<PAGE>
As filed with the Securities and Exchange Commission on September 27, 1996
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
____________________
WINNERS ENTERTAINMENT, INC.
(Exact name of Company as Specified in its Charter)
DELAWARE 7993 84-1103135
(State or other jurisdiction (Primary (I.R.S. Employer
of incorporation or organi- SIC Code Identification
zation) Number) Number)
1461 GLENNEYRE STREET, SUITE F
LAGUNA BEACH, CALIFORNIA 92651
(714) 376-3010
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
EDSON R. ARNEAULT
WINNERS ENTERTAINMENT, INC.
1461 GLENNEYRE STREET, SUITE F
LAGUNA BEACH, CALIFORNIA 92651
(714) 376-3010
(Name, Address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
KEVIN T. COLLINS, ESQ.
KENNETH ZUCKERBROT, ESQ.
ROSS & HARDIES
65 EAST 55TH STREET
NEW YORK, NEW YORK 10022
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The Company hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Company shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
WINNERS ENTERTAINMENT, INC.
CROSS REFERENCE SHEET
Forepart of Registration Statement and Forepart of Registration
Outside Front Cover Page of Prospectus Statement and Outside Front
Cover Page of Prospectus
Inside Front and Outside Back Cover Pages Available Information; Outside
of Prospectus Back Cover Page of Prospectus
Summary Information, Risk Factors and Prospectus Summary; Summary;
Ratio of Earnings to Fixed Charges Risk Factors
Use of Proceeds Use of Proceeds
Determination of Offering Price Not Applicable
Dilution Not Applicable
Selling Security Holders Selling Stockholders
Plan of Distribution Plan of Distribution
Description of Securities to be Description of Securities
Registered
Interests of Named Experts and Counsel Legal Matters; Experts
Information with Respect to the Business; Management;
Registrant Price Range of Common Stock;
Dividend Policy; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Executive
Compensation; Principal
Stockholders; Certain
Transactions; Consolidated
and Interim Financial
Statements
Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Title of each class of Proposed maximum
securities to BE offering price PER UNIT Amount of registration
REGISTERED Amount to be REGISTERED Aggregate OFFERING FEE
PRICE
<S> <C> <C> <C> <C>
Shares of Common Stock, 183,206 Shares $1.03125 per Share $188,931.18 $65.15
par value $.00001
per share (1)
Shares of Common Stock, 1,492,860 Shares $1.06 per Share $1,582,431.60 $545.67
par value $.00001
per share (2)
Shares of Common Stock, 50,000 Shares $1.03125 per Share $51,562.50 $17.78
par value $.00001
per share (3)
Warrants to purchase an 1,542,860 Warrants --- --- ---
aggregate of
1,542,860 shares of
Common Stock, par value
$.00001 per share (4)
Totals $628.60
</TABLE>
(1) To be offered and sold by Selling Stockholders (as defined herein);
registration fee calculated pursuant to Rule 457(c) based on the
average of the bid and ask price for the Common Stock of the Company
on September 23, 1996.
(2) To be offered and sold by Selling Stockholders upon the exercise of
the $1.06 Warrants (as defined herein). The $1.06 Warrants to
purchase 1,492,860 of such shares are exercisable at a price of $1.06
per share. In accordance with Rule 457(g) the price used for
calculating the registration fee is the exercise price of the $1.06
Warrants.
(3) To be offered and sold by Selling Stockholders (as defined herein)
upon the exercise of the $.80 Warrants (as defined herein). Warrants
to purchase 50,000 of such shares of Common Stock are exercisable at a
price of $.80 per share. In accordance with Rule 457(g) the price
used for calculating the registration fee is based on the average bid
and ask price of the Company's Common Stock on September 23, 1996.
(4) To be offered and sold by Selling Stockholders (as defined herein).
In accordance with Rule 457(g), no separate registration fee is
required for the resale of the Warrants.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such state.
PROSPECTUS
WINNERS ENTERTAINMENT, INC.
Warrants to purchase 1,542,860 shares
of Common Stock, par value $.00001 per share
1,726,066 shares of Common Stock, par value $.00001 per share
The registration statement (the "Registration Statement"), of which
this Prospectus forms a part, registers the offer and sale by certain
stockholders (the "Selling Stockholders") of (i) warrants to purchase an
aggregate of 1,492,860 shares of the common stock, par value $.00001 (the
"Common Stock") of Winners Entertainment, Inc. (the "Company" or "Winners")
at a price of $1.06 per share, subject to adjustment, (the "$1.06
Warrants"); (ii) warrants to purchase an aggregate of 50,000 shares of
Common Stock at a price of $0.80 per share, subject to adjustment, (the
"$0.80 Warrants") and (iii) 1,726,066 shares of Common Stock. The $1.06
Warrants and the $0.80 Warrants are collectively referred to herein as the
"Warrants." Of the 1,726,066 shares of Common Stock registered herein,
183,206 shares are outstanding and held by the Selling Stockholders and
1,542,860 shares are issuable upon the exercise of the Warrants held by the
Selling Stockholders. The Selling Stockholders acquired the outstanding
shares of Common Stock and the Warrants offered hereby directly from the
Company in connection with a secured working capital loan agreement (the
"Term Loan Agreement") between a wholly-owned subsidiary of the Company,
the Company as guarantor and a private lender. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Selling Stockholders." The Company
will not receive any of the proceeds from the sale of the shares of Common
Stock and Warrants offered hereby by the Selling Stockholders. The
Warrants are exercisable commencing on July 2, 1996 and ending at the close
of business on July 2, 2001. Except with respect to the exercise price,
the $1.06 Warrants and $.80 Warrants are identical. To the extent any of
the Warrants are exercised, the Company will use the proceeds thereof for
its working capital purposes. See "Use of Proceeds."
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<PAGE>
The Common Stock is quoted on the NASDAQ SmallCap Market. On
September 25, 1996 the high bid and low asked quotations of the Common
Stock were $1 and $1 1/16, respectively. Prior to this offering there has
been no public market for the Warrants and the Company does not intend to
apply for listing or quotation of the Warrants on any securities exchange
or stock market.
The Selling Stockholders may sell the securities registered herein
from time to time in transactions in the open market (including any
securities exchange or through any inter-dealer quotation system), in
negotiated transactions, or by a combination of these methods, at fixed
prices that may be changed, at market prices at the time of sale, at prices
related to market prices or at negotiated prices. The Selling Stockholders
may effect these transactions directly with the purchasers by selling the
securities registered herein to or through underwriters, agents, or broker-
dealers, in each case who may receive compensation in the form of discounts
or commissions from the Selling Stockholders or otherwise from the
purchasers of such securities for whom the underwriters, agents or broker-
dealers may act as agent or to whom they may sell as principal, or both.
See "Plan of Distribution."
The Company will bear all of the expenses in connection with the
registration of the Common Stock and Warrants offered hereby, which
expenses are estimated to be $105,628.60. The Selling Stockholders will
pay any brokerage compensation in connection with their sale of the Common
Stock and Warrants registered herein.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" WHICH COMMENCES ON PAGE 7 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October __, 1996.
ii
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and other information statements filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
and at its regional offices located at Seven World Trade Center, Suite
1300, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of
such material can be obtained from the Public Reference Section of the
Commission in Washington, D.C., at prescribed rates.
The Company has filed with the Commission a Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933,
as amended (the "Act"), with respect to the securities offered hereby.
This Prospectus (the "Prospectus") does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and the
securities offered hereby, reference is hereby made to the Registration
Statement, and exhibits and schedules thereto.
No dealer, salesman or any other person has been authorized to give
any information or to make any representation other than those contained in
this Prospectus in connection with the offering herein contained and, if
given or made, such information or representation must not be relied upon
as having been authorized by the Company. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the facts herein
set forth since the date hereof.
iii
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY........................................................1
RISK FACTORS..............................................................7
USE OF PROCEEDS..........................................................15
DIVIDEND POLICY..........................................................15
CAPITALIZATION...........................................................15
PRICE RANGE OF COMMON STOCK..............................................17
SELECTED FINANCIAL DATA..................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................19
BUSINESS ................................................................40
MANAGEMENT...............................................................63
EXECUTIVE COMPENSATION...................................................64
CERTAIN TRANSACTIONS.....................................................70
PRINCIPAL STOCKHOLDERS...................................................74
SELLING STOCKHOLDERS.....................................................78
PLAN OF DISTRIBUTION.....................................................80
DESCRIPTION OF SECURITIES................................................82
SHARES ELIGIBLE FOR FUTURE SALE..........................................89
DESCRIPTION OF CERTAIN INDEBTEDNESS......................................97
LEGAL MATTERS...........................................................100
EXPERTS.................................................................100
INDEX TO FINANCIAL STATEMENTS...........................................F-1
iv
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in the
body of this Prospectus and should be read in conjunction with the detailed
information and financial statements appearing elsewhere herein.
THE COMPANY
The Company, through wholly-owned subsidiaries, owns and operates
Mountaineer Race Track and Gaming Resort ("Mountaineer Park"), a resort
facility in Chester, West Virginia, and owns a working interest in proven
oil and gas reserves in Michigan.
The Company was incorporated in March 1988 in Delaware under the name
"Secamur Corporation," a wholly owned subsidiary of Buffalo Equities, Inc.,
("Buffalo") and later "spun-off" through the sale of its stock to the
stockholders of Buffalo in January 1989. In June 1989, the Company
acquired through merger, Pacific International Industries, Inc., which had
been engaged in the contract security guard services business in Southern
California since its inception in February 1987. Upon completion of the
merger, the Company was renamed Excalibur Security Services, Inc., to
reflect its new line of business. After operating unprofitably, the
Company filed a voluntary petition for reorganization with the U.S.
Bankruptcy Court for the Central District of California in December 1990,
and became a Chapter 11 debtor-in-possession. The Bankruptcy Court
approved the Company's sale of its security guard services business in May
1991, and confirmed the Company's plan of reorganization in December 1991.
The plan authorized the Company to acquire, primarily, specified gaming and
oil and gas businesses. Upon confirmation of the plan, the Company changed
its name to Excalibur Holding Corporation. In connection with management's
decision to operate as a gaming company, the Company was renamed Winners
Entertainment, Inc. in August 1993.
MOUNTAINEER RACE TRACK & GAMING RESORT - CHESTER, WEST VIRGINIA
Pursuant to a stock purchase agreement dated May 5, 1992, the Company
acquired all of the common stock of Mountaineer Park, Inc. ("Mountaineer"),
a West Virginia corporation, in December 1992. Mountaineer Park, the site
of the Company's gaming business and offers an entertainment complex and
destination resort with hotel, dining and lounge facilities, and outdoor
activities including golf, swimming and tennis. Mountaineer Park is
situated on a 606-acre site on the Ohio River at the northern tip of West
Virginia's northwestern panhandle in Hancock County, approximately 40 miles
south of Youngstown, Ohio and 35 miles west of Pittsburgh, Pennsylvania.
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RACETRACK FACILITIES
Mountaineer Park offers live horse racing before expanded clubhouse
and grandstand viewing areas with enclosed seating for year-round racing.
The track also conducts simulcast (closed circuit television) thoroughbred
horse and greyhound dog racing from other prominent racetracks.
Mountaineer Park's main racetrack consists of an oval dirt track
approximately one mile in length. Inside the main track is a natural turf
(grass) track measuring seven furlongs or 7/8 of a mile. The racetrack is
equipped with two chutes for races of lengths from 4 1/2 furlongs to over
one mile. The racetrack buildings consist of the clubhouse and grandstand
which provide glass-enclosed stadium and box seating for approximately 770
and 2,850 patrons, respectively. The buildings are each three-stories and
are connected by an enclosed walkway. Live and simulcast racing can be
viewed by approximately 1,200 dining patrons in two restaurants located in
the clubhouse and grandstand. In addition to seating areas, the grandstand
covers approximately 57,000 square feet of interior space on the main and
mezzanine levels containing 42 parimutuel windows, and four food and
beverage concession stands. The clubhouse covers approximately 25,000
square feet of interior space containing 22 parimutuel windows. The
grandstand has an indoor stage with a seating capacity of approximately
2,240, and has been the site of several nationally televised boxing
matches. The racetrack apron, which is accessible from both buildings,
provides racing fans with up-close viewing of horses entering the racetrack
and crossing the finish line. The stable area accommodates approximately
1,250 horses and is located adjacent to the main track. Mountaineer's
racetrack parking lots have a combined capacity for over 2,900 vehicles.
LODGE FACILITIES
The Mountaineer Lodge (the "Lodge") is a two-story facility which
overlooks the par three, nine hole "executive" golf course near Mountaineer
Park's main entrance on West Virginia State Route 2. The Lodge offers 101
rooms, including 50 standard rooms (one double bed), 46 superior rooms (two
double beds), and five king rooms and suites. The Mountaineer Lodge Dining
Room seats 125 patrons for casual dining overlooking the golf course. In
1995, in response to increased patronage of the off-track betting, video
lottery gaming, dining and bar facilities located at the Lodge, the Company
expanded its 5,000 square foot Speakeasy Gaming Saloon with an 8,000 square
foot addition. The capacity of the Speakeasy Gaming Saloon now stands at
750. Extensive off-track wagering facilities continue to be maintained at
the Speakeasy Gaming Saloon. The Lodge parking lots have a combined
capacity for approximately 370 vehicles.
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VIDEO LOTTERY FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer
Park offers video lottery gaming through 800 leased video lottery terminals
("VLTs") located in the racetrack clubhouse, and grandstand and Lodge.
Mountaineer introduced 400 new state-of-the-art VLTs in September 1994,
replacing 165 older machines operated by the Company since December 1992,
and subsequently placed an additional 400 VLTs into operation in June 1995.
The racetrack houses 400 of the VLTs in its Riverside Gaming Terrace on the
second floors of the clubhouse and grandstand, and the Lodge offers the
remaining 400 VLTs in the Speakeasy Gaming Saloon, Derby Room and Iron
Horse Lounge. Unlike the replaced machines, each of the new VLTs allows a
player to select from several game themes, including up to four versions of
draw poker, one version of blackjack and two versions of keno.
On July 3, 1996, Mountaineer installed slot games on the first 350 of
its 800 VLTs. The new games, which were authorized by West Virginia's
state lottery laws for the first time in June 1996, include Double Diamond,
a classic casino slot game with cherries, bars and items that "spin" on
video reels, and the internationally popular Black Rhino game. These new
games are offered in addition to blackjack, poker and keno. Management
intends to install 200 additional VLTs with slot games within the next
year, and replace older VLTs that cannot accommodate the new games as
leases lapse, subject, to evidence that the Company's current VLTs are
utilized to full capacity, so that by the end of fiscal year 1997,
Mountaineer expects to operate 1,000 VLTs with slot games.
RECREATIONAL FACILITIES
Mountaineer Park has a par three, nine-hole "executive" golf course,
three tennis courts, a volleyball court, a basketball court, two swimming
pools and two children's swimming pools. These facilities are made
available for use by Lodge guests and the general public at specified daily
or seasonal fee rates.
TRAILER PARK
The Company maintains a trailer park consisting of 61 individual lots
on approximately 11.5 acres located across West Virginia State Route 2 from
the Lodge and the entrance to Mountaineer Park. The lots are rented for
fixed monthly fees, mostly to individuals who are employed by Mountaineer
in racing operations. The Company is responsible for maintenance of the
road and grounds, refuse removal and providing water and sewage hook-ups.
The tenants pay all utility expenses.
3
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UNDEVELOPED LAND
Mountaineer owns, as part of its 606 acre site, a 375 acre tract that
is currently undeveloped. The acreage is located directly across West
Virginia State Route 2 from the Lodge and racetrack main entrance.
Management has no current plans to develop such property.
RECENT DEVELOPMENTS
The Company has recently distributed a proxy statement to its
shareholders which requests that the shareholders' grant their proxies to
vote at the annual meeting scheduled to be held on October 15, 1996 to,
among other things, (i) amend the Company's certificate of incorporation to
change the Company's name to "MTR Gaming Group, Inc.," (ii) amend the
Company's certificate of incorporation to effect a one for five reverse
split of the Common Stock (the "Reverse Split"), (iii) amend the Company's
certificate of incorporation to increase the number of authorized shares of
Common Stock from 25 million to 50 million in the event the Reverse Split
is not approved or from five million to 10 million in the event the Reverse
Split is approved, and (iv) amend the Company's certificate of
incorporation to create a new class of "blank-check" preferred stock.
EXCEPT AS OTHERWISE INDICATED HEREIN, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THESE PROPOSALS HAVE NOT BEEN APPROVED BY THE SHAREHOLDERS.
On July 2, 1996, Mountaineer, entered into a financing arrangement
with a private lender for a secured working capital loan pursuant to the
Term Loan Agreement (the "Term Loan") and a commitment for first mortgage
refinancing (the "Loan Commitment"). The $5 million loan is secured by a
second mortgage on all of Mountaineer's real and personal property and is
guaranteed by the Company. The note evidencing the loan calls for monthly
payments of interest only at the rate of 12% per annum, and a default rate
of 22% per annum. As additional consideration for the note, the Company
agreed to issue the lender 183,206 shares of Common Stock and five-year
Warrants to purchase an additional 1,142,860 shares of Common Stock at
$1.06 per share. The Warrants are exercisable for a period of five (5)
years from the date of the loan agreement. Five-year Warrants to purchase
an additional 50,000 shares of Common Stock in the aggregate at an exercise
price of $.80 per share were issued by the Company to two affiliates of the
lender. Except with respect to the exercise price, the $1.06 Warrants and
the $.80 Warrants are identical. See "Management's Discussion of Financial
Condition and Results of Operations - Liquidity and Capital Resources,"
"Selling Stockholders" and "Description of Certain Indebtedness." The
principal of the Term Loan is to be repaid at the end of a three year term,
during which period the Term Loan is subject to, on each anniversary date,
additional fees in cash equal to 8% of the outstanding principal balance,
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<PAGE>
stock equal to 5% of the outstanding principal balance (valued at the
average closing bid price for the 30 days prior to each anniversary date),
and additional warrants to purchase an aggregate of 250,000 shares of
Common Stock at an exercise price of $1.06 per share. The shares of Common
Stock and Warrants which have been issued to the lender and its affiliates
and the shares of Common Stock underlying such Warrants are covered by this
Registration Statement and the shares and warrants issuable to the lender
in connection with the Term Loan Agreement in the future and the shares
underlying such warrants will be the subject of future registration
statements. In addition to the fees, certain restrictions are imposed
under the Term Loan Agreement limiting the Company's ability to incur
additional debt, make capital expenditures and increase management's
compensation. The Warrants Certificates provide for adjustment to the
exercise price of, and number of shares of Common Stock issuable pursuant
to, the Warrants in the event the Company issues additional securities at a
price below the exercise price of the Warrants. See "Description of
Securities - Warrants."
In connection with the Term Loan, the lender also provided a one year
Loan Commitment to lend Mountaineer up to $11.1 million of additional funds
to be used to refinance the current first mortgage held by Bennett
Management & Development Corp. ("Bennett"). The Loan Commitment is subject
to customary conditions, including negotiation of definitive loan
agreements, but provides that any refinancing would be on terms no less
favorable than those of the Company's obligation to Bennett. In connection
with the Loan Commitment, the Company paid a $110,000 commitment fee and
issued the lender additional Warrants to purchase 350,000 shares of Common
Stock at the exercise price of share. These Warrants and the shares of
Common Stock underlying such Warrants are covered by this Registration
Statement.
In order to assure compliance with provisions of the West Virginia
Racetrack Video Lottery Act (the "Lottery Act") concerning control over a
licensee of the West Virginia Lottery Commission (the "Lottery
Commission"), the lender has agreed that it may not own, through the
exercise of warrants or otherwise, more than 5% of the Company's
outstanding Common Stock unless and until the Commission either (i)
approves the lender or (ii) provides an advisory opinion approving an
arrangement whereby the lender may own but may not have voting rights to
any shares of Common Stock in excess of the 5% threshold. If the lender
becomes disqualified after such Lottery Commission approval, any shares
held in excess of the 5% threshold, if registered, shall be sold by the
lender; otherwise such shares may be put to the Company for repurchase by
the Company at the then current market price, payable in cash or a note
with interest payable monthly at 24% per annum with all principal due in
one year. The lender did file a Schedule 13D based on its ownership of
Common Stock and the immediately exercisable Warrants.
5
<PAGE>
The Company agreed to register the Common Stock and Warrants with the
Commission, subject to cash penalties if such registration statement is not
initially filed on or before 90 days from the date of the Loan Agreement,
and up to two additional cash penalties if the registration is not declared
effective before seven and nine months from the date of the Loan Agreement.
Net proceeds to the Company after repayment of a $250,000 loan from an
affiliate of the lender, legal fees, loan origination fees, fees associated
with the Loan Commitment and the costs of the transaction were
approximately $4.2 million. The loan proceeds will be used by the Company
to retire a substantial portion of its accounts payable, to make future
site improvements and decorate the Speakeasy Gaming Saloon at Mountaineer
Park. The loan proceeds will also be used for television and print
advertising campaigns in the Pittsburgh and Cleveland markets.
Winners, a Delaware corporation, was incorporated in 1988. The
Company's executive offices are located at 1461 Glenneyre Street, Suite F,
Laguna Beach, California 92651, Telephone: (714) 376-3010.
THE OFFERING
Securities Offered......... This Prospectus relates to an offering by the
Selling Stockholders of (i) Warrants, which,
when exercised, would entitle the holders
thereof to purchase, in the aggregate
1,542,860 shares of Common Stock, (ii)
1,542,860 shares of Common Stock issuable
upon exercise of the Warrants, and (iii)
183,206 shares of outstanding Common Stock
which are outstanding and held by one of the
Selling Stockholders. The Warrants and the
outstanding shares of Common Stock were
issued to the Selling Stockholders in private
transactions in connection with the Term Loan
Agreement dated as of July 2, 1996 between a
wholly-owned subsidiary of the Company and
one of the Selling Stockholders. See
"Selling Stockholders."
6
<PAGE>
Securities Outstanding..... As of September 13, 1996, the Company had
18,869,397 shares of Common Stock
outstanding. Assuming that all of the
Warrants are exercised and no other shares of
Common Stock are issued subsequent to
September 13, 1996, the Company would have
20,412,257 shares of Common Stock
outstanding.
Use of Proceeds............ The Company will not receive any proceeds
from the sale of the Warrants or the shares
of Common Stock offered by the Selling
Stockholders. To date, none of the Warrants
have been exercised. If all of the Warrants
are exercised, the Company will receive
estimated additional net proceeds of
$1,622,431. The Company intends to utilize
any proceeds received from the exercise of
the Warrants as working capital. There can
be no assurance that any of the Warrants will
be exercised. See "Use of Proceeds."
Risk Factors............... See "Risk Factors" for a discussion of
certain risk factors that should be
considered by prospective investors in
connection with an investment in the
securities offered hereby.
RISK FACTORS
The securities offered hereby are speculative and involve a high
degree of risk. They should not be purchased by anyone who cannot afford
the loss of his or her entire investment. In analyzing this offering,
prospective investors should consider the following risk factors, as well
as other information contained in this Prospectus before making an
investment in such securities. Information contained in this Prospectus
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-
looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
7
<PAGE>
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results
indicated in such forward-looking statements. Other factors could also
cause actual results to vary materially from the future results indicated
in such forward-looking statements.
HISTORICAL AND ANTICIPATED FUTURE LOSSES; WORKING CAPITAL DEFICIT.
The Company has incurred substantial losses in 1995, 1994 and 1993 and as
of June 30, 1996, the Company had current liabilities in excess of current
assets of $8.4 million. As of June 30, 1996, the Company had an
accumulated deficit of $26.2 million. Additionally, the Company's
independent accountants expressed concerns that these factors raised
substantial doubt regarding the Company's ability to continue as a going
concern in connection with their audit of the Company's 1995 consolidated
financial statements for the fiscal year ended December 31, 1995. For the
six months ended June 30, 1996, the Company had narrowed its loss to
$115,000 from $2.6 million for the comparable period in 1995. There can be
no assurance, however, that the Company will achieve positive cash flow
from operations in the future or that the Company will have sufficient
working capital to service its obligations as they become due.
LEVERAGE AND DEBT SERVICE. The Company has significant interest
expense and principal repayment obligations under its long term
indebtedness including the Term Loan pursuant to the Term Loan Agreement.
At June 30, 1996, after giving effect to the Term Loan and the application
of the net proceeds therefrom, the Company's PRO FORMA total consolidated
long-term debt (excluding the current portion of long term debt of $3.7
million) would have been approximately $11.3 million, consisting of $9.1
million outstanding under the Company's first mortgage loan (the "Bennett
Loan") from Bennett Management and Development Corp. ("Bennett"), $5
million outstanding under the Term Loan and approximately $457,000 of other
long-term debt. The Bennett Loan is secured by a first mortgage on
Mountaineer's real and personal assets and bears interest at the rate of
12.5% per year with a delinquency rate of 14.5% and is guaranteed by the
Company. The Bennett Loan requires the Company to make 36 monthly payments
of principal and interest based on a 36 month amortization schedule and
contains no prepayment penalties. The Company recently negotiated an
Amendment to the Bennett Loan, which has not yet become effective. The
Term Loan is secured by a second mortgage on Mountaineer's real and
personal property and is guaranteed by the Company. The note evidencing
the Term Loan calls for monthly payments of interest only at the rate of
12% per year, and bears a default rate of 22% per year. The principal of
the Term Loan must be repaid at the end of a the three year term, during
which period, the loan is subject to, on each anniversary date, additional
fees of cash equal to 8% of the outstanding principal balance, stock equal
to 5% of the outstanding principal balance (valued at the closing bid and
asked price for the 30 days prior to each anniversary date), and warrants
to purchase 250,000 shares at $1.06 per share. See "Selected Financial
8
<PAGE>
Data -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description
of Certain Indebtedness."
The Company's ability to service its debt will be dependent on its
future performance, which will be affected by prevailing economic
conditions and financial, business, regulatory and other factors, many of
which are beyond the Company's control. Accordingly, no assurance can be
given that the Company will maintain a level of operating cash flow that
will permit it to service its obligations and to satisfy the financial
covenants in its loan agreements. If the Company is unable to generate
sufficient cash flow or is unable to refinance or extend its outstanding
indebtedness, it will have to adopt one or more alternatives, such as
reducing or delaying future expansion and capital expenditures, selling
assets, restructuring debt or obtaining additional equity capital. There
is no assurance that any of these strategies could be effected on
satisfactory terms to the Company, if at all. Moreover, the terms and
financial covenants contained in certain of the Company's debt instruments
may restrict the Company's ability to compete effectively in the gaming
market by effectively preventing expansion of the Company's facilities or
other competitively advantageous capital expenditures, which may have an
adverse effect on the Company. See "Selected Financial Data --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
GAMING REGULATION. The Company's business is highly regulated. The
ability of the Company to remain in business, and to operate profitability
depends upon the Company's continued ability to satisfy all applicable
gaming laws and regulations.
The Company's horse racing operations are subject to extensive
regulation by the West Virginia Racing Commission (the "Racing
Commission"), which is responsible for, among other things, granting annual
licenses to conduct race meets, approving simulcasting post times, and
other matters. When granting licenses, the Racing Commission has the
authority to determine the dates on which Mountaineer may conduct races.
In order to conduct simulcast racing, Mountaineer is required under West
Virginia law to hold a minimum of 220 live race days each year. The Racing
Commission granted Mountaineer a license to conduct a minimum of 220 live
race days for its 1996 year.
The operation of video lottery games in West Virginia is subject to
the Lottery Act. Licensing and regulatory control is provided by the West
Virginia Lottery Commission (the "Lottery Commission.") The Lottery Act
provides that only licensed horse race or dog race facilities may offer
video gaming. Accordingly, the ability of the Company to maintain its
9
<PAGE>
video lottery business requires it to comply fully with the Racing
Commission to qualify for its license under the Lottery Act.
The Lottery Act regulates the ability of horse race or dog race
facilities to offer video gaming. Under the Lottery Act, only parimutuel
horse or dog racing facilities that were licensed by the Racing Commission
prior to January 1, 1994 and that conduct at least 220 live racing dates
for each dog or horse race meeting, or such other number as may be approved
by the Racing Commission, are eligible for licensure to operate video
lottery games. There are four racing facilities in West Virginia (two
horse racing and two dog racing) including Mountaineer Park, three of which
currently satisfy the eligibility requirements of the Lottery Act, and are
thus eligible to offer video lottery gaming in the state. To provide video
lottery gaming, the voters of the county in which the facility is to be
located must approve such gaming in advance. If such approval is obtained,
the facility may continue to conduct video lottery gaming activities unless
the matter is resubmitted to the voters pursuant to a petition signed by at
least five percent of the registered voters in the county, who must wait at
least five years subsequent to voter approval to bring such a petition. If
approval is denied, another vote on the issue may not be held for a period
of two years. Video lottery gaming was approved in Hancock County, the
location of Mountaineer Park, on May 10, 1994.
Licenses granted by the Lottery Commission must be renewed by July 1
of each year. A license to operate video lottery games is a privilege
personal to the license holder and, accordingly, is non-transferable. In
order for a license to remain in effect, Lottery Commission approval is
required prior to any change of ownership or control of a license holder.
Unless prior approval of the Lottery Commission is obtained, the sale of
five percent or more of the voting stock of the license holder or any
corporation that controls the license holder or the sale of a license
holder's assets (other than in the ordinary course of business), or any
interest therein, to any person not previously determined by the Lottery
Commission to have satisfied the licensing qualifications, voids the
license. Accordingly, should a party, unaffiliated with the Company,
acquire 5% or more of the voting stock of the Company, including purchases
made on the open market, the Company's license could be jeopardized insofar
as such party would be required to undergo approval by the Lottery
Commission.
Under the Company's Certificate, any person who purchases 5% or more
of the Common Stock without first securing Lottery Commission approval to
own such shares, is subject to the Company's right to repurchase such
shares from the holder. See "Impact of Anti-takeover Measures" and
"Description of Securities - Common Stock - Anti-takeover Provisions".
10
<PAGE>
Pursuant to both the Racing Commissioner's and Lottery Commissioner's
regulatory authority, the Company may be investigated by either body at
virtually any time. Accordingly, the Company must comply with all gaming
laws at all times. Should either body consider the Company to be in
violation of any of the applicable laws or regulations, each has the
plenary authority to suspend or rescind the Company's licenses. While the
Company has no knowledge of any non-compliance, and believes that it is in
full compliance with all relevant regulations, should the Company fail to
comply, its business would be materially adversely effected.
To date, the Company has obtained all governmental licenses, findings
of suitability, registrations, permits and approvals necessary for the
operation of its currently operating gaming activities. However, no
assurances can be given that any new licenses or approvals that may be
required in the future will be given or that existing ones will be renewed.
Horse racing, the first form of legalized wagering in West Virginia,
was the product of legislative initiative. The West Virginia legislature
approved on March 17, 1994, West Virginia's first form of gaming activity
by authorizing video lottery machines under the Lottery Act. In addition,
the Lottery Act, the enabling legislation for video lottery gaming, is
subject to renewal pursuant to the West Virginia sunset legislation every
three years. The Lottery Act will expire in July 1997 if not renewed by
the legislature. Accordingly, the Company's ability to remain in the
gaming business depends on the continued political acceptability of gaming
activities to both the public and state governmental officials. In
addition, the gaming laws impose high tax rates, and fixed parimutuel
commission rates which, if altered, may diminish the Company's
profitability.
During the next year, West Virginia voters will elect a new governor
and, most likely, new state legislators. Due to the political nature of
gaming issues, and despite recent appropriations towards educational and
recreational purposes derived from funds generated by gaming activities, it
is unknown at this time whether such new state officials will maintain the
same policies towards gaming activities, particularly video lottery gaming,
as in the past. Any substantial unfavorable change in the enabling laws or
tax rates on gaming revenues could make the Company's business
substantially more onerous, less profitable or illegal, which will have a
material adverse effect on the Company's business.
IMPACT OF ANTI-TAKEOVER MEASURES. Certain provisions of the Company's
Restated Certificate of Incorporation (the "Certificate") and the Delaware
General Corporation Law (the "DGCL") may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the
11
<PAGE>
future for shares of the Company's common stock. Specifically, the
Company's Certificate includes a number of provisions which may have the
effect of discouraging persons from pursuing non-negotiated takeover
attempts. Moreover, the Company's Certificate requires the Board to
consider a variety of factors other than the adequacy of the price offered
for the Company's securities in evaluating a takeover attempt. The effect
of this provision, in the event of a takeover attempt, may be to prevent
shareholders from receiving maximum returns on their shares in the short
term and may deflate the price of the Company's common stock over the long
term. Additionally, the Certificate provides the Company with a right to
repurchase any shares of common stock of the Company from any person who
acquires more than 5% of the voting stock of the Company. This provision
was adopted so that the Company can remain in compliance with the West
Virginia Lottery Act, which requires advanced approval of any acquisition
of more than 5% of the Company's common stock. Nonetheless, there can be
no assurance that such provision can provide adequate protection against
the Company losing its qualification with the Lottery Commission due to the
acquisition by a third party, whether on the open market or otherwise, of
more than 5% of the Company's common stock, as the provision in the
Certificate applies only retroactively and the Lottery Act requires
approval of such acquisitions prospectively. See "Description of
Securities - Common Stock - Anti-Takeover Provisions."
DEPENDENCE ON KEY PERSONNEL. The Company is currently managed by a
small number of key management and operating personnel, whose efforts will
largely determine the Company's success. The success of the Company also
depends upon its ability to attract, hire and retain qualified operating,
marketing, financial and technical personnel. Competition for qualified
personnel in the gaming industry is intense and, accordingly, there can be
no assurance that the Company will be able to continue to hire or retain
necessary personnel. The loss of key management personnel, particularly
Edson R. Arneault, the Company's Chairman and Chief Executive Officer,
would likely have a material adverse effect on the Company. See
"Management."
COMPETITION. In recent years, the number of gaming options available
to consumers in the Company's principal markets have increased
considerably. Mountaineer's principal direct competitors are Wheeling
Downs, located approximately 40 miles to the south in Wheeling, West
Virginia and Thistledown, located approximately 85 miles to the northwest
in Cleveland, Ohio. Wheeling Downs conducts parimutuel greyhound dog
racing and video lottery gaming. Thistledown conducts parimutuel
thoroughbred horse racing but not video lottery gaming. The Company also
competes with statewide lotteries in West Virginia, Pennsylvania and Ohio,
off-track and on-site wagering in Pennsylvania, and to a lesser extent
destination gaming facilities in Las Vegas and Atlantic City, as well as
other entertainment options available to consumers, including live and
12
<PAGE>
televised professional and collegiate major sports events. The Company
will also compete with off-track wagering in Ohio, which has recently been
approved in that state. To the extent that either Pennsylvania or Ohio
legalize any forms of casino gaming, and West Virginia does not, or, if
recent proposals for land-based gaming are eventually approved in West
Virginia and the Company does not qualify for a casino gaming license and
other entities do, the Company's video lottery operations might compete
with any such new gaming facilities located within driving distance of
Mountaineer Park. Such facilities may offer more or superior gaming
machines than Mountaineer, as well as forms of gaming not available in West
Virginia. Taken together such competition could have a material adverse
effect on the Company. See "Business-Competition."
NO DIVIDENDS. The Company has not paid any dividends on its Common
Stock since its inception and does not currently foresee the payment of
cash dividends in the future. Furthermore, under the Company's Term Loan
Agreement and the Warrants issued to its lender, the Company is prohibited
from paying any dividends without the lender's consent. The Company
currently intends to retain all earnings, if any, to finance its
operations.
CONTINUED LOSSES FROM HORSE RACING AND LODGING, FOOD AND BEVERAGE
BUSINESS. To date, the Company has incurred continued losses on the
Company's parimutuel commission business and lodging, food and beverage
businesses, which have been offset by gains in the video lottery business.
The Company believes that the racing business is currently unprofitable,
and is attempting to minimize or eliminate losses from such operations by
increased marketing efforts cost cutting and enhancing the quality of
racing activities. The Company believes that its strategy of becoming a
one-stop entertainment, recreation and gaming destination resort will
produce synergies which, in combination with its video lottery operations,
may maximize shareholder value. Nonetheless, there can be no guarantees
that this strategy will prove successful, that the Company's unprofitable
operations can become profitable or that the Company's profitable
operations will remain so. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations."
FAILURE TO LIQUIDATE DISCONTINUED OPERATIONS. The Company owns
certain oil and gas properties in Michigan, which it is in the process of
liquidating in furtherance of the Company's determination to focus its
efforts on its core gaming, entertainment and recreational businesses. To
date, the Company has been unable to find a buyer for these properties.
Should the Company be unable to find a buyer at a price which management
believes represents fair value for the properties, the Company may be
required to sell the properties at a loss or to write down the value of
these assets on its balance sheet.
13
<PAGE>
CYCLICAL NATURE OF BUSINESS. The Company's primary business involves
leisure and entertainment. During periods of recession or economic
downturns, consumers may reduce or eliminate spending on leisure and
entertainment activities. In the event that the Company's primary
demographic market suffers adverse economic conditions, the Company's
revenues may be materially adversely effected. The operations of
Mountaineer are typically seasonal in nature. Winter conditions may
adversely affect transportation routes to Mountaineer, as well as cause
cancellations of live horse racing. As a result, adverse seasonal
conditions could materially effect the operations of the Company.
LIMITED PUBLIC MARKET AND LIQUIDITY. The Company's Common Stock is
traded on the Nasdaq SmallCap Market and trading of its Common Stock in the
over-the-counter market is limited. A limited trading market could result
in an investor being unable to liquidate his or her investment. For
continued listing on the Nasdaq SmallCap Market, the Company, generally,
must have $2 million in total assets, $1 million in total stockholders'
equity $200,000 in market value of public float, a minimum bid price of
$1.00 per share, a minimum of 100,000 shares publicly held and a minimum of
300 shareholders. If the Company is unable to satisfy Nasdaq's maintenance
criteria in the future, its Common Stock will be subject to being delisted,
and trading, if any, in the Company's Common Stock would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or
the NASD's "Electronic Bulletin Board." As a consequence of such
delisting, an investor would likely find it more difficult to dispose, or
to obtain quotations as to the price, of the Company's Common Stock.
LACK OF PUBLIC MARKET. There is currently no market for the Warrants.
The Company does not intend to apply for listing of the Warrants on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance as to the development or
liquidity of any market for the Warrants. If an active market does not
develop, the market price and liquidity of the Warrants will be adversely
affected.
SHARES ELIGIBLE FOR FUTURE SALE. The Company had 18,869,397 shares of
Common Stock outstanding as of September 13, 1996. Of these outstanding
shares, approximately 7,187,507 shares are "restricted securities" as
defined in Rule 144 adopted under the Securities Act. Of these restricted
shares, 183,206 are covered by this Registration Statement, approximately
3,964,186 were eligible to be sold under Rule 144 under the Act ("Rule
144"). The (i) 183,206 shares of outstanding restricted Common Stock
included in this Registration Statement will, if sold pursuant to this
Registration Statement, and (ii) the 1,542,860 shares of Common Stock
included in this Registration Statement which are issuable upon exercise of
the Warrants will, if issued upon exercise of the Warrants and sold
pursuant to this Registration Statement, be freely tradeable without
14
<PAGE>
restriction under the Act, except that any shares acquired by an
"affiliate," as that term is defined under the Act, will be subject to the
resale limitations of Rule 144. In addition to the Warrants to purchase
1,542,860 shares of Common Stock registered herein, as of September 23,
1996 there were outstanding options and warrants to purchase an aggregate
of 4,836,130 shares of Common Stock which have not been registered with the
Commission. The future sale of a substantial number of shares of Common
Stock by existing holders of Common Stock and holders of warrants and
options exercisable for Common Stock pursuant to Rule 144 or through
effective registration statements may have an adverse impact on the market
price of the Common Stock and could dilute the value of options or
warrants. See "Shares Eligible for Future Sale" and "Description of
Securities - Registration Rights."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the
Warrants or the shares of Common Stock offered herein by the Selling
Stockholders. If all of the Warrants are exercised, the Company will
receive estimated net proceeds of approximately $1,622,431. The Company
intends to utilize any proceeds received from the exercise of the Warrants
for general corporate purposes. There can be no assurance that any of the
Warrants will be exercised.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and does not currently foresee the payment of cash dividends in
the future. Furthermore, the Company's Term Loan Agreement and the
Warrants issued to the lender thereunder prohibit the payment of any
dividends without the lender's consent. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company currently intends to retain any earnings
to finance its operations.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1996 and as adjusted repayment of $250,000 to reflect the closing
of the Term Loan ($4,378,000 net proceeds) on July 2, 1996, the issuance of
183,206 shares of Common Stock valued at $250,000 as discounted and the
value of warrants to purchase 50,000 shares of the Company's Common stock
totaling $6,000.
15
<PAGE>
JUNE 30, 1996
ACTUAL AS ADJUSTED
Short-term debt (excluding current
maturities of long-term debt) $ 718,000 $ 468,000
Current portion of redeemable common stock 772,000 772,000
Current portion of Long-term debt 3,727,000 3,727,000
Total short-term debt 5,217,000 4,967,000
Long-term debt - noncurrent portion
12% Term Loan -0- 5,000,000
12.5% Bennett Loan 6,233,000 6,233,000
Other long-term debt bearing interest at
rates ranging from 8% to 12% 130,000 130,000
Total long-term debt-noncurrent portion 6,363,000 11,363,000
Redeemable common stock-noncurrent portion 246,000 246,000
Stockholders' equity:
Common stock, $.00001 par value.
Authorized 25,000,000 shares;
issued and outstanding
18,869,375 shares at
June 30, 1996(1) and 19,052,581 2,000 2,000
as adjusted
Additional Paid-in Capital 32,760,000 33,016,000
Accumulated deficit (26,179,000) (26,179,000)
Total stockholders' equity 6,583,000 6,839,000
Total capitalization $18,409,000 $23,415,000
(1) Excludes 4,836,130 shares of Common Stock reserved as of July 2, 1996
for issuance pursuant to outstanding options and warrants to purchase
Common Stock. The Company is seeking stockholder approval to amend
its Certificate to increase the authorized Common Stock to a level
which would permit exercise of all outstanding options and warrants.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded under the symbol "WINS". At the
present time the Company's Common Stock is quoted on the NASDAQ SmallCap
Market. On September 23, 1996, the high bid and low asked quotations for
the Company's Common Stock were $1 and $1 1/16, respectively. As of
September 13, 1996 there were approximately 582 stockholders of record of
the Company's Common Stock.
The following table sets forth the range of high and low closing bid
quotations obtained from the National Quotations Bureau for the Common
Stock for the two fiscal years ended December 31, 1994 and 1995 and for the
first two quarters of the fiscal year ending December 31, 1996. These
quotes are believed to be representative of inter-dealer quotations,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
HIGH LOW
Year Ended December 31, 1994:
First Quarter 7 3/16 3 7/8
Second Quarter 5 1/2 3
Third Quarter 4 1/4 1 15/16
Fourth Quarter 2 7/32 31/32
Year Ended December 31, 1995:
First Quarter 1 15/16 1 1/16
Second Quarter 1 19/32 1 1/8
Third Quarter 1 11/32 1 1/16
Fourth Quarter 1 3/16 17/32
Year Ending December 31, 1996:
First Quarter 1 11/32
Second Quarter 1 17/32 9/16
Third Quarter 1 1/2 15/16
(through September 13, 1996)
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the
five years ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company included elsewhere in this
Prospectus, and should be read in conjunction with those consolidated
financial statements (including the notes thereto) and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
also included elsewhere herein. The selected financial data as of and for
the six months ended June 30, 1995 and June 30, 1996 have been derived from
the unaudited consolidated financial data of the Company certain of which
are included elsewhere in this Prospectus and which in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation
of the results of operations and financial condition for those periods.
The financial data for the six months ended June 30, 1996 are not
necessarily indicative of results to be expected for the year.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31 Six Months
Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991 1996 1995
Statement of
Operations
Data:
Net revenues $24,979,000 $14,682,000 $12,797,000 $690,000 $0 $16,101,000 $10,824,000
Net loss from (5,313,000) (6,902,000) (5,913,000) (2,749,000) (447,000) (115,000) (2,646,000)
continuing
operations
Loss per share
from continuing
operations (.33) (.48) (.46) (.42) (.07) (.01) (.17)
Balance Sheet
Data:
Working Capital(7,286,000) (1,808,000) 313,000 60,000 (441,044) (8,412,000) (4,406,000)
(Deficiency)
Current Assets 1,972,000 3,555,000 2,354,000 2,974,000 375,518 2,204,000 2,696,000
Current 9,258,000 5,363,000 2,041,000 2,914,000 789,562 10,616,000 7,102,000
Liabilities
Total 19,763,000 14,200,000 6,040,000 5,641,000 1,564,937 19,031,000 18,878,000
Liabilities
Total Assets 25,747,000 23,958,000 19,137,000 16,812,000 478,472 25,614,000 27,695,000
Total 5,984,000 9,758,000 13,097,000 11,171,000 (1,086,465) 6,583,000 8,817,000
Shareholders'
Equity (Capital
Deficiency)
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
In December 1992, the Company acquired all of the outstanding common
stock of Mountaineer with the intent of enhancing its existing facilities
for promotion as a high quality gaming, racing and recreation resort.
Shortly thereafter, the Company determined to focus its business primarily
on the gaming industry, and de-emphasized its activity in other businesses
in order to more fully devote corporate resources to Mountaineer, as
described elsewhere in this Prospectus. See "Results of Discontinued
Operations."
Results of Continuing Operations
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The Company incurred significant losses from continuing operations
during the years ended December 31, 1995, 1994 and 1993 ("1995," "1994" and
"1993" respectively). The Company incurred losses from continuing
operations of $5.3 million in 1995, $6.9 million in 1994, and $5.9 million
in 1993, largely due to the Company's inability to operate, market and
maximize revenues with respect to its video lottery business during the
final three quarters of 1993 and first quarter of 1994 due to delays
occasioned by the decision of the Supreme Court of West Virginia declaring
the enabling legislation for video lottery unconstitutional and prior to
the reintroduction and passage of the Lottery Act. In addition, legal
settlement provisions, operating losses incurred in the horse racing
operations of Mountaineer and corporate overhead charges added to the
Company's losses.
REVENUES
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
1995 1994 1993
Video Lottery Terminals $16,479,000 $7,481,000 $5,293,000
Parimutuel Commissions 4,263,000 3,768,000 4,323,000
Lodging, Food and Beverage 3,046,000 2,276,000 2,344,000
Other 1,191,000 1,157,000 1,054,000
$24,979,000 $14,682,000 $13,014,000
</TABLE>
Total revenues increased by $10.3 million from 1994 to 1995, an
increase of 70%. Approximately $9.0 million or 87%, of the increase was
produced by video lottery operations, while parimutuel commissions and
lodging, food, beverage and other operations at Mountaineer Park
contributed $1.3 million or 13% of additional revenues. Total revenues
increased by $1.7 million or 13% to $14.7 million for 1994, from $13.0
million for 1993.
19
<PAGE>
VIDEO LOTTERY OPERATIONS
Revenues from video lottery operations increased 120%, from $7.5
million in 1994 to $16.5 million in 1995. In response to increased
patronage and a trend towards increased productivity of video lottery
activities, Mountaineer doubled the number of (VLTs) to 800 in June 1995.
Video lottery revenues in the second half of 1995 surpassed $9.1 million, a
level 28% higher than revenues earned in all of 1994. A comparison of
fourth quarter revenues shows that 1995 outperformed 1994 by $1.6 million,
an increase of 57% over the $2.8 million of revenues earned in the final
quarter of 1994. In December 1995, the Company completed an expansion of
its Lodge gaming facilities, allowing the placement of half of its VLTs at
the Lodge with the other half remaining in the racetrack grandstand and
clubhouse, in response to a perceived demand for more terminal availability
on days when live racing is not conducted.
VLT revenues increased by $2.2 million or 41% to $7.5 million for 1994
as compared to $5.3 million in VLT revenues for 1993. The increase was
primarily attributable to increased utilization of the 400 new VLTs which
replaced 165 older VLTs on September 1, 1994.
PARIMUTUEL COMMISSIONS
Parimutuel commissions revenue is a function of wagering handle, with
a higher commission earned on a more exotic wager, such as a trifecta, than
on a single horse wager, such as a win, place, or show bet. The Company
earned an average commission rate of 20.6% in 1995, up slightly from the
20.3% average commission rate earned in 1994.
Both live and off-track wagering handles increased in 1995 from 1994,
yielding a 13% increase in parimutuel commissions to $4.3 million. Live
wagering handle increased 4%, from $21.2 million in 1994 to $22.0 million
in 1995, an increase which slightly surpassed the 3% increase in live race
days from 220 in 1994 to 227 in 1995. Purses increased from an average of
$22,500 in 1994 to an average of $25,000 in 1995.
In September 1995, Mountaineer Park hosted the West Virginia Breeders'
Classics, a night of stakes races with $330,000 in purses funded by taxes
on statewide video lottery revenues. Mountaineer Park broadcast a
simulcast signal of the stakes races, earning commissions on $351,000 of
handle wagered off-site.
Early in 1995 the Company expanded its off-track betting facilities in
both the racetrack clubhouse, grandstand and the Lodge, contributing to a
24% increase in simulcast wagering handle from $14.3 million in 1994 to
$17.8 million in 1995, an increase of $3.5 million. In April 1995,
Mountaineer Park began offering greyhound off-track betting, which
20
<PAGE>
contributed $2.7 million to increased simulcast handle in 1995. The
remaining $800,000 increase is attributable to the enhancement of
Mountaineer's off-track betting facilities and more extensive offerings of
simulcast racing. For most of 1995, Mountaineer offered simulcast racing
seven days per week, compared to six days per week in 1994.
Parimutuel commissions in 1994 decreased 13% to $3.8 million from $4.3
million for 1993. Total parimutuel wagering handle decreased from $41.0
million to $35.5 million or 13.4% for 1994 as compared to 1993.
Live racing handle constituted an 18% decrease from $25.7 million to
$21.1 million, while simulcast handle reflected only a 7% decrease to $14.3
million in 1994 from $15.3 million for 1993. Although the Company
experienced an increase in live racing attendance of approximately 6,000
patrons, from 234,000 to 240,000, the Company had fewer racing days in 1994
(220) than 1993 (226). Management increased minimum daily purses from
$18,000 in 1993 to $22,500 in 1994 for live racing in order to attract
higher quality performing horses and higher spectator betting to increase
parimutuel commission revenues. Fifteen and one-half percent (15.5%) of
VLT revenues are automatically devoted to purse funding to achieve this
management objective.
LODGING, FOOD AND BEVERAGE
Revenues earned from lodging, food and beverage activities increased
34%, from $2.3 million earned in 1994 to $3.0 million in 1995. The
increase is a reflection of significantly greater attendance at the
Company's video gaming and off-track betting facilities, as well as a
slight increase in live racing attendance. Restaurant, bar and concession
facilities produced $582,000 of the revenue increase, while Lodge revenues
increased $194,000. Food and beverage operations accounted for
approximately three quarters of the revenues earned by this profit center
in both 1995 and 1994. A fire in October 1994 caused 41 of the Lodge's 101
rooms to be unusable during the fourth quarter of 1994 and the first four
months of 1995.
Food, beverage and lodging revenues decreased 3% from slightly more
than $2.3 million for 1993 to slightly under $2.3 million for 1994. Guest
room revenues decreased $50,000 or 8% from $621,000 to $571,000 for 1994 as
compared to the year ended 1993, which resulted from the reduction in
available rooms due to planned remodeling and construction. Additional
negative impact on room revenues was attributable to the fire damage
sustained during the fourth quarter of 1994. Between 1993 and 1994,
average occupancy remained stable at 46%, while the average room rate
decreased from $36 to $34. Food and beverage revenues increased $38,000 to
$1.7 million in 1994 compared to 1993. The increase is primarily due to
the higher attendance and dining room menu improvements implemented in
early 1994.
21
<PAGE>
OTHER REVENUES
Other sources of revenues consist primarily of non-core businesses
such as admission, programs, golf, tennis and swimming. While these lines
of business are not the Company's most profitable, the Company believes
they are necessary for the Company to continue to attract gaming patrons.
In total, other revenues were virtually unchanged from 1994 to 1995,
amounting to approximately $1.2 million each year. Operations in 1995 saw
a moderate increase in revenues relating to admission fees and program
sales. Other revenues increased to $1.2 million from $1.1 million or 10%
for 1994 as compared to 1993.
OPERATING COSTS
Total operating costs increased by 62%, from $13.4 million in 1994 to
$21.8 million in 1995. Approximately $6.5 million of the increase was
attributable to the substantial growth in VLT revenues which more than
doubled from $5.7 million in 1994 to $12.3 million in 1995. Parimutuel
commissions expense accounted for $500,000 of the increase, largely a
reflection of the 13% increase in commission revenues, and lodging, food
and beverage operating costs increased $900,000, exceeding the $770,000
revenue increase earned by those operations. The gains resulting from the
profitability of the video lottery operations have been offset by the
losses sustained by parimutuel commissions and lodging, food and beverage
businesses; however, the Company has been able to substantially reduce its
losses due to the improvement in VLT operations. Based on this trend, the
Company is attempting to expand the video lottery business, while
attempting to reduce the losses of the parimutuel and lodging, food and
beverage businesses, by increasing productivity, expanding marketing
efforts, increasing purse sizes and attracting higher quality jockeys and
horses to increase parimutuel wagering.
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
Operating Costs 1995 1994 1993
Video Lottery Terminals $12,256,000 $5,709,000 $3,720,000
Parimutuel Commissions 5,064,000 4,563,000 5,136,000
Lodging, Food and Beverage 3,285,000 2,337,000 2,364,000
Other 1,195,000 798,000 787,000
$21,800,000 $13,407,000 $12,007,000
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C>
Gross Profit (Loss) 1995 1994 1993
Video Lottery Terminals $4,223,000 $1,772,000 $1,573,000
Parimutuel Commissions (801,000) (795,000) (813,000)
Lodging, Food and Beverage (239,000) (61,000) (20,000)
Other (4,000) 359,000 267,000
$3,179,000 $1,275,000 $1,007,000
</TABLE>
22
<PAGE>
VIDEO LOTTERY TERMINALS OPERATING COSTS
Taxes on statutory assessments applicable to VLT revenue increased
from 35% of such revenues ("net win") prior to March 1994 to 53% of net win
thereafter. This increase in assessment rate, coupled with the 120%
increase in VLT revenues, resulted in a $4.5 million increase in state
taxes and statutory assessments from 1994 to 1995, to $8.4 million.
Approximately $2.5 million of 1995 statutory costs were contributed to
Mountaineer's horseowners' association in the form of live racing purse
payments, compared to $1.1 million in 1994, while $80,000 was contributed
to Mountaineer's employee pension fund in 1995, up from $31,000 in 1994.
VLT lease expenses increased from $790,000 in 1994 to $1.3 million in
1995, a reflection largely of the increased number of terminals leased,
from 165 prior to September 1994, to 400 from September, 1994 through June,
1995, and 800 thereafter. Salaries, payroll taxes and employee benefits
increased from $503,000 in 1994 to $964,000 in 1995, and utilities
increased from $125,000 to $313,000, both increases resulting in increased
personnel to service the expanded number of gaming terminals and related
increase in patronage.
Cost of VLTs increased by $2.0 million or 53% from $3.7 million to
$5.7 million for 1994 compared to 1993. Contributing to this increase were
statutory expenses which increased from $1.7 million in 1993 to $3.9
million for 1994, excluding costs associated with VLT leases of $790,000
and $1.2 million in 1994 and 1993, respectively. On March 17, 1994, the
State of West Virginia approved the continued operation of VLTs, however,
statutory rates paid to certain entities were mandated at substantially
higher amounts in effect as follows:
<TABLE>
<CAPTION>
March 18, 1994 and Beyond March 17, 1994 and Prior
<S> <C> <C>
State of West Virginia 30.0% 25.0% (1)
Hancock County 2.0% 0.0%
Horseman's Association 15.5% 10.0%
Other 5.5% 0.0%
Total Statutory Payments 53.0% (2) 35.0%
</TABLE>
(1) Increased from 20% to 25% in June 1993.
(2) Excludes up to a 4% administrative fee charged by the State of West
Virginia based on revenues. In addition, rates are applied to
revenues net of this 4% administrative fee.
23
<PAGE>
In addition to the above rates, the Company paid a 3% management fee
(after the State's 4% administrative fee), based on VLT revenues to
American Gaming and Entertainment, Ltd. ("AGEL") which began on October 26,
1994, as approved by the Lottery Commission. This management agreement was
stayed in July 1995. A consulting agreement with American Newco providing
for fees of $20,000 per month as discussed below replaced the management
agreement. The Company was also required to pay additional management fees
of 8% of income before depreciation, amortization, taxes and interest.
Total management fees charged to the cost of VLTs in 1994 were $133,000.
From January 1, 1993 to March 1993 and from April 1993 to August 1993, the
Company paid the lessor of its 165 video lottery terminals 23% and 10% of
net revenues, respectively. This agreement has since been terminated.
VLT cashier and technician salaries expense in 1994 increased $52,000
to $215,000 from 1993, which reflected the additional employees hired to
support the operation of 400 VLTs. Increased costs for utilities,
insurance, and rentals, due to enlarged facilities and increased personnel
costs, accounted for an additional increase of 17% for 1994 as compared to
1993.
PARIMUTUEL COMMISSIONS OPERATING COSTS
Salaries, payroll taxes and employee benefits increased from $2.2
million in 1994 to $2.5 million in 1995, partly as an accommodation due to
certain inefficiencies caused by Mountaineer Park's extensive construction
activities in 1995. A general upgrade in maintenance activities
contributed to this increase, as well as a $65,000 increase in repair and
maintenance supplies. The Company's totalisator rents and payments of host
track fees increased $177,000 in 1995 from the prior year as a result of
the 24% increase in revenues achieved by its off-track betting operation.
Liability insurance expense in 1995 was $87,000 higher than the prior
period, a reflection of the increased volume of business and an industry-
wide increase in jockey insurance.
Cost of parimutuel commissions was lower by $573,000 or 11% from $5.1
million to $4.6 million for 1994 compared to 1993. This decrease is
consistent with the decrease in parimutuel revenues in 1994 largely due to
the contractual nature of the Company's expenses, as well as certain cost
reduction measures implemented by management.
LODGING, FOOD AND BEVERAGE OPERATING COSTS
Mountaineer experienced an increase in Lodging, Food and Beverage
Operating Costs from 1994 to 1995 of $948,000, $695,000 of which related to
the segment's operating increased costs attributable to food and beverage
operations. Although cost of sales rates increased only slightly from 42%
in 1994 to 44% in 1995, this cost category increased by $303,000 in
proportion to the $582,000 increase in sales. Food and beverage labor
24
<PAGE>
costs rose approximately $320,000 which was also commensurate with the
increase in revenues despite no appreciable change in occupancy rates from
1994 to 1995. The cost of lodging, food, and beverage sales decreased from
$2,364,000 for 1993 to $2,337,000 in 1994 or $27,000.
OTHER OPERATING COSTS
Cost of other, consisting primarily of non-core businesses such as
admission, programs, golf, tennis and swimming were higher by $422,000 or
64% from $778,000 to $1.2 million for 1995 as compared to 1994
notwithstanding flat revenues for these operations in 1995. Approximately
81% of such increase was directly attributable to expanded hours of
operation and increased staffing and scope of off-track betting operations.
Costs of other revenues were higher by $11,000 or 1% from $787,000 to
$798,000 for 1994 as compared to 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, AND INTEREST EXPENSE
Selling general and administrative expenses decreased $104,000 from
$6.7 million in 1994 to $6.6 million in 1995. Legal and other professional
fees decreased from $1.4 million in 1994 to $1.1 million in 1995. In
addition, several non-recurring charges affected selling, general and
administrative expenses as follows: a provision for settlement of legal
actions of $525,000 and development costs write-offs of $200,000 in 1994,
and provisions for settlement of legal actions of $408,000 and doubtful
notes receivable from related parties of $290,000, and relocation and
severance charges of $596,000 in 1995.
Selling, general and administrative expenses at Mountaineer rose 4%,
from $2.6 million in 1994 to $2.7 million in 1995. Advertising expenses
increased from $715,000 in 1994 to $938,000 in 1995 as revenues grew from
$14.7 million to $25.0 million. Salaries decreased from $1.3 million in
1994 to $961,382 in 1995; 1994 compensation includes $600,000 in non-cash
expense incurred in connection with stock options on the Company's Common
Stock issued below market in connection with an employment agreement with a
former stockholder of Mountaineer. During the years 1995 and 1994, the
Company incurred noncash expenses of $2.1 million and $2.9 million,
respectively.
Interest expense decreased 24% from $729,000 in 1994 to $557,000 in
1995 despite the increased construction loan balances carried in 1995. Of
the interest incurred in 1995, $1.1 million was capitalized to the cost of
construction compared to only $790,000 capitalized in 1994 due to higher
levels of construction activity in 1995.
25
<PAGE>
Selling, general and administrative expenses increased by 5% from $6.4
million to $6.7 million in 1994 versus 1993. Costs included in this
increase were the $525,000 for settlement of legal actions, a $200,000
write-off of development, design and architectural costs and legal and
professional fees, which, in the aggregate, caused an increase of
$1,039,000 from $319,000 to $1,359,000. In addition, payroll expenses
increased from $812,000 to $1,109,000 or $297,000 and advertising expenses
increased by $170,000 from $915,000 to $1,085,000. The Company experienced
significantly higher legal and professional fees in 1994 because of the
West Virginia Supreme Court litigation and costs associated with securing
the ultimate approval of VLT operations. The Company also incurred fees
associated with a new collective bargaining agreement, lawsuits in the
normal course of business and contractual agreements consummated in 1994,
including agreements with the horseman's association, the lease for VLTs,
and the management agreement with AGEL.
Interest expenses increased by $659,000 from $70,000 to $729,000 for
1994, as compared to 1993. The increase was attributable to the interest
cost at 12.5% per annum on principal amounts borrowed for construction and
redevelopment activities at Mountaineer, as well as approximately $631,000
of non-cash interest expenses associated with Common Stock issued to
Bennett. Interest costs capitalized to construction activities in 1994
totalled approximately $790,000, and financing costs deferred in the
consolidated balance sheet at December 31, 1994 were $1,628,000 to be
amortized over the expected term of the loan for construction activities
(based on qualified assets) and interest expenses; however, due to certain
settlement negotiated in 1995 with Bennett, $998,000 such costs which were
accrued on that date, were cancelled and not amortized.
Depreciation and amortization expense increased from $910,000 in 1994
to $1.5 million in 1996, in reflection of the $5.9 million investment in
property, plant and equipment during that period. 1994 depreciation and
amortization expenses increased $285,000 from a level of $625,000 in 1993,
largely as a result of the $3.4 million investment in capital expenditures
incurred in 1994. These investments were made as part of the capital
improvement and expansion program at Mountaineer Park, Inc.
During the years 1994 and 1993, the Company incurred noncash expenses
of $2.9 million and $2.4 million, including depreciation and amortization
of $1.1 million and $1.0 million, respectively. From time to time, the
Company has issued Common Stock for services, settlements and interest
expenses (see Notes 5, 9 and 15 in the "Notes to Consolidated Financial
Statements.")
26
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUES
The Company earned revenues for the respective six-month periods in
1996 and 1995 as shown below:
<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C> <C>
June 30, 1996 June 30, 1995
Video lottery operations $11,900,000 $6,843,000
Parimutuel commissions 2,165,000 2,048,000
Lodging, food and beverage 1,573,000 1,391,000
Other revenues 463,000 542,000
$16,101,000 $10,824,000
</TABLE>
Operating revenues increased significantly in late 1995, most notably
in video lottery operations. Total revenues increased by $5.3 million or
49%, to $16.1 million in the first half of 1996 from $10.8 million in the
first half of 1995.
The geographic area surrounding the Company's operating facilities in
West Virginia experienced extensive flooding and unusually heavy snowfall
in the first quarter of 1996. Flood and snow damage in portions of Ohio,
West Virginia and Western Pennsylvania reached levels resulting in their
designation as federal disaster areas. Nonetheless, Mountaineer Park's
facilities are situated well above the flood plain and did not sustain any
damage. Mountaineer Park's nearest competitor was extensively damaged and
ceased operations for approximately four weeks in the first quarter of
1996.
VIDEO LOTTERY OPERATIONS
A summary of the video lottery gross winnings, less patron payouts,
for the six months ended June 30, 1996 and 1995 is as follows:
Six Months Ended
<TABLE>
<CAPTION>
June 30 1996 June 30 1995
<S> <C> <C> <C>
Total gross wagers $42,217,000 $23,178,000
Less patron payouts (30,317,000) (16,335,000)
Revenues - video lottery operations $11,900,000 $6,843,000
</TABLE>
27
<PAGE>
VLT revenues for the six month period ended June 30, 1996 increased by
$5.1 million to $11.9 million, or nearly double the level of VLT revenues
for the same period in 1995. The increase was primarily attributable to
the expansion of video lottery facilities, the addition of 400 more
terminals in July 1995 and the expansion of the Speakeasy Gaming Saloon in
December 1995. The results of video lottery operations reflect a
continuing trend of increasing aggregate net win. The Company maintained
$82 per machine net win per day for the six months ended June 30, 1996 with
800 VLTs in operation, compared to $95 per day for the six months ended
June 30, 1995 with only 400 VLTs in operation.
On July 3, 1996, the Company introduced several offerings of classic
casino "slot" games on 350 of its 800 VLTs. The new games are offered in
addition to the Company's existing gaming choices of video poker, keno and
blackjack. The inception of video slot gaming coincided with the
commencement of a large scale marketing campaign aimed beyond the 40 mile
radius from which Mountaineer has traditionally drawn the bulk of its
patrons. The Company earned an average daily net win of $142 per terminal
during the period between July 4 and August 31, 1996 following installation
of video slot games, compared to $68 per terminal during the same period in
1995.
PARIMUTUEL COMMISSIONS
The Company's revenues from racing operations are derived mainly from
commissions earned on parimutuel wagering handle on live races held at
Mountaineer Park and on races conducted at other host racetracks and
simulcast at Mountaineer Park. The Company's total parimutuel commissions
for the six months ended June 30, 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C>
June 30 1996 June 30 1995
Total parimutuel wagering handle $20,182,000 $19,242,000
Less patrons' winning tickets (15,990,000) (15,314,000)
4,192,000 3,928,000
Less:
State and County parimutuel tax (246,000) (224,000)
Purses and Horsemen's Association (1,781,000) (1,656,000)
Parimutuel Commissions $2,165,000 $2,048,000
</TABLE>
28
<PAGE>
For the six months ended June 30, 1996, simulcast handle rose by $2.6
million, or 32% compared to $10.6 million for the same period in 1995.
Management believes the increase resulted from renovations to track betting
facilities and an increase in the number of wagering days to seven days per
week at multiple facilities within Mountaineer Park, plus the introduction
of simulcast greyhound racing in the second quarter of 1995.
Live racing handle declined by $1.7 million to $9.6 million, or 15%
for the six months ended June 30, 1996 from $11.2 million for the six
months ended June 30, 1995. Through the first half of 1996, Mountaineer
Park had completed 108 of the annually required 220 live racing days
compared to 113 days for the same period in 1995. Average daily purses,
which were $25,000 in the second quarter of 1995, have increased several
times during 1995 and 1996 to $31,000 at June 30, 1996, and the Company
plans to raise daily purses to $50,000 in the fourth quarter of 1996.
Management believes that live racing handle will increase as racing purses
increase, based on the belief that higher purses attract higher quality
jockeys and horses, which in turn captures the interest of horse racing
bettors from a larger geographic region. In accordance with this
philosophy, the Company has recently begun offering moderately funded
stakes races of up to $20,000, with the intention of funding more sizable
stakes races if a favorable revenue trend develops from this practice. The
Company also plans to raise daily purses (excluding stakes races)
approximately 50% to $50,000 during the fourth quarter of 1996.
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging revenues increased 13% to $1,573,000 for
the six months ended June 30, 1996 from $1,391,000 for the same six month
period in 1995. Management believes that refurbishment of the Lodge guest
rooms early in 1995, in combination with other improvements at Mountaineer
Park, contributed to a $109,000 lodging revenue increase to $439,000 from
$330,000 for the same period-to-period comparison. Forty-one guest rooms
were unavailable for use in the first quarter of 1995 due to smoke damage
sustained as a result of fire experienced in the fourth quarter of 1994.
Food and beverage revenues also reflected an increase of $73,000 to
$1,134,000 from $1,061,000 for the six months ended June 30, 1995.
OTHER OPERATING REVENUE
Other sources of revenue decreased by $79,000 to $463,000 from
$542,000, for the six month period ended June 30, 1996, compared to the
same period in 1995. Other operating revenues are primarily derived from
the sale of programs, parking and admission fees relating to Mountaineer
Park's racing activities.
29
<PAGE>
OPERATING COSTS
Operating costs and gross profit earned from operations for the six
month periods ended June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C> <C> <C>
OPERATING COSTS June 30 1996 June 30 1995
Video lottery operations $8,028,000 $4,892,000
Parimutuel commissions 2,497,000 2,644,000
Lodging, food and beverage 1,529,000 1,616,000
Other revenues 492,000 522,000
$12,546,000 $9,674,000
Six Months Ended
GROSS PROFIT (LOSS) June 30 1996 June 30 1995
Video lottery operations $3,872,000 $1,951,000
Parimutuel commissions (332,000) (596,000)
Lodging, food and beverage 44,000 (225,000)
Other revenues (29,000) 20,000
$3,555,000 $1,150,000
</TABLE>
The Company's 49% increase in revenues resulting from the expanded
scope of entertainment offerings resulted in higher total costs as expenses
increased by $2.9 million to $12.5 million in the first half of 1996, an
increase of 30%, from $9.7 million for the six months ended June 30, 1995.
VIDEO LOTTERY OPERATIONS
Costs of VLTs increased by $3.1 million, or 64%, from $4.9 million to
$8.0 million for the six months ended June 30, 1996, compared to the six
months ended June 30, 1995, reflecting the increase in statutory expenses
directly related to the 74% increase in video lottery revenues. Such
expenses accounted for $2.7 million of the total cost increase.
After payment of a state administrative fee of up to 4% of revenues,
Mountaineer is obligated to make payments from the remaining video lottery
revenues to certain funds administered by the Lottery Commission, as
follows: State Tax Fund 30%, Horsemen's Purse Fund 15.5%, Hancock County
Tax Fund 2%, Breeders Classics Fund 1%, Veterans Memorial Fund 1%, and 0.5%
to the Mountaineer Employee Pension Fund. Taxes and assessments paid to
these restricted funds are included in cost of video lottery operations in
30
<PAGE>
the consolidated statements of operations. Fund payments for the
respective six-month periods are as follows:
<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C> <C> <C>
June 30 1996 June 30 1995
State Tax Fund $3,481,000 $1,999,000
Horsemen's Purse Funds 1,799,000 1,033,000
Other Funds 870,000 501,000
$6,150,000 $3,533,000
</TABLE>
In addition, the Company paid management fees of $198,000 to AGEL for
management services for the six months ended June 30, 1995. The Company's
June 2, 1994 management agreement with AGEL was suspended pursuant to a
stay agreement effective June 30, 1995, until such time as Bennett, the
Company's construction lender, complied with certain financial disclosure
requirements of the Lottery Commission.
On July 1, 1995, the Company and American Newco, which the Company
believes is an affiliate of AGEL, entered into a consulting agreement
whereby American Newco agreed to provide consulting services in connection
with the Company's video lottery operations at the rate of $10,000 per
month, subject to increases of up to $10,000 per month for additional
services which may be provided, through March 17, 1997. The personal
involvement of the two shareholders of American Newco as consultants to the
Company is a material element of the consulting agreement. Such personal
involvement has not been provided since October 15, 1995, and on May 10,
1996, the Company provided American Newco and AGEL with formal notice of
termination of the consulting and management agreements, respectively.
(Pursuant to a June 30, 1995 settlement agreement between the Company,
Mountaineer and Gamma of West Virginia, Inc., a subsidiary of AGEL, in the
event the consulting agreement with American Newco is terminated for cause,
the management agreement automatically terminates.) As a result, no
consulting fees have accrued in 1996. On May 14, 1996, the Company
received written notice from a representative of AGEL demanding payment
under the management agreement. On September 19, 1996, the Company and
AGEL settled all claims with each other, however, this agreement may be
subject to the approval by the bankruptcy court and there can be no
guarantee that such approval will be made on terms satisfactory to the
Company, if at all. Notwithstanding this fact, management believes that
sufficient grounds exist to terminate the Management Agreement without
additional liability to the Company.
31
<PAGE>
VLT salaries expense increased by $154,000 to $401,000 for the six
months ended June 30, 1996, compared to $247,000 for the six months ended
June 30, 1995. This increase was attributable to staff hired to support
the operations of the additional VLTs. Costs incurred by the Company for
utilities and insurance in 1996 due to enlarged facilities and expanded
staff increased by $122,000 to $255,000 for the six months ended June 30,
1996 from $133,000 for the six months ended June 30, 1995. Lease expenses
increased from $435,000 in the first half of 1995 to $718,000 in the first
half of 1996, reflecting the 400 additional VLTs placed into service in the
third quarter of 1995.
RACING OPERATIONS
Costs of parimutuel commissions declined $147,000, or 6%, from $2.6
million in the first half of 1995 to $2.5 million in the first half of
1996. Simulcast host race fees and totalisator system lease expenses
relating to simulcasting operations increased $106,000 from the first half
of 1995 to the first half of 1996, due to expansion of this phase of
racing. Totalisator lease expenses relating to live racing declined
$75,000 from the first half of 1995 versus the same period of 1996 due to
negotiation of more favorable lease terms in December 1995. The reduction
in live race days, from 113 in the first half of 1995 to 108 in the same
period in 1996, also contributed to the reduction in expenses.
FOOD, BEVERAGE AND LODGING OPERATIONS
Food, beverage and lodging expenses decreased by $87,000 to $1,529,000
in the first half of 1996 from $1,616,000 for the same period of 1995,
reflecting greater operating efficiencies achieved in 1996.
COSTS OF OTHER REVENUES
Costs of other revenues decreased by $30,000 to $492,000 for the six
month period ended June 30, 1996 from $522,000 for the six month period
ended June 30, 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the first half of 1996
decreased by $403,000 to $2.1 million or 16%, from $2.5 million for the
first half of 1995. Management's efforts to reduce the cost of corporate
operations produced a decrease in corporate general and administrative
expenses of $150,000 from $925,000, or 16%, to $775,000 for the same
period-to-period comparison. Corporate general and administrative expenses
for the first half of 1996 reflected the issuance of 200,000 shares, valued
at $106,000, for services rendered by a key consultant and significant
shareholder. Selling, General and administrative expenses at Mountaineer
32
<PAGE>
reflected a 13% decrease, from $1.6 million for 1995 to $1.3 million for
1996 despite the expanded scope of Mountaineer's operations and the
assumption of certain corporate responsibilities. A $208,000 reversal of a
1995 provision for estimated litigation losses had a favorable impact on
second quarter 1996 expenses.
Advertising expenses, included in selling, general and administrative
expenses, decreased by 19%, from $535,000 to $433,000 for the six months
ended June 30, 1996, compared to the same period in 1995. Advertising
expenditures are expected to increase significantly in the second half of
1996 as the Company commences promotion of its new video slot games.
RESULTS OF DISCONTINUED OPERATIONS
On March 31, 1993, the Company's board of directors approved a formal
plan to divest the Company of certain oil and gas operations the Company
owns in Michigan through a plan of orderly liquidation. This decision was
based upon several factors including (i) the anticipated potential of the
Company's gaming operations and the anticipated time to be devoted to it by
management, (ii) the expiration of "Section 29" credits, a credit against
federal income taxes derived from gas produced from Devonian Shale and
"tight sands" formations from wells commenced before January 1993, (iii)
the impact of delays in connection with the West Virginia Supreme Court
litigation and subsequent passage of enabling legislation for video lottery
during 1994 which caused management to focus the Company's efforts and
financial resources on Mountaineer Park, and (iv) the Company's desire to
continue to place its primary emphasis on its gaming and recreational
businesses. That plan of orderly liquidation provided for certain rework,
remediation and development costs to address environmental matters,
increased production and enhancement of the value of such properties for
sale.
Descriptions of the oil and gas properties and financial information
relating to operating results and balance sheet items as of December 31,
1994 and 1995 and as of June 30, 1996 have been disclosed as "Discontinued
Operations" for purposes of this Prospectus.
Although the Company has prepared a plan of liquidation with respect
to these properties, it has thus far been unable to effect a liquidation of
its Michigan properties due to the lack of financial resources available to
complete its rework costs. The Company has valued such properties at
$2,616,000 as of June 30, 1996, net of $252,000 of accrued rework costs,
which it believes represents net realizable value for the properties.
Nonetheless, given the Company's difficulty in finding a buyer for the
properties, it may be required to sell the properties at a loss and on
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terms substantially less favorable to the Company than initially foreseen
or, alternatively, to write down the value of such assets on its
consolidated balance sheet. Management will thoroughly assess the carry
value of its Michigan properties during the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had current liabilities in excess of
current assets of approximately $8.4 million, of which $772,000 relates to
redeemable Common Stock obligations and $3.7 million represents the current
portion of long-term debt. The Company secured a series of short-term
loans in the second quarter of 1996 totaling $1.1 million to address cash
flow demands existing prior to the funding of the $5 million Term Loan in
July 1996. Approximately $382,000 of these short-term obligations were
repaid in the second quarter and the remaining $718,000 were repaid or
settled in July and August.
Pursuant to the $10.2 million Bennett Loan, the Company paid the first
four of the 36 requisite monthly principal payments in May, June, July and
August 1996. Despite increases in revenues, repayment of the Bennett Loan
over 36 months could unduly burden the Company's cash flow, and there can
be no assurance that, absent approval of the restructuring of the Bennett
Loan or additional financing on terms more favorable than those of the
Bennett Loan, the Company could continue to pay that indebtedness and meet
all of its other obligations. The Company is taking the following measures
discussed below to address its near and long-term liquidity concerns and
capital needs.
AMENDMENT OF THE BENNETT CONSTRUCTION LOAN AGREEMENT
The Bennett Loan, which had an outstanding balance of approximately
$9.1 million as of September 23, 1996, is secured by a first mortgage on
Mountaineer's real and personal property and is guaranteed by the Company.
The Bennett Loan calls for 36 monthly payments of principal and interest
based on a 36 month amortization schedule. The Bennett Loan bears interest
at the rate of 12.5% per year with a delinquency interest rate of 14.5%.
The Bennett Loan does permit prepayment by the Company without interest
penalty. In March 1996, Bennett and its parent, The Bennett Funding Group,
Inc., filed for protection from creditors under Chapter 11 of the federal
bankruptcy laws. The bankruptcy court assigned a trustee to administer the
Bennett companies while in bankruptcy. On July 1, 1996, the Company lost
an application for a Temporary Restraining Order, which would have
suspended payments of interest and principal under the Bennett Loan.
Despite this ruling, the Company has continued negotiations with the
Trustee and as of September 19, 1996 reached an agreement.
By Amendment of the Construction Loan Agreement (the "Amendment")
dated September 19, 1996 among the Company, Mountaineer Park and Richard C.
Breeden, solely in his capacity as trustee (the "Trustee") of the estate of
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Bennett, the Company and Mountaineer agreed to settle all claims against
Bennett. This Amendment is contingent upon approval by the United States
Bankruptcy Court for the Western District of New York (the "Bankruptcy
Court"). If the Amendment is approved by the United States Bankruptcy
Court, it will be effective as of October 31, 1996 and the Company and
Mountaineer will dismiss their lawsuit against Bennett with prejudice. The
material terms of the Amendment are as follows:
The Amendment would modify the schedule for amortization of the
principal of the Bennett Loan such that instead of 36 equal monthly
payments of $283,333, Mountaineer will make principal payments of $75,000
per month from October through March and $125,000 per month from April
through September. The remaining principal balance would continue to be
due on April 30, 1999. In the event that the Bennett Loan is not prepaid
by December 31, 1997, the interest rate on any outstanding balance would,
as of January 1, 1998, increase from 12.5% to 14.5% until paid in full;
provided, however, that (i) if the Holder of the second trust on
Mountaineer's property (currently Madeleine, LLC pursuant to a Deed of
Trust and the Term Loan Agreement) for any reason does not approve such
interest rate increase, then the interest rate would not increase; and (ii)
in lieu thereof, the monthly payments of principal would increase to
$100,000 from October through March and to $200,000 from April through
September.
The Amendment would also modify the Company's obligation to issue
additional shares of the Company's Common Stock to Bennett if the loan is
not prepaid by January 1, 1997. Whereas the Bennett Loan as previously
amended required the Company to issue Bennett $2.5 million worth of the
Company's Common Stock based on the average market price for the 20
consecutive trading days preceding January 2, 1997, the Amendment would
permit the Company, at its option, either to pay Bennett $500,000 or issue
$750,000 in Common Stock. Similarly, the Company would be permitted to pay
$750,000 or issue $1 million in Common Stock if the Bennett Loan is not
prepaid by July 1, 1997, and pay $1 million or issue $1.25 million in
Common Stock if the Bennett Loan is not prepaid by December 31, 1997. If
the Company elects to issue Bennett additional shares of Common Stock, such
shares would be subject to the requirement that, to the extent such
issuance would otherwise result in Bennett having voting rights greater
than 5% of the Company's issued and outstanding shares of Common Stock,
then such voting rights would be transferred to the Company's Board.
To the extent any shares of Common Stock previously issued pursuant to
the Bennett Loan or to be issued pursuant to the Amendment are restricted
and are not eligible for public sale pursuant to court order or exemption,
then Bennett would be entitled to piggyback registration rights with
respect to such shares should the Company or any shareholder of the Company
make a registered offering of Common Stock excluding registered offerings
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undertaken in connection with the Term Loan Agreement until December 31,
1997. Bennett would also be entitled to demand registration rights after
December 31, 1997 or any other time at which there is a registered offering
in connection with the Term Loan Agreement.
In the event the Trustee desires to sell any of the shares of Common
Stock held by Bennett, the Amendment would also grant the Company the right
to match any bona fide offer of a nonaffiliate to purchase the shares until
December 31, 1997. The Amendment likewise grants the Company an option for
the period commencing on the date Mountaineer has paid the Bennett Loan in
full and terminating ten business days thereafter, to purchase all (but not
part) of the 1,530,000 shares currently held by Bennett for a price per
share equal to 90% of the average closing bid price of the Common Stock as
reported by Nasdaq for the twenty (20) consecutive trading days immediately
preceding the date on which Mountaineer retires the Bennett Loan. In no
event will such price be less than $1.125 per share.
As part of the Amendment, AGEL, an affiliate of Bennett which had
performed management services at Mountaineer Park pursuant to the
Management Agreement, delivered an acknowledgment that the Management
Agreement had been terminated and that a June 30, 1995 Settlement Agreement
among the Company, Mountaineer, and AGEL was now deemed to be in effect.
That Settlement Agreement, when deemed effective, will terminate the
Management Agreement and settle the accounts of the parties as of June 30,
1995.
The Amendment is expressly subject to the approval of the Bankruptcy
Court, upon application to be made by the Trustee upon proper notice to
Bennett's creditors, which application was served by the Trustee on
September 20, 1996 and filed with the Court on September 25, 1996. There
can be no assurance, however, that the Bankruptcy Court will approve the
Amendment or any modification thereof on terms acceptable to the Company or
that other satisfactory terms could be renegotiated if the Amendment is not
approved.
Pending final Bankruptcy Court approval of the Amendment, the Company
has continued to remit interest and principal payments to Bennett under the
terms of the Bennett Loan agreement. See "Description of Certain
Indebtedness."
$5 MILLION TERM LOAN
On July 2, 1996, the Company and Mountaineer entered into a financing
arrangement with a private lender for a working capital loan and a
commitment for first mortgage refinancing (the "Loan Commitment"). The $5
million Term Loan is secured by a second mortgage on Mountaineer's real and
personal property and is guaranteed by the Company. The note evidencing
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the loan calls for monthly payments of interest only at the rate of 12% per
annum, and a default rate of 22% per annum. The Company also agreed to
issue the lender 183,206 shares of its Common Stock and $1.06 Warrants to
purchase an additional 1,142,860 shares for no separate consideration at
$1.06 per share. The $.80 Warrants to purchase an additional aggregate
amount of 50,000 shares at $.80 per share were issued to two affiliates of
the lender. The principal is to be repaid at the end of the three year
term, during which time the loan is subject to, on each anniversary date,
additional fees in cash equal to 8% of the outstanding principal balance,
stock equal to 5% of the outstanding principal balance (valued at the
average closing bid price for the 30 days prior to each anniversary date),
and warrants to purchase 250,000 shares of Common Stock at $1.06 per share.
This loan can be prepaid without payment penalty at the Company's option.
The loan proceeds will be used to substantially liquidate trade accounts
payable, fund future capital expenditures, and launch extensive television
and print advertising campaigns. See "Description of Certain
Indebtedness."
$11.1 MILLION FIRST MORTGAGE COMMITMENT
As part of the Term Loan transaction, the lender also provided a one-
year commitment which expires on June 30, 1997 to lend Mountaineer up to
$11.1 million of additional funds to be used to refinance the current
mortgage held by Bennett on terms no less favorable than the Bennett Loan.
The financing commitment is subject to customary conditions, including
negotiation of definitive loan agreements and no material adverse changes
in Mountaineer's business prior to closing. In connection with the
financing commitment, the Company paid a $110,000 commitment fee and issued
the lender additional $1.06 Warrants to purchase 350,000 shares of Common
Stock at $1.06 per share.
If the Company is able to close such financing, the loan terms provide
that the lender would be secured by a first priority deed of trust, a first
priority lien and security interest on Mountaineer's real and personal
property, and a guarantee of the Company, an assignment of leases and rents
and a pledge of the stock of Mountaineer owned by the Company, plus annual
fees and warrants as reduced by the amount of principal repaid. An initial
financing facility fee of $888,000 would be payable upon closing along with
550,000 shares of the Company's Common Stock and warrants to purchase
1,632,140 shares at $1.06 per share. The note evidencing the loan would
provide for monthly payments of interest only at the rate of 12% per annum.
Principal would be payable at the end of a three year term, during which
period the loan would be subject to, on each anniversary date, additional
financing facility fees of cash equal to 8% of the outstanding principal
balance, 550,000 shares of the Company's Common Stock and warrants to
purchase an additional 550,000 shares at $1.06 per share. The loan
proceeds would be used to pay the initial financing facility fee and to
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repay the Bennett Loan. The fair value of such common shares issued will
be charged to operations and, accordingly, will have a material impact on
the Company's statements of operations. The Company is interested in
finding a lender which can offer superior terms to those provided by the
loan commitment; however, the lender has a right of first refusal entitling
the lender to match the basic terms of the commitment within 30 days of the
receipt of another offer. While management is vigorously pursuing
alternative financing, there can be no assurances that such financing will
be obtained on terms acceptable to management or within sufficient time for
the Company to meet its ongoing obligations.
ALTERNATIVE MORTGAGE FINANCING
The Company is continuing to seek alternative mortgage financing from
a number of prospective lenders on more favorable terms and with longer
amortization periods than those currently in place. The Company believes
that its recent increases in revenues, reductions in accounts payable from
proceeds of the Term Loan and improvements in the facilities of Mountaineer
Park will permit the Company to obtain permanent financing on satisfactory
terms. If such a facility is offered, the Company will avail itself of the
early repayment clauses of its existing loan agreements. There are no
assurances that such alternative financing will be obtained on terms
acceptable to the Company or within sufficient time to meet its ongoing
obligations.
The Company intends to further expand its physical renovation of
Mountaineer Park in preparation for its marketing as a comprehensive
destination resort centered around extensive video gaming operations.
Significant increases in revenues were provided by Mountaineer Park's
expanded gaming operations after the introduction of 400 additional VLTs in
July 1995 and the subsequent expansion of the Lodge-based Speakeasy Gaming
Saloon in December 1995. This trend has continued since the introduction
of video slots gaming in July 1996. Management anticipates further
increases in the number of VLTs within the next year and replace older VLTs
as leases lapse, subject to evidence that the existing VLTs are utilized
fully, so that by fall of 1997, the Company expects to operate 1,000 VLTs
with slot games. Mountaineer's revenue streams have historically exhibited
seasonal peaks in the summer months with declining patronage in the winter
months. Management believes that the emergence of video gaming as its
dominant profit center will reduce the severity of these seasonal
fluctuations in revenue; however, there can be no assurances that this
trend will be appreciably altered.
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During the six months ended June 30, 1996, the Company invested
$593,000 for redevelopment of its properties at Mountaineer Park. The
Company borrowed $1,100,000 under short term borrowing arrangements to
service its working capital requirements in the first half of 1996, and
paid $1,076,000 in short term and long-term principal during the same
period.
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BUSINESS
MOUNTAINEER RACE TRACK & GAMING RESORT
RACETRACK FACILITIES
Mountaineer Park offers horse racing before expansive clubhouse and
grandstand viewing areas with enclosed seating for year-round racing. The
track also conducts simulcast thoroughbred and greyhound racing from other
prominent racetracks. Mountaineer's main racetrack consists of an oval
dirt track approximately one mile in length. Inside the main track is a
natural turf (grass) track measuring seven furlongs or 7/8 of a mile. The
racetrack is equipped with two chutes for races of lengths from 4 1/2
furlongs to over one mile. The racetrack buildings consist of the
clubhouse and grandstand which provide glass-enclosed stadium and box
seating for approximately 770 and 2,850 patrons, respectively. The
buildings are each three-stories and are connected by an enclosed walkway.
Live and simulcast racing can be viewed by approximately 1,200 dining
patrons in two restaurants located in the clubhouse and grandstand. In
addition to seating areas, the grandstand covers approximately 57,000
square feet of interior space on the main and mezzanine levels containing
42 parimutuel windows and four food and beverage concession stands. The
clubhouse covers approximately 25,000 square feet of interior space
containing 22 parimutuel windows. The grandstand has an indoor stage with
a seating capacity of approximately 2,240, and has been the site of several
nationally televised boxing matches. The racetrack apron, which is
accessible from both buildings, provides racing fans with up-close viewing
of horses entering the racetrack and crossing the finish line. The stable
area accommodates approximately 1,250 horses and is located adjacent to the
main track. None of the horses are owned by Mountaineer or the Company,
however, Mountaineer leases stable space to horse owners whose horses race
at Mountaineer Park. Mountaineer Park's racetrack parking lots have a
combined capacity for over 2,900 vehicles.
LODGE FACILITIES
The Lodge is a two-story facility which overlooks the golf course at
Mountaineer's main entrance on West Virginia State Route 2. The Lodge
offers 101 rooms, including 50 standard rooms (one double bed), 46 superior
rooms (two double beds), and five king rooms and suites. The Mountaineer
Lodge Dining Room seats 125 patrons for casual dining overlooking the golf
course. In 1995, in response to increased patronage of the off-track
betting, video lottery gaming, dining and bar facilities located at the
Lodge, the Company expanded its 5,000 square foot Speakeasy Gaming Saloon
with an 8,000 square foot addition. Capacity of the Speakeasy Gaming Salon
now stands at 750. Extensive off-track wagering facilities continue to be
maintained at the Speakeasy Gaming Saloon. Lodge parking lots have a
combined capacity for approximately 370 vehicles.
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VIDEO LOTTERY FACILITIES
In addition to live and simulcast parimutuel wagering, Mountaineer
offers video lottery gaming through 800 VLTs located in the racetrack
clubhouse, grandstand and the Lodge. Mountaineer introduced 400 new state-
of-the-art VLTs in September 1994, replacing 165 older machines operated
since the Company's Acquisition of Mountaineer in December 1992, and
subsequently placed an additional 400 VLTs into operation in June 1995.
The racetrack houses 400 of the VLTs in its Riverside Gaming Terrace on the
second floors of the clubhouse and grandstand, and the Lodge offers the
remaining 400 VLTs in the Speakeasy Gaming Saloon, Derby Room and Iron
Horse Lounge. Unlike the replaced machines, each of the new VLTs allows a
player to select from several game themes, including up to four versions of
draw poker, five versions of slot machine themes, one version of blackjack
and two versions of keno, as well as permitting the player to determine
which cards to hold while playing draw poker. The Company is currently
authorized to install up to 200 more VLTs which it intends to install
sometime within the fiscal year ending December 31, 1997, subject to
evidence that the Company's current VLTs are utilized at full capacity.
RECREATIONAL FACILITIES
Mountaineer offers a par three nine-hole "executive" golf course,
three tennis courts, a volleyball court, a basketball court, two swimming
pools and two children's swimming pools. These facilities are made
available for use by Lodge guests and the general public at specified daily
or seasonal fee rates.
TRAILER PARK
Located across West Virginia State Route 2 from the Lodge and the
entrance to Mountaineer Park, the Company maintains a trailer park
consisting of 61 individual lots of approximately 11.5 acres. The lots are
rented for fixed monthly fees, mostly to individuals who are employed by
Mountaineer in racing operations. The Company is responsible for
maintenance of the road and grounds, refuse removal and providing water and
sewage hook-ups. The tenants pay all utility expenses.
UNDEVELOPED LAND
Mountaineer owns, as part of its 606 acre site, a 375 acre tract that
is currently undeveloped. The acreage is located directly across West
Virginia State Route 2 from the Lodge and racetrack main entrance.
Management currently has no plans for development of such property.
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CURRENT OPERATIONS
The Company's operating revenues at Mountaineer Park are derived
principally from its racing and video lottery operations, and, to a lesser
extent, its Lodge, food and beverage operations. Additional revenues are
generated from greens fees and other recreational facilities fees.
RACING OPERATIONS
The Company is subject to annual licensing requirements established by
the West Virginia Racing Commission. The Company's license was renewed in
December 1995, through December 1996.
The Company's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer
Park and on races conducted at other "host" racetracks and broadcast live
(i.e., import simulcast) at Mountaineer Park. In parimutuel wagering,
patrons bet against each other rather than against the operator of the
facility or with pre-set odds. The dollars wagered form a pool of funds
from which winnings are paid based on odds determined solely by the
wagering activity. The racetrack acts as a stakeholder for the wagering
patrons and deducts from the amounts wagered a "take-out" or gross
commission, from which the racetrack pays state and county taxes and racing
purses. The Company's parimutuel commission rates are fixed as a
percentage of the total handle or amounts wagered. With respect to
Mountaineer Park's live racing operations, such percentage is fixed by West
Virginia law at three levels, 17.25%, 19% and 25%, depending on the
complexity of the wager. The lower rate applies to wagering pools
involving only win, place and show wagers while the higher rates apply to
pools involving wagers on specified multiple events, such as trifecta,
quinella and perfecta wagers. With respect to simulcast racing operations,
the Company generally has opted to apply the commission rates imposed by
the jurisdictions of the host racetracks, as it may do with the consent of
the Racing Commission. Such rates vary with each jurisdiction and may be
more or less favorable than the live racing commission rates. Out of its
gross commissions, the Company is required to distribute fixed percentages
to its fund for the payment of regular purses (the "regular purse fund"),
the state of West Virginia and Hancock County and, with respect to
commissions derived from simulcast operations, Mountaineer's employee
pension plan. After deducting state and county taxes and, with respect to
simulcast commission, simulcast fees and expenses and employee pension plan
contributions, approximately one-half of the remainder of the commissions
are payable to the regular purse fund.
Mountaineer also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool
exceeds a multiple of ten cents. Breakage from simulcast wagers is
generally allocated proportionately between the host racetrack and
Mountaineer on the basis of the amounts wagered at their respective
facilities.
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VIDEO LOTTERY OPERATIONS
The Company is subject to annual licensing requirements established by
the West Virginia Lottery Commission. The Company's license was renewed in
July 1996 for a period of one year.
The Company derives revenue from the operation of video lottery games
in the form of net win on the gross terminal income, or the total cash
deposited into a VLT less the value of credits cleared for winning
redemption tickets. Pursuant to the Lottery Act, the Company's commission
is fixed at 47% of the net win after deducting an administration fee of up
to 4% of gross terminal revenues first paid to the state of West Virginia.
The VLTs are leased under a master lease agreement which requires the
Company to insure the machines for their full replacement value, pay any
taxes, insurance and maintenance expenses and, upon the expiration of the
lease, allows the Company to purchase the VLTs at fair market value.
Monthly payments for the first 400 VLTs were $72,378 from September 1994
through December 1995, and monthly payments for the second 400 VLTs were
free of rent for the first six months after installation in late June 1995.
The master lease agreement provides that the Company may exercise an option
to purchase the VLTs at the end of the lease term for a nominal sum. The
Company accrued monthly lease expenses of $70,743 during the deferral
period of July through December 1995. On March 26, 1996, the master lease
agreement was amended to reflect a new monthly consolidated payment
schedule as follows: (i) $0 in December 1995, January 1996 and February
1996, (ii) $119,471 in March and April 1996, (iii) $183,176 from May
through October 1996, and (iv) $119,471 from November 1996 through January
1999. In addition, the Company is obligated to make interest payments from
March through October 1996 at the rate of 15% of the past due periodic
rental payments under the master lease agreement, representing a total
interest obligation of $26,278.
In 1995, the Lottery Commission approved the linking of VLTs to
enhance the amount that could be won on any single play of any single
terminal within the linked group. The Lottery Commission also approved
nominal payout percentages for this gaming option, commonly referred to as
"progressives," of up to 95%. The Company expects to link approximately
one-half of its VLTs into several progressive playing groups located in the
Riverside Gaming Terrace at the racetrack and the Speakeasy Gaming Saloon
at the Lodge. The Company's supplier is actively working on the
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development of progressive gaming software for the Company's existing VLTs.
Management's target date for implementation of progressive gaming play is
the first quarter of 1997, although there can be no assurance that
progressive games will be successfully implemented by that date or at all.
In March 1996, the West Virginia legislature approved the usage of
video game themes depicting symbols on reels, commonly referred to as "line
games" or "slot games."
On July 3, 1996, Mountaineer installed slot games on the first 350 of
its 800 VLTs. The new games, which were introduced for the first time in
June 1996 pursuant to the new legislation, included Double Diamond, a
classic casino slot game with cherries, bars and the like that "spin" on
video reels, and the internationally popular Black Rhino game. These new
games are offered in addition to blackjack, poker and keno. Management
intends to replace older VLTs that cannot accommodate the new games as
leases lapse and subject to evidence that the Company's 800 VLTs currently
in place are utilized fully, the Company intends to install an additional
200 VLTs, so that by the end of 1997, Mountaineer Park expects to operate
1,000 VLTs with slot games.
MANAGEMENT OF VIDEO LOTTERY OPERATIONS
Pursuant to the Bennett Loan Agreement, American Gaming &
Entertainment, Ltd. ("AGEL," formerly named Gamma International, Ltd.) was
engaged by the Company pursuant to a June 2, 1994 management agreement (the
"Management Agreement") to provide management services for video lottery
and other gaming activities at Mountaineer Park permitted under West
Virginia law, other than its parimutuel horse racing operations (the
"Permitted Activities"). The Company was required to enter this Management
Agreement with AGEL as a condition to the loan initiated by Bennett. Under
the Management Agreement, AGEL was entitled to receive a management fee of
3% of the gross revenues of the Permitted Activities after a 4%
administrative fee. In addition, AGEL was entitled to receive 8% of the
earnings before interest, taxes, depreciation and amortization of all
businesses conducted at or, in the case of off-track betting, generated as
a result of the operations at Mountaineer, including the Permitted
Activities and all parimutuel horse racing operations.
The Company's Management Agreement with AGEL was suspended pursuant to
a Stay Agreement effective June 30, 1995 until such time as Bennett, the
Company's construction loan lender, complied with certain requirements of
the Lottery Commission. For the six months ended June 30, 1995, the
Company paid AGEL $198,000, however, no additional payments were made after
June 30, 1995. As of June 30, 1995, the Company and AGEL entered a
settlement agreement staying the Management Agreement. Simultaneously,
American Newco entered into a Consulting Agreement with Mountaineer to
provide consulting services in connection with Mountaineer's video lottery
operations at the rate of $10,000 per month, subject to increases of up to
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$10,000 per month for possible additional services to be provided through
March 17, 1997. Fees under this Consulting Agreement which are
substantially less than those which would have been paid under the original
Management Agreement. The agreements provide that if the Stay Agreement or
the Consulting Agreement are terminated in accordance with certain
specified contingencies, the Management Agreement will also terminate.
However, the agreements also provided that if Bennett should fulfill
certain requirements of the Lottery Commission and declare no later than
January 1, 1996 that it will continue as lender to Mountaineer on a
permanent basis, the Management Agreement will be reinstated prospectively
and the Consulting Agreement will terminate. Notwithstanding such
agreements, the Company has reached an agreement with AGEL as of September
19, 1996 acknowledging the effectiveness of the June 30, 1995 settlement
agreement and thereby terminating the Management Agreement. Such agreement
may, however, be subject to approval by the bankruptcy court of the
Amendment to the Bennett Loan Agreement dated September 19, 1996.
Nonetheless, management believes that even without such bankruptcy court
approval, the Management Agreement may be terminated without any liability
to the Company.
The personal involvement of the two shareholders of American Newco,
Inc. in the consulting activities is a material element of the Consulting
Agreement. Such personal involvement had not been provided since October
15, 1995, and on May 10, 1996, Management provided American Newco and AGEL
with formal notice of termination of the consulting agreement. As a
result, no consulting fees have accrued since that time. On May 14, 1996,
the Company received written notice from a representative of AGEL demanding
payment under the Management Agreement although Management believes there
are sufficient grounds to terminate the Consulting and Management
Agreements without additional liability to the Company, there can be no
assurance that such terminations will not be successfully challenged or
that the Company will not incur additional liability in connection with the
agreements.
On March 28, 1996 the Commission filed suit against The Bennett
Funding Corporation, the parent of Bennett and an affiliate of a major
shareholder of AGEL, seeking a financial judgment and civil penalties for
actions that are unrelated to Bennett's lending activities to Mountaineer.
Also named in the suit was Patrick Bennett, Chief Executive Officer of
Bennett, the Company's construction lender. Management does not believe
that these recent developments will have a material negative impact on the
Company's licenses or financing efforts.
RACETRACK, FOOD AND BEVERAGE OPERATIONS
The clubhouse restaurant is open a minimum of 220 days annually on
live race days, and offers seating for 650 customers with full lunch and
dinner menus and a private buffet. Clubhouse customers include racing
fans, local residents and private social groups. Beverages and cocktails
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are also available in the clubhouse at the Riverside Gaming Terrace bar,
which services video lottery players, as well as racing fans. The
grandstand's Man O' War restaurant offers a buffet primarily for bus and
riverboat excursion tours and charter groups and is open approximately 140
days annually. Renovation and expansion were completed in March 1995
increasing dining capacity of the Man O' War from 230 to 550. Closed
circuit television monitors displaying Mountaineer's live and simulcast
races are provided at every table in both the Clubhouse and Man O' War
Restaurants for the convenience of racing fans. The racetrack food and
beverage facilities are intended to complement the entertainment experience
for racing fans and video lottery players and, therefore, are designed to
offer familiar menus with moderate pricing in a comfortable atmosphere.
Mountaineer Lodge customers principally include local residents and
business travelers visiting nearby steel plants and other businesses on
week days, with a larger number of recreational customers and persons from
non-local markets on weekends. Lodge facilities also include the
Mountaineer Lodge Dining Room, which seats 125 patrons for casual dining
overlooking the golf course. Food and beverages are also available at the
Lodge in the Speakeasy Gaming Saloon and the Iron Horse Lounge. Table and
barstool seating is available in the Speakeasy Gaming Saloon and the Iron
Horse Lounge for the video lottery gaming and off-track wagering patrons
accommodated there. The Lodge and its food and beverage operations are
operated in combination with its entertainment facilities and is utilized
principally to increase racing attendance and video lottery play.
Accordingly, the Company maintains inexpensive room rates.
IMPROVEMENT PLAN AND EXPANDED OPERATIONS
Since its acquisition of Mountaineer in December 1992, the Company has
been engaged in an ongoing effort to renovate and, more recently, enhance
and expand Mountaineer Park, which was first opened in 1951. Prior to West
Virginia's adoption of the Lottery Act in March 1994, the Company completed
certain renovations necessary to maintain the clubhouse and lower
grandstand areas, including upgrades to the plumbing and electrical
systems, the installation of new furniture and furnishings and the redesign
of the grandstand parimutuel (wagering) windows. These improvements were
made during 1993.
In 1993, the Company commenced its capital improvement program,
designed to upgrade and expand Mountaineer Park's existing facilities to a
level which would allow its marketing as a more upscale gaming, racing, and
recreational destination resort.
In 1994 and 1995, the Company invested $8.9 million in building
improvements, furnishings, fixtures and equipment suitable for large scale
gaming activities in its race track grandstand and clubhouse, and an
additional $591,000 to convert a portion of existing lodge space to gaming
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areas. In response to increased patronage at its lodge gaming areas, the
Company embarked upon an 8,000 square foot expansion of the Lodge video
lottery facilities in 1995.
Mountaineer has expanded its off-track betting facilities in both the
racetrack and Lodge locations. In 1994 and 1995, the Company invested $1.9
million in two track-side restaurants offering seating for 1,200 racing
patrons, with new 13-inch television monitors located at each table, and a
total of 32 overhead monitors with 40-inch screens. A simulcast control
center is located in the clubhouse restaurant, which also offers video and
graphic overlay capabilities. This system enables the Company to promote
upcoming events and Mountaineer's other entertainment facilities, in
addition to the day's live and off-track racing schedule. In 1995, the
Company completed the renovation of the Lodge off-track betting facility,
offering seating for 198 patrons in the Speakeasy Gaming Saloon. The Lodge
simulcasting facility is served by 24 40-inch television monitors, as well
as a 15-foot projection screen. The Company currently has available 64
mutuel windows in the racetrack facility and six windows in the Speakeasy
Gaming Saloon, to be supplemented by self-activated portable betting
terminals in 1996 and beyond.
The Company also created a boxing arena and entertainment stage, which
it has integrated into the grandstand seating. The stage is an integral
component of the Company's efforts to expand Mountaineer Park's customer
base by offering new, complementary forms of entertainment. Mountaineer
has hosted six boxing events since December 1994, including nationally
televised bouts on ESPN and USA Cable. Mountaineer paid fixed fees and
provided certain lodging at no charge to the event promoters. Mountaineer
retained all proceeds from ticket sales, food and beverage sales and
program sales. Management intends to engage in similar events to increase
public awareness and to thereby help to increase future attendance at
Mountaineer Park.
The Lodge lobby and reception area were renovated in 1994, followed by
restoration of 41 guest rooms damaged by fire and a general renovation and
upgrade of the 60 remaining guest rooms and common areas in 1995.
Remaining components of the improvements plan scheduled for completion
in 1996 consist of enhancements to the Speakeasy Gaming Saloon, parking lot
expansion and general paving. The cost of these improvements is not
expected to exceed $1.5 million.
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BUSINESS STRATEGY
The Company's business strategy is to increase revenues in all areas
of operations through the promotion and expansion of its video lottery
business and the enhancement of its racing and entertainment facilities.
DEVELOP AND MARKET MOUNTAINEER PARK AS A DIVERSIFIED
ENTERTAINMENT FACILITY
The Company believes that the Mountaineer Park racetrack facility has
not performed up to its potential in the past because it was utilized
primarily to conduct parimutuel racing, thereby limiting the facility's
customer base and under-utilizing its sizable infrastructure during non-
racing times. The expansion of video lottery operations and the
introduction of bingo for local senior citizen groups and boxing events at
Mountaineer Park have begun to remedy these deficiencies. Management
believes that the addition of such improvements and programs to those
already completed, will provide the right product mix to attract an
increasing number of visitors and more efficiently use Mountaineer's
facilities during non-racing times. It is anticipated that the resulting
benefits will be shared by parimutuel, as well as by video lottery and
other entertainment operations, since patrons who traditionally do not
visit horse racetracks may be, once at Mountaineer, more inclined to wager
on racing. In addition, because a significant percentage of revenues from
video lottery operations must be contributed to the racing purse fund, as
video lottery revenues increase, so will the size of purses. Management
believes that this will have the effect of attracting better quality
racehorses, further enhancing Mountaineer Park's appeal to traditional
horse racing fans who largely generate for the Company's parimutuel
revenues.
EXPAND VIDEO LOTTERY OPERATIONS
The Company intends to expand its video lottery operations by
installing an additional 200 VLTs, which were authorized by the Lottery
Commission in 1995, to replace existing VLTs as leases lapse during the
first quarter of 1997, subject to evidence that the Company's 800 VLTs
currently in place are utilized fully. By the fall of 1997, the Company
expects to operate 1,000 VLTs with slot games. The Company believes that
its video lottery revenues will continue to increase with the installation
of new machines, the implementation of progressive and video slot games,
and the implementation of its expanded marketing plan. With its current
involvement in video lottery gaming and parimutuel racing, its substantial
infrastructure and grounds, and the attractive location of its facility,
management believes that Mountaineer is positioned to take advantage of any
future forms of gaming which may be legalized in West Virginia. There can
be no assurances, however, that the state of West Virginia will authorize
additional gaming activities or that, if authorized, the Company would be
licensed.
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RELOCATE OFF-TRACK WAGERING
The Company recently relocated its primary simulcasting operations to
the Speakeasy Gaming Saloon at the Lodge. Management believes that by
exposing video lottery patrons to simulcast and live racing, new racing
fans can be developed, thereby increasing parimutuel operations. The
expanded clubhouse simulcast facilities are also expected to create
additional excitement and increase the level of activity at the racetrack
on live race days.
IMPROVE LIVE RACING PRODUCT AND COMMENCE EXPORT SIMULCASTING OUTSIDE
HUB AREA
The Company's ability to attract attendance at Mountaineer and
wagering on its live races is dependent, in part, upon the quality of the
horses racing at Mountaineer. Horse races at racetracks competing with
Mountaineer, and at the racetracks from which Mountaineer receives import
simulcasts, have often been of higher quality than Mountaineer's horse
races, thereby attracting a larger volume of wagering and higher average
wagers than at Mountaineer Park. Beginning in October 1994, Mountaineer
has been able to attract better quality horses by paying incrementally
higher purses. The increased purses reflect an increase in the minimum
daily purses guaranteed pursuant to the Company's agreement with the
horsemen's association, a non-union entity which represents the jockeys in
their dealings with Mountaineer. Management's ability to increase further
the size of purses will depend on increased video lottery operations and,
to a lesser extent, expanded simulcast racing operations. The Company
anticipates that it will be able to continue increasing purse sizes to
levels attractive to owners of mid-level quality or better racehorses.
Management has sponsored several stakes races in 1996, with purses of
up to $20,000 per race. In September 1995, Mountaineer sponsored the West
Virginia Breeders' Classics stakes races, with purses totaling $330,000
funded by state-wide video lottery tax revenue. Mountaineer broadcast
certain of these to a number of other racetracks around the country, and
intends to simulcast its regular card of live races within the next year.
Wagering handles from participating racetracks are commingled with
Mountaineer's on-site wagering handle when it exports its simulcast signal.
COMMENCE EXPORT SIMULCASTING OUTSIDE HUB AREA
Export simulcasting is a highly desirable source of revenue because
the direct costs associated with such operations are relatively low. The
Company believes that the higher average purses anticipated from video
lottery contributions will improve the quality of races to other
racetracks, off-track betting facilities, casinos and other gaming
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establishments once it has completed its improvement plan. In order to
make its races more attractive to simulcast outlets, the Company
anticipates that it will experiment with different post times, possibly
adopting more evening racing days which are preferable because they do not
compete with live racing conducted by host tracks. Although the Company
intends to pursue export simulcasting possibilities vigorously, there can
be no assurance that such opportunities will prove realistic or that the
Company will be successful in its pursuit of such business.
INCREASING IMPORT SIMULCASTING
The Company intends to increase the number and quality of races it
makes available for wagering by simulcasting additional out-of-state races.
Although Management does not anticipate that it will increase the number of
import signals it can receive simultaneously, it will increase the number
of races displayed with each available signal. In May 1995, Mountaineer
introduced simulcasts off-track greyhound racing, and has since offered
thoroughbred and/or greyhound import simulcasting seven days per week.
Because operating expenses associated with simulcast racing are generally
lower than those associated with live racing, Management believes that
increases in the levels of simulcast wagering would result in greater
operating profits than similar increases in live racing levels.
MARKETING
Mountaineer's primary market includes four million persons of gaming
age who reside within a one-hour drive, or approximately 50 miles, of the
facility including the population centers of Pittsburgh, Pennsylvania,
Youngstown/Warren and Akron/Canton, Ohio, and Wheeling, West Virginia. A
secondary market of 3.4 million persons of gaming age reside within a two-
hour drive, including Cleveland, Ohio and Morgantown, West Virginia. Both
markets have an average household income of approximately $26,000.
The Company has adopted and is in the process of implementing a
comprehensive marketing program to capitalize on Mountaineer Park's
recently expanded gaming facilities to create a larger and more loyal
customer base. The program includes (i) the Players Club, a player rating
and tracking system designed to reward qualified play through the issuance
of reward certificates which are redeemable for food and beverages,
merchandise and other services, (ii) entertainment programming featuring
boxing and other special events, (iii) attractive food and beverage
pricing, (iv) comprehensive advertising, and (v) a bus program. Some
features of the program are subject to approval by the Lottery Commission.
Prior to the formulation of the new marketing program, the Company's
marketing efforts consisted of limited television, radio and print
advertising and promotional events tied to major holidays or horse racing
events.
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COMPETITION
Mountaineer's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia and
Thistledown, located approximately 85 miles to the northwest in Cleveland,
Ohio. Wheeling Downs conducts parimutuel greyhound dog racing and video
lottery gaming. Thistledown conducts parimutuel thoroughbred horse racing
but not video lottery. Other than Wheeling Downs and Thistledown, there
are currently no facilities offering competitive parimutuel live
thoroughbred or video lottery gaming within a 100-mile radius of
Mountaineer Park. As a result, although there are facilities located more
than 100 miles away, Management does not believe that such other facilities
compete with Mountaineer Park for a significant segment of its target
customer base (although they do compete to some extent for quality
racehorses). In addition, none of those facilities, all of which are
located in Pennsylvania and Ohio, are currently licensed to offer video
lottery gaming. Moreover, the one facility in West Virginia, other than
Mountaineer and Wheeling Downs, offering video lottery is located in the
central part of the state and, as a result, Management believes it does not
compete to any significant extent with Mountaineer Park for customers. In
addition, one other well-known resort located downstate, has sought
legislative approval to operate a land-based casino. The Company also
competes with statewide lotteries in West Virginia, Pennsylvania and Ohio,
on site and off-track wagering in Pennsylvania and other entertainment
options available to consumers, including live and televised professional
and collegiate major sports events. The Company will also compete with
off-track wagering in Ohio, which was approved in 1996.
The Company is attempting to attract patrons by promoting Mountaineer
Park as a complete entertainment complex and destination resort offering a
unique combination of quality racing, video lottery wagering, dining,
special events and other entertainment options, all in a physically
attractive setting which is easily accessed with ample on-site parking. To
the extent that Pennsylvania or Ohio legalize any forms of casino gaming,
the Company's video lottery operations will compete with new gaming
facilities located within driving distances from Mountaineer's geographic
market. Such facilities may offer more gaming machines than Mountaineer as
well as forms of gaming not available in West Virginia.
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EMPLOYEES
As of September 17, 1996, Mountaineer had approximately 460 full-time
employees and 25 part-time employees, of whom approximately 70 were
represented by a labor union under a collective bargaining agreement. The
union representing mutuel clerks at the race track, has been expanded in
recent years to cover certain employees providing off-track betting
services at the Lodge. In September 1996 additional employees voted to
consider expanding the union to make approximately an additional 200
employees union members. Based on the information available to the
Company, the Company believes that the vote on the proposal to expand the
union coverage was 72 against and 60 for, with 87 votes challenged. The
Company is unable to predict the ultimate outcome of this vote. As of June
30, 1996, the Company also employed one person, at its corporate offices in
Laguna Beach, California. The Company believes that its employee relations
are good, however, there can no assurance that if such expansion of the
union is approved, the Company's employee relations will remain on the same
terms as in the past.
REGULATION AND LICENSING
RACING
The Company's horse racing operations are subject to extensive
regulation by the Racing Commission, which is responsible for, among other
things, granting annual licenses to conduct race meets, approving
simulcasting post times, and other matters. When granting licenses, the
Racing Commission has the authority to determine the dates on which
Mountaineer may conduct races. In order to conduct simulcast racing,
Mountaineer is required under West Virginia law to hold a minimum of 220
live race days each year. Mountaineer was granted a license to conduct 220
live race days for its 1996 meet.
West Virginia law requires that at least 80% of Mountaineer's
employees must be citizens and residents of West Virginia and must have
been such for at least one year. In addition, certain activities, such as
simulcasting races, require the consent of the representatives of a
majority of the horse owners and trainers at Mountaineer Park.
Mountaineer's revenues from live racing operations are derived
substantially from its parimutuel commissions, which are fixed by the State
of West Virginia as percentages of Mountaineer's wagering handles. The
West Virginia legislature could change these percentages at any time,
although the Company is not aware of any current proposal to do so.
The Company's simulcast activities that occur outside of West Virginia
could be subject to regulation of other state racing commissions, as well
as the provisions of the Federal Interstate Horse Racing Act of 1978, which
prohibits Mountaineer from accepting off-track wagering on simulcast racing
without the approval of the Racing Commission and, subject to certain
exceptions, of any other currently operating track within 60 miles, or if
none, of the closest track in any adjoining state.
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VIDEO LOTTERY
The operation of video lottery games in West Virginia is subject to
the Lottery Act. Licensing and regulatory control is provided by the
Lottery Commission.
Prior to the adoption of the Lottery Act in March 1994, the Company
conducted video lottery gaming pursuant to an agreement with the Lottery
Commission which authorized the Company to operate video lottery machines
at the racetrack and Lodge as part of a video lottery pilot project. Under
the terms of the agreement, the Company retained ownership or control of
the video lottery machines and other equipment it provided for use in video
lottery gaming. In March 1993, the Attorney General of West Virginia
issued an opinion that, under the West Virginia Constitution, video lottery
machines could not be privately owned. As a result of the Attorney
General's opinion, the Company was unable to renew its agreement with the
Lottery Commission, which was scheduled to expire in June 1993. In October
1993, the Supreme Court of West Virginia found that the legislature had not
adequately defined and authorized video lottery gaming and, as a result,
the Lottery Commission's authorization of video lottery gaming at
Mountaineer was invalid. The court's order was to become effective in late
November 1993, at which time video lottery gaming at Mountaineer would have
had to terminate. However, the court stayed its order pending
consideration and passage of satisfactory video lottery legislation. The
subsequent adoption of the Lottery Act has not been contested in or
otherwise addressed by the court or any other West Virginia court.
Under the Lottery Act, only parimutuel horse or dog racing facilities
that were licensed by the Racing Commission prior to January 1, 1994 and
that conduct at least 220 live racing dates for each dog or horse race
meeting, or such other number as may be approved by the Racing Commission,
are eligible for licensure to operate video lottery games. There are four
racing facilities in West Virginia (two horse racing and two dog racing)
including Mountaineer Park, three of which satisfy the eligibility
requirements of 1995. The conduct of video lottery gaming by a racing
facility is subject to the approval of the voters of the county in which
the facility is located. If such approval is obtained, the facilities may
continue to conduct racing activities unless the matter is resubmitted to
the voters pursuant to a petition by at least 5% of the registered voters,
who must wait at least five years to bring such a petition. If approval is
denied, another election on the issue may not be held for a period of two
years. Video lottery gaming was approved in Hancock County, the location
of Mountaineer Park, on May 10, 1994.
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In order to qualify as a "video lottery game," as the term is defined
under the Lottery Act, a game must, among other things, be a game of chance
which utilizes an interactive electronic terminal device allowing input by
an individual player. Such a game may not be based on any of the following
game themes: roulette, dice, or baccarat card games. Moreover, video
lottery machines must meet strict hardware and software specifications,
including minimum and maximum pay-out requirements, and must be connected
to the Lottery Commission's central control computer by an on-line or dial-
up communication system. Only machines registered with and approved by the
Lottery Commission may offer video lottery games.
Under the Lottery Act, racetracks that conduct video lottery gaming,
as well as persons who service and repair video lottery machines and
validation managers (persons who perform video lottery ticket redemption
services) are required to be licensed by the Lottery Commission. The
licensing application procedures are extensive and include inquiries into
and an evaluation of the character, background (including criminal record,
reputation and associations) and business ability and experience of an
applicant and the adequacy and source of the applicant's financing
arrangements. In addition, a racetrack applicant must hold a valid racing
license, have an agreement regarding video lottery revenues with the
representatives of a majority of the horsemen, the parimutuel clerks and
the breeders for the racetrack and post a bond or irrevocable letter of
credit in such amount as the Lottery Commission shall determine. Finally,
no license will be granted until the Lottery Commission determines that
each person who has "control" of an applicant meets all of the applicable
licensing qualifications. Persons deemed to have control of a corporate
applicant include: (i) any holding or parent company or subsidiary of the
applicant who has the ability to elect a majority of the applicant's board
of directors or to otherwise control the activities of the applicant; and
(ii) key personnel of an applicant, including any executive officer,
employee or agent, who has the power to exercise significant influence over
decisions concerning any part of the applicant's business operations. The
Company's license application was approved by the Lottery Commission in
June 1995. From March 1994 until such approval, the Company conducted
video lottery gaming under a provision of the Lottery Act that permitted
any racetrack authorized by the Lottery Commission to conduct video lottery
gaming prior to November 1, 1993 to continue to do so for a limited time
without additional licensure.
Prior to Mountaineer Park's loan with Bennett, the Lottery Commission
approved the Company's license in September, 1994. During the relicensing
proceedings prior to July 1, 1995, the Lottery Commission required Bennett
to submit audited financial statements, based on the combined effect of
Bennett's stock ownership in the Company, its security interest pursuant to
the deed of trust in connection with the Bennett Loan, and the fact that
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AGEL, Bennett's affiliate, performed management services for the Company.
These factors have required the Company to seek Lottery Commission approval
of Bennett. Although Bennett failed to initially provide information
required by the Lottery Commission, the Lottery Commission relicensed
Mountaineer in June, 1995, after which time Bennett supplied the requisite
information. During the relicensing proceedings in June 1996, the Lottery
Commission released a letter opinion on May 9, 1996 to the effect that
because Bennett had the right to vote less than 5% of the outstanding stock
of Winners and AGEL, an affiliate of Bennett, was no longer providing
management services, Bennett could not influence or control Mountaineer's
business, and thus, Lottery Commission approval was not required.
Accordingly, no Lottery Commission approval of Bennett was required in
1996.
Mountaineer is currently attempting to refinance its loan with
Bennett. Assuming the Lottery Commission does not change its current
position, if no new lender acquires the right to vote more than 5% of the
voting stock and does not obtain the right to take an active role in the
affairs of Mountaineer, no Lottery Commission approval will be required.
While the Company has no reason to believe that its license is in jeopardy
as a result of either loan, a change of policy by the Lottery Commission
could affect Mountaineer's license and thus adversely affect the business.
Licenses granted by the Lottery Commission must be renewed on July 1
of each year. A license to operate video lottery games is a privilege
personal to the license holder and, accordingly, is non-transferable. In
order for a license to remain in effect, Lottery Commission approval is
required prior to any change of ownership or control of a license holder.
Unless prior approval of the Lottery Commission is obtained, the sale of
five percent or more of the voting stock of the license holder or any
corporation that controls the license holder or the sale of a license
holder's assets (other than in the ordinary course of business), or any
interest therein, to any person not previously determined by the Lottery
Commission to have satisfied the licensing qualifications voids the
license.
Once licensed, a racetrack has the right to install and operate up to
400 video lottery machines and may operate more than 400 machines only upon
Lottery Commission approval. The Company has received approval to operate
a total of 1,000 machines.
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Video Lottery machines may only be operated in the areas of the
racetrack where parimutuel wagering is permitted; provided, however, that
if a racetrack was authorized by the Lottery Commission prior to November
1, 1993 to operate video lottery machines in another area of the
racetrack's facilities, such racetrack may continue to so as long as there
is one video lottery machine in the parimutuel wagering area for each
machine located in another area of the racetrack. Accordingly, the Company
may continue to operate video lottery machines at the Lodge, providing
there are at least as many machines located at Mountaineer's racetrack.
The Lottery Act imposes extensive operational controls relating to,
among other matters, security and supervision, access to the machines,
hours of operation, general liability insurance coverage and machine
location. In addition, the Lottery Act prohibits the extension of credit
for video lottery play and requires Lottery Commission approval before any
video lottery advertising and promotional activities are conducted. The
Lottery Act provides for criminal and civil liability in the event of
specified violations.
All revenues derived from the operation of video lottery games must be
deposited with the Lottery Commission to be shared in accordance with the
provisions of the Lottery Act. Under such provisions, each racetrack must
electronically remit to the Lottery Commission its "gross terminal income"
(total cash deposited into video lottery machines less the value of credits
cleared for winning redemption tickets). To ensure the availability of
such funds to the Lottery Commission, each racetrack must maintain in its
account an amount equal to or greater than the gross terminal income to be
remitted. If a racetrack fails to maintain this balance, the Lottery
Commission may disable all of the racetrack's video lottery machines until
full payment of all amounts due is made. From the gross terminal income
remitted by a licensee, the Lottery Commission will deduct up to 4% to
cover its costs of administering video lottery at the licensee's racetrack
and divide the remaining amounts as follows: 47% is returned to the
racetrack, 30% is paid to the State's general revenue fund, 15.5% is
deposited in the racetrack's fund for the payment of purses, and the
remaining 9% is divided among tourism promotion, Hancock County, the
Breeders' Classics, the Veterans Memorial Program and the Racetrack
Employees Pension Fund.
DISCONTINUED OPERATIONS
BARTLETT FIELD LEASES - OHIO
In January 1992, the Company, through its wholly owned subsidiary,
ExCal Energy Corporation ("ExCal") acquired approximately 16,000 net
developed acres and 16,800 net undeveloped acres (held by production) of
oil and gas leases in the Bartlett Field in Southeastern Ohio from Biscayne
Petroleum Corporation, an affiliate of Edson R. Arneault, a director for
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the Company. The Company agreed to provide funds to drill 40 gas wells on
such properties, and in 1992, the Company attempted to raise the required
capital through a public offering. Due to the expiration of "Section 29"
credits (a credit against Federal income taxes derived from gas produced
from Devonian Shale and "tight sands" formations from wells commenced
before January 1993), in December 1992, the Company abandoned the offering.
As a result, the Company recorded certain provisions for writedown of these
interests. During 1993, the Company allowed the leases for the net
undeveloped acreage to expire, and sold to third parties approximately
2,300 of net developed acres. In December 1994, all of the remaining
leases were sold pursuant to the plan of orderly liquidation described
below.
BARTLETT FIELD WELLS - OHIO
In January 1992, ExCal acquired 77 gas wells in the Bartlett Field
from 18 limited partnerships controlled by Mr. Arneault and operated by his
affiliate, Century Energy Management Company, Inc. The wells were in need
of repair and the Company planned to incur rework costs to increase
production and maximize the value of the assets. Aggregate annual gas
production was 100,000 to 150,000 MCF, and Management believed that with
limited rework, production could be increased by at least 100%. In
December 1994, all of the wells were sold pursuant to the plan of orderly
liquidation described below.
MARATHON-OTTER LAKE FIELD - MICHIGAN
In January 1992, ExCal acquired all the issued and outstanding shares
of Crystal Oil Company, Inc. ("Crystal"). Crystal's assets consisted of an
average 64% net revenue interest in approximately 3.4 million barrels of
oil (proved reserves) plus 34 oil and gas wells and related equipment in
the Marathon-Otter Lake Field in the State of Michigan. In 1991, the wells
were shut-in by Crystal who had undertaken no material drilling since then.
In December 1992, ExCal entered into a joint venture agreement with Fleur-
David Corporation ("Fleur-David"), a minority shareholder of the Company,
to perform rework and remediation activities to re-establish production and
provide activities necessary for compliance with state environmental
standards. ExCal contributed its net revenue interest in the proved
reserves and agreed to pay 25% of on-going costs in exchange for a 25%
interest in the joint venture. For a 75% interest in the joint venture,
Fleur-David agreed to provide technical expertise and 75% of on-going
costs. Fleur-David also obtained a covenant not to sue for clean-up and
abandonment costs from the state of Michigan by funding $188,000 in an
environmental escrow fund required by the state. Costs were estimated at
$2,200,000 and have included rework of wells, repairs to oil storage tank
batteries, acid treatments of producing formations, plugging, clean-up,
equipment removal, waste disposal and soil removal costs required by the
Michigan Department of Natural Resources. The Company is responsible to
provide 25%, or approximately $550,000 of such costs, of which $286,000 has
been paid primarily from proceeds from the exercise of certain stock
options granted to Fleur-David by the Company, as well as cash from
continuing operations.
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PLAN OF ORDERLY LIQUIDATION
On March 31, 1993, the Company's board of directors approved a formal
plan to divest its oil and gas operations over a period of two years. This
decision was based upon several factors including (i) the anticipated
potential of the Company's gaming operations and the anticipated time to be
devoted to it by Management, (ii) the expiration of "Section 29" credits, a
credit against Federal income taxes derived from gas produced from Devonian
Shale and "tight sands" formations from wells commenced before January
1993, and (iii) the impact of delays in connection with a political
controversy over video lottery in West Virginia during 1993 which caused
Management to focus the Company's efforts and financial resources on
Mountaineer. To enhance the value of the properties for sale, the plan of
orderly liquidation provided for remediation costs to address certain
environmental matters and rework and development costs to increase future
production.
During 1993, the Company began disposition of the Bartlett Field oil
and gas leases by selling to third parties or, based on certain
contingencies in the acquisition agreement, returning to their previous
owners approximately 2,300 net developed acres. The Company received
approximately $85,000 in connection with the sale of the leases. The
Company also allowed leases comprising 16,800 net undeveloped acres to
expire. At December 31, 1993, the Company held net developed acreage of
13,700 acres and reserves in the Bartlett Field of 902,200 MCF.
The plan of orderly liquidation also called for rework costs of
approximately $150,000 in connection with the Company's 77 Bartlett Field
gas wells. Because the wells were in various states of disrepair, the plan
called for maintenance of wells, acid treatments of producing formations
and, in some cases, plugging and abandonment, all for the purpose of
increasing production and the value of such assets for ultimate sale. In
mid-1993, the Company reduced its appropriation for such rework costs to
$100,000, which was estimated to increase net cash flows from production to
a minimum of $25,000 per month. However, after completion of only $50,000
of such rework costs, the Bartlett Field wells and remaining bartlett Field
leases were sold in December 1994 to Development & Acquisition Ventures in
Energy, Inc., whose principal stockholder is the brother of Edson R.
Arneault, Chief Executive Officer and Director of the Company, for notes
valued at approximately $426,000, of which $150,000 (discounted to
$126,000) is non-recourse, secured solely by the assets sold. See "Certain
Transactions".
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At the time of the sale, the Company remained obligated on a $590,000,
9% note to the previous owners of the Bartlett Field wells. On March 31,
1995, the note was amended to provide the Company with a credit for the
current value of 98,333 shares of the Company's Common Stock issued to the
previous owners in March 1993 in the amount of $123,000. The amendment
further provided for the $467,000 balance of the note to be paid in monthly
payments of interest only at 10% from May through October 1995, with
principal amortized over 36 months thereafter with a balloon payment after
12 months on October 1, 1996. The note was payable at the option of the
Company through the issuance of Common Stock on or before November 1, 1995
at the then market value, provided that such shares were registered by the
Company at the time of issuance. The Company paid monthly interest
payments in May and June 1995, and in October 1995, the note was canceled
in exchange for interest payments for the months of July, August and
September 1995, and 373,600 shares of the Company's Common Stock, subject
to registration rights and valued for purposes of the transaction at the
then current market value of $1.25 per share.
The Company intends to sell its sole remaining oil and gas interest in
the Marathon-Otter Lake Field, during 1996. For further discussion of
Management's plan of orderly liquidation, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Discontinued Operations".
PROPERTIES
GAMING, RACING AND OTHER ENTERTAINMENT
Mountaineer Park is comprised of a thoroughbred race track and the
Lodge providing video lottery gaming, off-track wagering, dining and lounge
facilities as well as faculties for golf, swimming, tennis and other
outdoor activities covering approximately 606 acres (including 375
undeveloped acres) in Chester, West Virginia. The Mountaineer facility
encompasses approximately 4,100 feet of frontage on the Ohio River and
approximately 2,500 feet of highway frontage straddling West Virginia State
Route 2. At July 31, 1996, Mountaineer Park was encumbered by (i) a first
deed of trust in favor of Bennett Management aggregating $10.2 million in
original principal amount (current balance of $9.1 million as of September
23, 1996) and (ii) a second deed of trust in favor of Madeleine LLC,
collateralizing indebtedness aggregating $5 million in principal.
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OIL AND GAS
The Company's oil and gas interest constitutes a 25% joint venture in
a 64% net revenue interest in proved reserves with 34 net producible wells
in the Marathon-Otter Lake field in Lapeer and Genesee Counties, Michigan.
Proved reserves are estimated at 3,314,800 BBL. For financial and other
information about the Company's oil and gas interests, see "Discontinued
Operations,". "Management's Discussion and Analysis of Financial
Conditions" and Results of Operations - Results of Discontinued
Operations," and Note 10 of the Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.
EQUIPMENT LEASES
At Mountaineer Park, the Company leases 800 video lottery machines, a
totalisator system, video tape and closed circuit televisions systems and
other equipment required for operations. For discussion of such equipment
leases, see Note 7 of the Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.
OFFICE LEASE
The Company leases approximately 880 square feet of office space in
Laguna Beach, California for its corporate offices under an operating lease
with an monthly rental payment of $1,395. The lease for this office
expires on October 31, 1996. The Company intends to close this office in
the near future, and to transfer the Company's headquarters to Mountaineer
Park.
LEGAL PROCEEDINGS
SETTLED LITIGATION
Jackpot Enterprises, Inc. ("Jackpot") v. Winners Entertainment, Inc.,
Circuit Court of Kanawha County, West Virginia Case No. 94-C-819. On May
13, 1994, the Company was served with a complaint in which Jackpot sought
an award of 250,000 shares of the Company's Common Stock as liquidated
damages for an alleged breach of a January 27, 1993 agreement which
contemplated a joint venture between the parties to operate Mountaineer
Park and a financing arrangement and for alleged intentional torts in
refusing to issue the stock.
The parties settled these claims on February 28, 1995. The terms of
the agreement require the Company to issue to Jackpot, and include in a
registration statement, such number of shares which, when combined with the
30,000 shares of the Company's stock previously issued to Jackpot, on the
date the registration statement becomes effective, based on the market
price for the Common Stock, will provide net proceeds of $512,500 to
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<PAGE>
Jackpot. Pursuant to the agreement, after June 30, 1996, the Company has
the right to reacquire from Jackpot at par value any shares necessary to
limit Jackpot's net proceeds to $512,500. Moreover, if the registration
statement was not effective by April 29, 1995, which it was not, the
Company was required to issue an additional 12,500 shares every sixty days
until the effective date. In no event, however, would the Company have
been required to issue more than 250,000 shares. Through June 30, 1996,
the Company has issued 207,500 shares (excluding the 30,000 shares referred
to above) of its Common Stock in accordance with terms of the Agreement.
Crystal Asset Management Group, Ltd. In July of 1994, the Company and
Crystal Asset Management Group, Ltd. ("CAM") settled all of CAM's claims
arising from a financial advisory agreement dated April 1, 1993. Under the
settlement agreement, the Company was to pay CAM $165,684 to cancel
previously issued warrants to purchase 135,000 shares of Common Stock at
$7.00 per share with registration rights, and instead issued warrants to
purchase 145,000 shares of Common Stock at $6.25 per share prior to
December 1996 with registration rights. An initial payment of $15,000 was
made upon execution of the settlement agreement, however, no further
payments were made. On September 4, 1996, the Company entered into an
agreement, modifying the settlement agreement. The amendment to the
settlement agreement, provides for mutual releases of all claims in
exchange for the Company's payment of $90,000 in cash. The amendment to
the settlement agreement also reduced the exercise price of the previously
issued warrants to $3.00 per share and extended the term thereof through
January 15, 1998. The agreement contemplates the registration of the
shares underlying such warrants on a registration statement to be filed
shortly after the date of the amendment to the settlement agreement. See
"Shares Eligible for Future Sale" and "Registration Rights."
PENDING LITIGATION
George Jones v. Mountaineer Park, Inc. and Winners Entertainment,
Inc., Case No. 95-C-103-G, Circuit Court of Hancock County, West Virginia.
On June 19, 1995, the Company and its wholly owned subsidiary, Mountaineer
were served with a complaint by George Jones, claiming breach and wrongful
termination of Mr. Jones' employment agreement with Mountaineer,
retaliatory discharge, fraud, outrage, and defamation. The complaint
alleges, among other things, that Mountaineer terminated Jones' employment
in September of 1993 in retaliation for his efforts to investigate alleged
improper activities occurring at Mountaineer. Mr. Jones seeks an award for
compensatory damages in the amount of $1 million and a like amount in
punitive damages. Discovery recently has commenced in this action, and the
Company is seeking to be dismissed from the case.
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<PAGE>
The Company and Mountaineer have answered the complaint, denying any
liability to Mr. Jones. Management has determined to defend the case
vigorously on the grounds that the defamation claim is barred by the
statute of limitations, and the remaining claims should be dismissed
because Mr. Jones' employment was properly and justifiably terminated.
Mountaineer has been advised by its insurance carrier that the claims
against it are covered by insurance. Management does not believe that
either the Company or Mountaineer will incur any material loss on account
of such claims but there can be no assurance that this will be the case.
Daniel Barrett v. Mountaineer Park, Inc., Case No. 94-C-147G, Circuit
Court of Hancock County, West Virginia. The Company was served with a
complaint in 1994 by a jockey who sustained head injuries from a fall
during a race at Mountaineer. The plaintiff is seeking both compensatory
and punitive damages. Management has believes that this matter will be
covered by insurance. There can be no assurance that the Company's
insurance coverage will be sufficient to completely cover the Company's
potential liability in this case.
The Company (including its subsidiaries) is also a defendant in
various law suits relating to routine matters incidental to its business.
Management does not believe that the outcome of such litigation, in the
aggregate, will have any material adverse effect on the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICES AND DIRECTORS
The following table sets forth information regarding the directors and
executive offices of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE HELD
<S> <C> <C>
Edson R. Arneault 49 President, Chief Executive Officer,
Director
Thomas K. Russell 43 General Counsel, Chief Financial Officer,
Secretary, Treasurer, Director
Robert L. Ruben 34 Assistant Secretary, Director
Robert A. Blatt 55 Director
</TABLE>
BUSINESS EXPERIENCE
EDSON R. ARNEAULT, 49, has served as the Company's President and Chief
Executive Officer since April 26, 1995. He is also a member of the Board
of Directors of the Company and an officer and director of the Company's
subsidiaries, Mountaineer, Golden Palace, and ExCal. He has served as a
member of the Board since 1992, when he was elected President of ExCal.
Mr. Arneault is also president and chief executive officer of Century
Energy Management Co., Inc., which he founded in 1987, and general partner
of numerous partnerships directly or indirectly engaged in the development
and production of oil and gas. Mr. Arneault also engages in oil and gas
leasing, drilling and operation through Biscayne Petroleum Corporation,
which he founded in 1987. Mr. Arneault is a certified public accountant,
and served as a tax partner with Seidman and Seidman (now "BDO Seidman"), a
public accounting firm, in Grand Rapids, Michigan, from 1977 to 1980. Mr.
Arneault is a member of the Independent Producers Association of America,
the Ohio Oil and Gas Association, the Michigan Oil and Gas Association and
the Michigan Association of Certified Public Accountants. Mr. Arneault has
been the Company's liaison with the West Virginia Lottery Commission and
Legislature with respect to Mountaineer Park's video lottery operations.
THOMAS K. RUSSELL, 43, has served the Company as its secretary,
treasurer, chief financial officer, general counsel and a director since
December 1989. Mr. Russell is also an officer and director of ExCal, SDR
Corporation ("SDR") and Mountaineer Park. Mr. Russell is an attorney with
responsibility for the management of compliance, litigation and general
legal matters. From 1979 to 1989, he was a practicing attorney in Tustin
and Palos Verdes, California emphasizing business litigation, medical
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<PAGE>
malpractice and representation of American Indian Tribes in tribal and
federal courts and legislative and administrative matters. Since 1975, Mr.
Russell has served as an officer or director of various corporations
engaged in the oil, mining, hotel, equipment leasing, wholesale travel and
motion picture businesses. Mr. Russell received his Bachelor of Arts in
Marketing from California State University at Fullerton in 1975 and his
Juris Doctor from Pepperdine University in 1978. He has been an active
member of the State Bar of California since 1979.
ROBERT L. RUBEN, 34, is a principal in Freer & McGarry, P.C., a
Washington, D.C. law firm, where he has practiced since 1991. From 1986 to
1988, Mr. Ruben was associated with the firm of Bishop, Cook, Purcell &
Reynolds, which later merged with Winston & Strawn, and from 1989 to 1991,
Mr. Ruben was associated with the firm of Wickens, Koches & Brooks. Mr.
Ruben is a graduate of the University of Virginia and the Dickinson School
of Law and practices principally in the areas of commercial litigation and
corporate/securities law. Freer & McGarry, P.C. has served as counsel to
the Company since November of 1991, and Mr. Ruben has represented Mr.
Arneault and various of his affiliates since 1987.
ROBERT A. BLATT, 55, is the Chief Executive Officer of Island Golf
Resorts, L.L.C., Championship Golf Enterprises, L.L.C., and Golf
Development Services, Limited of St John's Antigua, and a member of the
board of directors of AFP Imaging Corporation. Since 1979 he had been
chairman and majority owner of CRC Group, Inc., and related entities, and
since 1985, a member (seat owner) of the New York Stock Exchange, Inc.
From 1959 through 1991, Mr. Blatt served as director, officer or principal
of numerous public and private enterprises. Mr. Blatt received his
Bachelor of Science in Finance from the University of Southern California
in 1962 and his Juris Doctor from the University of California at Los
Angeles in 1965. He is a member of the State Bar of California (inactive)
and a Registered General Principal, NASD and New York Stock Exchange, Inc.
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded, paid to or
earned by the most highly compensated executive officers of the Company
whose compensation exceeded $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AWARDS PAYOUTS
Other Annual Restricted
Comp. Stock Options LTIP All
Salary Bonus ($)(2) Awards SARs Payouts Other
NAME YEAR ($)(1) ($) ($) ($)(4) ($) COMP.
EDSON R. ARNEAULT(5) 1995 213,652 23,000 - - 618,415 - -
President and CEO of
Mountaineer Park, Inc. ExCal
Energy Corporation
1994 188,729 - 4,021 46,000(3) - - -
1993 151,865 - - - - -
THOMAS K. RUSSELL(5) 1995 147,288 - - - 358,316 - -
Secretary, Treasurer, CFO
General Counsel of Winners
Entertainment, Inc.
1994 134,075 - 2,789 - - - -
1993 109,597 16,250 - - - - -
MICHAEL R. DUNN (6) 1995 38,659 - - - 240,000 - 176,973
President and CEO of
Winners Entertainment, Inc.
1994 204,437 - 12,500 - - -
1993 161,436 36,250 - - - - -
Compensation paid to all 1995 399,599 23,000 - - 975,731 - -
officers and directors as a
group during 1995
</TABLE>
(1) Salaries for Mr. Arneault and Mr. Russell include accrued compensation
for the year ended December 31, 1995 of $144,667 and $41,554,
respectively. Subsequent to December 31, 1995, said amounts, together
with interest at the rate of 10% per annum, were converted to shares
of the Company's common stock at the market value of the shares on
February 9, 1996, the effective date of the conversion.
(2) Represents accrued 1994 vacation compensation for executive officers
distributed in 1994.
(3) Represents the dollar value of a stock award of 20,000 shares of
restricted Common Stock.
(4) No options were granted in 1994 or 1993. All options granted by the
board of directors in 1995 were approved by vote of the stockholders
at the Company's annual meeting of shareholders held September 11,
1995.
(5) See "Employment Agreements" below.
(6) Mr. Dunn resigned from all offices with the Company and its
subsidiaries on April 26, 1995. This amount represents severance
payments.
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<PAGE>
OPTIONS GRANTS IN 1995
The following table contains information concerning the grant of stock
options during fiscal 1995 to the Company's executive officers named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of Stock
Price Appreciation FOR OPTION
TERM
<S> <C> <C> <C> <C> <C> <C>
% of Total
Options
Granted in
Fiscal YEAR
Options Exercise Expiration
NAME GRANTED PRICE DATE 5% 10%
EDSON R. ARNEAULT 378,415 45.98% $1.219 Sept. 1998 $72,711 $152,686
240,000 30.00% $2.000(1) Oct. 1997 0 0
223,316 27.01% $1.219 Sept. 1998 $42,176 $89,702
THOMAS K. RUSSELL
135,000 11.25% $2.000(1) Oct. 1997 0 0
MICHAEL R. DUNN 240,000 20.00% $2.000(1) Oct. 1997 0 0
</TABLE>
(1) In October 1992, the Board granted incentive stock options to certain
executive officers, key personnel and employees to purchase, in the
aggregate, 1,200,000 shares of the Company's Common Stock for a price
of $4.875 per share. In December, 1994, the Board voted and
shareholders approved at the annual shareholders' meeting, to reduce
the exercise price of such incentive stock options from $4.875 to
$2.00 per share.
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and
value of options held by each of the Company's executive officers names in
the Summary Compensation Table during fiscal 1995. None of the named
executives officers exercised any stock options during fiscal 1995.
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<PAGE>
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised in-the-Money Options
Unexercised Options at Fiscal Year End(2) at Year End ($)(1)
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
Edson R. Arneault 759,749 - 0 -
Thomas K. Russell 436,816 - 0 -
Michael R. Dunn 419,133 - 0 -
</TABLE>
(1) Based on the market price of the Company's Common Stock of $0.75 on
December 31, 1995, as reported by Nasdaq.
(2) On January 23, 1996, the Company, pursuant to a qualified incentive
stock option plan, granted to Mr. Arneault and Mr. Russell, options to
purchase 300,000 shares and 100,000 shares of the Company's Common
Stock, respectively, at the estimated fair market value price on the
date of grant of $0.5625, the options are subject to approval at the
next annual meeting of shareholders. Such options grants were made in
1996, and are not reflected in the table above.
TEN-YEAR OPTIONS/SAR REPRICINGS
The following table sets forth the number of options held by officers
of the Company subject to repricing during the fiscal year ended December
31, 1995. See table entitled "Option Grants in 1995 - footnote (1), above.
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<PAGE>
<TABLE>
<CAPTION>
Length of
Exercise Original
Market Price Price at Option Term
Number of of Stock at Time of Remaining at
Options/SARS Repricing or Repricing or New Exercise Date of
Amended Fiscal Amendment ($) Amendment Price Repricing or
Name Date Year ($) ($) Amendment
<S> <C> <C> <C> <C> <C> <C>
Edson R. Sep. 95 240,000 1.563 4.875 2.00 2 years
Arneault
Thomas K. Sep. 95 240,000 1.563 4.875 2.00 2 years
Russell
Michael R. Dunn Sep. 95 135,000 1.563 4.875 2.00 2 years
(6)
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the provisions of Section 16(a) of the Exchange Act, the
Company's officers, directors and 10% beneficial stockholders are required
to file reports with the Commission of their transactions in the Company's
securities. Based solely on a review of the Forms 3 and 4 and amendments
thereto furnished to the Company during its most recent fiscal year and
Forms 5 and amendments thereto furnished to the Company with respect to its
most recent fiscal year, the Company believes that certain forms were not
filed timely by the Company's officers, directors and 10% beneficial
stockholders.
Of these persons, Mr. Arneault did not file one report and filed seven
late reports relating to six transactions, Mr. Russell filed three late
reports relating to two transactions, Mr. Ruben filed three late reports
relating to one transaction, Mr. Blatt filed three late reports relating to
two transactions and Mr. Saunders did not file one report and filed 11 late
reports relating to 10 transactions. In addition, the Company has not
received at least two reports from Michael Dunn, the Company's former
President, relating to eight transactions or holdings known to the Company.
EMPLOYMENT AGREEMENTS
Messrs. Arneault and Russell each has an employment agreement with the
Company. Each agreement provides for a three year period of employment by
the Company of each of these individuals. Both Agreements terminate on May
9, 1997. Each employment agreement provides that the employee will receive
a base salary with annual cost of living adjustments, increases contingent
on certain events and bonuses at the discretion of the Board. Mr.
Arneault's base salary is $228,900 and Mr. Russell's base salary is
$157,500.
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<PAGE>
Each agreement provides that if the employee's period of employment is
terminated by reason of death or physical or mental incapacity, the Company
will continue to pay the employee or his estate the compensation otherwise
payable to the employee for a period of two years. If the employee's
period of employment is terminated for a reason other than death or
physical or mental incapacity or for cause, the Company will continue to
pay the employee the compensation that otherwise would have been due to him
for the remaining period of employment. If the employees' period of
employment is terminated for cause, the Company will have no further
obligation to pay the employee, other than compensation unpaid at the date
of termination. The term "cause" is defined by the agreement as (i)
conviction of a felony, (ii) embezzlement or misappropriation of funds or
property of the Company or its affiliates, or (iii) the employee's refusal
to substantially perform, or willful misconduct in the performance of his
duties and obligations under the agreement.
In the event that the termination of the employee's period of
employment occurs after there has been a change of control of the Company
and (i) the termination is not for cause of by reason of the death or
physical or mental disability of the employee or (ii) the employee
terminates his employment for good reason, then the employee will have the
right to receive within thirty days of the termination a sum that is three
times his annual base salary, but not to exceed the amount deductible by
the Company under the Internal Revenue Code of 1986. The term "change of
control" means (i) any change of control of the Company that would be
required to be reported on Schedule 14A under the Securities Exchange Act
of 1934, as amended, (ii) any person becoming the direct or indirect
beneficial owner of 20% or more of the Company's outstanding voting
securities, other than a person who was an officer or director of the
Company on the date of the agreement or (iii) the circumstance in which the
present directors do not constitute a majority of the Board. The term
"good reason" means (i) the assignment to the employee of any duties that
in the employee's judgement are inconsistent with, or constitute a
diminution of, the employee's position, authority, duties or
responsibilities, (ii) the employee's involuntary relocation from San Juan
Capistrano, California or (iii) the Company's failure to comply with the
compensation provisions of the agreement.
Each agreement provides that, during the term of the agreement, the
employee will not compete with the business or any contemplated business of
the Company either individually or as an officer, director, stockholder,
employee, agent, partner or consultant of any entity at any location within
ninety miles of any locations at which the company does business or at
which the employee knows that the company contemplates doing business.
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<PAGE>
COMPENSATION OF DIRECTORS
Mr. Ruben and Mr. Blatt are entitled to receive a fee of $2,500 for
each quarterly Board meeting that they attend and are also entitled to be
reimbursed for out-of-pocket expenses incurred in attending Board meetings.
Mr. Blatt is also entitled to a fee of $3,000 per month for serving as
Chairman of the Finance Committee effective October 1, 1996. Directors who
are employees of the Company do not receive compensation for attendance at
Board meetings, but are entitled to reimbursement for expenses that they
incur in attending such meetings.
On January 23, 1996, Mr. Ruben and Mr. Blatt were granted options to
purchase 75,000 and 50,000 shares of the Company's Common Stock,
respectively, at the fair market value on the date of the grant of $0.5625
per share. The options are exercisable at any time and from time to time
in whole of in part for a period of three years from the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On November 8, 1995, the Board voted to form an executive compensation
committee consisting of Mr. Ruben and Mr. Blatt, the Company's two non-
employee directors (the "Committee"). The Committee is authorized to review
all compensation matters involving directors and executive officers and
Committee approval is required for any compensation to be paid to executive
officers or directors who are employees of the Company.
CERTAIN TRANSACTIONS
In January 1992, pursuant to the approval of the Company's plan of
reorganization by the United States Bankruptcy Court, the Company acquired
100% of the stock of SDR, a Nevada corporation owned and controlled by
certain members of management and stockholders of the Company. Pursuant to
the plan or reorganization, in exchange for all the stock of SDR, the
stockholders of SDR received an aggregate of 3,169,583 shares of the
Company's Common Stock. SDR's principal asset was an option to purchase a
casino development site in Cripple Creek, Colorado, which site was
ultimately reconveyed to its previous owner on July 21, 1993, when the
Company decided not to proceed with development of the project.
All the Company's oil and gas leases were acquired by its subsidiary,
ExCal in January 1992 from Biscayne Petroleum Corporation, of which Edson
R. Arneault was president. At the time of this acquisition, Mr. Arneault
was not affiliated with the Company. As a result of this transaction, Mr.
Arneault became ExCal's president. The acquisition of such leases was part
of a larger transaction involving the acquisition by ExCal of 77 operating
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wells formerly owned by limited partnerships (the "Partnerships")
controlled by Mr. Arneault, the acquisition of all the stock of Crystal
Exploration Company, Inc. from Century Energy Management Company, Inc.,
another affiliate of Mr. Arneault, and the employment of Mr. Arneault by
ExCal for a period of three years at a salary of $120,000 per year and
participation in other board approved compensation plans.
Such leases were acquired in exchange for $100,000 cash, a $790,000
non-interest bearing note (of which $100,000 was paid on December 31, 1992,
the balance being due during 1993) and 50,000 shares of the Company's
Common Stock. The Company and the Partnerships entered into modifications
of their original agreement dated March 25 and November 17, 1993, March 30,
August 10 and September 30, 1994, and March 30, and October 1, 1995. Under
the terms of the September 30, 1994 modification the balance remaining to
be paid by the Company to the Partnerships was $590,000, which the Company
satisfied by the payment of $100,000 cash and the issuance of 98,333 shares
of its Common Stock to the Partnerships. The shares issued to the
Partnerships, together with 5,000 additional shares issued in consideration
of the Partnerships' agreement to extend the date for registration from
September 15, 1994 to October 15, 1994, were to be registered for public
sale under the Act. Because the registration statement covering the
Partnerships shares did not become effective before March 31, 1995, the
March 30, 1995 modification of the agreement (i) increased the interest
rate on the note representing the $590,000 balance to 10%, (ii) reduced the
balance to $467,084 by crediting the note with the average share price of
the Company's Common Stock for the first 14 days that the shares were
eligible for sale under Rule 144, and (iii) amended the payment schedule to
provide for payments of interest only from May 1, 1995 through October 1,
1995 and twelve payments of principal and interest from November 1, 1995
through October 1, 1995 calculated on a 36 month amortization schedule with
a balloon payment of the unpaid balance on October 1, 1995. Pursuant to
the October 1, 1995 modification, the outstanding balance of the note was
retired through the issuance of 373,600 shares of the Company's Common
Stock.
On December 16, 1994, ExCal entered into an agreement to sell its Ohio
oil and gas leases pursuant to the Company's March 1993 plan of orderly
liquidation to Development & Acquisition Ventures in Energy, Inc. ("DAVE"),
a corporation that is controlled by David T. Arneault, the brother of Edson
R. Arneault. The buyer agreed to pay ExCal a total of $450,000 in the form
of (i) a promissory note in the amount of $300,000 bearing interest at 8%
per annum and payable in monthly installments of $10,000 beginning six
months after the sale and (ii) $150,000 payable from the portion of the
monthly net revenues of the wells in excess of $10,000. In addition, if
the leases are sold, ExCal is to receive any unpaid balance of the $150,000
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<PAGE>
plus 50% of the payments received from the sale. The bid submitted by DAVE
was the highest of four independent bids received by the Company. Through
June 30,1 996 DAVE was current in its payments under the notes, although
the Company has made provisions from time-to-time for Edson R. Arneault to
make certain interest payments on behalf of DAVE.
During 1994 and 1995, various corporate affiliates of Mr. Arneault
advanced an aggregate sum of approximately $100,000 to ExCal primarily to
cover overhead expenses in connection with the maintenance of leases and
other costs associated with the Company's existing oil and gas interests in
Michigan and the Company's former interests in Ohio. In February 1996,
such accrued amount, along with accrued interest at the rate of 10% per
annum, was converted into a demand promissory note in the principal amount
of $100,218 payable to Mr. Arneault at the rate of 10% per annum.
To assist Fleur-David Corporation, the Company's joint venture partner
in rework activities related to the Company's plan of orderly liquidation
of its oil and gas interests in Michigan, Mr. Arneault purchased 25,000
shares of the Company's Common Stock held by Fleur-David in July 1995 in a
private transaction.
During 1995, Thomas K. Russell and Mark C. Russell, his brother, each
purchased a working interest in the Marathon-Otter Lake oil and gas
reserves in Michigan, owned in part by the joint venture between the
Company and Fleur-David for an aggregate amount of approximately $50,000.
The subject working capital interests and others were offered by Fleur-
David to raise capital to finance further rework and remediation activities
at the property.
Mr. Robert Ruben is a principal in the law firm of Freer & McGarry,
P.C., which has performed legal services for the Company since 1991.
During the fiscal year ended December 31, 1995, the Company paid Freer &
McGarry the sum of $86,295 for legal services. The Company and Freer &
McGarry anticipate that the law firm will perform legal services for the
Company in the future.
The Company has a note receivable for $240,000 from a shareholder of
the Company at the December 31, 1995 and 1994, as well as additional
noninterest bearing advances of $62,000 made in 1994. The $240,000 note
receivable bears interest at 8% per annum, is due on demand, and is
collateralized by certain shares of the Company's Common Stock. No demand
has been made the Company's management through December 31, 1995 as
management believes recovery is doubtful. During 1995, the Company has
recorded a provision for loss in the amount of $240,000 which is included
in "selling, general and administrative" expenses in the accompanying
consolidated statement of operations.
In March 1994, the Company lent $50,000 to a company for a term of
seven days in exchange for a promissory note bearing interest at 8% per
annum. The loan was made upon the recommendation of a significant
shareholder of both the Company and the recipient. During 1995, the
Company recorded a provision for loss in the amount of $50,000. In April
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1996, the Company and the recipient renegotiated and cancelled the original
note, and executed a replacement confessed judgment promissory note in the
principal amount of $58,333 at 8% per annum, all due and payable August 4,
1996.
NOTES PAYABLE TO RELATED PARTIES
During the year ended December 31, 1993, the Company fully paid
certain 8% notes payable totaling $401,000 to the former majority
shareholder of Mountaineer and an existing shareholder of the Company.
At December 31, 1993, the Company had a $70,000 demand note due to an
officer/shareholder that bore interest at 6.25% per annum. The note was
paid in full in January 1994.
During 1995, the Company incurred salaries to key management, which
remain unpaid; a December 31, 1995, such amounts accrued were approximately
$204,000. In February 1996, management agreed to accept an aggregate of
466,676 shares of the Company's Common Stock in satisfaction of the amounts
due them. Such shares have an approximate value of $204,000; therefore, no
additional compensation expense will be recorded as a result of the
issuance of Common Stock.
STOCKS AND WARRANTS ISSUED IN CONNECTION WITH PLAN OF REORGANIZATION
As part of the Company's Plan of Reorganization, which was confirmed
January 15, 1992, the Company issued certain warrants to purchase its
Common Stock. During the year ended December 31, 1993, the Company
received $2,239,000 for the purchase of 373,241 shares of its Common Stock
as a result of the exercise of Series C warrants. The warrants expired in
March 1993.
REDEEMABLE COMMON STOCK
In connection with certain arrangements entered into by the Company as
of December 31, 1994, 367,937 common shares could have been put to the
Company at $6.00 per share upon demand. In 1995, 98,333 redeemable shares
issued in connection with its oil and gas activities were satisfied through
the issuance of 373,600 additional shares of its Common Stock. In 1995,
194,500 common shares valued at $212,000 were issued for the cancellation
of 104,500 redeemable shares with put rights of certain holders of Golden
Palace acquisition debt. In connection therewith, the Company issued
276,750 redeemable shares which are subject to registration with the SEC
and have a guaranteed selling price of $1.50 per share at the time of
registration. At December 31, 1995, 441,854 share of redeemable Common
Stock were outstanding.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 29, 1996, the ownership
of the presently issued and outstanding shares of the Company's Common
Stock by persons owning more than 5% of such stock, and the ownership of
such stock by the Company's executive officers named in the summary
compensation table, and directors individually and as a group. As of August
29, 1996 there were 18,628,397 shares of Common Stock outstanding. All such
shares were owned both beneficially and of record, except as otherwise
noted.
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<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
Percentage of Class
Name and Address
<S> <C> <C>
Edson R. Arneault(1) 2,412,133 12.3
7199 Thornapple Drive
Ada, MI 49301
Donald G. & Bonnie Saunders 1,817,685 9.3
1987 Family Trust(2)
900 East Desert Inn Road, Suite 521
Las Vegas, Nevada 89109
Madeleine LLC(3) 1,676,066 8.4
950 Third Avenue,
New York, New York 10022
Bennett Management & 1,530,000 8.1
Development Corp.(4)
2 Clinton Square
Syracuse, NY 13202
Thomas K. Russell(5) 540,626 2.8
1461 Glenneyre Street, Suite F
Laguna Beach, CA 92677
Robert A. Blatt(6) 391,684 2.1
The CRC Group
Larchmont Plaza
1890 Palmer Avenue,
Suite 303
Larchmont, NY 10538
Robert L. Ruben(7) 113,228 0.6
Freer & McGarry, P.C.
1000 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
All officers and directors 3,457,671 17.1
as a group (4 persons)(8)
</TABLE>
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<PAGE>
(1) Includes 20,000 shares and options and other rights to acquire
beneficial ownership of 1,122,615 shares within 60 days held by Mr.
Arneault, and 1,269,518 shares held by corporations and limited
partnerships for which Mr. Arneault is a control person.
(2) Includes 1,191,816 shares and options, warrants and other rights to
acquire beneficial ownership held directly by Mr. Saunders and
indirectly by a trust of 625,869 shares exercisable within 60 days of
August 29, 1996.
(3) Includes 183,206 shares and Warrants exercisable within 60 days held
by Madeleine LLC ("Madeleine"). This information is based on
information supplied to the Commission on a Schedule 13D filed by
Madeleine on July 2, 1996. Stephen Feinberg owns directly no shares
of the Company. By reason of the provisions of Rule 13d-3 under the
Exchange Act, Stephen Feinberg, the sole managing partner of Feinberg
Management,L.P., the sole managing member of Madeleine, may be deemed
to own beneficially 183,206 shares of Common Stock and 1,492,860 of
the Warrants, constituting approximately 8.4% of the outstanding
Common Stock of the Company. Madeleine owns directly 183,206 shares
of Common Stock and 1,492,860 of the Warrants. In consideration of
the funding of the Term Loan and loan commitment by Lost Horizons
Fund, L.P. ("Lost Horizons"), Illiad, L.P. ("Illiad"), Stix Partners,
L.P. ("Stix Partners"), and to a discretionary account managed by
Partridge Hill Management, LLC ("Partridge Hill"), as more
specifically described in the Schedule 13D filed by Stephen Feinberg
with respect to the Common Stock and Warrants held by Madeleine,
Madeleine will assign to a discretionary account managed by Partridge
Hill all of the securities of the Company owned by such parties such
that, upon such assignments, the securities will be owned as follows:
Lost Horizons - 109,923.6 shares of Common Stock and 895,716 Warrants,
constituting approximately 5.04% of the shares of Common Stock
outstanding; Illiad - 45,801.5 shares and 373,215 Warrants,
constituting approximately 2.10% of the shares of Common Stock
outstanding; Stix Partners - 25,648.84 shares and 209,000.4 Warrants,
constituting approximately 1.17% of the shares of Common Stock
outstanding; and the discretionary account managed by Partridge Hill -
1,832.06 shares and 14,928.6 Warrants, constituting approximately .08%
of the shares of Common Stock outstanding. Madeleine has entered into
an agreement with the Company in which it is agreed to restrict its
ability to exercise its Warrants in order to comply with the
requirements of the West Virginia Lottery Commission. See
"Description of Securities -- Common Stock -- Anti-takeover
Provisions."
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(4) Includes 780,000 shares for which voting rights have been assigned to
the Board to satisfy licensing requirements of the West Virginia
Lottery Commission.
(5) Includes 103,810 shares and options and other rights to acquire
beneficial ownership of 436,816 shares exercisable within 60 days of
August 29, 1996 held by Mr. Russell.
(6) Includes 341,684 shares and options to acquire beneficial ownership of
50,000 shares exercisable within 60 days of August 29, 1996 held by
Mr. Blatt.
(7) Includes 38,228 shares and options to acquire beneficial ownership of
75,000 shares exercisable within 60 days of August 29, 1996 held by
Mr. Ruben.
(8) Includes Messrs. Arneault, Russell, Blatt and Ruben.
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SELLING STOCKHOLDERS
GENERAL
On July 2, 1996 the Company issued 183,206 shares of Common Stock and
Warrants to purchase an aggregate of 1,542,860 shares of Common Stock to a
private lender and two of its affiliates in connection with the Term Loan
Agreement and related commitment. Of the Warrants, 1,492,860 have an
exercise price of $1.06 per share and 50,000 have an exercise price of
$0.80 per share. Other than with respect to the exercise price, all of the
Warrants are identical. In addition to the shares of Common Stock and
Warrants to purchase Common Stock which were initially sold in connection
with the Term Loan Agreement, the private lender is to receive Warrants
equivalent to an amount of stock determined on each anniversary date equal
to 5% the outstanding principal balance (valued at the closing bid and
asked price for the 30 days prior to each anniversary date) and warrants to
purchase 250,000 shares at $1.06 per share. Contemporaneous with the Term
Loan, the private lender also made a first mortgage financing commitment.
If such financing is consummated, the Company would be required to issue to
the lender 550,000 shares of Common Stock and warrants to purchase an
additional 1,632,140 shares of Common Stock at $1.06 per share. Pursuant
to the warrant agreements entered into by the Company with each of the
Selling Stockholders (the "Warrant Certificate") and a registration rights
agreement entered into by the Company with the lender, Madeleine LLC, the
Company agreed to indemnify each of the Selling Stockholders against any
liabilities, under the Securities Act or otherwise, arising out of or based
upon any untrue or alleged untrue statement of a material fact in the
Registration Statement or this Prospectus or any omission of a material
fact required to be stated therein except to the extent that such
liabilities arise out of or are based upon any untrue or alleged untrue
statement or omission of any information furnished in writing to the
Company by the Selling Stockholder expressly for use in the Registration
Statement. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to its certificate of incorporation and
by-laws, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
The Selling Stockholders have the right, at the Company's expense, to
have the shares of Common Stock offered hereby registered for the offer and
sale to the public under the Securities Act until i) none of the shares
constitute Registrable Securities (as defined in the Registration Rights
Agreements and the Warrant Certificates) or ii) all of such shows may be
sold under Securities Act Rule 144(k) subject to the Company obtaining an
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<PAGE>
opinion of counsel and counsel for the Selling Stockholders concurring with
such opinion that such conditions were satisfied.
<PAGE>
In connection with the registration of the securities offered hereby,
the Company will supply prospectuses to the Selling Stockholders and, use
its best efforts to qualify such securities for sale in certain states
which may be designated by the Selling Stockholders.
STOCK OWNERSHIP
The table below sets forth the number of shares of Common Stock (i)
owned beneficially by each of the Selling Stockholders and (ii) being
offered by each Selling Stockholder pursuant to this Prospectus; (iii) to
be owned beneficially by each Selling Stockholder after completion of the
offering, assuming that all of the Warrants held by the Selling
Stockholders are exercised and all of the shares offered hereby are sold
and that none of the other shares held by the Selling Stockholders, if any,
are sold and (iv) the percentage to be owned by each Selling Stockholder
after completion of the offering, assuming that all of the shares offered
hereby are sold and that none of the other shares held by the Selling
Stockholders, if any, are sold. For purposes of this table each Selling
Stockholder is deemed to own beneficially (i) the shares of Common Stock
underlying the Warrants, (ii) the issued and outstanding shares of Common
Stock owned by the Selling Stockholder as of August 29, 1996, and (iii) the
shares of Common Stock underlying any other options or warrants owned by
the Selling Stockholder which are exercisable as of August 29, 1996 or
which will become exercisable within 60 days after August 29, 1996. Except
as otherwise noted, none of such persons or entities has had any material
relationship with the Company during the past three years.
<TABLE>
<CAPTION>
Number of Number of Number of Shares to be Percentage of
Shares Beneficially Shares OFFERED Owned Beneficially Outstanding Shares to
SELLING STOCKHOLDERS OWNED After Completion of be Owned Beneficially
OFFERING After Completion of
OFFERING(1)
<S> <C> <C> <C> <C>
Madeleine LLC (1) 1,676,066 1,676,066 0 0
Bridge Capital 25,000 25,000 0 0
Brownstone Holding 25,000 25,000 0 0
</TABLE>
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<PAGE>
(1) Includes 183,206 shares and Warrants exercisable within 60 days held
by Madeleine LLC ("Madeleine"). This information is based on
information supplied to the Commission on a Schedule 13D filed by
Madeleine on July 2, 1996. Stephen Feinberg owns directly no shares
of the Company. By reason of the provisions of Rule 13d-3 under the
Exchange Act, Stephen Feinberg, the sole managing partner of Feinberg
Management, L.P., the sole managing member of Madeleine, may be deemed
to own beneficially 183,206 shares of Common Stock and 1,492,860 of
the Warrants, constituting approximately 8.4% of the outstanding
Common Stock of the Company. Madeleine owns directly 183,206 shares
of Common Stock and 1,492,860 of the Warrants. In consideration of
the funding of the Term Loan and loan commitment by Lost Horizons
Fund, L.P. ("Lost Horizons"), Illiad, L.P. ("Illiad"), Stix Partners,
L.P. ("Stix Partners"), and to a discretionary account managed by
Partridge Hill Management, LLC ("Partridge Hill"), as more
specifically described in the Schedule 13D filed by Stephen Feinberg
with respect to the Common Stock and Warrants held by Madeleine,
Madeleine will assign to a discretionary account managed by Partridge
Hill all of the securities of the Company owned by such parties such
that, upon such assignments, the securities will be owned as follows:
Lost Horizons - 109,923.6 shares of Common Stock and 895,716 Warrants,
constituting approximately 5.04% of the shares of Common Stock
outstanding; Illiad - 45,801.5 shares and 373,215 Warrants,
constituting approximately 2.10% of the shares of Common Stock
outstanding; Stix Partners - 25,648.84 shares and 209,000.4 Warrants,
constituting approximately 1.17% of the shares of Common Stock
outstanding; and the discretionary account managed by Partridge Hill -
1,832.06 shares and 14,928.6 Warrants, constituting approximately .08%
of the shares of Common Stock outstanding. Madeleine has entered into
an agreement with the Company in which it agreed to restrict its
Warrants in order to comply with the requirements of the West Virginia
Lottery Commission. See "Description of Securities - Common Stock -
Anti-takeover Provisions."
PLAN OF DISTRIBUTION
Shares of Common Stock currently outstanding and shares of Common
Stock issuable upon exercise of the Warrants may be sold pursuant to this
Prospectus by the Selling Stockholders. These sales may occur in privately
negotiated transactions or in the over-the-counter market through brokers
and dealers as agents or to brokers and dealers as principals, who may
receive compensation in the form of discounts or commissions from the
Selling Stockholders or from the purchasers of the Common Stock for whom
the broker-dealers may act as agent or to whom they may sell as principal,
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<PAGE>
or both. The Company has been advised by the Selling Stockholders that
they have not made any arrangements relating to the distribution of the
shares of Common Stock covered by this Prospectus. In effecting sales,
broker-dealers engaged by the Selling Stockholders may arrange for other
broker-dealers to participate. Broker-dealers will receive commissions or
discounts from the Selling Stockholders in amounts to be negotiated
immediately prior to the sale.
Upon being notified by a Selling Stockholder that any material
arrangement (other than a customary brokerage account agreement) has been
entered into with a broker or dealer for the sale of shares through a block
trade, purchase by a broker or dealer, or similar transaction, the Company
will file a supplemented Prospectus pursuant to Rule 424(c) under the
Securities Act disclosing (a) the name of each such broker-dealer, (b) the
number of shares involved, (c) the price at which such shares were sold,
(d) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), (e) if applicable, that such broker-dealer(s) did not
conduct any investigation to verify the information set out in the
Prospectus, as supplemented, and (f) any other facts material to the
transaction.
Certain of the Selling Stockholders and any broker-dealers who execute
sales for the Selling Stockholders may be deemed to be "underwriters"
within the meaning of the Securities Act by virtue of the number of shares
of Common Stock to be sold or resold by such persons or entities or the
manner of sale thereof, or both. If any of the Selling Stockholders,
broker-dealers or other holders were determined to be underwriters, any
discounts or commissions received by them or by brokers or dealers acting
on their behalf and any profits received by them on the resale of their
shares of Common Stock might be deemed underwriting compensation under the
Securities Act.
The Selling Stockholders have represented to the Company that any
purchase or sale of the Common Stock by them will be in compliance with
Rules 10b-6 and 10b-7 under the Exchange Act. In general, Rule 10b-6 under
the Exchange Act prohibits any person connected with a distribution of the
Company's Common Stock (the "Distribution") from directly or indirectly
bidding for, or purchasing for any account in which he has a beneficial
interest, any Common Stock or any right to purchase Common Stock, or
attempting to induce any person to purchase Common Stock or rights to
purchase Common Stock, until after he has completed his participation in
the Distribution (the "Distribution Period").
During the Distribution Period, Rule 10b-7 under the Exchange Act
prohibits the Selling Stockholders and any other person engaged in the
Distribution from engaging in any stabilizing bid or purchasing the Common
Stock except for the purpose of preventing or retarding a decline in the
open market price of the Common Stock. No such person may effect any
stabilizing transaction to facilitate any offering at the market. Inasmuch
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<PAGE>
as the Selling Stockholders will be reoffering and reselling the Common
Stock at the market, Rule 10b-7 prohibits them from effecting any
stabilizing transaction with respect to the Common Stock.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is currently authorized to issue 25,000,000 shares of
Common Stock, par value $.00001 per share. As of September 13, 1996, there
were 18,869,397 shares of Common Stock issued and outstanding and held of
record by approximately 582 stockholders.
As of September 23, 1996, 4,836,130 shares of Common Stock were
reserved for issuance pursuant to outstanding options and warrants
A majority of the outstanding shares of the Company's Common Stock
must be present at a duly called stockholders' meeting in order to have a
quorum under the Company's By-Laws. Only those shareholders of record as
of the record date, which may be fixed not more than 60 nor less than 10
days before the meeting or shareholder action in lieu of a meeting are
entitled to vote on the subject matter before the shareholders. In most
cases, if a quorum is present the affirmative vote of the majority of the
shares represented at the meeting constitutes the act of the stockholders.
Consequently, the holders of one share more than one-quarter of the
outstanding Common Stock could exercise effective control over the Company.
The affirmative vote of a majority of all outstanding shares entitled to
vote, however, is required to amend the Company's Restated Certificate of
Incorporation (the "Certificate"), as well as to accomplish certain other
matters.
All shares of Common Stock are equal to each other with respect to
voting, liquidation, dividend and other rights. Owners of shares of Common
Stock are entitled to one vote for each share they own at any stockholders'
meeting. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor, and upon liquidation are entitled to participate pro
rata in a distribution of assets available for such a distribution to
stockholders. The Term Loan Agreement restrict the payment of dividends to
stockholders without the lender's consent. There are no preemptive rights
or privileges with respect to any shares of Common Stock. The Common Stock
of the Company does not have cumulative voting rights which means that the
holders of more than 50% of the shares voting for the election of the
directors may elect all of the directors if they choose to do so. In such
event, the holders of the remaining shares aggregating less than 50% would
not be able to elect any directors.
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The Company does not currently have a sufficient number of shares of
Common Stock authorized to allow for the issuance of all of the shares
subject to warrants and options. The Company is seeking shareholder
approval of the increase in number of authorized shares of Common Stock at
the annual meeting of shareholders to be held October 15, 1996. See
"Summary - Recent Developments".
ANTI-TAKEOVER PROVISIONS
The Company's Certificate has two significant anti-takeover
provisions. Pursuant to Article VI of the Certificate, any "Acquisition
Proposal" (defined therein as a proposal by any person to (i) make a tender
offer or exchange offer for any equity securities of the Company, (ii)
merge or consolidate the Company with another corporation, or (iii)
purchase or otherwise acquire all or substantially all of the properties
and assets of the Company), requires the Board to scrutinize such
Acquisition Proposal within certain guidelines. Specifically, the
Certificate states that the Board, in exercising its judgment with respect
to the best interests of the Company, is authorized to give due
consideration to such factors as the Board determines to be relevant,
including, without limitation:
(i) the interests of the Company's stockholders;
(ii) whether the proposed transaction might violate federal
or state laws, or affect the Company's ability to obtain required licenses;
(iii) the consideration being offered in the proposed
transaction, in relation not only to the then current market price for the
outstanding capital stock of the Company, but also to the market price for
the capital stock of the Company over a period of years, the estimated
price that might be achieved in a negotiated sale of the Company as a whole
or in part or through orderly liquidation, the premiums over market price
for the securities of other corporations in similar transactions, current
political, economic and other factors bearing on securities prices, and the
Company's financial condition and future prospects; and
(iv) the social, legal and economic effects upon employees,
suppliers, customers and others having similar relationships with the
Company, and the communities in which the Company conducts its business.
The Certificate requires a supermajority of 80% of the outstanding
shares of the Company entitled to vote in the election of directors to
amend or repeal this provision.
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In addition to this provision relating to the Board's response to a
takeover offer, in response to regulatory requirements of the Lottery
Commission requiring advance approval of persons who acquire 5% or more of
the Company's voting stock, Article VII of the Certificate provides the
Company with the right to redeem any shares acquired on the open market or
otherwise. Specifically, the Certificate prohibits any Person (a natural
person or entity) from becoming the Beneficial Owner (as defined in
conformance with Rule 13d-3 of the Exchange Act) of five percent (5%) or
more of the Company's common stock unless such person agrees in writing
delivered to the Company at its registered office to:
(1) provide to the Gaming Authorities (defined in the Certificate as
any governmental authority regulating any form of gaming which has
jurisdiction over the Company or its subsidiaries) information regarding
such Person, including, without limitation, information regarding other
gaming related activities of such Person and financial statements and
disclosures, in such form, and with such updates, as may be requested
and/or required by any Gaming Authority;
(2) respond to written and/or oral questions and inquiries that may
be propounded by any Gaming Authority; and
(3) consent to the performance of any personal background
investigation that may be required by any Gaming Authority, including,
without limitation, an investigation of any criminal record and/or alleged
criminal activity of such Person.
Notwithstanding such provisions, any and all issued and outstanding
shares of common stock held or otherwise owned by a Disqualified Holder
(defined in the Certificate as any Beneficial Owner of shares of common
stock of the Company, or its subsidiaries, whose holding of common stock
may result, in the judgment of the Board, in (i) the denial, loss or non-
reinstatement of any license or franchise from any governmental agency
applied for or held by the Company or any subsidiary to conduct any portion
of the proposed or actual business of the Company or any subsidiary, which
license or franchise is conditioned upon some or all of its holders of
common stock meeting certain criteria, or (ii) the disapproval,
modification, or non-renewal of any contract under which the Company or any
of its subsidiaries has sole or shared authority to manage any gaming
operations) (such securities being defined as the "Repurchase Securities")
shall be subject to repurchase by the Company at any time at the sole
discretion of the Company by action of the Board. The terms and conditions
of such repurchase provided for by the Certificate are as follows:
(1) the repurchase price of the Repurchase Securities to be
repurchased pursuant to such provision shall be an amount equal to the Fair
Market Value (defined as the average closing price as quoted on Nasdaq for
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<PAGE>
the 20 days preceding the repurchase) of such Repurchase Securities or such
other repurchase price as required by either the DGCL, any State law
applicable to the determination that a Beneficial Owner is a Disqualified
Holder or applicable federal law;
(2) the repurchase price of such Repurchase Securities may be paid in
cash, or Corporation Debt Securities (defined as any debt securities of the
Company which comprise all or a portion of the repurchase price), or any
combination thereof;
(3) if less than all of the Repurchase Securities held or otherwise
owned by one or more Disqualified Holders are to be repurchased, the
Repurchase Securities to be repurchased shall be selected in such manner as
shall be determined by the Company's Board in their sole discretion, which
may include selection of the most recently acquired Repurchase Securities,
selection of Repurchase Securities by lot, or selection of Repurchase
Securities in such other manner as shall be determined by the Company's
Board;
(4) at least ten (10) days' written notice of the Repurchase Date
shall be given to the Beneficial Owner (and the record holder if such
Person is not the Beneficial Owner) of the Repurchase Securities selected
to be repurchased unless notice is waived in writing by any such holder)
provided that the Repurchase Date may be the date on which written notice
is given if the cash or Corporation Debt Securities necessary to effect the
repurchase shall have been deposited in trust for the benefit of such
record holder and subject to immediate withdrawal upon surrender of the
certificates for the Repurchase Securities to be repurchased;
(5) from and after the Repurchase Date or such earlier date as
mandated by either the DGCL, any State law applicable to the determination
that a Beneficial Owner is a Disqualified Holder or applicable federal law,
any and all rights of whatever nature which may be held by the Beneficial
Owners of Repurchase Securities selected for repurchase (including, without
limitation, any rights to vote or participate in dividends declared on
securities of the same class or series as such Repurchase Securities),
shall cease and terminate and such Beneficial Owners shall thenceforth be
entitled only to receive the cash or Corporation Debt Securities payable
upon repurchase; and
(6) such other terms and conditions as the board of directors shall
determine.
All securities subject to this restriction bear a restrictive legend
stating the fact that such securities are subject to the repurchase option
of the Company and may not be transferred other than in accordance with the
Certificate.
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DESCRIPTION OF WARRANTS
In connection with the Term Loan Agreement, the Company issued an
aggregate of 1,542,560 Warrants to a private lender and two of its
affiliates (the "Warrant Holders"), all of which are presently outstanding.
The Warrants were issued pursuant to Warrant Certificates dated July 2,
1996 between the Company and each of the Warrant Holders.
Each Warrant entitles the holder thereof to purchase one share of
Common Stock (each a "Warrant Share") from the Company. The exercise price
of 1,492,560 of the Warrants is $1.06 per share and the exercise price of
50,000 of the Warrants is $0.80 per share, in each case subject to
adjustment as described below. Subject to certain limitations, the
Warrants may be exercised at any time beginning on July 2, 1996 until 5:00
p.m. Pacific Time on July 2, 2001 (the "Expiration Date"). Warrants that
are not exercised prior to the Expiration Date will expire.
CERTAIN TERMS
EXERCISE
In order to exercise all or any of the Warrants represented by the
Warrant Certificate, the holder thereof is required to surrender to the
Company a completed Exercise Agreement (as defined in the Warrant
Certificate), a Warrant Certificate and cash or certified check payable to
the Company in an amount equal to the then effective Purchase Price for the
shares for which the Warrant Certificate is being exercised. Certificates
for Warrant Shares purchased upon exercise of the Warrants will be
delivered by the Company to the holder thereof within five business days
after the exercise. The Warrant Shares shall, when issued, be duly
authorized, validly issued, previously unissued, fully paid and
nonassessable and will be free from all taxes, liens and charges with
respect thereto.
ADJUSTMENTS
The initial purchase price per Warrant shall be subject to adjustment
from time to time upon the occurrence of certain events including: (i) the
issuance or sale of any shares of Common Stock by the Company, (ii) the
grant of any rights to subscribe for or to purchase Common Stock, or any
options for the purchase of Common Stock or any securities convertible into
or exchangeable for Common Stock, (iii) the issuance or sale of convertible
securities, whether or not immediately exercisable, or (iv) the declaration
of any dividend or the making of any other distribution of any stock of the
Company payable in Common Stock, options or convertible securities. Upon
the occurrence of such an event, the holder shall be entitled to purchase
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the number of Warrant Shares equal to that percentage of the total number
of shares of Common Stock that the holder was entitled to purchase
immediately prior to such event; provided, however, that if the issuance of
securities is made to all holders of the Common Stock, then the Warrant
holder shall be entitled to receive the number of shares which such holder
would have been entitled to receive had the holder exercised the Warrants
immediately prior to the event. Notwithstanding this fact, no adjustment
shall be made: (i) at any time prior to 30 months after repayment in full
of the outstanding amounts under the Term Loan Agreement and the Loan
Commitment (if drawn down by the Company), if (a) the securities issued in
connection with such event exceed the holder's purchase price or if (b) the
event was approved in advance in writing by the holders of a majority of
the shares of Common Stock issuable on the exercise of the Warrants; and
(ii) following the date that is 30 months after the repayment in full of
all of the outstanding amounts under the Term Loan Agreement and the Loan
Commitment (if drawn down by the Company) ; provided, that notwithstanding
(i) and (ii) above, the adjustments provided for in the event of the
issuance of Common Stock of the Company shall be made to the extent that
such issuance involves the offer and/or issuance of securities to all
holders of any class of securities of the Company; provided, further, that
the provisions referenced above will not limit any adjustments to be
provided pursuant to other sections of the Warrant Certificate. No
adjustment need be made based on issuances of stock to employees, directors
or officers of the Company in any fiscal year, not to exceed 1% of the
issued and outstanding shares of Common Stock on the date of issuance;
Common Stock issued in the ordinary course of business, not to exceed .5%
of the outstanding shares of Common Stock on the day of issuance; or any of
the Warrants or shares of Common Stock issued in connection with the Term
Loan Agreement or Loan Commitment. The holder of the Warrants shall be
entitled to participate in any dividends declared by the Company or any
rights to subscribe for the purchase of Common Stock, options, or
convertible securities to the same extent as such holder would be entitled
after giving full effect to the exercise of such Warrants. Finally, should
the Company undertake a subdivision or combination of its Common Stock to
either increase such shares into a greater number or decrease such shares
into a lesser number, the number of shares purchasable under the Warrant
Certificate are to be proportionately increased or reduced. If conditions
arise not otherwise covered by the anti-dilution provisions discussed
above, the Company is required to appoint a firm of independent certified
public accountants of recognized national standing, which shall give their
opinion on any adjustment necessary to preserve the exercise rights of the
Warrant holder.
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REORGANIZATIONS, MERGERS, AND CERTAIN OTHER TRANSACTIONS
If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, shall be effected so as to entitle the holders of the Common
Stock of the Company to receive stock, securities or assets with respect to
or in exchange for shares of Common Stock, then, prior to and as a
condition of such reorganization, reclassification, consolidation, merger,
sale or conveyance, the Warrant holder shall be entitled to receive in lieu
of any Warrant Shares, such shares of stock, securities, or assets as may
be issued or payable in exchange for a number of shares of Common Stock
equal to the number of shares immediately theretofore purchasable or
receivable upon exercise of the rights under the Warrant Certificate had
such reorganization, reclassification, consolidation or merger, sale or
conveyance, not taken place.
NO RIGHTS AS STOCKHOLDERS
The holders of unexercised Warrants are not entitled, as such, to
receive notice of any meeting of the stockholders of the Company, to
consent to any action of the stockholders of the Company, to receive notice
of any other stockholder proceedings, or to any other rights as
stockholders of the Company, except with respect to dividends subscription
rights and rights upon merger or consolidation, as discussed above, and
none of the rights of the Warrant holder shall give rise to liability for
the purchase price of the Warrant Shares or as a stockholder of the
Company.
INSUFFICIENT AUTHORIZED SHARES
Currently the number of shares of Common Stock authorized to be issued
under the Company's Certificate is insufficient to permit the exercise of
all securities ("convertible securities") of the Company (including the
Warrants) that are exercisable for shares of Common Stock. Many of such
convertible securities have an exercise price in excess of the market
price. Nonetheless, the Company expects that at the meeting of the
stockholders of the Company scheduled to be held on October 15, 1996, the
number of authorized shares will be increased to permit exercise of all
convertible securities. No assurance can be given, however, that such
action will be taken.
REGISTRATION RIGHTS
For a description of the registration rights with respect to the
Warrants, see "Description of Securities - Registration Rights".
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TRANSFER AGENT
The Transfer Agent for the Common Stock is Continental Stock Transfer
& Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company had 18,869,397 shares of Common Stock outstanding as of
September 13, 1996. Of these outstanding shares, approximately 7,187,507
shares are "restricted securities" as defined in Rule 144 adopted under the
Securities Act. Of these restricted shares, 183,206 shares are covered by
this Registration Statement and were sold in connection with the July 2,
1996 Term Loan. Such 183,206 shares will, if sold pursuant to this
Registration Statement, and the 1,542,860 shares of Common Stock included
in this Registration Statement and underlying the Warrants will, if issued
upon exercise of the Warrants and sold pursuant to this Registration
Statement, be freely tradeable without restriction under the Securities
Act, except that any shares purchased and held by an "affiliate," as that
term is defined under the Securities Act, will be subject to the resale
limitations of Rule 144. In addition to the Warrants to purchase 1,542,860
shares of Common Stock as of September 13, 1996 there were outstanding
options and warrants to purchase an aggregate of 4,836,130 shares, all of
which shares will be restricted securities. Certain of the outstanding
shares and shares underlying outstanding options and warrants have
registration rights described in "Registration Rights."
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated), including affiliates, who have
beneficially owned shares for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of one percent of the then outstanding shares of the Company's
Common Stock or the weekly trading volume in the Company's Common Stock
during the four calendar weeks preceding such sale. A person (or persons
whose shares are aggregated), who is not deemed an affiliate of the
Company, and who has beneficially owned shares for at least three years is
entitled to sell such shares under Rule 144 without regard to the
limitations described above.
REGISTRATION RIGHTS
Under a Separation Agreement effective October 15, 1996, the Company
issued 15,000 shares of Common Stock and 30,000 shares of Common Stock
issuable upon the exercise of options to Julie Waring, a former employee of
the Company, with registration rights.
Pursuant to an Amendment to the Bennett Loan dated September 19, 1996,
the Company granted registration rights with respect to shares of Common
Stock previously issued to Bennett as well as shares issuable pursuant to
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such amendment. Whereas the Bennett Loan as previously amended required
the Company to issue Bennett $2.5 million worth of the Company's Common
Stock based on the average market price for the 20 consecutive trading days
preceding January 2, 1997, the Amendment would permit the Company, at its
option, either to pay Bennett $500,000 or issue $750,000 in Common Stock.
Similarly, the Company would be permitted to pay $750,000 or issue $1
million in Common Stock if the Bennett Loan is not prepaid by July 1, 1997,
and pay $1 million or issue $1.25 million in Common Stock if the Bennett
Loan is not prepaid by December 31, 1997. To the extent any shares of
Common Stock previously issued pursuant to the Bennett Loan or to be issued
pursuant to the Amendment are restricted and are not eligible for public
sale pursuant to court order or exemption, Bennett would be entitled to
piggyback registration rights with respect to such shares should the
Company or any shareholder of the Company make a registered offering of
Common Stock excluding registered offerings undertaken in connection with
the Term Loan Agreement until December 31, 1997. Bennett would also be
entitled to demand registration rights after December 31, 1997 or any other
time at which there is a registered offering in connection with the Term
Loan Agreement.
Pursuant to a settlement agreement signed on July 13, 1994 as modified
by an amendment dated September 4, 1996 between the Company and CAM, the
Company granted registration rights with respect to the 145,000 shares
underlying the warrants issued to CAM. The settlement agreement as amended
contemplates the inclusion of such shares on a registration to be filed
shortly after the date of such modified agreement.
Pursuant to a Registration Rights Agreement dated July 2, 1996, (the
"Registration Rights Agreement") between the Company and Madeleine L.L.C.,
the Company's lender under the Term Loan Agreement and one of the Selling
Stockholders ("Madeleine"), the Company agreed to use its best efforts to
register and have a registration statement declared effective with respect
to 183,206 shares of Common Stock issued to Madeleine in connection with
the Term Loan and, any other securities of the Company acquired by
Madeleine and any securities into or for which such other securities are
convertible or exercisable, whether acquired pursuant to the Term Loan
Agreement or otherwise (the "Additional Shares") (collectively the
"Registrable Securities"). The Registration Rights Agreement requires the
Company to effect the registration of any such Registrable Securities
within 120 days of the date the Registration Rights Agreement, and to keep
such registration effective until i) none of the securities covered by such
registration continue to be Registrable Securities as determined in
accordance with the Registration Rights Agreement or ii) all of the
Registrable Securities become freely transferable under Securities Act Rule
144(k), provided that the Company secures an opinion of counsel that such
conditions have been satisfied and Madeleine's counsel concurs with such
opinion.
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In the event that a registration statement required to be filed
pursuant to the Registration Rights Agreement shall fail to be declared
effective on or before the seven calendar months from the date of demand
wherefor by the Holder (the "Demand Date"), the Company shall pay to the
Holder within 5 days of the expiration of such seven calendar month period
5% of the closing price (the last recorded sale price, or if no sales are
made that day, the average of the bid and asked prices, as quoted on
Nasdaq) of the Common Stock on the business day immediately preceding the
end of such seven month period. In the event that a registration statement
required to be filed pursuant to the Registration Rights Agreement shall
fail to be declared effective on or before nine calendar months from the
Demand Date, the Company shall pay to the Holder within 5 days of the
expiration of such nine calendar month, and on the last day of each
calendar month thereafter until such registration statement is declared
effective, 10% of the closing price of the Common Stock on the business day
immediately preceding the end of such nine month or one-month period, as
applicable. Similar provisions attach for any Additional Shares acquired
by Madeleine.
Pursuant to the Warrant Certificates issued to the Selling
Stockholders in connection with the Term Loan Agreement, the Company agreed
to use its best efforts to effect the registration of the resale of the
Warrants, and the issuance, or if not permissible under the Act, the resale
of the shares issuable on exercise of the Warrants. The Company agreed to
use its best efforts to keep such registration statement continuously
effective subsequent to the Commission's determination of effectiveness
until either none of the securities covered by the registration statement
constitute Registrable Securities or all of the Registrable Securities
covered by such registration statement are freely transferable under Rule
144(k), provided that the Company secures an opinion of counsel
satisfactory to the Warrant Holder and concurred upon by counsel to such
Warrant Holder. In the event that a registration statement required to be
filed pursuant to the Warrant Certificates shall fail to be declared
effective on or before February 1, 1997, the Company must pay to the
Warrant Holder an additional amount equal to 5% of the closing price (the
last recorded sale price, or if no sales are made that day, the average of
the bid and asked prices, as quoted on Nasdaq) of the Common Stock on the
business day immediately preceding February 1, 1997 for each Warrant Share
(determined on an as-converted basis) to be included on such registration
statement. If such registration statement is not declared effective by
March 31, 1997, the Company must pay to the Warrant Holder an additional
penalty of 10% of the closing price of the Common Stock on March 31, 1997,
and the last day of each month thereafter (each a "10% Due Date") on the
business day immediately preceding such 10% Due Date for Warrant Shares
(determined on an as-converted basis) to be included on such registration
statement until such registration statement is declared effective. Similar
provisions attach for any subsequent registration statement to be filed on
the request of the Warrant Holder, if registration is not effected within
90 days, seven months, or nine months respectively subsequent to the
request of the Warrant Holder.
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Pursuant to an agreement dated April 2, 1996 and amended June 18,
1996, the Company issued 133,416 shares of Common Stock to Dorothy M. van
Haften. The Company agreed that it would register the shares on behalf of
Ms. van Haften and that in the event that the average closing market price
of the Common Stock was less than $1.50 a share during the ninety (90) days
immediately following the effective date of the registration statement, the
Company would be required to issue additional shares equivalent to the
difference between $1.50 and the average market price. Due to the
Company's failure to register such shares within the required time period,
as of June 30, 1996, the Company executed a promissory note in favor of Ms.
van Haften in the amount of $200,125. The note bears interest at the rate
of 12% per year, payable in twenty-four monthly (24) installments. If the
Company is not in default with respect to its repayment obligations under
the note, the principal of the note will be reduced based on i) the number
of shares which become eligible for resale pursuant to Rule 144 or ii) the
number of shares which are registered, multiplied by the average closing
market price of the Common Stock for the 90 trading days following the
effective date of the registration statement or eligibility for sale
pursuant to Rule 144. For every $1.50 in principal amount paid by the
Company, shares issued to Ms. van Haften are redeemed, and thus the
Company's registration obligations with respect to such redeemed shares is
eliminated. As of September 25, 1996, the Company had redeemed 11,118
shares.
Pursuant to a Letter Agreement dated March 25, 1996 between the
Company and Edson R. Arneault, Chief Executive Officer of the Company and
member of the Board, the Company agreed to file a registration statement on
Form S-8 as soon as possible with respect to 362,866 shares of Common Stock
held by Mr. Arneault.
Pursuant to a Letter Agreement dated March 25, 1996 between the
Company and Thomas K. Russell, Chief Financial Officer, Secretary and
member of the Board, the Company agreed to file a registration statement on
Form S-8 as soon as possible with respect to 103,810 shares of Common Stock
held by Mr. Russell.
In connection with the issuance of five promissory notes to the
Company, AstraFund was issued 100,000 shares of Common Stock with
registration rights on March 20, 1996.
Pursuant to a mutual release agreement dated October 18, 1995 between
the Company and Dublin Energy Corporation ("Dublin"), the Company agreed to
file a registration statement with respect to 10,850 shares held by Dublin
at the earliest practicable time from the date of the agreement. The
agreement provides that failure to file a registration statement by October
18, 1996 will require the Company to issue an additional 10,850 shares to
Dublin.
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Pursuant to a separation agreement dated October 11, 1995 between the
Company and Barbara A. Sigler, the Company agreed to use its best efforts
to include 15,000 shares of Common Stock on a registration statement on
Form S-1 or S-3 at the earliest possible date, without any guarantee that
such registration statement would be actually filed or subsequently be
declared effective by the Commission.
Under an agreement dated August 9, 1995 with Lawrence L. Mannypenny,
the Company agreed to use its best efforts to file a registration statement
with the Commission at the earliest practicable date to cover 77,449 of the
shares issued under the agreement. The parties acknowledged that no
assurances could be given regarding timing of approval or that approval
could be obtained.
Pursuant to a settlement agreement dated June 30, 1995 between the
Company and Michael Mapes, the Company agreed to use its best efforts to
cause a registration statement to become effective with the Commission by
June 30, 1996 with respect to 165,000 shares of Common Stock (120,000 of
which have since been transferred to Louis Haskell pursuant to an agreement
with Mr. Mapes) and 20,000 shares of Common Stock issuable upon exercise of
options. The agreement provides that withdrawal of the registration
statement prior to effectiveness will not constitute a breach, provided the
shares are included in the next registration statement filed with the
Commission. The agreement further provides that the failure to register
such shares shall not constitute a breach of the agreement unless the
Company has registered shares for another selling stockholder and could
have included the stockholder but did not. If during the ninety days
subsequent to the date of the effectiveness of the registration statement,
the average market price of the Common Stock is less than $1.50 per share,
then the Company is required to issue additional shares in an amount
equivalent to the difference between the average market price and $1.50.
Pursuant to a Settlement Agreement dated June 30, 1995 between the
Company and Glenn Hall, the Company agreed to use its best efforts to cause
a registration statement covering 201,750 shares of Common Stock and 30,000
shares of Common Stock issuable on exercise of certain options held by him.
Under the agreement, withdrawal of the registration statement prior to
effectiveness does not constitute a breach, provided the shares are
included in the next registration statement filed with the Commission. The
agreement provides that the failure to register such shares shall not
constitute a breach of the agreement unless the Company has registered
shares for another stockholder and could have included the stockholder's
shares but did not. Based on the Company's failure to register such shares
before June 30, 1996, the Company issue a promissory note for $235,125. If
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during the ninety days subsequent to the date of the effectiveness of the
registration statement, the average market price of the Common Stock is
less than $1.50 per share, then the Company is required to issue additional
shares in an amount equivalent to the difference between the average market
price and $1.50.
Pursuant to a termination of employment letter agreement dated May 30,
1995 between the Company and Robin L. Reynolds, the Company agreed to
include 10,000 shares of Common Stock on a registration statement on Form
S-3, if and when such registration statement is approved by the Commission.
Pursuant to an Agreement dated May 31, 1994 as amended on January 12,
1995 between the Company and William E. Blair, Jr. and Bonnie Blair, the
Company is required to file a registration statement with respect to
183,888 shares issuable upon exercise of options held by Mr. and Mrs.
Blair.
Pursuant to a Consulting Agreement dated December 30, 1994, between
the Company and a consultant to the Company, the Company granted
registration rights with respect to 87,500 shares of Common Stock, 150,000
shares of Common Stock issuable upon exercise of Warrants at the exercise
price of $1.06 per share, and additional shares as fees for professional
services not to exceed 120,000. The Company agreed to register such shares
on Form S-3, if and when such registration statement is filed.
Pursuant to an amendment to Rider No. 4 to a Stock Purchase Agreement
(Merger and Stock Exchange Agreement) for all of the outstanding shares of
Mountaineer dated November 28, 1994 between the Company and the previous
owner of Mountaineer and affiliates of such owner, an Original Rider dated
December 3, 1992 contemplated the Company using its best efforts to file a
registration statement covering 469,072 shares issued in connection with
the acquisition of Mountaineer. Under the amendment, the Company agreed to
use its reasonable best efforts to cause a registration statement to become
effective with respect to such shares. In addition, the Company agreed
that if any shares were sold pursuant to Rule 144 during the period prior
to effectiveness of the registration statement or pursuant to the
registration statement, within 20 days of the effectiveness of such
registration statement, at a price of less than $6.00 per share based on
the average closing bid price of the Company's Common Stock as reported on
Nasdaq for the ten days prior to the effective date of such registration
statement, Winners would issue additional registered shares in an amount
equal to the difference between the price received and $6.00. The Company
is in the process of renegotiating this agreement; however, there can be no
assurance that such renegotiation will be successful.
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Pursuant to an Amendment to a Supplemental Agreement with respect to
the acquisition of 77 gas wells dated September 30, 1994 between the
Company and 18 Limited Partnerships controlled by the Company's Chief
Executive Officer, Edson R. Arneault as amended by letter agreement dated
October 2, 1995, the Company agreed to use its best efforts to include
373,000 shares plus an additional 51,000 shares issued to such Partnerships
on a registration statement to be filed with the Commission. If a
registration statement with respect to such shares not become effective
before March 31, 1995, the Company was required to restate a note issued to
the party in the amount of $590,000 payable in 12 monthly installments at
the rate of 9% per year. Which would be reduced by an amount equal to the
average closing bid price of the Company's Common Stock for the 14 days
subsequent to April 15, 1996 multiplied by 98,333.
Pursuant to a Consulting Agreement dated September 1, 1994 between the
Company and Eli Dragisich, the Company agreed to file three registration
statements on Form S-8 to cover the three issuances of shares of Common
Stock to the stockholder. The Company agreed to file such registration
statements as soon as practicable after December 31, 1994, December 31,
1995 and February 1, 1997 respectively.
Pursuant to a Warrant dated March 1, 1994, between the Company and
Ladenburg, Thalmann & Co. Inc. ("Ladenburg"), the Company granted demand
registration rights with respect to 300,000 shares of Common Stock issuable
upon exercise of such warrants, provided that Ladenburg or the holders of
other shares issuable upon exercise of warrants requesting such
registration hold in aggregate not less than the sum of i) 50% of the total
number of shares issuable upon exercise of outstanding warrants of the
Company and ii) the total number of shares previously issued upon exercise
of warrants and not previously sold pursuant to a registered offering.
Alternatively, if the Board authorizes the filing of a registration
statement on any form (other than Form S-4) at any time prior to March 1,
2002, Ladenburg and any other registered holder of warrants of the Company
shall have the right to be notified of the Company's intent to so file a
registration statement and to include either all or a portion of the
warrants and shares issuable upon exercise of warrants on such registration
statement. The Company agreed to use its best efforts to include all
shares requested to be included on such registration statement and to cause
such registration statement to become effective and remain so for as long
as no amendment need be filed or in the case of a registration effected on
Form S-3, for a period of two years.
Pursuant to subscription agreements dated January 1994 between the
Company and various investors, the Company granted a demand registration
rights with respect to 350,000 shares of Common Stock such that the Company
within six months of the request of such stockholders file as soon as
reasonably possible a registration statement with the Commission and the
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relevant state authorities (the state in which the stockholders reside)
with respect to the shares subscribed for and to use its best efforts to
keep such registration statement effective for one year.
In February, 1994, the Company issued 58,333 shares of Common Stock to
Lease Equities, Inc. as a form of commission in connection with the private
placement of 350,000 shares of Common Stock. The Company granted
registration rights with respect to such 58,333 shares, such that upon the
request of the shareholders it would file a registration statement with the
Commission and the relevant state authorities (the state in which the
stockholders reside) as soon as reasonably possible and to use its best
efforts to keep such registration statement effective for one year.
Pursuant to a Letter Agreement dated December 15, 1993 between the
Company and Fleur-David Corporation, the Company granted piggy-back
registration rights with respect to 50,000 shares of Common Stock
outstanding and 71,500 shares of Common Stock issuable upon exercise of an
option exercisable until December 15, 1996. Under the agreement, the
Company is required to provide timely notice to the option holder of its
intent to file a registration statement such that stockholder may assert
its right to participate.
Pursuant to various stock option plans and grants of options to
employees and directors of the Company, such persons have the right to
request that the Company file a registration statement on Form S-8 with
respect to 3,338,047 shares of Common Stock when issued subsequent to the
exercise of such options.
Except as otherwise noted, the Company intends to file registration
statements for all of the securities covered by the foregoing registration
rights.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
On June 27, 1994, the Company as Guarantor and its subsidiary entered
a Construction Loan Agreement (the "Bennett Loan") with Bennett Management
and Development Corp. The Bennett loan bears interest at the rate of 12.5%
per year with a delinquency rate of 14.5% with an original principal amount
of $10.2 million. The Bennett Loan requires the Company to make 36 monthly
payments of principal and interest based on a 36 month amortization
schedule through April 30, 1995. The Company may prepay such loan without
penalty. The Bennett loan, which had an outstanding balance of
approximately $9.1 million as of September 23, 1996, is secured by a first
mortgage on Mountaineer's real and personal property and is guaranteed by
the Company. Bennett was issued an aggregate of 1,530,000 shares of Common
Stock in connection with the Bennett loan. See "Principal Stockholders."
The loan agreement allows the Company at its option, to prepay the
outstanding advances by January 1, 1997. If such prepayment is not made by
the Company, it will be obligated to issue an additional number of shares
of its Common Stock equal to $2.5 million divided by the average closing
stock price per share for 20 trading days prior to January 6, 1997.
The Company has renegotiated the Bennett Loan by Amendment of the
Construction Loan Agreement (the "Amendment") dated September 19, 1996
among the Company, Mountaineer Park and Richard C. Breeden, solely in his
capacity as trustee (the "Trustee") of the estate of Bennett, the Company
and Mountaineer agreed to settle all claims against Bennett. This
Amendment is contingent upon approval by the United States Bankruptcy Court
for the Western District of New York (the "Bankruptcy Court"). If the
Amendment is approved by the United States Bankruptcy Court, it will be
effective as of October 31, 1996 and the Company and Mountaineer will
dismiss their lawsuit against Bennett with prejudice. The material terms
of the Amendment are as follows:
The Amendment would modify the schedule for amortization of the
principal of the Bennett Loan such that instead of 36 equal monthly
payments of $283,333, Mountaineer will make principal payments of $75,000
per month from October through March and $125,000 per month from April
through September. The remaining principal balance would continue to be
due on April 30, 1999. In the event that the Bennett Loan is not prepaid
by December 31, 1997, the interest rate on any outstanding balance would,
as of January 1, 1998, increase from 12.5% to 14.5% until paid in full;
provided, however, that (i) if the Holder of the second trust on
Mountaineer's property (currently Madeleine, LLC pursuant to a Deed of
Trust and the Term Loan Agreement) for any reason does not approve such
interest rate increase, then the interest rate would not increase; and (ii)
in lieu thereof, the monthly payments of principal would increase to
$100,000 from October through March and to $200,000 from April through
September.
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The Amendment would also modify the Company's obligation to issue
additional shares of the Company's Common Stock to Bennett if the loan is
not prepaid by January 1, 1997. Whereas the Bennett Loan as previously
amended required the Company to issue Bennett $2.5 million worth of the
Company's Common Stock based on the average market price for the 20
consecutive trading days preceding January 2, 1997, the Amendment would
permit the Company, at its option, either to pay Bennett $500,000 or issue
$750,000 in Common Stock. Similarly, the Company would be permitted to pay
$750,000 or issue $1 million in Common Stock if the Bennett Loan is not
prepaid by July 1, 1997, and pay $1 million or issue $1.25 million in
Common Stock if the Bennett Loan is not prepaid by December 31, 1997. If
the Company elects to issue Bennett additional shares of Common Stock, such
shares would be subject to the requirement that, to the extent such
issuance would otherwise result in Bennett having voting rights greater
than 5% of the Company's issued and outstanding shares of Common Stock,
then such voting rights would be transferred to the Company's Board.
To the extent any shares of Common Stock previously issued pursuant to
the Bennett Loan or to be issued pursuant to the Amendment are restricted
and are not eligible for public sale pursuant to court order or exemption,
then Bennett would be entitled to piggyback registration rights with
respect to such shares should the Company or any shareholder of the Company
make a registered offering of Common Stock excluding registered offerings
undertaken in connection with the Term Loan Agreement until December 31,
1997. Bennett would also be entitled to demand registration rights after
December 31, 1997 or any other time at which there is a registered offering
in connection with the Term Loan Agreement.
In the event the Trustee desires to sell any of the shares of Common
Stock held by Bennett, the Amendment would also grant the Company the right
to match any bona fide offer of a nonaffiliate to purchase the shares until
December 31, 1997. The Amendment likewise grants the Company an option for
the period commencing on the date Mountaineer has paid the Bennett Loan in
full and terminating ten business days thereafter, to purchase all (but not
part) of the 1,530,000 shares currently held by Bennett for a price per
share equal to 90% of the average closing bid price of the Common Stock as
reported by Nasdaq for the twenty (20) consecutive trading days immediately
preceding the date on which Mountaineer retires the Bennett Loan. In no
event will such price be less than $1.125 per share.
As part of the Amendment, AGEL, an affiliate of Bennett which had
performed management services at Mountaineer Park pursuant to the
Management Agreement, delivered an acknowledgment that the Management
Agreement had been terminated and that a June 30, 1995 Settlement Agreement
among the Company, Mountaineer, and AGEL was now deemed to be in effect.
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That Settlement Agreement, when deemed effective, will terminate the
Management Agreement and settle the accounts of the parties as of June 30,
1995.
The Amendment is expressly subject to the approval of the Bankruptcy
Court, upon application to be made by the Trustee upon proper notice to
Bennett's creditors, which application was served by the Trustee on
September 20, 1996 and filed with the Court on September 25, 1996. There
can be no assurance, however, that the Bankruptcy Court will approve the
Amendment or any modification thereof on terms acceptable to the Company or
that other satisfactory terms could be renegotiated if the Amendment is not
approved.
On July 2, 1996, the Company as Guarantor and the Company's
subsidiary, Mountaineer, entered into a financing arrangement with a
private lender for a secured working capital loan pursuant to the Term Loan
Agreement and a commitment for first mortgage refinancing. The $5 million
loan is secured by a second mortgage on all of Mountaineer's real and
personal property. The note evidencing the loan calls for monthly payments
of interest only at the rate of 12% per annum, and a default rate of 22%
per annum. As additional consideration, the Company agreed to issue the
lender 183,206 shares of Common Stock and five-year Warrants to purchase
and additional 1,492,860 shares at $1.06 per share, which are exercisable
for a period of five (5) years from the date of the loan agreement. Five-
year Warrants to purchase an additional 50,000 shares of Common Stock in
the aggregate at an exercise price of $.80 per share were issued by the
Company to two affiliates of the lender. See "Selling Stockholders." The
principal is to be repaid at the end of a three year term, during which the
loan is subject to, on each anniversary date, additional fees in cash equal
to 8% of the outstanding principal balance, stock equal to 5% of the
outstanding principal balance (valued at the average closing bid price for
the 30 days prior to each anniversary date), and warrants to purchase
250,000 shares of Common Stock at $1.06 per share. The shares of Common
Stock and Warrants issued to the lender and its affiliates and the shares
of Common Stock underlying such Warrants are covered by this Registration
Statement and the shares and warrants issuable to the lender in connection
with the Term Loan Agreement in the future and the shares underlying such
Warrants will be the subject of future registration statements. Certain
restrictions are imposed under the Term Loan Agreement limiting the
Company's ability to incur additional debt, make capital expenditures and
increase management's compensation. Anti-dilution provisions are included
in the Warrants issued to the lender and its affiliates which would adjust
the exercise price of, and number of shares of Common Stock issuable
pursuant to, the Warrants in the event the Company issues additional
securities at a price below the exercise price of the Warrants.
99
<PAGE>
As part of the transaction, the lender also provided a one year
commitment to lend Mountaineer up to $11.1 million of additional funds to
be used to refinance the current first mortgage held by Bennett Management
& Development Corp. ("Bennett"). The commitment is subject to customary
conditions, including negotiation of definitive loan agreements, but
provides that any refinancing would be on terms no less favorable than
those of the Company's obligation to Bennett. In connection with the
financing commitment, the Company paid a $110,000 commitment fee and issued
the lender additional five-year Warrants to purchase 350,000 shares of
Common Stock at $1.06 share and issued 50,000 five year Warrants to
affiliates of the lender at an exercise price of $0.80. These Warrants and
the shares of Common Stock underlying the Warrants are covered by this
Registration Statement.
LEGAL MATTERS
The validity of the Warrants and the shares of Common Stock offered
hereby will be passed upon for the Company by Ross & Hardies, New York, New
York.
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries included herein have been audited by Corbin & Wertz,
independent certified public accountants, as set forth in their opinion
included herein. The financial statements referred to above have been
included herein in reliance upon such opinion given upon the authority of
such firm as experts in accounting and auditing.
100
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and 1994................................................................. F-3
Consolidated Statements of Operations for each of
the years in the three-year period ended December 31, 1995............... F-5
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 31, 1995.................................................. F-6
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 1995........................................................ F-10
Notes to Consolidated Financial Statements................................ F-12
Condensed and Consolidated Balance Sheets
at December 31, 1995 and June 30, 1996................................... F-41
Condensed and Consolidated Statement of Operations for the
Three Months and Six Months Ended June 30, 1996 and 1995................. F-43
Condensed and Consolidated Statement of Cash flows
for the Six Months Ended June 30, 1996 and 1995.......................... F-44
Notes to Condensed and Consolidated Financial Statements.................. F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Winners Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Winners
Entertainment, Inc. and its subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. 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 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 Winners
Entertainment, Inc. and its subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred substantial losses
in the past three years and has a significant working capital deficit at
December 31, 1995. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management is implementing plans which
it believes will allow the Company to improve operations and cash flows, and
meet its obligations as they come due (see Note 1). The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/CORBIN & WERTZ
Corbin & Wertz
Irvine, California
April 5, 1996
F-2
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
ASSETS 1995 1994
---- ----
Current assets:
Cash $ 807,000 $ 1,057,000
Restricted cash (Notes 7 and 13) 426,000 646,000
Accounts receivable, net of allowance
for doubtful accounts of $70,000 and
$93,870 in 1995 and 1994, respectively 174,000 79,000
Notes receivable from related parties,
net of allowance for doubtful accounts
of $290,000 in 1995 (Note 8) 62,000 352,000
Prepaid management fees (Note 14) --- 220,000
Prepaid purses (Note 13) --- 352,000
Deferred financing costs (Note 5) 388,000 630,000
Other current assets 115,000 219,000
----------- -----------
Total current assets 1,972,000 3,555,000
----------- -----------
Property and equipment, net
(Notes 2, 4 and 5) 18,100,000 13,462,000
----------- -----------
Net assets of discontinued oil and
gas activities (Note 10) 2,616,000 2,616,000
----------- -----------
Other assets:
Deferred financing costs (Note 5) --- 998,000
Excess of cost of investments over
net assets acquired, net of accumulated
amortization of $770,000 and $517,000
in 1995 and 1994 (Note 2) 3,004,000 3,255,000
Deposits and other 55,000 72,000
----------- -----------
3,059,000 4,325,000
----------- -----------
$25,747,000 $23,958,000
=========== ===========
Continued
F-3
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 1995 and 1994
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
---- ----
Current liabilities:
Accounts payable $ 3,474,000 $ 2,259,000
Accrued liabilities (Notes 7, 8,
13 and 14) 2,257,000 805,000
Current portion of long-term
debt (Note 5) 2,536,000 648,000
Current portion of redeemable common
stock (Notes 2, 9 and 10) 991,000 1,651,000
------------ ------------
Total current liabilities 9,258,000 5,363,000
------------ ------------
Accrued financing costs (Note 5) --- 998,000
Accrued liabilities (Notes 7 and 8) 490,000 525,000
Long-term debt, less current portion
(Note 5) 8,071,000 5,095,000
Deferred income taxes (Note 11) 1,529,000 1,662,000
Redeemable common stock, 441,854
and 367,937 issued and outstanding at
December 31, 1995 and 1994, net of
current portion (Notes 2, 9 and 10) 415,000 557,000
Commitments and contingencies (Notes
5, 7, 9, 13 and 14)
Shareholders' equity (Notes 2, 3, 5,
and 9):
Common stock, par value $.00001,
25,000,000 shares authorized;
17,022,645 and 14,620,877 issued
and outstanding in 1995 and
1994, respectively 2,000 1,000
Paid-in capital 32,115,000 30,508,000
Receivable from exercise of
stock options (69,000) ---
Accumulated deficit (26,064,000) (20,751,000)
------------ ------------
Total shareholders' equity 5,984,000 9,758,000
------------ ------------
$ 25,747,000 $ 23,958,000
============ ============
See accompanying notes to consolidated financial statements
F-4
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
1995 1994 1993
----------- ----------- -----------
Revenues:
Video lottery terminals
(Note 14) $16,479,000 $ 7,481,000 $ 5,293,000
Parimutuel commissions
(Note 13) 4,263,000 3,768,000 4,323,000
Lodging, food and beverage 3,046,000 2,276,000 2,344,000
Other 1,191,000 1,157,000 1,054,000
----------- ----------- -----------
24,979,000 14,682,000 13,014,000
----------- ----------- -----------
Costs and expenses:
Cost of video lottery terminals
(Note 14) 12,256,000 5,709,000 3,720,000
Cost of parimutuel commissions
(Note 13) 5,064,000 4,563,000 5,136,000
Cost of lodging, food and
beverage 3,285,000 2,337,000 2,364,000
Cost of other 1,195,000 798,000 787,000
Selling, general and admini-
strative expenses (Note 7) 6,564,000 6,668,000 6,370,000
Depreciation and amortization 1,504,000 910,000 625,000
Interest expense (Notes 5 and 8) 557,000 729,000 70,000
----------- ----------- -----------
30,425,000 21,714,000 19,072,000
----------- ----------- -----------
Loss before income taxes (5,446,000) (7,032,000) (6,058,000)
Benefit for income taxes (Note 11) 133,000 130,000 145,000
----------- ----------- -----------
Loss from continuing operations (5,313,000) (6,902,000) (5,913,000)
----------- ----------- -----------
Discontinued operations (Note 10):
Loss on disposal of oil and gas
operations --- (640,000) (1,653,000)
----------- ----------- -----------
Loss from discontinued operations --- (640,000) (1,653,000)
----------- ----------- -----------
Net loss $(5,313,000) $(7,542,000) $(7,566,000)
=========== =========== ===========
Loss per share from continuing
operations $ (.33) $ (.48) $ (.46)
Loss per share from discontinued
operations .00 (.04) (.13)
----------- ----------- -----------
Net loss per share $ (.33) $ (.52) $ (.59)
=========== =========== ===========
Weighted average number of
shares outstanding 16,226,743 14,523,377 12,883,031
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993 11,226,231 $1,000 $17,013,000 $--- $(5,643,000) $11,371,000
Shares issued from exercise
of Series C warrants
(Note 9) 373,241 --- 2,239,000 --- --- 2,239,000
Shares canceled on notes
payable and interest to
affiliates (Note 10) (20,000) --- (120,000) --- --- (120,000)
Shares issued for notes
payable and interest to
affiliates, net of 98,333
shares of redeemable common
stock (Note 10) 226,286 --- 792,000 --- --- 792,000
Shares issued for conversion
of debentures (Note 6) 416,197 --- 832,000 --- --- 832,000
Shares issued for services
rendered and letter of credit
fees (Notes 7 and 9) 197,787 --- 619,000 --- --- 619,000
Shares issued for cash, net
of commissions (Note 9) 746,755 --- 3,280,000 --- --- 3,280,000
Shares issued for investment
in riverboat gaming
(Note 2) 50,000 --- 300,000 --- --- 300,000
Shares issued in connection
with LVEN (Note 2) 250,000 --- 750,000 --- --- 750,000
</TABLE>
Continued
F-6
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued for capital
raising activities (Note 9) 125,000 --- --- --- --- ---
Compensation for stock
options issued below fair
value (Notes 2 and 9) --- --- 600,000 --- --- 600,000
Net loss --- --- --- --- (7,566,000) (7,566,000)
---------- ----- ---------- -------- ----------- ----------
Balances, December 31, 1993 13,591,497 1,000 26,305,000 --- (13,209,000) 13,097,000
Shares received in connection
with settlement with
LVEN (Notes 2 and 3) (250,000) --- (750,000) --- --- (750,000)
Shares issued to for cash,
net of commissions (Note 9) 786,199 --- 2,193,000 --- --- 2,193,000
Shares issued from exercise
of stock options
(Note 9) 50,000 --- 200,000 --- --- 200,000
Shares issued for services
rendered and interest (Note 9) 147,500 --- 210,000 --- --- 210,000
Shares issued in connection with
financing arrangement (Note 5) 285,000 --- 1,710,000 --- --- 1,710,000
Shares issued for accounts
payable (Note 9) 10,681 --- 40,000 --- --- 40,000
Compensation for stock
options issued below fair
value (Notes 2 and 9) --- --- 600,000 --- --- 600,000
</TABLE>
Continued
F-7
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss --- --- --- --- (7,542,000) (7,542,000)
---------- ----- ---------- -------- ----------- ----------
Balances, December 31, 1994 14,620,877 1,000 30,508,000 --- (20,751,000) 9,758,000
Shares issued from exercise
of stock options
(Notes 2 and 9) 286,667 --- 109,000 (69,000) --- 40,000
Shares issued for services
rendered and interest (Note 9) 77,332 --- 42,000 --- --- 42,000
Shares issued in connection with
financing arrangement (Note 5) 225,000 1,000 1,349,000 --- --- 1,350,000
Cancellation of price guarantee
in connection with financing
arrangement (Note 5) --- --- (3,060,000) --- --- (3,060,000)
Shares issued to replace price
guarantee in connection with
financing arrangement (Note 5) 1,020,000 --- 1,530,000 --- --- 1,530,000
Shares forfeited by Company
(510,000), retained by creditor,
in connection with financing
arrangement (Note 5) --- --- 478,000 --- --- 478,000
Shares issued, and 104,500
redeemable shares without
rights canceled in connection
with the Golden Palace
acquisition debt (Notes 2
and 9) 194,500 --- 212,000 --- --- 212,000
Shares issued, and 98,333
redeemable shares with
put rights canceled, in
connection with oil and gas
acquisition debt (Note 10) 471,933 --- 590,000 --- --- 590,000
Shares issued in connection
with legal settlement
(Note 7) 175,000 --- 414,000 --- --- 414,000
</TABLE>
Continued
F-8
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
-------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued for notes
payable (Note 5) 60,850 --- 43,000 --- --- 43,000
Cancellation of shares issued
in 1994 for services rendered
(Note 7) (97,500) --- (100,000) --- --- (100,000)
Adjustment to shares
outstanding (12,014) --- --- --- --- ---
Net loss --- --- --- --- (5,313,000) (5,313,000)
---------- ------ ----------- -------- ------------ -----------
Balances, December 31, 1995 17,022,645 $2,000 $32,115,000 $(69,000) $(26,064,000) $ 5,984,000
========== ====== =========== ======== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing
operations $(5,313,000) $(6,902,000) $(5,913,000)
Adjustments to reconcile loss to
net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 1,504,000 910,000 625,000
Provision for settlements (Note 7) 408,000 525,000 ---
Other non-cash provisions, net (133,000) 125,000 510,000
Provision for notes receivable
from related parties 290,000 --- ---
Common stock and options issued for
services rendered and interest
(Notes 2 and 9) 77,000 1,340,000 1,219,000
Change in operating assets and
liabilities, net of effects of
acquired companies:
Prepaid management fees 220,000 (220,000) ---
Prepaid purses 352,000 (352,000) ---
Other current assets 54,000 63,000 73,000
Accounts payable 1,676,000 1,221,000 1,049,000
Other accrued liabilities 1,418,000 (244,000) (341,000)
----------- ----------- -----------
Cash provided by (used in)
continuing operations 553,000 (3,534,000) (2,778,000)
----------- ----------- -----------
Loss from discontinued operations:
Oil and gas operations --- (640,000) (1,653,000)
Adjustments to reconcile loss to
net cash used in discontinued
operating activities:
Depletion --- --- 25,000
Provision for estimated loss on
sale of discontinued oil and gas
operations (Note 10) --- 567,000 1,546,000
----------- ----------- -----------
Cash used in discontinued operations --- (73,000) (82,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 553,000 (3,607,000) (2,860,000)
----------- ----------- -----------
Cash flows from investing activities:
Restricted cash 220,000 (401,000) (170,000)
Proceeds from insurance reimbursement --- 241,000 ---
Repayments (advances) on notes receivable
from related parties --- 38,000 (160,000)
Deposits and other assets 17,000 (2,000) 5,000
Capital expenditures (5,482,000) (3,444,000) (2,544,000)
Expenditures for investment in riverboat --- --- (428,000)
Net assets of discontinued oil and gas
operations (45,000) (198,000) (210,000)
----------- ----------- -----------
Net cash used in investing activities (5,290,000) (3,766,000) (3,507,000)
----------- ----------- -----------
</TABLE>
Continued
F-10
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments on notes payable (53,000) (150,000) (300,000)
Proceeds from the issuance of long-term debt 4,500,000 5,700,000 240,000
Proceeds from the issuance of notes
payable to shareholders --- --- 100,000
Payments on notes payable to shareholders --- (70,000) (432,000)
Deferred finance costs --- (61,000) ---
Proceeds from issuance of common stock
Series C warrants exercised --- --- 2,239,000
Proceeds from issuance of common stock
for cash, net 2,193,000 3,280,000
Proceeds from issuance of common stock
in connection with LVEN --- --- 750,000
Proceeds from issuance of common stock
through exercise of stock options 40,000 200,000 ---
----------- ----------- -----------
Net cash provided by financing
activities 4,487,000 7,812,000 5,877,000
----------- ----------- -----------
Net increase (decrease) in cash
(250,000) 439,000 (490,000)
Cash, beginning of year 1,057,000 618,000 1,108,000
----------- ----------- -----------
Cash, end of year $ 807,000 $ 1,057,000 $ 618,000
=========== =========== ===========
Supplemental disclosures of cash flow information -
Cash paid during the year for:
Interest $ 896,000 $ 204,000 $ 68,000
=========== =========== ===========
Income taxes $ 4,000 $ 5,000 $ 15,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-11
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Secamur Corporation was incorporated on March 7, 1988. Effective June 19, 1989,
Secamur Corporation and Pacific International Industries, Inc., dba Excalibur
Securities Services, completed a merger accounted for under the pooling-of-
interests method. Prior to the merger, Secamur Corporation had no operations.
Secamur Corporation subsequently changed its name to Excalibur Security
Services, Inc. During 1991, Excalibur Security Services, Inc. formally changed
its name to Excalibur Holding Corporation.
Due to the inability of Excalibur Security Services, Inc. to attain profitable
operations, its Board of Directors, on December 28, 1990, filed a voluntary
petition for reorganization with the U.S. Bankruptcy Court in the Central
District of California for protection under Chapter 11 of the U.S. Bankruptcy
Code (see Note 10) and in May 1991, Excalibur Holding Corporation sold the
assets of its discontinued security guard business. Effective January 15, 1992,
a formal plan was approved by the Bankruptcy Court to operate oil and gas
activities and to devote Excalibur Holding Corporation's efforts to the
acquisition of new businesses.
In January 1992, Excalibur Holding Corporation formed ExCal Energy Corporation
(ExCal) as a wholly-owned subsidiary to acquire certain assets of various
companies which were controlled by the newly appointed president of ExCal for
the purpose of establishing oil and gas operations.
During 1992, Excalibur Holding Corporation acquired all of the outstanding
common stock of Golden Palace Casinos, Inc., an entity with no significant
operations and cash of approximately $3,200,000. Excalibur Holding Corporation
utilized substantilly all of the cash obtained from Golden Palace Casinos to
financie the acquisition of all of the outstanding common stock of Mountaineer
Park, Inc., which operates a thoroughbred horse track, a 101 room inn and dining
facility, and video lottery terminal activities in West Virginia. Excalibur
Holding Corporation undertook a major renovation of this facility in 1993 with
cash expenditures, including capitalized finance costs incurred through December
31, 1995 of approximately $11,400,000.
Because of the significant acquisitions by Excalibur Holding Corporation in the
gaming industry and their long-term potential, it is management's current
strategy to focus all of its effrots in such industry. Accordingly, on March
31, 1993, management decided to adopt a formal plan of orderly liquidation of
its oil and gas properties and is effecting an orderly sale of such assets
having sold approximately 30% of such assets in 1994 (see Note 10). During
1993, the Excalibur Holding Corporation formally changed its name to Winners
Entertainment, Inc. (the "Company").
Basis of Presentation
The consolidated financial statements have been presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Certain conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has incurred substantial losses in 1995, 1994 and 1993, and as of
December 31, 1995, the Company has current liabilities in excess of current
assets of $7,286,000. The Company expects that its continuing operations will
be derived primarily by its operations at Mountaineer Race Track and Gaming
Resort ("Mountaineer") (see Note 2). The Company's business strategy is to
increase revenues in all areas of operations through the promotion and expansion
of its video lottery business and the enhancement of its racing and
entertainment facilities. Therefore, the following factors pertain primarily to
the operations at Mountaineer. Management believes that it will be successful in
its attempt to continue to operate as a going concern for the foreseeable future
based, in part, on the plans and factors described below:
Continued
F-12
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
- - Mountaineer replaced 165 existing terminals in September 1994 with 400
new terminals, and upon the authorization by the West Virginia Lottery
Commission, Mountaineer installed an additional 400 terminals in June
1995. In March 1996, the West Virginia State Legislature approved
"line" (symbol) games, which is expected to be in operation on at least
400 video lottery terminals by June 1996. In addition, in December
1995, the Lottery Commission voted to allow progressive video lottery
poker and keno games to exceed a 92% payout threshold. As a result,
progressive blackjack, poker and keno games can now be implemented at
payout rates competitive with other gaming jurisdictions. As the most
heavily patronized gaming venue in West Virginia, Mountaineer is
uniquely positioned to benefit from the interest generated by
progressive jackpots. Management believes that such line games and
progressives will have a significantly positive impact on the Company's
operations. Total Mountaineer revenue increased from $14,583,000 in
1994 to $24,961,000 in 1995. In addition, Mountaineer's first quarter
operating revenues have increased from $4.7 million (unaudited) in 1995
to $7.2 million (unaudited) in 1996. Management believes that the
substantial and steady revenue increases over the past three years at
Mountaineer will continue and ultimately result in positive cash flows
from operations. However, there is no guarantee that the Company will
achieve the increases in revenues and cash flows it expects to occur.
- - As discussed in Note 3, management intends to refinance its $10.2
million construction loan in 1996. At December 31, 1995, approximately
$2.3 million of this balance is recorded as a current liability in the
accompanying consolidated balance sheet. Mountaineer is currently in
negotiations with a lender to refinance this debt and provide
additional working capital. A $12,500 due diligence fee has been paid
by Mountaineer in connection with the negotiations. However, there is
no guarantee that Mountaineer will be successful in these negotiations.
- - In March 1996, Mountaineer received bridge financing from a different
lender in the amount of $570,000, net (see Note 16), which Mountaineer
expects to repay with the proceeds from the aforementioned refinancing.
- - Mountaineer has expended approximately $11.4 million for capital
improvements, which includes expenditures for the lodge which was
damaged by fire in 1994. Management believes that the Company's
capital improvements have had a favorable impact on the Company's
operations and management believes this should continue in 1996 and
beyond. However, there is no guarantee that such favorable impact will
continue.
- - As discussed in Note 7, Mountaineer amended its video lottery
terminals' lease agreement in March 1996 resulting in a reduction of
future monthly payments over an extended term. Scheduled annual lease
payments under the original agreement were approximately $1,859,000.
The amendment reduced the required cash outflows by approximately
$256,000 for 1996.
The consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation. The accounts of the Company's acquired
companies include the operations from the consummation dates.
Continued
F-13
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Discontinued Operations
The Company adopted a formal plan in March 1993 to discontinue operations of its
oil and gas operations (see Note 10). The net assets and operating results of
the oil and gas segment are shown separately in the accompanying consolidated
financial statements as discontinued operations. Although management still
retains certain assets to maximize their ultimate value upon disposition,
management believes that the classification as discontinued operations remains
appropriate.
Cash and Restricted Cash
For purposes of the statements of cash flows, the Company considers investments
purchased with a remaining maturity of three months or less from the purchase
date to be cash equivalents.
Restricted cash includes collateralized, short-term certificates of deposit (see
Note 7), cash in banks designated for redevelopment activities, and unredeemed
winning tickets from its racing operations (see Note 13).
At December 31, 1995, the Company has approximately $73,000 of deposits which
are in excess of limits insured by the Federal Deposit Insurance Corporation.
Property and Equipment
Property and equipment is stated at cost. The Company capitalizes direct
materials and labor, and allocates interest during the construction periods.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Buildings 20 to 40 years
Furniture and fixtures 5 to 7 years
Equipment and automobiles 3 to 15 years
Interest is capitalized to construction in progress during periods of
redevelopment based on qualifying assets, using a method which approximates the
effective interest rate method. Interest incurred in 1995 and 1994 was
$1,711,000 and $2,337,000, respectively. Interest capitalized in 1995 and 1994,
was $1,127,000 and $790,000, respectively. Interest costs in 1993 were not
significant.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair market value of these
financial instruments could be different than that recorded on a historical
basis on the December 31, 1995 and 1994 consolidated balance sheets. The
Company's significant financial instruments consist of its long-term debt and
its redeemable common stock. An estimate of the fair value of these financial
instruments is not practicable because there is not an active market for such
financial instruments.
Deferred Financing Costs
The Company capitalizes certain loan costs in connection with its financing
activities (see Note 5) and these costs are amortized over the expected term of
the related loans using a method that approximates the effective interest
method.
Continued
F-14
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Excess of Cost of Investments Over Net Assets Acquired, Net
The excess of cost of investments over net assets acquired (goodwill) is
amortized on a straight-line basis over the expected periods to be benefitted.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which goodwill impairment is
determined by management. Goodwill is being amortized on the straight-line
method over an expected fifteen year life. The methodology that management used
to project results of operations forward twelve years, which represents the
remaining life of the goodwill as of December 31, 1995, was based on a five-year
trend line of expected cash flows. At December 31, 1995, 1994 and 1993, no
impairment of goodwill was determined by management.
Amortization expense included in the consolidated statement of operations for
the years ended December 31, 1995, 1994 and 1993 is $252,000, $252,000 and
$266,000, respectively.
Revenue Recognition
The Company recognizes revenues from parimutuel commissions earned from
thoroughbred racing at the time wagers are made. Such commissions are a
designated portion of the wagering handle as determined by the West Virginia
Racing Commission (the "Racing Commission"). Such revenues are shown net of the
taxes assessed by state and local agencies, as well as purses and contract
amounts paid to the Horsemen's Association (see Note 13).
Revenues from video lottery terminals is the net win, which is the difference
between wins (wagers) and losses (payouts), and is recorded at the time wagers
are made (see Note 14).
Revenues from food and beverage are recognized at the time of sale and revenues
from lodging are recognized at the time services are rendered.
Seasonality
The operations of Mountaineer are typically seasonal in nature. Winter
conditions may adversely affect transportation routes to Mountaineer, as well as
cause cancellations of live horse racing. As a result, adverse seasonal
conditions could materially effect the operations of the Company.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Such
estimates may be materially different from actual financial results.
Continued
F-15
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred taxes are based on the difference between the tax
bases of assets and liabilities and their amounts for financial statement
purposes; deferred taxes are then provided based on the estimated tax rates in
effect when the temporary differences are expected to reverse. The Company
records a valuation allowance for deferred tax assets when it is more likely
than not that such deferred tax assets will not be realized through future
operations (see Note 11).
Per Share Information
Per share information is computed by dividing net loss for the year by the
weighted average number of shares of common stock outstanding during the year.
The effect of common stock equivalents would be antidilutive for all periods
presented and is not included in the net loss per share calculations.
Reclassifications
Certain reclassifications have been made to the 1993 and 1994 consolidated
financial statements to conform with the 1995 presentation.
NOTE 2 - MERGERS AND ACQUISITIONS
Mountaineer Park, Inc.
On December 4, 1992, the Company acquired all of the issued and outstanding
common shares of Mountaineer Park, Inc. (Mountaineer), in a tax-free exchange,
for 183,181 shares of the Company's common stock, guaranteed at a per share
sales value of $6.00, an additional 400,000 shares of the Company's common stock
and approximately $91,000 in cash. Should the 183,181 shares, upon
registration, have a sales value in the aggregate less than $6.00 per share, the
Company will register additional shares such that the total market value of the
shares is equal to approximately $1,099,000, (183,181 shares times $6.00 per
share) (Note 9).
The acquisition was accounted for as a purchase and, accordingly, the results of
operations of the acquired business have been consolidated with those of the
Company commencing on December 4, 1992. The purchase price of $2,895,000 was
allocated to the acquired assets and assumed liabilities based on their
respective fair values. The purchase price exceeded the estimated fair value of
the net assets acquired by $2,774,000, which has been recorded as excess of cost
of investment over net assets acquired (see Note 1).
The Company paid certain outstanding indebtedness of Mountaineer of
approximately $3,652,000 in cash and issued approximately 446,496 shares of
common stock valued at $2,428,000 to certain creditors of Mountaineer in
satisfaction of additional obligations, of which 346,496 shares have
registration rights, guaranteed at a per share sales value of $6.00. Upon
registration, the Company will issue additional shares such that the market
value of the shares is equal to approximately $2,079,000. The Company granted
put rights to the holder (a bank) of 60,604 of the aforementioned shares (see
Note 9 "Redeemable common stock") at $6.00 per share, all of which became
exercisable on or before December 31, 1995. No demand has been made to the
Company. The Company has reflected certain amounts as current liabilities in
the accompanying consolidated balance sheets.
Continued
F-16
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 2 - MERGERS AND ACQUISITIONS, continued
Mountaineer Park, Inc. operates a thoroughbred horse racing track and 800 video
lottery terminals on a 606 acre facility in Chester, West Virginia. Mountaineer
also operates a 101 room inn adjacent to the track, dining facilities, as well
as a nine-hole executive golf course and other recreational facilities. Certain
operations are regulated by agencies within the state of West Virginia, which
includes annual licensing (see Notes 13 and 14). At December 31, 1995, all
significant licenses were in effect.
Golden Palace Casinos, Inc.
In October 1992, the Company acquired all of the outstanding capital stock of
Golden Palace Casinos, Inc. ("GPC" and "Golden Palace"), a Minnesota
corporation organized to manage casinos on Indian reservations. Although Golden
Palace had no significant operations at the time of the acquisition, it held,
through a wholly owned subsidiary, a contract, to manage a casino planned for
an Indian reservation in Oklahoma, subject to the satisfaction of certain
conditions. Shortly after the acquisition of Golden Palace, the West Virginia
Lottery Commission advised Management that, as a condition to licensing of the
Company's then-proposed video lottery operations at Mountaineer, the Company
could not engage in Indian gaming activities. Consequently, in December 1992,
the Company sold the subsidiary holding the management contract and agreed to
not otherwise engage in Indian gaming activities as long as it conducted video
lottery operations in West Virginia. Notwithstanding the sale of the management
contract, the acquisition of Golden Palace, which had substantial cash on hand,
provided the Company with sufficient funds to complete the acquisition of all
of the outstanding capital stock of Mountaineer. In connection therewith, the
Company granted put rights to the holders of 209,000 of the aforementioned
shares (see Note 9 "Redeemable common stock") at $6.00 per share should such
shares not have been registered by February 1, 1993; such registration has not
been effected to date.
On June 30, 1995, holders (2) of 104,500 shares of $6.00 redeemable common
stock received an aggregate of 366,750 shares of the Company's common stock, of
which 276,750 shares are subject to conversions into notes at a value of $1.50
per share or approximately $415,000, payable in 24 equal monthly installments
beginning June 30, 1996, interest at 12% per annum, in the event a registration
statement is not effective. Beginning June 30, 1995, the Company has the right
to purchase the 276,750 shares, in whole or in part, at $1.50 per share, less
any credit for payments made through the date of repurchase. Should a
registration statement become effective before the notes are paid in full, the
Company will receive credit for all payments made, as well as a credit for an
amount equal to the average closing market value for 90 days following the
effective date of the registration. All shares issued are subject to
registration, to the extent such shares have not been sold by the parties.
Considering the terms of the settlement discussed above, the Company has
recorded the value of the shares of $415,000 as noncurrent "redeemable common
stock" in the accompanying consolidated balance sheet.
In addition, on the acquisition date, the Company issued options to holders of
Golden Palace options to purchase (a) 190,000 shares of the Company's common
stock at $2.00 per share, (b) 200,000 shares of the Company's common stock at
$.01 per share, and (c) warrants to purchase 283,250 shares of the Company's
common stock at $2.40 per share through 1997. Options to purchase 70,000 shares
at $0.01 were exercised in 1995 (Note 9).
LVEN
On August 12, 1993, the Company entered into a letter of intent with Las Vegas
Entertainment Network, Inc. (LVEN) to acquire, through merger, the issued and
outstanding shares of LVEN. Pursuant to the letter of intent, the Company also
issued 250,000 shares of its common stock for $750,000 in cash. The letter of
intent provided for other terms to be negotiated; however, the parties were
unable to consummate a definitive agreement and the merger was not effected.
The Company and LVEN later reached a settlement arrangement in 1994 (see Note
3).
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN
Riverboat Gaming
On March 2, 1993, the Company, as assignee, entered into an agreement with M&R
Investment Company (M&R) for an assignment of an 80% interest in a ground lease
zoned for riverboat gaming in Tunica, Mississippi. The ground lease covered a
riverboat gaming site approved by the US Army Corps of Engineers. The Company
paid $106,937 on September 6, 1993 and $40,000 in rental payments in accordance
with the terms of the agreement. On March 9, 1993, the Company entered into a
joint venture arrangement with Regal Casinos, the remaining leaseholder, to
construct and operate a riverboat. On April 21, 1993, the Company agreed to
purchase Regal's 20% interest in the venture for $50,000 in cash and 50,000
shares of its common stock valued at $300,000.
Continued
F-17
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN, continued
On July 30, 1993, the Company entered into a joint venture arrangement with LVEN
and BP Group, Ltd., which agreed to assist in the funding, construction and
operation of the riverboat. On February 2, 1994, the Company sold its interest
in the venture. At December 31, 1993, the Company's investment in the riverboat
venture was $728,000 as reflected in the accompanying consolidated balance sheet
at December 31, 1993.
On February 25, 1994, the Company entered into a settlement agreement with LVEN
(see Note 2), whereby the Company sold its interest in the ground lease valued
at $728,000 at December 31, 1993, and was repaid its note receivable of
$200,000, totaling $928,000. Consideration received was 250,000 shares of the
Company's common stock owned by LVEN valued at $750,000, and the balance in
cash. No significant gain or loss resulted from this sale of the Company's
interest and note receivable.
The parties mutually agreed to be released from all claims which may have
existed as a result of the abandonment of the proposed merger between the
Company and LVEN.
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 1995 and 1994, property and equipment consists of the following:
1995 1994
----------- -----------
Land $ 371,000 $ 371,000
Buildings 15,716,000 11,899,000
Equipment 2,021,000 1,294,000
Furniture and fixtures 2,258,000 1,058,000
Construction in progress 519,000 372,000
----------- -----------
20,885,000 14,994,000
Less accumulated depreciation (2,785,000) (1,532,000)
----------- -----------
$18,100,000 $13,462,000
=========== ===========
Depreciation expense charged to operations during the years ended December 31,
1995, 1994 and 1993 is $1,252,000, $658,000 and $359,000, respectively.
NOTE 5 - LONG-TERM DEBT
Construction Note Payable
On June 27, 1994, the Company entered into a financing arrangement with Bennett
Management and Development Corporation (Bennett) for construction and
redevelopment activities at Mountaineer. Pursuant to the agreement, Bennett
agreed to finance the Company $10,200,000 for construction with interest payable
monthly at 12.5% per annum, subject to a default rate of 14.5% per annum. The
Company received advances of $5,700,000 from Bennett in 1994 and the remaining
$4,500,000 in 1995. The loan is secured by a deed of trust on all real property
at the resorts. The outstanding principal balance of the loan is $10,200,000 at
December 31, 1995.
Continued
F-18
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 5 - LONG-TERM DEBT, continued
The Company was obligated to issue 5 shares of common stock for every $100 in
advances, subject to a $6.00 per share price guarantee by the Company at the
time of registration of such shares. During 1995 and 1994, the Company issued
225,000 shares and 285,000 shares of its common stock valued at $1,350,000 and
$1,710,000, respectively, for a total value of $3,060,000. Such amounts
were recorded by the Company as deferred financing costs. If the Company did
not register these shares by October 1, 1995, the interest rate would have
increased to 22.5% per annum (see below). In addition to the financing costs
above, the Company incurred a $200,000 loan fee to an investment banker to be
amortized over the life of the loan.
In a series of amendments to the loan agreements and forbearance agreements
which were executed between July 7, 1995 and January 12, 1996, certain terms of
the Bennett loan agreement were amended by the parties as described below:
1) The Company's prepayment option dates of July 1, 1995 and November 1, 1995
were deleted. Upon amendment, the construction loan is payable interest only
through May 31, 1996, with principal and interest payable monthly over 36 months
through April 30, 1999.
2) An interest rate escalation, as defined in the original agreement, of 22.5%
was deleted.
3) Under the July 7, 1995 amendment, the $6.00 per share price guarantee on
510,000 shares discussed above was canceled in exchange for an additional
1,020,000 shares of common stock at an estimated fair value of $1,530,000. The
Company capitalized $1,530,000 as deferred financing costs. This amount is
amortized to interest expense and construction in progress through October 1,
1995 (see subsequent paragraphs).
The original 510,000 shares with $6.00 price guarantees were held by Bennett on
behalf of the Company, and in the event the Company prepaid the outstanding
indebtedness by October 1, 1995, such shares would have been returned to the
Company. No prepayment was made on October 1, 1995, and accordingly, the
510,000 shares were forfeited to Bennett and were valued on October 1, 1995 at
their estimated fair value of $478,000. This amount has been recorded as
additions to deferred financing costs and will be amortized from October 1, 1995
to January 2, 1997 (see Note 1).
The Company shall register all shares referred to above with the SEC on a best-
efforts basis.
Bennett has transferred the voting rights with respect to 780,000 shares to the
Board of Directors of the Company, and Bennett has agreed not to acquire
additional common stock so that Bennett will not be permitted to vote more than
5% of the Company's common stock.
4) At December 31, 1994, deferred financing costs of $998,000 were recorded as
a reflection of future obligations to Bennett. The requirement for these future
obligations was deleted from the amended agreement in July 1995, resulting in a
$998,000 reduction in "deferred financing costs" with a corresponding reduction
in "accrued financing costs".
Continued
F-19
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 5 - LONG-TERM DEBT, continued
5) The amended agreement allows the Company, at its option, to prepay the
outstanding advances by January 1, 1997. If such prepayment is not made by the
Company, it will be obligated to issue an additional number of shares of its
common stock equal to $2,500,000, divided by the average closing stock price per
share for 20 consecutive trading days prior to January 2, 1997.
Management intends to refinance this note through the issuance of long-term debt
on satisfactory terms by January 2, 1997; however, there are no assurances that
such obligation will be refinanced on terms satisfactory to the Company.
Interest expense charged to operations and interest capitalized to construction
in progress incurred under this agreement for the year ended December 31, 1995
were $547,000, of which $131,000 results from common stock issued by the
Company, and $1,127,000, of which $409,000 results from common stock issued by
the Company, respectively, and for the year ended December 31, 1994 were
$700,000, of which $614,000 results from common stock issued by the Company and
$709,000, of which $693,000 results from common stock issued by the Company,
respectively. At December 31, 1995 and 1994, the Company had approximately
$388,000 deferred as finance costs in connection with this arrangement in the
accompanying consolidated balance sheets.
Other Notes Payable
On December 4, 1992, the Company issued a 10% note in $93,750 principal amount
payable to an unrelated party in connection with the acquisition of Mountaineer.
At December 31, 1994, the outstanding principal balance of the note was $43,000.
In 1995, the Company converted the note into 60,850 shares of its common stock.
On March 11, 1993, the Company issued 20% notes in $300,000 aggregate principal
amount. Such notes were fully paid by October 10, 1993.
In September 1995, the Company entered into an agreement with its Totalisator
system supplier to convert $461,000 of outstanding trade payables into a term
note. Under the terms of the agreement, the Company is required to make 21
monthly interest and principal payments of $17,800 and eight (8) additional
payments of approximately $17,800 on various dates through May 31, 1997. The
loan, which is unsecured, bears interest at the rate of 12% per annum. The loan
is subject to an acceleration clause and other financial disincentives in the
event of default. At December 31, 1995, the outstanding principal balance is
$408,000. The Company paid $53,642 and $17,651 of principal and interest,
respectively, in 1995 related to this term note.
Annual Commitments
Future annual principal payments under all indebtedness as of December 31, 1995,
assuming the Bennett notes are prepaid on or before January 2, 1997, are as
follows:
Years Ended December 31,
------------------------
1996 $ 2,536,000
1997 8,071,000
-----------
$10,607,000
===========
Continued
F-20
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 6 - CONVERTIBLE DEBENTURES
In connection with the acquisition of Golden Palace (see Note 2), the Company
assumed unsecured convertible debentures bearing interest at 8% per annum and
due on March 31, 1993. In 1993, the holders agreed to convert such debentures,
plus accrued interest of approximately $82,000, into 416,197 shares of the
Company's common stock.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Mountaineer Bond Requirements
Mountaineer is required to maintain a $250,000 bond with the Racing Commission
for its operations through December 31, 1996. The Company obtained the bond
through a letter of credit with a bank which is collateralized by a $100,000
certificate of deposit (see Note 1) and a $150,000 bank deposit.
The Company is also required to maintain a bond of $70,000 for the benefit of
the Lottery Commission through June 30, 1996. The bonding requirement has been
satisfied via the issuance of a $20,000 surety bond and two letters of credit
aggregating $50,000, each of which is collateralized by certain bank deposits
(see Note 1).
Jackpot Settlement Agreement
In January 1993, the Company entered into a financing arrangement with Jackpot
Enterprises, Inc. (Jackpot), the proceeds of which were to be used for
redevelopment activities. Pursuant to such arrangement, Jackpot initially
provided the Company with a $600,000 letter of credit collateralized by
Mountaineer Park's land and improvements to insure the performance of the
Company's obligations with respect to racing and video lottery activities under
its agreements with the State of West Virginia. For its letter of credit, the
Company's issued Jackpot 30,000 shares of its common stock which were valued at
$90,000.
The Company and Jackpot were unable to consummate the overall financing
arrangement. The agreement provided that if financing could not be reached due
to certain contingencies, the Company would be required to issue 250,000 shares
of its common stock as liquidated damages. On March 2, 1995, management settled
such claim effective June 25, 1994, agreeing to issue shares of its common stock
with registration rights. The number of shares of common stock to be issued was
based on $512,500 divided by the closing market price per share on the effective
date of registration. In the event the Company did not register the shares by
May 2, 1995, the Company was, and continued to be, required to issue 12,500
shares on such date and 12,500 shares each 60 days that such registration is not
effective. In no event will the Company be obligated to issue more than 250,000
shares of its common stock. The Company recorded a provision for loss of
$525,000 in connection with the settlement which is included in the consolidated
statement of operations for the year ended December 31, 1994.
During 1995, the Company issued 175,000 shares of its common stock as part of
its settlement and, accordingly, $414,000 was reduced from accrued liabilities.
At December 31, 1995, $111,000 remains included in accrued liabilities in the
accompanying 1995 consolidated balance sheet. Management expects to issue an
additional 75,000 shares of its common stock as management does not expect to
file an effective registration statement by the deadline provided in this
agreement.
Continued
F-21
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
Other Settlement
In July 1994, the Company entered into an agreement settling all claims by a
consulting firm arising from an April 1993 financial advisory agreement. The
Company agreed to pay fees and expenses of $165,000. An initial payment of
$15,000 was made upon execution of the settlement agreement and two additional
payments of $15,000 were required from the proceeds of certain unrelated
financings by the Company by December 1, 1994. Such payments were not made and
the entire balance is due upon demand. At December 31, 1995, the Company has
$150,000 outstanding under the agreement, which is included in "accrued
liabilities" in the accompanying consolidated balance sheet.
Under the settlement agreement, the Company canceled previously issued warrants
to purchase 145,000 shares of common stock with registration rights at $7.00 per
share, and instead, issued warrants to purchase 145,000 shares of common stock
with registration rights, exercisable at $6.25 per share through December 1996.
Operating Leases
Totalisator System Operating Lease
The Company leased its Totalisator system under an operating lease which was
amended November 28, 1995 (see below). Under the terms of the lease prior to
amendment, the Company was obligated to pay the lessor approximately $1,500 per
live race performance, plus .5% of the wagered handle in excess of $300,000.
The Company was also paying $300 per live race day ($550 if no live race
performance), plus .5% of simulcast handle in excess of $60,000, per simulcast
race day.
Under the amended terms, the Company must pay the greater of $1,000 per live
race performance or 0.55% of the live racing handle. In addition, the Company
must pay the greater of $300 per live race day ($550 if no live race
performance) per simulcast race day or 0.55% of the simulcast racing handle. For
the years ended December 31, 1995, 1994 and 1993, the rent expense under the
lease was approximately $529,000, $495,000 and $509,000, respectively, which is
included in "cost of parimutuel commissions" in the accompanying consolidated
statements of operations.
The Company also leases its videotape and closed circuit television systems at a
cost of $500 per race day and $125 per simulcast race day under an operating
lease expiring in October 2002. The lease was entered into with a company whose
ownership included the majority shareholder (an existing shareholder of the
Company) at the time of its inception. The Company has the option to purchase
the equipment by October 1, 1996 at the estimated fair value of $350,000.
Rental payments made pursuant to this lease for the years ended December 31,
1995, 1994 and 1993 was approximately $142,000, $223,000 and $172,000,
respectively.
Video Lottery Terminals Operating Lease
The Company leased 165 video lottery terminals under an operating lease through
September 1994. Under the terms of the lease, the Company was obligated to pay
the lessor a fixed percentage of video lottery terminal revenues. These video
lottery terminals were replaced in September 1994 as discussed below.
Continued
F-22
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
In September 1994, the Company entered into a master lease agreement for 400 new
video lottery terminals which was scheduled to expire September 1997 (see
below). The monthly lease payments on these 400 video lottery terminals were
$72,378, plus taxes, insurance and maintenance costs (see discussion of
amendment to the master lease below).
On April 7, 1995, the Company updated the master lease to provide for 400
additional video lottery terminals which were installed in June 1995. In
connection with this lease addition, the Company was obligated to pay 36 monthly
installments of $83,000 beginning in January 1996 through December 1998 for
these 400 additional video lottery terminals. The Company has normalized rent
expense over the 42 month lease term (see discussion of amendment to the master
lease below).
As of December 31, 1995, the Company had past due payments under the master
lease agreement amounting to $190,093 which constituted an event of default. On
March 26, 1996, periodic rental payments under the master lease agreement were
amended to reflect a new consolidated payment schedule as a result of an event
of default by the Company. Under the new agreement, the Company must make
monthly payments of approximately $119,000 in March and April 1996, $183,000
from May through October 1996 and $119,000 from November 1996 through January
1999. In addition to the amounts reflected above, the Company is obligated to
make interest payments from March through October 1996 at a rate of 15% on
certain past due rental payments under the previous agreement for a total
interest obligation of $26,000.
OTHER LEASES
The Company leases office space for its corporate offices under operating
leases. To reduce overhead costs, the Company has moved to progressively
smaller offices on two occasions since January 1, 1994. The Company's lease
for a 6,034 square foot facility in Irvine, California expired at that time, and
the Company moved and entered into a new lease for a period of 36 months at a
smaller 4,300 square foot office in San Juan Capistrano, California. On
November 1, 1995, the Company downsized again and moved to a smaller 880
square foot office in Laguna Beach, California pursuant to a 12 month lease with
an option to extend the term for an additional six months. On February 15,
1996, the San Juan Capistrano office was subleased through December 15, 1996,
the termination date for the underlying lease. Net annual minimum lease
payments at December 31, 1995 are approximately $41,000 and $17,000 per year in
1996 and 1997. Rent expense for the Company's corporate offices included in the
consolidated statements of operations amounted to $78,000, $84,000, and $125,000
for 1995, 1994 and 1993, respectively.
For the years ended December 31, 1995, 1994 and 1993, rent expense under its
video lottery leases was $1,294,000, $1,203,000 and $790,000, respectively,
which is included in "costs of video lottery terminals" in the consolidated
statements of operations. At December 31, 1995, the Company has recorded
deferred rent obligations of $408,000 in the accompanying consolidated balance
sheet, which is included in accrued liabilities.
Future annual minimum payments under all material operating leases as of
December 31, 1995 are as follows, after providing for the amended video lottery
lease agreement described above:
Years Ended December 31,
------------------------
1996 $2,075,000
1997 1,912,000
1998 1,915,000
1999 522,000
2000 113,000
Thereafter 212,000
----------
Total $6,749,000
==========
Litigation
In 1995, the Company was served with a complaint by a former employee. The
complaint was not answered timely by the Company's counsel and as a result, a
default judgment was entered by the court in the amount of approximately
$308,000. Management has filed a motion to vacate the judgment. There are no
assurances that the motion will be granted or the Company will be successful in
defending the matter. Although management believes that the ultimate outcome
will not necessarily result in a payment of the judgment amount, the Company has
recorded a provision for loss of $308,000 in the accompanying consolidated
statement of operations during the year ended December 31, 1995.
Continued
F-23
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
The Company was served with a complaint in 1994 by a jockey who sustained head
injuries from a fall during a race at Mountaineer. The plaintiff is seeking
both compensatory and punitive damages. Although the matter is covered by
insurance, management has been advised by its carrier, after discovery that a
jury could award damages in excess of Mountaineer's $1 million policy limits.
In the event that such an award is made, the Company would be liable for any
such excess amount. Although management believes that the matter will
ultimately be resolved within the policy limits, there can be no assurance that
it will.
The Company is party to various other lawsuits which have arisen in the normal
course of its business. Certain matters are covered by insurance, after the
Company meets certain deductible requirements, generally $2,500 per occurrence.
It is the opinion of management, that the liability, if any, arising from such
lawsuits would not have a material adverse effect on the Company's consolidated
financial statements.
Environmental Considerations
The Company has developed and is implementing a corrective action plan in
connection with leakage from underground storage tanks. Management has
estimated the cost of corrective action to be approximately $143,000 for the
cost of equipment to be installed in 1995 and 1996 and for remediation in 1996
and 1997. The Company has recorded a provision for anticipated expenditures of
$143,000 in 1995 under "selling, general and administrative" expenses, and has
entered into a service contract for the installation of equipment and future
remediation costs.
Common Stock Registration Rights
As of April 4, 1996, the Company is obligated to register approximately
4,077,991 shares of its common stock and 4,813,143 shares of its common stock
underlying certain options and warrants (see Note 9), which if not registered,
could have an adverse impact on the Company's future financial operations or
cause substantial dilution to existing shareholders. As discussed elsewhere,
the Company has certain price guarantees to sellers of its common stock, which
as of April 4, 1996, and based on a closing market price per share of 7/8, the
Company would have to issue approximately 5.7 million shares of its common
stock. Estimated costs of the registration are not considered significant to
the consolidated financial statements taken as a whole. There are no assurances
that such registration will be effected.
Pension Plan
Mountaineer has a qualified defined contribution plan covering substantially all
of its employees (the "Plan"). The Plan was ratified retroactively on March 18,
1994 by the legislature of the State of West Virginia. The Plan contributions
are based on .25% of the race track and simulcast wagering handles, and
approximately 0.5% of the net revenues of video lottery activities beginning
March 18, 1994. Contributions to the Plan for the years 1995, 1994 and 1993
were $179,000, $106,000 and $102,000, respectively.
Insurance Proceeds From Involuntary Conversion of Assets
In 1994, the Company experienced two fires at Mountaineer, believed to be caused
by arson, in which the Company received approximately $241,000 of insurance
proceeds. The Company realized a nominal gain based on the net carrying value
of the assets destroyed in the fire.
NOTE 8 - RELATED PARTY TRANSACTIONS
Employment Contracts
Effective December 4, 1992 (acquisition date), Mountaineer entered into
management agreements with certain former shareholders. In connection
therewith, the Company granted options to purchase 400,000 shares of its common
stock at $.50 per share. At the time the fair value of the Company's common
stock, subject to transferability restrictions, was approximately $3.50 per
share. As a result, Mountaineer recorded compensation expense of $600,000 for
the year ended December 31, 1994; no amounts were charged in 1995. The
agreements have been terminated by mutual consent without further obligation of
the parties.
Continued
F-24
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 8 - RELATED PARTY TRANSACTIONS, continued
In addition, the Company has entered into various employment agreements with
certain officers, key management and a consultant for periods of up to three
years expiring in 1997. The agreements provide for certain salaries, and stock
and stock option incentives (see Note 9) in the ordinary course of business.
Minimum annual salaries are approximately $523,000.
Severance Agreement
On April 26, 1995, the Company entered into a severance agreement with its
former Chief Executive Officer. In connection therewith, the Company is
obligated to pay approximately $440,000 over a period of two years. In
addition, the Company repriced certain incentive options and is obligated to
provide certain benefits during the term of the agreement. Management
discontinued payments under the agreement due to their discovery of certain
matters which they believe nullify the agreement. At December 31, 1995,
management has an accrued liability of $400,000 which is included in "accrued
liabilities" in the accompanying 1995 consolidated balance sheet.
Notes Payable and Advances Receivable From Related Parties
The Company has a note receivable for $240,000 from a shareholder of the Company
at December 31, 1995 and 1994, as well as additional noninterest bearing
advances of $62,000 made in 1994. The $240,000 note receivable bears interest
at 8% per annum, is due on demand, and is collateralized by certain shares of
the Company's common stock. No demand has been made by the Company's management
through December 31, 1995 as management believes recovery is doubtful. During
1995, the Company has recorded a provision for loss in the amount of $240,000
which is included in "selling, general and administrative" expenses in the
accompanying consolidated statement of operations.
In March 1994, the Company lent $50,000 to a company for a term of seven days in
exchange for a promissory note bearing interest at 8% per annum. The loan was
made upon the recommendation of a significant shareholder of both the Company
and the recipient. During 1995, the Company has recorded a provision for loss
in the amount of $50,000 which is included in "selling, general and
administrative" expenses in the accompanying consolidated statement of
operations. In April 1996, the Company and the recipient renegotiated,
cancelled the original note, and executed a substitute and replacement confessed
judgment promissory note in the principal amount of $58,333 at 8% per annum, all
due and payable August 4, 1996.
Notes Payable to Related Parties
During the year ended December 31, 1993, the Company fully paid certain 8% notes
payable totaling $401,000 to the former majority shareholder of Mountaineer (see
Note 2) and an existing shareholder of the Company.
At December 31, 1993, the Company had a $70,000 demand note due to an
officer/shareholder that bore interest at 6.25% per annum. The note was paid in
full in January 1994.
During 1995, the Company incurred salaries to key management, which remain
unpaid; at December 31, 1995, such amounts accrued were approximately $204,000.
In February 1996, management agreed to accept an aggregate of 466,676 shares of
the Company's common stock in satisfaction of the amounts due them. Such shares
have an approximate value of $204,000; therefore, no additional compensation
expense will be recorded as a result of the issuance of common stock.
Continued
F-25
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY
Stock and Warrants Issued in Connection With Plan of Reorganization
As part of the Company's Plan of Reorganization, which was confirmed January 15,
1992, the Company issued certain warrants to purchase its common stock. During
the year ended December 31, 1993, the Company received $2,239,000 for the
purchase of 373,241 shares of its common stock as a result of the exercise of
Series C warrants. The warrants expired in March 1993.
Redeemable Common Stock
In connection with certain arrangements entered into by the Company as of
December 31, 1994 (see Notes 2 and 10), 367,937 common shares could have been
put to the Company at $6.00 per share upon demand. In 1995, 98,333 redeemable
shares issued in connection with its oil and gas activities (Note 10) were
satisfied through the issuance of 373,600 additional shares of its common stock
as reflected in the aggregate in the accompanying 1995 consolidated statement
of shareholders' equity. In 1995, 194,500 common shares valued at $212,000 were
issued for the cancelation of 104,500 redeemable shares with put rights of
certain holders of Golden Palace acquisition debt. In connection therewith, the
Company issued 276,750 redeemable shares which are subject to registration with
the SEC and have a guaranteed selling price of $1.50 per share at the time of
registration. At December 31, 1995, 441,854 shares of redeemable common stock
are outstanding.
In connection therewith, the Company has classified the put value of such shares
of $1,405,000 and $2,208,000, respectively, as "redeemable common stock" in the
consolidated balance sheets at December 31, 1995 and 1994. Management has
reflected the value certain of these shares as a current liability in the
accompanying consolidated balance sheet at December 31, 1995 and 1994 to the
extent management believes these shares should have been registered. Amounts
reflected as noncurrent are based on scheduled payments in the event such shares
are not registered.
Common Stock and Options Issued for Services
From time to time in the ordinary course of business, the Company has issued
restricted common stock in exchange for services, interest and obligations. The
Board of Directors has determined the fair value of such shares based on 50% of
the value of freely tradable shares as determined through NASDAQ market
quotations. Such values are charged to operations or have extinguished
obligations depending upon the nature of the agreements.
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations; also see following
paragraph for additional shares issued in 1995.
During the year ended December 31, 1994, the Company issued 50,000 shares valued
at approximately $110,000 for services rendered, and the value of such shares
was charged to the 1994 consolidated statement of operations. Also in 1994, the
Company issued 97,500 shares of its common stock valued at $100,000 to a
financial consultant to seek capital for the Company; in 1995, such shares were
cancelled by mutual consent of the parties. The value of such shares, included
in noncurrent "Accrued Liabilities" at such value, will be settled through the
issuance of common stock in 1996. In addition, the Company issued 10,681
shares of its common stock for certain accounts payable valued at $40,000.
During the year ended December 31, 1993, the Company issued 197,787 shares
valued at approximately $619,000 for services rendered and letter of credit
fees for Jackpot, and the value of such shares was charged to the 1993
consolidated statement of operations.
In connection with certain employment agreements (see Note 8), the Company has
granted to two former shareholders of Mountaineer an option to purchase 400,000
shares of the Company's common stock at $.50 per share. The options are
exercisable beginning January 1993 and expire January 1996. The excess of the
estimated value of these shares of $3.50 each over their option price is
included as compensation expense over the two-year term of the employment
agreements, as amended. Compensation expense included in the consolidated
statements of operations for each of the years ended December 31, 1994 and 1993
is $600,000.
Continued
F-26
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY, continued
During 1995, 216,667 shares were exercised for $108,000 of which $69,000 remains
unpaid. At December 31, 1995, this receivable from the exercise of these stock
options is shown as a reduction in stockholders' equity.
Shares Issued for Cash
From January 1994 through May 1994, the Company issued 727,866 shares of its
common stock for $2,193,000, net of commissions of $146,000 and 58,333
restricted shares of its common stock. The 58,333 shares were issued for a
capital raising activity and thus are effectively charged to consolidated
shareholders' equity. In 1994, the Company received $200,000 for the exercise of
options to purchase 50,000 shares of its common stock.
From July through December 1993, the Company issued 746,755 shares of the
Company's common stock for $3,280,000, net of commissions of $592,000 and
125,000 restricted shares valued at $250,000. The 125,000 shares were issued
for a capital raising activity and thus are effectively charged to consolidated
shareholders' equity. The 746,755 shares are exempt from registration under
Regulation S of the Securities Act of 1933, whereby nonresident, aliens of the
United States (i.e., foreign purchasers) may purchase shares with a 40 day
restricted period.
See above and Note 2 for a total of 286,667 shares purchased from the exercise
of stock options at $0.01 and $0.50, per share.
Stock Option Plans
In May 1992, the Board of Directors approved the grant of nonqualified options
to purchase 600,000 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of $1.06 per share and is fully vested as of the date of grant.
The exercise price approximates the fair value of the shares at the date of
grant; such options expire in May 1997.
In October 1992, the Board of Directors adopted an incentive stock option plan
meeting the requirements of Section 422 of the Internal Revenue Code. The plan
reserves 1,200,000 shares for issuance which were granted effective October
1992. The options are exercisable at the then fair market value of $4.875 per
share (unless such options are granted to a 10% shareholder, in which case the
exercise price would be no less than 110% of the then fair market value), and
are exercisable over a period of five (5) years, subject to certain
restrictions. Options to acquire approximately 1,200,000 shares are exercisable
at December 31, 1995 and no options have been exercised to date. In December
1994, the Board of Directors adopted an amendment to reprice the options at
$2.00 per share; shareholder approval was obtained on September 11, 1995.
In May 1995, the Board of Directors approved the grant of nonqualified options
to purchase 823,047 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of approximately $1.22 per share and is fully vested as of the
date of grant. The exercise price approximates the fair value of the shares at
the date of grant; such options expire in September 1998. Shareholder approval
was obtained on September 11, 1995.
In November 1995, the Board of Directors adopted, subject to shareholder
approval, an incentive stock option plan meeting the requirements of Section 422
of the Internal Revenue Code (see above for certain requirements under Section
422). The plan reserves 500,000 shares for issuance which were granted
effective January 23, 1996. The options will be exercisable at the then fair
market value of $.5625 per share, and are exercisable over a period of five (5)
years, subject to certain restrictions.
Continued
F-27
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY, continued
From time to time, the Company issued options and warrants (exclusive of the
options and warrants described in the preceding paragraphs) to unrelated
entities in connection with service arrangements to purchase shares of its
common stock at their estimated fair value ranging from $0.01 to $8.00 per
share, expiring at various dates through April 1998.
During each of the years in the three year period ended December 31, 1995, stock
options and warrants activity is as follows:
Shares Price Range
Available per Share
--------- -----------
Balance, January 1, 1993 3,388,176 $0.01-$6.00
Granted 315,000 $3.00-$8.00
Canceled (70,185) $3.00-$6.00
Exercised (373,241) $4.00-$6.00
---------
Balance, December 31, 1993 3,259,750 $0.01-$8.00
Granted 1,155,000 $3.00-$6.25
Canceled (605,000) $7.00
Exercised (50,000) $4.00
---------
Balance, December 31, 1994 3,759,750 $0.01-$8.00
Granted 868,047 $1.21-$2.00
Canceled (10,000) $8.00
Exercised (286,667) $0.01-$0.50
---------
Balance, December 31, 1995 4,331,130(1) $0.01-$8.00
=========
Exercisable at December 31, 1995 4,331,130
=========
(1) Includes options to purchase 130,000 shares of common stock at $0.01 per
share.
See Notes 2, 3, 5, 7 and 10 for additional transactions in which the Company
issued its common stock and Note 7 for discussion on commitment to register
certain common stock and the underlying common stock of options and warrants
and dilution impact.
NOTE 10 - DISCONTINUED OPERATIONS
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. On March 31, 1993, the Company's Board of Directors
approved a formal plan of orderly liquidation to divest its oil and gas
operations. This decision was precipitated by several factors, including the
long-term potential of the Company's gaming operations and the anticipated time
to be devoted to it by management. In February 1993, the Company decided not to
continue to pursue funds in the public market to undertake the drilling of oil
and gas properties primarily due to the expiration of "Section 29" credits, a
credit against federal income taxes for gas produced from Devonian shale or
tight formations from wells commenced before January 1993. As discussed
further, the Company sold certain interests in these oil and gas assets in
December 1994. Certain interests are currently under rework, to be later sold
after management has enhanced the ultimate value of such interests.
Continued
F-28
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
The following is a summary of the significant accounting policies and a
description of other issues pertaining to the oil and gas operations.
Significant Accounting Policies
The Company follows the successful efforts method of accounting for its oil and
gas activities. Costs of property acquisitions, successful exploratory wells,
all development costs, and support equipment are capitalized. Costs of
unsuccessful exploratory wells are expensed when determined to be nonproductive.
Production costs, overhead and all exploratory drilling costs are expensed as
incurred. The carrying value of proved and unproved reserves are subjected to a
"ceiling test" based on the sum of (a) discounted future net cash flows from
proven reserve estimates, (b) the cost of properties not being amortized and (c)
the lower of cost or fair value of estimated unproved reserves; impairment of
the carrying value of such reserves is charged to operations. Costs of
abandonment and remedial work are expensed over the life of the net future
production cash flows.
Depletion of the cost of producing oil and gas properties has been computed on
the unit-of-production method. Due to the Company's decision to discontinue
these operations, no depletion has been recorded adjusted to their net
realizable value.
The consolidated financial statements reflect the operating results and balance
sheet items of its oil and gas operations separately from continuing operations
pursuant to the plan of divestiture. The assets of the discontinued operations
are shown net of the allocated liabilities.
In 1993, management believed that the operations would have been sold within a
period of one to two years, but due to certain delays and cash flow
considerations, management was not able to complete its rework on the properties
in the state of Michigan within the time originally estimated. Management does
not intend to retain the interest for the purpose of operating the wells.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves
Standardized measures of discounted future net cash flows and changes therein
relating to proved oil and gas reserves are not presented since the Company does
not intend to produce any oil and gas on a continuing basis.
Remaining Oil and Gas Interests
The Company's remaining assets are located in Michigan, consisting of a 25%
working interest in a 64% net revenue interest in proved reserves; 34 wells
exist on the property which have been inoperative since the Company's ownership.
Fleur-David Corporation is currently in the process reworking the wells, which
upon commencement of production, is expected to enable the wells to generate
production of approximately 3,300,000 barrels (BBLs) of oil, over a period of
ten years, with approximately 65% of such reserves recoverable over a period of
four years. Leases, for which the 34 wells are located, are held by force majure
(by production).
Continued
F-29
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
In December 1993, the Company entered into an agreement with Fleur-David
Corporation, whereby the Company contributed its 64% (original interest) working
interests in proved reserves. Fleur-David assumed a note payable of $375,000,
plus accrued interest from the Company, and paid approximately $250,000 in well
lease maintenance costs. In addition, Fleur-David was granted options to
purchase 121,500 shares of the Company's common stock at their then fair market
value of $4.00 each. Fleur-David was also to provide substantially all the
expertise and fund 75% of the costs to perform rework and water-flood of
approximately $2,200,000. The Company's is responsible for 25% of such costs or
approximately $550,000 and will be paid through the proceeds received from the
exercise of the options described above, as well as cash available from
continuing operations.
Fleur-David also obtained a covenant not to sue for clean-up and abandonment
costs from the State of Michigan, as required by the joint venture, by
depositing $188,000 into an environmental escrow account required by the state.
The Company retains a 25% net revenue interest in the joint venture through the
joint venture. An adjustment to the carrying value of these oil and gas proved
reserves was not affected since the additional costs incurred, and to be
incurred by Fleur-David, enhance the value of the interest retained by the
Company by a corresponding amount.
The Michigan well sites require certain remedial activities, which include
abandonment costs. Management has estimated the cost of such remedial
activities to range from $1,200,000 to $2,000,000 should its current plan of
operation with Fleur-David not continue. Management expects to continue with
its initial rework and eventual waterflood project with Fleur-David to minimize
the Company's costs associated with remediation and abandonment of the wells.
The Company's estimated cost of rework and waterflood, as a 25% joint venture
interest holder, is $550,000, $297,000 of which has been paid through December
31, 1995, and the remaining $252,000 included as a liability in the net assets
of discontinued operations in the accompanying 1995 consolidated balance sheet.
Oil and Gas Leases
Certain leases were acquired in 1992 as part of the Company's plan of
reorganization from Biscayne Petroleum Corporation. On March 25, 1993, the
seller agreed to amend certain terms of the acquisition agreement, which, as so
amended, provided for the payment of $50,000 in 1993 and the issuance of 226,286
shares of the Company's common stock in satisfaction of the purchase price. The
March 1993 amendment also rescinded the issuance of 20,000 shares in December
1992 for $100,000 of debt and $20,000 of interest as reflected in the
consolidated statements of shareholders' equity. The purchase price remained
unchanged, after the amendment discussed above, at $2,000,000. The leases, held
by production, were assigned for consideration, along with the 77 wells
discussed below, in December 1994.
Continued
F-30
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
Oil and Gas Wells
Certain oil and gas interests, consisting of 77 production wells, were acquired
in 1992 as part of the Company's plan of reorganization from Biscayne Petroleum
Corporation. On March 25, 1993, the sellers agreed to convert the outstanding
principal balance of an unpaid acquisition note of $590,000, into 98,333 shares
of the Company's common stock subject to registration rights and a put right at
a price of $6.00 per share (see Note 9 "Redeemable common stock"), and payment
of $100,000 in March 1993.
In September 1994, the Company negotiated certain additional terms extending the
date by which the registration of the 98,333 shares was required to be effected
to March 31, 1995, as amended. However, because the registration was not
effected as of March 31, 1995, subject to the terms of the agreement, the
Company was obligated to pay $590,000, less the average market value of the
98,333 shares of common stock for a value of $123,000, or $467,000, in 12 equal
monthly installments, together with interest at 9% per annum beginning April 1,
1995.
On March 31, 1995, the agreement was amended to extend the payment term and
amounts such that the note will be interest only at 10% per annum from April 1,
1995 until October 1, 1995, at which time the outstanding principal balance was
to be amortized over 36 months with a balloon payment due on October 1, 1996,
together with unpaid interest thereon. On October 1, 1995, the parties agreed
to covert the entire principal balance of $467,000 into 373,600 shares of the
Company's common stock based on a value of $1.25 per share. In 1995, the 98,333
shares discussed above, plus the 373,600 shares (471,933) valued at an
aggregate amount of $590,000 are reflected in the accompanying consolidated
statement of shareholders' equity during the year ended December 31, 1995.
In September 1993, the Company recorded a provision of $1,471,000 for an
estimated loss on the disposal of its leases and 77 wells located in
Southeastern Ohio. The Company's estimate was based on the current conditions
in the gas market, estimated costs to prepare such sites for sale, lease
expirations (see reserve quantity information below) and sales commissions.
Related Party Transactions
Sale of Oil and Gas Leases and Wells
In December 1994, the Company entered into an arrangement to sell certain proved
and unproven gas reserves located in Southeast Ohio for notes valued at
approximately $426,000 to a party related to an officer and shareholder of the
Company. In connection therewith, the Company obtained two notes, a $300,000
note, bearing interest at 8% per annum, payable $10,000 per month beginning May
1995, and a $150,000 noninterest bearing note, payable based on 50% of excess
revenues over $10,000 per month from production, secured by the assets sold.
The Company recorded a loss on the sale of these assets of $567,000 which is
included in loss on disposal of oil and gas operations. At December 31, 1995,
the principal balance on the note receivable is approximately $386,000.
Notes Payable
During 1994 and 1995, various corporate affiliates of Mr. Arneault advanced an
aggregate sum of approximately $100,000 to ExCal primarily to cover overhead
expenses in connection with the maintenance of leases and other costs associated
with the Registrant's existing oil and gas interests in Michigan and former
interests in Ohio. In February 1996, such accrued amount, along with accrued
interest thereon at the rate of 10% per annum, was converted into a demand
promissory note in the principal amount of $100,218 payable to Mr. Arneault at
the rate of 10% per annum. No material overhead expenses are expected to be
incurred in 1996.
Continued
F-31
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
The following summarizes the net assets of the discontinued operations as of
December 31, 1995 and 1994 and the results of its operations for each of the
years in the three-year period ended December 31, 1995.
Balance sheet items
December 31, 1995 and 1994
1995 1994
---------- ----------
Assets:
Cash $ --- $ ---
Receivable from sale of assets 386,000 426,000
Oil and gas activities -
Working interest in proved oil
and gas properties 2,582,000 2,582,000
---------- ----------
2,968,000 3,008,000
---------- ----------
Less liabilities:
Accrued liabilities (252,000) (350,000)
Payables to related parties (100,000) (42,000)
---------- ----------
Net assets $2,616,000 $2,616,000
========== ==========
Results of its operations for the
years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- -------- ---------
Revenues $ --- $184,000 $ 268,000
---------- -------- ---------
Costs and expenses:
General and administrative --- 148,000 224,000
Operating costs, including
depletion of $100,000 in
1993 --- 109,000 226,000
---------- -------- ---------
Total costs --- 257,000 450,000
---------- -------- ---------
Loss from operations $ --- $(73,000) $(182,000)
========== ======== =========
Reserve Quantity Information
Oil Gas
(in BBLs) (in MCF)
---------- ---------
Proved developed:
Balances, January 1, 1993 2,134,800 1,095,530
Revisions of previous estimates --- (58,378)
Production --- (134,952)
---------- ----------
Balances, December 31, 1993 2,134,800 902,200
Revisions of previous estimates 1,180,000(1) ---
Production --- (99,000)
Sale of assets --- (803,200)
---------- ----------
Balances, December 31, 1994 3,314,800 ---
Activity --- ---
Balances, December 31, 1995 3,314,800 ---
========== ==========
(1) In 1994, management determined that certain reserves existed in an
additional formation (Berea) which has been included in the Company's reserve
analysis.
Continued
F-32
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 11 - INCOME TAXES
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $23,000,000 for federal income tax reporting purposes and
approximately $5,111,000 for state reporting purposes, expiring through 2010.
The Tax Reform Act of 1986 includes provisions which limit the Federal net
operating loss carryforwards available for use in any given year if certain
events, including a significant change in stock ownership, occur. Because of
such limitations, the Company may only utilize net operating loss carryforwards
of approximately $1,500,000 per year for such losses of approximately $3,200,000
incurred prior to December 1992; additional limitations are believed to exist
between 1992 to 1995. Temporary differences are not considered
significant, exclusive of the differences (see below) in financial and tax
reporting bases of assets acquired from Mountaineer in a statutory tax-free
exchange.
At December 31, 1995 and 1994, the deferred taxes of $1,529,000 and $1,662,000,
respectively, represent the nondeductible tax bases of assets acquired from
Mountaineer totaling approximately $4,900,000 net of depreciation. The benefit
for income taxes in the consolidated statement of operations for the years
ended December 31, 1995, 1994 and 1993 represents the tax effect of
nondeductible depreciation less certain minimum state taxes paid.
The Company's only significant deferred tax asset as of December 31, 1995 and
1994 is approximately $8,700,000 and $6,800,000, respectively related to the
net operating loss carryforwards for federal and state tax reporting purposes.
The Company's valuation allowance at December 31, 1995 and 1994 was
approximately $8,700,000 and 6,800,000, respectively. The valuation allowance
at January 1, 1994 and 1993 was approximately $3,467,000 and $1,079,000,
respectivly. The difference between the federal income tax benefit using a 34%
and the benefit recorded in the accompanying statements of operations for each
of the years in the three-year period ended December 31, 1995 related primarily
to increases in the valuation allowances in each year.
NOTE 12 - SEGMENT REPORTING
The Company operates in two segments, oil and gas and gaming. The Company has
not presented segment information in accordance with Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise" because its oil and gas operations have been discontinued, are
separately disclosed in the accompanying consolidated financial statements and
will not be significant in the future.
NOTE 13 - RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Park Race Track
and Gaming Resort. Under West Virginia Horse Racing Law, the Company's
commission revenue is a designated portion of the parimutuel wagering handle
(amounts wagered).
The Racing Commission authorized a minimum of 220 days of racing; the Company
was in compliance with this provision in years reported. The Company is subject
to annual licensing requirements established by the Racing Commission which has
been renewed through December 31, 1996.
In August 1994, the Company renewed its contract with the West Virginia
Horsemens' Benevolent Protection Association (HBPA) for a period of three years.
In connection therewith, the Company is required to provide average daily horse
racing purses of at least $22,500, as well as operate a certain number of races
per day based on criteria provided in the contract.
Continued
F-33
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 13 - RACING OPERATIONS, continued
The Company pays purses for each race day to the horsemen and HBPA. The Company
receives a credit towards future purses for the difference of purses paid and
amounts earned by the horsemen and HBPA. The horsemen and HBPA earn a
percentage of the live and simulcast (satellite off-track wagering) race handle
less winning tickets and certain costs incurred by the Company, including
certain video lottery contractual expenses (approximately 15.5% of net video
lottery revenues) paid to the horsemen and HBPA.
The amounts paid in excess of the amounts earned are reflected in the
accompanying balance sheet as "prepaid purses" and totaled $352,000 at December
31, 1994. At December 31, 1995, purses earned in excess of amounts funded of
$85,000 are reflected in the accompanying 1995 consolidated balance sheet as
"accrued liabilities".
A summary of the parimutuel handle and deductions, including off-track wagering,
for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993
------------ ------------ ------------
Total parimutuel wagering
handles $ 39,819,000 $ 35,475,000 $ 40,961,000
Less patrons' winning
tickets (31,637,000) (28,246,000) (32,646,000)
------------ ------------ ------------
8,182,000 7,229,000 8,315,000
Less:
Parimutuel tax paid to:
State of West Virginia
and county (472,000) (442,000) (448,000)
Purses and Horsemen's
Association (3,447,000) (3,019,000) (3,544,000)
------------ ------------ ------------
Parimutuel commissions $ 4,263,000 $ 3,768,000 $ 4,323,000
============ ============ ============
Continued
F-34
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 14 - GAMING OPERATIONS
On March 17, 1994, the West Virginia State Legislature expressly authorized the
operation of up to 400 video lottery terminals through December 31, 1994,
subject to voter approval in a Hancock County referendum, which was approved on
May 10, 1994. The statute authorizing the operation of video lottery terminals
expires, unless extended, on June 13, 1997. In 1995, the Company received
approval from the West Virginia Lottery Commission (the "Lottery Commission") to
operate up to 1,000 video lottery terminals, and subsequently increased the
number of terminals in operation from 400 to 800.
One half of all video lottery terminals must be located in the racetrack
grandstand and clubhouse, while the balance may be located at the Company's on-
site lodge, as long as parimutuel wagering is operated therein. The Company is
subject to annual licensing requirements established by the Lottery Commission
which was renewed through June 1996.
In connection with its video lottery operations, the Company had the following
gross wins and losses for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
------------ ------------ ------------
Total gross winnings $ 55,988,000 $ 23,214,000 $ 16,736,000
Less losses (patron
payouts) (39,509,000) (15,733,000) (11,443,000)
------------ ------------ ------------
Revenues - Video lottery
terminals $ 16,479,000 $ 7,481,000 $ 5,293,000
============ ============ ============
With respect to the operations of video lottery terminals subsequent to March
17, 1994, the Company pays an administrative fee to the Lottery Commission not
to exceed 4% of video lottery terminal net revenues. After assessment of the
administrative fee, the Company is obligated to contribute legislatively
designated amounts to various funds. These amounts are included in "cost of
video lottery terminals" in the consolidated statements of operations.
Amounts contributed to these funds for the years ended December 31, 1995 and
1994 were as follows:
1995 1994
---------- ----------
HBPA purses (Note 13) $2,470,000 $1,070,000
Company pension plan (Note 7) 80,000 31,000
West Virginia tourism promotion fund 478,000 187,000
West Virginia Breeders' Classic fund 159,000 62,000
West Virginia general fund 4,780,000 2,371,000
Hancock County general fund 319,000 125,000
Veterans Memorial fund 159,000 63,000
---------- ----------
$8,445,000 $3,909,000
========== ==========
On June 2, 1994, the Company entered into a development agreement with American
Gaming Entertainment, Ltd. (formerly Gamma International, Ltd.) ("AGEL"), an
affiliate of Bennett, to provide services for development activities,
implementation of accounting and information systems and certain personnel
activities until AGEL was approved by the Lottery Commission. Upon approval in
October 1994, a long-term management agreement was executed.
Continued
F-35
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 14 - GAMING OPERATIONS, continued
Pursuant to the management agreement, the Company was obligated to pay 3% of
gross revenues, of video lottery and other non-parimutuel gaming and gaming
support operations, as defined, plus 8% of earnings before interest, taxes,
depreciation and amortization, as defined, from all operating activities of
Mountaineer. In the event of default by the Company, it would be required to
pay certain monies based on the remaining number of months through 1997, or in
the case of extension of video lottery activities by the State of West Virginia,
through the term of the agreement. The monthly base default fee begins at
$83,333. Management and consulting fees charged to "cost of video lottery
terminals" in the accompanying consolidated statements of operations during the
years ended December 31, 1995 and 1994 were $321,000 and $133,000, until such
time as a stay agreement was executed (see below). In addition, during 1994,
the Company advanced AGEL $300,000 which was used to reduce future management
fees and expenses. At December 31, 1994, prepaid management fees in the
accompanying consolidated balance sheet were $220,000.
The Company's management agreement with AGEL has been stayed pursuant to a stay
agreement effective June 30, 1995, and has been replaced by a consulting
agreement, dated July 1, 1995, until such time that Bennett complies with
certain requirements of the Lottery Commission. The consulting agreement calls
for American Newco, Inc. (owned by certain officers and shareholders of AGEL) to
continue to provide consulting services in connection with the Company's video
lottery operations at the rate of $10,000 per month, subject to increases of up
to $10,000 per month for additional services which may be provided, through
March 17, 1997. Fees under this consulting agreement are substantially less
than those which would have been paid under the original management agreement.
Should the stay agreement or the consulting agreement be terminated in
accordance with certain contingencies contained therein, the management
agreement shall also terminate. However, should the Lottery Commission
determine that Bennett has fully complied with its information requirements,
then the management agreement will be reinstated with the original terms as
defined above. At December 31, 1995, accrued consulting fees in the
accompanying consolidated balance sheet totaled $60,000.
The personal involvement of the two shareholders of American Newco, Inc. as
consultants to the Company is a material element of the contract. Since
September 1995, neither shareholder has provided such services and, as a
result, the Company has paid no consulting fees since that time. Management
believes that such failure to perform constitutes a material breach of the
Consulting Agreement and a resulting material breach of the Management
Agreement. Although there can be no assurances, Management believes that the
Management Agreement will not be reinstated.
NOTE 15 - STATEMENTS OF CASH FLOWS
The statements of cash flows exclude the effects of noncash investing and
financing activities for all periods presented. Supplemental disclosures of
significant noncash activities are as follows:
1995
In 1995, 202,833 redeemable common shares valued at $1,217,000 were satisfied
through 463,600 additional shares of its common stock (see Notes 2, 9 and 10).
Also see following paragraph for additional shares issued in 1995.
The Company issued 225,000 shares to Bennett for loan fees; these amounts, plus
285,000 shares valued at $1,710,000 (aggregate $3,060,000 of costs) were
reversed in 1995 due to the cancellation of the $6.00 price guarantee. In
satisfaction of such, the Company ultimately issued 1,020,000 additional shares
valued at $1,530,000 and relinquished its rights to the original 510,000 at a
value of $478,000. Such costs were accounted for as deferred finance costs,
interest and capitalized interest to its construction in progress (Notes 1 and
5).
Continued
F-36
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 15 - STATEMENTS OF CASH FLOWS, continued
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations. Certain services were
rendered in 1995 which were to be satisfied through the issuance of common
stock; however, the parties cancelled 97,500 shares issued in 1994 which were
valued at $100,000. Such amounts are reflected as a reduction from
stockholders' equity with a corresponding increase in accrued liabilities.
In connection with the Jackpot settlement (Note 7), the Company issued 175,000
shares of its common stock in satisfaction of noncurrent accrued liabilities
totalling $414,000 ($525,000 accrued at December 31, 1994); approximately
$77,000 at December 31, 1995 are expected to be reduced through the issuance of
75,000 shares in 1996.
Certain finance fees totalling $997,500 (Note 5) which were accrued as deferred
finance costs in at December 31, 1995, were canceled due to the amendment by the
Company and Bennett. In addition in 1995, the Company issued 60,850 shares in
satisfaction of a note payable of approximately $43,000.
1994
During 1994, the Company issued 50,000 common shares for various services
rendered valued at $110,000. The Company also issued 10,681 and 97,500 shares
of its common stock valued at $40,000 and $100,000, respectively for certain
accounts payable and other current assets. The Company recorded compensation
expense of $600,000 as a result of options to purchase the Company's common
stock at below market values granted to two former shareholders of Mountaineer
(see Note 9).
From July 1994 to December 1994, the Company issued 285,000 common shares valued
at $1,710,000, accrued $200,000 in loan commissions to be paid in 1995, and
accrued $998,000 of construction financing costs which will be satisfied through
the issuance of common stock. Components of such costs of $1,568,000, $709,000
and $631,000 are excluded from cash expended for deferred financing costs,
buildings and improvements and interest expense, respectively.
In December 1994, the Company accrued a liability for the Jackpot settlement
costs of $525,000 which will be satisfied through the issuance of its common
stock in 1995.
See Note 3 for discussion of sale of investment and settlement agreement for
noncash transactions.
During 1994, the Company had certain noncash provisions, net of benefits,
reflected in operations aggregating a net benefit of $29,000.
1993
On January 1, 1993, the Company adopted SFAS 109, "Accounting for Income Taxes"
and, as a result, recorded deferred income taxes of $1,952,000 with a
corresponding increase to property.
In April 1993, the Company issued 50,000 shares of its common stock valued at
$300,000 to acquire a 20% interest in a ground lease (see Note 2).
Continued
F-37
<PAGE>
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Three-Year Period Ended December 31, 1995
NOTE 15 - STATEMENTS OF CASH FLOWS, continued
On March 31, 1993, the holders of $750,000, 8% convertible debentures elected to
convert their debentures and accrued interest of $82,000 into 416,197 shares of
common stock.
On March 25, 1993, $1,382,000 in debt related to oil and gas activities was
converted into 226,286 shares of common stock (valued at $792,000) and 98,333
shares of Redeemable common stock (valued at $590,000). In addition, 20,000
shares of common stock issued in 1992 for $100,000 of debt and $20,000 of
interest were rescinded.
In July 1993, the Company reconveyed land acquired in Cripple Creek, Colorado,
valued at $1,315,000, to the seller in exchange for long-term debt of $1,315,000
(see Note 2).
The Company issued 197,787 shares for various services rendered in 1993 valued
at $619,000. The Company recorded compensation expense of $600,00 as a result
of options to purchase the Company's common stock at below market values granted
to two former shareholders of Mountaineer (see Note 9).
During 1993, the Company had certain noncash provisions, net of benefits,
reflected in operations aggregating $145,000. Such amounts were expected to
provide future benefits or were based on estimates at December 31, 1992.
NOTE 16 - SUBSEQUENT EVENTS
Expanded Gaming Legislation
In March 1996, the West Virginia code was amended to permit game themes
depicting symbols on reels, commonly referred to as "line games" or "video slot
games". The legislation will go into effect in June 1996, unless vetoed by the
Governor of West Virginia.
Lease Amendment
In March 1996, the Company amended its master lease for its video lottery
terminals (see Note 7).
Bridge Financing
In March 1996, the Company entered into five short-term note agreements
aggregating $750,000 due in five monthly equal principal installments of
$150,000 each, commencing 30 days from the date of the loan. The Company
received an aggregate of $570,000 of proceeds. In addition, the Company issued
consideration for the loan. Total interest costs on this indebtedness are
expected to be approximately $230,000 and will be charged to operations in 1996.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Winners Entertainment, Inc.
We have audited the consolidated financial statements of Winners Entertainment,
Inc. and subsidiaries as of December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, and have issued our report
thereon dated April 5, 1996; such consolidated report is included elsewhere in
this Registration Statement. Our audits also included the consolidated
financial statement schedule of Winners Entertainment, Inc. and subsidiaries,
listed in Item 11. This consolidated financial statement schedule is the
responsibility of Company's management. Our responsibility is to express
an opinion on this consolidated financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/CORBIN & WERTZ
Corbin & Wertz
Irvine, California
April 5, 1996
F-39
<PAGE>
CONDENSED AND CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 893,000 $ 807,000
Restricted cash 411,000 426,000
Notes receivable from related parties,
net of allowance for doubtful accounts
of $290,000 62,000 62,000
Accounts receivable, net of allowance for
doubtful accounts of $112,000 and
$70,000 for 1996 and 1995, respectively 224,000 174,000
Deferred financing costs 268,000 388,000
Other current assets 346,000 115,000
---------- -----------
Total current assets 2,204,000 1,972,000
----------- -----------
Property:
Land 371,000 371,000
Buildings 15,716,000 15,716,000
Equipment and automobiles 2,292,000 2,258,000
Furniture and fixtures 2,046,000 2,021,000
Construction in progress 989,000 519,000
----------- -----------
21,414,000 20,885,000
Less accumulated depreciation (3,525,000) (2,785,000)
----------- -----------
17,889,000 18,100,000
Net Assets of Discontinued
Oil and gas activities 2,616,000 2,616,000
Other Assets:
Excess of cost of investments
over assets acquired, net of accumulated
amortization of $896,000 and
$770,000 for 1996 and 1995, respectively 2,878,000 3,004,000
Deposits and other 27,000 55,000
----------- -----------
2,905,000 3,059,000
----------- -----------
TOTAL ASSETS $25,614,000 $25,747,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
CONDENSED AND CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> <C> <C>
June 30, 1996 December 31, 1995
------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable $ 2,606,000 $ 3,474,000
Accrued liabilities 2,183,000 2,096,000
Accrued leases 610,000 161,000
Short term notes payable 718,000 0
Current portion of long term debt 3,727,000 2,536,000
Redeemable common stock 772,000 991,000
------------ ------------
Total current liabilities 10,616,000 9,258,000
Accrued Liabilities 343,000 490,000
Deferred Income Taxes 1,463,000 1,529,000
Long Term Debt, net of current 6,363,000 8,071,000
Redeemable Common Stock, net of current 246,000 415,000
------------ ------------
Total Liabilities 19,031,000 19,763,000
------------ ------------
Shareholders' Equity:
Common stock 2,000 2,000
Paid-in-capital 32,760,000 32,115,000
Receivable from exercise of stock options 0 (69,000)
Accumulated deficit (26,179,000) (26,064,000)
------------ ------------
Total shareholders' equity 6,583,000 5,984,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,614,000 $ 25,747,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Video lottery terminals $ 6,142,000 $ 3,892,000 $11,900,000 $ 6,843,000
Pari-mutuel commissions 1,157,000 1,151,000 2,165,000 2,048,000
Food, beverage and lodging 921,000 873,000 1,573,000 1,391,000
Other 303,000 305,000 463,000 542,000
----------- ----------- ----------- -----------
Total Revenue $ 8,523,000 $ 6,221,000 $16,101,000 $10,824,000
----------- ----------- ----------- -----------
Costs and Expenses:
Cost video lottery terminals $ 4,083,000 $ 2,710,000 $ 8,028,000 $ 4,892,000
Cost of pari-mutuel commissions 1,361,000 1,393,000 2,497,000 2,644,000
Cost of food, beverage and lodging 848,000 871,000 1,529,000 1,616,000
Cost of other revenues 276,000 304,000 492,000 522,000
General and administrative expenses 883,000 1,380,000 2,078,000 2,481,000
Depreciation and amortization 407,000 317,000 866,000 620,000
----------- ----------- ----------- -----------
Total Costs and Expenses $ 7,858,000 $ 6,975,000 $15,490,000 $12,775,000
----------- ----------- ----------- -----------
Operating Income (Loss) 665,000 (754,000) 611,000 (1,951,000)
Interest Expense (593,000) (344,000) (792,000) (760,000)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 72,000 (1,098,000) (181,000) (2,711,000)
Benefit for Income Taxes 33,000 32,000 66,000 65,000
----------- ----------- ----------- -----------
Net Income (Loss) $ 105,000 $(1,066,000) $ (115,000) $(2,646,000)
=========== =========== =========== ===========
Net Income (Loss) Per Share $ .01 $ (.07) $ (.01) $ (.17)
=========== =========== =========== ===========
Weighted Average Number
of Shares Outstanding 18,274,708 15,260,481 18,217,246 16,033,815
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $ (115,000) $(2,646,000)
Adjustments to reconcile net losses to
net cash used in operating activities:
Depreciation and amortization 866,000 613,000
Common stock issued and
stock options granted for services rendered 292,000 0
Common stock issued for interest expense 230,000 315,000
Provision for doubtful accounts 40,000 0
Provision for settlement agreements (208,000) 18,000
Deferred income taxes (66,000) (65,000)
Net Change in Assets and Liabilities:
Prepaid expenses and other (80,000) 450,000
Restricted cash 15,000 286,000
Net assets of discontinued operations 0 (26,000)
Accounts payable and accrued expenses (347,000) 973,000
----------- -----------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 627,000 (82,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits and other 28,000 2,000
Capital expenditures (593,000) (3,573,000)
----------- -----------
CASH USED IN INVESTING ACTIVITIES $ (565,000) $(3,571,000)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Principal payments (1,076,000) 0
Proceeds from issuance of notes payable 1,100,000 3,652,000
Proceeds from issuance of common stock 0 27,000
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES $ 24,000 $ 3,679,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 86,000 26,000
Cash, Beginning of Period 807,000 1,057,000
----------- -----------
Cash, End of Period $ 893,000 $ 1,083,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed, consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of Management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included herein. Operating results
for the six months ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and notes thereto
included in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
NOTE 2 - CONTINGENCIES
In 1995, the Registrant recorded a provision for loss in the amount of $308,000
for a legal settlement based on management's estimates. In June 1996, the
related lawsuit was dismissed upon payment of a $100,000 settlement. The
remaining $208,000 reserve was reversed in June, 1996, and is reflected as a
reduction in general and administrative expenses in the Condensed and
Consolidated Statements of Operations.
The Registrant has developed and is implementing a corrective action plan to
stop leakage from underground storage tanks at its Mountaineer Race Track and
Resort facility in Chester, West Virginia. In 1995, Management estimated the
cost of the plan to be $140,000, consisting of $60,000 in monitoring and
operational costs to be expended in 1995 and 1996, and $80,000 in capital
expenditures to be incurred in 1996. The Registrant recorded a provision of
$140,000 in 1995 for these projected expenses. The Registrant expended $45,000
relating to this contingency in the second half of 1995 and $59,000 in the
first half of 1996.
NOTE 3 - INCOME TAXES
The benefit for income taxes recorded in the accompanying statement of
operations for the six month periods ended June 30, 1996 and 1995 results from
non-tax deductible depreciation expense attributable to the purchase method of
accounting for the investment. At June 30, 1996, the Registrant has recorded a
non-current valuation allowance of approximately $8.7 million against its
primary deferred tax assets (net operating loss carryforwards for federal and
state income tax purposes). At June 30, 1996, the Registrant has approximately
$23 million in net operating loss carryforwards, however, as a result of a
change of ownership of the Registrant during 1992 due to issuances of the
Registrant's common stock, the use of such net operating loss carryforwards
earned during 1992 through 1995 is subject to certain limitations.
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<PAGE>
NOTE 4 - DISCONTINUED OIL AND GAS ACTIVITIES
BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
---- ----
<S> <C> <C>
ASSETS
Term note receivable $ 192,000 $ 236,000
Production note receivable 150,000 150,000
Oil and gas activities:
Working interest in proved oil and gas properties 2,582,000 2,582,000
---------- ----------
2,924,000 2,968,000
---------- ----------
LIABILITIES
Accounts payable and accrued liabilities (293,000) (252,000)
Payables to related parties (15,000) (100,000)
---------- ----------
NET ASSETS $2,616,000 $2,616,000
========== ==========
</TABLE>
The Registrant's remaining oil and gas assets are located in Michigan,
consisting of a 25% working interest in a 64% net revenue interest in proved
reserves. Thirty-four wells are located on the property which have been
inoperative since the Registrant acquired the property in December 1992. The
well sites require certain remedial activities, which include abandonment
costs. Management has estimated the cost of such remedial activities to range
from $1,200,000 to $2,000,000 should its current plan of operation with
Fleur-David not continue. Management expects to continue with its initial
rework and eventual waterflood project with Fleur-David to minimize the
Registrant's costs associated with remediation and abandonment of the wells.
The Registrant's estimated cost of rework and waterflood, as a 25% joint
venture interest holder, is $550,000, $311,000 of which has been paid through
June 30, 1996 and the remaining $239,000 included as a liability in the net
assets of discontinued operations in the accompanying June 30, 1996 condensed
and consolidated balance sheet.
Related Party Transactions
Sale of Oil and Gas Leases and Wells. In December 1994, the Registrant entered
into an arrangement to sell certain proved and unproven gas reserves located in
Southeast Ohio for notes valued at approximately $426,000 to a party related to
an officer and shareholder of the Registrant. In connection therewith, the
Registrant obtained two notes, a $300,000 note bearing interest at 8% per
annum, payable at $10,000 per month beginning June 1995, and a $150,000
non-interest bearing note, payable based on 50% of production revenues in
excess of $10,000 per month, secured by the assets sold. The Registrant
recorded a loss on the sale of these assets of $567,000 in 1994. At June 30,
1996, the principal balance on the term note is approximately $192,000, and the
principal balance of the production note is $150,000.
Notes Payable. During 1994 and 1995, various corporate affiliates of Mr.
Arneault advanced an aggregate sum of approximately $100,000 to the Registrant's
ExCal subsidiary primarily to cover overhead expenses in connection with the
maintenance of leases and other costs associated with the Registrant's existing
oil and gas interests in Michigan and former interests in Ohio. In February
1996, such accrued amount, along with accrued interest thereon at the rate of
10% per annum, was converted into three demand promissory notes in the aggregate
principal amount of $100,218 payable to such corporate affiliates of Mr.
Arneault at the rate of 10% per annum. At June 30, 1996, two of the notes have
been paid and the principal balance on the remaining note payable is $15,000.
No material overhead expenses are expected to be incurred in 1996.
F-45
<PAGE>
NOTE 5 - LICENSING
In June 1996, Mountaineer's video lottery license was renewed through June 30,
1997.
NOTE 6 - SETTLEMENT AGREEMENT
In January 1993, the Registrant entered into a financing arrangement with
Jackpot Enterprises, Inc. On March 2, 1995, the Registrant settled a claim by
Jackpot, effective June 25, 1994, by agreeing to issue shares of its common
stock with registration rights. The number of shares is based on a guaranteed
price of $512,500 divided by the closing market price per share on the effective
date of registration. The Registrant recorded a provision for loss of $525,000
in connection with the settlement which was included in the consolidated
statement of operations for the year ended December 31, 1994.
The Registrant issued 125,000 shares to Jackpot on the date of the settlement
and, for every 60 days the registration statement remains unfiled, the
Registrant is obligated to issue an additional 12,500 shares, up to a maximum
of 125,000 additional shares. At June 30, 1996, 100,000 of such additional
shares have been issued; 37,500 of such additional shares were issued during
the six months ended June 30, 1996, to which a value of $52,000 was ascribed
and charged to accrued liabilities. The issuance of such shares has been, and
will continue to be reflected in the statement of stockholders' equity at no
additional value or consideration.
NOTE 7 - LONG-TERM DEBT
Construction Note Payable
In March 1996, Bennett Management & Development Corporation and its parent, The
Bennett Funding Group, Inc., filed for protection from creditors under Chapter
11 of the federal bankruptcy laws. The bankruptcy court subsequently assigned
a trustee to administer the affairs of the estates while in bankruptcy. The
Registrant has continued to remit interest and principal payments to Bennett
Management & Development Corporation under the terms of the construction loan
agreement, as amended January 1996. The outstanding principal balance of the
construction note payable is $9,633,333 at June 30, 1996. The Registrant paid
$566,666 and $638,000, respectively, of principal and interest relating to the
construction note in the first six months of 1996.
Term Notes
In September 1995, the Registrant entered into an agreement with its
totalisator system supplier to convert $461,000 of outstanding trade payables
into a term note. Under the terms of the agreement, the Registrant is required
to make 21 monthly interest and principal payments of $17,800 and 8
additional payments of approximately $17,800 on various dates through May 31,
1997. The loan, which is unsecured, bears interest at the rate of 12% per
annum. The loan is subject to an acceleration clause and other financial
disincentives in the event of default. At June 30, 1996, the outstanding
principal balance is $251,000. The Registrant paid $157,000 and $21,000 of
principal and interest, respectively, in the first six months of 1996 related
to this term note.
In May 1996, the Registrant reached a settlement agreement with the holder of
52,250 shares of redeemable common stock, valued at $313,000, as further
described in Note 9. Pursuant to the settlement agreement, the Registrant
agreed to pay $25,000 upon execution of the settlement agreement and delivered
a promissory note calling for a total of three payments of $5,000 due on August
1, 1996, November 1, 1996 and February 1, 1997; a payment of $50,087 on May 1,
1997; and a total of four annual payments of $40,087 due on May 1, 1998 through
2001. The
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<PAGE>
promissory note, which is unsecured, does not bear interest. The obligation to
pay the amounts identified above was discounted at the rate of 8%, and long
term debt in the amount of $206,000 was recorded in the Condensed and
Consolidated Balance Sheet, as of June 30, 1996.
The Registrant charged $601,000 and $760,000, respectively, to interest expense
relating to long-term debt in the six month periods ended June 30, 1996 and
1995. The Registrant capitalized $267,000 and $1,027,000 of interest in the
first two quarters of 1996 and 1995, respectively.
NOTE 8 - SHORT TERM NOTES PAYABLE
In the first half of 1996, the Registrant entered into a series of short-term
note agreements with three lenders aggregating $1,100,000. Under the terms of
the agreements the Registrant is obligated to repay a total of $1,302,000 in
interest and principal in 1996. In addition, the Registrant issued 100,000
shares of its common stock, and warrants to purchase 50,000 shares of its
common stock at $0.80 per share, valued in the aggregate at $81,000 as
supplemental consideration for the loans. The remaining principal balance of
the notes is $718,000 at June 30, 1996. Future principal obligations for the
loans, which are unsecured, are as shown below:
<TABLE>
<CAPTION>
July 1996 August 1996 Total
--------- ----------- --------
<S> <C> <C> <C>
$600,000 short-term notes dated March 22, 1996 $112,000 $106,000 $218,000
$250,000 short-term note dated May 30, 1996 250,000 0 250,000
$250,000 short-term note dated June 7, 1996 0 250,000 250,000
-------- -------- --------
$362,000 $356,000 $718,000
======== ======== ========
</TABLE>
The Registrant charged $192,000 to interest expense relating to short-term
notes in the first half of 1996.
NOTE 9 - CAPITAL TRANSACTIONS
During 1995, the Registrant incurred salaries to key members of management
totaling $204,000 which remained unpaid at December 31, 1995. On February 9,
1996, the board of directors approved two agreements to issue a total of
466,676 shares of the Registrant's common stock in satisfaction of $186,000 of
these liabilities (plus accrued interest of $3,300 calculated at the rate of
10% per annum) based on the closing market price of the stock on that day of
$.40625 per share. The agreements provide that for a term of one year
commencing February 9, 1996, in the event the initial holders propose to sell
any of the shares, they shall be required to notify the Registrant of such
intention and the Registrant may then elect, at any time before the proposed
date of sale, to purchase the shares at the price of $1.00 per share, payable
within two days after the date of such election. Otherwise, the shares may be
sold as proposed. In addition, the Registrant shall have the right at any time
to purchase the shares for a price of $1.00 per share within two days after
notice of its intention to do so.
In November 1995, the Registrant entered into an agreement to compensate a key
consultant for services previously rendered to the Registrant. The agreement
provided for the issuance of 200,000 shares of the Registrant's common stock to
the consultant and registration of the shares on From S-8 with the Securities
and Exchange Commission. The registration statement was filed on December 4,
1995, and the shares were issued effective January 19, 1996.
In November 1995, the Registrant's board of directors adopted an incentive
stock option plan meeting the requirements of Section 422 of the Internal
Revenue Code, subject to shareholder approval. In accordance with the plan,
500,000 shares were reserved for issuance on January 23,
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<PAGE>
1996 at an exercise price of $.5625 per share, based on the closing market
price of the stock on that day. The options are exercisable over a period of
five years, subject to certain limitations.
On January 23, 1996, the board of directors granted to its two outside
directors, Robert A. Blatt and Robert L. Ruben, non-qualified stock options to
purchase 50,000 shares and 75,000 shares of the Registrant's common stock,
respectively, at the fair market value of the shares on the date of grant of
$0.5625 per share. The options are immediately exercisable for a term of five
years.
On March 22, 1996, the Registrant issued 100,000 shares of common stock in
connection with the short-term financing described in Note 8 above. Such
shares were valued at the fair market value of $.8125 per share on that date,
and are being amortized to interest expense over the life of the related loan.
In 1992, the Registrant acquired all of the capital stock of Golden Palace
Casinos, Inc. in exchange for 4,311,000 shares of the Registrant's common
stock. With respect to 209,000 shares of such stock, the founders of Golden
Palace Casinos were granted put rights requiring the Registrant to redeem such
shares at $6.00 per share at the request of the holders ("Redeemable Shares").
On June 30, 1995, holders of 104,500 Redeemable Shares received an aggregate of
366,750 shares of the Registrant's common stock, of which 276,750 shares are
subject to conversion into notes at a value of $1.50 per share or approximately
$417,000. The Registrant negotiated settlements in the second quarter of 1996
with the holders of the remaining 104,500 Redeemable Shares as described below
and in Note 7. As a result of these settlements, the Registrant recorded a
$211,000 increase to paid-in-capital, reflecting the reclassification of
104,500 shares to stockholders' equity. The $206,000 long-term note payable
was recorded in the accompanying Condensed and Consolidated Balance Sheet.
There was no gain or loss arising from the settlement agreements.
Pursuant to one of the settlement agreements, the Registrant agreed to issue
133,416 shares of the Registrant's common stock (the "Shares"). In the event
the average market price of the Registrant's common stock is less than $1.50
per share for the 90 trading days following the effective date of the
registration statement, the Registrant will be required to issue that number of
additional shares required to satisfy the difference between $1.50 per share
and such average market price. If the Shares were not registered by June 30,
1996, the Registrant agreed to execute a promissory note in the amount of
$200,125 with interest at 12% per year from the date of the note, payable in 24
equal monthly installments.
So long as the Registrant is not in default with respect to its repayment
obligations under the promissory note, if such note is required to be
delivered, then upon either (i) the registration of the Shares or (ii) the
eligibility of the Shares for public sale pursuant to SEC Rule 144, then the
Registrant shall receive as a credit against any amounts then due under the
note an amount equal to the average closing market price of the common stock
for the 90 trading days following the effective date of the registration
statement or the date the Shares become eligible for public sale under Rule
144. Upon execution and delivery of the promissory note, the Registrant will
have the right to repurchase the Shares for $1.50 per share and would, upon
such repurchase, receive a like credit against the amount due under the note.
The creditor may extinguish the Registrant's right of repurchase upon notice,
resulting in a credit against the note equal to $1.50 per share multiplied by
the number of shares as to which the right of repurchase had been extinguished.
NOTE 10 - SUBSEQUENT EVENTS
Finance Arrangement
On July 2, 1996, the Registrant's Mountaineer subsidiary entered into a
financing arrangement with a private lending firm for a working capital loan
and a commitment for first mortgage refinancing. The $5 million loan is
secured by a second mortgage on Mountaineer's real and
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<PAGE>
personal property and is guaranteed by the Registrant. The note evidencing the
loan calls for monthly payments of interest only at the rate of 12% per annum,
and a default rate of 22% per annum. The Registrant also agreed to issue the
lender 183,206 shares of its common stock and warrants to purchase an
additional 1,141,250 shares at $1.06 per share. The principal is to be repaid
at the end of the three year term, during which the loan is subject to, on each
anniversary date, additional fees in cash equal to 8% of the outstanding
principal balance, stock equal to 5% of the outstanding principal balance
(valued at the average closing bid price for the 30 days prior to each
anniversary date), and warrants to purchase 250,000 shares of common stock at
$1.06 per share. Certain restrictions are imposed limiting the Registrant's
ability to incur additional debt, make capital expenditures and increase
management's compensation, and anti-dilution provisions are included to protect
the lender in the event the Registrant issues additional securities at a price
below $1.06 per share without the consent of the lender or subsequent holders
of the warrants.
As part of the transaction, the lender also provided a one year commitment to
lend Mountaineer up to $11.1 million of additional funds to be used to
refinance the current first mortgage held by Bennett Management & Development
Corp. The commitment is subject to customary conditions, including negotiation
of definitive loan agreements. In connection with the financing commitment,
the Registrant agreed to pay a $110,000 commitment fee and to issue the lender
additional warrants to purchase 350,000 shares of common stock at $1.06 per
share.
In order to assure compliance with provisions of the West Virginia Racetrack
Video Lottery Act concerning control over a licensee of the State Lottery, the
lender has agreed that it may not own, through the exercise of warrants or
otherwise, more than 5% of the Registrant's outstanding common stock unless and
until the West Virginia Lottery Commission either (i) approves the lender or
(ii) provides an advisory opinion approving an arrangement whereby the lender
may own but may not have voting rights to any shares in excess of the 5%
threshold. If the lender becomes disqualified after such Lottery Commission
approval, any shares held in excess of the 5% threshold, if registered, shall
be sold by the lender in the market; otherwise such shares may be put to the
Registrant at the then market price, payable in cash or a note with interest
payable monthly at 24% per annum and all principal due in one year.
The Registrant agreed to register the stock and warrants with the SEC, subject
to cash penalties if such registration is not initially filed on or before
90 days from the date of the loan agreement, and up to two additional cash
penalties if the registration is not declared effective before seven and nine
months from the date of demand therefor by the lender. All warrants are
exercisable for a term of five years.
Net proceeds after repayment of a $250,000 loan from an affiliate of the lender
pending the closing, due diligence and loan origination fees, fees associated
with the take-out commitment and the costs of the transaction are approximately
$4.2 million. The loan proceeds will be used by Mountaineer to retire a
substantial portion of its accounts payable, make future site improvements and
decorate the Speakeasy Gaming Saloon. The loan proceeds will also be used for
television and print advertising campaigns in the Pittsburgh and Cleveland
markets.
Commencement of Video Slot Operations
On July 3, 1996, Mountaineer introduced several offerings of classic casino
"slot" games on 350 of its 800 video lottery terminals. The new games are
offered in addition to Mountaineer's existing gaming choices of video poker,
keno and blackjack. Mountaineer earned an average daily net win of $139 per
terminal in the first 33 days following installation of video slot games,
compared to $68 per terminal during the same period in 1995. There can be no
assurance that the revenue levels generated immediately after the inception of
video slot operations can be sustained in future periods.
Note Receivable
In 1995, the Registrant recorded a $50,000 loss provision in connection with a
short term loan advanced in 1994 to a company with a common significant
shareholder. In April 1996, a confessed judgment promissory note was obtained
to secure payment for the loan. Payment of $58,333, including interest at 8%
per annum, was due on August 4, 1996, however, no payment was made. The
Registrant is currently negotiating to collect the amount now due and will
proceed with legal action if Management determines that such negotiations
become unproductive.
F-49
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by
the Company in connection with the distribution of the securities being
registered hereby, other than underwriting discounts and commissions.
Registration Fees $ 628.60
Accountants' Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 75,000.00
Printing Expenses $ 10,000.00
Miscellaneous $ 5,000.00
Total $105,628.60
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of Delaware (the
"GCL") a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action,
suit or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful.
A corporation also may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation. However, in such an
action by or on behalf of a corporation, no indemnification may be made in
respect of any claim, issue or matter as to which the person is adjudged
liable to the corporation unless and only to the extent that the court
determines that, despite the adjudication of liability but in view of all
II-1
<PAGE>
the circumstances, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
In addition, the indemnification provided by Section 145 shall not be
deemed exclusive of any other rights to which those seeking indemnification
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
The Certificate and Bylaws of the Company are consistent with Section 145
of the GCL. The Certificate provides that no director shall be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except: i) for any breach of the
director's duty of loyalty to the corporation or its shareholders, ii) for
acts and omissions not in good faith or which involve intentional
misconduct or knowing violation of the law; iii) for acts for specified in
Title 8, Section 174 of the GCL, or iv) for which the director derived an
improper personal benefit.
In addition to the Certificate, the Company's By-laws provide
indemnification (the "Indemnity Provisions") for any person who is or was a
party to any threatened, pending or completed action, suit, or proceeding
whether civil, criminal, administrative, arbitrative, investigative
procedure by reason of the fact that he or she was a director, officer,
employee, fiduciary or agent of the Company or served in such capacity with
another entity at the Company's request (such persons are defined as
"Indemnified Party" or "Indemnified Parties"). With respect to third party
actions, the Indemnity Provisions represent the Company's commitment to
indemnify based on such persons incurring expenses (including legal fees)
judgments, fines, excise taxes, and amounts paid in settlement based on
civil or criminal matters. In the case of a civil matter, the Indemnified
Parties must have acted in good faith and in a manner reasonably believed
by that person to be in or not opposed to the best interests of the
Company. With respect to a criminal matter, the person must have had no
reasonable cause to believe that the conduct was unlawful.
With respect to derivative actions, Indemnified Parties are entitled
to indemnification for any and all expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the
settlement or defense of such actions. The Indemnified Party must show
that he or she acted in good faith and a manner reasonably believed by that
person to be in or not opposed to the best interests of the Company, except
that no indemnification shall be available if such person has been adjudged
liable for negligence or misconduct in performing his or her duties to the
Company, unless the court in which such action or suit was brought has
determined upon application that, despite the adjudication of liability but
in view of all of the circumstances of the case, the Indemnified Party is
fairly and reasonably entitled to indemnification for the expenses the
court deems proper. Nonetheless, if the Indemnified Party is successful on
the merits or otherwise, he or she need not show that the applicable
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<PAGE>
standard of conduct was met. If not successful on the merits, any
indemnification may only be made if the Indemnified Party applies to the
Company for indemnification and (i) a majority vote of a quorum of the
Board, or (ii) if a quorum is not available or even if obtainable, or if a
quorum of disinterested directly so directs, by independent legal counsel
in a written opinion, or (iii) by vote of the shareholders of the Company.
With respect to both derivative actions and actions and third party
actions, the Indemnity Provisions also provide for the advancement of
expenses, including actual and reasonable attorneys' fees, incurred in
defending or investigating any action, suit, proceeding or claim, subject
to a written affirmation by the Indemnified Party or person requesting an
advance for such Indemnified Party that he or she has met the applicable
standard of conduct and that he or she will repay such advance if it is
ultimately determined that he or she did not meet the applicable standard
of conduct.
Notwithstanding the foregoing, the Company has discretion to impose as
conditions to any of the Indemnification Provisions, such requirements as
may appear appropriate in the specific case including but not limited to:
a) that any counsel representing the person be mutually acceptable to the
Company and the Indemnified Party, b) that the Company has the right to
assume control of the defense of such Indemnified Party, and c) that the
Company shall be subrogated to the extent of any payments made by way of
indemnification to all of such Indemnified Party's right of recovery, and
do everything necessary to assure such rights of subrogation to the
Company.
The rights of Indemnified Parties under the Indemnity Provisions are
not exclusive of any other rights Indemnified Parties may have under the
Certificate, any agreement, vote of shareholders, vote of disinterested
directors, any liability insurance policies (which the Board in its
discretion may obtain) or otherwise.
Insofar as indemnification for liabilities arising under the Act may
be permitted to Indemnified Parties pursuant to the foregoing provisions,
or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such persons in connection with the securities
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
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<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 15, 1993, the Company issued 6,000 shares of Common Stock
to Herzog, Heine & Geduld pursuant to its exercise of certain warrants to
purchase Common Stock at $6.00 per share for an aggregate purchase price of
$360,000. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. section 1145.
On January 15, 1993, the Company issued 10,000 shares of Common Stock
to Spear Leeds & Kellogg pursuant to its exercise of certain warrants to
purchase Common Stock at $6.00 per share for an aggregate purchase price of
$60,000. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. section 1145.
On February 2, 1993, pursuant to a collateral pledge agreement, the
Company issued 30,000 shares of Common Stock to Jackpot Enterprises, Inc.
with an aggregate value of $90,000. This issuance was considered a private
transaction pursuant to Section 4(2) of the Act.
On February 4, 1993, the Company issued 5,659 shares of Common Stock
to Hector Salitrero in settlement of $26,710 in accrued liabilities for
legal services rendered prior to that date. This issuance was completed in
reliance on the exemption from registration provided by 11 U.S.C.
section 1145.
On February 4, 1993, the Company issued 3,957 shares of Common Stock
to Freer & Alagia in settlement of $38,200 in accrued liabilities for legal
services rendered prior to that date. This issuance was completed in
reliance on the exemption from registration provided by 11 U.S.C.
section 1145.
On February 16, 1993, the Company issued 14,500 shares of Common Stock
to Herzog, Heine & Geduld pursuant to its exercise of certain warrants to
purchase Common Stock at $6.00 per share for an aggregate purchase price of
$87,000. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. section 1145.
On February 18, 1993, the Company issued 20,000 shares of Common Stock
to Man & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of
$120,000. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. section 1145.
On February 19, 1993, the Company issued 40,171 shares of Common Stock
to Cede & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of
$241,026. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. section 1145.
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<PAGE>
On March 1, 1993, the Company issued 98 shares of Common Stock to Dean
Sessions pursuant to his exercise of certain warrants to purchase Common
Stock at $4.00 per share for an aggregate purchase price of $392. This
transaction was completed in reliance on the exemption from registration
provided by 11 U.S.C. section 1145.
On March 2, 1993, the Company issued 1,518 shares of Common Stock to
Cede & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 September 25, 1996, 9:28 PM per share for an
aggregate purchase price of $9,108. This transaction was completed in
reliance on the exemption from registration provided by 11 U.S.C.
section 1145.
On March 4, 1993, the Company issued 15,000 shares of Common Stock to
Herzog, Heine & Geduld pursuant to its exercise of certain warrants to
purchase Common Stock at $6.00 per share for an aggregate purchase price of
$90,000. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. section 1145.
On March 9, 1993, the Company issued 2,000 shares of Common Stock to
Cede & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of $12,000.
This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
On March 11, 1993, pursuant to a loan agreement, the Company issued
options to purchase 5,000 shares of Common Stock at an exercise price of
$8.70 to Arnold and Joyann M. Espeseth. The options, which vested upon
issuance, expired unexercised on March 11, 1995. This was a private
transaction effected pursuant to Section 4(2) of the Act.
On March 11, 1993, pursuant to a loan agreement, the Company issued
options to purchase 5,000 shares of Common Stock at an exercise price of
$8.70 to Brian Espeseth. The options, which vested upon issuance, expired
unexercised on March 11, 1995. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On March 22, 1993, the Company issued options to purchase 50,000
shares of Common Stock for $7.25 per share to M & R Investments, Inc.
These options vested upon issuance and expired unexercised on December 31,
1993. This was a private transaction effected pursuant to Section 4(2) of
the Act.
On March 30, 1993, the Company issued 47,781 shares of Common Stock to
Cede & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of
$286,686. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
On March 30, 1993, the Company issued 147 shares of Common Stock to
Paine Webber pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of $882.
This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
II-5
<PAGE>
On April 1, 1993, pursuant to a professional services agreement, the
Company approved the issuance of warrants to purchase up to 500,000 shares
of Common Stock at an exercise price of $7.00 per share to Crystal Asset
Management Group, Inc. The warrants were to vest incrementally from the
date of the agreement at the rate of 45,000 shares per month and were to be
exercisable through December 31, 1996. Warrants to purchase 135,000 shares
were actually issued and remained unexercised until they were canceled and
replaced pursuant to a settlement agreement, dated July 13, 1994, with
warrants to purchase 145,000 shares at $6.25 per share through December 31,
1996. The terms of the replacement warrants were modified pursuant to a
settlement agreement dated September 25, 1996, 9:28 PM.
On April 15, 1993, the Company issued 3,013 shares of Common Stock to
Charles Schwab pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of $18,078.
This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section> 1145.
On April 15, 1993, the Company issued 6 shares of Common Stock to Bear
Stearns Securities pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of $36.
This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section> 1145.
On April 15, 1993, the Company issued 72,271 shares of Common Stock to
Man & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of
$433,626. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
On April 15, 1993, the Company issued 19,317 shares of Common Stock to
Herzog, Heine & Geduld pursuant to its exercise of certain warrants to
purchase Common Stock at $6.00 per share for an aggregate purchase price of
$115,902. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
On April 15, 1993, the Company issued 1,202 shares of Common Stock to
National Financial Services pursuant to its exercise of certain warrants to
purchase Common Stock at $6.00 per share for an aggregate purchase price of
$7,212. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section> 1145.
On April 16, 1993, the Company issued 103,759 shares of Common Stock
to Cede & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of
$622,554. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section> 1145.
II-6
<PAGE>
On April 19, 1993, the Company issued 28,145 shares of Common Stock to
Cede & Company pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of
$168,870. This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
On April 22, 1993, the Company issued 3,243 shares of Common Stock to
Paine Webber pursuant to its exercise of certain warrants to purchase
Common Stock at $6.00 per share for an aggregate purchase price of $19,458.
This transaction was completed in reliance on the exemption from
registration provided by 11 U.S.C. <section>1145.
On May 7, 1993, in consideration of professional services rendered
pursuant to a consulting agreement, the Company issued 30,000 shares of
Common Stock with an aggregate value of $93,750 to Dallas Gold & Silver
Exchange. This was a private transaction effected pursuant to Section 4(2)
of the Act.
On May 7, 1993, the Company issued 18,333 shares of Common Stock to
Electronic Concepts, Inc. in settlement of $110,000 in accrued liabilities
for services rendered prior to that date. This was a private transaction
effected pursuant to Section 4(2) of the Act.
On May 7, 1993, pursuant to an amendment to an oil and gas property
acquisition agreement, the Company issued 226,286 shares of Common Stock to
Biscayne Petroleum Corporation for notes payable and interest with an
aggregate value of $792,000. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On May 13, 1993, pursuant to a stock exchange agreement, the Company
issued 4,321,00 shares of Common Stock with an aggregate value of
$3,210,481 to the shareholders of Golden Palace Casinos, Inc. in exchange
for all of the outstanding shares of common and preferred stock of Golden
Palace Casinos, Inc. These were private transactions effected pursuant to
Section 4(2) of the Act.
On May 13, 1993, pursuant to a stock exchange agreement, the Company
issued 416,197 shares of Common Stock with an aggregate value of $832,394
in exchange for debentures held by Golden Palace Casinos debenture holders.
These were private transactions effected pursuant to Section 4(2) of the
Act.
On May 21, 1993, pursuant to an amendment to an oil and gas property
acquisition agreement, the Company issued 98,333 shares of Common Stock to
nine oil and gas partnerships for a notes payable and interest with an
aggregate value of $123,000. This was a private transaction effected
pursuant to Section 4(2) of the Act. On October 1, 1995, pursuant to
another amendment, the Company authorized the issuance of 373,600
additional shares of Common Stock valued at $467,000. This transaction was
completed in reliance on the exemption from registration provided by
Section 4(2) of the Act.
On July 6, 1993, pursuant to an offering circular and subscription
agreement, the Company issued 60,000 shares of Common Stock to EBC Zurich
A. G. for an aggregate purchase price of $480,000, of which aggregate
commissions of $45,000 were paid. This transaction was completed in
reliance on the exemption from registration provided by Regulation S of the
Act.
II-7
<PAGE>
On July 27, 1993, pursuant to a subscription agreement, the Company
authorized the issuance 100,000 shares of Common Stock to Winterport
Holdings for a price of $4.95 per share. This transaction was to be
completed in reliance on the exemption from registration provided by
Regulation S of the Act. On September 22, 1993, the subject shares were
canceled and returned to authorized and unissued status when Winterport
canceled its subscription.
On August 1O, 1993, pursuant to an offering circular and subscription
agreement, the Company issued 55,000 shares of Common Stock to Now Model,
Inc. for a price of $5.0375 per share for an aggregate purchase price of
$277,063, of which aggregate commissions of $27,706 were paid. This
transaction was completed in reliance on the exemption from registration
provided by Regulation S of the Act.
On August 17, 1993, pursuant to a subscription agreement, the Company
issued 250,000 shares of Common Stock to Las Vegas Entertainment, Inc. for
a price of $3.00 per share. Pursuant to a settlement agreement, the
Company repurchased the shares for $3.00 per share on February 22, 1994.
This was a private transaction effected pursuant to Section 4(2) of the
Act.
On August 16, 1993, pursuant to an offering circular and subscription
agreement, the Company issued 79,076 shares of Common Stock to Mid Pacific
Bank, NV for a price of $5.50 per share for an aggregate purchase price of
$434,918, of which $52,992 was paid in commissions. This transaction was
completed in reliance on the exemption from registration provided by
Regulation S of the Act.
On August 16, 1993, pursuant to an offering circular and subscription
agreement, the Company issued 8,027 shares of Common Stock to Mid Pacific
Bank, NV for a price of $5.0375 per share for an aggregate purchase price
of $440,436, of which $4,044 was paid in commissions. This transaction was
completed in reliance on the exemption from registration provided by
Regulation S of the Act.
On August 17, 1993, pursuant to an offering circular and subscription
agreement, the Company authorized the issuance 22,610 shares of Common
Stock to Giga Distribution for a price of $5.0375 per share. This
transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act. On September 30, 1993,
the subject shares were canceled and returned to authorized and unissued
status when Giga Distribution canceled its subscription.
On August 17, 1993, pursuant to an offering circular and subscription
agreement, the Company issued 43,750 shares of Common Stock to Montagu
Capital for a price of $5.0375 per share for an aggregate purchase price of
$220,391, of which $22,039 was paid in commissions. This transaction was
completed in reliance on the exemption from registration provided by
Regulation S of the Act.
On September 2, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 30,000 shares of Common Stock to
Montagu Capital for a price of $5.50 per share for an aggregate purchase
price of $165,000, of which $30,375 was paid in commissions. This
transaction was completed in reliance on the exemption from registration
provided by Regulation S of the Act.
II-8
<PAGE>
On September 2, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 49,505 shares of Common Stock to
MidPacific Bank for a price of $5.40 per share for an aggregate purchase
price of $267,327, of which $44,678 was paid in commissions. This
transaction was completed in reliance on the exemption from registration
provided by Regulation S of the Act.
On September 29, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 300,000 shares of Common Stock
to European Private Investments, Inc., Panama for a price of $5.25 per
share for an aggregate purchase price of $1,575,000, of which $216,000 was
paid in commissions. This transaction was completed in reliance on the
exemption from registration provided by Regulation S of the Act.
On October 29, 1993, the Company issued options to purchase 10,000
shares of Common Stock for $8.00 per share to Curtis Russell, an outside
consultant. These options vested upon issuance and expired unexercised on
December 31, 1994. This was a private transaction effected pursuant to
Section 4(2) of the Act.
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance 25,000 shares
of Common Stock to Now Model, Inc. for a price of $3.90 per share. This
transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act. On December 1, 1993, the
subject shares were canceled and returned to authorized and unissued status
when Now Model, Inc. canceled its subscription.
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance 34,000 shares
of Common Stock to Now Model, Inc. for a price of $3.90 per share. This
transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act. On December 1, 1993, the
subject shares were canceled and returned to authorized and unissued status
when Now Model. Inc. canceled its subscription.
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance 20,611 shares
of Common Stock to Inversiones Paterik for a price of $3.90 per share.
This transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act. On December 1, 1993, the
subject shares were canceled and returned to authorized and unissued status
when Inversiones Paterik canceled its subscription.
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance 8,365 shares of
Common Stock to Trex International Commercializadora for a price of $3.90
per share. This transaction was to be completed in reliance on the
exemption from registration provided by Regulation S of the Act. On
December 1, 1993, the subject shares were canceled and returned to
authorized and unissued status when Trex International Commercializadora
canceled its subscription.
II-9
<PAGE>
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance 3,921 shares of
Common Stock to Inverlink CA, Venezuela for a price of $3.90 per share.
This transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act. On December 1, 1993, the
subject shares were canceled and returned to authorized and unissued status
when Inverlink CA, Venezuela canceled its subscription.
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance of 50,000
shares of Common Stock to Montagu Capital for a price of $3.90 per share.
This transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act. On December 1, 1993, the
subject shares were canceled and returned to authorized and unissued status
when Montagu Capital canceled its subscription.
On November 17, 1993, pursuant to an offering circular and
subscription agreement, the Company authorized the issuance 50,000 shares
of Common Stock to Atlantic Global Management for a price of $3.90 per
share. This transaction was to be completed in reliance on the exemption
from registration provided by Regulation S of the Act. On December 1,
1993, the subject shares were canceled and returned to authorized and
unissued status when Atlantic Global Management canceled its subscription.
On November 19, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 28,156 shares of Common Stock to
Inversiones Paterik, CA for a price of $3.50 per share for an aggregate
purchase price of $98,546, of which $33,280 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On November 23, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 33,600 shares of Common Stock to
Now Model, Inc., BVI for a price of $3.125 per share for an aggregate
purchase price of $105,000, of which $20,458 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On November 24, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 28,571 shares of Common Stock to
Banco Cooperativo Costar RL for a price of $3.50 per share for an aggregate
purchase price of $99,999, of which $33,770 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On November 24, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 14,285 shares of Common Stock to
Banco Cooperativo Costar RL for a price of $3.50 per share for an aggregate
purchase price of $49,998, of which $16,885 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
II-10
<PAGE>
On November 30, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 5,357 shares of Common Stock to
Inverlink CA, Venezuela for a price of $3.50 per share for an aggregate
purchase price of $18,750, of which $6,332 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On November 30, 1993, pursuant to an offering circular and
subscription agreement, the Company issued 11,428 shares of Common Stock to
Trex International Commercializadora for a price of $3.50 per share for an
aggregate purchase price of $39,998, of which $13,494 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On December 2, 1993, pursuant to a consulting agreement, the Company
issued warrants to purchase 100,000 shares of Common Stock for $3.00 per
share to Cyndel & Company, Inc., 50,000 of which were exercisable from
December 2, 1993 through December 2, 1994, and the remaining 50,000 from
March 2, 1994 through March 1995. This was a private transaction effected
pursuant to Section 4(2) of the Act. None of these warrants were exercised
by the time they were canceled and replaced with other warrants pursuant to
a consulting agreement dated September 21, 1994 whereby the Company
approved the issuance of warrants to purchase up to 120,000 shares of
Common Stock for $3.00 per share to Cyndel. The new warrants were to be
issued in equal monthly increments for twelve months commencing October 21,
1994, and exercisable for a term of two years from the date issuance.
Warrants to purchase 20,000 shares were actually issued by November 1,
1994, when the consulting agreement was canceled along with the warrants
for the remaining 100,000 shares. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On December 15, 1993, pursuant to an oil and gas joint operating
agreement, the Company issued options to purchase 121,500 shares of Common
Stock for $4.00 per share to Fleur-David Corporation. These options
replaced options previously issued to Fleur-David Corporation on December
15, 1992 to purchase 130,000 shares of Common Stock for $3.30 per share.
The new options vested upon issuance and had an expiration date, as
extended, of December 15, 1995. Fleur-David Corporation exercised options
to purchase 50,000 shares in June 28, 1994, and the remaining options to
purchase 71,500 shares expired unexercised. This was a private transaction
effected pursuant to Section 4(2) of the Act.
On January 7, 1994, pursuant to an offering circular and subscription
agreement, the Company authorized the issuance 200,000 shares of Common
Stock to MidPacific Bank NV for a price of $3.00 per share. On January 27,
1994, the subject shares were canceled and returned to authorized and
unissued status when MidPacific Bank NV canceled its subscription. This
transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act.
II-11
<PAGE>
On January 7, 1994, pursuant to an offering circular and subscription
agreement, the Company authorized the issuance 100,000 shares of Common
Stock to Global Financial Services SA for a price of $3.00 per share. On
January 27, 1994, the subject shares were canceled and returned to
authorized and unissued status when Global Financial Services SA canceled
its subscription. This transaction was to be completed in reliance on the
exemption from registration provided by Regulation S of the Act.
On January 12, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 8,000 shares of Common Stock to Jose Tost for
a price of $3.00 per share for an aggregate purchase price of $24,000, of
which $3,949 was paid in fees and commissions. This transaction was
completed in reliance on the exemption from registration provided by
Regulation S of the Act.
On January 14, 1994, pursuant to an offering circular supplement and
subscription agreement, the Company issued 48,611 shares of Common Stock to
Banco Cooperativo Costar RL for a price of $3.00 per share for an aggregate
purchase price of $145,833, of which $23,996 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On January 17, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 5,000 shares of Common Stock to Offshore
Investment Fund Ltd. for a price of $3.00 per share for an aggregate
purchase price of $15,000, of which $2,467 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company authorized the issuance 300,000 shares of Common
Stock to Metro Funding Corp SA for a price of $3.00 per share. On March 1,
1994, the subject shares were canceled and returned to authorized and
unissued status when Metro Funding Corp SA canceled its subscription. This
transaction was to be completed in reliance on the exemption from
registration provided by Regulation S of the Act.
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company issued options to purchase 50,000 shares of Common
Stock for $3.50 per share to Thomas and Regina Farida. These options
vested upon issuance and expired unexercised on January 18, 1995. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company issued options to purchase 50,000 shares of Common
Stock for $3.50 per share to John and Thomas Farida. These options vested
upon issuance and expired unexercised on January 18, 1995. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company issued options to purchase 50,000 shares of Common
Stock for $3.50 per share to Ronald and Ban Farida. These options vested
upon issuance and expired unexercised on January 18, 1995. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
II-12
<PAGE>
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company issued options to purchase 50,000 shares of Common
Stock for $3.50 per share to Larry and Denise Farida. These options vested
upon issuance and expired unexercised on January 18, 1995. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company issued options to purchase 50,000 shares of Common
Stock for $3.50 per share to Terry and Karen Farida. These options vested
upon issuance and expired unexercised on January 18, 1995. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 18, 1994, pursuant to an offering circular and subscription
agreement, the Company issued options to purchase 100,000 shares of Common
Stock for $3.50 per share to Pattah Investments, Inc. These options vested
upon issuance and expired unexercised on January 18, 1995. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 21, 1994, pursuant to an offering circular supplement and
subscription agreement, the Company issued 13,157 shares of Common Stock to
Trex International Commercializadora for a price of $3.00 per share for an
aggregate purchase price of $39,471, of which $6,495 was paid in fees and
commissions. This transaction was completed in reliance on the exemption
from registration provided by Regulation S of the Act.
On January 24, 1994, the Company issued 28,388 shares of Common Stock
to Freer & Alagia Chartered in settlement of $102,197 in accrued
liabilities for services rendered prior to that date. The shares were
subsequently registered on Form S-8 filed with the Securities Exchange
Commission on January 24, 1994. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On January 24, 1994, the Company issued 14,539 shares of Common Stock
to Patrick H. Allen in settlement of $52,340 in accrued liabilities for
services rendered prior to that date. The shares were subsequently
registered on Form S-8 filed with the Securities Exchange Commission on
January 24, 1994. This was a private transaction effected Pursuant to
Section 4(2) of the Act.
On January 24, 1994, the Company issued 37,728 shares of Common Stock
to Robert L. Ruben in settlement of $135,821 in accrued liabilities for
services rendered prior to that date. The shares were subsequently
registered on Form S-8 filed with the Securities Exchange Commission on
January 24, 1994. This was a private transaction effected pursuant to
Section 4(2) of the Act.
On January 28, 1994, the Company issued 10,000 shares of Common Stock
to Matthew A. Valentine in settlement of $30,000 in accrued liabilities for
services rendered prior to that date. This was a private transaction
effected pursuant to Section 4(2) of the Act.
II-13
<PAGE>
On February 3, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 50,000 shares of Common Stock to Thomas and
Regina Farida for an aggregate purchase price of $175,000. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On February 3, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 50,000 shares of Common Stock to John and
Thomas Farida for an aggregate purchase price of $175,000. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On February 3, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 50,000 shares of Common Stock to Ronald and
Ban Farida for an aggregate purchase price of $175,000. This transaction
was completed in reliance on the exemption from registration provided by
Section 4(2) of the Act.
On February 3, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 50,000 shares of Common Stock to Larry and
Denise Farida for an aggregate purchase price of $175,000. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On February 3, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 50,000 shares of Common Stock to Terry and
Karen Farida for an aggregate purchase price of $175,000. This transaction
was completed in reliance on the exemption from registration provided by
Section 4(2) of the Act.
On February 3, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 100,000 shares of Common Stock to Pattah
Investments, Inc. for an aggregate purchase price of $350,000. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On February 15, 1994, pursuant to an offering circular and
subscription agreement, the Company issued 200,000 shares of Common Stock
to European Private Investments, Inc., Panama for a price of $3.00 per
share for an aggregate purchase price of $600,000, of which $60,000 was
paid in commissions. This transaction was completed in reliance on the
exemption from registration provided by Regulation S of the Act.
On February 16, 1994, pursuant to a consulting agreement, the Company
issued 58,333 shares of Common Stock with an aggregate value of $175,000 to
Lease Equities Fund, Inc. This transaction was completed in reliance on
the exemption from registration provided by Section 4(2) of the Act.
II-14
<PAGE>
On February 23, 1994, pursuant to a consulting agreement, the Company
issued warrants to purchase 300,000 shares of Common Stock for $4.00 per
share to Laddenburg, Thalmann & Company, exercisable from February 28, 1994
through February 28, 2000. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On March 2, 1994, pursuant to an offering circular and subscription
agreement, the Company issued 50,000 shares of Common Stock to Sal
Cuccurullo, Panama for a price of $3.00 per share for an aggregate purchase
price of $150,000, of which $15,000 was paid in commissions. This
transaction was completed in reliance on the exemption from registration
provided by Regulation S of the Act.
On April 22, 1994, pursuant to a subscription agreement, the Company
issued 50,000 shares of Common Stock to Sal Cuccurullo, Panama for a price
of $3.00 per share for an aggregate purchase price of $150,000, of which
$15,000 was paid in commissions. This transaction was completed in
reliance on the exemption from registration provided by Regulation S of the
Act.
On April 16, 1994, the Company issued 2,500 shares of Common Stock to
Gary C. Wykidal in settlement of $6,500 in accrued liabilities for services
rendered prior to that date. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On April 22, 1994, pursuant to a consulting agreement, the Company
issued warrants to purchase 100,000 shares of Common Stock for $3.00 per
share to Turin & Associates. The warrants were exercisable from the date
of issuance through April 22, 1996, at which time they expired unexercised.
This was a private transaction effected pursuant to Section 4(2) of the
Act.
On April 26, 1994, pursuant to a purchase agreement for an interest in
a joint venture, the Company issued 50,000 shares of Common Stock with an
aggregate value of $300,000 to Regal Casinos, Inc. This was a private
transaction effected pursuant to Section 4(2) of the Act.
On April 26, 1994, pursuant to a stock award outside a plan, the
Company issued 20,000 shares of Common Stock with an aggregate value of
$46,000 to Edson R. Arneault. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On April 26, 1994, pursuant to a stock award outside a plan, the
Company issued 25,000 shares of Common Stock with an aggregate value of
$57,500 to Albert A. Forte. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On April 29, 1994, the Company issued 10,681 shares of Common Stock to
Archisystems International in settlement of $39,655 in accrued liabilities
for services rendered prior to that date. The shares were subsequently
registered on Form S-8 filed with the Securities Exchange Commission in
April 1994. This was a private transaction effected pursuant to Section
4(2) of the Act.
On April 29, 1994, the Company issued 5,556 shares of Common Stock to
Urban Systems in settlement of $20,000 in accrued liabilities for services
rendered prior to that date. The shares were subsequently registered on
Form S-8 filed with the Securities Exchange Commission in April 1994. This
was a private transaction effected pursuant to Section 4(2) of the Act.
On February 16, 1994, pursuant to a consulting agreement, the Company
issued 125,000 shares of Common Stock with an aggregate value of $250,000
to Campai Investments, Ltd. This transaction was completed in reliance on
the exemption from registration provided by Section 4(2) of the Act.
II-15
<PAGE>
On June 28, 1994, in payment of financing costs pursuant to a
construction loan agreement, the Company approved the issuance of 510,000
shares of Common Stock to Bennett Management & Development Corporation.
The Company was obligated to register the shares by a certain deadline or
be subject to put rights at $6.00 per share. By December 31, 1994, the
Company had issued 285,000 of such shares at an aggregate value of
$1,710,000, and by December 31, 1995, Company had issued the remaining
225,000 shares at an aggregate value of $1,350,000. Pursuant to an
amendment to the construction loan agreement, the put rights were cancelled
and replaced 20,000 shares causing the entire transaction to have a net
aggregate value of $1,530,000. This transaction was completed in reliance
on the exemption from registration provided by Section 4(2) of the Act.
On June 28, 1994, the Company issued 50,000 shares of Common Stock to
Fleur-David Corporation pursuant to its exercise of certain options to
purchase Common Stock at $4.00 per share for an aggregate purchase price of
$200,000. This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On September 1, 1994, the Company authorized the issuance of up to
36,000 shares of Common Stock in payment of consulting fees to Eli
Dragasich. Of this amount, 1O,800 shares with an aggregate value of $5,832
were issued on August 29, 1995, and 15,600 shares with an aggregate value
of $8,775 were issued on June 28, 1996. This was a private transaction
effected pursuant to Section 4(2) of the Act.
On September 12, 1994, pursuant to an employment agreement, the
Company issued options to purchase 30,000 shares of Common Stock for $2.00
per share to Paul E. Anthony. One third of the options vested after one
year with the balance vesting in equal monthly increments over the
following two years. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On September 12, 1994, pursuant to an employment agreement, the
Company issued options to purchase 30,000 shares of Common Stock for $2.00
per share to Pat Marasco. One third of the options vested after one year
with the balance vesting in equal monthly increments over the following two
years. The underlying shares are subject to registration on Form S-8.
This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On October 1, 1994, pursuant to an employment agreement, the Company
issued options to purchase 30,000 shares of Common Stock for $2.00 per
share to David J. Mesko. One third of the options vested after one year
with the balance vesting in equal monthly increments over the following two
years. The underlying shares are subject to registration on Form S-8.
This transaction was completed in reliance on the exemption from
registration provided by Section 4(2) of the Act.
On October 3, 1994, the Company issued 20,917 shares of Common Stock
to Lawrence Manypenny in settlement of $73,209 in accrued liabilities for
services rendered prior to that date. This was a private transaction
effected pursuant to Section 4(2) of the Act.
II-16
<PAGE>
On December 14, 1994, in payment of interest expense pursuant to an
amendment to an oil and gas property acquisition agreement, the Company
issued 5,000 shares of Common Stock with an aggregate value of $4,700 to
various oil and gas partnerships. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On January 24, 1995, the Company issued 216,667 shares of Common Stock
to William and Bonnie Blair pursuant to their exercise of certain options
to purchase Common Stock at $0.50 per share. The options were issued to
the Blairs in December 1992 as employment compensation by the Company and
all of the shares were registered on Form S-8 filed with the Securities
Exchange Commission on January 20, 1995. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On February 28, 1995, pursuant to a settlement agreement, the Company
authorized the issuance of up to 250,000 shares of Common Stock to Jackpot
Enterprises, Inc. The Company recorded a provision for loss of $525,000 in
connection with the settlement. By December 31, 1995, 175,000 of such
shares were issued with an aggregate value of $414,000, and the accrued
liability was reduced by this amount. By September 1996, an additional
62,500 of such shares were issued with an aggregate value of $92,500, and
the accrued liability was further reduced by this amount. This was a
private transaction effected pursuant to Section 4(2) of the Act.
On May 31, 1995, pursuant to a severance agreement, the Company issued
options to purchase 15,000 shares of Common Stock for $2.00 per share to
Robin L. Reynolds. The options vested at the date of issuance and are
exercisable for a term of five years. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On July 26, 1995, pursuant to a severance agreement, the Company
issued 10,000 shares of Common Stock with an aggregate value of $6,563, to
Robin L. Reynolds. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On August 29, 1995, pursuant to a settlement agreement, the Company
issued 56,532 shares of Common Stock with an aggregate value of $78,439 to
Lawrence Manypenny. This was a private transaction effected pursuant to
Section 4(2) of the Act.
II-17
<PAGE>
On September 11, 1995, pursuant to an incentive stock option plan, the
Company approved the issuance of options to purchase 378,415 shares of
Common Stock for $1.22 per share to Edson R. Arneault. The options vested
upon approval, are exercisable for a term of five years, and the underlying
shares are subject to registration on Form S-8. This was a private
transaction effected pursuant to Section 4(2) of the Act.
On September 11, 1995, pursuant to an incentive stock option plan, the
Company approved the issuance of options to purchase 222,316 shares of
Common Stock for $1.22 per share to Thomas K. Russell. The options vested
upon approval, are exercisable for a term of five years, and the underlying
shares are subject to registration on Form S-8. This was a private
transaction effected pursuant to Section 4(2) of the Act.
On September 11, 1995, pursuant to an incentive stock option plan, the
Company approved the issuance of options to purchase 222,316 shares of
Common Stock for $1.22 per share to Donald G. Saunders. The options vested
upon approval, are exercisable for a term -office years, and the underlying
shares are subject to registration on Form S-8. This was a private
transaction effected pursuant to Section 4(2) of the Act.
On October 1, 1995, pursuant to a severance agreement, the Company
issued options to purchase 30,000 shares of Common Stock for $2.00 per
share to Bobbe A. Sigler. The options vested at the date of issuance and
are exercisable for a term of five years. The underlying shares are
subject to registration on Form S-8. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On November 14, 1995, pursuant to a settlement agreement, the Company
issued 201,750 shares of Common Stock to Glenn Hall. The shares were
issued in exchange for cancellation of $6.00 put rights in connection with
52,250 shares issued to Mr. Hall in 1992 with an aggregate value of
$313,500. This was a private transaction effected pursuant to Section 4(2)
of the Act.
On November 14, 1995, the Company issued 40,000 shares of Common Stock
to Glenn Hall pursuant to his exercise of certain options to purchase
Common Stock at $0.01 per share. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On November 20, 1995, pursuant to a settlement agreement, the Company
issued 165,000 shares of Common Stock to Michael Mapes. The shares were
issued in exchange for cancellation of $6.00 put rights in connection with
52,250 shares issued to Mr. Mapes in 1992 with an aggregate value of
$313,500. This was a private transaction effected pursuant to Section 4(2)
of the Act.
On November 20, 1995, the Company issued 30,000 shares of Common Stock
to Michael Mapes pursuant to his exercise of certain options to purchase
Common Stock at $0.01 per share. This transaction was completed in
reliance on the exemption from registration provided by Section 4(2) of the
Act.
On December 4, 1995, pursuant to a settlement agreement, the Company
issued 60,850 shares of Common Stock with an aggregate value of $43,000 to
Dublin Energy Corporation. This was a private transaction effected
pursuant to Section 4(2) of the Act.
On January 19, 1996, pursuant to a consulting agreement, the Company
issued 200,000 shares of Common Stock with an aggregate value of $106,125
to Donald G. Saunders. The issuance of the shares was authorized by the
Company on November 17, 1995. The shares were registered on Form S-8 filed
with the Securities Exchange Commission on December 4, 1995. This was a
private transaction effected pursuant to Section 4(2) of the Act.
II-18
<PAGE>
On January 23, 1996, pursuant to an employee stock option plan, the
Company authorized the issuance (subject to shareholder approval) of
options to purchase 300,000 shares of Common Stock for $0.5625 per share to
Edson R. Arneault. If approved, the options would vest upon issuance, be
exercisable for five years and the underlying shares would be subject to
registration on Form S-8.
On January 23, 1996, pursuant to an employee stock option plan, the
Company authorized the issuance (subject to shareholder approval) of
options to purchase 100,000 shares of Common Stock for $0.5625 per share to
Thomas K. Russell. If approved, the options would vest upon issuance, be
exercisable for five years and the underlying shares would be subject to
registration on Form S-8.
On January 23, 1996, pursuant to an employee stock option plan, the
Company authorized the issuance (subject to shareholder approval) of
options to purchase 100,000 shares of Common Stock for $0.5625 per share to
an employee pool to be allocated by the Compensation Committee of the Board
of Directors. If approved, the options would vest upon issuance, be
exercisable for five years and the underlying shares would be subject to
registration on Form S-8.
On January 23, 1996, pursuant to a severance agreement, the Company
issued options to purchase 30,000 shares of Common Stock for $0.5625 per
share to Julie Waring. The options vested at the date of issuance and are
exercisable for a term of five years. The underlying shares are subject to
registration on Form S-8. This transaction was completed in reliance on
the exemption from registration provided by Section 4(2) of the Act.
On January 23, 1996, pursuant to an outside directors compensation
agreement, the Company issued options to purchase 75,000 shares of Common
Stock for $0.5625 per share to Robert L. Ruben. The options vested at the
date of issuance and are exercisable for a term of five years. The
underlying shares are subject to registration on Form S-8. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On January 23, 1996, pursuant to an outside directors compensation
agreement, the Company issued options to purchase 50,000 shares of Common
Stock for $0.5625 per share to Robert A. Blatt. The options vested at the
date of issuance and are exercisable for a term of five years. The
underlying shares are subject to registration on Form S-8. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On February 9, 1996, the Company approved the issuance of 362,866
shares of Common Stock, valued at $0.40625 per share, to Edson R. Arneault
in settlement of $147,414 in accrued liabilities for services rendered
prior to that date. The shares are subject to registration on Form S-8.
This was a private transaction effected pursuant to Section 4(2) of the
Act.
On February 9, 1996, the Company approved the issuance of 103,810
shares of Common Stock, valued at $0.40625 per share, to Thomas K. Russell
in settlement of $42,173 in accrued liabilities for services rendered prior
to that date. The shares are subject to registration on Form S-8. This
was a private transaction effected pursuant to Section 4(2) of the Act.
II-19
<PAGE>
On May 1, 1996, pursuant to a loan agreement, the Company issued
100,000 shares of Common Stock, with an aggregate value of $81,250, to
AstraFund Limited. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On July 26, 1996, pursuant to a severance agreement, the Company
issued 15,000 shares of Common Stock, with an aggregate value of $7,500, to
Bobbe A. Sigler. The shares are subject to registration on Form S-8. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On July 2, 1996, pursuant to a bridge loan between Bridge Capital LLC
and the Company, the Company issued 25,000 warrants to purchase Common
Stock for $3,125. This was a private transaction effected pursuant to
Section 4(2) of the Act.
On July 2, 1996, pursuant to a bridge loan between Brownstone Holdings
LLC and the Company, the Company issued 25,000 warrants for $3,125. This
was a private transaction pursuant to Section 4(2) of the Act.
On July 2, 1996, pursuant to a loan agreement, the Company issued
183,206 shares of Common Stock, with an aggregate value of $250,000, to
Madeleine LLC. This transaction was completed in reliance on the exemption
from registration provided by Section 4(2) of the Act.
On July 2, 1996, pursuant to a loan agreement, the Company issued
warrants to purchase 1,491,250 shares of Common Stock for $1.06 per share
to Madeleine LLC. The warrants were exercisable upon issuance and expire
on July 2, 2001. This transaction was completed in reliance on the
exemption from registration provided by Section 4(2) of the Act.
On July 2, 1996, pursuant to a loan agreement, the Company issued
warrants to purchase 25,000 shares of Common Stock for $0.80 per share,
with an aggregate value of $3,125, to Bridge Capital LLC. The warrants
were exercisable upon issuance and expire on July 2, 2001. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
On July 2, 1996, pursuant to a loan agreement, the Company issued
warrants to purchase 25,000 shares of Common Stock for $0.80 per share,
with an aggregate value of $3,125, to Bridge Capital LLC. The warrants
were exercisable upon issuance and expire on July 2, 2001. This
transaction was completed in reliance on the exemption from registration
provided by Section 4(2) of the Act.
On July 10, 1996, pursuant to a settlement agreement, the Company
issued 133,416 shares of Common Stock to Dorothy van Haaften. The shares
were issued in exchange for cancellation of $6.00 put rights in connection
with 52,250 shares issued to Mr. Hall in 1992 with an aggregate of
$313,500. This was a private transaction effected pursuant to Section 4(2)
of the Act.
II-20
<PAGE>
ITEM 16. EXHIBITS
The following are filed either as exhibits to this Registration
Statement or incorporated by reference to the exhibits to prior
Registration Statements and reports of the Company as indicated:
<TABLE>
<CAPTION>
Exhibit No. or
Incorporation BY REFERENCE
Exhibit No.
ITEM TITLE
<S> <C> <C>
3.1 Restated Certificate of Incorporation for Winners **
Entertainment, dated
August 17, 1993
3.2 By Laws *
4.1 Specimen of Common Stock Certificates *
4.2 Warrant Certificate No. 1 issued to Madeleine, LLC, ~~~~
dated July 2, 1996, to purchase 891,250 shares of Common
Stock of Winners Entertainment, Inc. at $1.06 per share
for five years commencing July 2, 1996.
5.1 Opinion of Ross & Hardies E-1
10.1 Amendment to June 27, 1994 Construction Loan Agreement, ~~~
dated October 31, 1995, among Bennett Management &
Development Corporation, the Company and Mountaineer
10.2 Construction Loan Agreement Amendment between the ***
Mountaineer, Gamma of West Virginia and Bennett
Management & Development Corp.
10.3 Term Loan Agreement among Mountaineer Park, Inc., ~~~~
Winners Entertainment, Inc. and Madeleine, LLC, dated
July 2, 1996
10.4 First Amendment to Term Loan Agreement among ~~~~
Mountaineer, the Company and Madeleine, LLC, dated July
2, 1996
10.5 Promissory Note by Mountaineer, Inc. to Madeleine, LLC, ~~~~
dated July 2, 1996
10.6 Security Agreement made by Mountaineer Park, Inc. in ~~~~
favor of Madeleine, LLC, dated July 2, 1996
10.7 Deed of Trust, Leasehold Deed of Trust, Security ~~~~
Agreement, Assignment, Fixture Filing and Financing
Statement by and among Mountaineer Park, Inc., Deborah
A. Sink and Carl D. Andrews as Trustees, and Madeleine,
LLC as the Secured Party, dated July 2, 1996
10.8 Stock Transfer Agreement between the Company and ~~~~
Madeleine, LLC, dated July 2, 1996
II-21
<PAGE>
10.9 Registration Rights Agreement between Madeleine, LLC and ~~~~
Winners Entertainment, Inc., dated July 2, 1996
10.10 Financing Commitment from Madeleine, LLC to Mountaineer, ~~~~
dated July 2, 1996.
10.11 October 31, 1995 Amendment to June 27, 1994 Construction ****
Loan Agreement by and among Bennett Management &
Development Corporation, Mountaineer, and the Company
10.20 November 28, 1995 Amendment to June 27, 1994 ****
Construction Loan Agreement by and among Bennett
Management & Development Corporation, Mountaineer, and
the Company
10.12 Construction Loan Agreement for $10.2 million between ****
the Company, Mountaineer, Gamma International, Ltd. and
Bennett Management & Development Corp.
10.13 January 12, 1996 Amendment to June 27, 1994 Construction ****
Loan Agreement by and among Bennett Management &
Development Corporation, Mountaineer, and the Company
10.14 November 29, 1995 Agreement by and between Autotote ****
Systems, Inc. and Mountaineer Park, Inc. for totalisator
services provided pursuant to an agreement dated
September 21, 1984, as amended. Letter agreement dated
April 12, 1995 attached as Exhibit "A"
10.15 Totalisator Services Agreement between Autotote Systems, ****
Inc. dated November 29, 1995 and Mountaineer
10.16 Master Lease Agreement #154920 and Schedule 2 thereto ****
between IGT-North America and Mountaineer for video
lottery machine equipment lease dated June 19, 1995
10.17 Amendment to Master Lease Agreement by and among IGT- ****
North America, Mountaineer and the Company dated March
26, 1996
10.18 Note for $10.2 million between the Company, Mountaineer ****
and Bennett Management & Development Corp.
10.19 Amendment, dated February 10, 1995, to Construction Loan ~
Agreement, dated June 27, 1995, between Mountaineer
Park, Inc. and Bennett Management & Development
Corporation
10.20 Amendment, dated May 11, 1995, to Totalisator Services ~
Agreement, dated March 15, 1988, between Autotote
Limited and Mountaineer
10.21 Master Lease Agreement, dated August 10, 1994, between ~
IGT-North America and Mountaineer
10.22 Totalisator Services Agreement, dated ~
March 15, 1988, between Autotote Limited and Mountaineer
Park, Inc.
10.23 Amendment, dated April 10, 1995, to Construction Loan ~~
Agreement, dated June 27, 1994, between Mountaineer and
Bennett Management & Development Corporation
II-22
<PAGE>
10.24 Amendment, dated July 7, 1995, to Construction Loan ~~
Agreement, dated June 27, 1994, between Mountaineer and
Bennett Management & Development Corporation
23.1 Consent of Ross & Hardies (included in Exhibit 5.1) E-1
23.2 Consent of Corbin and Wertz E-2
27.0 Financial Data Schedule ~~~~
</TABLE>
* Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 31, 1989 and incorporated herein by
reference thereto.
** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 31, 1993 and incorporated herein by
reference thereto.
*** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended December 31, 1994 and incorporated herein by
reference thereto.
**** Previously filed as an exhibit to the Company's Form 10-K for the
Fiscal Year ended June 30, 1994 and incorporated herein by reference
thereto.
~ Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended March 31, 1995 and incorporated herein by reference thereto.
~~ Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended June 30, 1995 and incorporated herein by reference thereto.
~~~ Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended September 30, 1995 and incorporated herein by reference thereto.
~~~~ Previously filed as an exhibit to the Company's 10-Q for the Quarter
ended June 30, 1996 and incorporated herein by reference thereto.
II-23
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in the periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-24
<PAGE>
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to any provision or
arrangement, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 18. FINANCIAL STATEMENTS AND SCHEDULES.
Schedule II Valuation and Qualifying Accounts is included as an
exhibit hereto and follows the signatures hereto.
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Laguna
Beach, State of California, on September 26, 1996.
WINNERS ENTERTAINMENT, INC.
(Company)
By:/s/EDSON R. ARNEAULT
Edson R. Arneault, President and
Chief Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/EDSON R. ARNEAULT Director, President and September 27, 1996
Edson R. Arneault Chief Executive Officer
(Principal Executive Officer)
/s/THOMAS K. RUSSELL Director, Secretary, September 27, 1996
Thomas K. Russell Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
/s/ROBERT L. RUBEN Director, Assistant September 27, 1996
Robert L. Ruben Secretary
/s/ROBERT A. BLATT Director September 27, 1996
Robert A. Blatt
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
Balance At Additions Deductions Balance at End
Beginning of of Period
Period
<S> <C> <C> <C> <C>
Year ended, December 31, 1995
(1):
Provision for doubtful notes $ -- $ 290,000 $ --(1) $ 290,000
receivable
Allowance for deferred tax $6,868,000 $1,592,000 $ -- $8,460,000
assets
$6,868,000 $1,882,000 $ -- $8,750,000
Year ended, December 31,
1994(1):
Allowance for deferred tax $3,467,000 $3,401,000 $ -- $6,868,000
assets
Year ended, December 31,
1993(1)
Allowance for deferred tax $1,079,000 $2,388,000 $ -- $3,467,000
assets
</TABLE>
(1) During each of the years reported, allowances for trade
receivables were not significant.
<PAGE>
EXHIBIT INDEX
Exhibit
Numbers
5.1 Opinion of Ross & Hardies
23.1 Consent of Ross & Hardies
(Incorporated in Exhibit 5.1)
23.2 Consent of Corbin & Wertz
<PAGE>
September 27, 1996
Winners Entertainment, Inc.
1461 Glenneyre Street, Suite F
Laguna Beach, CA 92651
Re: Winners Entertainment, Inc.
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
You have requested our opinion with respect to the public
offering and sale by certain selling stockholders (the "Selling
Stockholders") of Winners Entertainment, Inc., a Delaware corporation (the
"Company"), pursuant to a Registration Statement on Form S-1 (the
"Registration Statement") of up to 1,726,066 shares of the Company's common
stock, $.00001 par value per share (the "Common Stock") and up to 1,542,860
of the Company's outstanding warrants (the "Warrants") to purchase
1,542,860 shares of Common Stock held by the Selling Stockholders as
described in the Registration Statement. Of the 1,726,066 shares of Common
Stock, (i) 183,206 shares are outstanding and held by one of the Selling
Stockholders (the "Outstanding Common Shares"), and (ii) 1,542,860 shares
(the "Warrant Shares") are issuable upon exercise of the Warrants.
In connection with this opinion we have examined the Term Loan
Agreement dated July 2, 1996 between the Company as Guarantor, Mountaineer
Park, Inc., a wholly owned subsidiary of the Company, and one of the
Selling Stockholders; the Registration Rights Agreement dated as of July 2,
1996 and entered into by and among the Company and one of the Selling
Stockholders (the "Registration Rights Agreement"); the Warrant
Certificates dated July 2, 1996 representing the Warrants; the Company's
Certificate of Incorporation, as amended; the Company's By-laws, as
amended; records of applicable corporate proceedings of the Company; and
such other documents as we have deemed necessary as a basis for the opinion
herein expressed. With respect to such examination we have assumed the
legal capacity to sign and the genuineness of all signatures appearing on
all documents presented to us as originals, and the conformity to the
originals of all documents presented to us as conformed or reproduced
copies. With respect to factual matters relevant to such opinion, we have
relied, without independent verification thereof, upon representations,
oral and written, of appropriate executive officers, directors and
responsible employees and agents of the Company.
1
<PAGE>
Based upon the foregoing, and in reliance thereon, and subject to
the limitations and qualifications set forth herein, we are of the opinion
that:
1. The Outstanding Common Shares are legally and validly
issued, fully paid, and non-assessable.
2. The Warrants are legally and validly issued, fully paid, and
non-assessable.
3. When issued and paid for in accordance with the Warrants,
the Warrant Shares will be legally and validly issued, fully paid and non-
assessable shares.
We consent to the use of our name in the Registration Statement
and the related Prospectus under the caption "Legal Matters", and we
consent to the filing of this opinion as an Exhibit to the Registration
Statement.
Very truly yours,
/s/ROSS & HARDIES
ROSS & HARDIES
2
<PAGE>
Exhibit 23.2
CONSENT OF CORBIN & WERTZ
Winners Entertainment, Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
/S/CORBIN & WERTZ
Corbin & Wertz
Irvine, California
September 25, 1996
