As filed with the Securities and Exchange Commission on
November 14, 1996
Registration No. 333-12839
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
to the
REGISTRATION STATEMENT
on
FORM S-1
Under
THE SECURITIES ACT OF 1933
--------------------
MTR GAMING GROUP, INC.
(formerly known as 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
MTR GAMING GROUP, 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.
<PAGE>
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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Proposed
class of maximum Amount of
securities to Amount to be offering price Aggregate registration
be registered registered per unit offering price fee
- ------------- ------------ -------------- -------------- ---
<S> <C> <C> <C> <C>
Shares of 183,206 Shares $1.03125 per $188,931.18 $65.15
Common Stock, Share
par value
$.00001
per share (1)
Shares of 1,492,860 $1.06 per $1,582,431.60 $545.67
Common Stock, Shares Share
par value
$.00001
per share (2)
Shares of 50,000 Shares $1.03125 per $51,562.50 $17.78
Common Stock, Share
par value
$.00001
per share (3)
Warrants to 1,542,860 --- --- ---
purchase an Warrants
aggregate of
1,542,860
shares of
Common Stock,
par value
$.00001 per
share (4)
Totals $628.60(5)
</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 high bid and low 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 shares of Common Stock 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 upon the exercise of
the $.80 Warrants (as defined herein). The $.80 Warrants to purchase
50,000 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 . In accordance with
Rule 457(g), no separate registration fee is required for the resale
of the Warrants.
(5) Previously paid.
<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;
of Prospectus Outside Back Cover Page of
Prospectus
Summary Information, Risk Factors and Prospectus Summary; Summary
Ratio of Earnings to Fixed Charges Consolidated Financial and
Operating Data; 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; Price
Registrant 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 Description of Securities
Indemnification for Securities Act
Liabilities
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 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
MTR GAMING GROUP, 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 MTR Gaming Group, Inc. ("MTR" or
the "Company"), formerly known as Winners Entertainment, Inc., of (i) warrants
to purchase up to an aggregate of 1,492,860 shares of common stock, par value
$.00001 per share (the "Common Stock") of the Company at a price of $1.06 per
share, subject to adjustment (the "$1.06 Warrants"); (ii) warrants to purchase
up to an aggregate of 50,000 shares of Common Stock at a price of $0.80 per
share, subject to adjustment (the "$.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 currently outstanding and held by one of
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 through the close of business on July 2, 2001. Except with respect
- ii -
<PAGE>
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."
The Common Stock is quoted on the NASDAQ SmallCap Market. On November
4, 1996 the high bid and low asked quotations of the Common Stock were $1 3/16
and $1 3/16, 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 $96,000. 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 November __, 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") pursuant to the Securities Act of 1933,
as amended (the "Securities 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.................................................. ... 16
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.......................................................... 62
EXECUTIVE COMPENSATION...............................................64
CERTAIN TRANSACTIONS................................................ 69
PRINCIPAL STOCKHOLDERS.............................................. 73
SELLING STOCKHOLDERS................................................ 75
PLAN OF DISTRIBUTION................................................ 78
DESCRIPTION OF SECURITIES........................................... 79
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 merged with
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. At the annual meeting of stockholders on October 15, 1996, the
stockholders of the Company approved a change of the Company's name from Winners
Entertainment, Inc. to MTR Gaming Group, Inc.
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 , 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.
<PAGE>
Racetrack Facilities
Mountaineer Park offers live horse racing before 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 around the country.
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 and an additional 68
patrons may be seated on an outside deck, weather permitting. 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
- 2 -
<PAGE>
at the Speakeasy Gaming Saloon. The Lodge parking lots have a combined capacity
for approximately 370 vehicles.
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, 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, the Company installed slot games on the first 350 of
its 800 VLTs. In October 1996, the Company installed slot games on an additional
50 VLTs bringing the total number of VLTs with slot games to 400. 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 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.
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<PAGE>
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
On October 23, 1996, the Company announced its unaudited results of
operations for the three months ended September 30, 1996. Total revenues for the
period were $13,097,000 as compared to $7,904,000 for the three months ended
September 30, 1995, which represents a $5,193,000 or 66% increase. The Company
reported net income of $1,448,000 for the third quarter of 1996, or $.08 per
share. This represents a $2,083,000 increase from the $635,000 net loss, or $.04
per share, reported for the same period in 1995.
The Company also announced that its net win (gross wagers less payouts
to players) from video lottery operations for the third quarter 1996 increased
93% to $10,067,000 from $5,220,000 for the third quarter 1995, or $137 per
machine per day for the third quarter 1996, as compared to $71 per machine per
day for the third quarter 1995. The Company realized an increase of $3,375,000
in operating income from a loss of $1,037,000 in the third quarter of 1995 to
$2,338,000 for the same period of 1996.
Total revenues for the first nine months of 1996 were $29,198,000, up
$10,444,000, or 56%, from the $18,754,000 reported for the same period last
year. Net income increased to $1,333,000 or $.07 per share, for the first nine
months of 1996 from a loss of $3,384,000, or $.21 per share, for the first nine
months of 1995.
At the annual meeting of stockholders on October 15, 1996 , the
stockholders approved (i) an amendment to the Company's Restated Certificate of
Incorporation (the "Certificate") to change the Company's name to "MTR Gaming
Group, Inc. " and (ii) an amendment to the Company's Certificate to increase the
number of authorized shares of Common Stock from 25 million to 50 million.
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<PAGE>
The Company has filed an amended Certificate with the Secretary of State of
Delaware to reflect these changes.
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 a 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 Term 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 Term 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, all of the 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, Common
Stock equal to 5% of the outstanding principal balance divided by the average
daily closing price on each business day for the 30 days prior to the third day
before the 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 of Common Stock and
warrants issuable to the lender in connection with the Term Loan Agreement in
the future, and the shares of Common Stock 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 Warrant 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."
- 5 -
<PAGE>
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 $1.06. 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.
This Registration Statement is being filed by the Company based on its
agreement to register the Common Stock and Warrants , subject to cash penalties
if it 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 be used
for television and print advertising campaigns in the Pittsburgh and Cleveland
markets.
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<PAGE>
MTR, 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) 1,542,860 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 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."
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"
- 7 -
<PAGE>
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "intends," 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 forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
anticipated 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 Possible 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 originated 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
short term debt and redeemable Common Stock) would have been approximately $15
million, consisting of $9.6 million outstanding under the Company's first
mortgage loan (the "Bennett Loan") from Bennett , $5 million outstanding under
the Term Loan and approximately $459,000 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 became effective October 31,
1996. 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,
- 8 -
<PAGE>
and bears a default rate of 22% per year. The principal of the Term Loan must be
repaid at the end of the three year term, during which period, the loan is
subject , on each anniversary date, to additional fees of cash equal to 8% of
the outstanding principal balance, Common Stock equal to 5% of the outstanding
principal balance divided by the average daily closing price of the Common Stock
on each business day for the 30 days prior to the third day before the
anniversary date, and warrants to purchase 250,000 shares at $1.06 per share.
See "Selected Financial 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" and "Description
of Certain Indebtedness."
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 1996 .
- 9 -
<PAGE>
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 . 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 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
- 10 -
<PAGE>
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 "Risk Factors - Impact of Anti-takeover Measures" and "Description
of Securities - Common Stock - Anti-takeover Provisions".
Pursuant to both the Racing Commission's and Lottery Commission'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 current 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
- 11 -
<PAGE>
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 would have a material adverse effect on the
Company's business.
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, President 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 has 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,
- 12 -
<PAGE>
destination gaming facilities in Las Vegas and Atlantic City, as well as 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 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 gaming
machines than Mountaineer, or gaming machines which are superior to those
offered by 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 thereunder, 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 stockholder 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 recreation business. 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
- 13 -
<PAGE>
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.
Cyclical Nature of Business. The Company's primary business involves
leisure and entertainment. During periods of recession or economic downturn,
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. In addition, 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 have a material adverse effect on 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 the 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 stockholders. 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 under Rule
144 adopted by the Commission under the Securities Act ("Rule 144"). Of these
restricted shares, 183,206 are covered by this Registration Statement, and
approximately 4,136,936 were eligible to be sold under Rule 144 . The (i)
183,206
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<PAGE>
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 restriction under the Securities Act, except that any shares acquired 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 registered herein, as of September 13,
1996 there were outstanding options and warrants to purchase an aggregate of
4,764,630 shares of Common Stock . In addition to the shares of Common Stock and
Warrants registered herein, the Company has filed a registration statement with
respect to 4,836,340 shares of Common Stock, of which, 3,272,221 shares of
outstanding Common Stock, 878,250 shares of Common Stock issuable upon the
exercise of certain warrants of the Company, and 685,869 shares of Common Stock
issuable upon the exercise of certain options of the Company. The future sale of
a substantial number of shares of Common Stock by existing holders of Common
Stock , and/or 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 the
outstanding options or warrants of the Company. See "Shares Eligible for Future
Sale" and "Description of Securities Registration Rights."
Impact of Anti-takeover Measures. Certain provisions of the
Company's Certificate 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 future for shares of the
Company's Common Stock. Specifically, the Company's Certificate requires the
Board of Directors (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 stockholders 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 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."
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.
- 15 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1996 and as adjusted to reflect the closing of the Term Loan
($4,378,000 net proceeds) on July 2, 1996, the repayment of $250,000 of short
term debt with the proceeds of the Term Loan, the issuance of 183,206 shares of
Common Stock with an estimated fair value of $250,000 as discounted and the
issuance of warrants to purchase 50,000 shares of the Company's Common Stock
with an estimated fair value of $6,000.
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(2) 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 at
June 30, 1996; issued and outstanding
18,869,375 shares at June 30, 1996(1)
and 19,052,581 shares as adjusted 2,000 2,000
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
=========== ===========
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<PAGE>
(1) Excludes 4,836,340 shares of Common Stock reserved as of July 2, 1996
for issuance pursuant to outstanding options and warrants to purchase
Common Stock. At the annual meeting of stockholders, the Company
received stockholder approval to amend its Certificate to increase the
authorized Common Stock from 25,000,000 to 50,000,000. The Company has
filed an amended Certificate with the Secretary of State of Delaware
to reflect this change.
(2) Does not give effect to the Amendment to the Bennett Loan which became
effective October 31, 1996. The Amendment readjusts the amortization
schedule of the Bennett Loan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources" and "Description of Certain Indebtedness."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded under the symbol "MNTG". The
Company's Common Stock is quoted on the NASDAQ SmallCap Market. On November 4,
1996, the high bid and low asked quotations for the Company's Common Stock were
$1 3/16 and $1 3/16, 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 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 three 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.
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<PAGE>
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 9/16 1 1/16
Fourth Quarter 1 3/16 1 7/32
Year Ending December 31, 1996:
First Quarter 29/32 11/32
Second Quarter 1 17/32 9/16
Third Quarter 1 1/2 13/16
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 , certain of which are 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 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.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended December 31 Six Months
Ended June 30,
1995 1994 1993 1992 1991 1996 1995
---- ---- ---- ---- ---- ---- ----
Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $24,979,000 $14,682,000 $12,797,000 $690,000 $0 $16,101,000 $10,824,000
Net loss from
continuing
operations (5,313,000) (6,902,000) (5,913,000) (2,749,000) (447,000) (115,000) (2,646,000)
Loss per share
from continuing
operations (.33) (.48) (.46) (.42) (.07) (.01) (.17)
Balance Sheet Data:
Working Capital
(Deficiency) (7,286,000) (1,808,000) 313,000 60,000 (415,000) (8,412,000) (4,406,000)
Current Assets 1,972,000 3,555,000 2,354,000 2,974,000 375,000 2,204,000 2,696,000
Current Liabilities 9,258,000 5,363,000 2,041,000 2,914,000 790,000 10,616,000 7,102,000
Total Assets 25,747,000 23,958,000 19,137,000 16,812,000 478,000 25,614,000 27,695,000
Total Liabilities 19,763,000 14,200,000 6,040,000 5,641,000 1,565,000 19,031,000 18,878,000
Total
Stockholders'
Equity (Capital
Deficiency) 5,984,000 9,758,000 13,097,000 11,171,000 (1,087,000) 6,583,000 8,817,000
</TABLE>
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."
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<PAGE>
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
Years Ended December 31
-------------------------------
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
=========== =========== ============
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.
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
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<PAGE>
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
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, representing an increase of $3.5 million. In April 1995,
Mountaineer Park began offering greyhound off-track betting, which 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
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<PAGE>
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.
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.
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<PAGE>
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.
Years Ended December 31
--------------------------
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
=========== ============ ===========
Years Ended December 31
------------------------
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
========== ========== ==========
Video Lottery Terminals Operating Costs
Taxes on statutory assessments applicable to VLT revenues 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
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<PAGE>
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 from 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 than those previously in
effect as follows:
March 18, 1994 March 17, 1994
and Beyond and Prior
---------------------- ---------------------
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%
----- -----
(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.
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 up to
$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
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<PAGE>
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'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 operations. 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
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 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.
Costs of Other Operating Revenues
Cost of other revenues, 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.
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<PAGE>
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 $838,000 in 1994 to $935,000 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.
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
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<PAGE>
to $1,109,000 or $297,000 and advertising expenses increased from $709,000 to
$838,000. 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 a settlement negotiated in 1995 with Bennett, $998,000 of 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, a reflection of the $5.9 million investment in
property, plant and equipment during that period. Depreciation and amortization
expenses in 1994 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.
During the years 1994 and 1993, the Company incurred noncash expenses
of $2.9 million and $2.4 million, including depreciation and amortization
expenses 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.")
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:
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<PAGE>
Six Months Ended
June 30, June 30,
1996 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
==================== ====================
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
June 30 June 30
1996 1995
------------------- ---------------------
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
=================== =====================
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
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<PAGE>
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:
Six Months Ended
June 30 June 30
1996 1995
------------------------------------
Total parimutuel wagering handle $20,182,000 $19,242,000
Less patrons' winning (15,990,000) (15,314,000)
tickets
--------------------------------
4,192,000 3,928,000
Less:
State and County parimutuel (246,000) (224,000)
tax
Purses and Horsemen's (1,781,000) (1,656,000)
Association
--------------------------------
Parimutuel Commissions $2,165,000 $2,048,000
================================
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.
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<PAGE>
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.
Operating Costs
Operating costs and gross profit earned from operations for the six
month periods ended June 30, 1996 and 1995 are as follows:
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<PAGE>
Six Months Ended
Operating Costs June 30 June 30
1996 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 June 30
1996 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
======================================
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
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<PAGE>
in the consolidated statements of operations. Fund payments for
the respective six-month periods are as follows:
Six Months Ended
June 30 June 30
1996 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
================== ====================
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
stockholders 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 .
- 32 -
<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 racing activity. 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 stockholder. General and
administrative expenses at Mountaineer reflected a 13% decrease, from $1.6
million for 1995 to
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$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 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 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 terms substantially less favorable to
the Company than initially foreseen or, alternatively, to write down the value
of such assets
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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
five of the 36 requisite monthly principal payments in May, June, July , August
and September 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
discussed below or additional financing on terms more favorable than those of
the Bennett Loan, the Company could continue to pay such indebtedness and meet
all of its other obligations. The Company is taking the following measures
discussed below to address its near-term 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
$8.8 million as of September 30, 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
permits prepayment by the Company without interest or 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 continued negotiations
with the Trustee and reached an agreement to restructure the Bennett Loan which
became effective on October 31, 1996.
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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 was approved by the United States Bankruptcy Court for the Northern
District of New York (the "Bankruptcy Court") on October 22, 1996. Based on this
Amendment, the Company and Mountaineer agreed to dismiss their lawsuit against
Bennett with prejudice. The material terms of the Amendment are as follows:
The Amendment modifies 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 1996
through March 1997, $125,000 per month from April 1997 through September 1997,
$75,000 per month from October 1997 through March 1998, $125,000 per month from
April 1998 to September 1998, and $75,000 per month from October 1998 to March
1999. The remaining principal balance is 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 ("Madeleine")
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 1996 through March 1997 and to $200,000 from April 1997
through September 1997 .
The Amendment modifies 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 permits 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 equivalent to more 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.
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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 stockholder 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. See "Registration Rights".
In the event the Trustee desires to sell any of the shares of Common
Stock held by Bennett, the Amendment also grants the Company the right to match
any bona fide offer of a non-affiliate 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 the
Company 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
terminated the Management Agreement and settled all of the accounts of the
parties as of June 30, 1995.
$5 Million Term Loan
On July 2, 1996, the Company and Mountaineer entered into a financing
arrangement with a private lender for the Term Loan and 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 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 Warrants to purchase an additional
1,142,860 shares for no separate consideration at $1.06 per share. 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, Common Stock equal to 5% of the outstanding principal balance
divided by the average daily closing price of the Common Stock on each business
day for the 30 days prior to the third day before the 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 pay trade accounts payable, fund future capital
expenditures, and launch extensive television and print advertising campaigns.
See "Description of Certain Indebtedness."
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$11.1 Million First Mortgage Commitment
As part of the Term Loan transaction, the lender also provided the Loan
Commitment which expires on June 30, 1997, whereby the lender agreed 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 Loan 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 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 $1.06 per share.
If the Company is able to close such financing, the Loan Commitment
provides 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 of
Common Stock 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 repay the Bennett Loan. The fair value of the issuance of
such shares of Common Stock 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 any other 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
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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 intends to 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.
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 Saloon now stands at 750. Extensive off-track wagering
facilities continue to be maintained at the Speakeasy Gaming
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Saloon. Lodge parking lots have a combined capacity for approximately 370
vehicles.
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
during 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 constituting 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 lodging, 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 Racing Commission. The Company's license was renewed in December 1995, and
will remain effective 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
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simulcast wagers is generally allocated proportionately between the host
racetrack and Mountaineer on the basis of the amounts wagered at their
respective facilities.
Video Lottery Operations
The Company is subject to annual licensing requirements established by
the 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. 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 working on the development of progressive gaming software for the
Company's existing VLTs. Management's target date for implementation of
progressive gaming
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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 these 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 the June 2, 1994 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 Bennett Loan.
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,
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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 $10,000 per month
for possible additional services to 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. 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 would 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.
The personal involvement of the two stockholders 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 stockholder 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 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 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.
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Lodge customers principally include local residents and business
travelers visiting nearby steel plants and other businesses on weekdays, 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, and an
additional 68 persons may be seated on an outside deck, weather permitting. 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
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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 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
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Saloon, parking lot expansion and general paving. The cost of these improvements
is not expected to exceed $1.5 million.
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 simulcast 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 , once at Mountaineer Park, be 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 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.
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
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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
races 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 which it can export to other
racetracks, off-track betting facilities, casinos and other gaming
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
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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 of 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'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.
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
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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. 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.
Employees
As of October 14, 1996, Mountaineer had approximately 478 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
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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 October 14, 1996, the Company also employed one person, at its current
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 1996 .
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 by 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.
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.
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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 signed 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 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.
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
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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) ,
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 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. In connection with the
relicensing proceedings held in June 1996, the Lottery Commission released an
opinion dated May 9, 1996 to the effect that because Bennett had the right to
vote less
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than 5% of the outstanding stock of Winners Entertainment, Inc., the Company's
previous name, 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 in
policy by the Lottery Commission could affect Mountaineer's license and thus
adversely affect the Company.
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.
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 do 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, provided that 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
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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, President and Chief Executive
Officer and a Director of the Company. Mr. Arneault was not affiliated with the
Company at the time of such acquisition. 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
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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 of a 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 which 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 stockholder 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.
Plan of Orderly Liquidation
On March 31, 1993, the Company's Board approved a formal plan to divest
its oil and gas operations over a
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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. ("DAVE"), whose principal
stockholder is the brother of Edson R. Arneault, the President and Chief
Executive Officer and a 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".
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
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<PAGE>
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 current
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 facilities 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 (principal balance of
approximately $8.8 million as of September 30, 1996) and (ii) a second deed of
trust in favor of Madeleine collateralizing indebtedness aggregating $5 million
in principal.
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 Condition and Results of
Operations - Results of Discontinued Operations," and Note 10 of the Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
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<PAGE>
Equipment Leases
At Mountaineer Park, the Company leases 800 video lottery machines, a
totalisator system, video tape and closed circuit television 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
a monthly rental payment of $1,395. The lease for this office expires on October
31, 1996. The Company plans to close this office and move its corporate offices
to Mountaineer Park on or about November 30, 1996.
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 as well as a financing
arrangement, and for alleged intentional torts in refusing to issue the shares
of Common 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 Common Stock previously issued to Jackpot, based on the market
price for the Common Stock on the date the registration statement becomes
effective, will provide net proceeds of $512,500 to 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 declared 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 of such
registration statement. In no event, however, would the Company have been
required to issue more than 250,000 shares. Through October 31, 1996, the
Company has issued 220,000 shares (excluding the 30,000 shares referred to
above) of its Common Stock in accordance with terms of the agreement. Such
shares
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<PAGE>
are covered by another registration statement filed with the Commission.
In July 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 subject to 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.
The Company has filed a registration statement with respect to 145,000 shares of
Common Stock issuable upon exercise of warrants held by CAM. 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 Mr. 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.
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
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<PAGE>
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 believes that this matter will be covered by insurance. There can be
no assurance that the Company's insurance coverage will be sufficient to cover
completely 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.
MANAGEMENT
Executive Offices and Directors
The following table sets forth information regarding the directors and
executive offices of the Company.
Name Age Position and Office Held
---- --- ------------------------
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
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 Company's
Board 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
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<PAGE>
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") , a Nevada corporation owned and controlled by certain
members of management and stockholders of the Company, and Mountaineer . 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 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 has been chairman and majority owner
of CRC Group,
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<PAGE>
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, of the NASD and the 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 $100,000 in the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation
-------------------
Awards Payouts
------ -------
Other Restricted
Annual Stock Options LTIP All
Salary Bonus Comp. Awards SARs Payouts Other
Name Year ($)(1) ($) ($)(2) ($) ($)(4) ($) Comp.
---- ---- -------- ----- -------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Edson R. Arneault(5) 1995 213,652 23,000 - - 618,415 - -
Chairman, President and
Chief Executive Officer of
MTR Gaming Group, Inc. 1994 188,729 - 4,021 46,000(3) - - -
1993 151,865 - - - - -
Thomas K. Russell(5) 1995 147,288 - - - 358,316 - -
Secretary, Treasurer,
Chief Financial Officer,
General Counsel and
Director of MTR Gaming
Group, Inc. 1994 134,075 - 2,789 - - - -
1993 109,597 16,250 - - - - -
Michael R. Dunn (6) 1995 38,659 - - - 240,000 - 176,973
Former President and 1994 204,437 - 12,500 - - -
1993 161,436 36,250 - - - - -
Chief Executive Officer of
Winners Entertainment, Inc.
Compensation paid to all
officers
and directors as a
group during 1995 1995 399,599 23,000 - - 975,731 - -
</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 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 stockholders held September 11,
1995.
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<PAGE>
(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.
OPTION GRANTS IN 1995
The following table contains information concerning the grant of stock
options during fiscal year 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
---------------
% of
Total
Options
Granted
Options in Fiscal Exercise Expiration
Name Granted Year Price Date 5% 10%
---- ------- ---- ------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Edson R. 378,415 45.98% $1.219 Sept. 1998 $72,711 $152,686
Arneault
240,000 30.00% $2.000(1) Oct. 1997 0 0
Thomas K. 223,316 27.01% $1.219 Sept. 1998 $42,176 $89,702
Russell
135,000 11.25% $2.000(1) Oct. 1997 0 0
Michael R. 240,000 20.00% $2.000(1) Oct. 1997 0 0
Dunn
</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 the
stockholders voted at the annual stockholders' meeting, to reduce the
exercise price of such incentive stock options from $4.875 to $2.00
per share.
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<PAGE>
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the number and
value of options held by each of the Company's executive officers named in the
Summary Compensation Table as of December 31, 1995. None of the named executive
officers exercised any stock options during fiscal year 1995.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised in-
Underlying Unexercised the-Money Options at Year
Options at Fiscal Year End ($)(1)
End(2)
------------------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edson R. 759,749 - 0 -
Arneault
Thomas K. 436,816 - 0 -
Russell
Michael R. 419,133 - 0 -
Dunn
</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 $0.5625 . The options are subject to approval at the
next annual meeting of stockholders. Such option grants were made in
1996, and are not reflected in the table above.
TEN-YEAR OPTIONS/SAR REPRICINGS
The following table sets forth the number of options held by officers
of the Company subject to repricing during the fiscal year ended December 31,
1995. See table entitled "Option Grants in 1995".
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<PAGE>
<TABLE>
<CAPTION>
Length of
Exercise Original
Market Price Price at Option Term
Number of of Stock at Time of Remaining at
Repricing or Repricing or New Exercise Date of
Options/SARs Amendment Amendment Price Repricing or
Name Date Amended ($) ($) ($) Amendment
Fiscal Year
- -----------------------------------------------------------------------------------------------------------------------------------
<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. Sep. 95 135,000 1.563 4.875 2.00 2 years
Dunn (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 of their transactions in the Company's securities with the
Commission. 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
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<PAGE>
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.
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 or 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
Exchange Act , (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
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<PAGE>
locations at which the Company does business or at which the employee knows that
the Company contemplates doing business.
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 . 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 for the Central District of
California, 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 of reorganization, in exchange for all of 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 of 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
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<PAGE>
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 (i) the
acquisition by ExCal of 77 operating wells formerly owned by limited
partnerships (the "Partnerships") controlled by Mr. Arneault, (ii) the
acquisition of all of the stock of Crystal Exploration Company, Inc. from
Century Energy Management Company, Inc., another affiliate of Mr. Arneault, and
(iii) 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 of directors
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
March 25, 1993 modification of the note, the balance remaining to be paid by the
Company to the Partnerships was $590,000 . Pursuant to the modification, the
Company paid $100,000 cash and issued 98,333 shares of its Common Stock to the
Partnerships, which, based on the then current market value of the Common Stock,
satisfied the Company's obligation thereunder. 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
Securities Act. Because the registration statement covering the Partnership's
shares did not become effective before March 31, 1995, the March 30, 1995
modification of the agreement (i) reinstated the note with a principal amount of
$590,000 and 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, 1996 and twelve payments of principal and interest from November 1,
1995 through October 1, 1996 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
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<PAGE>
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 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, 1996 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, a member of the Company's Board, 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 stockholder of
the Company outstanding as of December 31, 1995 and 1994 respectively, as well
as additional noninterest bearing advances of $62,000 made in 1994, which was
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<PAGE>
subsequently converted into an additional note. The $240,000 note receivable
bears interest at 8% per annum, is due on demand, and is unsecured. No demand
has been made by the Company's management through December 31, 1995, as
management believes recovery is doubtful.
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 stockholder of both
the Company and the recipient. During 1995, the Company recorded a provision for
loss in the amount of $50,000. In April 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 stockholder of
Mountaineer and an existing stockholder of the Company.
At December 31, 1993, the Company had a $70,000 demand note due to an
officer/stockholder of the Company 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, thus no additional
compensation expense was recorded as a result of this issuance of Common Stock.
Common 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, 367,937 shares of Common Stock 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
shares of Common Stock 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 with a guaranteed selling price of $1.50 per share , until such time as
such shares are included in a registration statement filed with the Commission.
All of such shares are included in a registration statement which the Company
has filed with the Commission. At November 2, 1996, 281,843 shares of redeemable
Common Stock were outstanding.
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<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 13 , 1996, the
ownership of the Company's Common Stock by persons owning more than 5% of such
stock, and the ownership of such stock by the executive officers named in the
summary compensation table, the directors individually and the officers and
directors as a group. As of September 13, 1996 there were 18,869,397 shares of
Common Stock outstanding. All such shares were owned both beneficially and of
record, except as otherwise noted.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percentage of
Name and Address Ownership Class
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edson R. Arneault(1) 2,412,133 12.3
7199 Thornapple Drive
Ada, MI 49301
Donald G. & Bonnie Saunders 1,164,685 6.0
1987 Family Trust(2)
900 East Desert Inn Road,
Suite 521
Las Vegas, Nevada 89109
Madeleine LLC(3) 1,676,066 8.2
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
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<PAGE>
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>
(1) Includes 20,000 shares and options and other rights to acquire
beneficial ownership of 1,122,615 shares within 60 days of September
13, 1996 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 of 625,869 shares exercisable within 60
days of September 13, 1996, held directly by Mr. Saunders and
indirectly by a trust.
(3) Includes 183,206 shares and Warrants exercisable within 60 days of
September 13, 1996 held by 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
Warrants to purchase Common Stock at $1.06 per share, constituting
approximately 8.2% of the outstanding Common Stock of the Company.
Madeleine owns directly 183,206 shares of Common Stock and 1,492,860
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<PAGE>
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 such parties and
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 has agreed to restrict its ability to exercise its
Warrants in order to comply with the requirements of the Lottery
Commission. See "Description of Securities -- Common Stock
--Anti-takeover Provisions."
(4) Includes 780,000 shares for which voting rights have been assigned to
the Board to satisfy licensing requirements of the Lottery Commission.
(5) Includes 103,810 shares and options to acquire beneficial ownership of
436,816 shares exercisable within 60 days of September 13, 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 September 13, 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 September 13, 1996 held by
Mr. Ruben.
(8) Includes Messrs. Arneault, Russell, Blatt and Ruben.
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 Loan 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
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<PAGE>
stock determined on each anniversary date equal to 5% the outstanding principal
balance divided by the average closing price on each business day 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 (each a "Warrant Certificate") and a
registration rights agreement entered into by the Company with the lender,
Madeleine , 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 a 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 shares may be sold under Securities
Act Rule 144(k) subject to the Company obtaining an opinion of counsel, and
counsel for the Selling Stockholders concurring with such opinion, that such
conditions were satisfied.
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.
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<PAGE>
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 of
outstanding shares of Common Stock 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 held by
them, (ii) the issued and outstanding shares of Common Stock owned by the
Selling Stockholder as of September 13, 1996, and (iii) the shares of Common
Stock underlying any other options or warrants owned by the Selling Stockholder
which are exercisable as of September 13, 1996 or which will become exercisable
within 60 days after September 13, 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>
Percentage
of
Outstanding
Number of Shares to be
Shares to be Owned
Owned Beneficially
Number of Beneficially After
Shares Number of After Completion
Beneficially Shares Completion of of
Selling Stockholders Owned Offered Offering Offering(1)
-------------------- ----- ------- -------- -----------
<S> <C> <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
--------- ---------
Total 1,726,066 1,726,066
</TABLE>
(1) Includes 183,206 shares and Warrants exercisable within 60 days held
by 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
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<PAGE>
Company in which it agreed to restrict its exercise of the 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, or both. The Company has not been advised by
the Selling Stockholders that they have 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.
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<PAGE>
The Company has advised the Selling Stockholders that any purchase or
sale of the Common Stock by them must 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 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 50,000,000 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 13, 1996, a total of 6,309,490 shares of Common Stock
were reserved for issuance pursuant to outstanding options and warrant of the
Company.
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 stockholders of record as of the record
date, which may be fixed not more than 60 nor less than 10 days before the
meeting, or stockholder action in lieu of a meeting, are entitled to vote on the
subject matter before the stockholders. In most cases, if a quorum is present ,
the affirmative vote of the majority of the shares represented at the meeting
constitutes an 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
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<PAGE>
entitled to vote, however, is required to amend the Company's 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 of Common Stock 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 restricts 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 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.
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;
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<PAGE>
(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.
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
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<PAGE>
Beneficial Owner of shares of Common Stock, 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) shall be subject
to repurchase (such securities being defined as the "Repurchase Securities") 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 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;
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<PAGE>
(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 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.
Transfer Agent
The Transfer Agent for the Common Stock is Continental Stock Transfer &
Trust Company.
Indemnification of Directors and Officers
Under Section 145 of the DGCL, 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
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<PAGE>
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 the circumstances, the person is fairly and reasonably entitled to
indemnification 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 By-law, 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
By-laws of the Company are consistent with Section 145. The Certificate provides
that no director shall be personally liable to the corporation or its
stockholders 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 stockholders, (ii) for acts and omissions not in good faith or which
involve intentional misconduct or knowing violation of the law; (iii) for acts
specified in Title 8, Section 174 of the DGCL, 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 an "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
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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 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 directors so directs, by
independent legal counsel in a written opinion, or (iii) by vote of the
stockholders of the Company.
With respect to both derivative 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 stockholders, 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 Securities Act
may be permitted to Indemnified Parties pursuant to
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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 Securities 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 Securities Act and will be governed by
the final adjudication of such issue.
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 a
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.
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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 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
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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.
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 dividend 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.
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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 . Of these restricted shares,
183,206 shares are issued and outstanding and are covered by this Registration
Statement and were sold in connection with the 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 4,743,371 shares, all of which shares
will be restricted securities. In addition to the Warrants and shares of Common
Stock registered herein, the Company also has registered 4,836,340 shares of
Common Stock on another registration statement. Certain of the outstanding
shares of Common Stock and shares underlying outstanding options and warrants
have registration rights, and are covered by a registration statement filed with
the Commission, as described more specifically 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 an option to purchase 30,000 shares of
Common Stock to Julie Waring, a former employee of the Company. These shares
have registration rights. None of these shares are included in this registration
statement.
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Pursuant to the Bennett Loan , the Company granted registration rights
with respect to 1,530,000 shares of Common Stock issued thereunder. Pursuant to
an Amendment to the Bennett Loan dated September 19, 1996, the Company amended
the registration rights with respect to the shares of Common Stock previously
issued under the Bennett Loan and granted registration rights with respect to
shares issuable pursuant to 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 in cash or issue
$750,000 of 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 of 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, until December 31, 1997, Bennett would be
entitled to piggyback registration rights with respect to such shares should the
Company or any stockholder 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. The Company
registered 1,120,000 of such shares on a registration statement filed with the
Commission.
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 statement to be filed shortly after
the date of such modified agreement. The Company has filed a registration
statement covering all of these shares.
Pursuant to a Registration Rights Agreement dated July 2, 1996, (the
"Registration Rights Agreement") between the Company and 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
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Shares") (collectively the "Registrable Securities"). The Registration Rights
Agreement required 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. Such shares are registered herein.
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 seven calendar months from the date of demand by
Madeleine (the "Demand Date"), the Company shall pay Madeleine 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 for each share
subject to the Registration Rights Agreement. 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 Madeleine within five days of the expiration
of such nine calendar month period, 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 issued to them,
and the issuance, or if not permissible under the Securities 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
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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 each Warrant Share (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 filed
within 90 days, or declared effective seven months, or nine months respectively
subsequent to the request of the Warrant Holder. Such Warrants are registered
herein.
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 are eliminated. As of October 15, 1996, the
Company had redeemed 16,677 shares. The Company registered 116,739 of such
shares on a registration statement filed with the Commission.
Pursuant to a Letter Agreement dated March 25, 1996 between the Company and
Edson R. Arneault, the Company's President and Chief Executive Officer 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. None of these shares are included in this Registration Statement.
Pursuant to a Letter Agreement dated March 25, 1996 between the Company
and Thomas K. Russell, Chief Financial Officer, General Counsel, Treasurer,
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. None of these shares are included in this
Registration Statement.
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. Subsequently, the Company borrowed additional funds
from Astrafund and as consideration agreed to issue an additional 25,000 shares
with registration rights. The Company registered all of these shares on a
registration statement filed with the Commission.
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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 Company registered
all of these shares on a registration statement filed with the Commission.
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 actually be filed or subsequently be declared effective by the
Commission. None of these shares are included in this Registration Statement.
Under an agreement dated August 9, 1995 with Lawrence L. Manypenny, 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 of
Common Stock issued under the agreement. The parties acknowledged that no
assurances could be given regarding timing of approval or that approval could be
obtained. The Company registered all of these shares on a registration statement
filed with the Commission.
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
shares of Mr. Mapes but did not. If during the 90 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. The Company registered 75,000 of these shares on a
registration statement filed with the Commission.
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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 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. The Company registered 231,450 of these shares
on a registration statement filed with the Commission.
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. None of these
shares are included in this Registration Statement.
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 on Form S-8 with respect to
183,888 shares issuable upon
exercise of options held by Mr. and Mrs. Blair. None of these shares are
included in this Registration Statement.
Pursuant to a Consulting Agreement dated December 30, 1994, between the
Company and Arie From, 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. The Company has been instructed by Mr. From that 207,500
shares will be transferred to Astrafund, and that such shares will be subject to
the same registration rights. The Company registered 150,000 of these shares on
a registration statement filed with the Commission.
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An Original Rider dated December 3, 1992 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, contemplated the Company using its
best efforts to file a registration statement covering 469,072 shares issued in
connection with the acquisition of Mountaineer. Pursuant to an amendment to
Rider No. 4 to such an agreement, 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, the Company 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. None of these shares
are included in this Registration Statement.
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 the
Bartlett Field Partnerships controlled by the Company's President and 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 373,600
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 did not become effective before March 31,
1995, the Company was required to restate a note issued to such partnerships 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. The Company registered 378,600 of these shares on a
registration statement filed with the Commission.
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. The Company registered all of these shares on a registration
statement filed with the Commission.
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. The Company registered all of these shares on a
registration statement filed with the Commission.
- 95 -
<PAGE>
Pursuant to subscription agreements dated January 1994 between the
Company and various investors, the Company granted a demand registration right
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 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. The Company registered all of these shares on a
registration statement filed with the Commission.
- 96 -
<PAGE>
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
stockholders 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. The Company registered all of these shares on
a registration statement filed with the Commission.
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 3,488,047
shares of Common Stock when issued subsequent to the exercise of such options.
None of these shares are included in this Registration Statement.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On June 27, 1994, the Company as Guarantor , Mountaineer and Bennett
entered the Bennett Loan agreement. 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 principal balance of
approximately $8.8 million as of September 30, 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, whereby the Company and
Mountaineer agreed to settle all claims against Bennett. This Amendment was
approved by the Bankruptcy Court. The material terms of the Amendment are as
follows:
- 97 -
<PAGE>
The Amendment modifies 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 1996
through March 1997, $125,000 per month from April 1997 through September 1997,
$75,000 per month from October 1997 to March 1998, $125,000 per month from April
1998 to September 1998, and $75,000 per month from October 1998 to March 1999.
The remaining principal balance would 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 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 1996 through March 1997 and to $200,000 from April 1997 through
September 1997.
The Amendment also modifies 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 permits 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 stockholder 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. That Settlement Agreement
terminated the Management Agreement and settled the accounts of the parties as
of June 30, 1995.
- 98 -
<PAGE>
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 pursuant to the Loan Commitment. 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 an 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. The principal of the Term Loan
must be repaid at the end of the three year term, during which period, the Term
Loan is subject , on each anniversary date, to additional fees of cash equal to
8% of the outstanding principal balance, stock equal to 5% of the outstanding
principal balance divided by the average daily closing price on each business
day for the 30 days prior to the third day before the 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
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 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 . 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
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 as of December 31, 1995 and 1994, and for each of
the years in the three year period ended December 31, 1995 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-9
Notes to Consolidated Financial Statements .................................F-11
Condensed and Consolidated Balance Sheets at December 31, 1995 and
June 30, 1996 (Unaudited)................................................F- 33
Condensed and Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1996 and 1995 (Unaudited) ......... F- 35
Condensed and Consolidated Statements of Cash flows for the Six
Months Ended June 30, 1996 and 1995 (Unaudited)..........................F- 36
Notes to Condensed and Consolidated Financial Statements (Unaudited)... .F- 36
F-1
<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
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
Current assets:
<S> <C> <C>
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
=========== ===========
</TABLE>
F-3
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 1995 and 1994
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
---- ----
Current liabilities:
<S> <C> <C>
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
============ ============
</TABLE>
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
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Revenues:
Video lottery terminals
<S> <C> <C> <C> <C>
(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
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
Receivable
From
Additional Exercise of
Common Stock Paid-In of Stock Accumulated
Shares Amount Capital Options Deficit Totals
------ ------ ------- ------- ------- ------
Balances, January 1,
<S> <C> <C> <C> <C> <C> <C>
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>
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
From
Additional Exercise of
Common Stock Paid-In of Stock Accumulated
Shares Amount Capital Options Deficit Totals
------ ------ ------- ------- ------- ------
Shares issued for
capital raising
<S> <C> <C> <C> <C> <C> <C> <C>
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
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)
</TABLE>
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
From
Additional Exercise of
Common Stock Paid-In of Stock Accumulated
Shares Amount Capital Options Deficit Totals
------ ------ ------- ------- ------- ------
Shares issued to replace
price guarantee in
connection with
financing arrangement
<S> <C> <C> <C> <C> <C> <C> <C>
(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
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-8
<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
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
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>
F-9
<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
---- ---- ----
Cash flows from financing activities:
<S> <C> <C> <C>
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-10
<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 substantially all of the cash obtained from Golden Palace Casinos to
finance 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 efforts 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 considerations 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:
- 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
F-11
<PAGE>
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.
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.
F-12
<PAGE>
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.
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).
F-13
<PAGE>
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.
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
F-14
<PAGE>
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. 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).
F-15
<PAGE>
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.
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.
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
F-16
<PAGE>
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".
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.
F-17
<PAGE>
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
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
F-18
<PAGE>
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.
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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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.
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<PAGE>
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.
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 cancellation of 104,500 redeemable shares with put rights of
certain holders of Golden Palace acquisition debt. In connection therewith,
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<PAGE>
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.
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.
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<PAGE>
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.
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
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<PAGE>
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.
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
majeure (by production).
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
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<PAGE>
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.
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.
F-26
<PAGE>
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.
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
<TABLE>
<CAPTION>
1995 1994
---- ----
Assets:
<S> <C> <C>
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
========== ==========
</TABLE>
Results of its operations for the
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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)
====== ======== =========
</TABLE>
F-27
<PAGE>
Reserve Quantity Information
<TABLE>
<CAPTION>
Oil Gas
(in BBLs) (in MCF)
Proved developed:
<S> <C> <C> <C>
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 ---
========= =========
</TABLE>
(1) In 1994, management determined that certain reserves existed in an
additional formation (Berea) which has been included in the Company's
reserve analysis.
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, respectively. 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).
F-28
<PAGE>
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.
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Total parimutuel wagering
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
F-29
<PAGE>
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.
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.
F-30
<PAGE>
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).
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.
F-31
<PAGE>
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).
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 226,266 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 $600,000 as a result
of options to purchase the Company's common stock at below market values granted
to 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 $570,000 of proceeds. In addition, the Company issued
75,000 shares of its common stock valued at approximately $50,000 as
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-32
<PAGE>
CONDENSED AND CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
ASSETS
Current Assets:
<S> <C> <C>
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-33
<PAGE>
CONDENSED AND CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
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
============ ============
See accompanying notes to financial statements.
F-34
<PAGE>
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
<TABLE>
<CAPTION>
June 30 June 30
------- -------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
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-35
<PAGE>
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1995
------------- -------------
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
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.
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,
F-36
<PAGE>
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.
NOTE 4 - DISCONTINUED OIL AND GAS ACTIVITIES
BALANCE SHEET ITEMS
June 30 December 31
1996 1995
---- ----
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
========== ==========
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
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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.
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 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
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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:
July August
1996 1996 Total
---- ---- -----
$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
======== ======== ========
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, 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
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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 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 divided by the average daily closing price on each
business day for the 30 days prior to the third day before 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
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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.
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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............................. $ 628.00
Accountants' Fees and Expenses................ $15,000.00
Legal Fees and Expenses....................... $65,000.00
Printing Expenses............................. $10,000.00
Miscellaneous................................. $ 5,000.00
Total................................. $95.628.00
Item 14. Indemnification of Directors and Officers
Under Section 145 of the DGCL 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
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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 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 . The Certificate provides that
no director shall be personally liable to the corporation or its stockholders
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
stockholders, 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 DGCL, 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 an "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
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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 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
stockholders 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 stockholders, 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
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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.
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.
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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.
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 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.
** 3 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.
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<PAGE>
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 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.
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 between
the parties.
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
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<PAGE>
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.
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.
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<PAGE>
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 4,321,000 shares of Common Stock with an aggregate value of $3,210,481 to
the stockholders 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 note 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.
On July 27, 1993, pursuant to a subscription agreement, the Company
authorized the issuance of 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.
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<PAGE>
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.
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<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., of 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
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<PAGE>
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.
On November 17, 1993, pursuant to an offering circular and subscription
agreement, the Company authorized the issuance of 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.,
of the British Virgin Islands 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
II-11
<PAGE>
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.
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 at the time they were
canceled . Upon cancellation the warrants were 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
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<PAGE>
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 on 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.
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 of 300,000 shares of Common Stock
to Metro Funding Corp SA for a price
II-13
<PAGE>
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.
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
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<PAGE>
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 satisfaction 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.
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.
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<PAGE>
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., of 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.
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 Ladenburg, 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,
of 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.
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<PAGE>
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 , 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 , 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
II-17
<PAGE>
completed in reliance on the exemption from registration provided by Section
4(2) of the Act.
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 . 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
II-18
<PAGE>
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.
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 October 31, 1996, 250,000 of such shares had
been issued. 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.
II-19
<PAGE>
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.
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 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 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.
II-20
<PAGE>
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.
On January 23, 1996, pursuant to an employee stock option plan, the
Company authorized the issuance of options to purchase 300,000 shares of Common
Stock for $0.5625 per share to Edson R. Arneault. The options vested upon
issuance, are exercisable for five years and the underlying shares are subject
to registration on Form S-8.
On January 23, 1996, pursuant to an employee stock option plan, the
Company authorized the issuance of options to purchase 100,000 shares of Common
Stock for $0.5625 per share to Thomas K. Russell. The options vested upon
issuance, are exercisable for five years and the underlying shares are subject
to registration on Form S-8.
On January 23, 1996, pursuant to an employee stock option plan, the
Company authorized the issuance 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. The options vested upon
issuance, are exercisable for five years and the underlying shares are 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
II-21
<PAGE>
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.
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
II-22
<PAGE>
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 the Term Loan Agreement, the Company
issued 183,206 shares of Common Stock, with an aggregate value of $250,000, to
Madeleine . 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 The Term Loan Agreement, the Company
issued warrants to purchase 1,491,250 shares of Common Stock for $1.06 per share
to Madeleine . 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 the Term 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. This was a private
transaction effected pursuant to the exemption from registration provided by
Section 4(2) of the Act.
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:
II-23
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
or
Incorporation
Exhibit No. Item Title by Reference
----------- ---------- ------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation for **
Winners Entertainment, dated August 17,
1993
3.2 By Laws *
3.3 Certificate of Amendment of Restated ++
Certificate of Incorporation of Winner's
Entertainment, Inc. dated October 10, 1996
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
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
II-25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
10.24 Amendment, dated July 7, 1995, to ##
Construction Loan Agreement, dated June 27,
1994, between Mountaineer and Bennett
Management & Development Corporation
10.25 Amendment dated September 19, 1996, to the +
Construction Loan Agreement, dated June 27,
1994, between Mountaineer and Bennett
Management & Development Corporation
10.26 Order Approving Settlement of Winners ++
Entertainment/Mountaineer Park Litigation;
United States Bankruptcy Court for the
Northern District of New York, dated
October 22, 1996
23.1 Consent of Ross & Hardies (included in E-1
Exhibit 5.1)
23.2 Consent of Corbin and Wertz E-2
27.0 Financial Data Schedule ####
99.1 Schedule II - Valuation and Qualifying E-3
Accounts
</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.
II-26
<PAGE>
## 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.
+ Previously filed as an exhibit to the Company's Form 8-K dated
September 30, 1996 and incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Form 8-K dated November
1, 1996 and incorporated herein by reference thereto.
(b) Schedule II follows the exhibits hereto.
II-27
<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-28
<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.
II-29
<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 November 12, 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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/EDSON R. ARNEAULT Director, President and November 12, 1996
Edson R. Arneault Chief Executive Officer
Principal Executive Officer)
/s/THOMAS K. RUSSELL Director, Secretary, November 12, 1996
Thomas K. Russell Chief Financial Officer,
General Counsel and
Treasurer (Principal
Financial and
Accounting Officer)
/s/ROBERT L. RUBEN Director, Assistant November 12, 1996
Robert L. Ruben Secretary
/s/ROBERT A. BLATT Director November 12, 1996
Robert A. Blatt
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Opinion of Ross & Hardies E-1
Consent of Corbin & Wertz E-2
Schedule II - Valuation & Qualifying Accounts E-3
EXHIBIT 5.1
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.
<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 -
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
MTR Gaming Group, Inc.
(formerly 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
November 12, 1996
Exhibit 99.1
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. 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
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance At Balance at
Beginning of End of
Period Additions Deductions Period
------ --------- ---------- ------
Year ended, December 31, 1995 (1):
<S> <C> <C> <C> <C> <C>
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.
