(i) Not applicable.
(a)(1)(ii) The range of high and low bid quotations for the Registrant's
Common Stock for the last two fiscal years are provided below and were obtained
from tradeline. These over-the-counter market quotations reflect inter-dealer
prices without retail markup, markdown or commissions and may not necessarily
represent actual transactions.
High bid Low bid
---------------------------
1/1/95 - 3/31/95 $4.50 1.13
4/1/95 - 6/30/95 3.00 1.75
7/1/95 - 9/30/95 3.00 2.63
10/1/95 - 12/31/95 2.75 .63
1/1/96 - 3/31/96 1.44 .75
4/1/96 - 6/30/96 1.19 .54
7/1/96 - 9/30/96 1.13 .57
10/1/96 - 12/31/96 .94 .35
On March 19, 1997, the reported bid and asked prices for the Registrant's
Common Stock were $.16 and .19, respectively.
(a)(2) Not applicable.
14
<PAGE>
(b) On March 27, 1997 the Registrant had approximately 579 holders of
record of its Common Stock which does not include holders whose shares were held
in street name.
(c)(1) The Registrant has paid no dividends with respect to its Common
Stock.
(c)(2) The Registrant's outstanding 8 3/4% Convertible Subordinated
Debentures prohibit the Registrant from paying dividends, other than Common
Stock dividends on its preferred stock, while the Debentures are outstanding.
Item 6. Management's Discussion and Analysis or Plan of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report.
Liquidity and Capital Resources:
As of December 31, 1996, the Company had a working capital deficit of
$13,790,000 compared to a working capital deficit of $10,059,000 at December 31,
1995. As of December 31, 1996, the Company had a stockholder's deficiency of
$6,329,000 as compared to a stockholder's deficiency of $884,000 as of December
31, 1995. In addition, as of December 31, 1996, the Company is in default in the
payment of the following indebtedness: principal and interest payments on
mortgages, principal and interest payment on debentures, payroll taxes of
approximately $1,063,000, and property taxes, operating taxes, equipment leases
and various other accounts payable and accrued liabilities aggregating
approximately $3,643,000. During the year ended December 31, 1996, cash and cash
equivalents decreased by $172,000.
Financings
During 1996, the Company's long-term debt increased from $8,328,000 at
December 31, 1995 to $8,688,000 at December 31, 1996.
In March 1994 the Company obtained a $2,500,000 loan from Bennett
Management & Development Corp. ("Bennett"), the proceeds of which were used to
replace an existing mortgage on the Debbie Reynolds Hotel & Casino of $2,090,000
and the balance of $410,000 was used for working capital. The loan bears
interest at 13% per annum and is due on March 15, 1997. The loan requires
monthly payments of interest and payments of $1,200 per timeshare unit sold to
be applied to accrued interest and principal. In consideration of the loan the
Company issued to Bennett 25,000 shares of its Common Stock. Ms. Reynolds
executed a personal guarantee with respect to the loan. As of December 31, 1996
the principal amount outstanding was reduced to approximately $2,249,000. This
loan has matured and is in default.
In June 1994 the Company and its subsidiaries obtained a $1,000,000 loan
from TPM Holdings, Inc. ("TPM"), and Source Capital Corporation ("Source"), both
unaffiliated with the Company. The loan bore interest at 13% per annum and was
due on June 7, 1996. The loan required monthly payments of interest and payments
of $1,000 per timeshare unit sold to be applied to accrued interest and
principal. The loan was secured by the Company's real and personal property,
including the Debbie Reynolds Hotel & Casino. As of December 31, 1995 the
principal amount outstanding was reduced to approximately $151,000 and the loan
was paid off in July 1996.
In December 1994 TPM Holdings, Inc. and Source Capital Corporation loaned
the Company an additional $1,100,000. The loan bears interest at a rate equal to
the greater of four percent over the prime rate or 12%, and was due on November
15, 1996. The loan requires
15
<PAGE>
monthly payments of interest and payments of between $100 and $1,500 per
timeshare unit sold, depending on the actual number of units sold, to be applied
to accrued interest and principal. The loan is secured by the Company's real and
personal property, including the Debbie Reynolds Hotel & Casino. The principal
amount outstanding on the loan as of December 31, 1996 was approximately
$511,000. This loan was paid off in February 1997.
The Company allows purchasers to finance a significant portion of its
timeshare sales. To facilitate the sale of timeshares the Company obtained a
$25,000,000 (increased to $35,000,000 at March 31, 1995) commitment from Bennett
Funding International, Ltd. ("Bennett") whereby Bennett purchases timeshare
paper from the Company with recourse, subject to its credit criteria, and
advances the Company 85% of the amount financed. Generally, the Company receives
at least a 10% down payment from the purchaser and finances the remaining 90%
with Bennett. At December 31, 1996 the Company had utilized and was contingently
liable for approximately $2,824,000 of this commitment.
In January 1995, World Venture Trust, an unaffiliated company, loaned the
Company $250,000. The loan bore interest at 10% and was due April 26, 1995 with
a principal balance of $275,000. The loan was secured by the Company's real and
personal property. The loan was convertible, at the option of the holder, after
maturity, into 200,000 shares of the Company's common stock. The Company paid
off this loan in September of 1995 with $275,000 in cash and issued the holder
15,745 restricted shares of the Company's common stock.
In January 1995, Realecon, a California Corporation, loaned the Company
$125,000 and advanced an additional $75,000 in March 1995. The Loan bore
interest at 12% and was due July 16, 1995. The amount due at maturity was
$235,000. The loan was secured against certain receivables of the Company and
required principal and interest payments equal to $1,000 per timeshare interval
sold. In consideration of the loan the Company issued Realecon 10,000 restricted
shares of the Company's common stock. The Company paid off this loan in June of
1995.
In February 1995, the Company obtained a $525,000 loan from Bennett, the
proceeds of which were principally used in the construction of the museum and
for general corporate purposes. The loan bears interest at 13% and was
originally due and payable March 22, 1997. The loan is secured by the Company's
real and personal property.
In March 1995, the Company obtained a $245,000 loan from an independent
third party, the proceeds of which were principally used in the construction of
the museum. The loan bore interest at 6% and was due March 31, 1996. The loan
was convertible, at the holder's option, into the Company's restricted common
stock at a rate of $1.00 per share. In August 1995 the holder converted the
indebtedness into 245,000 shares.
In April 1995, the Company obtained a $500,000 loan from TPM
Financial/Source Capital, the proceeds of which were principally used in the
construction of the museum and for general corporate purposes. The loan bore
interest at 13% and was due June 25, 1996. This loan was issued as an addition
to the lender's second mortgage. The Company paid off this loan in November of
1995.
In May 1995, the Company obtained a $340,000 loan from Bennett, the
proceeds of which were principally used for general corporate purposes. The loan
bears interest at 13% and was originally due and payable March 22, 1997. The
loan is secured by the Company's real and personal property.
In August 1995, the Company obtained a $2,865,000 loan from Bennett Funding
International, LTD., the proceeds of which were principally used to pay off
existing debt and for
16
<PAGE>
general corporate purposes, which included the $340,000 advanced to the Company
in May of 1995 and $525,000 advanced in February of 1995. The loan bears
interest at 14% and is due August 23, 1999. The loan is secured by the Company's
real and personal property. This loan is personally guaranteed by Ms. Reynolds.
In October 1995, the Company raised additional financing through a
Regulation S offering under the Securities Act of 1933 (the "Act"). The Company
sold 300,000 shares of the Company's common stock totalling net proceeds of
approximately $225,000. The offering of shares was directed solely to persons
who were not residents of the United States. The Company offered a maximum of
2,666,666 shares at $.75 per share. The shares were not registered under the Act
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration. In addition the shares were subject to a
minimum six month restriction on transfer.
In December 1995, the Company commenced a Regulation D offering under the
Securities Act of 1933 (the "Act"). The Company sold 200,000 units, at $1.00 per
unit, consisting of 200,000 shares of the Company's common stock and 200,000
warrants to purchase one share of common stock at $1.00, totalling net proceeds
of approximately $182,000. The offering of shares was directed solely to persons
who met the definition of "Accredited Investor" set forth in rule 501(A) of
Regulation D promulgated under the Act. The Company offered a maximum of
3,000,000 Units, (the "Unit"), each unit consisting of one share of Common Stock
and one warrant to purchase one share of common stock at $1.00 per share.
In August 1995 the Company offered all holders of the Company's units
issued pursuant to the Company's private placement memoranda dated March 25,
1994 and November 17, 1994 the opportunity to convert the Series AA Preferred
Stock and Debentures constituting part of the units into restricted shares of
the Company's common stock. Each Series AA Preferred Stock and Debenture
converted into one share of the Company's common stock at the reduced conversion
prices of $2.00 and $2.25, per share, respectively. The total dollar amount
converted from Series AA Preferred Stock and Debentures was $2,954,500 which
converted into 1,392,240 shares of the Company's common stock. As additional
consideration, the Company also offered the unit holders the right to exercise
each Class A Warrant to purchase two shares of Common Stock (instead of one) at
an exercise price of $1.00 per share (instead of $5.50) for 60 days from the
date of the offer. Pursuant to the Warrant offer, the Company received $93,120
from the exercise of warrants to purchase 93,120 shares of Common Stock. As
additional consideration to the Company, the unit holders waived the delinquent
interest and dividend payments owed.
In May 1996, the Company offered all holders of the Company's units issued
pursuant to the Company's private placement memorandum dated March 25, 1994 the
opportunity to convert the Series AA Preferred Stock and Debentures constituting
part of the units into restricted shares of the Company's common stock. Each
Series AA Preferred Stock and Debenture converted into one share of the
Company's common stock at the reduced conversion prices of $1.10 per share. The
total dollar amount converted from Series AA Preferred Stock and Debentures was
$884,000 which converted into 803,637 shares of the Company's common stock. As
additional consideration, the Company reduced the conversion price for each
Series AA Preferred Stock and Debenture issued pursuant to the Private Placement
Memorandum dated November 17, 1994 to $2.25. As additional consideration to the
Company, the unit holders waived the delinquent interest and dividend payments
owed.
In August 1996, the Company obtained a $500,000 loan from Gregory Orman, a
third party, the proceeds of which were principally used to reduce past due tax
obligations, reduce trade payable debt and also allowed the Company to engage
its auditors. The loan bears interest at 12% and has $550,000 principal balance
due November 1, 1996. This loan is secured with a fourth mortgage on the
Company's property and with certain of the Company's receivables. In
17
<PAGE>
connection with the financing the Company granted Orman warrants to acquire
260,000 shares of the Company's common stock at an exercise price of $.70 per
share. On October 18, 1996, Orman agreed to extend the maturity date to February
1, 1997. In consideration for the extension the Company reduced Orman's exercise
price on the warrants to acquire 260,000 shares of the Company's common stock
from $.70 per share to $.22 per share. This loan is personally guaranteed by Ms.
Reynolds and Todd Fisher.
In February 1997, the Company obtained a $1,100,000 loan from Galt Capital,
an affiliate of Gregory Orman, an independent third party, the proceeds of which
were principally used to pay-off the TPM/Source second mortgage that was in
default, reduce past due tax obligations, reduce trade payable debt and the
balance will fund the Company's operations until additional financing can be
arranged. The loan bears interest at 12% and has $1,100,000 principal balance
due June 5, 1997. This loan is secured pursuant to an assignment of TPM Holding,
Inc. second Deed of Trust, Loan Agreement and Promissory Note dated December
1994 and is secured by a $573,000 first deed of trust placed against real
property owned by Selden Enterprises, ("Selden"), an affiliate of Ms. Reynolds
and Todd Fisher. In addition, Debbie Reynolds and Todd Fisher have personally
guaranteed this loan. The Company will issue Selden 500,000 shares of its common
stock as consideration for allowing the deed of trust to be placed on its real
property. The Company will also issue Ms. Reynolds 500,000 shares of its common
stock in consideration of her personal guarantee and in recognition of numerous
past uncompensated guarantees provided by Ms. Reynolds as well as Ms. Reynolds'
continued efforts on behalf of the Company. In connection with the financing the
Company has issued a warrant to purchase approximately 2% of the Company's
outstanding common stock, as calculated pursuant to the agreement, at an
exercise price of $.22 per share, the estimated fair market value, which expires
February 5, 2000.
As of January 1997, the Company is currently in default under: the Bennett
Management & Development ("BMD") mortgage due to non-payment of principal and
interest and the holder has the right to accelerate the mortgage immediately and
make demand on the entire outstanding principal balance; the BMD mortgage had a
principal balance of approximately $2,249,000 plus accrued interest outstanding
at December 31, 1996; the Bennett Funding International, Ltd. ("BFI") mortgage
is in default due to non-payment of interest and the holder has the right to
accelerate the mortgage immediately and make demand on the entire outstanding
principal balance; the BFI mortgage had a principal balance of approximately
$3,066,000 plus accrued interest outstanding at December 31, 1996; and the
Company is in default on its unsecured subordinated debentures due to
non-payment of monthly interest and delinquent principal payments, the holders
have the right to accelerate immediately and make demand on the entire
outstanding principal balance.
On October 30, 1996 the Company entered into an Agreement for Purchase and Sale
with ILX Incorporated ("ILX") under which ILX would purchase the Debbie Reynolds
Hotel & Casino (the "Hotel"), including all of the Hotel's real and personal
property and the Hotel's timeshare operations (the "ILX Agreement"). ILX is a
publicly-held corporation based in Phoenix, Arizona which principally owns,
operates and markets resort properties in Arizona, Florida, Indiana and Mexico.
On May 15, 1997 ILX elected to cancel and terminate this Agreement. The Company
and ILX continue to negotiate an alternative transaction. There is no guarantee
that an alternative agreement will be reached.
The Company's recurring losses from operations, its working capital
deficiency, its shareholders equity deficiency, its significant debt service
obligations and its default with respect to various agreements raise substantial
doubt about the Company's ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent on its ability to obtain
additional financing to finance its working capital deficit until such time as
cash flows from operations are sufficient to finance the Company's operations,
including the
18
<PAGE>
Company's proposed casino operations. The Company may need to seek protection
under the Federal bankruptcy laws.
In addition to pursuing an alternative transaction with ILX, management is
seeking additional sources of financing to reduce its debt service obligations,
complete certain capital projects and fund its working capital needs. In
addition, management has implemented cost control measures to improve the cash
flow of the Company. There can be no assurance that the additional financing
will be obtained.
Revenues:
Revenues for fiscal 1996 totaled $6,421,000 as compared to $9,790,000 for
fiscal 1995. This decrease is attributed to the timeshare department having cut
back to minimal sales and operations during the fiscal year 1996. Revenues from
timeshare sales were $1,340,000 and from hotel rooms were $2,325,000 for fiscal
year 1996 as compared to respective revenues of $3,839,000 and $2,444,000 for
fiscal year 1995. Showroom revenues totaled $1,226,000 for 1996 as compared to
$1,938,000 in 1995. This decrease is attributed to Ms. Reynolds performing 20
weeks as compared to 32 weeks during 1995. Restaurant revenues totaled $695,000
for 1996 as compared to $297,000 for the approximate four month period the
Company operated the restaurant during 1995. This increase is attributed to the
1996 operations including a full year of operations as compared to only four
months operations of the restaurant during 1995. Rental income for 1996 totaled
$96,000 all of which was from casino rental as compared to casino rental income
which totaled $502,000 for 1995. This decrease is attributed to the casino
operating only three months during 1996 as compared to a whole year of
operations during 1995. The Company's gift shop produced revenues of $176,000
for 1996 compared to $123,000 for 1995. Museum revenues for fiscal year 1996
totaled $404,000 as compared to museum revenue of $416,000 for 1995. See "Part
1, Item 1 Description of Business."
The loss from operations for 1996 totaled $4,910,000 as compared to
$6,002,000 for 1995. The decrease in the loss from operations for 1996 can be
attributed to the following expenses incurred during 1995 which were not
incurred in 1996: approximately $460,000 relating to the conversion of certain
of the company's debts into equity, the issuance of common stock and write-off
of prepaid consulting services totaling approximately $960,000, the Company
reserving an allowance of $450,000 relating to certain of its contingent
liabilities, and $126,500 expense relating to the forgiveness of a certain
account receivable. During 1996, the Company reserved an additional $440,000
relating to certain of its contingent liabilities. During 1996, the restaurant
operation contributed a loss from operations of $718,000. The restaurant loss is
attributed to the competitive food & beverage market in Las Vegas. In response
to the significant loss incurred from the restaurant, in November 1996 the
Company replaced the full-service style restaurant with a self-service deli. The
Company believes the change to a deli will reduce the restaurant operating loss.
During 1996, management reduced staff, restructured operations and implemented
cost cutting controls. Although the Company continues to incur significant
operating losses, during 1996 management's actions reduced General and
Administrative expenses approximately $2,014,000 and reduced property
operations, maintenance and energy expenses approximately $909,000 as compared
to 1995. The net loss for 1996 totaled $6,464,000 as compared to $8,603,000 for
1995.
Interest Expense:
Interest expense decreased from $2,601,000 in 1995 to $1,554,000 in 1996.
This decrease is attributed to costs associated with the conversion of debt into
shares of its common stock which were incurred during 1995, but were not
incurred during 1996.
19
<PAGE>
Item 7. Financial Statements.
The following financial statements are filed as a part of this Form 10-KSB
and are included immediately following the signature page.
Independent Auditor's Report
Consolidated Balance Sheet - December 31, 1996
Consolidated Statements of Operations - Years ended December 31, 1996 and
1995
Consolidated Statements of Shareholders' Equity (Deficiency) - Years ended
December 31, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1996 and
1995
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. (Not Applicable)
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
(a)(1),(2),(3) Identification of Directors and Executive Officers.
Date first
appointed
to such
Name Age Position with the Company position
- --------------------------------------------------------------------------------
Debbie Reynolds 64 Chairman, Director March 1994
Secretary May 1995
Todd Fisher 38 Chief Executive Officer, President, May 1995
Chief Financial Officer, Treasurer
Director March 1994
(a)(4) The business experience of the Registrant's officers and directors
is as follows:
Debbie Reynolds. Ms. Reynolds' 49-year business career has made her an
internationally known star of more than 30 motion pictures, two Broadway shows
and hundreds of television appearances. In December 1996, Paramount Pictures
released a feature film entitled "Mother", starring Ms. Reynolds and Albert
Brooks. Hamlett Productions, Ltd., a company owned 50% by Ms. Reynolds,
purchased the old Paddle Wheel Hotel and Casino in Las Vegas at auction as a
site for a movie museum to house her collection of Hollywood memorabilia,
believed to be the largest privately held in the world. The extensively
renovated property reopened in July 1993 as the Debbie Reynolds
Hotel/Casino/Hollywood Movie Museum. The unique, high-tech, multi-media
Hollywood Movie Museum opened in early 1995. Ms. Reynolds also is secretary and
a director of Debbie Reynolds Management Company, Inc. ("DRMC"), a wholly-owned
subsidiary of the Company, is secretary and a director of Debbie Reynolds
Resorts, Inc., a wholly-owned
20
<PAGE>
subsidiary of DRMC, and is president and sole shareholder of Raymax Production,
Ltd., an entertainment company, and Celebrity Restaurants, Inc, a service
company.
Todd Fisher. Mr. Fisher has more than twenty years of technical and
creative experience in television and film. He has designed and built sound
stages, recording studios and TV facilities. Mr. Fisher designed the Company's
state-of-the-art, 500-seat showroom which doubles as a complete television
production studio. He also conceived and designed the Company's unique,
high-tech, multi-media Hollywood Movie Museum, which is one of the first sites
in the country to exhibit high-definition television. In May 1995 the Board of
Directors of the Company appointed Mr. Fisher as the Company's Chief Executive
Officer, President, Chief Financial Officer and Treasurer. Mr. Fisher also is
president, treasurer and a director of DRMC and is president, treasurer and a
director of Debbie Reynolds Resorts, Inc.
The Board of Directors has no committees at this time.
(a)(5) Directorships Held in Other Reporting Companies. None.
(b) Identification of Certain Significant Employees. None.
(c) Family Relationships. Ms. Reynolds is the mother of Todd Fisher. Other
than this relationship, there are no family relationships between any director
or executive officer of the Company.
(d) Involvement in Certain Legal Proceedings.
During the past five years, no director, executive officer, promoter or
control person of the Company has:
(1) Had any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that date;
(2) Been convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) Been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
(4) Been found by a court of competent jurisdiction (in a civil action),
the Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, where the judgment has not been
reversed, suspended, or vacated.
(e) Compliance with Section 16(a) of the Exchange Act.
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Company's officers, directors and persons who own greater than 10% of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Based
solely on a review of the forms it has received and on written representations
from certain reporting persons, the Company believes, to the best of its
knowledge, that during 1996 all Section 16 filing requirements applicable to its
officers, directors and 10% beneficial owners were complied with by such
persons.
21
<PAGE>
Item 10. Executive Compensation.
(a) General.
During the 1994 fiscal year and in connection with the DRMC/Maxim mergers,
the Company entered into various compensation agreements with certain of its
executive officers. During 1995, some of these compensation agreements were
amended. See (g) "Employment Contracts and Arrangements" below.
(b) Summary Compensation Table.
The following table sets forth certain information regarding the
compensation paid or accrued by the Company to or for the account of the
executive officers of the Company whose total annual compensation exceeded
$100,000 during the fiscal years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Compensation Table
------------------
Annual Compensation Long - Term Compensation
------------------- ------------------------
Securit.
Name and Restrctd. Underly.
Principal Other Annual Stock Options/ LTIP
position Year Salary Bonuses Compensation Awards SARs (#) Payout Other
- -------- ---- ------ ------- ------------ ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Debbie Reynolds 1996 $825,000[1] -0- N/A -0- 100,000[2] -0- -0-
Chairman of the 1995 $965,000[1] -0- N/A -0- -0- -0- -0-
Board, Secretary 1994 $600,000[1],[3] -0- N/A -0- -0- -0-
50,000[4]
Todd Fisher 1996 $155,769 -0- N/A -0- 100,000[2] -0- -0-
CEO, President, 1995 $127,615 -0- N/A -0- -0- -0- -0-
Treasurer, CFO 1994 $128,000 -0- N/A -0- 50,000[4] -0- -0-
Henry Ricci 1996 $68,963 -0- N/A -0- 25,000[5] -0- -0-
Former President 1995 $129,038 -0- N/A -0- 275,000[6] -0- -0-
1994 $131,250 -0- N/A -0- -0- -0- -0-
Donald Granatstein 1996 -0- -0- N/A -0- -0- -0- -0-
Former CFO, 1995 $ 39,000 -0- $164,060[7] -0- -0- -0- -0-
Executive Vice 1994 $120,000 -0- $103,500[8] -0- 300,000[9] -0- -0-
President, and
Treasurer
</TABLE>
[1] Represents amounts paid or accrued to Raymax Productions, Inc., a Company
wholly-owned by Ms. Reynolds ("Raymax") and Ms. Reynolds individually, pursuant
to an agreement among Raymax, Ms. Reynolds and the Company. For the salary
indicated above for the year ended December 31, 1995 Raymax was actually paid
only $170,000 and is owed $795,000 in accrued showroom performance fees. For the
year ended December 31, 1996, Raymax Productions and Ms. Reynolds were paid $0
and are owed $825,000 in accrued showroom performance fees. As of
22
<PAGE>
December 31, 1996, Raymax Productions and Ms. Reynolds are owed a total of
$1,620,000 in accrued showroom performance fees. See (g) "Employment Contracts
and Arrangements" below.
[2] Represents shares underlying stock options exercisable at $.80 per share
until February 16, 2001. The fair market value of the Common Stock on the date
of grant was $1.00 per share.
[3] Does not include $455,000 advanced to Raymax during fiscal year 1994. See
(g) " Employment Contracts and Arrangements" below.
[4] Represents shares underlying stock options exercisable at $4.00 per share
until October 10, 1999. The fair market value of the Common Stock on the date of
grant was $5.00 per share.
[5] Represents shares underlying stock options exercisable at $1.00 per share
until March 22, 1999. The fair market value of the Common Stock on the date of
grant was $1.00 per share.
[6] Represents shares underlying stock options exercisable at $3.00 per share
until March 22, 1999. The fair market value of the Common Stock on the date of
grant was $5.70 per share.
[7] Represents timeshare commissions and advances paid to Roebling totalling
$37,560 and $126,500. See (g) "Employment Contracts and Arrangements."
[8] Represents timeshare commissions paid to Roebling. See (g) "Employment
Contracts and Arrangements."
[9] Represents shares underlying stock options exercisable at $3.00 per share
until March 22, 1999. The fair market value of the Common Stock on the date of
grant was $5.70 per share.
N/A: Disclosure is not applicable under the Securities and Exchange Commission's
rules.
(c) Option/SAR Grants Table.
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Market Price
Options/SARs Employees in Base Price Expiration on
Name Granted (#) Fiscal Year ($/Sh) Date Date of Grant
- ---- ----------- ----------- ------ ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Debbie Reynolds 100,000 44.4% $ .80 2/16/01 $ 1.00
Todd Fisher 100,000 44.4% $ .80 2/16/01 $ 1.00
Henry Ricci 25,000 11.1% $ 1.00 3/22/99 $ 1.00
</TABLE>
1994 Stock Option Plan. During 1994 the Company adopted a Stock Option Plan
for officers, directors and key employees (the "Plan"). The Company has reserved
a maximum of 2,000,000 shares of Common Stock to be issued upon the exercise of
options granted under the Plan. The Plan includes: (i) options intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended; (ii) non-qualified options which are not
23
<PAGE>
intended to qualify as "incentive stock options"; and (iii) formula plan options
which are non-discretionary and will be granted annually to the disinterested
directors of the Company. As of March 1997, options to purchase up to 425,000
shares have been granted under the Plan. The 1994 Stock Option Plan and the
190,000 options previously granted thereunder were approved by the Company's
shareholders at the 1994 Stockholders Meeting.
1994 Employee Stock Compensation Plan. The Company adopted in June 1994 an
Employee Stock Compensation Plan for employees, officers and directors of the
Company and consultants and advisors to the Company (the "1994 ESC Plan").
Employees will recognize taxable income upon the grant of Common Stock equal to
the fair market value of the Common Stock on the date of the grant. The shares
of Common Stock issuable under the 1994 ESC Plan have been registered under a
registration statement on Form S-8. The ESC Plan is administered by the Board of
Directors. Of the 1,000,000 shares reserved under the Plan 707,710 had been
granted as of December 31, 1996. During 1997 an additional 30,000 shares were
granted under the Plan.
24
<PAGE>
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End($)
Shares Acquired ------------- -------------
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Debbie Reynolds -0- -0- 150,000 $ -0-
exercisable
Todd Fisher -0- -0- 150,000 $ -0-
exercisable
Donald Granatstein -0- -0- 300,000 $ -0-
exercisable
Henry Ricci -0- -0- 300,000 $ -0-
exercisable
</TABLE>
(e) Long-Term Incentive Plan Awards Table. None.
(f) Compensation of Directors. Directors of the Company are not compensated for
their services as such but are reimbursed for expenses incurred in attending
Board meetings.
(g) Employment Contracts and Arrangements.
Agreement with Raymax Production, Ltd. DRMC entered into an agreement with
Debbie Reynolds and Raymax Production, Ltd., a California corporation
wholly-owned by Debbie Reynolds ("Raymax") as of January 25, 1994, and as
amended on March 9, 1995. Under the agreement Raymax provided the entertainment,
management and promotional services of Ms. Reynolds on an exclusive basis in Las
Vegas, Nevada during her lifetime. The agreement was terminable upon Ms.
Reynolds' death or a default. Under the agreement Ms. Reynolds was to provide
performance in the showroom at the Debbie Reynolds Hotel for a minimum of 30
weeks per year and other managerial and promotional activities. As compensation
for her performance services, Raymax was to receive $25,000 per weekly
performance (the "Weekly Performance Fee"). Under the agreement Raymax also was
to receive annually 10% of the Company's net profits (as defined in the
agreement) for her non-entertainment services. Raymax had the right to take a
non-refundable monthly draw against the net profits equal to the difference
between $60,000 and the Weekly Performance Fees for such month, up to a maximum
draw of $1,000,000. If the draw taken for any year exceeded the 10% net profits
for such year, such excess would be carried forward as a non-refundable advance
against future net profits earned under the agreement. Raymax also was to
receive reimbursement of reasonable business and travel expenses. Under the
agreement, DRMC is required to carry life insurance on Ms. Reynolds in the
amount of $10,000,000 for the benefit of DRMC. During 1994 and under the
original terms of the agreement prior to its amendment in March 1995, Ms.
Reynolds was to receive compensation of $50,000 per month for her services.
During 1994 the Company had advanced $455,000 to Raymax against future amounts
owing under this agreement, all of which was outstanding at
25
<PAGE>
December 31, 1995. As of December 31, 1995 the Company was in arrears
approximately $795,000 pursuant to the weekly performance fee and monthly draw
of this agreement. As of December 31, 1996, the amount the Company was in
arrears to Raymax and Ms. Reynolds was $1,620,000 plus $162,000 in accrued
interest. The Company and Raymax have agreed to net the $455,000 advance against
the $1,620,000 in arrears as of December 31, 1996. In September, 1996 Raymax and
Ms. Reynolds served the Company a written notice that this agreement was in
default due to non-payment. In November 1996, Raymax delivered a notice to the
Company terminating this agreement. Ms. Reynolds has agreed to render showroom
and other services on an "at will" basis, terminable at any time. The terms
relating to Ms. Reynolds' current "at will" services are the same as specified
in the terminated agreement except that as to all unpaid past and future sums
due Ms. Reynolds, the Company shall pay interest at a rate of prime plus 2%.
Exclusive License Agreement Effective March 9, 1995 the Company entered
into an agreement with Ms. Reynolds and Raymax under which Ms. Reynolds was to
grant the Company the exclusive, perpetual, non-transferable license: (i) to
display Ms. Reynolds' extensive Hollywood memorabilia collection at the
Company's Hollywood Movie Museum; and (ii) to use the name, photograph, likeness
and signature of Ms. Reynolds for the promotion of the Company and its
operations. In consideration for the license, the Company was to agree to issue
400,000 shares of restricted Common Stock to Raymax and to insure, maintain and
house the memorabilia. As additional consideration for the license, upon Ms.
Reynolds' death, the Company would pay to her heirs and/or assigns annually, 10%
of the net profits of the Company (as defined in the agreement) in perpetuity.
The Company is in default of the agreement with Ms. Reynolds. In November 1996,
Ms. Reynolds delivered a written notice to the Company terminating this
agreement.
Exclusive License Agreement Effective March 9, 1995 the Company entered
into a license agreement with Hollywood Motion Picture and Television Museum, a
non-profit organization ("Hollywood"), which also owns an extensive Hollywood
memorabilia collection. Under the agreement with Hollywood, the Company has been
granted the license to display Hollywood's memorabilia in its Museum in
consideration for the Company's annual payment to Hollywood of $50,000 until the
construction costs of the Museum has been recouped from the Museum profits, at
which time the annual payment will increase to $100,000. On December 27, 1996
Hollywood sent a default and 30-day termination notice to the Company due to
non-performance on the contract terminating the agreement as of January 26,
1997.
Employment Contract with Henry Ricci. Henry Ricci, formerly the President
of the Company, had entered into an Employment Contract with DRMC as of February
14, 1994. Under the contract, Mr. Ricci served as general manager of the Debbie
Reynolds Hotel for a term of five years and received annual base compensation of
$150,000. In addition, Mr. Ricci would receive an annual bonus equal to two
percent of the Hotel's net profits, as defined in the contract. Mr. Ricci also
was granted stock options to purchase 275,000 shares of the Company's Common
Stock, vesting ratably per diem and exercisable at $3.00 per share for five
years from the vesting dates. Mr. Ricci was also furnished with a vehicle. In
May 1995, the Company terminated this contract with Mr. Ricci and entered into a
modified contract. The modified contract with DRMC was dated June, 1995. Under
this contract Mr. Ricci served as Chief of Operations for the Debbie Reynolds
Hotel for a term of one year and received annual base compensation of $80,000.
Mr. Ricci also received a $30,000 payment as additional consideration from the
new contract. As of this date, Mr. Ricci has fully vested into his stock options
to purchase 275,000 shares of the Company's Common Stock exercisable at $3.00
per share. During 1996, the Company granted to Mr. Ricci options to purchase an
additional 25,000 shares of the Company's Common Stock exercisable at $1.00 per
share. In September 1996, Mr. Ricci and the Company mutually terminated his
employment.
26
<PAGE>
Consulting Arrangement with Roebling. The Company had an oral consulting
arrangement with Roebling Investments (Canada), Inc. ("Roebling"), a Canadian
company wholly-owned by M. Donald Granatstein, formerly the Executive Vice
President, Chief Financial Officer, Treasurer and a director of the Company. In
May 1995, the Company and Roebling mutually terminated this consulting agreement
through a severance agreement. Under the severance arrangement the Company
agreed to continue to defend Mr. Granatstein, to the extent required by
paragraph 3 of Section 78.751 of the Nevada Revised Statutes in certain
litigation. The Company also waived its rights to collect certain debts due from
Mr. Granatstein totalling $126,500 and issued a limited release of claims from
Debbie Reynolds Hotel & Casino, Inc., Debbie Reynolds Management Company and
Debbie Reynolds Resorts, Inc. The Company also indemnified Mr. Granatstein as to
his personal loan guarantee on the Renaldi loan and the $250,000 bond issued in
favor of the Nevada Department of Real Estate Timeshare Division. Mr.
Granatstein warranted and agreed to pay and/or defend, indemnify, secure and
hold the Company harmless from costs, assessments, penalties, damage, fees,
attorney fees, interest, employee withholding or other losses arising from any
federal or state tax obligations to which the Company is or may be subject by
reason of any debts forgiven or payments made by the Company to Mr. Granatstein.
Mr. Granatstein also agreed to assist the Company in any matters relating to the
business while the consultant was under contract with the Company.
Consulting Agreement with Peter D. Bistrian Consulting, Inc. On December 7,
1995, the Company entered into a Management Consulting Agreement with Peter D.
Bistrian Consulting, Inc. ("consultant") pursuant to which the Company agreed to
issue to the consultant Options to purchase up to an aggregate of 486,000 shares
of Common Stock of the Company in consideration for consulting services to be
provided to the Company over an anticipated eight-month period commencing as of
the date of the agreement. The option price to exercise the consultants option
to purchase 486,000 shares of Common Stock was $.75 per share and each option
was exercisable from December 10, 1995 until its expiration date of December 10,
1997. The Company filed a Registration Statement on Form S-8 registering the
486,000 shares of Common Stock underlying the stock options. The Options were
exercised by the consultant through the issuance of a short-term promissory note
payable in the principal amount of $364,500 (the "Note"). Subsequent to the
issuance of the shares, the consultant defaulted on the payment of the note. The
Company plans to pursue its remedies against the consultant, its principal and
others with respect to these shares.
Consulting Agreement with Robert. C. Brehm Consulting, Inc. On December 7,
1995, the Company entered into a Management Consulting Agreement with Robert C.
Brehm Consulting, Inc. ("consultant") pursuant to which the Company agreed to
issue to the consultant Options to purchase up to an aggregate of 264,000 shares
of Common Stock of the Company in consideration for consulting services to be
provided to the Company over an anticipated eight-month period commencing as of
the date of the agreement. The option price to exercise the consultants option
to purchase 264,000 shares of Common Stock was $.75 per share and each option
was exercisable from December 10, 1995 until its expiration date of December 10,
1997. The Company filed a Registration Statement on Form S-8 registering the
264,000 shares of Common Stock underlying the stock options. The Options were
exercised by the consultant through the issuance of a short-term promissory note
payable in the principal amount of $198,000 (the "Note"). Subsequent to the
issuance of the shares, the consultant defaulted on the payment of the note. The
Company plans to pursue its remedies against the consultant, its principal and
others with respect to these shares.
(h) Report on Repricing of Options/SARs. Not applicable.
27
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a), (b) Security Ownership of Beneficial Owners and Management. The
following table sets forth information as of March 27, 1997 with respect to the
ownership of the Company's Common Stock for all directors and officers
individually, all officers and directors as a group, and all beneficial owners
of more than five percent of the Common Stock.
Name and Address Amount & Nature Percent
of Beneficial of Beneficial of
Owner Ownership Class
Debbie Reynolds 3,545,833[1] 25.7%
305 Convention Center Drive
Las Vegas, NV 89109
Kennedy Capital 1,852,679[2] 13.8%
425 N. New Ballas Rd.
St. Louis, MO. 63141
Michael Weiner 735,056[3] 5.8%
1035 Pearl Street, #402
Boulder, Colorado 80302
Todd Fisher 252,593[4] 2.0%
305 Convention Center Drive
Las Vegas, NV 89109
All officers and directors 3,798,426[5] 27.3%
as a group (2 persons)
- ----------------------------
[1] Includes:(i) 2,395,833 shares held of record by the Debbie Reynolds
Trust dated February 11, 1986, a revocable trust of which Ms. Reynolds is
the sole trustee; (ii) 50,000 and 100,000 shares issuable upon the exercise
of presently outstanding options exercisable at $4.00 per share and
expiring on October 10, 1999 and $0.80 per share and expiring on February
16, 2001, respectively; (iii) 500,000 shares to be issued to Selden
Enterprises, "Selden", an affiliate of Ms. Reynolds and Todd Fisher and 57%
owned by Ms. Reynolds; and (v) 500,000 shares to be issued to Ms. Reynolds
as consideration of Ms. Reynolds personal guarantee of the Orman loan and
in recognition of numerous past uncompensated guarantees provided by Ms.
Reynolds. See Part III, Item 12 "Certain Relationships and Related
Transactions" for a description of the transaction relating to the shares
to be issued to Selden and Ms. Reynolds.
[2] Includes:(i) 245,000 shares owned by a principal of Kennedy Capital;
(ii) 772,727 shares owned by clients of Kennedy Capital for whom Kennedy
Capital serves as an investment advisor; (iii) 581,188 shares issuable upon
conversion of Series AA Preferred Stock and Debentures owned by clients of
Kennedy Capital; and (iv) 253,764 shares of the Company's common stock
issuable upon exercise of Class A Warrants, owned by clients of Kennedy
Capital, at an exercise price of $1.00.
[3] Includes 100,000 shares issuable upon the exercise of presently
outstanding options exercisable at $3.50 per share and expiring on August
6, 2000.
[4] Includes: 50,000 and 100,000 shares issuable upon the exercise of
presently outstanding options exercisable at $4.00 per share and expiring
on October 10, 1999 and
28
<PAGE>
$0.80 per share and expiring on June 30, 2000, respectively. Does not
include shares owned by Selden, a Company affiliated with Mr. Fisher, since
he does not control the voting power over such shares.
[5] Includes 300,000 shares issuable upon the exercise of presently
outstanding options.
(c) Changes in Control.
The Registrant knows of no arrangement, the operation of which may, at a
subsequent date, result in change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions.
Transactions of Debbie Reynolds Hotel & Casino, Inc. and Hamlett Production,
Ltd.
In December 1992, Debbie Reynolds Hotel & Casino, Inc. was incorporated as
a Nevada corporation ("DRMC"). At the time of its formation DRMC issued 500,000
shares of its common stock to Debbie Reynolds in consideration of $500. Ms.
Reynolds made subsequent capital contributions to DRMC totalling $50,000. Ms.
Reynolds is an officer and director of DRMC.
In March 1989, Hamlett Production Ltd. was incorporated as a Nevada
corporation ("HPL"). At the time of its formation HPL issued 250,000 shares of
its common stock to Debbie Reynolds and 250,000 shares to Richard Hamlett, each
in consideration of $250. Subsequently, Ms. Reynolds acquired all of Mr.
Hamlett's shares in HPL.
In March 1994, DRMC merged with and into HPL, the surviving company, and
HPL changed its name to DRMC. At the time of the merger of DRMC with and into
HPL, Ms. Reynolds was the sole shareholder of DRMC and HPL and she was an
officer and director of both companies.
As of December 31, 1993 DRMC and HPL had loans payable to Ms. Reynolds
totalling $2,160,000. The loans were unsecured, noninterest-bearing obligations
and were due on demand. The proceeds of the loans were used to pay operating
expenses for DRMC, HPL and Raymax Production, Ltd. ("Raymax"), a company
wholly-owned by Ms. Reynolds. During the quarter ended March 31, 1994 Ms.
Reynolds converted $1,761,000 of these obligations into additional capital
contributions to the Company and $149,000 was repaid. As of April 8, 1994 the
remaining obligations of $250,000 were repaid.
During the 1993 fiscal year Ms. Reynolds and Mr. Hamlett negotiated on
behalf of DRMC and HPL to obtain financing for such companies from unaffiliated
third parties. Although the loans were negotiated on behalf of DRMC and HPL, Ms.
Reynolds and Mr. Hamlett signed various notes personally and deposited the money
to the respective companies. All payments on the respective obligations have
been made by DRMC and HPL directly to the lenders. However, because these
individuals signed certain notes personally, these obligations are included in
the combined financial statements of DRMC and HPL as amounts due to related
parties. The amount outstanding under these obligations totalled $100,000 as of
December 31, 1994. During the 1995 fiscal year the $100,000 was converted into
equity in exchange for 80,000 shares of the Company's restricted common stock.
A company affiliated with a former officer, director and shareholder of HPL
loaned HPL $201,000 during 1993, all of which was outstanding as of December 31,
1994. The obligation was unsecured, non-interest bearing and payable upon
demand. During 1995, the Company wrote-off this obligation.
29
<PAGE>
As of December 31, 1993, DRMC had an operating lease with HPL for the
Debbie Reynolds Hotel & Casino, payable $75,000 monthly, with $525,000
outstanding on the obligation as of December 31, 1993. In addition, as of
December 31, 1993 DRMC and HPL were obligated under certain capital lease
obligations for certain hotel furniture and equipment totalling $984,000, some
of which obligations have been paid by one company on behalf of the other. As a
result of the merger of DRMC with and into HPL in March 1994, the operating
lease between DRMC and HPL and the obligations thereunder have terminated. See
"Part I, Item 1. Description of Business."
Up until August 1, 1996, the restaurant and bar operations of the Debbie
Reynolds Hotel & Casino were leased to Celebrity Restaurants, Inc. ("Celebrity")
under an oral lease. Celebrity is wholly-owned by Ms. Reynolds. This lease was
undertaken by Celebrity as an accommodation to the Company because Celebrity
held a liquor license and the Company did not. Under the lease agreement,
Celebrity was required to pay the Company 8% of net income for the lease of the
restaurant and bar and DRMC was obligated to cover the operating cash shortfalls
of Celebrity's operations. During the years ended December 31, 1995 and 1996 the
amount DRMC funded to Celebrity was approximately $461,000 and $136,000,
respectively. No money was received under this lease for the years ended
December 31, 1996, 1995 and 1994, respectively, because the operation of the
restaurant produced a net loss. On August 1, 1996 DRMC received a liquor license
from Clark County and terminated the oral lease agreement. The restaurant and
bar are currently operated by DRMC.
The showroom operations were leased to Raymax under a five-year operating
lease which commenced in June 1993. All revenues from the showroom operations
were received directly by DRMC, therefore, no lease payments were made by Raymax
to DRMC. As a result of the DRMC/Maxim Mergers, the lease was canceled and DRMC
operates the showroom directly. During the year ended December 31, 1993 Raymax
made $388,000 in leasehold improvements and furniture, fixture and equipment
purchases for the showroom, all of which were transferred to DRMC as additional
capital contributions by Ms. Reynolds as of December 31, 1993.
In February 1997, the Company borrowed $1,100,000 from Galt Capital secured
by a first deed of trust in the amount of $573,000 placed against real property
owned by Selden Enterprises, ("Selden"), an affiliate of Ms. Reynolds and Todd
Fisher. In addition, Debbie Reynolds and Todd Fisher have personally guaranteed
this loan. The Company will issue Selden 500,000 shares of its common stock as
consideration for allowing the deed of trust to be placed on its real property.
The Company will also issue Ms. Reynolds 500,000 shares of its common stock in
consideration of her personal guarantee and in consideration of numerous past
uncompensated guarantees provided by Ms. Reynolds as well as Ms. Reynolds'
continued efforts on behalf of the Company. See "Part III, Item 11 Security
Ownership of Certain Beneficial Owners and Management".
During the year ended December 31, 1994 the Company loaned M. Donald
Granatstein, the then Chief Financial Officer, Executive Vice President,
Treasurer and a director of the Company, an aggregate of $115,900, and as of
December 31, 1994 $126,500 in accrued interest and principal was outstanding.
The loan bore interest at nine percent and was due on December 31, 1996. The
loan was secured by all consulting fees, commissions and all other amounts due
Mr. Granatstein from the Company pursuant to his consulting arrangement with the
Company. Pursuant to a severance agreement entered into in May 1995 the Company
forgave this indebtedness. See Part III, Item 10. "Executive Compensation" for a
description of Mr. Granatstein's consulting arrangement and severance agreement
with the Company.
During 1996, Ms. Reynolds loaned the Company approximately $105,000, of
which, all is still outstanding as of December 31, 1996 and bears interest at
12% per annum. During 1997,
30
<PAGE>
Ms. Reynolds loaned the Company $125,000 and bears interest at a rate of 12% per
annum. During 1997, the Company repaid Ms. Reynolds $125,000. During 1997, Mr.
Fisher also loaned the Company 61,000 accruing interest at a rate of 12% per
annum. The loan was repaid in 1997.
During the year ended December 31, 1994 and since such time Ms. Reynolds,
Mr. Fisher and Mr. Granatstein have personally guaranteed various borrowings of
the Company and its subsidiaries. The amounts guaranteed by such persons
totalled approximately $8,725,000 as of December 31, 1996. The Company has
entered into a written indemnification agreement with Mr. Granatstein
indemnifying him from these personal guarantees. See Part III, Item 10,
"Executive Compensation".
Transactions of Maxim Properties Company
Maxim Properties Company ("Maxim") was incorporated as a Colorado
corporation in November 1993. At the time of its formation Maxim issued
1,500,000 shares of its common stock each to Maxim Financial Corp. ("Maxim
Financial") and Stephen Cherner in consideration of a total of $100,000. Maxim
Financial and Mr. Cherner subsequently transferred all of their shares to other
persons, including several of their affiliates. Maxim Financial is controlled by
Stephen Cherner.
Joe Kowal, a principal shareholder of Maxim at the time of the DRMC/Maxim
Mergers, transferred 705,000 of the 830,277 shares of the Company's common stock
which he was to receive in exchange for his Maxim shares in the DRMC/Maxim
Merger to four entities who he has represented are not affiliated with him.
Commencing in September 1993 the Maxim Profit Sharing Plan (the "Maxim
Plan") loaned a total of $800,000 to DRMC to pay for the build-out of the
showroom and working capital. The loan bore interest at 10% and was due on
demand. During 1994 a portion of the loan was repaid. In October 1994 the
Company agreed to issue 150,000 shares of the Company's common stock to the
Maxim Plan as full and complete consideration for the remaining balance owed to
it, including principal and interest. The Company has agreed to register the
150,000 shares issued to the Maxim Plan under the next available registration
statement filed by the Company. These shares were issued in November 1994.
Stephen Cherner, the beneficial owner of approximately 4.1% of the Company's
outstanding common stock (including the 150,000 shares), and a principal of
Maxim, is the primary beneficiary of the Maxim Plan.
Transactions of Halter Venture Corporation
SWTV owed Southwest TNT, Inc. ("SWTNT"), a corporation owned by Lawrence E.
Meyers, a former officer, director and principal shareholder of the Company,
approximately $2,602 and $254,996 at December 31, 1993 and 1992 for the
construction of a mobile television production unit. SWTV had made advances to
SWTNT of approximately $29,232 at December 31, 1991. These amounts were offset
against the amounts owed for the construction of the new mobile television
production unit during 1992. During 1993, SWTV renegotiated the construction
price with SWTNT resulting in a reduction in the amount due to SWTNT of $209,264
and a corresponding reduction in the basis of the mobile television production
unit to $142,080. Additionally, during 1993, part of the remaining balance due,
including additional advances made by SWTNT during 1993 in connection with
construction of the mobile television unit, totalling $59,743, were offset
against amounts due to a majority shareholder.
The Company had advances receivable from Lawrence E. Meyers in the amount
of $119,495 at December 31, 1992. The advances bore interest at the applicable
Federal rates for long-term obligations, accrued quarterly on the outstanding
balance. The amount was partially offset against the amount due to SWTNT, with
the balance being settled during 1993.
31
<PAGE>
Pursuant to a Divestiture Agreement dated March 23, 1994, after the closing
of the DRMC/Maxim Mergers, the Company divested its wholly-owned subsidiary,
SWTV Production Services, Inc., to the Company's former President, Lawrence E.
Meyers, in exchange for the 2,126,540 shares of common stock of the Company
owned by Mr. Meyers, effective March 31, 1994. Mr. Meyers' 2,126,540 shares were
canceled by the Company on March 31, 1994. Subsequent to the divestiture, Mr.
Meyers was a minority shareholder of the Company.
Item 13. Exhibits and Reports on Form 8-K.
32
<PAGE>
(a) Exhibits. The following is a complete list of exhibits filed as a part
of this Report on Form 10-KSB and are incorporated herein by reference.
Exhibit Number Title of Exhibit
- -------------- ----------------
2.1 Agreement of Merger and Plan of Reorganization dated February 11,
1994 (1)
2.2 Amended and Restated Agreement of Merger and Plan of
Reorganization dated March 10, 1994 (2)
3.1 Articles of Incorporation of Debbie Reynolds Hotel & Casino,Inc.,
as filed with the Nevada Secretary of State on November 17,
1994 (4)
3.4 Bylaws (4)
4.1 Specimen common stock certificate (4)
10.1 1994 Employee Stock Compensation Plan (4)
10.2 1994 Stock Option Plan (4)
10.4 Divestiture Agreement dated March 30, 1994 between the Company,
Lawrence Meyers and SWTV (3)
10.5 Management Agreement dated January 8, 1994 between DRHC and Grand
Nevada Hotel Corporation, as amended and terminated on February
17, 1994 (3)
10.6 Lease Agreement dated April 5, 1993 between DRHC and Grand Nevada
Hotel Corporation (3)
10.7 Lease Termination Agreement dated January 10, 1994 between DRHC
and Grand Nevada Hotel Corporation (3)
10.8 Agreement of Sublease between John Neumeyer, Edward Haddad and
DRHC dated April 27, 1993 (3)
10.9 Termination of Sublease Agreement dated February 11, 1994 between
Hollywood Restaurants, Inc. Hamlett Productions, Ltd., and DRHC.
(3)
10.10 Amended and Restated Space Lease Agreement dated May 7, 1993
between DRHC, Debbie's Casino Inc., Jackpot Enterprises, Inc.,
Richard R. Hamlett and Debbie Reynolds (3)
10.11 Agreement dated January 25, 1994 between Hamlett Productions,
Ltd., Raymax Productions, Inc. and Debbie Reynolds (3)
10.12 Employment contract dated February 14, 1994 between DRHC and
Henry Ricci (3)
10.13 Employment contract dated February 16, 1994 between the Company
and Steve Schiffman, as amended (3)
10.14 Agreement of Sublease between DRHC and Celebrity Restaurants,
Inc. dated April, 1993 (3)
33
<PAGE>
10.15 Loan Agreement between DRHC and Hamlett Production Ltd. and
Bennett Management & Development Corp. and Promissory Note and
Guarantee and Subordination Agreement, all dated March 7, 1994.
(3)
10.16 Contract of Sale Membership Agreements and Installment Purchase
Agreements with Recourse between Debbie Reynolds Resorts, Inc.
and Resort Funding, Inc. dated March 7, 1994 (3)
10.17 Amendment dated March 9, 1995 to Agreement dated January 25,
1994 between Hamlett Productions, Ltd., Raymax Productions, Inc.
and Debbie Reynolds (4)
10.18 Termination Agreement among Registrant, TPM Holdings and Source
Capital Corporation dated February 10, 1995.(4)
10.19 Consulting Agreement between the Registrant and MBL Investments
dated August 3, 1994. (4)
10.20 Loan Agreement between the Registrant and TPM Holdings, Inc.,
and Promissory Note, dated June 10, 1994. (4)
10.21 Loan Agreement between the Registrant and Source Capital
Corporation, and Promissory Note, dated December 1, 1994. (4)
10.22 Loan Agreement between DRMC and World Ventures Trust, and
Promissory Note, all dated April 26, 1995. (5)
10.23 Loan Agreement between the Registrant and RealEcon, and
Promissory Note, dated January 16, 1995. (5)
10.24 Loan Agreement between the Registrant and Bennett Funding
International Ltd., and Promissory Note, dated July 27, 1995. (5)
10.25 Loan Agreement between the Registrant and Source Capital/TPM
Holding, Inc., and Promissory Note, dated March 1995. (5)
10.26 Consulting Agreement between the Registrant and Miron Leshem
dated November 6, 1995. (5)
10.27 Amendment to Consulting Agreement between the Registrant and
Miron Leshem dated December 12, 1995. (5)
10.28 Consulting Agreement between the Registrant and Pacific
Consulting Group dated September 1, 1995. (5)
10.29 Consulting Agreement between the Registrant and Telex, Inc.
dated March 27, 1995. (5)
10.30 Consulting Agreement between the Registrant and Peter Bistrian
Consulting, Inc., ("Consultant"). (5)
10.31 Consulting Agreement between the Registrant and Robert C. Brehm
Consulting, Inc., ("Consultant"). (5)
10.32 ILX Incorporated definitive agreement dated October 30, 1996.
(5)
34
<PAGE>
10.33 Roy Warren Consulting Agreement dated August 27, 1996.
10.34 Cancellation of the ILX Agreement for Purchase and Sale dated
May 15, 1997.
10.35 Financing agreement with Galt Capital,LTD dated February 4, 1997
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
(1) Incorporated by reference from the like numbered exhibit filed with the
Registrant's Form 8-K dated February 11, 1994.
(2) Incorporated by reference from the like numbered exhibit filed with the
Registrant's Form 8-K dated March 22, 1994.
(3) Incorporated by reference from the like numbered exhibit filed with the
Registrant's Form 10-KSB for the year ended December 31, 1993.
(4) Incorporated by reference from the like numbered exhibit filed with the
Registrant's Form 10-KSB for the year ended December 31, 1994.
(5) Incorporated by reference from the like numbered exhibit filed with the
Registrant's Form 10-KSB for the year ended December 31, 1995.
(b) Reports on Form 8-K. During the last quarter period covered by this
report the Registrant filed no Reports on Form 8-K.
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEBBIE REYNOLDS HOTEL & CASINO, INC.
By:/s/ Todd Fisher
----------------------
Todd Fisher, President
Date: May 29, 1997
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ Debbie Reynolds Chairman of the May 29, 1997
--------------- Board, Secretary
DEBBIE REYNOLDS and Director
/s/ Todd Fisher Chief Executive Officer,
---------------- Chief Financial Officer,
TODD FISHER Treasurer, and Director May 29, 1997
36
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996
(With Independent Auditors' Report Thereon)
F-1
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Index to Financial Statements
Page
Independent Auditors' Report F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Debbie Reynolds Hotel & Casino, Inc.:
We have audited the accompanying consolidated balance sheet of Debbie Reynolds
Hotel & Casino, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for each of the years in the two year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Debbie Reynolds
Hotel & Casino, Inc. and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for each of the years in the two year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficiency, has a shareholders' equity
deficiency, significant debt service obligations, and is in default with respect
to various agreements, that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Notes 7 and 10. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
April 4, 1997, except for
notes 7 & 8 which are
as of May 16, 1997
Las Vegas, Nevada
F-3
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1996
<TABLE>
<S> <C>
Assets
Current assets:
Restricted cash $ 2,000
Accounts receivable, net of allowance of $103,000 985,000
Inventories (note 3) 541,000
Prepaid expenses and deposits 303,000
------------
Total current assets 1,831,000
------------
Property and equipment (notes 4, 5, 7 and 10):
Land and building 6,576,000
Furniture and equipment 4,010,000
------------
10,586,000
Less accumulated depreciation and amortization (3,219,000)
------------
Net property and equipment 7,367,000
------------
Deposits and other assets 94,000
------------
Total assets $ 9,292,000
============
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Bank overdraft $ 103,000
Current maturities of long-term debt and capital lease obligations (note 4) 8,688,000
Accounts payable and accrued liabilities (note 8) 5,381,000
Due to affiliates (note 2) 1,447,000
Timeshare deposits 2,000
------------
Total current liabilities 15,621,000
Commitments and contingencies (notes 5,7, 8, 9 and 10) Shareholders' equity
(deficiency) (notes 4, 8, 9 and 10):
Preferred stock, $.0001 par value. Authorized 50,000,000 shares; 2,000,000 designated
as Series AA, 215,844 issued and outstanding ($863,000 liquidation preference) --
Common stock, $.0001 par value. Authorized 25,000,000 shares; issued and outstanding
12,615,417 shares 1,000
Additional paid-in capital 15,160,000
Accumulated deficit (21,490,000)
------------
Total shareholders' equity (deficiency) (6,329,000)
------------
Total liabilities and shareholders' equity (deficiency) $ 9,292,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Timeshare sales $ 1,340,000 3,839,000
Rooms 2,325,000 2,444,000
Showroom 1,226,000 1,938,000
Museum 404,000 416,000
Restaurant 695,000 297,000
Casino lease 96,000 502,000
Other 335,000 354,000
------------ ------------
Total revenue 6,421,000 9,790,000
------------ ------------
Operating costs and expenses:
Timeshares 833,000 2,876,000
Rooms 1,176,000 1,591,000
Showroom 2,176,000 2,352,000
Museum 325,000 314,000
Restaurant 1,413,000 374,000
Other 193,000 263,000
General and administrative 2,597,000 4,611,000
Depreciation and amortization 1,223,000 1,107,000
Property operations, maintenance and energy 1,395,000 2,304,000
------------ ------------
Total operating costs and expenses 11,331,000 15,792,000
------------ ------------
Loss from operations (4,910,000) (6,002,000)
------------ ------------
Other income (expense):
Interest expense (1,554,000) (2,601,000)
------------ ------------
Total other income (expense) (1,554,000) (2,601,000)
------------ ------------
Net loss $ (6,464,000) (8,603,000)
============ ============
Loss per common share $ (.53) (.99)
============ ============
Weighted-average number of common shares outstanding 12,286,279 8,734,362
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency)
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994, brought
forward 667,904 $ -- 8,083,904 $ 1,000 $ 9,547,000
Shares issued for consulting and other
services -- -- 414,061 -- 876,000
Shares issued in consideration of
obtaining loans -- -- 400,745 -- 419,000
Regulation S offering, shares issued for
cash -- -- 300,000 -- 225,000
Regulation D offering, shares issued for
cash -- -- 50,000 -- 50,000
Shares issued through conversion of
preferred shares to common shares (348,060) -- 696,120 -- --
Shares issued through conversion of debt
-- -- 696,120 -- 2,158,000
Shares issued through exercise of warrants
-- -- 93,120 -- 93,000
Shares issued through exercise of options
-- -- 750,000 -- 563,000
Uncollected receivable for shares issued
through exercise of options (563,000)
Stock subscribed pursuant to a future
services contract -- -- -- -- --
Options issued for services -- -- -- -- 773,000
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 319,844 $ -- 11,484,070 $ 1,000 $ 14,141,000
============ ============ ============ ============ ============
<CAPTION>
Total
Accumu- Deferred Share-holders'
lated Stock Compen- Equity
Deficit Subscribed sation (deficiency)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994, brought
forward $ (6,423,000) $ -- $ -- $ 3,125,000
Shares issued for consulting and other
services -- -- -- 876,000
Shares issued in consideration of
obtaining loans -- -- -- 419,000
Regulation S offering, shares issued for
cash -- -- -- 225,000
Regulation D offering, shares issued for
cash -- -- -- 50,000
Shares issued through conversion of
preferred shares to common shares -- -- -- --
Shares issued through conversion of debt
-- -- -- 2,158,000
Shares issued through exercise of warrants
-- -- -- 93,000
Shares issued through exercise of options
Uncollected receivable for shares issued
through exercise of options -- -- -- 563,000
Stock subscribed pursuant to a future
services contract -- 300,000 (300,000) --
Options issued for services -- -- -- 773,000
Net loss (8,603,000) -- -- (8,603,000)
------------ ------------ ------------ ------------
Balance at December 31, 1995 $(15,026,000) $ 300,000 $ (300,000) $ (884,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
F-6
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficiency), Continued
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Accumu-
----------------------- --------------------------- Paid-in lated
Shares Amount Shares Amount Capital Deficit
------------ ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 319,844 $ -- 11,484,070 $ 1,000 $ 14,141,000 $(15,026,000)
Shares issued to employees for
services rendered -- -- 33,750 -- 17,000 --
Shares issued as deposit for
insurance -- -- 33,960 -- 20,000 --
Shares issued through conversion
of debt -- -- 425,455 -- 628,000 --
Shares issued through conversion
of preferred shares to common
shares (104,000) -- 378,182 -- -- --
Shares issued for consulting and
other services -- -- 110,000 -- 204,000 --
Shares issued for cash -- -- 150,000 -- 150,000 --
Cancellation of stock subscribed
pursuant to cancellation of
future services contract (See
note 2) -- -- -- -- -- --
Net loss -- -- -- -- -- (6,464,000)
------------ ------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 215,844 -- 12,615,417 1,000 15,160,000 (21,490,000)
<CAPTION>
Total
Deferred Share-holders'
Stock Compen- Equity
Subscribed sation (deficiency)
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 300,000 $ (300,000) $ (884,000)
Shares issued to employees for
services rendered -- -- 17,000
Shares issued as deposit for
insurance -- -- 20,000
Shares issued through conversion
of debt -- -- 628,000
Shares issued through conversion
of preferred shares to common
shares -- -- --
Shares issued for consulting and
other services -- -- 204,000
Shares issued for cash -- -- 150,000
Cancellation of stock subscribed
pursuant to cancellation of
future services contract (See
note 2) (300,000) 300,000 --
Net loss -- -- (6,464,000)
------------ ------------ ------------
Balance at December 31, 1996 -- -- (6,329,000)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,464,000) (8,603,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,223,000 1,107,000
Amortization of debt discount 340,000 275,000
Amortization of consulting fees -- 297,000
Donation to non-profit organization 105,000 --
Forgiveness of debt from affiliate -- 108,000
Forgiveness of debt to affiliate -- (201,000)
Expense associated with conversion of debt to equity 160,000 592,000
Common stock issued for services rendered 241,000 876,000
Options issued for services -- 773,000
Shares issued as consideration for loans -- 419,000
Changes in assets and liabilities: --
(Increase) decrease in accounts receivable 466,000 (494,000)
(Increase) in other receivables -- 5,000
Decrease (increase) in inventories 74,000 --
(Increase) in prepaid expenses and deposits (189,000) (13,000)
Decrease in deposits and other assets 348,000 473,000
Increase in accounts payable and accrued expenses 1,964,000 1,613,000
----------- -----------
Net cash used in operating activities (1,732,000) (2,773,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures (257,000) (676,000)
----------- -----------
Net cash used in investing activities (257,000) (676,000)
----------- -----------
Cash flows from financing activities:
Increase in bank overdraft 103,000 --
Proceeds from borrowings from affiliates 1,076,000 838,000
Payments on amounts due to affiliates -- (54,000)
Proceeds from issuance of stock 150,000 368,000
Proceeds from issuance of long-term debt 965,000 3,215,000
Principal payments on long-term debt and capital lease obligations (477,000) (758,000)
----------- -----------
Net cash provided by financing activities 1,817,000 3,609,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (172,000) 160,000
Cash and cash equivalents at beginning of year 172,000 12,000
----------- -----------
Cash and cash equivalents at end of year $ -0- 172,000
=========== ===========
</TABLE>
(Continued)
F-8
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1996 and 1995
1996 1995
--------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 847,000 821,000
========= ========
Supplemental disclosures of noncash investing and financing activities:
During 1995, the Company issued 814,806 shares of common stock with a fair
market value of approximately $1,233,000 for consulting and other
services rendered.
During 1995, the Company completed the construction of its timeshare units
and transferred all unsold units with a cost of $557,000 into inventory.
During 1995, the Company issued 696,120 shares of common stock through
conversion of 348,060 shares of preferred stock.
During 1995, the Company issued 696,120 shares of common stock valued at
$1,566,000 through conversion of debt.
InMay 1996, the Company issued 378,182 shares of common stock through
conversion of 104,000 shares of preferred stock.
InMay 1996, the Company issued 425,455 shares of common stock valued at
$628,000 through conversion of debt.
See accompanying notes to consolidated financial statements
F-9
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(1) Summary of Significant Accounting Policies
(a) Corporate Organization
The accompanying consolidated financial statements include the
accounts of Debbie Reynolds Hotel & Casino, Inc., formerly Halter
Venture Corporation (Halter) and its wholly-owned subsidiaries Debbie
Reynolds Management Company, Inc. (DRMC), formerly Debbie Reynolds
Hotel & Casino, Inc. (DRHC) and Debbie Reynolds Resorts, Inc. (DRRI)
(collectively the Company).
(b) Description of Business
The Company's operations consist primarily of the hotel operations of
DRMC and the timeshare operations of Debbie Reynolds Resorts, Inc.
("DRRI"), a wholly-owned subsidiary of DRMC. DRMC owns and operates
the Debbie Reynolds Hotel & Casino (the "Hotel"), a gift shop, the
Hollywood Motion Picture Museum, a restaurant and bar and a showroom
located on Convention Center Drive in Las Vegas, Nevada. DRMC leased
the restaurant to Celebrity Restaurants, Inc., a company wholly-owned
by Ms. Reynolds, until August 1, 1996 at which time DRMC was granted a
liquor license from Clark County and commenced operating the bar and
the restaurant. Until the Company received approval for its own liquor
license, Celebrity accommodated the Company by operating the
restaurant and bar under its liquor license. The Company's operations,
through DRRI, also consist of the sale of timeshare units in the
Debbie Reynolds Hotel. DRRI obtained a permanent timeshare license on
June 28, 1994. In addition, DRMC and its management have a pending
application filed for a gaming license from the Nevada Gaming
Authorities; however, there can be no assurance that such license will
be granted. Due to the Company's poor capital structure and acting on
the advice of counsel, the Company requested the Nevada Gaming
Authorities to place a hold on processing its pending gaming
applications until its capital structure substantially improves. Prior
to March 31, 1996, the Company leased space to a third party for the
operation of a casino. The Company served the operator with a
termination notice in February 1996, pursuant to the terms of the
lease agreement. Under the lease agreement the Company was losing
money on a monthly basis. The Company requested the operator to cease
operations as of June 30, 1996. On March 31, 1996 the operator
discontinued its gaming operations on the property, removed all of its
gaming equipment and subsequently filed a lawsuit against DRHC. This
case is currently pending and the outcome is not reasonably
determinable at this time.
(c) Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less at date of purchase to be cash
equivalents.
(d) Restricted Cash
Restricted Cash is cash deposits made by timeshare purchasers to hold
their units.
F-10
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the present value of minimum lease
payments at the inception of the lease.
Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the assets as
follows:
Building 20 years
Building improvements 10 years
Furniture and equipment 5 years
Property and equipment held under capital leases and leasehold
improvements are amortized straight-line over the shorter of the lease
term or estimated useful life of the asset and is included in
depreciation and amortization.
Debt issuance costs are amortized on a straight-line basis, which
approximates the effective interest method, over the life of the debt.
(f) Self Insurance
Between September 1995 and July 1996, the Company was self-insured for
losses and liabilities relating to health care coverage for its
employees. Losses were accrued based upon the Company's prior
experience and estimates using historical information. The total
estimated liability for the period between September 1995 and July
1996 was $467,000 and is included in accrued expenses.
(g) Long-Lived Assets
During fiscal 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS 121), which
establishes accounting standards for the recognition and measurement
of impairments of long-lived assets, certain identifiable intangibles
and goodwill either of which to be held or disposed of. The adoption
of SFAS 121 did not have a material impact on the Company's financial
position or results of operations.
(h) Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25. Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock Based Compensation,
which permits entities to recognize as expense over the vesting period
for the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(i) Recognition of Timeshare Revenue
F-11
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Revenue from sales of timeshare interests is recognized in accordance
with the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 66, Accounting for Sales of Real Estate. No
sales are recognized until such time as a minimum of 10% of the
purchase price has been received in cash, the buyer is committed to
continued payments of the remaining purchase price, the Company has
been released of all future obligations for the timeshare interest and
the recession period has past.
(j) Earnings Per Share
Earnings per common and common equivalent share is based upon the
weighted average of common and common equivalent shares outstanding
during the year. Primary and fully diluted earnings per share are the
same.
In February 1997, the Financial Accounting Standards Board issued a
Statement of Financial Accounting Standards No. 128, Earnings Per
Share, ("Statement 128"), which established standards for computing
and presenting earnings per share, ("EPS"). It replaces the
presentation of primary and fully diluted EPS with a presentation of
basic and diluted EPS. Statement 128 is effective for financial
statements for both interim and annual periods ending after December
15, 1997. Earlier application is not permitted. After adoption all
prior period EPS data should be restated to conform to Statement 128.
The Company does not expect the implementation of Statement 128 to
have a material effect on the earnings per share calculation when
implemented.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
amounts could differ from these estimates.
(l) Inventories
Inventory of food and beverage is accounted for at the lower of cost
(first-in first-out basis) or net realizable value. Timeshare
inventory is stated at the lower of cost or estimated fair value, less
costs to sell.
(m) Fair Value of Financial Instruments
The carrying amount of cash equivalents, receivables and all current
liabilities approximates fair value because of the short term maturity
of these instruments. The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties. (See note 4 for additional fair
value disclosure).
F-12
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(n) Income Taxes
Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the
enactment date.
(2) Related Party Transactions
In March 1993, the Company entered into an agreement with an affiliate to
lease the bar and any liquor operations, for a five-year period with five
five-year renewal options. Payments to the Company under the agreement are
equal to 8% of net liquor income and are payable monthly. On August 1,
1996, DRMC received a liquor license and terminated this lease.
Due to affiliates at December 31, 1996 consists of the following:
Accrued performance fees payable to the Chairman of the
Board of Directors of the Company plus interest $ 1,782,000
Unsecured loans payable, without interest, due on demand 120,000
-----------
1,902,000
Less: Advance to Chairman of the board (455,000)
Total due to affiliates $ 1,447,000
===========
On January 25, 1994, DRHC entered into an agreement with Raymax Production,
Ltd. (Raymax), a company wholly owned by the chairman of the board of
directors, to provide entertainment services for the remainder of the
chairman's life for $50,000 per month. On March 9, 1995, this agreement was
amended. Under the agreement, the chairman was to perform in the showroom
at the Property for a minimum of 30 weeks per year and perform other
managerial and promotional services. As compensation for her performance
services Raymax was to receive $25,000 per weekly performance (the Weekly
Performance Fee). Under the agreement Raymax also was to receive annually
10% of the Company's net profits (as defined in the agreement) for her
non-entertainment services. Raymax had the right to take a non-refundable
monthly draw against the net profits equal to the difference between
$60,000 and the Weekly Performance Fees for such month, up to a maximum
outstanding draw of $1,000,000. If the draw taken for any year exceeds the
10% net profits for such year, such excess would be carried forward as a
non-refundable advance against future net profits earned under the
agreement. Raymax also was to receive reimbursement of reasonable business
and travel expenses. Under the agreement, the Company is required to carry
life insurance on the chairman in the amount of $10,000,000 for the benefit
of the Company. During 1994 the Company had advanced $455,000 to Raymax
against future amounts owing under this agreement, all of which was
outstanding at December 31, 1995. As of December 31, 1995 the Company was
in arrears approximately $795,000 pursuant to the weekly performance fee
and monthly draw of this agreement. In September, 1996 Raymax and Ms.
Reynolds served the Company a written notice that this agreement was in
default due to non-payment. In November 1996, Raymax delivered a notice to
the Company terminating this agreement. As of December 31, 1996, the amount
the Company was in arrears to Raymax and Ms. Reynolds was $1,620,000 plus
$162,000 in accrued interest. The Company and Raymax have agreed to net the
$455,000 advance against the $1,620,000 in arrears as of December 31, 1996.
Ms. Reynolds has agreed to render showroom and other services on an "at
F-13
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
will" basis, terminable at any time. The terms relating to Ms. Reynolds'
current "at will" services are the same as specified in the terminated
agreement except that as to all unpaid past and future sums due Ms.
Reynolds, the Company shall pay interest at a rate of prime plus 2%.
Effective March 9, 1995 the Company entered into an agreement with Ms.
Reynolds and Raymax under which Ms. Reynolds was to grant the Company the
exclusive, perpetual, non-transferable license: (i) to display Ms.
Reynolds' extensive Hollywood memorabilia collection at the Company's
Hollywood Movie Museum; and (ii) to use the name, photograph, likeness and
signature of Ms. Reynolds for the promotion of the Company and its
operations. In consideration for the license, the Company was to agree to
issue 400,000 shares of restricted Common Stock to Raymax and to insure,
maintain and house the memorabilia. The Company's estimated fair value for
the 400,000 shares was $300,000. As additional consideration for the
license, upon Ms. Reynolds' death, the Company would pay to her heirs
and/or assigns annually, 10% of the net profits of the Company (as defined
in the agreement) in perpetuity. The Company is in default of the agreement
with Ms. Reynolds. In November 1996, Ms. Reynolds delivered a written
notice to the Company terminating this agreement.
Also Effective March 9, 1995 the Company entered into a license agreement
with Hollywood Motion Picture and Television Museum, a non-profit
organization ("Hollywood"), which also owns an extensive Hollywood
memorabilia collection. Under the agreement with Hollywood, the Company has
been granted the license to display Hollywood's memorabilia in its Museum
in consideration for the Company's annual payment to Hollywood of $50,000
until the construction costs of the Museum has been recouped from the
Museum profits, at which time the annual payment will increase to $100,000.
On December 27, 1996 Hollywood sent a default and 30-day termination notice
to the Company due to non-performance on the contract terminating the
agreement as of January 26, 1997.
During 1995, a $201,000 loan from a related party was forgiven and included
in other income.
(3) Inventories
During 1995, the Company finished construction of all timeshare units and
transferred the cost associated with these units into inventory. At
December 31, 1996, $493,000 of cost relating to units remained in inventory
awaiting sale.
The Company maintained an inventory of $15,000 of food and beverage for the
bar and restaurant area and inventory in the gift shop of $33,000 at
December 31, 1996.
F-14
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Long-Term Debt and Capital Lease Obligations
<TABLE>
<S> <C>
Long-term debt at December 31, 1996 consists of the following:
First mortgage note payable, due March 15, 1997, interest at 13% payable
monthly; secured by a first deed of trust; payments of $1,200 are
due upon sale of each timeshare unit, currently in default,
including interest of $134,000. This loan is guaranteed by the
chairman of the board $2,249,000
Note payable, due August 23, 1999, interest at 14%, secured by a third deed
of trust, currently in default, including interest of $201,000. This
loan is guaranteed by the chairman of the board 3,066,000
Note payable, due December 1, 1996, interest at the greater of 12% or 4%
above prime rate; secured by a second deed of trust; payments due
monthly based on a graduated scale of timeshare sales, currently in
default,
including interest of $20,000 511,000
Note payable, due February 1, 1997, interest at 12% ( 3% payable monthly and
9% accruing interest); secured by a fourth deed of trust, currently in 569,000
default, including interest of $69,000. This loan is guaranteed by the
chairman of the board and the chief executive officer
Convertible subordinated debentures, interest at 8-3/4%, due March 25,
1996; convertible into one share of common stock at $4.50, net of
discount of $180,000 and $360,000 as of December 31, 1996 and 1995,
respectively;
effective rate of 19%, currently in default 288,000
Convertible subordinated debentures, interest at 8-3/4%, due November
17, 1998; convertible into one share of common stock at $4.50, net
of discount of $92,000 and $187,000 as of December 31, 1996 and
1995, respectively; effective rate of 21%, currently in default 692,000
Capital lease obligations (note 5) 805,000
Notes to third parties, interest rates between 6% and 12%, unsecured,
currently in default, maturing at various dates from 1993 to 1996 508,000
----------
Total long term debt and capital lease obligations (All classified as
current maturities) 8,688,000
==========
</TABLE>
On December 1, 1994, the Company obtained a $1,100,000 loan, with a current
unpaid balance of $511,000, from Source Capital Corporation (Source), the
proceeds of which have been used principally to complete construction of
the museum and for general corporate purposes. Payments on the loan,
although made monthly, are to be facilitated through the following schedule
of timeshare sales:
Subsequent to February 1, 1995:
$500 per timeshare sale between 1 and 515 units
$1,500 per timeshare sale in excess of 516 units until the loan is repaid.
In August 1996, the Company obtained a $500,000 loan the proceeds of which
were principally used to reduce past due tax obligations, and reduce trade
payable debt. The loan bears interest at 12% and has $550,000 principal
balance due November 1, 1996. This loan is secured with a fourth mortgage
on the Company's property and with certain of the Company's receivables. In
connection with the financing, the Company granted warrants to acquire
260,000 shares of the Company's common stock at an exercise price of $.70
per share. On October 18, 1996, the maturity date was extended to February
1, 1997. In consideration for the extension the Company reduced the
exercise price on the warrants from $.70 per share to $.22 per share and
recognized a charge of $26,000. This loan is currently in default.
F-15
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The fair value of the Company's notes payable, capital lease obligations
and convertible subordinated debentures are estimated based on the quoted
market prices for the same or similar. The estimated fair values of the
notes payable, capital lease obligations and convertible subordinated
debentures, respectively, at December 31, 1996 are approximately
$6,145,000, $839,000 and $922,000, using an estimated market rate of 20%.
There is no assurance that the Company could obtain financing on such
terms.
(5) Leases
(a) Lessee
DRHC is obligated under various capital leases for certain hotel
furniture and equipment that expire at various dates during the next
five years. The Company is in default on all of their capital leases.
Management estimates that these leases will be settled at the
discounted present value of lease payments which is approximately
$805,000, and is recorded as current ( See note 4). At December 31,
1996, the gross amount of property and equipment and related
accumulated amortization recorded under capital leases is as follows:
Furniture and equipment $ 1,154,000
Less accumulated amortization (875,000)
-----------
$ 279,000
===========
The Company entered into a lease agreement during 1993 for the Hotel's
sign under terms classified as an operating lease. The lease is for a
five year period and provides for monthly payments of approximately
$8,000, representing principal only. Rent expense for the years ended
December 31, 1996 and 1995 aggregated $314,000 and $99,000
respectively, and is included in general and administrative expense in
the accompanying consolidated statements of operations. All leases are
currently in default and presently due.
(b) Lessor
The Company leased the casino and bar operations under agreements
classified as operating leases, as follows:
The Company leased approximately 6,000 square feet of its facility to
an unaffiliated third party operator for purposes of operating a
casino. The lease was for a four-year period beginning July 1993, with
extensions available for an unspecified number of successive one-year
periods. Rental income was $175 per slot machine per month but not
less than $30,625 in any one month, reduced by 10% until the Company
was fully operating two restaurants. Rental income was $96,000 and
$502,000 for the years ended December 31, 1996 and 1995, respectively.
Included in the lease is a provision whereby between July 1994 and
June 1996 the Company had the right to terminate the lease. In
exchange, the Company would have to pay the lessee an amount equal to
the remaining book value of the slot machines, one-half of the
lessee's capitalized expenditures related to the casino operations,
and reimburse the lessee for renovations made to the casino area. The
Company served the operator with a termination notice in February 1996
and requested that the operator cease operations effective June 30,
1996. On March 31, 1996, the operator discontinued its gaming
operations on the property and subsequently filed a lawsuit against
the Company.
F-16
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Income Taxes
Income tax benefit attributable to losses from continuing operations
differed from the amount computed by applying the federal income tax rate
of 34% to pretax loss from operations as a result of the following:
Computed "expected" tax benefit $ 2,236,000
Reduction in income tax benefit resulting from:
Change in the valuation allowance for deferred
tax assets (2,236,000)
-----------
$ --
===========
Prior to March 8, 1994, DRHC was taxed as an S Corporation and HPL as a C
Corporation. The S Corporation losses incurred prior to that date are not
eligible to be carried over by the Company. The tax effects of temporary
differences that give rise to significant portions of the deferred tax
assets are presented below:
Deferred tax assets:
Net operating loss carry forward $ 5,662,000
Allowance for doubtful accounts 35,000
Less valuation allowance (5,697,000)
-----------
Total net deferred tax assets $ --
===========
At December 31, 1996 the Company has net operating loss carry-forwards for
federal income tax purposes of approximately $16,652,000 which are
available to offset future federal taxable income, if any, through 2010.
(7) Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's
recurring losses from operations, working capital deficiency, debt service
obligations, and defaults on various agreements raise substantial doubt
about the consolidated entity's ability to continue as a going concern. The
Company's recurring losses from operations, its working capital deficiency,
its shareholders equity deficiency, its significant debt service
obligations and its default with respect to various agreements raise
substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern is
dependent on its ability to obtain additional financing to finance its
working capital deficit until such time as cash flows from operations are
sufficient to finance the Company's operations, including the Company's
proposed casino operations. The Company may need to seek protection under
the Federal bankruptcy laws. In addition to pursuing an alternative
transaction with ILX, management is seeking additional sources of financing
to reduce its debt service obligations, complete certain capital projects
and fund its working capital needs. In addition, management has implemented
cost control measures to improve the cash flow of the Company. There can be
no assurance that the additional financing will be obtained. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On October 30, 1996 the Company entered into an Agreement for Purchase and
Sale with ILX Incorporated ("ILX") under which ILX would purchase the
Debbie Reynolds Hotel & Casino (the "Hotel"), including all of the Hotel's
real and personal property and the Hotel's timeshare operations (the
F-17
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
"ILX Agreement"). ILX is a publicly-held corporation based in Phoenix,
Arizona which principally owns, operates and markets resort properties in
Arizona, Florida, Indiana and Mexico. On May 15, 1997 ILX elected to cancel
and terminate this Agreement. The Company and ILX continue to negotiate an
alternative transaction, there is no guarantee that an alternative
agreement will be reached.
On June 28, 1994, the Nevada Real Estate Board granted DRRI its permanent
timeshare license. The Company continues to allocate substantial resources
to developing the timeshare operations. Through December 31, 1996, 1,186
timeshare units have been sold, proceeds from which total $8,693,000.
(8) Commitments and Contingencies
The Company finances a significant portion of its timeshare sales. To
facilitate the sale of timeshares the Company has obtained a $25,000,000
(increased to $35,000,000 at March 31, 1995) commitment from Bennett
Funding International, Ltd. (Bennett) whereby Bennett purchases timeshare
notes receivable from the Company with recourse, and subject to its credit
criteria, and advances the Company 85% of the amount financed. Generally,
the Company receives at least a 10% down payment from the purchaser and
finances the remaining 90% with Bennett. At December 31, 1996 the Company
had utilized and was contingently liable for approximately $2,824,000 of
this commitment.
On April 21, 1997 Maxim Financial Profit Sharing Plan, filed a lawsuit in
the United States District Court, District of Colorado, against the Company
and others, alleging breach of contract, intentional fraud, Securities
Violations and Recission. The plaintiff is seeking damages in excess of
$75,000. The Company believes the probability of the outcome is not
determinable within reasonable limits and accordingly no provisions for
future losses, if any, from this matter have been included in the
accompanying consolidated financial statements.
A similar claim has been asserted against the Company by another party,
however, at this date, the Company is unaware of any formal claim filed.
In addition to the above mentioned lawsuits, there are numerous other
lawsuits filed against the Company by certain vendors and other creditors.
The Company believes that these lawsuits maybe satisfied through payment of
the related indebtedness to the extent the Company's cash flow permits.
The Company is involved in various claims and legal actions. In the opinion
of management, the ultimate disposition of these matters has been evaluated
and those claims considered probable and estimable have been accrued. As of
December 31, 1996, the Company has accrued $890,000 for these claims. In
addition, the Company estimates that the ultimate resolution of one matter
will result in the purchase of a fixed asset. Accordingly, the amount
relating to the fixed asset will be recorded when the matter has been
resolved. The Company believes the ultimate resolution of the matters which
have not been accrued for will not have a materiel effect on the Company's
financial position or results of operations.
(9) Equity Transactions and Stock Plans
In June 1994, the Board of Directors of the Company adopted the 1994
Employee Stock Compensation Plan (Plan) for all full-time and part-time
employees and consultants and advisors to the Company. The Company reserved
an aggregate of 1,000,000 shares of the Company's common stock for issuance
under the 1994 Plan. The number of shares granted to an individual is at
the discretion of the Board of Directors of the Company. During 1996,
177,710 shares were granted under the Plan.
In June 1994, the Board of Directors adopted the 1994 Stock Option Plan
(Option Plan) for officers, directors and key employees, approved by
shareholders at the November 1994 Annual Shareholders meeting. The Company
has reserved an aggregate of 2,000,000 shares of the Company's common stock
for
F-18
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
issuance under the 1994 Plan. The Option Plan includes options intended to
qualify as incentive stock options, non-qualified options, and formula plan
options which are non-discretionary and will be granted annually to the
disinterested directors of the Company. During 1996, the Company issued
options to purchase 225,000 shares of common stock which include various
exercise prices per share. The options, which vest immediately, expire on
October 10, 1999 and February 16, 2001. As of December 31, 1996, none of
these options have been exercised.
In August 1995, the Company offered all holders of the Company's units
issued pursuant to the Company's private placement in March and November
1994 the opportunity to convert the Series AA Preferred Stock and
Debentures constituting part of the units into restricted shares of the
Company's common stock. Each Series AA Preferred Stock and Debenture
converted into one share of the Company's common stock at the reduced
conversion prices of $2.00 and $2.25, respectively. The total dollar amount
converted from Series AA Preferred Stock and Debentures was $2,954,500,
which converted into 1,392,240 shares of the Company's common stock. As
additional consideration, the Company also offered the unit holders the
right to exercise each Class A Warrant to purchase two shares of Common
Stock (instead of one) at an exercise price of $1.00 (instead of $5.50) for
60 days from the date of the offer. Pursuant to the Warrant offer, the
Company received $93,120 from the exercise of warrants to purchase 93,120
shares of common stock. As additional consideration to the Company, the
unit holders waived the past due interest and dividend payments owed. Total
expenses associated with this conversion are $592,000.
The convertible debentures prohibit the Company from paying any dividends,
other than the dividend requirement of the preferred stock, which is
payable in common stock, while the debentures are outstanding.
In October 1995, the Company raised additional financing through a
Regulations S offering under the Securities Act of 1933 (the Act). The
Company sold 300,000 shares of the Company's common stock for net proceeds
of approximately $225,000. The offering of shares was directed solely to
persons who are not residents of the United States. The offer was for a
maximum of 2,666,666 shares at $.75 per share. The shares were not
registered under the Act and may not be offered or sold in the United
States absent registration or an applicable exemption from registration. In
addition the shares were subject to a minimum six month restriction on
transfer.
In December 1995, the Company commenced a Regulation D offering under the
Act. At December 31, 1995, the Company sold 50,000 units at a $1.00 per
unit price, consisting of one share of the Company's common stock and one
warrant to purchase one share of common stock. During 1996, the Company
sold an additional 150,000 units. No value has been ascribed to the
warrants.
On December 7, 1995, the Company entered into Management Consulting
Agreements with two unrelated third party consultants. Pursuant to these
agreements, the Company issued 750,000 options to purchase shares of the
Company's common stock at $.75 per share in exchange for an anticipated
eight months of consulting services. These options were exercised by the
consultants through the issuance of two short term promissory notes payable
with an aggregate principal value of $563,000. Subsequent to the issuance
of the shares, the consultants defaulted on these notes.
In connection with the $500,000 financing the Company obtained in August of
1996, the Company granted warrants to acquire 260,000 shares of the
Company's common stock at an exercise price of $.70 per share. On October
18, 1996, the maturity date of the loan was extended to February 1, 1997.
In consideration for the extension the Company reduced the exercise price
on the warrants from $.70 per share to $.22 per share and recognized a
charge of $26,000.
F-19
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In connection with financing obtained by the Company in October 1996, the
Company granted warrants to acquire 55,000 shares of the Company's common
stock at an exercise price of $.22 per share
Stock option activity during the periods indicated for the Company's stock
option plan is as follows:
Number of Weighted Average
Options Shares Exercise Price
------ --------------
Outstanding at
December 31, 1994 915,000 $3.27
Granted 860,000 $1.08
Exercised (250,000) $.75
Canceled (110,000) $4.00
Outstanding at
December 31, 1995 1,415,000 $2.39
Granted 225,000 $.82
Exercised
Canceled
Outstanding at
December 31, 1996 1,640,000 $2.17
Number of Weighted Average
Warrants Shares Exercise Price
------ --------------
Outstanding at
December 31, 1994 785,904 $3.74
Granted 72,000 $1.83
Exercised (93,120) $1.00
Canceled
Outstanding at
December 31, 1995 764,794 $1.00
Granted 465,000 $.47
Exercised
Canceled
Outstanding at
December 31, 1996 1,229,784 $.80
The Company applies APB Opinion No. 25 in accounting for their Plans and,
accordingly, no compensation cost has been recognized for their stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for their stock
options under SFAS 123, the impact on the Company's net income would not be
material, therefore pro forma net income and earnings per share disclosures
have not been presented.
(10) Subsequent Event
In February 1997, the Company obtained a $1,100,000 loan from Galt Capital,
an affiliate of Gregory Orman, an independent third party, the proceeds of
which were principally used to pay-off the TPM/Source second mortgage that
was in default, reduce past due tax obligations, reduce trade payable debt
and the balance will fund the Company's operations until additional
financing can be arranged. The loan bears interest at 12% and has
$1,100,000 principal balance. This loan is currently in default. This loan
is secured pursuant to an assignment of TPM Holding, Inc. second Deed of
Trust, Loan Agreement and Promissory Note dated December 1994 and is
secured by a $573,000 first deed of trust placed against real
F-20
<PAGE>
DEBBIE REYNOLDS HOTEL & CASINO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
property owned by Selden Enterprises, ("Selden"), an affiliate of Ms.
Reynolds and Todd Fisher. In addition, Debbie Reynolds and Todd Fisher have
personally guaranteed this loan. The Company will issue Selden 500,000
shares of its common stock as consideration for allowing the deed of trust
to be placed on its real property. The Company will also issue Ms. Reynolds
500,000 shares of its common stock in consideration of her personal
guarantee and in recognition of numerous past uncompensated guarantees
provided by Ms. Reynolds as well as Ms. Reynolds' continued efforts on
behalf of the Company. In connection with the financing the Company has
issued a warrant to purchase approximately 2% of the Company's outstanding
common stock, as calculated pursuant to the agreement, at an exercise price
of $.22 per share, the estimated fair market value, which expires February
5, 2000.
F-21
CONSULTING AGREEMENT
This agreement is made as of August 27, 1996, between and among Debbie Reynolds
Management Co. ( the COMPANY), having its principal address at 305 Convention
Center Drive, Las Vegas, NV 89109, and Royce Warren ( CONSULTANT), WHEREAS, the
COMPANY desires to retain the services of CONSULTANT.
NOW THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree to the following:
1. Retention as Consultant. The COMPANY hereby retains the CONSULTANT as
an independent contractor to render services on an advisory and consultant basis
with respect to various matters relating to the casino operations of the
COMPANY. CONSULTANT shall perform such consulting services as are reasonably
requested from time to time by the COMPANY.
2. Term. The term of the CONSULTANT'S retention hereunder shall be for a
term of months and shall commence on the date hereof. This agreement shall
continue in force for the initial term indicated, subject to the right of either
party to terminate it upon sixty (60) days with written notice to the other. The
CONSULTANT shall be compensated in accordance with this Agreement for the
services rendered and qualified expenses incurred prior to the effective date of
notice of termination. Unless notified otherwise, this Agreement shall renew on
a month to month basis upon the expiration of the initial term indicated.
3. Payment for Services, Expenses. For services rendered pursuant
to this agreement, the COMPANY shall pay to the CONSULTANT the compensation and
expenses set forth in Exhibit "A", attached hereto. All compensation and
expenses incurred will be billed monthly. Payment is due at the address
appearing on the invoice within thirty (30) days.
4. Confidential Information. CONSULTANT shall not disclose to any third
parties, without the prior consent of the COMPANY, any information designated by
the COMPANY as confidential or trade secrets except as required by law. The
COMPANY shall not disclose to any third party, without the prior consent of the
CONSULTANT, any information designated by the CONSULTANT as confidential or
trade secrets except as required by law. Information that is part of the public
domain or a matter of public record shall not be considered confidential or a
trade secret.
5. Documents and Usage. The COMPANY shall retain sole right and title
to all reports, and other documents resulting from the CONSULTANT'S performance
underthis agreement ("Documents"). The CONSULTANT shall not use the documents to
disseminate information to any third party without prior written consent of the
COMPANY.
6. Assignment; Binding Effect. Neither this Agreement nor any
duties or obligations under this Agreement may be assigned by either party
without the prior written consent of the other party.
7. Interpretation: Severability. Whenever possible, each
provision of this Agreement shall be interpreted in such manner as to be valid
and effective under applicable law. If any provision of this Agreement shall be
unlawful, void or for any reason unenforceable, it shall be deemed separable
from, and shall in no way affect the validity or enforceability of, the
remaining provisions of this Agreement, and the rights and obligations of the
parties shall be enforced to the fullest extent possible.
8. Compensation. Monthly retainer will be $2,000 per month. The
compensation of the CONSULTANT shall be subject to re-negotiation upon each
renewal of this Agreement.
Expenses. The COMPANY shall reimburse to CONSULTANT all
reasonable expenses, within the limits established by the COMPANY, incurred in
the services provided by the CONSULTANT. CONSULTANT shall provide to COMPANY a
detailed itemization and copies of receipts.
Insurance. The COMPANY shall allow CONSULTANT to participate
in the COMPANY'S group insurance plan. CONSULTANT shall be responsible to make
all payments for such coverage.
9. Entire Agreement. This Agreement contains the entire agreement of the parties
with respect to the subject matter hereof, and supersedes any prior oral or
written agreements or negotiations with respect to the subject matter hereof.
This Agreement cannot be modified or terminated or any performance or condition
waived, in whole or in part, except by a writing signed by the party against
whom enforcement of the modification, termination or waiver is sought. The
waiver of any breach of any term or condition of this Agreement shall not be
deemed to constitute the waiver of any other breach of the same or any other
term or condition.
Debbie Reynolds Management Company
By:
Its:
May 15, 1997
VIA FEDERAL EXPRESS AND FACSIMILE
- ---------------------------------
Debbie Reynolds Hotel & Casino, Inc.
Debbie Reynolds Resorts, Inc.
Debbie Reynolds Management Company - Inc.
Todd Fisher
Chief Executive Officer
Debbie Reynolds Hotel & Casino, Inc.
305 Convention Center Drive
Las Vegas, Nevada 89109
Re: Cancellation of Agreement for Purchase and Sale
Dear Todd:
This letter is to serve as the required formal written notice of our
election to cancel and terminate that certain Agreement for Purchase and Sale
dated October 30, 1996, by and between ILX Incorporated (as Buyer) and Debbie
Reynolds Hotel & Casino, Inc., and Debbie Reynolds Resorts, Inc., (collectively
as Seller), effective immediately. Since, to the best of our knowledge, the
subject Agreement was never placed in escrow nor executed by the Escrow Agent
(and no notice address is provided in the subject Agreement), we are not
transmitting notice to Escrow Agent.
With those formalities behind us, and on a personal note, I want to say
what a pleasure it has been working with you, David, and the other members of
your staff in connection with this transaction. We remain hopeful that we will
be in a position to restructure our relationship along the lines we discussed in
Las Vegas last week, and we are looking forward to our continued association
relative to the Red Rock Collection line of personal care products.
If you have any questions, please don't hesitate to contact me.
Sincerely,
Joseph P. Martori
Chairman
Copy to: David Crabtree, Matthew Q. Callister
Copy to: Nancy Stone, Sam Ciatu
FINANCING AGREEMENT FINANCING AGREEMENT, made effective the 4th day of February,
1997, by and between DEBBIE REYNOLDS HOTEL & CASINO, INC., F/K/A HAMLETT
PRODUCTION, LTD., a Nevada corporation ("DRHCI"), with a principal place of
business of 305 Convention Center Drive, Las Vegas, Nevada 89109, and GALT
CAPITAL, LTD. ("Galt") whose principal place of business is 1201 Walnut, Kansas
City, Missouri 64141. RECITALS A. DRHCI is one of the Makers of a Note dated
December 1, 1994 in the original principal amount of One- Million One Hundred
Thousand Dollars ($1,100,000), originally payable to Source Capital Corporation,
which Note has subsequently been assigned to TPM Financial, Inc. (Which Note may
be referred to as the "TPM Note"), a true and correct copy of which is attached
as Exhibit"A". B. The TPM Note currently has a remaining outstanding balance
(including principal, interest, and any other amounts due thereunder) of
approximately $540,000. The TPM Note is secured by an Deed of Trust, Partial
Assignment of Time Share and/or Vacation Interval Proceeds and Security
Agreement dated December 1, 1994 (which may be referred to herein as the "TPM
Deed of Trust"), a true and correct copy of which is attached as Exhibit "B". C.
DRHCI is in need of short term financing, D. Subject to various terms and
conditions, as set forth below, Galt is prepared to acquire the TPM Note, along
with any and all rights under the TPM Deed of Trust, and make short term
advances pursuant to such Note and Deed of Trust. E. The parties desire to enter
into a written agreement setting forth in detail the terms and conditions of the
transaction. NOW, THEREFORE, in consideration of the mutual promises contained
in this Agreement, the parties agree as follows: 1. GALT TO ACQUIRE TPM NOTE.
Subject to all of the other terms and conditions as set forth in this Agreement,
Galt agrees to use, its best efforts to acquire the TPM Note, 2. ADVANCES UNDER
THE TPM NOTE. Subject to the conditions set forth below, upon acquisition by
Galt of the TPM Note, Galt agrees to make cash advances to DRHCI in an - I -
<PAGE>
amount which, when added to the total cost of acquiring the TPM Note, brings the
total to One Million Dollars ($1,000,000). 3. TERMS OF TPM NOTE. The terms of
the TPM Note shall remain unchanged. Subject to that provision, Galt agrees
that, until the expiration of one hundred twenty (120) days from the date of
acquisition of the TPM Note or until the closing of DRHCI's financing
transaction with ILX Incorporated, whichever occurs first (which may be referred
to herein as the "Due Date" of the obligations), Galt will waive the requirement
for monthly payments from DRHCI under the TPM Note. If the TPM Note is paid-off
in its entirety by its Due Date, Galt agrees to waive a portion of the interest
due thereon to the extent that it exceeds interest at the rate of 12% per annum
on the $1 Million expended by Galt to acquire the TPM Note and to make the
additional advances to DRHCI. As an additional matter, if the amounts thus due
are paid by the Due Date, Galt agrees to waive any interest on the $100,000 owed
to it as part of the TPM Note, representing the portion attributable to the loan
fee hereunder (see section 5 below). 4. DRHCI TO GRANT STOCK OPTIONS TO GALT. In
consideration of Galt's promises under this Agreement and with respect to the
transaction generally, DRHCI agrees to grant to Galt unrestricted options to
purchase 260,000 shares of DRHCI common stock at a purchase price of $.22 per
share. DRHCI shall cause, at its sole expense, the registration under the
Securities Act of 1933, as amended, of all shares of stock to be issued pursuant
to the options granted under this section, so that all shares issued pursuant to
the options shall be fully tradable by October 31, 1997. DRHCI shall also
qualify the shares under applicable state securities laws. The options shall be
exercisable at any time within the three (3) year period from the date of the
acquisition of the TPM Note and the advances called for hereunder. It is agreed
and understood that the options shall not be subject to dilution. To the extent
that any additional stock is issued by DRHCI that would have the effect of
diluting the options, or to the extent that other options, warrants, or other
purchase rights are issued which would have the effect of diluting the ownership
of stock in DRHCI in the, event that the options were exercised, then additional
options shall be granted to Galt sufficient to permit it to maintain its
percentage of ownership at two percent (2%) of the total stock ownership of
DRHCI, if all such options were to be exercised. DRHCI warrants that there are
currently 13,000,000 fully diluted shares outstanding including without
limitation shares of stock, warrants, options, and the like. Galt's options
shall be divisible and assignable by it. The dilution restrictions imposed by
this section will be effective for a period of eighteen months from the
acquisition by Galt of the TPM Note. 5. LOAN FEE. Upon the acquisition by Galt
of the TPM Note and the making of the advances to DRHCI called for under this
Agreement, DRHCI agrees that it shall be obligated to Galt for a loan fee in the
amount of $100,000. Galt agrees to defer - 2 -
<PAGE>
Exhibit "D".
DRHCI warrants and represents that the TSI Title Preliminary Report is accurate,
except with the addition of one judgment, which has been orally disclosed, Any
other liens against the Real Estate for mortgages, deeds of trust, taxes,
judgments, or otherwise are as disclosed in the Title Report. c) To the best of
the knowledge of DRHCI, and its Officers and Directors, the Real Estate has no
environmental problems. Specifically, there are no material amounts of asbestos
in the structures situated on the Real Estate, and there are no hazardous
materials or other pollutants suspected, known, or believed to be present on the
Real Estate. DRHCI and its Officers and Directors have made due inquiries and
understand and believe these representations to be true and accurate. 9.
CONDITIONS TO GALT'S OBLIGATIONS. It is expressly agreed by the pages that the
following constitute absolute conditions to any and all of Galt's obligations
hereunder, including but not limited to the acquisition of the TPM Note and the
making of any advances thereunder as called for thereunder in this Agreement: a)
That all of the warranties and representations made by DRHCI in this Agreement
are accurate, true, and correct as of the date hereof and as of the date of the
acquisition of the TPM Note and of any advances thereunder. b) That, upon
completion of the acquisition by Galt of the TPM Note, and upon the making of
any advances by Galt as called for in this Agreement, the TPM Deed of Trust
shall secure Galt to the full extent of the $1.1 Million obligation of the TPM
Note, pursuant to the TPM Deed of Trust, and that Gait's security with respect
to that obligation shall be subordinate only to the Bennett Mortgage (only the
first mortgage) described above. c) That there shall be issued to Galt a
mortgagee's or lender's policy of title insurance in the amount of $1,100,000
issued by Fidelity National Title on a standard California Land Title
Association Standard Coverage form policy, describing the Real Estate, which
policy: (i) specifically insures that Galt's lien for $ 1,100,000 under the TPM
Deed of Trust is subordinate only to the Bennett Mortgage (only the first
Mortgage) described above, and is prior to and superior to any other liens
against the Real Estate; and (ii) is subject only to those exceptions
specifically approved by Galt. 10. GALT'S RIGHT TO ASSIGN. It is agreed and
understood that Galt shall have the unrestricted right to permit other
individuals and/or entities to participate with it in the transaction which is
the subject of this Agreement, so long as Galt continues - 4 -
to participate
personally in the transaction. To the extent of such participation, which shall
be determined in Galt's sole discretion, Gait shall have the right to assign to
such individuals or entities who participate with Galt in this transaction
proportionate shares of its rights under this Agreement and under the related
documents which are part of this transaction. 11. FINANCING COSTS TO BE PAID BY
DRHCI. DRHCI specifically agrees that it will pay any and all of Gait's costs
associated with this transaction, including, attorneys' fees incurred by Galt in
correction with the transaction, any and all filing fees or documentary deed
taxes or fees of any kind, fees payable to a title company for closing, and the
costs of obtaining the mortgagee's or lender's policies of title insurance
referred to in sections 9 and 14 above. Amounts for the payments of such fees
and expenses shall be paid out directly to the designated recipients and
considered as advances made with respect to the TPM Note. 12.TRANSFER OF SHARES
OF ILX INCORPORATED. As additional consideration to Galt, upon completion of the
ILX Incorporated transaction described above, DRHCI agrees to transfer and
assign 50,000 shares of ILX Incorporated stock to Galt free and clear of any
obligations and subject to no restrictions greater than those to which ILX stock
held by DRHCI is subject. 13.DEFAULT BY DRHCI. Under this Agreement, or under
the TPM Note or the TPM Deed of Trust, Galt shall be entitled to avail itself of
any and all remedies available to it under the TPM Note and the TPM Deed of
Trust, along with any other security given by or on behalf of DRHCI, and, to the
extent not otherwise provided for thereunder, Galt shall be entitled to recover
from DRHCI and any Guarantor hereunder all of its costs and expenses in
connection therewith, including reasonable attorneys' fees,, whether or not suit
is commenced. In addition, in the event of any default in payments due
hereunder, interest shall accrue on any amounts in default at the default rate
of interest provided for in the TPM Note. 14.CONTINGENCY FOR ADDITIONAL
SECURITY. In the event that DRHCI is unable to satisfy the condition set forth
in section 9.c) pertaining to full title insurance coverage, Galt agrees to
complete the transaction on the following additional conditions: a) DRHCI shall
provide additional security for Galt by way of an unconditional first mortgage
against real estate owned either by Debbie Reynolds or Selden Enterprises, a
limited Partnership owned directly or indirectly by her, against a strip mail
located in California, which DRHCI has represented as having an estimated market
value in excess of $600,000 (it being understood that, in the event of a
default, Gait, in its discretion and judgment, will seek first to satisfy its
claim out of the Real Estate secured by the TPM Deed of Trust). - 5 -
<PAGE>
b) DRHCI
shall procure for Gait a mortgagee's title insurance policy insuring Galt's
mortgage against such real estate at least to an amount equal to the difference
between $1.1 Million and the amount of title insurance coverage (insuring Gait's
security position as superior to all other liens other than the Bennett First
Mortgage) with respect to the, Real Estate secured by the TPM Deed of Trust. 15.
MISCELLANEOUS PROVISIONS. The parties agree: a) This Agreement represents the
entire agreement between the parties pertaining to its subject matter. b) This
Agreement shall be binding upon and shall benefit the parties and their
respective successors, assigns, heirs and personal representatives. c) Whenever
possible, each provision of this Agreement and each related document shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement or any related document shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of this
Agreement or such related documents. d) This Agreement may not be and shall not
be deemed or construed to be modified, amended, rescinded, canceled or waived in
whole or in part except by written instrument signed by the parties. e) All
representations, warranties, covenants and undertakings contained in this
Agreement shall survive the closing of this transaction and the delivery of any
documents or instruments. f) All notices, requests, covenants, demands, waivers
and other communication required or permitted to be given shall be in writing
and shall be deemed to have been properly given if delivered personally or
mailed first class, postage prepaid, by registered or certified mail to the
addresses set forth above. Such notices shall be given to such other persons and
addresses as a party shall specify in writing. g) This Agreement shall be
governed by Nevada law. h) This Agreement may be executed in counterparts, each
of which will be deemed an original but which, together, will constitute one and
the same instrument. However, in making proof hereof it will be necessary to
produce only one copy hereof - 6 -
<PAGE>
signed by the party to be charged. Proof of
execution may be transmitted by facsimile transmissions among the parties (which
term, as used herein, includes Guarantors). Upon transmission of a facsimile
copy of the executed signature page of this Agreement to any other party or to a
designated agent, the party so transmitting the signature page shall
conclusively be deemed to have executed the Agreement and to be bound thereby,
subject only to the obtaining of signatures of all the parties. IN WITNESS
WHEREOF, the parties executed this Financing Agreement effective as of the date
indicated. DEBBIE REYNOLDS HOTEL & CASINO, INC., F/K/A HAMLETT PRODUCTION, LTD.
BY:/s/ Debbie Reynolds, Chairperson of the Board, Secretary By:/s/ Todd Fisher,
President and Treasurer GALT CAPITAL LTD. By:/s/ Gregory Orman, President FOR
VALUABLE CONSIDERATION, the undersigned, DEBBIE REYNOLDS and TODD FISHER, whose
principal place of business is 305 Convention Center Drive, Las Vegas, Nevada
89109, agree to fully and unconditionally guaranty the performance of all
obligations of Debbie Reynolds Hotel & Casino, Inc. under the Financing
Agreement as set forth above, and under the TPM Note and the TPM Deed of Trust,
and further warrant and represent to Galt Capital, Ltd. that the warranties and
representations contained in the Financing Agreement are true and correct. 7 -
<PAGE>
Dated: February 4,1997 AMENDMENT TO DEED OF TRUST THESE PRESENTS, executed at
Las Vegas, Nevada, this 4 day of February, 1997 , by the undersigned, Trustor,
Trustee, and Beneficiary. WITNESSETH THAT: 1. The undersigned parties are named
respectively as Trustor, Trustee, and Beneficiary in that certain Deed of Trust
recorded as Document No. 01626 in Book 941202 of Official Records, in the office
of the County Recorder of Clark County, State of Nevada, and none of them has
transferred any interest under or in connection with the same. 2. As of the date
hereof said Beneficiary has made an additional loan of $1,000,000 to said
Trustor evidenced by a promissory note, executed and delivered by the Trustor to
the undersigned Beneficiary. 3. It has been and is hereby mutually agreed by and
between the parties hereto that in addition to the obligations originally
secured thereby, the Deed of Trust referred to in Paragraph 1 hereof shall
secure performance of all of the obligations evidenced by the promissory note
referred to in Paragraph 2 above. IN WITNESS WHEREOF, the undersigned parties
have executed these presents. Debbie Reynolds Hotel & Casino, Inc. Debbie
Reynolds Resorts, Inc. By:/s/ Todd Fisher, President and CEO County Mgr. Galt
Capital By:/s/ Rogena D. Horowitz STATE OF NEVADA COUNTY OF CLARK This
instrument was acknowledged before me on February 4, 1 997 by Todd Fisher and
Terrance L. Hatch TSI Title & Escrow, Inc. By:/s/ Terrance L. Hatch, V.P. and
<PAGE>
Notary Public: /s/Bernadette Jane Sterling This instrument was acknowledged
before me on February 5, 1997 by Rogena D. Horowitz, as beneficiary of Galt
Capital Notary Public: /s/ Kristina A. Heffner
- 9 -
Peat Marwick LLP
2300 West Sahara Avenue
Suite 300, Box 28
Las Vegas, NV 89102
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders Debbie Reynolds Hotel & Casino, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-82126) on Form S-8 of Debbie Reynolds Hotel & Casino. Inc. of our report
dated April 4. 1997, except for Notes 7 and 8, which are as of May 16, 1997,
relating to the consolidated balance sheet of Debbie Reynolds Hotel & Casino,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, shareholders' equity (deficiency) and cash flows for
each of the years in the two year period ended December 3 1, 1996, which report
appears in the December 31, 1996 annual report on Form 10-KSB of Debbie Reynolds
Hotel & Casino, Inc.
Our report dated April 4, 1997, except for Notes 7 and 8, which are as of May
16, 1997, contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations, has a working capital deficiency, has
a shareholders' equity deficiency, significant debt service obligations, and is
in default with respect to various agreements, all of which raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Las Vegas, Nevada
June 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 985,000
<ALLOWANCES> 0
<INVENTORY> 541,000
<CURRENT-ASSETS> 1,831,000
<PP&E> 10,586,000
<DEPRECIATION> 3,219,000
<TOTAL-ASSETS> 9,292,000
<CURRENT-LIABILITIES> 15,621,000
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> (6,330,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,292,000
<SALES> 6,421,000
<TOTAL-REVENUES> 6,421,000
<CGS> 0
<TOTAL-COSTS> 11,331,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,554,000
<INCOME-PRETAX> (6,464,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,464,000)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> 0
</TABLE>
