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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended
DECEMBER 31, 1995
COMMISSION FILE NO. 33-22521
WINNERS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE IRS NO. 84-1103135
State of Incorporation IRS Employer Identification
1461 GLENNEYRE STREET, SUITE F, LAGUNA BEACH, CALIFORNIA 92651
Address of principal executive offices
(714) 376-3010
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: Common Stock $.00001 par value
Name of each exchange on which registered: NASDAQ Stock Exchange
Indicate by check mark whether the registrant (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K of (Section 299.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ( )
As of April 4, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $11,962,400.*
As of April 4, 1996, the number of shares outstanding of the
Registrant's Common Stock was approximately 17,323,399.
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without conceding
that all such persons are "affiliates" of the Registrant for purposes of the
federal securities laws.
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TABLE OF CONTENTS
PART 1
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ITEM 1 BUSINESS
General ........................................................ 1
Acquisitions ................................................... 1
Mountaineer Race Track and Resort .............................. 2
Current Operations ............................................. 4
Improvement Plan and Expanded Operations ....................... 7
Business Strategy .............................................. 8
Marketing ...................................................... 10
Competition .................................................... 10
Employees ...................................................... 11
Regulation and Licensing ....................................... 11
Discontinued Operations ........................................ 14
ITEM 2 PROPERTIES ....................................................... 16
Gaming, Racing and Other Entertainment ......................... 16
Oil and Gas .................................................... 16
Equipment Leases ............................................... 16
Office Lease ................................................... 16
ITEM 3 LEGAL PROCEEDINGS ................................................ 16
Settled Litigation Involving Loss Contingencies ................ 16
Pending Litigation ............................................. 18
Threatened Litigation .......................................... 19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 20
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS ................................ 20
ITEM 6 SELECTED FINANCIAL DATA .......................................... 21
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............... 22
Results of Continuing Operations ............................... 22
Results of Discontinued Operations ............................. 28
Liquidity ...................................................... 28
Liquidity and Sources of Capital ............................... 28
Cash Flows ..................................................... 29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 30
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ......................... 30
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............... 31
Board of Directors ............................................. 31
Compliance with Section 16(a) of the Exchange Act .............. 32
Employment Agreements .......................................... 34
Other Agreements ............................................... 35
Compensation of Directors ...................................... 35
Compensation Committee Interlocks and Insider Participation .... 35
ITEM 11 EXECUTIVE COMPENSATION ........................................... 32
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ............................... 36
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 37
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
AND REPORTS ON FORM 8-K ........................................ 37
SIGNATURES ..................................................... 40
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ITEM 1. BUSINESS
GENERAL
Winners Entertainment, Inc. (the "Registrant") is a Delaware
corporation incorporated in 1988. The Registrant, through wholly owned
subsidiaries, owns and operates Mountaineer Race Track and Gaming Resort, a
resort facility in West Virginia, and a working interest in proved oil and gas
reserves in Michigan.
The Registrant was incorporated in March 1988 under the name "Secamur
Corporation," a wholly owned subsidiary of Buffalo Equities, Inc., and later
"spun-off" through the sale of its stock to Buffalo Equities' stockholders in
January 1989. In June 1989, the Registrant acquired through merger Pacific
International Industries, Inc., which had been engaged in the contract security
guard services business in Southern California since its inception in February
1987. Upon completion of the merger, the Registrant was renamed "Excalibur
Security Services, Inc.," to reflect its new line of business. After operating
unprofitably, the Registrant 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 Registrant's sale of its security guard services business in
May 1991, and confirmed the Registrant's plan of reorganization in December
1991. The plan authorized the Registrant to acquire, primarily, specified
gaming and oil and gas businesses. Upon confirmation of the plan, the
Registrant changed its name to "Excalibur Holding Corporation." In connection
with Management's decision to operate as a gaming company, the Registrant was
renamed "Winners Entertainment, Inc." in August 1993.
ACQUISITIONS
Mountaineer Race Track & Gaming Resort - Chester, West Virginia
Pursuant to a stock purchase agreement dated May 1992, the Registrant
acquired all of the capital stock of Mountaineer Park, Inc. ("MPI"), a West
Virginia corporation, in December 1992. MPI owns Mountaineer Race Track &
Gaming Resort ("Mountaineer"), an entertainment complex and destination resort
featuring thoroughbred racing, simulcast off-track racing, video lottery
gaming, hotel, dining and lounge facilities, and outdoor activities including
golf, swimming and tennis. Mountaineer 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.
Hotel-Casino Site - Cripple Creek, Colorado
In January 1992, the Registrant acquired through merger all of the
outstanding capital stock of SDR Corporation ("SDR"), a Nevada corporation
owned in part by affiliates of the Registrant. A ten percent interest in SDR
was subsequently issued to an individual who assisted SDR in acquiring its
principal asset -- an option to purchase commercial lots in Cripple Creek,
Colorado, some of which were zoned for hotels and gaming. After exercising the
option in September 1992, the lots were eventually deeded back to the original
owner in May 1993 when, due to the rapid saturation of the gaming market in
Cripple Creek, Management determined that the lots were less attractive than
originally assessed. Thereafter, SDR became inactive until it was formally
dissolved in March 1996.
Golden Palace Casinos - Oklahoma Indian Gaming Contract
In October 1992, the Registrant acquired all of the outstanding capital
stock of Golden Palace Casinos, Inc. ("GPC" and "Golden Palace"), a Minnesota
corporation
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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
Registrant's then-proposed video lottery operations at Mountaineer, the
Registrant could not engage in Indian gaming activities. Consequently, in
December 1992, the Registrant 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 Registrant with sufficient funds to
complete the acquisition of all of the outstanding capital stock of Mountaineer
Park, Inc., as described below.
Riverboat Casino Site - Tunica, Mississippi
In March 1993, the Registrant acquired an 80% interest owned by M&R
Investment Company in a joint venture which held a long-term ground lease
for a riverboat gaming development site in Tunica, Mississippi. The Registrant
subsequently acquired the remaining 20% interest in the joint venture from
Regal Casinos, Inc. In July 1993, the Registrant agreed to form a joint
venture with Las Vegas Entertainment Network ("LVEN") and BP, Ltd. to develop
the Tunica project. The joint venture agreement called for contributions of
the ground lease by the Registrant, working capital for initial development by
LVEN, and construction and opening financing and investment banking services by
BP, Ltd. Later in 1993, the Registrant and LVEN agreed to merge in a
stock-for-stock transaction. Neither the joint venture nor the merger with
LVEN was consummated as a result of disagreements over how to develop the
Tunica site, and pursuant to a settlement agreement reached in February 1994,
the Registrant sold its interest in the Tunica site to LVEN.
Oil and Gas Interests - Michigan and Ohio
In January 1992, the Registrant also acquired certain oil and gas
interests which have since been, or are in the process of being divested
pursuant to the Registrant's plan of orderly liquidation adopted in March
1993. Except for the limited resources required to prepare its remaining oil
and gas interests for orderly liquidation, the Registrant has focused
substantially all of its resources on Mountaineer. (For discussion of the
Registrant's oil and gas acquisitions and plan of orderly liquidation, see Item
1 -- "Discontinued Operations," Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Discontinued
Operations" and Notes 1 and 10 of "Notes to Consolidated Financial Statements").
MOUNTAINEER RACE TRACK & GAMING RESORT
Racetrack Facilities
Mountaineer 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
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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. The racetrack
parking admission fee is $1.50.
Lodge Facilities
The Mountaineer 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), 5 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
Registrant 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 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 video lottery terminals ("VLTs") located
in the racetrack clubhouse and grandstand and Lodge. Mountaineer introduced 400
new state-of-the-art VLTs in September 1994, replacing 165 older machines
operated 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 five
versions of draw poker and one version each of blackjack and keno, and also
which cards to hold while playing draw poker. The Registrant is currently
authorized to install up to 200 more VLTs.
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, the Registrant maintains a trailer park consisting of
61 individual lots on approximately 11.5 acres. The lots are rented for fixed
monthly fees, mostly to individuals who are employed by Mountaineer in racing
operations. The Registrant is
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responsible for maintenance of the road and grounds, refuse removal and
providing water and sewage hook-ups. The tenants pay all utility expenses.
Development 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.
CURRENT OPERATIONS
The Registrant's operating revenues at Mountaineer are derived
principally from its racing and video lottery operations, and, to a lesser
extent, its lodge and food and beverage operations. Additional revenues are
generated from greens fees and other recreational facilities fees.
Racing Operations
The Registrant is subject to annual licensing requirements established
by the West Virginia Racing Commission (the "Racing Commission"), the
Registrant's license was renewed in December 1995, through December 1996.
The Registrant's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer and
on races conducted at other "host" racetracks and broadcast live (i.e., import
simulcast) at Mountaineer. 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 Registrant's parimutuel commission rates are fixed
as a percentage of the total handle or amounts wagered. With respect to
Mountaineer'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 wins, 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, Mountaineer 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, Mountaineer is required to distribute
fixed percentages to its fund for the payment of regular purses (the "regular
purse fund"), the State, Hancock County and, with respect to commissions
derived from simulcast operations, Mountaineer's employee pension plan fund.
After deducting state and county taxes and, with respect to simulcast
commission, simulcast fees and expenses and employee pension plan
contributions, approximately one-half the remainder of the commission is
payable to the regular purse fund.
Mountaineer also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer on the basis of the
amounts wagered at their respective facilities.
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Video Lottery Operations
The Registrant is subject to annual licensing requirements as set forth
by the West Virginia Lottery Commission (the "Lottery Commission"). The
Registrant's license was renewed in June 1995 through June 1996.
The Registrant 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 video lottery machine less the value of credits cleared for
winning redemption tickets. Pursuant to the Video Lottery Act, the
Registrant'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
Registrant 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 Registrant to purchase the VLTs at fair market value. Monthly
payments for the first 400 terminals were $72,378 from September 1994 through
December 1995, and monthly payments for the second 400 terminals were $0 for
the first six months after installation in late June 1995. The Registrant
accrued monthly lease expense of $70,743 during this 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 Registrant 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, 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 Registrant expects to link approximately half of its video
lottery terminals into several progressive playing groups located in the
Riverside Gaming Terrace at the racetrack and the Speakeasy Gaming Saloon at the
Lodge. Mountaineer's VLT supplier is actively working on the development of
progressive gaming software for the Registrant's existing VLTs. Management's
target date for implementation of progressive gaming play is the third quarter
of 1996, 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." The Registrant's video lottery terminal supplier is
actively working on the development of slot game software to be installed in 400
of Mountaineer's existing VLTs. Management's target date for the
implementation of slot games is July 1996, although there can be no assurance
that slot game software will be successfully installed by that date, if at all.
Management of Video Lottery Operations
American Gaming & Entertainment, Ltd. ("AGEL," formerly named Gamma
International, Ltd.) was engaged by the Registrant pursuant to a June
1994 management agreement (the "Management Agreement") to provide management
services for video lottery and other gaming activities at Mountaineer permitted
under West Virginia law, other than its parimutuel horse racing operations (the
"Permitted Activities"). Under the
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Management Agreement, AGEL was entitled to receive a management fee of 3% of
the gross revenues of the Permitted Activities. 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 Registrant's Management Agreement with AGEL was suspended pursuant
to a Stay Agreement effective June 30, 1995 until such time as the Registrant's
construction loan lender, Bennett Management and Development Corporation
("Bennett") complied with certain requirements of the Lottery Commission. In
July 1995, AGEL assigned its right to conduct business with Mountaineer to
American Newco, Inc., a company owned by two officers and shareholders of AGEL.
Simultaneously, American Newco, Inc. entered into a Consulting Agreement with
MPI 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 not earlier than January 1, 1996 that it will continue as lender to
MPI on a permanent basis, then the Management Agreement will be reinstated
prospectively.
The personal involvement of the two shareholders of American Newco,
Inc. in the consulting activities is a material element of the Consulting
Agreement. Similarly, the personal involvement of Mr. Al Luciani with AGEL is a
material element of the Management Agreement. Since August 1995, neither
shareholder has provided such services for American Newco and Mr. Luciani has
left the employ of AGEL. Management believes that there has been a material
failure of performance under each agreement and, as a result, the Registrant has
paid no consulting fees to American Newco, Inc. since that time. Although there
can be no assurance, Management believes that the Management Agreement will not
be reinstated. On March 28, 1996 the SEC filed suit against The Bennett Funding
Corporation, the parent of Bennett and an affiliate of a major shareholder of
AGEL, seeking a financial judgment and civil penalties for actions that are
unrelated to Bennett's lending activities to Mountaineer in West Virginia. Also
named in the suit was Patrick Bennett, Chief Executive Officer of Bennett, the
Registrant's construction lender. Management does not believe that these recent
developments will have a material negative impact on the Registrant's licenses
or financing efforts.
Racetrack Food and Beverage Operations
The clubhouse restaurant is open 220 days annually on live race days,
and offers seating for 650 customers with full lunch and dinner menus and a
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 tour 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
simulcasted 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 Operations
Mountaineer Lodge customers principally include local residents and
business travelers visiting nearby steel plants and other businesses on week
days, with a larger number of recreational customers from non-local markets on
weekends. Occupancy rates and room rates for the 12 months ended December
1995 and 1994 averaged 45% and 46%, and $47 and $34, respectively. Lodge
facilities also include the Mountaineer Lodge Dining Room, which seats 125
patrons for casual dining overlooking the golf course. Food and beverages are
also available at the lodge in the Speakeasy Gaming Saloon and the Iron Horse
Lounge. Table and barstool seating is available in the Speakeasy Gaming Saloon
and the Iron Horse Lounge for the video lottery gaming and off-track wagering
patrons accommodated there. The Lodge and its food and beverage operations are
operated in combination with its entertainment facilities and is utilized
principally to increase racing attendance and video lottery play. Accordingly,
the Registrant maintains inexpensive room rates.
IMPROVEMENT PLAN AND EXPANDED OPERATIONS
Since its acquisition in December 1992, the Registrant has been engaged
in an ongoing effort to renovate and, more recently, enhance and expand
Mountaineer, which was first opened in 1951. Prior to West Virginia's adoption
of the Video Lottery Act in March 1994, the Registrant 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 finishes and the redesign of the grandstand parimutuel
(wagering) windows. These improvements were made during 1993.
In 1994, the Registrant commenced its capital improvement program,
designed to upgrade and expand Mountaineer's existing facilities to a level
which would allow its marketing as an upper scale gaming and racing destination
resort.
In 1994 and 1995, Mountaineer 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, Mountaineer embarked
upon an 8,000 square foot expansion to the Lodge video lottery facilities in
1995. At December 31, 1995, Mountaineer operated the Riverside Gaming Terrace
in the racetrack clubhouse and grandstand facilities, with 400 video lottery
terminals arranged on either side of a central lounge and hallway. The
Speakeasy Gaming Saloon is the primary gaming venue in the Lodge building, with
380 video lottery terminals in operation, including 39 in a non-smoking
location. A separate lounge area adjacent to the Lodge restaurant contains 20
additional terminals. Areas in the Riverside Gaming Terrace and Speakeasy
Gaming Saloon suitable for the addition of 200 VLTs were constructed in 1995,
and the ancillary facilities necessary to efficiently operate these additional
VLTs are already in place.
Mountaineer has expanded its off-track betting facilities in both the
racetrack and lodge locations. In 1994 and 1995, the Registrant 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 Registrant to promote upcoming
events and Mountaineer's other entertainment facilities, as well as the day's
live and off-track racing schedule. In 1995, Mountaineer completed the
renovation of its Lodge off-track betting facility, offering seating for 198
patrons in the Speakeasy Gaming Saloon. The Lodge simulcasting facility is
served by twenty-four 40-inch television monitors, as well as a 15-foot
projection screen. The Registrant currently has available 64 mutuels
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windows in the racetrack facility and 6 windows in the Lodge Speakeasy Gaming
Saloon, to be supplemented by self-activated portable betting terminals in 1996
and beyond.
The Registrant also created a boxing arena and entertainment stage,
which it has integrated into the grandstand seating. The stage is an integral
component of the Registrant's efforts to expand Mountaineer's customer base by
offering new, complementary forms of entertainment. Mountaineer has hosted
five 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.
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 improvement plan scheduled for completion
in 1996 consist of enhancements to the Speakeasy Gaming Saloon, parking lot
expansion and general paving. The cost of these improvements is not expected
to exceed $1.5 million.
BUSINESS STRATEGY
The Registrant'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 as Diversified Entertainment Facility
The Registrant believes that the Mountaineer racetrack facility has not
performed 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 groups and boxing events at Mountaineer has begun to remedy these
effects. 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 video lottery and other
entertainment operations, since patrons who traditionally do not visit horse
racetracks may be, once at Mountaineer, more inclined to wager on racing. In
addition, because a significant percentage of revenues from video lottery
operations must be contributed to the racing purse fund, as video lottery
revenues increase, so will the size of purses. Management believes that this
will have the effect of attracting better quality racehorses, further enhancing
Mountaineer's appeal to traditional horse racing fans who are largely
responsible for Mountaineer's parimutuel revenues.
Expand Video Lottery Operations
The Registrant intends to expand its video lottery operations by adding
up to 200 VLTs which were authorized by the Lottery Commission in 1995. The
Registrant believes that its video lottery revenues will continue to increase
with the installation of new machines, the implementation of progressives 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
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attractive location of its facility, Mountaineer is positioned to take
advantage of any future forms of gaming which may be legalized in West Virginia.
Relocate Off-Track Wagering
The Registrant recently relocated its primary simulcasting operations
to the Speakeasy Gaming Saloon at the Lodge. Management believes that by
exposing video lottery patrons to simulcast and live racing, new racing fans
can be developed, thereby increasing parimutuel operations. The expanded
clubhouse simulcast facilities are also expected to create additional
excitement and increase the level of activity at the racetrack on live race
days.
Improve Live Racing Product and Commence Export Simulcasting Outside
Hub Area
The Registrant'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 at Mountaineer. 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 Registrant's agreement with
the horsemen. 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 Registrant anticipates that it will be able to
continue increasing purse sizes to levels attractive to owners of mid-level
quality or better racehorses.
Management also expects to sponsor several stakes races in 1996, with
purses of up to $100,000 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
the stakes 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
Registrant believes that the higher average purses anticipated from video
lottery contributions will improve the quality of races to other racetracks,
off-track betting facilities, casinos and other gaming establishments once it
has completed its improvement plan. In order to make its races more attractive
to simulcast outlets, the Registrant 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.
Increasing Import Simulcasting
The Registrant 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
off-track greyhound racing, and has since offered thoroughbred and/or greyhound
import simulcasting 7 days per week.
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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 4 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 Registrant 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
Registrant'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 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. As a result, although there
are facilities located more than 100 miles away, Management does not believe
that such other facilities compete with Mountaineer for a significant segment
of its target customer base (although they do compete to some extent for
quality racehorses). In addition, none of those facilities, all of which are
located in Pennsylvania and Ohio, are currently licensed to offer video lottery
gaming. Moreover, the one facility in West Virginia, other than Mountaineer
and Wheeling Downs, offering video lottery is located in the central part of
the state and, as a result, does not compete with Mountaineer for customers.
However, the Registrant does compete with statewide lotteries in West Virginia,
Pennsylvania and Ohio, off-track wagering in Pennsylvania and other
entertainment options available to consumers, including live and televised
professional and collegiate major sports events. The Registrant will also
compete with off-track wagering in Ohio, if implemented as proposed.
The Registrant is attempting to attract patrons by promoting
Mountaineer 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
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Registrant'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. There is no assurance that such any of
such forms of competition will develop, however, Management believes that the
development of Mountaineer into a complete entertainment complex is necessary in
order to compete with casino gaming, if any, introduced in neighboring
jurisdictions.
EMPLOYEES
As of April 1, 1996, approximately 400 full-time persons and 150
part-time persons were employed at Mountaineer, of whom approximately 70 were
represented by a labor union under a collective bargaining agreement. As of
April 1, 1996, the Registrant also employed one part-time person in its oil and
gas operations in Ada, Michigan and, in addition to Management, one person, at
its corporate offices in Laguna Beach, California. The Registrant believes
that its employee relations are good.
REGULATION AND LICENSING
Racing
The Registrant'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
activities and establishing and regulating wagering procedures, minimum purses,
post times, and other matters. When granting licenses the Racing Commission
has the authority to determine the dates on which Mountaineer may conduct
races. In order to conduct simulcast racing, Mountaineer is required under
West Virginia law to hold a minimum of 220 live race days each year.
Mountaineer was granted a license to conduct 220 live race days for its 1996
meet.
West Virginia law requires that at least 80% of Mountaineer's employees
must be citizens and residents of West Virginia and must have been such for at
least one year. In addition, certain activities, such as simulcasting races,
require the consent of the representatives of the majority of the horse owners
and trainers at Mountaineer.
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
Registrant is not aware of any current proposal to do so.
The Registrant's simulcast activities that occur outside of West
Virginia could be subject to regulation of other state racing commissions, as
well as the provisions of the Federal Interstate Horse Racing Act of 1978,
which prohibits Mountaineer from accepting off-track wagering on simulcast
racing without the approval of the Racing Commission and, subject to certain
exceptions, of any other currently operating track within 60 miles, or if none,
of the closest track in any adjoining state.
Video Lottery
The operation of video lottery games in West Virginia is subject to the
Video Lottery Act. Licensing and regulatory control is provided by the Lottery
Commission.
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Prior to the adoption of the Video Lottery Act in March 1994, the
Registrant conducted video lottery gaming under the West Virginia State Lottery
Act pursuant to an agreement with the Lottery Commission which authorized the
Registrant 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
Registrant 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 Registrant 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 Appeals 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 Video Lottery Act has not been contested in or
otherwise addressed by the court or any other West Virginia court.
Under the Video 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, 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 voters of the county in which such facility is located. If such approval is
obtained, the facility may continue to conduct racing activities unless the
matter is resubmitted to the voters pursuant to a petition by at least 5% of the
registered voters, who must wait at least five years to bring such a petition.
If approval is denied, another election on the issue may not be held for a
period of two years. Video lottery gaming was approved in Hancock County, the
location of Mountaineer, on May 10, 1994.
In order to qualify as a "video lottery game," as the term is defined
under the Video 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 and is not based on any of the following game themes;
roulette, dice, baccarat card games or games having a video display depicting
symbols which appear to roll on drums to simulate classic casino slot machines.
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 communications systems. Only machines registered with and approved by
the lottery Commission may offer video lottery games.
Under the Video Lottery Act, racetracks that conduct video lottery
gaming, as well as persons who service and repair video lottery machines and
validation managers (persons who perform video lottery ticket redemption
services) are required to be licensed by the Lottery Commission. The licensing
application procedures are extensive and include inquiries into and an
evaluation of the character, background (including criminal record, reputation
and associations) and business ability and experience of an applicant and the
adequacy and source of the applicant's financing arrangements. In addition, a
racetrack applicant must hold a valid racing license, have an agreement
regarding video lottery revenues with the representatives of the majority of the
horsemen, the parimutuel clerks and the breeders for the racetrack and post a
bond or irrevocable letter of credit in such
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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 Registrant's license application was
approved by the Lottery Commission in June 1995. From March 1994 until such
approval, the Registrant conducted video lottery gaming under a provision of
the Video 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.
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 Registrant 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 Registrant may continue to operate
video lottery machines at the Lodge, providing there are at least as many
machines located at Mountaineer's racetrack.
The Video Lottery Act imposes extensive operational controls relating
to, among other matters, security and supervision, access to the machines,
hours of operation, general liability insurance coverage and machine location.
In addition, the Video 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 Video 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 Video 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
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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, Breeders'
Classics, Veterans Memorial Program and the Racetrack Employees Pension Fund.
DISCONTINUED OPERATIONS
Bartlett Field Leases - Ohio
In January 1992, the Registrant, through its wholly owned subsidiary,
ExCal Energy Corporation ("ExCal") acquired approximately 16,000 net developed
acres and 16,800 net undeveloped acres (held by production) of oil and gas
leases in the Bartlett Field in Southeastern Ohio from Biscayne Petroleum
Corporation, an affiliate of Edson R. Arneault, a director of the Registrant.
The Registrant agreed to provide funds to drill 40 gas wells on such
properties, and in 1992, the Registrant 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 Registrant abandoned the offering. As a result, the
Registrant recorded certain provisions for writedown of these interests.
During 1993, the Registrant allowed the leases for the net undeveloped acreage
to expire, and sold to third parties approximately 2,300 net developed acres.
In December 1994, all of the remaining leases were sold pursuant to the plan of
orderly liquidation described below.
Bartlett Field Wells - Ohio
In January 1992, ExCal acquired 77 gas wells in the Bartlett Field from
18 limited partnerships controlled by Mr. Arneault and operated by his
affiliate, Century Energy Management Company, Inc. The wells were in need of
repair and the Registrant planned to incur rework costs to increase production
and maximize the value of the assets. Aggregate annual gas production was
100,000 to 150,000 MCF, and Management believed that with limited rework,
production could be increased by at least 100%. In December 1994, all of the
wells were sold pursuant to the plan of orderly liquidation described below.
Marathon-Otter Lake Field - Michigan
In January 1992, ExCal acquired all the issued and outstanding shares of
Crystal Oil Company, Inc. ("Crystal"). Crystal's assets consisted of an average
64% net revenue interest in approximately 3.4 million barrels of oil (proved
reserves) plus 34 oil and gas wells and related equipment in the Marathon-Otter
Lake Field in the State of Michigan. In 1991, the wells were shut-in by Crystal
who had undertaken no material drilling since then. In December 1992, ExCal
entered into a joint venture agreement with Fleur-David Corporation
("Fleur-David"), a minority shareholder of the Registrant, 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
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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 Registrant 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 Registrant, as well as cash from
continuing operations.
Plan of Orderly Liquidation
On March 31, 1993, the Registrant's board of directors approved a
formal plan to divest its oil and gas operations over a period of two years.
This decision was based upon several factors including (i) the anticipated
potential of the Registrant'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
Registrant'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 Registrant 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 Registrant received approximately $85,000 in
connection with the sale of the leases. The Registrant also allowed leases
comprising 16,800 net undeveloped acres to expire. At December 31, 1993, net
developed acreage was approximately 13,700 acres and the Registrant held proved
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 Registrant'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
Registrant reduced its appropriation for such rework costs to $100,000, which
was estimated to increase net cash flows from production to a minimum of
$25,000 per month. However, after completion of only $50,000 of such rework
costs, the Bartlett Field wells and remaining Bartlett Field leases were sold
in December 1994 to Development & Acquisition Ventures in Energy, Inc., whose
principal shareholder is the brother of Mr. Arneault, 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 Item 13 - "Certain
Relationships and Related Transactions").
At the time of the sale, the Registrant 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 Registrant with a credit for the
then current value of 98,333 shares of the Registrant'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
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the note to be paid in monthly payments of interest only at 10% from May
through October 1995, with principal amortized over 36 months thereafter with a
balloon payment after 12 months on October 1, 1996. The note was payable at
the option of the Registrant through the issuance of common stock on or before
November 1, 1996 at the then market value, provided that such shares were
registered by the Registrant at the time of issuance. The Registrant 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 Registrant's common stock,
subject to registration rights and valued for purposes of the transaction at
the then market value of $1.25 per share.
The Registrant intends to sell its sole remaining oil and gas interest,
its 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" and Note 10 of the accompanying "Notes to
Consolidated Financial Statements".
ITEM 2. PROPERTIES
GAMING, RACING AND OTHER ENTERTAINMENT
Mountaineer comprises a thoroughbred race track and Lodge with 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 and State Route 2. At December 31, 1995, Mountaineer
was encumbered by a first deed of trust in favor of Bennett Management &
Development Corporation, collateralizing indebtedness aggregating $10.2 million
in principal amount.
OIL AND GAS
The Registrant'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 Registrant's oil and gas interests, see Item 1. "Business
- - Discontinued Operations," Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Discontinued
Operations," and Note 10 of the accompanying "Notes to Consolidated Financial
Statements."
EQUIPMENT LEASES
At Mountaineer, the Registrant leases 800 video lottery machines,
totalisator system, video tape and closed circuit televisions systems and other
equipment required for operations. For discussion of such equipment leases,
see Note 7 of the accompanying "Notes to Consolidated Financial Statements -
Commitments and Contingencies."
OFFICE LEASE
The Registrant leases office space for its corporate offices under
operating leases. To reduce overhead costs, the Registrant has moved to
progressively smaller offices on two occasions since January 1, 1994. The
Registrant's lease for a 6,034 square foot facility in Irvine, California
expired at that time, and the Registrant moved and entered into a new
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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 Registrant 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.
ITEM 3. LEGAL PROCEEDINGS
SETTLED LITIGATION INVOLVING LOSS CONTINGENCIES
Jackpot Enterprises, Inc. v. Winners Entertainment, Inc., Circuit Court
of Kanawha County, West Virginia Case No. 94-C-819. On May 13, 1994, the
Registrant was served with a complaint in which Jackpot sought an award of
250,000 shares of the Registrant's common stock as liquidated damages for an
alleged breach of a January 27, 1993 agreement and for alleged intentional
torts in refusing to issue the stock. Jackpot also sought a cash award equal
to the difference in the market price of the stock from May 28, 1993 to the
date of issuance. Jackpot also alleged that the refusal to issue the 250,000
shares constituted a separate intentional tort, for which Jackpot sought
punitive damages of $5 million.
The parties settled these claims on March 3, 1995. The terms of the
agreement require the Registrant to issue to Jackpot, and include in a
registration statement, such number of shares which, when combined with the
30,000 shares of the Registrant's stock previously issued to Jackpot, on the
date the registration statement becomes effective, will result in net proceeds
of $550,000 to Jackpot. If the registration statement was not effective by
April 29, 1995, which it was not, the Registrant was required to issue an
additional 12,500 shares every sixty days until the effective date. In no
event, however, will the Registrant be required to issue more than 250,000
shares. The Registrant had the right under the Settlement Agreement to
repurchase at par value any shares (other than the 30,000 shares Jackpot has
held since January of 1993) necessary to limit Jackpot's net proceeds to
$550,000. The repurchase was not effective within one year of the date of the
Settlement Agreement. Through December 31, 1995, Management has issued 175,000
shares (excluding the 30,000 shares referred to above) of its common stock in
accordance with terms of the Agreement.
Glenn Hall v. Winners Entertainment, Inc. and Michael Mapes v. Winners
Entertainment, Inc., United States District Court for the District of
Minnesota, Case Nos. 3-94-CV-1383 and 3-94-CV-1384. On October 26, 1994,
Winners was served with complaints by Glenn Hall and Michael Mapes, former
directors of Golden Palace Casinos, Inc., alleging breach of a provision of the
October 13, 19932 stock exchange (through which Golden Palace became a wholly
owned subsidiary of the Registrant) requiring the Registrant under certain
circumstances to repurchase 52,250 shares of the Registrant's stock from each
of them. Mr. Hall alleged that the Registrant must purchase 52,250 shares of
the Registrant's stock from Hall for $6 per share, compensate him for his
unspecified lost investment opportunity, and reimburse him for legal fees
incurred in the suit.
Mr. Mapes, who sold 209,000 shares of the Registrant's stock in a
private transaction, seeks, as to 52,250 shares, payment of the difference
between $6 per share and the price for which he sold such shares, unspecified
damages for lost investment opportunity, and
-17-
<PAGE> 20
replacement of 156,750 shares that Mr. Mapes claims he would not have sold but
for the alleged breach. He also sought attorneys' fees.
Effective June 1, 1995, the Registrant settled the claims of Messrs.
Hall and Mapes as follows:
Mr. Hall received 156,750 shares of the Registrant's common stock,
valued at $1.50 per share (the "Make-Up Shares") to make up the difference
between $313,500 (the proceeds he would have received if the Registrant had
repurchased 52,250 shares for $6 per share) and $78,375 (the market value of
52,250 shares on June 30, 1995). Mr. Hall received an additional 45,000 shares
to cover his costs and attorneys' fees (the "Expense Shares"). The Registrant
has agreed to register the Make-Up Shares, the Expense Shares, and 30,000
shares underlying options previously granted (and exercised in 1995) to Mr.
Hall as part of the October 13, 1992 stock exchange through which Golden Palace
became a wholly owned subsidiary of the Registrant.
Pursuant to the agreement, 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 issue Mr. Hall that number of additional shares required to satisfy the
difference between $1.50 per share and such average market price. Mr. Hall's
right to receive, and the Registrant's obligation to issue additional shares,
however, applies only to the Make-Up Shares. In the event a registration
statement with respect to the shares is not effective by June 1, 1996, then the
Registrant will execute a promissory note in favor of Mr. Hall in the amount of
$235,125, payable in 24 equal monthly installments of principal and interest at
12% per annum, such interest accruing from July 1, 1995. 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 Make-Up Shares or (ii) the eligibility of the
Make-Up 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 Make-Up shares for $1.50 per share and would, upon such
repurchase, receive a like credit against the amount due under the note. Mr.
Hall 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.
The Registrant settled with Mr. Mapes on identical terms, except that
(i) Mr. Mapes received 120,000 Make-Up Shares, 45,000 Expense Shares, and the
Registrant agreed to register 20,000 shares underlying Mr. Mapes" previously
granted options; and (ii) the promissory note in favor of Mapes, if required,
will be in the principal amount of $180,000. Both cases have been dismissed
without prejudice until the earlier of registration of the shares or the
delivery of the promissory notes, at which time Messrs. Hall and Mapes have
agreed to enter dismissals with prejudice.
PENDING LITIGATION
Darelynn Lehto v. Winners Entertainment, Inc., Case No. 4-96-49, U.S.
District Court for the District of Minnesota (filed January 11, 1996). Ms.
Lehto's complaint alleges breach of provisions of the October 1, 1992 stock
exchange (through which Golden Palace became a wholly owned subsidiary of the
Registrant) requiring the Registrant under certain circumstances to repurchase
52,500 shares of the Registrant's stock from
- 18 -
<PAGE> 21
her at a price of $6 per share and to use its best efforts to register such
shares for sale to the public. The complaint claims damages in the amount of
$315,000 (the proceeds if the Registrant had repurchased 52,500 shares for $6
per share) and $64,564.94 (the net proceeds Ms. Lehto received for such shares
in the market), plus prejudgment interest; unspecified damages for the
Registrant's failure to register Ms. Lehto's shares at a time when the
prevailing market price of Registrant's common stock was higher; and costs and
attorney's fees. Based on discussions with Ms. Lehto's counsel, Management
believes that the case will be settled on terms satisfactory to the Registrant,
however, there is no assurance that such a settlement will be reached.
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 Registrant and its wholly owned subsidiary, Mountaineer Park,
Inc. ("Mountaineer") were served with a complaint by George Jones, claiming
breach and wrongful termination of Mr. Jones' employment agreement with
Mountaineer, retaliatory discharge, fraud, outrage, and defamation. The
complaint alleges, among other things, that Mountaineer terminated Jones'
employment in September of 1993 in retaliation for his efforts to investigate
alleged improper activities occurring at Mountaineer. Mr. Jones seeks an award
for compensatory damages in the amount of $1 million and a like amount in
punitive damages.
The Registrant 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 statue of
limitations, and the remaining claims should be dismissed because Mr. Jones'
employment was properly and justifiably terminated. Mountaineer has been
advised by its insurance carrier that the claims against it are covered by
insurance. Mr. Jones' counsel has indicated that Jones is considering a
voluntary dismissal of the claims against the Registrant. Management does not
believe that either the Registrant or Mountaineer will incur any material loss
on account of such claims.
Joyce Richard Brantley v. Mountaineer Park, Inc., Case No. 94-C-124,
Circuit Court of Hancock County, West Virginia. In 1994, the Registrant was
served with a complaint by a former part-time employee for wrongful termination,
claiming that Mountaineer fired her as a result of a worker's compensation
claim. The complaint was not answered timely by the Registrant's counsel and,
as a result, a default judgment was entered by the Court in the amount of
approximately $308,000. The Registrant has filed a motion to set aside the
default judgment, however, there is no assurance that the motion will be
granted.
Daniel Barrett v. Mountaineer Park, Inc., Case No. 94-C-147G, Circuit
Court of Hancock County, West Virginia. The Registrant 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 were made,the Registrant would be liable for any such excess amount.
Although Management believes that the matter will ultimately be resolved within
the policy limits, there can be no assurance that it will.
THREATENED LITIGATION
Dorothy van Haaften. Dorothy van Haaften, a former director of Golden
Palace Casinos, Inc. has threatened to bring suit against the Registrant
alleging breach of a
- 19 -
<PAGE> 22
provision of the October 13, 1992 stock exchange (through which Golden Palace
became a wholly owned subsidiary of the Registrant) requiring the Registrant
under certain circumstances to repurchase 52,250 shares of the Registrant's
stock from her. Ms. van Haaften's threat comes notwithstanding a Loan
Agreement dated March 4, 1993 pursuant to which (i) Ms. van Haaften agreed to
forbear from requesting that the Registrant repurchase her shares until after
the effective date of the Registration Statement; and (ii) the Registrant agreed
to lend and did lend van Haaften the sum of $10,000.00 without interest and
without recourse except for a pledge of 1,666 shares of Ms. van Haaften's
Winners stock.
Although definitive agreements have not yet been signed, the parties
have agreed to settle Ms. van Haaften's claims as follows: (i) the Registrant
will issue Ms. van Haaften 150,083 Make-Up Shares (as defined above in
connection with the claims of Messrs. Hall and Mapes); (ii) if the Make-Up
Shares have not been registered within one year after the execution of the
definitive Settlement Agreement, the Registrant will execute a promissory note
in favor of Ms. van Haaften in the amount of $225,125 on the same terms and
conditions as the Hall and Mapes notes; (iii) the Registrant will forgive the
$10,000 loan made in March of 1993 and release the collateral therefor.
Crystal Asset Management Group, Ltd. In July of 1994, the Registrant
and Crystal Asset Management Group, Ltd. ("CAM") settled CAM's claims for
amounts due under a Financial Advisory Agreement of April 1, 1993. Under the
settlement agreement, the Registrant was to pay CAM $165,684 ($65,684 of which
constitutes reimbursement for fees for professional services incurred by CAM in
connection with its work for the Registrant), payable $15,000 upon execution,
up to $30,000 in the event the Registrant sold equity securities, and the
balance payable in monthly payments of $7,500 beginning December 1, 1994, and
warrants to purchase 145,000 shares of WINS common stock at $6.25 per share.
The Registrant made the initial $15,000 payment and delivered the warrants but
has not made the subsequent payments. In February of 1996, CAM threatened to
bring suit to enforce the settlement and, although Management believes the
matter will be settled on satisfactory terms there can be no assurance that
it will.
Michael R. Dunn. During the second quarter of 1995, the Registrant and
Michael R. Dunn, the former president and chairman of the Registrant, entered
into an agreement pursuant to which Mr. Dunn resigned from the Registrant and
its subsidiaries effective April 26, 1995. Pursuant to this agreement, the
Registrant agreed to pay Mr. Dunn bi-monthly payments equal to his former salary
for a period of two years, certain medical and health benefits, and
indemnification for actions taken while he was an employee of the Registrant.
Terry D. Elliott. On October 20, 1995, a horse, which was stabled by
one of the horse owners at Mountaineer, became loose and ran onto a highway
resulting in an automobile collision and the death of a motorist. Although no
action has been filed to date, the Registrant has been advised that the brother
of the decedent intends to file a civil action. Management believes that if
Mountaineer is found to be responsible, the matter will be resolved within the
limits of its insurance policy, however, there can be no assurance that it
will.
Subsequent to the agreement, the Registrant discovered circumstances
which has caused Management to believe that the agreement should be rescinded.
Bi-monthly payments were made to Mr. Dunn through September 30, 1995, and no
payments thereafter. Mr. Dunn has made demand for payment of unpaid
installments under the agreement, attorneys' fees incurred in pursuing his
claim and unspecified investment opportunity. No action has been filed,
however, Mr. Dunn has made a formal demand for arbitration. The Registrant
intends to defend or settle the matter after a complete review by counsel.
There is no assurance that the matter will be resolved on terms acceptable
to Management.
The Registrant (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 Registrant.
-20-
<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock is traded in the over-the-counter market
and has been quoted on the Nasdaq stock exchange since December 7, 1992. The
Registrant currently trades under the symbol "WINS." The following table sets
for the high and low stock prices of the Registrant's common stock during each
of the quarterly periods indicated, as reported by the National Quotation
Bureau.
<TABLE>
<CAPTION>
1996 1995* 1994
Sales Price Sales Price Sales Price
------------- ---------------- ----------------
Quarter Ended High Low High Low High Low
- ------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
March 31 1 11/32 1-31/32 1-3/32 7-3/16 3-7/8
June 30 1-11/16 1-1/8 5-1/2 3
September 30 1-5/8 1-1/16 4-1/4 1-15/16
December 31 1-1/4 1-7/32 2-7/32 31/32
</TABLE>
The high and low bid quotations set forth above reflect inter-dealer
prices, without retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions. On April 4, 1996, the last reported
sale price was $0.875. The Registrant has never paid a dividend and does not
intend to for the foreseeable future. As of April 4, 1996, there were
approximately 532 holders of record of the Registrant's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Registrant included elsewhere
in this Report, 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.
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands of dollars, except per-share data)
-------------------------------------------------------------------------------------
1995 1994 1993(b) 1992(b) 1991(a)
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $24,979,000 $14,682,000 $13,014,000 $ 690,000 $ 0
Net loss from continuing operations (5,313,000) (6,902,000) (5,913,000) (2,749,000) (447,000)
Loss per share from
continuing operations (.33) (.48) (.46) (.42) (.07)
Balance Sheet Data:
Total Assets $25,747,000 $23,958,000 $19,137,000 $16,812,000 $ 0
</TABLE>
-21-
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C>
Redeemable Common Stock 1,406,000 2,208,000 2,208,000 1,618,000 0
Total liabilities 19,763,000 14,200,000 6,040,000 5,641,000 0
Stockholders' Equity 5,984,000 9,758,000 13,097,000 11,171,000 0
</TABLE>
- -----------------------
(a) The Registrant discontinued and disposed of its security guard business in
1991 and devoted substantially all of its efforts in 1991 to bankruptcy
proceedings and the acquisition of new businesses. In 1992, the Registrant
emerged from bankruptcy and acquired Mountaineer Park, Inc. and the oil and
gas properties described herein. Since the periods included in the
foregoing selected financial information reflect businesses of a
substantially different nature, balance sheet data for 1991 has been
excluded.
(b) Due to the Registrant's approval of a plan of orderly liquidation of its
oil and gas operations in March 1993, the results of these operations in
1992 and 1993 have been excluded from such data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In December 1992, the Registrant acquired all of the outstanding stock
of Mountaineer Park, Inc. ("Mountaineer") with the intent of enhancing its
existing facilities for promotion as a high quality gaming and racing
destination resort. Shortly thereafter the Registrant 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 report.
RESULTS OF CONTINUING OPERATIONS
The Registrant incurred significant losses from continuing operations
during the years ended December 31, 1995, 1994 and 1993 largely due to certain
regulatory delays in the State of West Virginia encountered by the Registrant as
discussed elsewhere as well as, the costly frame in which management
transitioned its operations under such regulations. The Registrant incurred
losses from continuing operations of $5.3 million in 1995, $6.9 million in 1994,
and $5.9 million in 1993, largely as a result of legal settlement provisions,
operating losses incurred in the horse racing operations of Mountaineer
Racetrack and Gaming Resort ("Mountaineer") and corporate overhead charges.
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------
Revenues 1995 1994 1993
- -------- ---- ---- ----
<S> <C> <C> <C>
Video Lottery Operations $16,479,000 $ 7,481,000 $ 5,293,000
Parimutuel Commission 4,263,000 3,768,000 4,323,000
Lodging, Food and Beverage 3,046,000 2,276,000 2,344,000
Other 1,191,000 1,157,000 1,054,000
----------- ----------- -----------
$24,979,000 $14,682,000 $13,014,000
=========== =========== ===========
</TABLE>
Revenues -- Year ended December 31, 1995 compared to Year Ended
December 31, 1994.
Total revenues increased by $10.3 million from 1994 to 1995, an
increase of 70%. Approximately $9.0 million of the increase was produced by
video lottery operations, while the parimutuel commissions and lodging, food,
beverage and other operations at Mountaineer contributed $1.3 million of
additional revenues.
-22-
<PAGE> 25
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,
Mountaineer doubled the number of video lottery terminals, to 800, in June
1995. Video lottery revenues in the second half of 1995 surpassed $9.6
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 56% over the $2.8 million of revenue earned in the final quarter
of 1994. In December 1995, the Registrant completed an expansion of its lodge
gaming facilities, allowing the placement of half of its video lottery
terminals at the Lodge with the other half remaining in the racetrack
grandstand/clubhouse, in response to a perceived demand for more terminal
availability on days when live racing is not conducted.
Parimutuel Commissions
Parimutuel commission revenue is a function of wagering handle, with a
higher commission earned on more exotic wagers, such as a trifecta, than on
single horse wagers, such as a win, place or show bet. Mountaineer 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.
In September 1995, Mountaineer 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 broadcasted a simulcast signal
of the stakes races, earning commissions on $351,000 of handle wagered
off-site.
Early in 1995 the Registrant expanded its off-track betting facilities
in both the racetrack clubhouse/grandstand and the Lodge, leading to a 24%
increase in simulcast wagering handle from $14.3 million to $17.8 million, an
increase of $3.5 million. In April 1995, Mountaineer began offering greyhound
off-track betting, which contributed $2.7 million to the increased simulcast
handle. The remaining $.8 million 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.
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 Registrant'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. The increase in lodge
revenues was achieved despite an outage of 41 of the hotel's 101 rooms for the
first four months of 1995 due to a fire experienced in October 1994.
-23-
<PAGE> 26
Other Revenues
In total, other revenues were virtually unchanged from 1994 to 1995,
registering approximately $1.2 million each year. Last year's operations saw a
moderate increase in revenues relating to admission fees and program sales.
Revenues -- Year Ended December 31, 1994 Compared to Year Ended December
31, 1993
Total revenues increased by $1.7 million or 13% to $14.7 million for
the year ended December 31, 1994, from $13.0 million for the year ended December
31, 1993. Video lottery terminal ("VLT") revenues increased by $2.2 million or
41% to $7.5 million for the year ended December 31, 1994 as compared to $5.3
million in VLT revenues for the same period a year earlier. The increase was
primarily attributable to the installation of 400 new VLTs which replaced 165
existing VLTs on September 1, 1994. A significant increase in VLT revenues was
evidenced in fourth quarter 1994 results of operations of 38% to $2.8 million
from $1.3 million for the same quarter ended December 31, 1993. Other sources
of revenues, which consist primarily of admissions, programs, golf, tennis and
swimming, as well as incidental revenues, increased to $1.2 million from $1.1
million or 10% which is an increase of $110,000 for the year ended December 31,
1994 as compared to 1993.
The higher revenues helped absorb the 13% decrease in parimutuel
commissions to $3.8 million for the year ended December 31, 1994 from $4.3
million for the prior year ended December 31, 1993. Total parimutuel wagering
handle decreased from $41.0 million to $35.5 million or 13.4% for the twelve
months ended December 31, 1994 from the same period ended December 31, 1993.
Live racing handle constituted an 18% decrease from $25.7 million to
$21.1 million, while simulcast handle reflected only a 7% decrease from $15.3
million to $14.3 million for the years ended December 31, 1993, to December 31,
1994, respectively. Although the Registrant experienced an increase in live
racing attendance of approximately 6,000 patrons, from 234,000 to 240,000, the
Registrant had fewer racing days in 1994 of 220 versus 226 in 1993. Management
has increased minimum daily purses of $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 mandatorily appropriated for purse
funding to achieve this Management objective.
Food, beverage and lodging revenues decreased 3% from slightly more
than $2.3 million for the year ended December 31, 1993 to slightly under $2.3
million for the year ended December 31, 1994. Guest room revenues decreased
$50,000 or 8% from $621,000 to $571,000 for the year ended December 31, 1994 as
compared to December 31, 1993, which resulted from the reduction in available
rooms due to planned remodeling and construction. Additional negative impact
was attributable to 41 guest rooms which were smoke damaged by fire and out of
service in the fourth quarter 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 $1,706,000 in 1994 from $1,668,000 in 1993. The
increase is primarily due to higher attendance and dining room menu
improvements implemented in early 1994.
Operating Costs -- Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Total profit center 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 1994 to 1995. Parimutuel commissions expense accounted for
$.5 million of the increase, largely a reflection of its 13% increase in
commission revenues, and lodging, food and beverage
-24-
<PAGE> 27
operating costs increased $1.0 million, exceeding the $776,000 revenue increase
earned by that profit center.
Costs and Expenses
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating costs
Video Lottery Operations $12,256,000 $ 5,709,000 $ 3,720,000
Parimutuel Commissions 5,064,000 4,563,000 5,136,000
Lodging, Food and Beverage 3,285,000 2,337,000 2,364,000
Other 1,195,000 798,000 787,000
----------- ----------- -----------
$21,800,000 $13,407,000 $12,007,000
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Profit (Loss)
Video Lottery Operations $ 4,223,000 $ 1,772,000 $ 1,573,000
Parimutuel Commissions (801,000) (795,000) (813,000)
Lodging, Food and Beverage (239,000) (61,000) (20,000)
Other (4,000) 359,000 267,000
----------- ----------- -----------
$ 3,179,000 $ 1,275,000 $ 1,007,000
=========== =========== ===========
</TABLE>
Video Lottery Terminals Operating Costs
Taxes on statutory assessments applicable to video lottery increased
from 35% of video lottery revenues ("net win") prior to March 1994 to 53% of
net win thereafter. This increase in assessment rate, coupled with the 120%
increase in video lottery revenues, resulted in a $5.0 million increase in
taxes and statutory assessments from 1994 to 1995, to $9.0 million.
Approximately $2.5 million of 1995 statutory costs were contributed to
Mountaineer's horseowners' association in the form of live racing purse
payments, compared to $1.1 million in 1994, while $80,000 was contributed to
Mountaineer's employee pension fund in 1995, up from $31,000 returned in 1994.
Video lottery terminal 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 $115,000 to $313,000, both increases resulting from the expanded
number of gaming terminals and related increases in patronage.
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 to
certain inefficiencies caused by Mountaineer's extensive construction activities
in 1995. A general upgrade in
- 25 -
<PAGE> 28
maintenance activities contributed to this increase, as well as a $65,000
increase in repair and maintenance supplies. The Registrant's totalisator
rents and payments of host track fees increased $177,000 in 1995 from the prior
year as a result of the 24% increase in revenues achieved by its off-track
betting operation. Liability insurance expense in 1995 was $87,000 higher than
the prior period, a reflection of the increased volume of business and an
industry-wide increase in jockey insurance.
Lodging, Food and Beverage Operating Costs
$695,000 of the $947,000 increase in this segment's operating costs
were 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 also
commensurate with the increase in revenues. Hotel labor costs increased
approximately $191,000 in response to the upgraded service levels which
produced a $194,123 increase in revenues despite no appreciable change in
occupancy rates from 1994 to 1995.
Other Operating Costs
Selling General and Administrative Expenses and Interest Expense
Selling general and administrative expense decreased $104,000 from $6.7
million in 1994 to $6.6 million in 1995. Legal and other professional fees
decreased from $1.4 in 1994 to $1.1 million in 1995. In addition, several
one-time charges affected selling, general and administrative fees as follows: a
provision for settlement of $525,000 and development cost writeoffs of $200,000
in 1994, and provisions for settlements of $408,000 and doubtful notes
receivable from related parties of $290,000, and relocation and severance
charges of $596,000 in 1995.
Other selling, general and administrative expenses at Mountaineer rose
4%, from $2.6 million in 1994 to $2.7 million in 1995. Advertising expenses at
Mountaineer increased from $715,000 in 1994 to $938,000 in 1995 as its revenue
volume 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
charged to a former shareholder of Mountaineer in the form of Winners
Entertainment, Inc. stock options issued below market in connection with an
employment agreement. During the years ended December 31, 1995 and 1994, the
Registrant incurred noncash expenses of $2.1 million and $2.9 million,
respectively. From time to time, the Company issues common stock for services,
settlements and interest. In addition, in 1995, the Company provided an
allowance for doubtful notes receivable from related parties.
Interest expense decreased 24% from $729,000 in 1994 to $557,000 in
1995 despite the increased construction loan balances carried in 1995; $1.1
million of the interest incurred in 1995 was capitalized to the cost of
construction compared to only $709,000 capitalized in 1994.
Operating Costs -- Year Ended December 31, 1994 Compared to Year Ended
December 31, 1993
Video Lottery Terminals Operating Costs
Cost of VLTs increased by $2.0 million or 53% from $3.7 million to $5.7
million for the year ended December 31, 1994 compared to the same year ended
December 31, 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 million and $1.2 million in 1994 and
1993, respectively. On March 17, 1994, the State of West Virginia approved the
continued operation of VLTs, however, statutory rates paid to certain entities
were mandated at substantially higher amounts in effect as follows:
<TABLE>
<CAPTION>
March 18, 1994 March 17, 1994
and Beyond and Prior
---------- ---------
<S> <C> <C>
State of West Virginia 30.0% 25.0% (1)
Hancock County 2.0% 0.0%
</TABLE>
-26-
<PAGE> 29
<TABLE>
<S> <C> <C>
Horsemen 15.5% 10.0%
Other 5.5% 0.0%
---- ----
Total Statutory Payments 53.0% (2) 35.0%
---- ----
</TABLE>
- ---------------
(1) Increased from 20% to 25% in June 1993.
(2) Excludes up to 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 Registrant paid a 3% management fee
(after 4% administrative fee), based on VLT revenues to American Gaming and
Entertainment, Ltd. ("AGEL") which began on October 26, 1994, as approved by
the West Virginia Lottery Commission. The Registrant was also required to pay
additional management fees of 8% of income before depreciation, amortization,
taxes and interest. Total management fees charged to the cost of VLTs in 1994
was $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.
VLT cashier and technician salaries expense increased $52,000 for the
twelve months ended December 31, 1994 to $215,000 from the same period ended
December 31, 1993, which reflected the additional employees hired to support
the operation of 400 new video lottery terminals, 278 of which have been placed
in operation at the Registrant's newly developed Riverside Gaming Terrace in
the racetrack clubhouse. Increased costs for utilities, insurance and rentals,
due to enlarged facilities and increased personnel costs, accounted for an
additional increase of 17% for the twelve months ended December 31, 1994 as
compared to the twelve months ended December 31, 1993.
PARIMUTUEL COMMISSIONS OPERATING COSTS
Cost of parimutuel commissions were lower by $573,000 or 2% from $5.1
million to $4.6 million for the year ended December 31, 1994 compared to the
year ended December 31, 1993. This decrease is consistent with the decrease in
parimutuel commission revenues for the respective years largely due to the
contractual nature of the Registrant's expenses, as well as certain cost
reduction measures implemented by Management.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Cost of food, beverage and lodging decreased by $27,000 or 1%
registering at approximately $2.3 million for the years ended December 31, 1994
and December 31, 1993. Costs of food and beverage were essentially unchanged,
reflecting a lower labor cost per dollar of sales. This profit improvement was
made possible by expansion of the clubhouse dining and bar facilities, allowing
for more efficient service. Costs of lodging decreased in 1994 by $26,000 from
$725,000 to $699,000. The decrease is attributable to certain salaries and
other variable expenses which were curtailed in late 1994 due to the fire at
Mountaineer Lodge. This decrease in lodge operating costs is commensurate
with the decline in revenues experienced by the lodge.
OTHER OPERATING COSTS
Costs of other revenues were higher by $11,000 or 1% from $787,000 to
$798,000 for the twelve months ended December 31, 1994 as compared to the same
period ended December 31, 1993. Selling, general and administrative and selling
expenses increased by 4% from $6.4 million to $6.7 million in 1994 versus 1993.
Costs included in this increase pertaining to Mountaineer were the $525,000
Jackpot settlement and legal and professional fees, which, in the aggregate,
cause an increase of $1,039,000 from $319,000 to $1,359,000. In addition,
payroll expenses increased from $812,000 to $1,109,000 or $297,000 and
advertising expenses increased by $170,000 from $915,000 to $1,085,000.
Mountaineer experienced significantly higher legal and professional fees because
of actions by the State of West Virginia in determining legality of VLT
operations and the ultimate approval of such operations. Mountaineer also
incurred fees associated with a new collective bargaining agreement, lawsuits
in the normal course of business and contractual agreements consummated in 1994
(horsemen, VLT lease, AGEL Management Agreement, etc.).
-27-
<PAGE> 30
Interest expense increased by $659,000 from $70,000 to $729,000 for the
twelve months ended December 31, 1994, as compared to the twelve months ended
December 31, 1993. The increase was attributable to the interest cost at 12.5%
per annum on principal amounts drawn down for the 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 totalled approximately $709,000 and
financing costs deferred in the consolidated balance sheet at December 31, 1995
are $1,628,000 and will be amortized over the expected term of the loan to
construction activities (based on qualified assets) and interest expense.
During the years ended December 31, 1994 and 1993, the Registrant incurred
noncash expenses of $2.9 million and $2.4 million, including depreciation and
amortization of $1.1 million and $1.0 million, respectively. From time to time,
the Registrant has issued common stock for services, settlements and interest
expenses (see Notes 5, 9 and 15 in the "Notes to Consolidated Financial
Statements").
RESULTS OF DISCONTINUED OPERATIONS
On March 31, 1993, the Registrant's board of directors approved a formal
plan to divest its oil and gas operations through a plan of orderly liquidation.
This decision was based upon several factors including (i) the anticipated
potential of the Registrant'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
Registrant's efforts and financial resources on Mountaineer. The plan of orderly
liquidation provided for certain rework, remediation and development costs to
address environmental matters, increase production and enhance 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 have been disclosed as "Discontinued Operations" for purposes of this
report.
LIQUIDITY AND SOURCES OF CAPITAL
The consolidated financial statements have been presented on a going
concern basis. The Registrant has incurred substantial losses in 1995, 1994 and
1993, and as of December 31, 1995, the Registrant has current liabilities in
excess of current assets of $7,286,000. The Registrant expects that its
continuing operations will be derived primarily by its operations at
Mountaineer. 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 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 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 Registrant 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, 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 Registrant's
capital improvements have had a favorable impact on the Registrant's
operations and management believes this should continue in 1996 and
beyond. However, there is no guarantee that such favorable impact will
continue.
- - 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.
There are no assurances that management's plans as stated above will be
successfully implemented to a degree sufficient to support operations, generate
positive cash flow and service its obligations.
Operations
The Registrant has incurred losses from continuing operations of $5.3
million in 1995, following losses of $6.9 million in 1994 and $5.9 million in
1993. The operating loss prior to 1995 is substantially the result of delays in
the operation and expansion of its
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<PAGE> 31
video lottery activities, as previously discussed herein. During the years
ended December 31, 1994 and 1993, the Registrant funded losses from proceeds of
approximately $2,193,000 and $3,280,000, respectively, from private placements
and overseas sales under Regulation "S" of the Securities Act of 1933. In
addition in 1994, the Registrant financed certain losses through $1,500,000 of
advances under the Bennett loan.
Operating losses incurred in the Registrant's parimutuel/racing
operation have contributed approximately $800,000 to the overall losses
experienced in each of the three years ended December 31, 1995.
Achievements in early 1995 in off-track betting and live racing purse
increases (which are supported by a 15.5% contribution from VLTs) may resurrect
horse racing at Mountaineer from substantial losses to more moderate shortfalls
in 1996. The Registrant expects to expend significant funds for advertising,
promotion and busing programs to substantially increase attendance and revenues
in 1996 and future years.
In addition, two significant changes have occurred recently in West
Virginia Gaming legislation: (i) 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, and
(ii) In March, 1996 Section 29-22A-3 of the West Virginia code was amended to
permit game themes depicting symbols on reels (commonly referred to as "slot
games" or "line games"). Furthermore, there were no changes to the
grandfathering provisions of the West Virginia code which inhibited the access
of new entities to participate in gaming activities in the state.
The addition of line games has heralded a marked leap in gaming revenue
in other jurisdictions to which it has recently been introduced. Mountaineer
has already engaged in renovation activities which have to position itself for
an almost immediate, low cost expansion in video lottery terminals when the
need arises.
In 1995 the Lottery Commission granted permission for Mountaineer to
increase the number of video lottery terminals in use to 1,000 from the present
800 in operation. Areas in the Speakeasy Gaming Saloon and the Riverside
Gaming Terrace suitable for the addition of 200 video lottery terminals were
constructed in 1995. These areas are already
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<PAGE> 32
fitted with security cameras, cashiering stations, count rooms and most of the
attendant ancillary facilities necessary to efficiently operate as a gaming
facility.
CASH FLOWS
The Registrant's continuing operations have consumed cash from
operations in the following amounts: 1994--$3.9 million, 1993--$2.9 million,
while operations produced $553,000 of cash in 1995. Such cash provided by
continuing operations in 1995 was a result of $3.0 of increases in accounts
payable and accrued liabilities.
Mountaineer has significantly completed its capital expansion and
improvement campaign, investing $5.5 million in property additions in
1995, following investments of $3.4 million in 1994 financed primarily through
its $10.2 construction loan, and $2.5 million in 1993 financed through the
issuance of Registrant's common stock. Approximately $5.9 million of 1994 and
1995 capital improvements were invested in video lottery facilities, with
approximately $518,000 of construction in progress remaining at December 31,
1995. Racetrack related construction totaled $2.4 million in 1994 and 1995,
including renovation of two restaurants seating 1,200, each of which contains
facilities for wagering on live and simulcast racing, and a boxing arena with a
seating capacity of approximately 2,240. Approximately $1.2 million was
invested in hotel renovations in 1994 and 1995, including extensive repairs to
41 rooms damaged in an October, 1994 fire and general furnishing and fixture
upgrades to all other lodging rooms and common areas. Total 1996 capital
expenditures are not expected to exceed $1.5 million.
Mountaineer borrowed $10.2 million under a construction loan with
Bennett in 1994. Mountaineer received $5.7 million of the loan's proceeds in
1994 and the remaining $4.5 million in 1995. The construction loan will convert
to a 36 month term loan, with equal principal payments commencing May 31, 1996
if not prepaid prior to that date. In addition, if the loan is not repaid by
January 2, 1997, the Registrant will be obligated to issue common stock valued
at $2.5 million to Bennett. Management intends to refinance the loan prior to
that date, although there are no assurances that a refinancing will be
successfully completed at favorable terms by that date.
In December, 1995 Mountaineer entered into an agreement with its
totalisator system supplier to convert $461,167 of outstanding trade payables
into a 21 month term loan with monthly principal payments ranging from $13,188
to $34,894.
The Registrant capitalized interest costs relating to construction
totaling $1.1 million in 1995 and $709,000 in 1994. In 1994 the Registrant
recorded a provision in the amount of $525,000 relating to the value of stock
to be used in 1995 in settlement of a legal dispute. Significant items
affecting cash flows in 1993, which are non-cash related are (1) the January 1,
1993 adoption of SFAS 109, "Accounting for Income Taxes," whereby
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<PAGE> 33
the Registrant recorded deferred income taxes of $1,952,000 with a
corresponding increase to property and (2) in July 1993, the Registrant
reconveyed land acquired in Cripple Creek, Colorado, valued at $1,315,000 in
exchange for cancelled long-term debt of $1,315,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and accompanying notes are set
forth on pages F-1 through F-38 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies the Registrant's directors and principal
executive officers and sets forth their business experience during the past
five years. Each director serves for a period of one year and thereafter until
his or her successor is elected and qualified. ExCal Energy Corporation,
Golden Palace Casinos, Inc. and Mountaineer Park, Inc. are subsidiaries of
Winners Entertainment, Inc., as was SDR Corporation until its dissolution in
March 1996.
<TABLE>
<CAPTION>
Director
Name Age Since Registrant Positions
---- --- -------- ---------- ---------
<S> <C> <C> <C> <C>
Edson R. Arneault 49 1995 Winners Entertainment, Inc. Chairman of the Board, President,
and Chief Executive Officer
1994 Mountaineer Park, Inc. President
1992 Winners Entertainment, Inc. Director
SDR Corporation Director
Mountaineer Park, Inc. Director and Treasurer
Golden Palace Casinos, Inc. Director, Secretary and Treasurer
ExCal Energy Corporation Chairman, President and CEO
Robert A. Blatt 55 1995 Winners Entertainment, Inc. Director
Robert L. Ruben 34 1995 Winners Entertainment, Inc. Director
Thomas K. Russell 43 1995 Mountaineer Park, Inc. Director and Secretary
1992 Mountaineer Park, Inc. Director and Assistant Secretary
ExCal Energy Corporation Director, Secretary and Treasurer
1991 SDR Corporation Director, Secretary and Treasurer
1989 Winners Entertainment, Inc. Director, Secretary, Treasurer,
Chief Financial Officer and
General Counsel
</TABLE>
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<PAGE> 34
BOARD OF DIRECTORS
Members of the Registrant's Board of Directors are elected for a one
year term at each annual meeting of stockholders to succeed those directors
whose terms are expiring.
Mr. Arneault is responsible for government relations in connection
with the Registrant's oil and gas, racing and video lottery operations, with
responsibility for licensing, legislative and regulatory matters and political
relations involving the Registrant. Mr. Arneault manages the daily operations
of the Registrant, including supervision of video lottery gaming, racing and
parimutuel activities, financing and development. Mr. Arneault has an MBA and
is a certified public accountant.
Mr. Blatt is Chief Executive Officer of Island Gold Resorts, L.L.C.,
Championship Golf Enterprises, L.L.C., and Gold Development Services, Limited
of St. John's Antigua, a consultant to the board of directors of AFP Imaging
Corporation. Mr. Blatt is a member of the New York Stock Exchange, Inc. and
has served as director, officer or principal of numerous public and private
enterprises. Mr. Blatt is an attorney and a Registered Principal, NASD and New
York Stock Exchange, Inc.
Mr. Ruben is a principal in Freer & McGarry, P.C., a Washington, D.C.
law firm, where he has practiced since 1991. Freer & McGarry, P.C. has served
as counsel to the Registrant since November 1991, and Mr. Ruben has represented
Mr. Arneault and various of his affiliates since 1987. Mr. Ruben is an attorney
and practices principally in the areas of commercial litigation and
corporate/securities law.
Mr. Russell is responsible for the management of the Registrant's
compliance, litigation, and general legal matters, including coordination of all
activities involving outside professionals, financing and matters concerning
markets for the Registrant's securities. Mr. Russell is an attorney licensed
to practice in the State of California.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
At the date hereof, the Registrant has received reports on Form 5 which
are being submitted by 5 affiliates for filing with the Securities and Exchange
Commission to complete all reports required uner Section 16(a) of the
Securities Act of 1934 during the Registrant's last two fiscal years, including
7 reports by Mr. Arneault involving 8 transactions or holdings, 2 reports by
Mr. Blatt involving 2 transactions or holdings, 2 reports by Mr. Ruben
involving 2 transactions or holdings, 5 reports by Mr. Russell involving 6
transactions or holdings, and 4 reports by the Don Saunders and Bonnie Saunders
1987 Trust involving 5 transactions or holdings. Many of the transactions and
holdings reportable in the previously required reports have been reported in
this report and the Registrant's prior proxy statements and reports on Forms
10-K and 10-Q.
The Registrant has not received at least 2 such reports from a former
affiliate, Michael R. Dunn, involving 8 transactons or holdings known to the
Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The following information is furnished with respect to all the
remuneration for services rendered in all capacities to the Registrant during
1995, paid to (i) each of the Registrant's highest paid executive officers and
directors for whom such remuneration exceeded $100,000 in the last three
completed fiscal years and (ii) all executive officers and directors of the
Registrant as a group.
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<PAGE> 35
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation ----------------------------------------------
------------------------------------- Awards Payouts
---------------------- -------
Other Restricted
Annual Stock Options LTIP All
Comp. Awards SARs Payouts Other
Name Year Salary ($) Bonus ($) ($) ($) (#) ($) Comp.
---- ---- ---------- --------- ---- --------- ------ ------- ------
(1) (2) (3) (4) (5) (6)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edson R. Arneault
President and CEO of 1995 213,652 23,000 -- -- 618,415 -- --
Mountaineer Park, Inc. 1994 188,729 -- 4,021 46,000 -- -- --
ExCal Energy Corporation 1993 151,865 -- -- -- -- -- --
Thomas K. Russell
Secretary, Treasurer, CFO 1995 147,288 -- -- -- 357,316 -- --
General Counsel of 1994 134,075 -- 2,789 -- -- -- --
Winners Entertainment, Inc. 1993 109,597 16,250 -- -- -- -- --
Michael R. Dunn (6) 1995 38,659 -- -- -- -- -- 176,973
President and CEO of 1994 204,437 -- 12,500 -- 240,000 -- --
Winners Entertainment, Inc. 1993 161,436 36,250 -- -- -- -- --
Compensation paid to all 1995 399,599 23,000 -- -- 975,731 -- --
officers and directors
as a group during 1995
</TABLE>
- ---------------
(1) Salaries for Mr. Arneault and Mr. Russell include accrued compensation for
the year ended December 31, 1995 of $144,667 and $41,554, respectively.
Subsequent to December 31, 1995, said amounts, together with interest at
the rate of 10% per annum, will be converted to shares of the Registrant's
common stock at the market value of the shares on February 9, 1996, the
effective date of the conversion.
(2) Represents accrued 1994 vacation compensation for executive officers
distributed in 1994.
(3) Represents the dollar value of 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
Registrant's annual meeting of shareholders held September 11, 1995.
(5) See "Employment Agreements" below.
(6) Mr. Dunn resigned from all offices with the Registrant and its subsidiaries
on April 26, 1995. See "Other Agreements" below and Item 1--Legal
Proceedings."
The following table contains information concerning the grant of stock
options during fiscal 1995 to the Registrant's executive officers named in the
Summary Compensation Table.
OPTIONS GRANTS IN 1995
<TABLE>
<CAPTION>
Potential Realized Value
at Assumed Annual Rates
% of Total of Stock Price Appreciation
Options for Option Term
Options Granted In Exercise Expiration ---------------------------
Name Granted Fiscal Year Price Date 5% 10%
- ---- ------- ----------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Edson R. Arneault 378,415 45.98% $1.219 Sep 1998 $72,711 $152,686
240,000 20.00% $2.000(1) Oct 1997 $ 0 $ 0
Thomas K. Russell 222,316 27.01% $1.219 Sep 1998 $42,176 $ 89,702
135,000 11.25% $2.000(1) Oct 1997 $ 0 $ 0
Michael R. Dunn 240,000 20.00% $2.000(a) Oct 1997 $ 0 $ 0
</TABLE>
- -----------------
(1) In October 1992, the board of directors granted incentive stock options to
certain executive officers, key personnel and employees to purchase, in
the aggregate, 1,200,000 shares of the Registrant's common stock for a
price of $4.875 per share. In December, 1994, the board of directors of
the Registrant voted and shareholders approved at the annual shareholders'
meeting, to reduce the exercise price of such incentive stock options from
$4.875 to $2.00 per share.
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<PAGE> 36
The following table sets forth information regarding the number and
value of options held by each of the Registrant's executive officers named in
the Summary Compensation Table during fiscal 1995. None of the named executive
officers exercised any stock options during fiscal 1995.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in-the-Money Options
Fiscal Year End(2) at Fiscal Year End($)(1)
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edson R. Arneault 759,749 -- 0 --
Thomas K. Russell 436,816 -- 0 --
Michael R. Dunn 419,133 -- 0 --
</TABLE>
- ----------------
(1) Based on the market price of the Registrant's common stock at $0.75 on
December 31, 1995, as reported by Nasdaq.
(2) On January 23, 1996, the Registrant, 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 Registrant's common stock,
respectively, at the estimated fair market value price on the date of grant
of $0.5625, the options are subject to approval at the next annual meeting
of shareholders. Such options grants were made in 1996, and are not
reflected in the table above.
The following table sets forth the number of options held by officers
of the Registrant subject to repricing during the fiscal year ended December
31, 1995. See table entitled "Option Grants in 1995 - footnote (a)," above.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Length of
Original
Number Market Price Exercise Price Option Term
of Options/ of Stock at at Time of Remaining
SARs Repricing or Repricing or New at Date of
Amended Amendment Amendment Exercise Repricing or
Name Date # ($) ($) Price($) Amendment
---- ---- ----------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edson R. Arneault Sep 95 240,000 1.563 4.875 2.00 2 years
Thomas K. Russell Sep 95 240,000 1.563 4.875 2.00 2 years
Michael R. Dunn Sep 95 135,000 1.563 4.875 2.00 2 years
</TABLE>
EMPLOYMENT AGREEMENTS
In May 1994, employment agreements were entered into by the Registrant
and three of its officers, Edson R. Arneault, Thomas K. Russell and Michael R.
Dunn. The employment agreements contain substantially similar compensation
terms, differing only as to the amounts of compensation for each officer. Each
agreement provides for a three year period of employment, with an automatic
renewal of the three-year term on each anniversary date unless either party
provides written notice of cancellation of the renewal. On January 23, 1996,
the Registrant canceled the renewal provision for each of the agreements
effective May 11, 1996. Mr. Dunn's employment agreement terminated effective
April 26, 1995, the date of his resignation as an officer and director of the
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<PAGE> 37
Registrant and its subsidiaries. Mr. Dunn's employment agreement was replaced
with the agreement discussed in "Other Agreements" below. Each employment
agreement provides for a base salary with annual cost of living adjustments,
increases contingent on certain events and bonuses at the discretion of the
board of directors. Base salaries of the executive officers of the registrant
at December 31, 1995 are $228,900 for Mr. Arneault and $157,500 for Mr. Russell.
Under the employment agreements, if the employee's period of employment
is terminated for a reason other than death or physical or mental incapacity or
for cause, the Registrant will continue to pay the employee, or the employee's
estate, the compensation that otherwise would have been due to him for the
remaining period of employment. The agreements may be terminated with no
further obligation by the Registrant to pay the employee, but only if such
termination is for cause defined as (i) conviction of a felony, (ii)
embezzlement or misappropriation of funds or property of the Registrant, or
(iii) refusal to substantially perform or willful misconduct in the performance
of duties under the agreement. The agreements provide that in the event an
officer's employment is terminated by the Registrant without cause or by the
officer following a change of control, as defined, the officer is to receive
within 30 days of the termination a sum that is three times his annual base
salary, but not to exceed the amount deductible by the Registrant under the
Internal Revenue Code of 1986. The agreements also prohibit employment in a
competitive gaming venture located within a 90 mile radius of any gaming
facility owned or to be owned by the Registrant during the term of the
agreement.
OTHER AGREEMENTS
During the second quarter of 1995, Mr. Dunn and the Registrant
entered into an agreement pursuant to which Mr. Dunn resigned from the
Registrant and its subsidiaries effective April 26, 1995. Pursuant to this
agreement, the Registrant agreed to pay Mr. Dunn bi-monthly payments equal to
his former salary for a period of two years, certain medical and health
benefits, and indemnification for actions taken while he was an employee of
the Registrant.
Subsequent to the agreement, the Registrant discovered circumstances
which has caused Management to believe that the agreement should be rescinded.
Bi-monthly payments were made to Mr. Dunn through September 30, 1995, and no
payments thereafter. Mr. Dunn has made demand for payment of unpaid
installments under the agreement, attorneys' fees incurred in pursuing his
claim and unspecified investment opportunity. No action has been filed,
however, Mr. Dunn has made a formal demand for arbitration. The Registrant
intends to defend or settle the matter after a complete review by counsel.
COMPENSATION OF DIRECTORS
On September 11, 1995, the shareholders elected Mr. Ruben and Mr. Blatt
as directors of the Registrant. Although Mr. Ruben and Mr. Blatt are not
employees of the Registrant, they are entitled to a fee of $2,500 for each
quarterly board meeting attended, and reimbursement for out-of-pocket expenses
incurred in connection with their attendance at board meetings. Directors who
are employees of the Registrant do not receive additional compensation for
services as directors, except that they are reimbursed for out-of-pocket
expenses. On January 23, 1996, Mr. Blatt and Mr. Ruben, were granted
non-qualified options to purchase 50,000 shares and 75,000 shares of the
Registrant's common stock, respectively, at the fair market value on the date
of grant of $0.5625 per share. The options are immediately exercisable for
a term of three years.
-35-
<PAGE> 38
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On September 11, 1995, the board of directors appointed Mr. Ruben and
Mr. Blatt to serve as the board's Compensation Committee. The Committee is
authorized to review all compensation matters involving directors and executive
officers, and Compensation Committee approval is required for any compensation
to be paid to executive officers or directors who are employees of the
Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1995 the ownership of
the presently issued and outstanding shares of the Registrant's common stock by
persons owning more than 5% of such stock, and the ownership of such stock by
the Registrant's officers, directors and key employees, individually and as a
group. As of April 4, 1996, there were 17,323,399 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
Name and Address Ownership of Class
------------------- ------------- ----------
<S> <C> <C>
Edson R. Arneault(1) 2,412,133 11.77%
7199 Thornapple River Drive
Ada, MI 49306
Donald Saunders and Bonnie Saunders 1987 Trust(2) 2,017,685 9.85%
Donald G. Saunders, Trustee
900 East Desert Inn Road, Suite 521
Las Vegas, NV 89109
Bennett Management(3) 1,530,000 7.47%
and Development Corp
2 Clinton Square
Syracuse, NY 13202
Thomas K. Russell(4) 540,626 2.64%
1461 Glenneyre Street, Suite F
Laguna Beach, CA 92651
Robert A. Blatt(5) 377,684 1.84%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue, Suite 303
Larchmont, NY 10538
Robert L. Ruben(6) 90,000 0.44%
Freer and McGarry
1000 Thomas Jefferson St., NW, Suite 600
Washington, DC 20007
All officers and directors as a
Group (4 persons)(7) 3,420,443 16.70%
</TABLE>
- ---------------
(1) Includes 20,000 shares and options and other rights to acquire beneficial
ownership of 1,122,615 shares within 60 days held by Mr. Arneault, and
1,269,518 shares held by corporations and limited partnerships for which Mr.
Arneault is a control person.
-36-
<PAGE> 39
(2) Includes 1,016,816 shares and options, warrants and other rights to acquire
beneficial ownership of 1,000,869 shares within 60 days held by trust.
(3) Includes 780,000 shares for which voting rights have been assigned to the
board of directors of the Registrant to satisfy licensing requirements of
the West Virginia Lottery Commission.
(4) Includes options and other rights to acquire beneficial ownership of 540,626
shares within 60 days held by Mr. Russell.
(5) Includes 327,684 shares and options to acquire beneficial ownership of
50,000 shares within 60 days held by Mr. Blatt.
(6) Includes 15,000 shares and options to acquire beneficial ownership of 75,000
shares within 60 days held by Mr. Ruben.
(7) Includes Messrs. Arneault, Russell, Blatt and Ruben.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the Registrant's officers and directors may be subject to
various potential conflicts of interest arising out of their relationship with
the Registrant and ExCal Energy Corporation, including their status as
creditors of the Registrant, owners of working interests in properties owned by
the Registrant, contractors for operating wells for the Registrant, their
control of pipelines through which the Registrant transports gas, and
the ownership of leases on land adjacent to leases owned by the Registrant.
Sales of Leases and Wells. In December 1994, the Registrant sold its
Ohio oil and gas operations pursuant to its March 1993 plan of orderly
liquidation to Development & Acquisition Ventures in Energy, Inc. ("DAVE"), the
brother of Mr. Arneault, for notes secured, in part, solely by the assets
sold. The Registrant had received four independent bids for the purchase of
such properties, with the highest having been submitted by DAVE. Management
determined, based on market conditions and the Registrant's plans to liquidate
its oil and gas operations, that the sale terms were in the best interest of
the Registrant. Though DAVE is current with payments under the notes to date,
ExCal will be confronted with a continuing conflict of interest with respect to
the enforcement of the notes.
Advances by Director to Subsidiary. 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.
Purchase of Stock by Affiliate from Joint Venture Partner. To assist
Fleur-David Corporation, the Registrant's joint venture partner in rework
activities related to the Registrant's plan of orderly liquidation of its oil
and gas interests in Michigan, Mr. Arneault purchased 25,000 shares of the
Registrant's common stock held by Fleur-David, in July 1995, in a private
transaction.
Participation by Director and Affiliate in Proved Reserves. During
1995, Thomas K. Russell, a director of the Registrant, and Mark C. Russell, his
brother, each purchased a working interest in the Marathon-Otter Lake oil and
gas reserves in Michigan, owned in
-37-
<PAGE> 40
part by a joint venture between Fleur-David Corporation and the Registrant for
an aggregate amount of approximately $50,000. The subject working interests,
and others, were offered by Fleur-David to raise capital to finance further
rework and remediation activities at the property.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Included in Part II of this Report:
Independent Auditors' Report (F-2)
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)
(a) 2. FINANCIAL STATEMENT SCHEDULES.
Included in Part IV of this Report.
For the years ended December 31, 1995, 1994 and 1993
Schedule II - Valuation Allowance and Qualifying Accounts
(a) 3. EXHIBITS.
3(1) Articles of Incorporation, as amended.(1)
3(2) By-Laws of Winners Entertainment, Inc.(1)
10(1) Amendment re outstanding promissory note to Bartlett Field
Partnership by ExCal Energy Corporation pursuant to the March 30,
1995 Amendment of Supplemental Agreement with Respect to Acquisition
of 77 Gas Wells, dated October 2, 1995.
10(2) Amendment to June 27, 1994 Construction Loan Agreement by and among
Bennett Management & Development Corporation, Mountaineer Park, Inc.,
and Winners Entertainment, Inc., dated October 31, 1995.
- ---------------
(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, Exhibit 3(i) and (ii).
-38-
<PAGE> 41
10(3) Amendment to June 27, 1994 Construction Loan Agreement by and among
Bennett Management & Development Corporation, Mountaineer Park, Inc.,
and Winners Entertainment, Inc., dated November 28, 1995.
10(4) Amendment to June 27, 1994 Construction Loan Agreement by and among
Bennett Management & Development Corporation, Mountaineer Park, Inc.,
and Winners Entertainment, Inc., and Mutual Release, dated January
12, 1995.
10(5) Agreement by and between Autotote Systems, Inc. and Mountaineer Park,
Inc., dated November 29, 1995, 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(6) Totalisator Services Agreement between Autotote Systems, Inc. and
Mountaineer Park, Inc., dated November 29, 1995.
10(7) Master Lease Agreement #154920 and Schedule 2 between IGT North
America and Mountaineer Park, Inc. re video lottery machine equipment
lease, dated June 19, 1995.
10(8) Amendment to Master Lease Agreement by and among IGT, Mountaineer
Park, Inc. and Winners Entertainment, Inc., dated March 26, 1996.
10(9) Mutual Release by and between Dublin Energy Corporation and Edward R.
Knezevich and Winners Entertainment, Inc., Mountaineer Park, Inc. and
Mountaineer Magic, Inc., dated October 18, 1995.
10(10) Letter Agreement dated November 17, 1995, with Donald G. Saunders for
the issuance of 200,000 shares of Winners Entertainment, Inc. common
stock.
10(11) Promissory Note No. 1 by Mountaineer Park, Inc. to AstraFund, Ltd.,
dated March 20, 1996 and due April 22, 1996, and Schedule of
Substantially Identical Promissory Notes.
10(12) Irrevocable and Unconditional Guaranty of Payment by Winners
Entertainment, Inc., dated March 20, 1996, of Promissory Note No. 1,
dated March 20, 1996, by Mountaineer Park, Inc. to AstraFund, Ltd.,
and Schedule of Substantially Identical Irrevocable and Unconditional
Guarantys of Payment.
17 Letter of Resignation from Michael R. Dunn as director and officer of
Winners Entertainment, Inc., dated April 26, 1995.
-39-
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
--------------------------
Name: Edson R. Arneault
Title: President and Chief Executive Officer
Date: March 15, 1996
------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Signature Capacity
- --------- --------
/s/ Edson R. Arneault Chairman and Director
- ----------------------------
Edson R. Arneault
/s/ Thomas K. Russell Chief Financial Officer and Director
- ----------------------------
Thomas K. Russell
<PAGE> 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and 1994................................................................. F-3
Consolidated Statements of Operations for each of
the years in the three-year period ended December 31, 1995............... F-5
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 31, 1995.................................................. F-6
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 1995........................................................ F-10
Notes to Consolidated Financial Statements................................ F-12
</TABLE>
<PAGE> 44
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.
Corbin & Wertz
Irvine, California
April 5, 1996
F-2
<PAGE> 45
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash $ 807,000 $ 1,057,000
Restricted cash (Notes 7 and 13) 426,000 646,000
Accounts receivable, net of allowance
for doubtful accounts of $70,000 and
$93,870 in 1995 and 1994, respectively 174,000 79,000
Notes receivable from related parties,
net of allowance for doubtful accounts
of $290,000 in 1995 (Note 8) 62,000 352,000
Prepaid management fees (Note 14) --- 220,000
Prepaid purses (Note 13) --- 352,000
Deferred financing costs (Note 5) 388,000 630,000
Other current assets 115,000 219,000
----------- -----------
Total current assets 1,972,000 3,555,000
----------- -----------
Property and equipment, net
(Notes 2, 4 and 5) 18,100,000 13,462,000
----------- -----------
Net assets of discontinued oil and
gas activities (Note 10) 2,616,000 2,616,000
----------- -----------
Other assets:
Deferred financing costs (Note 5) --- 998,000
Excess of cost of investments over
net assets acquired, net of accumulated
amortization of $770,000 and $517,000
in 1995 and 1994 (Note 2) 3,004,000 3,255,000
Deposits and other 55,000 72,000
----------- -----------
3,059,000 4,325,000
----------- -----------
$25,747,000 $23,958,000
=========== ===========
</TABLE>
Continued
F-3
<PAGE> 46
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 1995 and 1994
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,474,000 $ 2,259,000
Accrued liabilities (Notes 7, 8,
13 and 14) 2,257,000 805,000
Current portion of long-term
debt (Note 5) 2,536,000 648,000
Current portion of redeemable common
stock (Notes 2, 9 and 10) 991,000 1,651,000
------------ ------------
Total current liabilities 9,258,000 5,363,000
------------ ------------
Accrued financing costs (Note 5) --- 998,000
Accrued liabilities (Notes 7 and 8) 490,000 525,000
Long-term debt, less current portion
(Note 5) 8,071,000 5,095,000
Deferred income taxes (Note 11) 1,529,000 1,662,000
Redeemable common stock, 441,854
and 367,937 issued and outstanding at
December 31, 1995 and 1994, net of
current portion (Notes 2, 9 and 10) 415,000 557,000
Commitments and contingencies (Notes
5, 7, 9, 13 and 14)
Shareholders' equity (Notes 2, 3, 5,
and 9):
Common stock, par value $.00001,
25,000,000 shares authorized;
17,022,645 and 14,620,877 issued
and outstanding in 1995 and
1994, respectively 2,000 1,000
Paid-in capital 32,115,000 30,508,000
Receivable from exercise of
stock options (69,000) ---
Accumulated deficit (26,064,000) (20,751,000)
------------ ------------
Total shareholders' equity 5,984,000 9,758,000
------------ ------------
$ 25,747,000 $ 23,958,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 47
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
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Video lottery terminals
(Note 14) $16,479,000 $ 7,481,000 $ 5,293,000
Parimutuel commissions
(Note 13) 4,263,000 3,768,000 4,323,000
Lodging, food and beverage 3,046,000 2,276,000 2,344,000
Other 1,191,000 1,157,000 1,054,000
----------- ----------- -----------
24,979,000 14,682,000 13,014,000
----------- ----------- -----------
Costs and expenses:
Cost of video lottery terminals
(Note 14) 12,256,000 5,709,000 3,720,000
Cost of parimutuel commissions
(Note 13) 5,064,000 4,563,000 5,136,000
Cost of lodging, food and
beverage 3,285,000 2,337,000 2,364,000
Cost of other 1,195,000 798,000 787,000
Selling, general and admini-
strative expenses (Note 7) 6,564,000 6,668,000 6,370,000
Depreciation and amortization 1,504,000 910,000 625,000
Interest expense (Notes 5 and 8) 557,000 729,000 70,000
----------- ----------- -----------
30,425,000 21,714,000 19,072,000
----------- ----------- -----------
Loss before income taxes (5,446,000) (7,032,000) (6,058,000)
Benefit for income taxes (Note 11) 133,000 130,000 145,000
----------- ----------- -----------
Loss from continuing operations (5,313,000) (6,902,000) (5,913,000)
----------- ----------- -----------
Discontinued operations (Note 10):
Loss on disposal of oil and gas
operations --- (640,000) (1,653,000)
----------- ----------- -----------
Loss from discontinued operations --- (640,000) (1,653,000)
----------- ----------- -----------
Net loss $(5,313,000) $(7,542,000) $(7,566,000)
=========== =========== ===========
Loss per share from continuing
operations $ (.33) $ (.48) $ (.46)
Loss per share from discontinued
operations .00 (.04) (.13)
----------- ----------- -----------
Net loss per share $ (.33) $ (.52) $ (.59)
=========== =========== ===========
Weighted average number of
shares outstanding 16,226,743 14,523,377 12,883,031
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 48
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993 11,226,231 $1,000 $17,013,000 $--- $(5,643,000) $11,371,000
Shares issued from exercise
of Series C warrants
(Note 9) 373,241 --- 2,239,000 --- --- 2,239,000
Shares canceled on notes
payable and interest to
affiliates (Note 10) (20,000) --- (120,000) --- --- (120,000)
Shares issued for notes
payable and interest to
affiliates, net of 98,333
shares of redeemable common
stock (Note 10) 226,286 --- 792,000 --- --- 792,000
Shares issued for conversion
of debentures (Note 6) 416,197 --- 832,000 --- --- 832,000
Shares issued for services
rendered and letter of credit
fees (Notes 7 and 9) 197,787 --- 619,000 --- --- 619,000
Shares issued for cash, net
of commissions (Note 9) 746,755 --- 3,280,000 --- --- 3,280,000
Shares issued for investment
in riverboat gaming
(Note 2) 50,000 --- 300,000 --- --- 300,000
Shares issued in connection
with LVEN (Note 2) 250,000 --- 750,000 --- --- 750,000
</TABLE>
Continued
F-6
<PAGE> 49
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued for capital
raising activities (Note 9) 125,000 --- --- --- --- ---
Compensation for stock
options issued below fair
value (Notes 2 and 9) --- --- 600,000 --- --- 600,000
Net loss --- --- --- --- (7,566,000) (7,566,000)
---------- ----- ---------- -------- ----------- ----------
Balances, December 31, 1993 13,591,497 1,000 26,305,000 --- (13,209,000) 13,097,000
Shares received in connection
with settlement with
LVEN (Notes 2 and 3) (250,000) --- (750,000) --- --- (750,000)
Shares issued to for cash,
net of commissions (Note 9) 786,199 --- 2,193,000 --- --- 2,193,000
Shares issued from exercise
of stock options
(Note 9) 50,000 --- 200,000 --- --- 200,000
Shares issued for services
rendered and interest (Note 9) 147,500 --- 210,000 --- --- 210,000
Shares issued in connection with
financing arrangement (Note 5) 285,000 --- 1,710,000 --- --- 1,710,000
Shares issued for accounts
payable (Note 9) 10,681 --- 40,000 --- --- 40,000
Compensation for stock
options issued below fair
value (Notes 2 and 9) --- --- 600,000 --- --- 600,000
</TABLE>
Continued
F-7
<PAGE> 50
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss --- --- --- --- (7,542,000) (7,542,000)
---------- ----- ---------- -------- ----------- ----------
Balances, December 31, 1994 14,620,877 1,000 30,508,000 --- (20,751,000) 9,758,000
Shares issued from exercise
of stock options
(Notes 2 and 9) 286,667 --- 109,000 (69,000) --- 40,000
Shares issued for services
rendered and interest (Note 9) 77,332 --- 42,000 --- --- 42,000
Shares issued in connection with
financing arrangement (Note 5) 225,000 1,000 1,349,000 --- --- 1,350,000
Cancellation of price guarantee
in connection with financing
arrangement (Note 5) --- --- (3,060,000) --- --- (3,060,000)
Shares issued to replace price
guarantee in connection with
financing arrangement (Note 5) 1,020,000 --- 1,530,000 --- --- 1,530,000
Shares forfeited by Company
(510,000), retained by creditor,
in connection with financing
arrangement (Note 5) --- --- 478,000 --- --- 478,000
Shares issued, and 104,500
redeemable shares without
rights canceled in connection
with the Golden Palace
acquisition debt (Notes 2
and 9) 194,500 --- 212,000 --- --- 212,000
Shares issued, and 98,333
redeemable shares with
put rights canceled, in
connection with oil and gas
acquisition debt (Note 10) 471,933 --- 590,000 --- --- 590,000
Shares issued in connection
with legal settlement
(Note 7) 175,000 --- 414,000 --- --- 414,000
</TABLE>
Continued
F-8
<PAGE> 51
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
-------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued for notes
payable (Note 5) 60,850 --- 43,000 --- --- 43,000
Cancellation of shares issued
in 1994 for services rendered
(Note 7) (97,500) --- (100,000) --- --- (100,000)
Adjustment to shares
outstanding (12,014) --- --- --- --- ---
Net loss --- --- --- --- (5,313,000) (5,313,000)
---------- ------ ----------- -------- ------------ -----------
Balances, December 31, 1995 17,022,645 $2,000 $32,115,000 $(69,000) $(26,064,000) $ 5,984,000
========== ====== =========== ======== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE> 52
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing
operations $(5,313,000) $(6,902,000) $(5,913,000)
Adjustments to reconcile loss to
net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 1,504,000 910,000 625,000
Provision for settlements (Note 7) 408,000 525,000 ---
Other non-cash provisions, net (133,000) 125,000 510,000
Provision for notes receivable
from related parties 290,000 --- ---
Common stock and options issued for
services rendered and interest
(Notes 2 and 9) 77,000 1,340,000 1,219,000
Change in operating assets and
liabilities, net of effects of
acquired companies:
Prepaid management fees 220,000 (220,000) ---
Prepaid purses 352,000 (352,000) ---
Other current assets 54,000 63,000 73,000
Accounts payable 1,676,000 1,221,000 1,049,000
Other accrued liabilities 1,418,000 (244,000) (341,000)
----------- ----------- -----------
Cash provided by (used in)
continuing operations 553,000 (3,534,000) (2,778,000)
----------- ----------- -----------
Loss from discontinued operations:
Oil and gas operations --- (640,000) (1,653,000)
Adjustments to reconcile loss to
net cash used in discontinued
operating activities:
Depletion --- --- 25,000
Provision for estimated loss on
sale of discontinued oil and gas
operations (Note 10) --- 567,000 1,546,000
----------- ----------- -----------
Cash used in discontinued operations --- (73,000) (82,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 553,000 (3,607,000) (2,860,000)
----------- ----------- -----------
Cash flows from investing activities:
Restricted cash 220,000 (401,000) (170,000)
Proceeds from insurance reimbursement --- 241,000 ---
Repayments (advances) on notes receivable
from related parties --- 38,000 (160,000)
Deposits and other assets 17,000 (2,000) 5,000
Capital expenditures (5,482,000) (3,444,000) (2,544,000)
Expenditures for investment in riverboat --- --- (428,000)
Net assets of discontinued oil and gas
operations (45,000) (198,000) (210,000)
----------- ----------- -----------
Net cash used in investing activities (5,290,000) (3,766,000) (3,507,000)
----------- ----------- -----------
</TABLE>
Continued
F-10
<PAGE> 53
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments on notes payable (53,000) (150,000) (300,000)
Proceeds from the issuance of long-term debt 4,500,000 5,700,000 240,000
Proceeds from the issuance of notes
payable to shareholders --- --- 100,000
Payments on notes payable to shareholders --- (70,000) (432,000)
Deferred finance costs --- (61,000) ---
Proceeds from issuance of common stock
Series C warrants exercised --- --- 2,239,000
Proceeds from issuance of common stock
for cash, net 2,193,000 3,280,000
Proceeds from issuance of common stock
in connection with LVEN --- --- 750,000
Proceeds from issuance of common stock
through exercise of stock options 40,000 200,000 ---
----------- ----------- -----------
Net cash provided by financing
activities 4,487,000 7,812,000 5,877,000
----------- ----------- -----------
Net increase (decrease) in cash
(250,000) 439,000 (490,000)
Cash, beginning of year 1,057,000 618,000 1,108,000
----------- ----------- -----------
Cash, end of year $ 807,000 $ 1,057,000 $ 618,000
=========== =========== ===========
Supplemental disclosures of cash flow information -
Cash paid during the year for:
Interest $ 896,000 $ 204,000 $ 68,000
=========== =========== ===========
Income taxes $ 4,000 $ 5,000 $ 15,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-11
<PAGE> 54
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:
Continued
F-12
<PAGE> 55
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
- - Mountaineer replaced 165 existing terminals in September 1994 with 400
new terminals, and upon the authorization by the West Virginia Lottery
Commission, Mountaineer installed an additional 400 terminals in June
1995. In March 1996, the West Virginia State Legislature approved
"line" (symbol) games, which is expected to be in operation on at least
400 video lottery terminals by June 1996. In addition, in December
1995, the Lottery Commission voted to allow progressive video lottery
poker and keno games to exceed a 92% payout threshold. As a result,
progressive blackjack, poker and keno games can now be implemented at
payout rates competitive with other gaming jurisdictions. As the most
heavily patronized gaming venue in West Virginia, Mountaineer is
uniquely positioned to benefit from the interest generated by
progressive jackpots. Management believes that such line games and
progressives will have a significantly positive impact on the Company's
operations. Total Mountaineer revenue increased from $14,583,000 in
1994 to $24,961,000 in 1995. In addition, Mountaineer's first quarter
operating revenues have increased from $4.7 million (unaudited) in 1995
to $7.2 million (unaudited) in 1996. Management believes that the
substantial and steady revenue increases over the past three years at
Mountaineer will continue and ultimately result in positive cash flows
from operations. However, there is no guarantee that the Company will
achieve the increases in revenues and cash flows it expects to occur.
- - As discussed in Note 3, management intends to refinance its $10.2
million construction loan in 1996. At December 31, 1995, approximately
$2.3 million of this balance is recorded as a current liability in the
accompanying consolidated balance sheet. Mountaineer is currently in
negotiations with a lender to refinance this debt and provide
additional working capital. A $12,500 due diligence fee has been paid
by Mountaineer in connection with the negotiations. However, there is
no guarantee that Mountaineer will be successful in these negotiations.
- - In March 1996, Mountaineer received bridge financing from a different
lender in the amount of $570,000, net (see Note 16), which Mountaineer
expects to repay with the proceeds from the aforementioned refinancing.
- - Mountaineer has expended approximately $11.4 million for capital
improvements, which includes expenditures for the lodge which was
damaged by fire in 1994. Management believes that the Company's
capital improvements have had a favorable impact on the Company's
operations and management believes this should continue in 1996 and
beyond. However, there is no guarantee that such favorable impact will
continue.
- - As discussed in Note 7, Mountaineer amended its video lottery
terminals' lease agreement in March 1996 resulting in a reduction of
future monthly payments over an extended term. Scheduled annual lease
payments under the original agreement were approximately $1,859,000.
The amendment reduced the required cash outflows by approximately
$256,000 for 1996.
The consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation. The accounts of the Company's acquired
companies include the operations from the consummation dates.
Continued
F-13
<PAGE> 56
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Discontinued Operations
The Company adopted a formal plan in March 1993 to discontinue operations of its
oil and gas operations (see Note 10). The net assets and operating results of
the oil and gas segment are shown separately in the accompanying consolidated
financial statements as discontinued operations. Although management still
retains certain assets to maximize their ultimate value upon disposition,
management believes that the classification as discontinued operations remains
appropriate.
Cash and Restricted Cash
For purposes of the statements of cash flows, the Company considers investments
purchased with a remaining maturity of three months or less from the purchase
date to be cash equivalents.
Restricted cash includes collateralized, short-term certificates of deposit (see
Note 7), cash in banks designated for redevelopment activities, and unredeemed
winning tickets from its racing operations (see Note 13).
At December 31, 1995, the Company has approximately $73,000 of deposits which
are in excess of limits insured by the Federal Deposit Insurance Corporation.
Property and Equipment
Property and equipment is stated at cost. The Company capitalizes direct
materials and labor, and allocates interest during the construction periods.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings 20 to 40 years
Furniture and fixtures 5 to 7 years
Equipment and automobiles 3 to 15 years
</TABLE>
Interest is capitalized to construction in progress during periods of
redevelopment based on qualifying assets, using a method which approximates the
effective interest rate method. Interest incurred in 1995 and 1994 was
$1,711,000 and $2,337,000, respectively. Interest capitalized in 1995 and 1994,
was $1,127,000 and $790,000, respectively. Interest costs in 1993 were not
significant.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair market value of these
financial instruments could be different than that recorded on a historical
basis on the December 31, 1995 and 1994 consolidated balance sheets. The
Company's significant financial instruments consist of its long-term debt and
its redeemable common stock. An estimate of the fair value of these financial
instruments is not practicable because there is not an active market for such
financial instruments.
Deferred Financing Costs
The Company capitalizes certain loan costs in connection with its financing
activities (see Note 5) and these costs are amortized over the expected term of
the related loans using a method that approximates the effective interest
method.
Continued
F-14
<PAGE> 57
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Excess of Cost of Investments Over Net Assets Acquired, Net
The excess of cost of investments over net assets acquired (goodwill) is
amortized on a straight-line basis over the expected periods to be benefitted.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which goodwill impairment is
determined by management. Goodwill is being amortized on the straight-line
method over an expected fifteen year life. The methodology that management used
to project results of operations forward twelve years, which represents the
remaining life of the goodwill as of December 31, 1995, was based on a five-year
trend line of expected cash flows. At December 31, 1995, 1994 and 1993, no
impairment of goodwill was determined by management.
Amortization expense included in the consolidated statement of operations for
the years ended December 31, 1995, 1994 and 1993 is $252,000, $252,000 and
$266,000, respectively.
Revenue Recognition
The Company recognizes revenues from parimutuel commissions earned from
thoroughbred racing at the time wagers are made. Such commissions are a
designated portion of the wagering handle as determined by the West Virginia
Racing Commission (the "Racing Commission"). Such revenues are shown net of the
taxes assessed by state and local agencies, as well as purses and contract
amounts paid to the Horsemen's Association (see Note 13).
Revenues from video lottery terminals is the net win, which is the difference
between wins (wagers) and losses (payouts), and is recorded at the time wagers
are made (see Note 14).
Revenues from food and beverage are recognized at the time of sale and revenues
from lodging are recognized at the time services are rendered.
Seasonality
The operations of Mountaineer are typically seasonal in nature. Winter
conditions may adversely affect transportation routes to Mountaineer, as well as
cause cancellations of live horse racing. As a result, adverse seasonal
conditions could materially effect the operations of the Company.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Such
estimates may be materially different from actual financial results.
Continued
F-15
<PAGE> 58
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred taxes are based on the difference between the tax
bases of assets and liabilities and their amounts for financial statement
purposes; deferred taxes are then provided based on the estimated tax rates in
effect when the temporary differences are expected to reverse. The Company
records a valuation allowance for deferred tax assets when it is more likely
than not that such deferred tax assets will not be realized through future
operations (see Note 11).
Per Share Information
Per share information is computed by dividing net loss for the year by the
weighted average number of shares of common stock outstanding during the year.
The effect of common stock equivalents would be antidilutive for all periods
presented and is not included in the net loss per share calculations.
Reclassifications
Certain reclassifications have been made to the 1993 and 1994 consolidated
financial statements to conform with the 1995 presentation.
NOTE 2 - MERGERS AND ACQUISITIONS
Mountaineer Park, Inc.
On December 4, 1992, the Company acquired all of the issued and outstanding
common shares of Mountaineer Park, Inc. (Mountaineer), in a tax-free exchange,
for 183,181 shares of the Company's common stock, guaranteed at a per share
sales value of $6.00, an additional 400,000 shares of the Company's common stock
and approximately $91,000 in cash. Should the 183,181 shares, upon
registration, have a sales value in the aggregate less than $6.00 per share, the
Company will register additional shares such that the total market value of the
shares is equal to approximately $1,099,000, (183,181 shares times $6.00 per
share) (Note 9).
The acquisition was accounted for as a purchase and, accordingly, the results of
operations of the acquired business have been consolidated with those of the
Company commencing on December 4, 1992. The purchase price of $2,895,000 was
allocated to the acquired assets and assumed liabilities based on their
respective fair values. The purchase price exceeded the estimated fair value of
the net assets acquired by $2,774,000, which has been recorded as excess of cost
of investment over net assets acquired (see Note 1).
The Company paid certain outstanding indebtedness of Mountaineer of
approximately $3,652,000 in cash and issued approximately 446,496 shares of
common stock valued at $2,428,000 to certain creditors of Mountaineer in
satisfaction of additional obligations, of which 346,496 shares have
registration rights, guaranteed at a per share sales value of $6.00. Upon
registration, the Company will issue additional shares such that the market
value of the shares is equal to approximately $2,079,000. The Company granted
put rights to the holder (a bank) of 60,604 of the aforementioned shares (see
Note 9 "Redeemable common stock") at $6.00 per share, all of which became
exercisable on or before December 31, 1995. No demand has been made to the
Company. The Company has reflected certain amounts as current liabilities in
the accompanying consolidated balance sheets.
Continued
F-16
<PAGE> 59
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 2 - MERGERS AND ACQUISITIONS, continued
Mountaineer Park, Inc. operates a thoroughbred horse racing track and 800 video
lottery terminals on a 606 acre facility in Chester, West Virginia. Mountaineer
also operates a 101 room inn adjacent to the track, dining facilities, as well
as a nine-hole executive golf course and other recreational facilities. Certain
operations are regulated by agencies within the state of West Virginia, which
includes annual licensing (see Notes 13 and 14). At December 31, 1995, all
significant licenses were in effect.
Golden Palace Casinos, Inc.
In October 1992, the Company acquired all of the outstanding capital stock of
Golden Palace Casinos, Inc. ("GPC" and "Golden Palace"), a Minnesota
corporation organized to manage casinos on Indian reservations. Although Golden
Palace had no significant operations at the time of the acquisition, it held,
through a wholly owned subsidiary, a contract, to manage a casino planned for
an Indian reservation in Oklahoma, subject to the satisfaction of certain
conditions. Shortly after the acquisition of Golden Palace, the West Virginia
Lottery Commission advised Management that, as a condition to licensing of the
Company's then-proposed video lottery operations at Mountaineer, the Company
could not engage in Indian gaming activities. Consequently, in December 1992,
the Company sold the subsidiary holding the management contract and agreed to
not otherwise engage in Indian gaming activities as long as it conducted video
lottery operations in West Virginia. Notwithstanding the sale of the management
contract, the acquisition of Golden Palace, which had substantial cash on hand,
provided the Company with sufficient funds to complete the acquisition of all
of the outstanding capital stock of Mountaineer. In connection therewith, the
Company granted put rights to the holders of 209,000 of the aforementioned
shares (see Note 9 "Redeemable common stock") at $6.00 per share should such
shares not have been registered by February 1, 1993; such registration has not
been effected to date.
On June 30, 1995, holders (2) of 104,500 shares of $6.00 redeemable common
stock received an aggregate of 366,750 shares of the Company's common stock, of
which 276,750 shares are subject to conversions into notes at a value of $1.50
per share or approximately $415,000, payable in 24 equal monthly installments
beginning June 30, 1996, interest at 12% per annum, in the event a registration
statement is not effective. Beginning June 30, 1995, the Company has the right
to purchase the 276,750 shares, in whole or in part, at $1.50 per share, less
any credit for payments made through the date of repurchase. Should a
registration statement become effective before the notes are paid in full, the
Company will receive credit for all payments made, as well as a credit for an
amount equal to the average closing market value for 90 days following the
effective date of the registration. All shares issued are subject to
registration, to the extent such shares have not been sold by the parties.
Considering the terms of the settlement discussed above, the Company has
recorded the value of the shares of $415,000 as noncurrent "redeemable common
stock" in the accompanying consolidated balance sheet.
In addition, on the acquisition date, the Company issued options to holders of
Golden Palace options to purchase (a) 190,000 shares of the Company's common
stock at $2.00 per share, (b) 200,000 shares of the Company's common stock at
$.01 per share, and (c) warrants to purchase 283,250 shares of the Company's
common stock at $2.40 per share through 1997. Options to purchase 70,000 shares
at $0.01 were exercised in 1995 (Note 9).
LVEN
On August 12, 1993, the Company entered into a letter of intent with Las Vegas
Entertainment Network, Inc. (LVEN) to acquire, through merger, the issued and
outstanding shares of LVEN. Pursuant to the letter of intent, the Company also
issued 250,000 shares of its common stock for $750,000 in cash. The letter of
intent provided for other terms to be negotiated; however, the parties were
unable to consummate a definitive agreement and the merger was not effected.
The Company and LVEN later reached a settlement arrangement in 1994 (see Note
3).
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN
Riverboat Gaming
On March 2, 1993, the Company, as assignee, entered into an agreement with M&R
Investment Company (M&R) for an assignment of an 80% interest in a ground lease
zoned for riverboat gaming in Tunica, Mississippi. The ground lease covered a
riverboat gaming site approved by the US Army Corps of Engineers. The Company
paid $106,937 on September 6, 1993 and $40,000 in rental payments in accordance
with the terms of the agreement. On March 9, 1993, the Company entered into a
joint venture arrangement with Regal Casinos, the remaining leaseholder, to
construct and operate a riverboat. On April 21, 1993, the Company agreed to
purchase Regal's 20% interest in the venture for $50,000 in cash and 50,000
shares of its common stock valued at $300,000.
Continued
F-17
<PAGE> 60
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN, continued
On July 30, 1993, the Company entered into a joint venture arrangement with LVEN
and BP Group, Ltd., which agreed to assist in the funding, construction and
operation of the riverboat. On February 2, 1994, the Company sold its interest
in the venture. At December 31, 1993, the Company's investment in the riverboat
venture was $728,000 as reflected in the accompanying consolidated balance sheet
at December 31, 1993.
On February 25, 1994, the Company entered into a settlement agreement with LVEN
(see Note 2), whereby the Company sold its interest in the ground lease valued
at $728,000 at December 31, 1993, and was repaid its note receivable of
$200,000, totaling $928,000. Consideration received was 250,000 shares of the
Company's common stock owned by LVEN valued at $750,000, and the balance in
cash. No significant gain or loss resulted from this sale of the Company's
interest and note receivable.
The parties mutually agreed to be released from all claims which may have
existed as a result of the abandonment of the proposed merger between the
Company and LVEN.
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 1995 and 1994, property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
Depreciation expense charged to operations during the years ended December 31,
1995, 1994 and 1993 is $1,252,000, $658,000 and $359,000, respectively.
NOTE 5 - LONG-TERM DEBT
Construction Note Payable
On June 27, 1994, the Company entered into a financing arrangement with Bennett
Management and Development Corporation (Bennett) for construction and
redevelopment activities at Mountaineer. Pursuant to the agreement, Bennett
agreed to finance the Company $10,200,000 for construction with interest payable
monthly at 12.5% per annum, subject to a default rate of 14.5% per annum. The
Company received advances of $5,700,000 from Bennett in 1994 and the remaining
$4,500,000 in 1995. The loan is secured by a deed of trust on all real property
at the resorts. The outstanding principal balance of the loan is $10,200,000 at
December 31, 1995.
Continued
F-18
<PAGE> 61
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 5 - LONG-TERM DEBT, continued
The Company was obligated to issue 5 shares of common stock for every $100 in
advances, subject to a $6.00 per share price guarantee by the Company at the
time of registration of such shares. During 1995 and 1994, the Company issued
225,000 shares and 285,000 shares of its common stock valued at $1,350,000 and
$1,710,000, respectively, for a total value of $3,060,000. Such amounts
were recorded by the Company as deferred financing costs. If the Company did
not register these shares by October 1, 1995, the interest rate would have
increased to 22.5% per annum (see below). In addition to the financing costs
above, the Company incurred a $200,000 loan fee to an investment banker to be
amortized over the life of the loan.
In a series of amendments to the loan agreements and forbearance agreements
which were executed between July 7, 1995 and January 12, 1996, certain terms of
the Bennett loan agreement were amended by the parties as described below:
1) The Company's prepayment option dates of July 1, 1995 and November 1, 1995
were deleted. Upon amendment, the construction loan is payable interest only
through May 31, 1996, with principal and interest payable monthly over 36 months
through April 30, 1999.
2) An interest rate escalation, as defined in the original agreement, of 22.5%
was deleted.
3) Under the July 7, 1995 amendment, the $6.00 per share price guarantee on
510,000 shares discussed above was canceled in exchange for an additional
1,020,000 shares of common stock at an estimated fair value of $1,530,000. The
Company capitalized $1,530,000 as deferred financing costs. This amount is
amortized to interest expense and construction in progress through October 1,
1995 (see subsequent paragraphs).
The original 510,000 shares with $6.00 price guarantees were held by Bennett on
behalf of the Company, and in the event the Company prepaid the outstanding
indebtedness by October 1, 1995, such shares would have been returned to the
Company. No prepayment was made on October 1, 1995, and accordingly, the
510,000 shares were forfeited to Bennett and were valued on October 1, 1995 at
their estimated fair value of $478,000. This amount has been recorded as
additions to deferred financing costs and will be amortized from October 1, 1995
to January 2, 1997 (see Note 1).
The Company shall register all shares referred to above with the SEC on a best-
efforts basis.
Bennett has transferred the voting rights with respect to 780,000 shares to the
Board of Directors of the Company, and Bennett has agreed not to acquire
additional common stock so that Bennett will not be permitted to vote more than
5% of the Company's common stock.
4) At December 31, 1994, deferred financing costs of $998,000 were recorded as
a reflection of future obligations to Bennett. The requirement for these future
obligations was deleted from the amended agreement in July 1995, resulting in a
$998,000 reduction in "deferred financing costs" with a corresponding reduction
in "accrued financing costs".
Continued
F-19
<PAGE> 62
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 5 - LONG-TERM DEBT, continued
5) The amended agreement allows the Company, at its option, to prepay the
outstanding advances by January 1, 1997. If such prepayment is not made by the
Company, it will be obligated to issue an additional number of shares of its
common stock equal to $2,500,000, divided by the average closing stock price per
share for 20 consecutive trading days prior to January 2, 1997.
Management intends to refinance this note through the issuance of long-term debt
on satisfactory terms by January 2, 1997; however, there are no assurances that
such obligation will be refinanced on terms satisfactory to the Company.
Interest expense charged to operations and interest capitalized to construction
in progress incurred under this agreement for the year ended December 31, 1995
were $547,000, of which $131,000 results from common stock issued by the
Company, and $1,127,000, of which $409,000 results from common stock issued by
the Company, respectively, and for the year ended December 31, 1994 were
$700,000, of which $614,000 results from common stock issued by the Company and
$709,000, of which $693,000 results from common stock issued by the Company,
respectively. At December 31, 1995 and 1994, the Company had approximately
$388,000 deferred as finance costs in connection with this arrangement in the
accompanying consolidated balance sheets.
Other Notes Payable
On December 4, 1992, the Company issued a 10% note in $93,750 principal amount
payable to an unrelated party in connection with the acquisition of Mountaineer.
At December 31, 1994, the outstanding principal balance of the note was $43,000.
In 1995, the Company converted the note into 60,850 shares of its common stock.
On March 11, 1993, the Company issued 20% notes in $300,000 aggregate principal
amount. Such notes were fully paid by October 10, 1993.
In September 1995, the Company entered into an agreement with its Totalisator
system supplier to convert $461,000 of outstanding trade payables into a term
note. Under the terms of the agreement, the Company is required to make 21
monthly interest and principal payments of $17,800 and eight (8) additional
payments of approximately $17,800 on various dates through May 31, 1997. The
loan, which is unsecured, bears interest at the rate of 12% per annum. The loan
is subject to an acceleration clause and other financial disincentives in the
event of default. At December 31, 1995, the outstanding principal balance is
$408,000. The Company paid $53,642 and $17,651 of principal and interest,
respectively, in 1995 related to this term note.
Annual Commitments
Future annual principal payments under all indebtedness as of December 31, 1995,
assuming the Bennett notes are prepaid on or before January 2, 1997, are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
<S> <C>
1996 $ 2,536,000
1997 8,071,000
-----------
$10,607,000
===========
</TABLE>
Continued
F-20
<PAGE> 63
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 6 - CONVERTIBLE DEBENTURES
In connection with the acquisition of Golden Palace (see Note 2), the Company
assumed unsecured convertible debentures bearing interest at 8% per annum and
due on March 31, 1993. In 1993, the holders agreed to convert such debentures,
plus accrued interest of approximately $82,000, into 416,197 shares of the
Company's common stock.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Mountaineer Bond Requirements
Mountaineer is required to maintain a $250,000 bond with the Racing Commission
for its operations through December 31, 1996. The Company obtained the bond
through a letter of credit with a bank which is collateralized by a $100,000
certificate of deposit (see Note 1) and a $150,000 bank deposit.
The Company is also required to maintain a bond of $70,000 for the benefit of
the Lottery Commission through June 30, 1996. The bonding requirement has been
satisfied via the issuance of a $20,000 surety bond and two letters of credit
aggregating $50,000, each of which is collateralized by certain bank deposits
(see Note 1).
Jackpot Settlement Agreement
In January 1993, the Company entered into a financing arrangement with Jackpot
Enterprises, Inc. (Jackpot), the proceeds of which were to be used for
redevelopment activities. Pursuant to such arrangement, Jackpot initially
provided the Company with a $600,000 letter of credit collateralized by
Mountaineer Park's land and improvements to insure the performance of the
Company's obligations with respect to racing and video lottery activities under
its agreements with the State of West Virginia. For its letter of credit, the
Company's issued Jackpot 30,000 shares of its common stock which were valued at
$90,000.
The Company and Jackpot were unable to consummate the overall financing
arrangement. The agreement provided that if financing could not be reached due
to certain contingencies, the Company would be required to issue 250,000 shares
of its common stock as liquidated damages. On March 2, 1995, management settled
such claim effective June 25, 1994, agreeing to issue shares of its common stock
with registration rights. The number of shares of common stock to be issued was
based on $512,500 divided by the closing market price per share on the effective
date of registration. In the event the Company did not register the shares by
May 2, 1995, the Company was, and continued to be, required to issue 12,500
shares on such date and 12,500 shares each 60 days that such registration is not
effective. In no event will the Company be obligated to issue more than 250,000
shares of its common stock. The Company recorded a provision for loss of
$525,000 in connection with the settlement which is included in the consolidated
statement of operations for the year ended December 31, 1994.
During 1995, the Company issued 175,000 shares of its common stock as part of
its settlement and, accordingly, $414,000 was reduced from accrued liabilities.
At December 31, 1995, $111,000 remains included in accrued liabilities in the
accompanying 1995 consolidated balance sheet. Management expects to issue an
additional 75,000 shares of its common stock as management does not expect to
file an effective registration statement by the deadline provided in this
agreement.
Continued
F-21
<PAGE> 64
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
Other Settlement
In July 1994, the Company entered into an agreement settling all claims by a
consulting firm arising from an April 1993 financial advisory agreement. The
Company agreed to pay fees and expenses of $165,000. An initial payment of
$15,000 was made upon execution of the settlement agreement and two additional
payments of $15,000 were required from the proceeds of certain unrelated
financings by the Company by December 1, 1994. Such payments were not made and
the entire balance is due upon demand. At December 31, 1995, the Company has
$150,000 outstanding under the agreement, which is included in "accrued
liabilities" in the accompanying consolidated balance sheet.
Under the settlement agreement, the Company canceled previously issued warrants
to purchase 145,000 shares of common stock with registration rights at $7.00 per
share, and instead, issued warrants to purchase 145,000 shares of common stock
with registration rights, exercisable at $6.25 per share through December 1996.
Operating Leases
Totalisator System Operating Lease
The Company leased its Totalisator system under an operating lease which was
amended November 28, 1995 (see below). Under the terms of the lease prior to
amendment, the Company was obligated to pay the lessor approximately $1,500 per
live race performance, plus .5% of the wagered handle in excess of $300,000.
The Company was also paying $300 per live race day ($550 if no live race
performance), plus .5% of simulcast handle in excess of $60,000, per simulcast
race day.
Under the amended terms, the Company must pay the greater of $1,000 per live
race performance or 0.55% of the live racing handle. In addition, the Company
must pay the greater of $300 per live race day ($550 if no live race
performance) per simulcast race day or 0.55% of the simulcast racing handle. For
the years ended December 31, 1995, 1994 and 1993, the rent expense under the
lease was approximately $529,000, $495,000 and $509,000, respectively, which is
included in "cost of parimutuel commissions" in the accompanying consolidated
statements of operations.
The Company also leases its videotape and closed circuit television systems at a
cost of $500 per race day and $125 per simulcast race day under an operating
lease expiring in October 2002. The lease was entered into with a company whose
ownership included the majority shareholder (an existing shareholder of the
Company) at the time of its inception. The Company has the option to purchase
the equipment by October 1, 1996 at the estimated fair value of $350,000.
Rental payments made pursuant to this lease for the years ended December 31,
1995, 1994 and 1993 was approximately $142,000, $223,000 and $172,000,
respectively.
Video Lottery Terminals Operating Lease
The Company leased 165 video lottery terminals under an operating lease through
September 1994. Under the terms of the lease, the Company was obligated to pay
the lessor a fixed percentage of video lottery terminal revenues. These video
lottery terminals were replaced in September 1994 as discussed below.
Continued
F-22
<PAGE> 65
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
In September 1994, the Company entered into a master lease agreement for 400 new
video lottery terminals which was scheduled to expire September 1997 (see
below). The monthly lease payments on these 400 video lottery terminals were
$72,378, plus taxes, insurance and maintenance costs (see discussion of
amendment to the master lease below).
On April 7, 1995, the Company updated the master lease to provide for 400
additional video lottery terminals which were installed in June 1995. In
connection with this lease addition, the Company was obligated to pay 36 monthly
installments of $83,000 beginning in January 1996 through December 1998 for
these 400 additional video lottery terminals. The Company has normalized rent
expense over the 42 month lease term (see discussion of amendment to the master
lease below).
As of December 31, 1995, the Company had past due payments under the master
lease agreement amounting to $190,093 which constituted an event of default. On
March 26, 1996, periodic rental payments under the master lease agreement were
amended to reflect a new consolidated payment schedule as a result of an event
of default by the Company. Under the new agreement, the Company must make
monthly payments of approximately $119,000 in March and April 1996, $183,000
from May through October 1996 and $119,000 from November 1996 through January
1999. In addition to the amounts reflected above, the Company is obligated to
make interest payments from March through October 1996 at a rate of 15% on
certain past due rental payments under the previous agreement for a total
interest obligation of $26,000.
OTHER LEASES
The Company leases office space for its corporate offices under operating
leases. To reduce overhead costs, the Company has moved to progressively
smaller offices on two occasions since January 1, 1994. The Company's lease
for a 6,034 square foot facility in Irvine, California expired at that time, and
the Company moved and entered into a new lease for a period of 36 months at a
smaller 4,300 square foot office in San Juan Capistrano, California. On
November 1, 1995, the Company downsized again and moved to a smaller 880
square foot office in Laguna Beach, California pursuant to a 12 month lease with
an option to extend the term for an additional six months. On February 15,
1996, the San Juan Capistrano office was subleased through December 15, 1996,
the termination date for the underlying lease. Net annual minimum lease
payments at December 31, 1995 are approximately $41,000 and $17,000 per year in
1996 and 1997. Rent expense for the Company's corporate offices included in the
consolidated statements of operations amounted to $78,000, $84,000, and $125,000
for 1995, 1994 and 1993, respectively.
For the years ended December 31, 1995, 1994 and 1993, rent expense under its
video lottery leases was $1,294,000, $1,203,000 and $790,000, respectively,
which is included in "costs of video lottery terminals" in the consolidated
statements of operations. At December 31, 1995, the Company has recorded
deferred rent obligations of $408,000 in the accompanying consolidated balance
sheet, which is included in accrued liabilities.
Future annual minimum payments under all material operating leases as of
December 31, 1995 are as follows, after providing for the amended video lottery
lease agreement described above:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
<S> <C>
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
==========
</TABLE>
Litigation
In 1995, the Company was served with a complaint by a former employee. The
complaint was not answered timely by the Company's counsel and as a result, a
default judgment was entered by the court in the amount of approximately
$308,000. Management has filed a motion to vacate the judgment. There are no
assurances that the motion will be granted or the Company will be successful in
defending the matter. Although management believes that the ultimate outcome
will not necessarily result in a payment of the judgment amount, the Company has
recorded a provision for loss of $308,000 in the accompanying consolidated
statement of operations during the year ended December 31, 1995.
Continued
F-23
<PAGE> 66
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
The Company was served with a complaint in 1994 by a jockey who sustained head
injuries from a fall during a race at Mountaineer. The plaintiff is seeking
both compensatory and punitive damages. Although the matter is covered by
insurance, management has been advised by its carrier, after discovery that a
jury could award damages in excess of Mountaineer's $1 million policy limits.
In the event that such an award is made, the Company would be liable for any
such excess amount. Although management believes that the matter will
ultimately be resolved within the policy limits, there can be no assurance that
it will.
The Company is party to various other lawsuits which have arisen in the normal
course of its business. Certain matters are covered by insurance, after the
Company meets certain deductible requirements, generally $2,500 per occurrence.
It is the opinion of management, that the liability, if any, arising from such
lawsuits would not have a material adverse effect on the Company's consolidated
financial statements.
Environmental Considerations
The Company has developed and is implementing a corrective action plan in
connection with leakage from underground storage tanks. Management has
estimated the cost of corrective action to be approximately $143,000 for the
cost of equipment to be installed in 1995 and 1996 and for remediation in 1996
and 1997. The Company has recorded a provision for anticipated expenditures of
$143,000 in 1995 under "selling, general and administrative" expenses, and has
entered into a service contract for the installation of equipment and future
remediation costs.
Common Stock Registration Rights
As of April 4, 1996, the Company is obligated to register approximately
4,077,991 shares of its common stock and 4,813,143 shares of its common stock
underlying certain options and warrants (see Note 9), which if not registered,
could have an adverse impact on the Company's future financial operations or
cause substantial dilution to existing shareholders. As discussed elsewhere,
the Company has certain price guarantees to sellers of its common stock, which
as of April 4, 1996, and based on a closing market price per share of 7/8, the
Company would have to issue approximately 5.7 million shares of its common
stock. Estimated costs of the registration are not considered significant to
the consolidated financial statements taken as a whole. There are no assurances
that such registration will be effected.
Pension Plan
Mountaineer has a qualified defined contribution plan covering substantially all
of its employees (the "Plan"). The Plan was ratified retroactively on March 18,
1994 by the legislature of the State of West Virginia. The Plan contributions
are based on .25% of the race track and simulcast wagering handles, and
approximately 0.5% of the net revenues of video lottery activities beginning
March 18, 1994. Contributions to the Plan for the years 1995, 1994 and 1993
were $179,000, $106,000 and $102,000, respectively.
Insurance Proceeds From Involuntary Conversion of Assets
In 1994, the Company experienced two fires at Mountaineer, believed to be caused
by arson, in which the Company received approximately $241,000 of insurance
proceeds. The Company realized a nominal gain based on the net carrying value
of the assets destroyed in the fire.
NOTE 8 - RELATED PARTY TRANSACTIONS
Employment Contracts
Effective December 4, 1992 (acquisition date), Mountaineer entered into
management agreements with certain former shareholders. In connection
therewith, the Company granted options to purchase 400,000 shares of its common
stock at $.50 per share. At the time the fair value of the Company's common
stock, subject to transferability restrictions, was approximately $3.50 per
share. As a result, Mountaineer recorded compensation expense of $600,000 for
the year ended December 31, 1994; no amounts were charged in 1995. The
agreements have been terminated by mutual consent without further obligation of
the parties.
Continued
F-24
<PAGE> 67
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 8 - RELATED PARTY TRANSACTIONS, continued
In addition, the Company has entered into various employment agreements with
certain officers, key management and a consultant for periods of up to three
years expiring in 1997. The agreements provide for certain salaries, and stock
and stock option incentives (see Note 9) in the ordinary course of business.
Minimum annual salaries are approximately $523,000.
Severance Agreement
On April 26, 1995, the Company entered into a severance agreement with its
former Chief Executive Officer. In connection therewith, the Company is
obligated to pay approximately $440,000 over a period of two years. In
addition, the Company repriced certain incentive options and is obligated to
provide certain benefits during the term of the agreement. Management
discontinued payments under the agreement due to their discovery of certain
matters which they believe nullify the agreement. At December 31, 1995,
management has an accrued liability of $400,000 which is included in "accrued
liabilities" in the accompanying 1995 consolidated balance sheet.
Notes Payable and Advances Receivable From Related Parties
The Company has a note receivable for $240,000 from a shareholder of the Company
at December 31, 1995 and 1994, as well as additional noninterest bearing
advances of $62,000 made in 1994. The $240,000 note receivable bears interest
at 8% per annum, is due on demand, and is collateralized by certain shares of
the Company's common stock. No demand has been made by the Company's management
through December 31, 1995 as management believes recovery is doubtful. During
1995, the Company has recorded a provision for loss in the amount of $240,000
which is included in "selling, general and administrative" expenses in the
accompanying consolidated statement of operations.
In March 1994, the Company lent $50,000 to a company for a term of seven days in
exchange for a promissory note bearing interest at 8% per annum. The loan was
made upon the recommendation of a significant shareholder of both the Company
and the recipient. During 1995, the Company has recorded a provision for loss
in the amount of $50,000 which is included in "selling, general and
administrative" expenses in the accompanying consolidated statement of
operations. In April 1996, the Company and the recipient renegotiated,
cancelled the original note, and executed a substitute and replacement confessed
judgment promissory note in the principal amount of $58,333 at 8% per annum, all
due and payable August 4, 1996.
Notes Payable to Related Parties
During the year ended December 31, 1993, the Company fully paid certain 8% notes
payable totaling $401,000 to the former majority shareholder of Mountaineer (see
Note 2) and an existing shareholder of the Company.
At December 31, 1993, the Company had a $70,000 demand note due to an
officer/shareholder that bore interest at 6.25% per annum. The note was paid in
full in January 1994.
During 1995, the Company incurred salaries to key management, which remain
unpaid; at December 31, 1995, such amounts accrued were approximately $204,000.
In February 1996, management agreed to accept an aggregate of 466,676 shares of
the Company's common stock in satisfaction of the amounts due them. Such shares
have an approximate value of $204,000; therefore, no additional compensation
expense will be recorded as a result of the issuance of common stock.
Continued
F-25
<PAGE> 68
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY
Stock and Warrants Issued in Connection With Plan of Reorganization
As part of the Company's Plan of Reorganization, which was confirmed January 15,
1992, the Company issued certain warrants to purchase its common stock. During
the year ended December 31, 1993, the Company received $2,239,000 for the
purchase of 373,241 shares of its common stock as a result of the exercise of
Series C warrants. The warrants expired in March 1993.
Redeemable Common Stock
In connection with certain arrangements entered into by the Company as of
December 31, 1994 (see Notes 2 and 10), 367,937 common shares could have been
put to the Company at $6.00 per share upon demand. In 1995, 98,333 redeemable
shares issued in connection with its oil and gas activities (Note 10) were
satisfied through the issuance of 373,600 additional shares of its common stock
as reflected in the aggregate in the accompanying 1995 consolidated statement
of shareholders' equity. In 1995, 194,500 common shares valued at $212,000 were
issued for the cancelation of 104,500 redeemable shares with put rights of
certain holders of Golden Palace acquisition debt. In connection therewith, the
Company issued 276,750 redeemable shares which are subject to registration with
the SEC and have a guaranteed selling price of $1.50 per share at the time of
registration. At December 31, 1995, 441,854 shares of redeemable common stock
are outstanding.
In connection therewith, the Company has classified the put value of such shares
of $1,405,000 and $2,208,000, respectively, as "redeemable common stock" in the
consolidated balance sheets at December 31, 1995 and 1994. Management has
reflected the value certain of these shares as a current liability in the
accompanying consolidated balance sheet at December 31, 1995 and 1994 to the
extent management believes these shares should have been registered. Amounts
reflected as noncurrent are based on scheduled payments in the event such shares
are not registered.
Common Stock and Options Issued for Services
From time to time in the ordinary course of business, the Company has issued
restricted common stock in exchange for services, interest and obligations. The
Board of Directors has determined the fair value of such shares based on 50% of
the value of freely tradable shares as determined through NASDAQ market
quotations. Such values are charged to operations or have extinguished
obligations depending upon the nature of the agreements.
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations; also see following
paragraph for additional shares issued in 1995.
During the year ended December 31, 1994, the Company issued 50,000 shares valued
at approximately $110,000 for services rendered, and the value of such shares
was charged to the 1994 consolidated statement of operations. Also in 1994, the
Company issued 97,500 shares of its common stock valued at $100,000 to a
financial consultant to seek capital for the Company; in 1995, such shares were
cancelled by mutual consent of the parties. The value of such shares, included
in noncurrent "Accrued Liabilities" at such value, will be settled through the
issuance of common stock in 1996. In addition, the Company issued 10,681
shares of its common stock for certain accounts payable valued at $40,000.
During the year ended December 31, 1993, the Company issued 197,787 shares
valued at approximately $619,000 for services rendered and letter of credit
fees for Jackpot, and the value of such shares was charged to the 1993
consolidated statement of operations.
In connection with certain employment agreements (see Note 8), the Company has
granted to two former shareholders of Mountaineer an option to purchase 400,000
shares of the Company's common stock at $.50 per share. The options are
exercisable beginning January 1993 and expire January 1996. The excess of the
estimated value of these shares of $3.50 each over their option price is
included as compensation expense over the two-year term of the employment
agreements, as amended. Compensation expense included in the consolidated
statements of operations for each of the years ended December 31, 1994 and 1993
is $600,000.
Continued
F-26
<PAGE> 69
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY, continued
During 1995, 216,667 shares were exercised for $108,000 of which $69,000 remains
unpaid. At December 31, 1995, this receivable from the exercise of these stock
options is shown as a reduction in stockholders' equity.
Shares Issued for Cash
From January 1994 through May 1994, the Company issued 727,866 shares of its
common stock for $2,193,000, net of commissions of $146,000 and 58,333
restricted shares of its common stock. The 58,333 shares were issued for a
capital raising activity and thus are effectively charged to consolidated
shareholders' equity. In 1994, the Company received $200,000 for the exercise of
options to purchase 50,000 shares of its common stock.
From July through December 1993, the Company issued 746,755 shares of the
Company's common stock for $3,280,000, net of commissions of $592,000 and
125,000 restricted shares valued at $250,000. The 125,000 shares were issued
for a capital raising activity and thus are effectively charged to consolidated
shareholders' equity. The 746,755 shares are exempt from registration under
Regulation S of the Securities Act of 1933, whereby nonresident, aliens of the
United States (i.e., foreign purchasers) may purchase shares with a 40 day
restricted period.
See above and Note 2 for a total of 286,667 shares purchased from the exercise
of stock options at $0.01 and $0.50, per share.
Stock Option Plans
In May 1992, the Board of Directors approved the grant of nonqualified options
to purchase 600,000 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of $1.06 per share and is fully vested as of the date of grant.
The exercise price approximates the fair value of the shares at the date of
grant; such options expire in May 1997.
In October 1992, the Board of Directors adopted an incentive stock option plan
meeting the requirements of Section 422 of the Internal Revenue Code. The plan
reserves 1,200,000 shares for issuance which were granted effective October
1992. The options are exercisable at the then fair market value of $4.875 per
share (unless such options are granted to a 10% shareholder, in which case the
exercise price would be no less than 110% of the then fair market value), and
are exercisable over a period of five (5) years, subject to certain
restrictions. Options to acquire approximately 1,200,000 shares are exercisable
at December 31, 1995 and no options have been exercised to date. In December
1994, the Board of Directors adopted an amendment to reprice the options at
$2.00 per share; shareholder approval was obtained on September 11, 1995.
In May 1995, the Board of Directors approved the grant of nonqualified options
to purchase 823,047 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of approximately $1.22 per share and is fully vested as of the
date of grant. The exercise price approximates the fair value of the shares at
the date of grant; such options expire in September 1998. Shareholder approval
was obtained on September 11, 1995.
In November 1995, the Board of Directors adopted, subject to shareholder
approval, an incentive stock option plan meeting the requirements of Section 422
of the Internal Revenue Code (see above for certain requirements under Section
422). The plan reserves 500,000 shares for issuance which were granted
effective January 23, 1996. The options will be exercisable at the then fair
market value of $.5625 per share, and are exercisable over a period of five (5)
years, subject to certain restrictions.
Continued
F-27
<PAGE> 70
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY, continued
From time to time, the Company issued options and warrants (exclusive of the
options and warrants described in the preceding paragraphs) to unrelated
entities in connection with service arrangements to purchase shares of its
common stock at their estimated fair value ranging from $0.01 to $8.00 per
share, expiring at various dates through April 1998.
During each of the years in the three year period ended December 31, 1995, stock
options and warrants activity is as follows:
<TABLE>
<CAPTION>
Shares Price Range
Available per Share
--------- -----------
<S> <C> <C>
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
=========
</TABLE>
(1) Includes options to purchase 130,000 shares of common stock at $0.01 per
share.
See Notes 2, 3, 5, 7 and 10 for additional transactions in which the Company
issued its common stock and Note 7 for discussion on commitment to register
certain common stock and the underlying common stock of options and warrants
and dilution impact.
NOTE 10 - DISCONTINUED OPERATIONS
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. On March 31, 1993, the Company's Board of Directors
approved a formal plan of orderly liquidation to divest its oil and gas
operations. This decision was precipitated by several factors, including the
long-term potential of the Company's gaming operations and the anticipated time
to be devoted to it by management. In February 1993, the Company decided not to
continue to pursue funds in the public market to undertake the drilling of oil
and gas properties primarily due to the expiration of "Section 29" credits, a
credit against federal income taxes for gas produced from Devonian shale or
tight formations from wells commenced before January 1993. As discussed
further, the Company sold certain interests in these oil and gas assets in
December 1994. Certain interests are currently under rework, to be later sold
after management has enhanced the ultimate value of such interests.
Continued
F-28
<PAGE> 71
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
The following is a summary of the significant accounting policies and a
description of other issues pertaining to the oil and gas operations.
Significant Accounting Policies
The Company follows the successful efforts method of accounting for its oil and
gas activities. Costs of property acquisitions, successful exploratory wells,
all development costs, and support equipment are capitalized. Costs of
unsuccessful exploratory wells are expensed when determined to be nonproductive.
Production costs, overhead and all exploratory drilling costs are expensed as
incurred. The carrying value of proved and unproved reserves are subjected to a
"ceiling test" based on the sum of (a) discounted future net cash flows from
proven reserve estimates, (b) the cost of properties not being amortized and (c)
the lower of cost or fair value of estimated unproved reserves; impairment of
the carrying value of such reserves is charged to operations. Costs of
abandonment and remedial work are expensed over the life of the net future
production cash flows.
Depletion of the cost of producing oil and gas properties has been computed on
the unit-of-production method. Due to the Company's decision to discontinue
these operations, no depletion has been recorded adjusted to their net
realizable value.
The consolidated financial statements reflect the operating results and balance
sheet items of its oil and gas operations separately from continuing operations
pursuant to the plan of divestiture. The assets of the discontinued operations
are shown net of the allocated liabilities.
In 1993, management believed that the operations would have been sold within a
period of one to two years, but due to certain delays and cash flow
considerations, management was not able to complete its rework on the properties
in the state of Michigan within the time originally estimated. Management does
not intend to retain the interest for the purpose of operating the wells.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves
Standardized measures of discounted future net cash flows and changes therein
relating to proved oil and gas reserves are not presented since the Company does
not intend to produce any oil and gas on a continuing basis.
Remaining Oil and Gas Interests
The Company's remaining assets are located in Michigan, consisting of a 25%
working interest in a 64% net revenue interest in proved reserves; 34 wells
exist on the property which have been inoperative since the Company's ownership.
Fleur-David Corporation is currently in the process reworking the wells, which
upon commencement of production, is expected to enable the wells to generate
production of approximately 3,300,000 barrels (BBLs) of oil, over a period of
ten years, with approximately 65% of such reserves recoverable over a period of
four years. Leases, for which the 34 wells are located, are held by force majure
(by production).
Continued
F-29
<PAGE> 72
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
In December 1993, the Company entered into an agreement with Fleur-David
Corporation, whereby the Company contributed its 64% (original interest) working
interests in proved reserves. Fleur-David assumed a note payable of $375,000,
plus accrued interest from the Company, and paid approximately $250,000 in well
lease maintenance costs. In addition, Fleur-David was granted options to
purchase 121,500 shares of the Company's common stock at their then fair market
value of $4.00 each. Fleur-David was also to provide substantially all the
expertise and fund 75% of the costs to perform rework and water-flood of
approximately $2,200,000. The Company's is responsible for 25% of such costs or
approximately $550,000 and will be paid through the proceeds received from the
exercise of the options described above, as well as cash available from
continuing operations.
Fleur-David also obtained a covenant not to sue for clean-up and abandonment
costs from the State of Michigan, as required by the joint venture, by
depositing $188,000 into an environmental escrow account required by the state.
The Company retains a 25% net revenue interest in the joint venture through the
joint venture. An adjustment to the carrying value of these oil and gas proved
reserves was not affected since the additional costs incurred, and to be
incurred by Fleur-David, enhance the value of the interest retained by the
Company by a corresponding amount.
The Michigan well sites require certain remedial activities, which include
abandonment costs. Management has estimated the cost of such remedial
activities to range from $1,200,000 to $2,000,000 should its current plan of
operation with Fleur-David not continue. Management expects to continue with
its initial rework and eventual waterflood project with Fleur-David to minimize
the Company's costs associated with remediation and abandonment of the wells.
The Company's estimated cost of rework and waterflood, as a 25% joint venture
interest holder, is $550,000, $297,000 of which has been paid through December
31, 1995, and the remaining $252,000 included as a liability in the net assets
of discontinued operations in the accompanying 1995 consolidated balance sheet.
Oil and Gas Leases
Certain leases were acquired in 1992 as part of the Company's plan of
reorganization from Biscayne Petroleum Corporation. On March 25, 1993, the
seller agreed to amend certain terms of the acquisition agreement, which, as so
amended, provided for the payment of $50,000 in 1993 and the issuance of 226,286
shares of the Company's common stock in satisfaction of the purchase price. The
March 1993 amendment also rescinded the issuance of 20,000 shares in December
1992 for $100,000 of debt and $20,000 of interest as reflected in the
consolidated statements of shareholders' equity. The purchase price remained
unchanged, after the amendment discussed above, at $2,000,000. The leases, held
by production, were assigned for consideration, along with the 77 wells
discussed below, in December 1994.
Continued
F-30
<PAGE> 73
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
Oil and Gas Wells
Certain oil and gas interests, consisting of 77 production wells, were acquired
in 1992 as part of the Company's plan of reorganization from Biscayne Petroleum
Corporation. On March 25, 1993, the sellers agreed to convert the outstanding
principal balance of an unpaid acquisition note of $590,000, into 98,333 shares
of the Company's common stock subject to registration rights and a put right at
a price of $6.00 per share (see Note 9 "Redeemable common stock"), and payment
of $100,000 in March 1993.
In September 1994, the Company negotiated certain additional terms extending the
date by which the registration of the 98,333 shares was required to be effected
to March 31, 1995, as amended. However, because the registration was not
effected as of March 31, 1995, subject to the terms of the agreement, the
Company was obligated to pay $590,000, less the average market value of the
98,333 shares of common stock for a value of $123,000, or $467,000, in 12 equal
monthly installments, together with interest at 9% per annum beginning April 1,
1995.
On March 31, 1995, the agreement was amended to extend the payment term and
amounts such that the note will be interest only at 10% per annum from April 1,
1995 until October 1, 1995, at which time the outstanding principal balance was
to be amortized over 36 months with a balloon payment due on October 1, 1996,
together with unpaid interest thereon. On October 1, 1995, the parties agreed
to covert the entire principal balance of $467,000 into 373,600 shares of the
Company's common stock based on a value of $1.25 per share. In 1995, the 98,333
shares discussed above, plus the 373,600 shares (471,933) valued at an
aggregate amount of $590,000 are reflected in the accompanying consolidated
statement of shareholders' equity during the year ended December 31, 1995.
In September 1993, the Company recorded a provision of $1,471,000 for an
estimated loss on the disposal of its leases and 77 wells located in
Southeastern Ohio. The Company's estimate was based on the current conditions
in the gas market, estimated costs to prepare such sites for sale, lease
expirations (see reserve quantity information below) and sales commissions.
Related Party Transactions
Sale of Oil and Gas Leases and Wells
In December 1994, the Company entered into an arrangement to sell certain proved
and unproven gas reserves located in Southeast Ohio for notes valued at
approximately $426,000 to a party related to an officer and shareholder of the
Company. In connection therewith, the Company obtained two notes, a $300,000
note, bearing interest at 8% per annum, payable $10,000 per month beginning May
1995, and a $150,000 noninterest bearing note, payable based on 50% of excess
revenues over $10,000 per month from production, secured by the assets sold.
The Company recorded a loss on the sale of these assets of $567,000 which is
included in loss on disposal of oil and gas operations. At December 31, 1995,
the principal balance on the note receivable is approximately $386,000.
Notes Payable
During 1994 and 1995, various corporate affiliates of Mr. Arneault advanced an
aggregate sum of approximately $100,000 to ExCal primarily to cover overhead
expenses in connection with the maintenance of leases and other costs associated
with the Registrant's existing oil and gas interests in Michigan and former
interests in Ohio. In February 1996, such accrued amount, along with accrued
interest thereon at the rate of 10% per annum, was converted into a demand
promissory note in the principal amount of $100,218 payable to Mr. Arneault at
the rate of 10% per annum. No material overhead expenses are expected to be
incurred in 1996.
Continued
F-31
<PAGE> 74
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
The following summarizes the net assets of the discontinued operations as of
December 31, 1995 and 1994 and the results of its operations for each of the
years in the three-year period ended December 31, 1995.
Balance sheet items
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Assets:
Cash $ --- $ ---
Receivable from sale of assets 386,000 426,000
Oil and gas activities -
Working interest in proved oil
and gas properties 2,582,000 2,582,000
---------- ----------
2,968,000 3,008,000
---------- ----------
Less liabilities:
Accrued liabilities (252,000) (350,000)
Payables to related parties (100,000) (42,000)
---------- ----------
Net assets $2,616,000 $2,616,000
========== ==========
</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>
Reserve Quantity Information
<TABLE>
<CAPTION>
Oil Gas
(in BBLs) (in MCF)
---------- ---------
<S> <C> <C>
Proved developed:
Balances, January 1, 1993 2,134,800 1,095,530
Revisions of previous estimates --- (58,378)
Production --- (134,952)
---------- ----------
Balances, December 31, 1993 2,134,800 902,200
Revisions of previous estimates 1,180,000(1) ---
Production --- (99,000)
Sale of assets --- (803,200)
---------- ----------
Balances, December 31, 1994 3,314,800 ---
Activity --- ---
Balances, December 31, 1995 3,314,800 ---
========== ==========
</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.
Continued
F-32
<PAGE> 75
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 11 - INCOME TAXES
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $23,000,000 for federal income tax reporting purposes and
approximately $5,111,000 for state reporting purposes, expiring through 2010.
The Tax Reform Act of 1986 includes provisions which limit the Federal net
operating loss carryforwards available for use in any given year if certain
events, including a significant change in stock ownership, occur. Because of
such limitations, the Company may only utilize net operating loss carryforwards
of approximately $1,500,000 per year for such losses of approximately $3,200,000
incurred prior to December 1992; additional limitations are believed to exist
between 1992 to 1995. Temporary differences are not considered
significant, exclusive of the differences (see below) in financial and tax
reporting bases of assets acquired from Mountaineer in a statutory tax-free
exchange.
At December 31, 1995 and 1994, the deferred taxes of $1,529,000 and $1,662,000,
respectively, represent the nondeductible tax bases of assets acquired from
Mountaineer totaling approximately $4,900,000 net of depreciation. The benefit
for income taxes in the consolidated statement of operations for the years
ended December 31, 1995, 1994 and 1993 represents the tax effect of
nondeductible depreciation less certain minimum state taxes paid.
The Company's only significant deferred tax asset as of December 31, 1995 and
1994 is approximately $8,700,000 and $6,800,000, respectively related to the
net operating loss carryforwards for federal and state tax reporting purposes.
The Company's valuation allowance at December 31, 1995 and 1994 was
approximately $8,700,000 and 6,800,000, respectively. The valuation allowance
at January 1, 1994 and 1993 was approximately $3,467,000 and $1,079,000,
respectivly. The difference between the federal income tax benefit using a 34%
and the benefit recorded in the accompanying statements of operations for each
of the years in the three-year period ended December 31, 1995 related primarily
to increases in the valuation allowances in each year.
NOTE 12 - SEGMENT REPORTING
The Company operates in two segments, oil and gas and gaming. The Company has
not presented segment information in accordance with Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise" because its oil and gas operations have been discontinued, are
separately disclosed in the accompanying consolidated financial statements and
will not be significant in the future.
NOTE 13 - RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Park Race Track
and Gaming Resort. Under West Virginia Horse Racing Law, the Company's
commission revenue is a designated portion of the parimutuel wagering handle
(amounts wagered).
The Racing Commission authorized a minimum of 220 days of racing; the Company
was in compliance with this provision in years reported. The Company is subject
to annual licensing requirements established by the Racing Commission which has
been renewed through December 31, 1996.
In August 1994, the Company renewed its contract with the West Virginia
Horsemens' Benevolent Protection Association (HBPA) for a period of three years.
In connection therewith, the Company is required to provide average daily horse
racing purses of at least $22,500, as well as operate a certain number of races
per day based on criteria provided in the contract.
Continued
F-33
<PAGE> 76
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 13 - RACING OPERATIONS, continued
The Company pays purses for each race day to the horsemen and HBPA. The Company
receives a credit towards future purses for the difference of purses paid and
amounts earned by the horsemen and HBPA. The horsemen and HBPA earn a
percentage of the live and simulcast (satellite off-track wagering) race handle
less winning tickets and certain costs incurred by the Company, including
certain video lottery contractual expenses (approximately 15.5% of net video
lottery revenues) paid to the horsemen and HBPA.
The amounts paid in excess of the amounts earned are reflected in the
accompanying balance sheet as "prepaid purses" and totaled $352,000 at December
31, 1994. At December 31, 1995, purses earned in excess of amounts funded of
$85,000 are reflected in the accompanying 1995 consolidated balance sheet as
"accrued liabilities".
A summary of the parimutuel handle and deductions, including off-track wagering,
for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Total parimutuel wagering
handles $ 39,819,000 $ 35,475,000 $ 40,961,000
Less patrons' winning
tickets (31,637,000) (28,246,000) (32,646,000)
------------ ------------ ------------
8,182,000 7,229,000 8,315,000
Less:
Parimutuel tax paid to:
State of West Virginia
and county (472,000) (442,000) (448,000)
Purses and Horsemen's
Association (3,447,000) (3,019,000) (3,544,000)
------------ ------------ ------------
Parimutuel commissions $ 4,263,000 $ 3,768,000 $ 4,323,000
============ ============ ============
</TABLE>
Continued
F-34
<PAGE> 77
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 14 - GAMING OPERATIONS
On March 17, 1994, the West Virginia State Legislature expressly authorized the
operation of up to 400 video lottery terminals through December 31, 1994,
subject to voter approval in a Hancock County referendum, which was approved on
May 10, 1994. The statute authorizing the operation of video lottery terminals
expires, unless extended, on June 13, 1997. In 1995, the Company received
approval from the West Virginia Lottery Commission (the "Lottery Commission") to
operate up to 1,000 video lottery terminals, and subsequently increased the
number of terminals in operation from 400 to 800.
One half of all video lottery terminals must be located in the racetrack
grandstand and clubhouse, while the balance may be located at the Company's on-
site lodge, as long as parimutuel wagering is operated therein. The Company is
subject to annual licensing requirements established by the Lottery Commission
which was renewed through June 1996.
In connection with its video lottery operations, the Company had the following
gross wins and losses for the years ended December 31, 1995, 1994 and 1993:
<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>
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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
On June 2, 1994, the Company entered into a development agreement with American
Gaming Entertainment, Ltd. (formerly Gamma International, Ltd.) ("AGEL"), an
affiliate of Bennett, to provide services for development activities,
implementation of accounting and information systems and certain personnel
activities until AGEL was approved by the Lottery Commission. Upon approval in
October 1994, a long-term management agreement was executed.
Continued
F-35
<PAGE> 78
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 14 - GAMING OPERATIONS, continued
Pursuant to the management agreement, the Company was obligated to pay 3% of
gross revenues, of video lottery and other non-parimutuel gaming and gaming
support operations, as defined, plus 8% of earnings before interest, taxes,
depreciation and amortization, as defined, from all operating activities of
Mountaineer. In the event of default by the Company, it would be required to
pay certain monies based on the remaining number of months through 1997, or in
the case of extension of video lottery activities by the State of West Virginia,
through the term of the agreement. The monthly base default fee begins at
$83,333. Management and consulting fees charged to "cost of video lottery
terminals" in the accompanying consolidated statements of operations during the
years ended December 31, 1995 and 1994 were $321,000 and $133,000, until such
time as a stay agreement was executed (see below). In addition, during 1994,
the Company advanced AGEL $300,000 which was used to reduce future management
fees and expenses. At December 31, 1994, prepaid management fees in the
accompanying consolidated balance sheet were $220,000.
The Company's management agreement with AGEL has been stayed pursuant to a stay
agreement effective June 30, 1995, and has been replaced by a consulting
agreement, dated July 1, 1995, until such time that Bennett complies with
certain requirements of the Lottery Commission. The consulting agreement calls
for American Newco, Inc. (owned by certain officers and shareholders of AGEL) to
continue to provide consulting services in connection with the Company's video
lottery operations at the rate of $10,000 per month, subject to increases of up
to $10,000 per month for additional services which may be provided, through
March 17, 1997. Fees under this consulting agreement are substantially less
than those which would have been paid under the original management agreement.
Should the stay agreement or the consulting agreement be terminated in
accordance with certain contingencies contained therein, the management
agreement shall also terminate. However, should the Lottery Commission
determine that Bennett has fully complied with its information requirements,
then the management agreement will be reinstated with the original terms as
defined above. At December 31, 1995, accrued consulting fees in the
accompanying consolidated balance sheet totaled $60,000.
The personal involvement of the two shareholders of American Newco, Inc. as
consultants to the Company is a material element of the contract. Since
September 1995, neither shareholder has provided such services and, as a
result, the Company has paid no consulting fees since that time. Management
believes that such failure to perform constitutes a material breach of the
Consulting Agreement and a resulting material breach of the Management
Agreement. Although there can be no assurances, Management believes that the
Management Agreement will not be reinstated.
NOTE 15 - STATEMENTS OF CASH FLOWS
The statements of cash flows exclude the effects of noncash investing and
financing activities for all periods presented. Supplemental disclosures of
significant noncash activities are as follows:
1995
In 1995, 202,833 redeemable common shares valued at $1,217,000 were satisfied
through 463,600 additional shares of its common stock (see Notes 2, 9 and 10).
Also see following paragraph for additional shares issued in 1995.
The Company issued 225,000 shares to Bennett for loan fees; these amounts, plus
285,000 shares valued at $1,710,000 (aggregate $3,060,000 of costs) were
reversed in 1995 due to the cancellation of the $6.00 price guarantee. In
satisfaction of such, the Company ultimately issued 1,020,000 additional shares
valued at $1,530,000 and relinquished its rights to the original 510,000 at a
value of $478,000. Such costs were accounted for as deferred finance costs,
interest and capitalized interest to its construction in progress (Notes 1 and
5).
Continued
F-36
<PAGE> 79
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 15 - STATEMENTS OF CASH FLOWS, continued
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations. Certain services were
rendered in 1995 which were to be satisfied through the issuance of common
stock; however, the parties cancelled 97,500 shares issued in 1994 which were
valued at $100,000. Such amounts are reflected as a reduction from
stockholders' equity with a corresponding increase in accrued liabilities.
In connection with the Jackpot settlement (Note 7), the Company issued 175,000
shares of its common stock in satisfaction of noncurrent accrued liabilities
totalling $414,000 ($525,000 accrued at December 31, 1994); approximately
$77,000 at December 31, 1995 are expected to be reduced through the issuance of
75,000 shares in 1996.
Certain finance fees totalling $997,500 (Note 5) which were accrued as deferred
finance costs in at December 31, 1995, were canceled due to the amendment by the
Company and Bennett. In addition in 1995, the Company issued 60,850 shares in
satisfaction of a note payable of approximately $43,000.
1994
During 1994, the Company issued 50,000 common shares for various services
rendered valued at $110,000. The Company also issued 10,681 and 97,500 shares
of its common stock valued at $40,000 and $100,000, respectively for certain
accounts payable and other current assets. The Company recorded compensation
expense of $600,000 as a result of options to purchase the Company's common
stock at below market values granted to two former shareholders of Mountaineer
(see Note 9).
From July 1994 to December 1994, the Company issued 285,000 common shares valued
at $1,710,000, accrued $200,000 in loan commissions to be paid in 1995, and
accrued $998,000 of construction financing costs which will be satisfied through
the issuance of common stock. Components of such costs of $1,568,000, $709,000
and $631,000 are excluded from cash expended for deferred financing costs,
buildings and improvements and interest expense, respectively.
In December 1994, the Company accrued a liability for the Jackpot settlement
costs of $525,000 which will be satisfied through the issuance of its common
stock in 1995.
See Note 3 for discussion of sale of investment and settlement agreement for
noncash transactions.
During 1994, the Company had certain noncash provisions, net of benefits,
reflected in operations aggregating a net benefit of $29,000.
1993
On January 1, 1993, the Company adopted SFAS 109, "Accounting for Income Taxes"
and, as a result, recorded deferred income taxes of $1,952,000 with a
corresponding increase to property.
In April 1993, the Company issued 50,000 shares of its common stock valued at
$300,000 to acquire a 20% interest in a ground lease (see Note 2).
Continued
F-37
<PAGE> 80
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 15 - STATEMENTS OF CASH FLOWS, continued
On March 31, 1993, the holders of $750,000, 8% convertible debentures elected to
convert their debentures and accrued interest of $82,000 into 416,197 shares of
common stock.
On March 25, 1993, $1,382,000 in debt related to oil and gas activities was
converted into 226,286 shares of common stock (valued at $792,000) and 98,333
shares of Redeemable common stock (valued at $590,000). In addition, 20,000
shares of common stock issued in 1992 for $100,000 of debt and $20,000 of
interest were rescinded.
In July 1993, the Company reconveyed land acquired in Cripple Creek, Colorado,
valued at $1,315,000, to the seller in exchange for long-term debt of $1,315,000
(see Note 2).
The Company issued 197,787 shares for various services rendered in 1993 valued
at $619,000. The Company recorded compensation expense of $600,000 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).
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-38
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Winners Entertainment, Inc.
We have audited the consolidated financial statements of Winners Entertainment,
Inc. and subsidiaries as of December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, and have issued our report
thereon dated April 5, 1996; such consolidated report is included elsewhere in
this Form 10-K. Our audits also included the consolidated financial statement
schedule of Winners Entertainment, Inc. and subsidiaries, listed in Item 14.
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.
Corbin & Wertz
Irvine, California
April 5, 1996
F-39
<PAGE> 82
WINNERS ENTERTAINMENT, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------- ---------- --------
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended, December 31, 1995(1):
Provision for doubtful notes
receivable $ -- $ 290,000 $ -- (1) $ 290,000
Allowance for deferred
tax assets 6,868,000 1,592,000 -- 8,460,000
---------- ---------- ---------- ----------
$6,868,000 $1,882,000 $ -- $8,750,000
========== ========== ========== ==========
Year ended, December 31, 1994(1):
Allowance for deferred tax
assets $3,467,000 $3,401,000 $ -- $6,868,000
========== ========== ========== ==========
Year ended December 31, 1993(1):
Allowance for deferred tax
assets $1,079,000 $2,388,000 $ -- $3,467,000
========== ========== ========== ==========
</TABLE>
- ---------------
(1) During each of the years reported, allowances for trade receivables were not
significant.
F-40
<PAGE> 1
EXHIBIT 10(01)
[EXCAL ENERGY CORPORATION LETTERHEAD]
October 2, 1995
Albert A. Forte
3548 Reeds Lake Boulevard
Grand Rapids, Michigan 49506
Re: March 30, 1995 Amendment of Supplemental Agreement with Respect to
Acquisition of 77 Gas Wells
Dear Mr. Forte:
This shall confirm our agreement that the outstanding promissory note owed to
the Bartlett Field Partnerships ("Partnerships") by ExCal Energy Corporation
pursuant to the above-referenced amendment, in the approximate remaining
principal balance of $467,000, shall be returned to ExCal marked "Cancelled"
upon delivery to the Partnerships of the following consideration:
(1) $11,676 in payment of the accrued interest under the note for the months
of July, August and September 1995, and
(2) 373,600 shares of restricted Rule 144 common stock of Winners
Entertainment, Inc., valued for purposes of this transaction at the closing bid
price of $1.25 on October 2, 1995, and subject to piggy back registration rights
to any future registration filed with the SEC by Winners, on a best efforts
basis, on Forms S-1, S-2 or S-3.
Please indicate your acceptance of the above terms as representative of our
agreement, which shall be deemed effective October 2, 1995, by your signature
below.
Very truly yours,
/s/ Thomas K. Russell
Thomas K. Russell
Secretary
Acknowledged and accepted this 2nd day of October, 1995.
/s/ Albert A. Forte
-------------------------------------
Albert A. Forte, Attorney for the
General Partners of the "Partnerships"
<PAGE> 1
[BENNETT MANAGEMENT & DEVELOPMENT CORPORATION LETTERHEAD]
EXHIBIT 10(02)
October 31, 1995
Mountaineer Park, Inc. (Borrower)
c/o Winners Entertainment, Inc.
30448 Rancho Viejo Road, Suite 110
San Juan Capistrano, CA 92675
RE: CREDIT IN THE PRINCIPAL AMOUNT OF $10,200,000 EXTENDED BY BENNETT
MANAGEMENT & DEVELOPMENT CORP. (THE "LOAN") PURSUANT TO A CERTAIN
JUNE 27,1994 CONSTRUCTION LOAN AGREEMENT BY AND AMONG BENNETT
MANAGEMENT & DEVELOPMENT CORP., LENDER, MOUNTAINEER PARK, INC.,
BORROWER, AND WINNERS ENTERTAINMENT, INC., WINNERS, AS AMENDED
Gentlemen:
For a period of thirty days from the date hereof, Bennett Management &
Development Corp. will pursuant to section 7.2 waive any Event of Default during
such period and will not in any way during such period (a) seek repayment of the
Loan from Mountaineer Park, Inc. or Winners Entertainment, Inc., (b) seek to
enforce the promissory note made by Mountaineer Park, Inc., evidencing the loan
(including its rights under the Credit Line Deed of Trust securing the same),
or, (c) claim that an Event of Default (as that term is defined in the
Construction Loan Agreement) has occurred.
The foregoing forbearance is provided upon Bennett Management & Development
Corp.'s understanding and upon the condition that it will receive an
interest-only payment (at the interest rate of 12.5%) for the month of October,
in the amount of $109,791.67 on or before November 10, 1995.
Very truly yours,
BENNETT MANAGEMENT
& DEVELOPMENT CORPORATION
/s/ Stewart Weisman
STEWART WEISMAN
Acting Secretary and General Counsel
SW/ld
cc: Edson R Arneault
<PAGE> 1
EXHIBIT 10(03)
[BENNETT MANAGEMENT & DEVELOPMENT CORP. LETTERHEAD]
November 28, 1995
Mr. Edson R. Arneault, President
Winners Entertainment, Inc.
Route 2 South, P. O. Box 358
Chester, West Virginia 26034
RE: Construction Loan Agreement between Bennett Management &
Development Corp., Mountaineer Park, Inc. and Winners
Entertainment, Inc., dated June 24, 1994, as amended and further
modified on November 9, 1995 (the "Loan")
Dear Mr. Arneault:
You have asked Bennett Management & Development Corp. ("BMDC"), to
further extend the repayment date in order to further assist you with your
contemplated financing.
This letter sets forth the agreement between BMDC, Mountaineer Park,
Inc. and Winners Entertainment, Inc. that if: (a) the Loan from BMDC to
Mountaineer Park, Inc. in the principal amount of $10.2 million plus all accrued
and unpaid interest at an interest rate of 12.5% per annum is paid in full by
December 10, 1995, and (b) Mountaineer Park, Inc. and Winners Entertainment,
Inc. deliver to BMDC a broad form general release of all liability arising out
of or related to the loan, BMDC transfer to Winners Entertainment, Inc. all of
its current and future rights to any shareholder interest in Winners at no
additional cost to Winners, and a duly executed release of the deed of trust.
If the foregoing correctly sets forth our agreement, please sign the
enclosed copy of this letter and return the same to me.
Very truly yours,
BENNETT MANAGEMENT &
DEVELOPMENT CORP.
By: /s/ Patrick R. Bennett
---------------------------
Its: CFO
AGREED TO:
WINNERS ENTERTAINMENT, INC. MOUNTAINEER PARK, INC.
By: /s/ Edson R. Arneault By: /s/ Edson R. Arneault
- --------------------------- ---------------------------
Title: President Title: President
<PAGE> 1
EXHIBIT 10(04)
[MOUNTAINEER PARK, INC. LETTERHEAD]
January 12, 1996
Patrick R. Bennett, CFO
Bennett Management & Development Corp.
Two Clinton Square
Syracuse, NY 13202
RE: CONSTRUCTION LOAN AGREEMENT BETWEEN BENNETT
MANAGEMENT & DEVELOPMENT CORP., MOUNTAINEER
PARK, INC. AND WINNERS ENTERTAINMENT, INC.
DATED JUNE 24, 1994, AS AMENDED (THE "LOAN")
Dear Mr. Bennett:
This letter sets forth the recent agreement between Bennett Management
& Development Corp., Mountaineer Park, Inc. and Winners Entertainment, Inc.,
relative to the Loan and Mountaineer Park, Inc.'s need for more time to commence
Loan amortization payments. The undersigned, intending to be legally bound,
agree:
1. With the understanding of both parties that Bennett Management &
Development Corp. never intended to be a permanent lender but only to
act as a construction lender, Mountaineer Park, Inc. and Winners
Entertainment, Inc. will cooperate with and assist Bennett Management
& Development Corp. in its continuing efforts to sell the Loan to some
third party and will extend such cooperation and assistance so long as
such does not unreasonably interfere with Mountaineer Park, Inc.'s
day-to-day operations or unreasonably infringe upon Mountaineer Park,
Inc.'s need to protect its proprietary information.
2. The Loan interest payment that would have been due on November 30,
1995, but for Bennett's prior extension agreements, shall be paid on
or before January 16, 1996. The Loan interest payment that would have
been due on December 31, 1995, but for Bennett's prior extension
agreements, shall be paid on or before February 15, 1996.
3. The Loan payments due on January 31, February 29, March 31, and April
30 of 1996 shall be payments of interest only and shall be paid on or
before each of said dates.
4. In the event all amounts owing to Bennett Management & Development
Corp., or its successors or assigns (the "Lender"), pursuant to the
Loan documents have not been paid in full on or before May 31, 1996,
then in such event, principal and interest payments based on the
36-month amortization specified in the Loan documents shall commence
on May 31, 1996, and shall be due and paid monthly on the last day of
each month thereafter for a total of 36 months. Be assured that Lender
will not be again requested by Mountaineer Park, Inc. to delay the
commencement of payments on the principal.
5. The interest rate applicable to the Loan shall be 12.5%, provided,
however, that in the event any payment amounts due and owing under the
Loan, as altered by this letter agreement, are delinquent, the
interest rate applicable on the entire outstanding principal for as
long as such amounts remain delinquent shall be the
<PAGE> 2
rate specified in paragraph 2.4 of the Construction Loan Agreement, if
said paragraph 2.4 rate would then apply pursuant to its own terms. It
is further agreed that the enforcement of such "default rate" shall
not preclude the Lender from exercising any other rights or remedies
available to it under the Loan documents by reason of such default.
6. In the event amounts owing to Lender pursuant to the Loan are not paid
in full on or before April 30, 1996, Mountaineer Park, Inc. shall,
prior to May 31, 1996, extend to Lender a security interest in all of
its assets except for (i) those assets already covered by the Loan
deed of trust, and (ii) those assets which covered by a prior lien
accompanied by covenants precluding a junior lienholder and for which
consent for a junior lien is unobtainable after a good faith effort by
Mountaineer Park, Inc., to secure same. Such security interest will,
to the extent not precluded by law or by a prior non-consenting
lienholder, include the right upon default for Lender to be in receipt
of funds otherwise flowing to Mountaineer Park, Inc., and the
discretion in favor of Lender to apply such funds to the payment of
sums due and owing Lender under the Loan documents.
7. Mountaineer Park, Inc. agrees that between the date hereof and the
date it provides the additional collateral as contemplated by
paragraph 67 above, it will not grant or create a security interest in
such additional collateral in favor of any other person or entity
(except for purchase money security interests) unless Lender, as a
part of such transaction, has been paid in full all amounts owing to
it under the Loan documents.
8. In the event some action is required to inform or seek approval of
this letter agreement from the West Virginia Lottery Commission or the
West Virginia Racing Commission or any other West Virginia regulatory
agency, then in such event, Mountaineer Park, Inc. shall be solely
responsible to accomplish such and shall do so in such manner and upon
such schedule as Mountaineer Park, Inc. deems appropriate.
9. Except as amended, modified or altered by this letter agreement, the
documents evidencing the Loan and all terms and provisions thereof
shall remain in full force and effect. Additionally, it is agreed that
nothing contained in the Mutual Release Agreement described in
paragraph 11 below will preclude Lender from pursuing and enforcing
its remedies under the Loan documents upon an occurrence of an event
of default as defined in Article VII of the Construction Loan
Agreement. Additionally, it is agreed that the benefits and
obligations existing by reason of a certain November 9, 1995 letter
agreement by and among Winners Entertainment, Inc., Mountaineer Park,
Inc. and Bennett Management & Development Corp. (and being a letter
addressed to Kevin J. Kuppel) will be at an end and will forever cease
and terminate as of the 16th day of January, 1996.
10. In the event Lender shall initiate a foreclosure under the Loan deed
of trust based upon a failure to pay amounts owing to Lender pursuant
to the Loan documents, as altered by this letter agreement, then in
such event no action will be taken by Mountaineer Park, Inc., or
Winners Entertainment, Inc. by legal proceedings or otherwise to
delay, hinder or interrupt the Lender in its foreclosure or other
efforts of enforcing its right under said deed of trust. It is
Page 2
<PAGE> 3
understood that this covenant would not preclude and is not intended
to preclude Mountaineer Park, Inc. or Winners Entertainment, Inc. from
seeking the protections and benefits existing through federal
bankruptcy laws, if it should elect to do so.
11. As a part of the consideration for the benefits hereof, the Mutual
Release Agreement dated January 12, 1996, a copy of which is attached
hereto marked Exhibit A, shall be agreed to, executed and delivered by
Mountaineer Park, Inc., Winners Entertainment, Inc., Bennett
Management & Development Corp., and the Bennet Funding Group, Inc.
If the foregoing correctly sets forth our agreement, please cause
Bennett Management & Development Corp. to sign the enclosed copy of this letter
and return the same to me.
Very truly yours,
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
-------------------------------
Its:President
MOUNTAINEER PARK, INC.
By: /s/ Edson R. Arneault
-------------------------------
Its:President
AGREED to as of the 12th day of January, 1996.
BENNETT MANAGEMENT &
DEVELOPMENT CORP.
By: /s/ Patrick R. Bennett
-------------------------------
Its:CFO
Page 3
<PAGE> 4
MUTUAL RELEASE AGREEMENT
THE RELEASE EXTENDED BY MOUNTAINEER/WINNERS: The undersigned, Mountaineer
Park, Inc., and Winners Entertainment, Inc. (herein sometimes referred to
collectively as "Mountaineer/Winners"), for and in consideration of the
execution and delivery by Bennett Management & Development Corp. and the Bennett
Funding Group, Inc. of this Mutual Release Agreement, and for other good and
valuable consideration, including, but not limited to, $100.00 cash in hand paid
by Bennett Management & Development Corp. and The Bennett Funding Group, Inc. to
Mountaineer/Winners, the receipt and sufficiency of all of which are hereby
acknowledged, and subject to the limitations hereinafter set forth, hereby
RELEASE and FOREVER DISCHARGE Bennett Management & Development Corp., and The
Bennett Funding Group, Inc., and their officers, directors, shareholders,
employees, agents, servants, representatives, subsidiaries, and each and every
other corporate or other type entity affiliated directly or indirectly with The
Bennett Funding Group, Inc. ("Bennett affiliated entities"), and also their
officers, directors, shareholders, employees, agents, personal representatives,
of and from any and all claims, suits and causes of action of whatsoever kind or
character Mountaineer/Winners, or either of them, now has or may hereafter have,
by reason of any damages, losses or expenses incurred or to be incurred and of
whatever kind or character by the undersigned Mountaineer/Winners, arising from
or growing out of or in any way related to (i) the borrower-lender relationship
between Mountaineer and Bennett Management & Development Corp., or (ii) the
relationships between or among any of the undersigned or any of the other
parties released by this or the following paragraph ("other relationships")
arising by reason of or growing out of or in any way related to said
borrower-lender relationship between Mountaineer and Bennett Management &
Development Corp.
THE RELEASE EXTENDED BY BENNETT/BENNETT: The undersigned, Bennett
Management & Development Corp. and the Bennett Funding Group, Inc. (herein
sometimes referred to collectively as "Bennett/Bennett"), for and in
consideration of the execution and delivery by Mountaineer/Winners of this
Mutual Release Agreement, and for other good and valuable consideration,
including, but not limited to, $100.00 cash in hand paid by Mountaineer/Winners
to Bennett/Bennett, the receipt and sufficiency of all of which are hereby
acknowledged, and subject to the limitations hereinafter set forth, hereby
RELEASE and FOREVER DISCHARGE Mountaineer Park, Inc. and Winners Entertainment,
Inc., and their officers, directors, shareholders, employees, agents, servants,
attorneys, successors, assigns, insurers, heirs and personal representatives,
subsidiaries, and each and every other corporate or other type entity affiliated
directly or indirectly with Winners Entertainment, Inc. ("Winners' affiliated
entities"), and also their officers, directors, shareholders, employees, agents,
servants, attorneys, successors, assigns, insurers, heirs and personal
representatives, of and from any and all claims, suits and causes of action of
whatsoever kind or character Bennett/Bennett, or either of them, now has or may
hereafter have, by reason of any damages, losses or expenses incurred or to be
incurred and of whatever kind or character by the undersigned Bennett/Bennett,
arising from or growing out of or in any way related to (i) the borrower-lender
relationship between Mountaineer and Bennett Management & Development Corp., or
(ii) the relationships between or among any of the undersigned or any of the
other parties released by this or the preceding paragraph ("other
relationships") arising by reason of or growing out of or in any way related to
said borrower-lender relationship between Mountaineer and Bennett Management &
Development Corp.
Page 4
<PAGE> 5
Mutual Release Agreement
LIMITATIONS: By way of clarification, if needed, the undersigned declare it
to be their understanding and intentions that whether or not the said
borrower-lender relationship is ended on or before January 15, 1996, the acts
and omissions of the undersigned, or any of them, in the performance of their
obligations under or related to the loan documents evidencing said
borrower-lender relationship occurring prior to January 15, 1996, shall never be
or become the basis of (or a part of the basis of) a claim, suit or cause of
action by or against any of the undersigned. However, it is agreed that the
releases hereby extended will not preclude a claim, suit or cause of action by
any of the undersigned, nor an enforcement of remedies available to Bennett
Management & Development Corp. (or its successors or assigns) under said loan
documents, so long as such claim suit, cause of action or enforcement of
remedies is based solely upon a breach of obligation, or breach of duty, or
failure to pay or failure to perform occurring on or after January 15, 1996
(e.g., the failure of Mountaineer to timely tender the January 15, 1996 interest
payment would be a failure for which Bennett Management & Development Corp.
could pursue a claim, suit, cause of action or an enforcement of its remedies
under said loan documents).
Mountaineer/Winners understand and agree that the aforesaid claims hereby
released by them include, but are not limited to, any claims and possible claims
stated in, implied by or inferred from (i) the content of a certain letter dated
September 25, 1995, from Mountaineer to Bennett Management & Development Corp.
(signed by Edson R. Arneault and addressed to Kevin J. Kuppel), and (ii) the
content of a certain letter dated September 6, 1995, from Mountaineer to Bennett
Management & Development Corp. (also, signed by Edson R. Arneault and addressed
to Kevin J. Kuppel). Mountaineer/Winners further understand and agree that the
aforesaid Bennett affiliated entities hereby released include, but are not
limited to, American Gaming & Entertainment, Inc., Gamma of West Virginia, Inc.,
and Gamma International, Ltd., insofar as claims, suits and causes of action by
the undersigned would relate directly or indirectly to the loan which is the
basis of the aforesaid borrower-lender relationship.
The undersigned hereby declare that the terms of this Release have been
completely read and are fully understood and voluntarily accepted for the
purpose of making a full and final compromise, adjustment and settlement,
subject to the above-stated limitations, of any and all claims, disputed or
otherwise, known or unknown, discovered or not discovered, on account of said
borrower-lender relationship or said other relationships and for the express
purpose of precluding forever, subject to the above-stated limitations, any
further or additional claims, demands or suits against any and all entities and
persons named or referred to herein as a released party, arising out of the
aforesaid borrower-lender relationships or said other relationships.
The undersigned understand and agree that the aforesaid payments of cash
and execution and delivery of this Mutual Release Agreement were made by way of
settlement and that liability for any claims hereby released have been and are
specifically denied by the parties released hereby.
The undersigned represent and warrant that the terms hereof were reached by
them after full and complete opportunity to consult with counsel regarding the
settlement and the effect of this release; that they execute this release
voluntarily, freely, without compulsion or duress and mindful that it has legal
consequences precluding any further action, subject to the above-stated
limitations, on any claim they have or might have as to said borrower-lender
relationship or said other relationships against the parties released;
Page 5
<PAGE> 6
Mutual Release Agreement
and that no person has made any promise or given any inducement whatsoever to
encourage them to make this settlement other than the considerations above
recited; and, that (i) no limitation or restriction exists as to the power or
the authority of the undersigned to execute this release, (ii) the persons
executing same on behalf of the undersigned have been duly authorized so to do,
and (iii) this release is valid and binding and the provisions hereof are
enforceable against the undersigned in accordance with its terms.
This Mutual Release Agreement may be executed in any number of
counterparts, each of which shall, for all purposes be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
WITNESS the following signatures as of the 12th day of January, 1996.
MOUNTAINEER PARK, INC.
By: /s/ Edson R. Arneault
------------------------------
/S/ witness Its: President
- ------------------------------
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
------------------------------
/S/ witness Its: President
- ------------------------------
BENNETT MANAGEMENT &
DEVELOPMENT CORP.
/S/ witness By: /s/ Patrick R. Bennett
- ------------------------------ ------------------------------
Its: CFO
THE BENNETT FUNDING GROUP, INC.
/S/ witness By: /s/ Patrick R. Bennett
- ------------------------------ ------------------------------
Its: CFO
Page 6
<PAGE> 1
Exhibit 10(5)
AGREEMENT
Agreement made as of this 29th day of November, 1995 by and between
Autotote Systems, Inc. ("Autotote"), a Delaware Corporation, having an office at
100 Bellevue Road, Newark, Delaware 18714 and Mountaineer Park, Inc. ("MPI") a
West Virginia corporation, having an office at Mountaineer Park, Chester, West
Virginia 26034.
WITNESSETH:
WHEREAS, AUTOTOTE has provided totalisator services to MPI pursuant to an
agreement dated September 21, 1984 (as amended); and
WHEREAS, the parties have engaged in negotiations for the extension of said
totalisator agreement and the supplying by Autotote of Video Gaming Machines,
which culminated in a letter agreement dated April 12, 1995, attached as Exhibit
A ("Letter");
WHEREAS, the needs and desires of the parties have changed such that they
do not wish for the Letter to govern their relationship; and
WHEREAS, the parties wish to rescind the Letter, completely release each
other from any obligations thereunder, and conduct themselves from this day
forward in accordance with this Agreement, the Promissory Note (defined herein),
and the New Totalisator Agreement (defined herein); and
WHEREAS, as part of the consideration for the execution by MPI of a new
totalisator agreement, the parties have agreed to a repayment schedule for
amounts owed by MPI to Autotote under the original totalisator agreement; and
WHEREAS, the terms of said repayment are reflected in a Promissory Note
("Promissory Note") in the form of Exhibit B;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements herein set forth, the parties hereby agree as follows:
1. Simultaneously with the execution of this Agreement, MPI will execute
the Promissory Note.
2. Simultaneously with the execution of this Agreement, the parties will
execute a Totalisator Agreement for the provision by ASI of Totalisator Services
to MPI ("New Totalisator Agreement").
3. Simultaneously with the execution of this Agreement, MPI will deliver to
Autotote a certified check (or arrange for a wire transfer) in the amount of
$35,600, representing payments owed for Totalisator Services for the months of
September and October, 1995 and interest thereon (as reflected in Annex A of the
Promissory Note).
4. Autotote and MPI on their own behalf and on behalf of their respective
shareholders, directors, officers, representatives, successors, assigns,
subsidiaries, parent corporations and/or affiliates do each hereby release and
forever discharge the other and their shareholders, directors, officers,
representatives, successors, assigns, subsidiaries, parent corporations and/or
affiliates from any and all obligations, liabilities, claims, demands, causes of
action or losses on account of any kind, character or nature whatsoever known or
unknown, suspected or unsuspected, including costs, fees, interest payments, or
1
<PAGE> 2
other demands for payment, arising from or related to or connected with the
Letter or, until the date hereof, claims related to or connected with the
original totalisator agreement and negotiations related to or connected with the
New Totalisator Agreement (including submissions to regulatory authorities),
except as herein otherwise specifically set forth. In the event of the breach of
any term or condition of this Agreement, however, each party reserves the right
to assert against the other such claims for recoverable damages as may arise out
of said breach.
5. This Agreement shall not be amended or modified in any respect, except
in writing by an officer of the party to be charged therewith.
6. This Agreement embodies the entire agreement between the parties, and
there have been and are no covenants, representations or warranties between the
parties other than those set forth herein or herein provided for.
7. This Agreement shall inure to the benefit of the parties and their
respective authorized legal representatives, successors or assigns and shall be
binding upon Autotote and MPI and their authorized successors and assigns.
8. The validity, construction and performance of this Agreement and the
transactions shall be governed by the laws of the State of Delaware, without
regard to conflict of law principles.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first written above.
Autotote Systems, Inc.
/s/ Autotote Systems, Inc.
- ------------------------------
Mountaineer Park, Inc.
By: /s/ Edson R. Arneault
- ------------------------------
Name: Edson R . Arneault
Title: President
2
<PAGE> 3
[AUTOTOTE LETTERHEAD]
EXHIBIT A
April 12, 1995
Mr. Michael Dunn
Mountaineer Park
P.O. Box 358
Chester, WV 26034
Dear Michael:
This letter shall serve as an agreement for the provision of totalisator
services and video gaming machines to Mountaineer Park (subject to approval by
the West Virginia Lottery Commission): under the following terms and conditions,
which will be ratified by a subsequent contract.
1. Autotote will loan Mountaineer $1 million, net of all outstanding
receivables which are currently approximately $260,000 upon execution of a
contract subsequent to this agreement. This loan schedule is as follows:
a. $250,000 upon execution of contract
b. 50% of the outstanding balance upon delivery of video gaming machines
c. remaining balance 90 days after completion of delivery of video gaming
machines
2. Autotote will receive a five year extension of its present totalisator
services agreement, under the terms and conditions described therein,
except that on an annual basis during the term of this agreement, when the
totalisator fees invoiced and paid to Autotote equal those invoiced
Mountaineer Park in 1994, the daily totalisator fee for the remainder of
the calendar year shall be reduced to .005 of all monies handled or $1,000
per live performance, whichever is greater. All additional contractual fees
are unaffected and remain the same.
3. Autotote will replace the existing Mark II terminals with Probe terminals
and Tiny Tims as agreed. Delivery of those machines will be within six
weeks after the execution of the aforementioned contract.
4. Autotote will provide 200 Probe XLC Video gaming machines at the rate of
$45,000 per month for three years from the date of installation. These
machines will not be equipped with the picture in picture capability or
have the ability to place parimutuel wagers. Parts, maintenance and data
communications costs will be the responsibility of Mountaineer Park.
Autotote will provide a 90-day warranty for all parts except where the
manufacturer has a one-year warranty that Autotote will honor. After the
initial three year term, Mountaineer will return the Video Gaming Machines
to Autotote, unless however, the parties mutually agree to an extension of
the initial agreement at terms to be negotiated between Mountaineer Park
and Autotote. Mountaineer Park will have the ability to choose laminate
colors and award glass design for the 200 machines.
5. Should the capability of having coin in/coin out be approved by the West
Virginia Lottery Commission during the term of this agreement, Mountaineer
Park has the right to replace the existing Autotote terminals and will pay
all amounts due immediately according to the attached amortization
schedule. Autotote reserves the right, with the
<PAGE> 4
Mr. Michael Dunn
Mountaineer Park, Inc.
April 12, 1995
approval of Mountaineer Park, to replace the existing Video Gaming Machines
with new Video Gaming Machines with coin in/coin out capability already
built in.
6. In consideration of the above-mentioned loan, Mountaineer Park agrees to
pay Autotote an annual fee of $150,000 for years four and five of the
totalisator agreement. In addition, if, during any part of the three year
VGM contract, Mountaineer Park decides to replace the Autotote VGMs,
Mountaineer Park will pay based on the attached amortization schedule.
7. Autotote agrees to give to Mountaineer Park the choice of using the
Autotote central system located at Tri-State Greyhound Park, or interfacing
to the existing IGT central system at Mountaineer Park. Mountaineer Park
agrees to pay $2,000 per month for 36 months for the software work to allow
Autotote terminals to interface to the IGT central system. Mountaineer Park
also agrees to pay the $90 fee per terminal for the hardware modification
to allow Autotote's terminals to work with IGT central system. If during
the course of the 36 month lease, Autotote interfaces to another IGT
central system other than the one located at Mountaineer Park, Autotote
will rebate the prorated amount to Mountaineer Park for the initial
software development.
8. The time for delivery of Autotote machines is three weeks from the
execution of a formal agreement between Autotote and Mountaineer Park.
If you are in agreement with the above terms and conditions, please signify by
signing on the appropriate line below.
If you have any questions, please do not hesitate to call.
Best regards,
/s/ Brooks H. Pierce
Brooks H. Pierce
BHP:sm
As agreed this 12th day of April 1995, by and between the undersigned on behalf
of their respective companies.
/s/ Brooks H. Pierce /s/ Michael R. Dunn
- -------------------------------- ----------------------------
Brooks H. Pierce, Vice President Michael R. Dunn, President
Autotote Systems, Inc. Winners Entertainment, Inc.
<PAGE> 5
NEGOTIABLE PROMISSORY NOTE
Exhibit B
FOR VALUE RECEIVED, Mountaineer Park, Inc. ("MPI"), a West Virginia corporation,
having its principal place of business at Route 2 South, Chester, West Virginia
26034 unconditionally promises to pay to the order of Autotote Systems, Inc.
("Autotote"), without set-off of any kind, the principal amount of $461,167.14
such payments, together with the interest thereon, to be made as provided herein
in Annex A.
All payments shall be made in lawful money of the United States of America to
the above-named payee at 100 Bellevue Road, Newark, Delaware 19714 or at such
other place as such payee or any successor holder hereof shall have designated
at MPI in writing.
The Note may be prepaid at any time and from time to time in whole or in part
without penalty.
Upon non-payment of any installment, all remaining installments shall
immediately become due and payable, plus interest at the rate of 12% per annum,
unless such rate is higher than the maximum rate of interest permitted by law,
in which case the rate charged shall be the highest permitted by law.
Notwithstanding the above, MPI shall have five (5) business days to cure any
monetary default hereunder.
If one or more of the following events (herein referred to as "Events of
Default") shall occur:
(a) If MPI shall make an assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts as they become due, or shall
file a petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent,
or shall file a petition seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, or shall file an answer admitting or not
contesting the material allegations of a petition filed against it in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver, or liquidator of MPI or any material part of its properties;
or
(b) If any proceeding is brought against MPI seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief or under present or future statute, law or regulation, or if, with or
without consent of MPI any trustee, receiver or liquidator of MPI or of any
material part of its property is appointed; or
(c) If MPI defaults in the terms of this Negotiable Promissory; or
<PAGE> 6
NEGOTIABLE PROMISSORY NOTE
Exhibit B
(d) If MPI defaults in payment of any monetary obligation under any
agreement pursuant to which it has borrowed money from any other party.
Then, and in any such event, the holder hereof may, at any time thereafter by
written notice to MPI, declare the entire amount of this Note to be due and
payable, whereupon the same shall forthwith become due and payable, together
with interest accrued thereon as provided above, without presentment, demand,
protest, or notice of any kind, all of which are hereby expressly waived.
If this Note is turned over to an attorney or collection agency for collection,
all costs of collection, including, without limitation, reasonable attorney's
fees, may, at the holder's option, be added to the principal amount hereof and
shall become payable by MPI at maturity by acceleration or otherwise.
No course of dealing between MPI and the holder of this Note and no delay on the
part of the holder of this Note in exercising any rights of this Note shall
operate as a waiver of the right of holder of this Note. No provision of this
Note nor any default or Event of Default in connection therewith may be waived
other than by a written instrument signed by the party waiving such provision,
default or Event of Default. This Note may not be changed or terminated orally.
This Note and any interpretation and/or enforcement thereof shall be governed by
the internal laws of the State of West Virginia without regard to principles of
conflict of laws. This Note shall be a negotiable instrument transferable by
endorsement.
If any provision of this Note shall be invalid or unenforceable, such invalidity
or unenforceability shall attach only to such provision and shall not in any
manner affect or render invalid or unenforceable any other provision of this
Note and the obligations of MPI shall be carried out as if such invalid or
unenforceable provision were not contained herein.
ATTEST MOUNTAINEER PARK, INC.
/s/ Michele Hollomon By: /s/ Edson R. Arneault
- ------------------------------ ------------------------------
Michele Hollomon Name: Edson R. Arneault
Title: President
<PAGE> 7
MOUNTAINEER PARK
REPAYMENT SCHEDULE
ANNEX A
Interest rate = 12.00
Mountaineer Park Repayment Schedule
Payments due at the end of each listed month
<TABLE>
<CAPTION>
Balance Interest Payment Balloon Ending Bal
------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Sep 95 Outstanding balance as of 08/25/95 461,167.14 4,612.00 17,800.00* -- 447,979.14
Oct 85 447,979.14 4,480.00 17,800.00* -- 434,659.14
Nov 95 434,659.14 4,347.00 17,800.00 -- 421,206.14
Dec 95 421,206.14 4,212.00 17,800.00 -- 407,618.14
Jan 96 407,618.14 4,076.00 17,800.00 -- 393,894.14
Feb 96 393,894.14 3,939.00 17,800.00 -- 380,033.14
Mar 96 380,033.14 3,800.00 17,800.00 17,800.00 348,233.14
Apr 96 348,233.14 3,482.00 17,800.00 17,800.00 316,115.14
May 96 316,115.14 3,161.00 17,800.00 17,800.00 283,676.14
Jun 96 283,676.14 2,837.00 17,800.00 17,800.00 250,913.14
Jul 96 250,913.14 2,509.00 17,800.00 17,800.00 217,822.14
Aug 96 217,822.14 2,178.00 17,800.00 -- 202,200.14
Sep 96 202,200.14 2,022.00 17,800.00 -- 186,422.14
Oct 96 186,422.14 1,864.00 17,800.00 -- 170,486.14
Nov 96 170,486.14 1,705.00 17,800.00 -- 154,391.14
Dec 96 154,391.14 1,544.00 17,800.00 -- 138,135.14
Jan 97 138,135.14 1,381.00 17,800.00 -- 121,716.14
Feb 97 121,716.14 1,217.00 17,800.00 -- 105,133.14
Mar 97 105,133.14 1,051.00 17,800.00 17,800.00 70,584.14
Apr 97 70,584.14 706.00 17,800.00 17,800.00 35,690.14
May 97 35,690.14 357.00 17,800 18,247.14 0.00
----------------------------------------
55,480.00 373,800.00 142.847.14
</TABLE>
* Amount paid pursuant to Settlement Agreement and Mutual Release
<PAGE> 1
EXHIBIT 10(06)
TOTALISATOR SERVICES AGREEMENT
THIS AGREEMENT, made this 29TH day of NOVEMBER 1995, between AUTOTOTE
SYSTEMS, INC., a corporation of the State of Delaware (hereinafter called
AUTOTOTE), and MOUNTAINEER PARK, INC. a corporation of the State of West
Virginia (hereinafter called OWNER);
WITNESSETH:
WHEREAS, AUTOTOTE provides wagering services and designs, programs and
manufactures totalisator systems for use in wagering applications; and
WHEREAS, the OWNER and AUTOTOTE mutually agree that this Totalisator
Services Agreement shall, when fully executed by the duly authorized officers of
both parties, supersede the Totalisator Services Agreement dated September 21,
1984, and the Totalisator Services Agreement dated March 15, 1988; and
WHEREAS, OWNER wishes to obtain such wagering services utilizing
computer programs and equipment from AUTOTOTE at a facility known as Mountaineer
Park, which includes the adjacent Lodge (hereinafter called the RACETRACK)
located at Rt. 2, Chester, West Virginia 26034; and
WHEREAS, AUTOTOTE wishes to provide totalisator services utilizing its
computer programs and equipment to the OWNER for use at the RACETRACK, all on
the terms and conditions hereinafter set forth;
NOW, THEREFORE:, in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
I. BASIC TERMS
l.A. AUTOTOTE shall provide totalisator services utilizing its computer
programs and equipment as described in Schedules A, C and D hereof (the
SERVICES) to OWNER for all wagering held at the RACETRACK, consisting of
consecutive weeks, during the five (5) year period commencing November 1, 1995
and ending October 31, 2000 and OWNER shall use these SERVICES exclusively
during said period for all wagering held at the RACETRACK during the term of
this Agreement. A performance is defined as the betting period for a race or
races, which shall commence no sooner than one (1) hour prior to scheduled post
time for the first such race and which shall be limited to a maximum of fifteen
(15) races.
I.B.1 OWNER agrees to pay AUTOTOTE for said SERVICES the greater of:
(i) One Thousand dollars ($1,000.00) per live performance, or
(ii) The following percentage of the gross monies wagered, as
shown by the totalisator as having been received from the
sale of tickets issued for such live performance:
.0055 of all monies wagered
I.B.2 In addition to the above fees, OWNER agrees to pay AUTOTOTE for
simulcast SERVICES for wagering at Mountaineer Park on races conducted at other
interstate and intrastate racetracks, the greater of:
1
<PAGE> 2
(i) Three Hundred dollars ($300.00) per day during which live
racing is conducted at the RACETRACK, or
(ii) Five Hundred Fifty dollars ($550.00) per day during which no
live racing is conducted at the RACETRACK, or
(iii) The following percentage of gross monies wagered on such
simulcast race, as shown by the Totalisator as having been
received from the sale of tickets issued for such simulcast
races.
.0055 of all monies wagered
I.B.3. To conduct wagering at the Lodge, OWNER agrees to pay AUTOTOTE
Forty dollars ($40.00) per week for the supply of required modems and remote
interface box necessary to communicate with the totalisator at Mountaineer Park.
Such charge shall be in addition to those provided for in Paragraphs I.B. and
I.C.
I.C. The minimum annual amount to be paid by OWNER to AUTOTOTE for the
SERVICES shall not be less than the sum of Three Hundred and Fifty Thousand
dollars ($350,000.00) per annum for each year of this Agreement. In the event
the amount payable to AUTOTOTE under paragraph l.B., above is less than this
minimum amount for any such year, OWNER shall pay AUTOTOTE the difference
(herein called "the deficiency") within ten (10) days after the end of such
year.
I.D. All amounts due, except "the deficiency", shall be payable weekly
without deduction not later than Monday of the following week. Set amount will
be remitted to AUTOTOTE's Track Manager. If all amounts are not paid within five
(5) days after the due date, interest at the rate of two percent (2%) per month
or to the extent allowed by law if less, starting from the day immediately
following the due date shall be imposed on such amounts, and AUTOTOTE may refuse
to provide SERVICES hereunder for so long as the failure of OWNER to pay
continues, and AUTOTOTE may terminate this Agreement and be relieved and
discharged from any and all further responsibility, liability or obligation
hereunder.
I.E. The Totalisator System, computer programs and ancillary equipment
set forth in Schedule "A" attached hereto (hereinafter referred to as the
"Totalisator System"), shall remain the property of AUTOTOTE except that
junction boxes, wiring and cabling provided by AUTOTOTE and made a part of the
fixed installation shall become the property of OWNER upon payment for same by
OWNER under paragraph I(H) herein. The Totalisator System, computer programs and
ancillary equipment shall at all times be and remain under the exclusive control
of AUTOTOTE.
I.F. (Intentionally left blank)
I.G. AUTOTOTE has provided OWNER, one (I) computer controlled
incandescent alphanumeric display board (message board) consisting of four (4)
lines of display, each with twenty-four (24) characters. OWNER agrees to provide
a teletype operator to operate the alphanumeric display board.
OWNER shall pay AUTOTOTE Twenty-five dollars ($25.00) per racing program
for message board. Such charge shall be in addition to those provided for in
Paragraphs I.B. and I.C. of this Agreement.
2
<PAGE> 3
I.H. OWNER shall pay all of the cost for installation materials and
provide, at its expense, all labor required to install the additional
Totalisator Equipment in accordance with AUTOTOTE'S specifications. AUTOTOTE
shall provide design and supervision of the installation at no additional cost
to OWNER.
I.I. OWNER shall provide adequate security for all AUTOTOTE equipment
and materials delivered to the RACETRACK. In the event that any such equipment
is damaged or missing due to no fault of AUTOTOTE, there shall be an appropriate
extension of the date by which the Totalisator System shall be completely
installed and operating as otherwise provided in paragraph F. above.
I.J. If additional Sell/Cash Terminals or Auxiliary Odds Boards are
required by OWNER, over and above what is listed in Schedule "A", AUTOTOTE will
provide them within a reasonable time from receipt of OWNER'S written request,
provided such equipment is available, and OWNER agrees to make payment to
AUTOTOTE effective immediately upon OWNER'S receipt of the additional equipment,
as follows, for a minimum of thirty (30) consecutive performances: (Such charge
shall be in addition to those provided for in paragraphs 1. B and I.C.)
(a) Five dollars ($5.00) per day per Probe terminal.
(b) Fifteen dollars ($15.00) per day per Sam-in-a-Can Terminal.
(c) Twelve dollars ($12.00) per day per Probe Self-Service (SAM)
Terminal.
(d) Twelve dollars ($12.00) per day per Probe Voucher Dispensing
Terminal.
(e) Three dollars ($3.00) per day per Tiny Tim Terminal.
(f) Twenty-five dollars ($25.00) per day per Auxiliary Odds Board
and Display.
(g) Modems required for the operation of simulcast wagering on races
conducted at other interstate and intrastate racetracks will be
billed to OWNER at the rate of Five dollars ($5.00) each per day
or Thirty-five dollars ($35.00) each per week, whichever is
less.
These charges shall be in addition to the charges in paragraphs I.(B.)
and I.(C.).
I.K. Should OWNER implement "Early-Bird Wagering", OWNER agrees to pay
to AUTOTOTE Three Hundred dollars ($300.00) per day for each day that
"Early-Bird Wagering" is implemented in addition to the amounts payable under
paragraphs I.(B.) and I.(C.) above and payable as provided in subparagraph D
above.
I.L. Annexed hereto as Schedule "C" is a description of the reports
provided by AUTOTOTE.
I.M. Annexed hereto as Schedule "D" is a detailed description of the
required capabilities for which the Totalisator System will be programmed by
AUTOTOTE.
II. AUTOTOTE HEREBY FURTHER AGREES AS FOLLOWS:
II.A. Should additions to the SERVICES be necessary after the initial
permanent installation of the Totalisator System AUTOTOTE shall furnish all
necessary DC and signal installation materials and equipment required for the
electrical installation of the "Tote" room, the selling lines and in the public
display board(s), the cost of such materials shall be borne by the OWNER at
prices in effect at the time of delivery.
3
<PAGE> 4
II.B. To service the Totalisator System and maintain it in efficient
operating condition during each race betting interval on all racing days during
the term of this Agreement.
II.C. To provide the necessary high speed printer paper, betting slips,
logging teleprinter paper and other stationery supplies as may be required for
use with the Totalisator System, and OWNER shall pay AUTOTOTE for these supplies
at the prices in effect at the time of delivery. Should OWNER elect to purchase
the supplies from a vendor other than AUTOTOTE these supplies shall be in
accordance with AUTOTOTE'S specifications.
II.D. To notify OWNER of new or improved services perfected by AUTOTOTE
and to implement changes in the SERVICES provided hereunder to reflect such of
the new or improved services as OWNER may desire, provided that OWNER shall pay
for all such modifications and changes provided by AUTOTOTE at the prices in
effect at the time they are made, in addition to the sums payable under
paragraph I. (BASIC TERMS) above.
II.E. To furnish and maintain at the RACETRACK on each wagering day the
personnel necessary for AUTOTOTE to perform the SERVICES, including operating
the central controls and maintaining the Totalisator System in efficient
operating condition. The number of personnel provided shall be mutually agreed
upon by AUTOTOTE and OWNER, but in no event shall the number of personnel be
greater than the standard for the racing industry.
II.F. To maintain adequate fire insurance, theft, vandalism and riot
insurance coverage on the Totalisator System and on all ancillary materials and
equipment which are required by AUTOTOTE in order to perform the SERVICES, and
which are the property of AUTOTOTE.
II.G. To carry Workmen's Compensation insurance on its own employees. To
carry public liability insurance on its own equipment and the Totalisator
System.
II.H. To furnish all necessary ticket paper for the Sell/Cash terminals.
II.I. To reimburse OWNER for all amounts which OWNER shall be required
to disburse by reason of errors made by AUTOTOTE or its employees or its
equipment (other than as provided for in paragraph IV C.), provided however that
in arriving at the amount, if any, to be so reimbursed, AUTOTOTE shall receive
credit for all like overages and, provided further, that AUTOTOTE shall not be
required to make a reimbursement if any error is due to the neglect, acts,
omission or mistakes of OWNER or any of its employees, the State or any of its
employees, or acts of other parties for whom AUTOTOTE is not responsible, and
provided further that AUTOTOTE shall not be required to reimburse OWNER for any
errors regardless of cause in the Big "P", Big "Q", Twin Trifecta or similar
pools in which winning tickets in a prior division of the pool are exchanged for
tickets in a subsequent division of that pool.
II.J. To indemnify and hold OWNER harmless against any loss, liability,
costs or expenses (including reasonable attorney's fees) arising out of or
related to claims and suits for damages which may be instituted against OWNER,
or to which OWNER may be made a party, to person or property, including patent
claim arising out of or by reason of the SERVICES provided herein by AUTOTOTE,
provided written notice of such claim is given to AUTOTOTE within ten (10) days
after receipt of same by OWNER. AUTOTOTE shall have the right to exercise full
control of all negotiations and litigation in connection therewith, including
selection of counsel, and shall not be liable for any costs or expenses
4
<PAGE> 5
incurred by OWNER without AUTOTOTE'S prior written approval, nor shall AUTOTOTE
be responsible for any claim or litigation based on equipment not furnished by
AUTOTOTE as part of its SERVICES hereunder.
III. OWNER HEREBY FURTHER AGREES AS FOLLOWS:
III.A. After the initial permanent Totalisator System installation OWNER
will furnish, at its expense, all necessary labor required for additions to the
installation of the Totalisator System, which labor includes the laying,
pulling, connecting and terminating of all necessary cables, terminals,
switches, junction boxes, and other similar material, as required in the "Tote"
room, display boards, ticket selling lines, judges and/or stewards locations,
mutuel manager and head banker locations, which services shall be performed in
accordance with AUTOTOTE'S specifications.
III.B. OWNER will furnish at its expense:
(i) Adequate electrical power for the proper operation of the
Totalisator System. For this purpose incoming power lines having
sufficient capacity shall be brought from the local utility to the
"Tote" room, the selling lines, and the display boards, and
distributed and terminated at locations as specified by AUTOTOTE.
(ii) A "Tote" room of sufficient size to house and permit the
maintenance of the central control equipment in a secure manner
with an efficient layout, free from dampness and reasonably free
from dust, with necessary air conditioning, suitable lighting,
raised flooring, and with adequate entrances capable of being
secured so as to limit access to such control room in accordance
with paragraph III(L).
(iii) Teller windows having ticket counters of sufficient size and
structural strength to accommodate AUTOTOTE'S ticket issuing
machines in areas reasonably free from dust and dirt.
(iv) A fieldboard structure and auxiliary odds board structures
sufficiently secure and dry with adequate ventilation, interior
lighting and AC electric power to permit the accommodation and
satisfactory operation of fieldboard and auxiliary odds board
display equipment.
(v) Adequate and appropriate facilities, under the exclusive control of
and reasonably satisfactory to AUTOTOTE for proper maintenance of
its materials and equipment and for the safe and secure storage of
ticket paper and other supplies.
(vi) Adequate and appropriate rest rooms, convenient free parking, and
other facilities for AUTOTOTE'S personnel on a par with facilities
provided for other similar level personnel employed by the
RACETRACK.
(vii) All facilities furnished by OWNER hereunder shall conform to all
applicable government, fire, electrical codes, building and similar
codes; O.S.H.A. standards, and other government regulations.
III.C. In carrying out its undertaking hereunder, OWNER may be required
to provide new structures or housings for the materials and equipment utilized
by AUTOTOTE in performing the SERVICES hereunder, or to alter its existing
structures or
5
<PAGE> 6
housings for such purpose. In such event, it will furnish at its expense, all
materials and labor required for such structures or housings in accordance with
specifications supplied by AUTOTOTE, including opening and closing of necessary
trenches required, surrounding underground cable ducts with suitable casing,
burying cable ducts if run underground, opening and closing of walls, floors or
ceilings, clean-up and disposition of refuse, and repair of any damage to
buildings, grounds, track, plantings, etc. caused by installation, provided such
damage was not caused by negligence of AUTOTOTE.
III.D. It will keep proper records and books of account and make true
and complete entries therein of all appropriate information relating to the
operation of wagering at the RACETRACK.
III.E. It will pay the cost of any alterations in or additions to the
SERVICES, including programming changes, as may hereafter be desired by OWNER,
and such alterations, if practicable, will be made by AUTOTOTE promptly after
receipt from OWNER of its written request therefor.
III.F. It will furnish, at its own expense, an adequate staff of paper
changers, tellers, mutuel personnel and any other personnel as are required in
connection with the operation of the wagering at the RACETRACK, except for the
personnel to be furnished by AUTOTOTE as provided in paragraph II(E) hereof.
OWNER'S paper changers, tellers, mutuel personnel and any other personnel will
operate the terminals strictly in accordance with AUTOTOTE'S instructions, will
account as required to AUTOTOTE'S Manager at the RACETRACK for all rolls of
ticket paper and will not otherwise attempt to handle or operate the Totalisator
System.
III.G. It will afford AUTOTOTE and its duly authorized agents or
representatives access at all reasonable times to the buildings and premises at
the RACETRACK and will permit AUTOTOTE and such agents or representatives to
inspect during each wagering day and at all other reasonable times the record
sheets, books of account and other relevant information kept by OWNER with
respect to the operation of wagering at the RACETRACK and will furnish AUTOTOTE
with duplicate copies of all sheets required by it to verify the operation of
the wagering, including the mutuel's recapitulation sheets, ticket summary
sheets and any other pertinent records.
III.H. It will not use the Totalisator System for any purpose other than
as specified in this Agreement and will not permit any part of the system to be
removed from the RACETRACK by persons other than agents or employees of
AUTOTOTE.
III.I. It will, at its expense, furnish electricians to maintain and
service the electric power facilities required to be furnished by OWNER as
provided in paragraph III(B).
III.J. It will take, at its expense, all necessary measures to keep the
Totalisator System materials and equipment kept by AUTOTOTE at the RACETRACK
free from any restraint, levy, execution or seizure or other process of law
arising from any acts or omissions of OWNER or its agent(s) or representative(s)
which would in any way impair the title of AUTOTOTE to such Totalisator System,
materials and equipment or possession or repossession thereof when permitted
under this Agreement. At AUTOTOTE'S request, it will provide AUTOTOTE with a
waiver of landlord's lien.
III.K. It will comply with all rules, laws, ordinances and lawful
requirements of every government, county, state or municipality, department,
bureau or board which may arise out of or in connection with the possession, use
and/or operation of wagering at the
6
<PAGE> 7
RACETRACK including fire insurance underwriters' requirements. OWNER shall also
furnish, at its expense, the safety devices needed to comply with such
requirements.
III.L. It will maintain and furnish to AUTOTOTE a list of persons
authorized to have access to any room or structure housing any part of the
Totalisator System, which list shall specify the particular position to which
each such person is assigned and the place or location of employment, the
persons on such list being subject to the approval of AUTOTOTE, which approval
shall not be unreasonably withheld. It will not permit access to the "Tote" room
or fieldboard by any unauthorized persons, and will protect the secured areas
from trespass or interference by such persons. OWNER further agrees to indemnify
AUTOTOTE for damages or loss to AUTOTOTE caused as a result of access to the
secured areas having been given by OWNER or its employees or agents.
III.M. It will indemnify and hold AUTOTOTE harmless against any loss,
liability, costs or expenses (including reasonable attorney's fees) arising out
of or related to claims or suits for damages to persons or property resulting
from the operation of the wagering by agents and employees of OWNER provided
written notice of such claim is given to OWNER within ten ( 10) days after
receipt of same by AUTOTOTE. OWNER shall have the right to exercise full control
of all negotiations and litigation in connection therewith, including selection
of counsel, and shall not be liable for any costs or expenses incurred by
AUTOTOTE without OWNER'S prior written approval.
IV. OTHER TERMS AND CONDITIONS
IV.A. Except as herein provided, AUTOTOTE shall be under no obligation
to furnish SERVICES to OWNER in excess of those specified herein, nor shall
OWNER be entitled to additional SERVICES unless a supplementary agreement is
entered into between the parties, providing for the desired additions, upon
terms acceptable to both parties.
IV.B. OWNER shall notify AUTOTOTE in writing of the racing days allotted
to it by the appropriate governmental authority each year during the term of
this Agreement at least ninety (90) days prior to the start of such racing days
and will not change, without the written consent of AUTOTOTE, which consent
shall not be unreasonably withheld, such dates including the number of
performances live and simulcast, including matinees (two (2) performances on one
( I ) day) if applicable, and the beginning and closing dates of any
performances. AUTOTOTE shall have the right to remove any of its personnel,
materials and equipment at any time during the term of this Agreement when
wagering is not scheduled at the RACETRACK but no removal shall in any way
effect AUTOTOTE'S obligation, subject to ninety (90) days written notice, to
return the necessary materials and equipment and reinstitute the SERVICES for
operation on all wagering days at the RACETRACK, provided such wagering days
fall within the beginning and closing dates of any performances as previously
notified and herein specified. If during any scheduled racing period wagering
does not, for any reason other than a default by AUTOTOTE, commence as
scheduled, or having commenced, is interrupted, AUTOTOTE shall have the right to
remove its personnel, materials and equipment from the RACETRACK. In such case,
AUTOTOTE shall be obligated to reinstitute the SERVICES at the RACETRACK no
later than sixty (60) days after receipt by AUTOTOTE of written notice that
wagering is to commence or resume and the original closing date of the
performances may at OWNER'S option, be extended by the number of performances
that wagering did not take place in accordance with the original schedule.
IV.C. AUTOTOTE guarantees and warrants that the Totalisator System
utilized by it to perform the SERVICES will be suitable for betting and that it
will operate efficiently and without interruption on all wagering days for the
term of this Agreement; provided,
7
<PAGE> 8
however, that there shall not be deemed to be a breach of the foregoing
guarantee and warranty if wagering is interrupted for less than thirty (30)
minutes on any racing day, or if any interruption in the function of any
component part or unit of the Totalisator System takes place which does not
prevent the efficient operation of wagering on any wagering day, or if not more
than ten percent (10%) of the ticket issuing machines fail to operate at any
one-time on any wagering day, or if the failure of the Totalisator System to
operate efficiently or without interruption shall be due to or result from one
or more of the causes enumerated in paragraph IV(K) hereof, or acts or neglect
of the OWNER, its agents or employees, or of any third party, or for any other
cause not within the control of AUTOTOTE and/or its employees. If the failure of
the Totalisator System to operate efficiently or without interruption shall be
due to any acts other than those enumerated or referred to by reference in the
preceding sentence, or other than as a result of the failure of OWNER to perform
its obligations hereunder, then OWNER shall be entitled to liquidated damages in
an amount to be calculated as follows: five (5%) of the difference between the
amount of money handled on the day of such interruption and the amount of money
handled on the day of such interruption and the amount of money handled on a
comparable day during the current race meeting; in the event there is no
comparable day in the current race meeting, then the amount to be paid by
AUTOTOTE to OWNER shall be five percent (5%) of the difference between the
amount of money handled on a comparable race day of the season immediately
preceding. In no event shall AUTOTOTE be obligated to pay to OWNER a sum
exceeding:
(i) Fifteen Thousand dollars ($15,000.00) in respect of any racing day,
or
(ii) One Hundred Fifty Thousand dollars ($150,000.00) in respect of any
racing season.
IV.D. AUTOTOTE shall not be liable either directly, indirectly or
consequentially for any counterfeit, altered, or illegally printed tickets.
AUTOTOTE shall be liable, however, for all amounts as branded by the Sell/Cash
Terminals on any counterfeit, altered, or illegally printed tickets on which the
branded serial number digits are identical to those of such tickets. However,
AUTOTOTE shall not be liable for such counterfeit, altered, or illegally printed
tickets arising out of acts by OWNER or its employees or agents, or by failure
of OWNER to provide proper security.
IV.E. If at any time during the term of this Agreement, any kind of a
tax, license, duty, commission or fee shall be imposed upon or levied or
assessed against AUTOTOTE by any governmental or other authority, or on the
installation, use or the SERVICES provided under this Agreement, or the receipt
of monies hereunder, the OWNER agrees to pay to AUTOTOTE an amount equivalent
thereto, together with any penalties or interest assessed thereon, such payment
to be made by the OWNER as and when such tax or fee is assessed. If the OWNER
fails to pay any such amounts as aforesaid, then OWNER shall be charged interest
at the rate of two percent (2%) per month or to the extent allowed by law if
less, starting from the day after the due date, and AUTOTOTE may, by five (5)
days prior written notice to OWNER terminate the Agreement and be relieved and
discharged from any and all further responsibility, liability, or obligations
hereunder. In the event AUTOTOTE terminates the Agreement as provided herein,
the OWNER shall remain liable as aforesaid for payment of such tax or fee, and
any penalty or interest accrued thereon, or if AUTOTOTE fails to contest the
validity of any such tax or fee after written demand by the OWNER, the OWNER, at
its expense, may contest the validity thereof in the name of AUTOTOTE. Nothing
herein contained shall make the OWNER responsible for federal or state income
taxes of AUTOTOTE by reason of the receipt of payments hereunder. If, by reason
of its use of the SERVICES provided by AUTOTOTE under this Agreement, the OWNER
is assessed or has imposed or levied upon it any tax or fee by any governmental
8
<PAGE> 9
authority, the OWNER agrees to pay such taxes or fees directly to the
appropriate taxing authority and also agrees to provide to AUTOTOTE, from time
to time as required by AUTOTOTE, documentation as proof that such taxes or fees
have been paid.
IV.F. In the event that wagering at the RACETRACK shall be prohibited or
become illegal by statute or court decision or by action of cognizant
governmental agency, the period of this Agreement shall be deemed to have
terminated as of the date of such prohibition or cessation of such legal
wagering, but without prejudice to the rights of either party up to the date of
termination; provided, however, that in the event the prohibition or cessation
of legal wagering is removed and racing on the abovementioned premises becomes
legal, this Agreement shall be returned to force intact, subject to availability
of personnel and equipment, for the unused balance of the term of the Agreement.
Upon termination AUTOTOTE shall have the right to remove its personnel,
materials and equipment from the RACETRACK.
IV.G. Any charges for work done by AUTOTOTE under any section of this
Agreement, or for additional material or equipment supplied by AUTOTOTE in
accordance with order(s) of the OWNER or his agent, shall be considered as
amounts due to AUTOTOTE from the OWNER in accordance with paragraph I(D) hereof.
IV.H. In the event that AUTOTOTE shall default in the performance of any
provision of this Agreement on its part to be performed (except a breach by
AUTOTOTE of the provisions of paragraph IV(C) hereof as to which the provisions
of said paragraph shall apply) and such default shall not be cured within a
period of ten (10) days after written notice shall have been received by
AUTOTOTE specifying such default, then the OWNER may terminate this Agreement by
delivering to AUTOTOTE written notice of such termination prior to the
expiration of thirty (30) days after the expiration of said ten (10) day period;
and in the event of any such termination AUTOTOTE, at its expense, shall remove
its personnel, materials and equipment from the RACETRACK.
IV.I. In the event that the OWNER shall default in the performance of
any provisions of this Agreement on its part to be performed (except a breach by
the OWNER of the provisions of paragraphs I(D) and IV(E) hereof as to which the
provisions of said paragraphs shall apply) and such default shall not be cured
within a designated time period or a period of ten ( 10) days after notice shall
have been given by AUTOTOTE to the OWNER specifying such default, then AUTOTOTE
may terminate this Agreement by delivering to the OWNER written notice of such
termination prior to the expiration of thirty (30) days after the expiration of
said ten ( 10) day period; and in the event of any such termination AUTOTOTE
shall remove its personnel, materials and equipment from the RACETRACK, and the
cost of such removal shall be paid for by the OWNER.
IV.J. If it becomes necessary for AUTOTOTE to undertake work or
activities, or purchase or install equipment or materials, which herein are made
the obligations of the OWNER, in order to assure AUTOTOTE'S proper performance
of the Agreement, then any costs incurred by AUTOTOTE as a result of such work,
activities, purchases, or installations shall be considered as amounts due to
AUTOTOTE from the OWNER in accordance with paragraph I(D) hereof.
IV.K. Failure to perform any provision of this Agreement by either party
hereto shall not constitute a default hereunder if such failure shall be caused
by fire, strike, boycott, picketing, or other industrial disturbances, riot,
civil commotion, theft, vandalism, flood, lightning, tempest, storm, acts of
God, war, acts of war and defense, power failure, failure of any cable or
interference by any government or government agency.
9
<PAGE> 10
IV.L. If any of the said sums of money due AUTOTOTE under this Agreement
are not promptly and fully paid when the same individually or severally become
due and payable, or if OWNER becomes insolvent, ceases to do business as a going
concern, a petition in bankruptcy or for arrangement or reorganization be filed
by or against OWNER, the materials or equipment provided by AUTOTOTE be attached
at no fault of AUTOTOTE, or a receiver be appointed for OWNER, and as a result
thereof AUTOTOTE elects to terminate this Agreement pursuant to paragraph IV(I),
then the aggregate sum of the minimum annual amount specified in paragraph I(C)
remaining to be paid for the balance of the term of this Agreement shall become
due and payable forthwith, or thereafter at the option of AUTOTOTE, as fully and
completely as if the said amounts were originally stipulated as due prior to
such time, anything in this Agreement herein to the contrary notwithstanding. In
any of said events AUTOTOTE is authorized and empowered to enter the premises of
the OWNER or other place where AUTOTOTE'S materials and equipment may be and
resume possession of the same without notice or demand or without legal process,
such notice and demand being expressly waived, and AUTOTOTE may at its option,
by suit or otherwise, enforce payment of all due obligations, plus interest and
reasonable attorney's fees, and no suit or legal proceedings with respect
thereto shall be deemed any waiver of said rights of AUTOTOTE to resume
possession of said property as herein provided.
IV.M. No waiver of any term, condition or obligation of this Agreement
or assent to the breach of any term, condition or obligation shall be construed
by the failure of either party to act in the event the other party shall be in
default of this Agreement, nor shall such failure to act be construed as assent
to any other or future breach of the same or any other term, condition or
obligation of this Agreement. This Agreement shall not be modified, amended or
changed without the prior written consent of both parties
IV.N. Any notice to be given to AUTOTOTE hereunder shall be duly given
by mailing the same by registered mail addressed to AUTOTOTE at 100 Bellevue
Road, P.O. Box 6009, Newark, Delaware 19714-6009, or such other address as
AUTOTOTE shall specify in writing to the OWNER. Any notice to be given to the
OWNER hereunder shall be duly given by mailing the same by registered mail
addressed to the OWNER at P. O. Box 254, Chester, West Virginia 26034-0254 or
such other address as the OWNER shall specify in writing to AUTOTOTE.
IV.O. Any controversy or claim not settled by the parties arising out of
or relating to this contract, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration
Association, and judgment upon the award rendered by the Arbitrator(s) may be
entered in any Court having jurisdiction thereof.
IV.P. The remedies expressly provided in this Agreement for breach
thereof by AUTOTOTE or the OWNER shall constitute the sole and exclusive
remedies to the aggrieved party, and all other remedies which might be otherwise
available under the law of any jurisdiction are hereby waived by both AUTOTOTE
and OWNER. EXCEPT AS PROVIDED HEREIN, AUTOTOTE SHALL HAVE NO LIABILITY FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES.
IV.Q. This Agreement shall be binding upon and inure to the benefit of
AUTOTOTE and the OWNER and their successors and assigns. No assignment of this
Agreement shall be made without the prior written consent of the other party,
which consent shall not be unreasonably withheld, however, OWNER herein agrees
to any assignment AUTOTOTE may make for the purpose of obtaining financing with
a prime institution on the strength of this Agreement.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers, duly attested, all as of
the day and year first above written.
Attest: MOUNTAINEER PARK, INC.
/s/ Michele Hollomon By /s/ Edson R. Arneault
- --------------------------------- --------------------------------
Michele Hollomon Title: President
Attest: AUTOTOTE SYSTEMS, INC.
/s/ Witness By /s/ President
- --------------------------------- --------------------------------
Title: President
11
<PAGE> 12
MOUNTAINEER PARK
SCHEDULE "A"
LIST OF EQUIPMENT
Autotrak 11 Sell/Cash Totalisator System which is installed at an Autotote Hub
and other equipment residing at Mountaineer Park consisting of:
Digital VAX Computers*
Disk Units*
Mag Tape Units*
Board Control Units
Color Video Channels
High Speed Line Printers Consoles**
Consoles **
Logging Printers**
Tote Control Desk *
Communication Controller for Terminals
Up to Fifty (50) PROBE Sell/Cash Terminals
(with Brander and Bet Slip Reader in all terminals)
Up to Twenty (20) Mark 11 Sell/Cash Terminals
Lampboxes and associated equipment required for infield and
one (1) auxiliary display boards
One (1) 96 box alpha-numeric display board
Magnetic Tape Storage Cabinet w/set of Magnetic Tapes to store History
of Performances for One Full Season *
Motorola Beeper System with Beepers
Autotrak 1I Sell/Cash Software to include Player Tracking
Uninterrupted Power Supply (UPS) for Control Room if necessary
50 VDC Motor Generators
TV Running Results Monitor
* - Equipment Installed at Autotote Hub
** - Equipment Installed at Mountaineer Park and Autotote Hub
AUTOTOTE RESERVES THE RIGHT TO SUBSTITUTE EQUIVALENT FUNCTION COMPONENTS IN
PLACE OF ANY OF THE ABOVE ITEMS AND TO DETERMINE WHETHER A HUB WILL, IN FACT, BE
USED.
AUTOTOTE WILL PROVIDE ALL COMMUNICATION AND CONTROL EQUIPMENT CONNECTING
MOUNTAINEER PARK TO AUTOTOTE'S HUB IN WEST VIRGINIA OR PENNSYLVANIA. THIS
INCLUDES THE TELECOMMUNICATION LINES. INSTALLATION AND MONTHLY FEES. THIS DOES
NOT INCLUDE
12
<PAGE> 13
MOUNTAINEER, PARK
SCHEDULE "B"
LIST OF INITIAL PERMANENT INSTALLATION EQUIPMENT
PROVIDED BY AUTOTOTE
FOR VAX/AUTOTRAK 1I TOTALISATOR INSTALLATION
A. CONTROL ROOM
Connectors and Pins for all Cables
AC and DC Power Leads
Indicator Distribution Panel
Control Room Interconnecting and Extension Leads
Ground Strap
B. SELLING LINES
All Data Cables
TIM Line Splitter Leads
Breakout Leads for up to 80 Terminals
Mounting Brackets for up to 80 Terminals
SJO AC Cords for up to 80 Terminals
Connectors and Pins for all Data Cables
C. JUDGE'S ROOM
Judge's Console Lead w/connectors
D. INDICATOR EQUIPMENT
Infield Board Cable Box
AC Contactor Panels (Infield Display Board)
All necessary AC Infield Board Leads
All necessary DC Infield Board Leads
All necessary Additional Dimmers
E. MISCELLANEOUS EQUIPMENT
All necessary shielded 52 pr. DC Data Cable
All necessary shielded 6 pr. DC Data Cable
All necessary shielded 1173/3 DC Data Cable
All necessary Coaxial Cables for Beeper System
All necessary Winchester Connectors and Pins
Aerial for Beeper System
NOTE: OWNER will be responsible to install all AC outlets and associated AC and
DC power distribution panels and power wiring for the terminals, public display
board/s and Control Room, provide all labor to pull and terminate all cables,
the labor for the installation of all switch panels and interconnecting cabling.
OWNER will also be responsible for all labor and materials for any carpentry
work required for the computer room, public display board/s and/or selling
lines. AUTOTOTE will provide all drawings and supervision labor for the
installation.
13
<PAGE> 14
MOUNTAINEER PARK
SCHEDULE "C"
LINE PRINTER REPORTS
The following reports are provided:
CYCLIC REPORTS (Totals, Odds, Probable Pays)
REFUNDS REPORT
RESULTS AND DIVIDENDS REPORTS
PRICE CALCULATION REPORTS
WILL PAYS REPORTS (FOR DOUBLE)
TELLER BANK BALANCE REPORT
FINAL TELLER BALANCE REPORTS (with Overs and Shorts)
WINDOW BALANCE REPORTS
WINDOW ALLOCATION REPORTS
PERFORMANCE POOL TOTALS REPORT
PERFORMANCE SALES SUMMARY REPORT
SALES SUMMARY REPORTS (by Pool)
IRS REPORT
CASHED TICKETS REPORT
UNCASHED TICKETS REPORT
CASHING SUMMARY REPORTS (All Cashing Activity)
PERFORMANCE PARAMETERS REPORT
BETTING ACTIVITY BREAKDOWN BY BET TYPE AND TICKET COUNT
WINDOW TRANSACTION REPORTS
HISTORY REPORTS
Supplied if Applicable:
ADVANCE POOL TOTALS REPORTS
PURGED TICKETS REPORT (Overage unpaid winners)
FUTURE DAY POOLS REPORT
FUTURE DAY BETTING SUMMARY REPORT
Teller Histories will be supplied on request for up to an average of three (3)
tellers per performance. Charges will be billed for AUTOTOTE'S labor for all
Teller Histories in excess of that amount.
14
<PAGE> 15
MOUNTAINEER PARK
SCHEDULE "D"
The equipment listed in Schedule "A" annexed shall have the following minimum
capabilities:
1. The central totalisator system shall accurately total the amounts wagered in
the various pools as agreed to by the parties. It shall provide a record of
all such totals and be capable of transmitting to the appropriate display
board(s) at regular intervals the data presently prescribed for display on
such board(s). The system shall be capable of performing the following
functions:
(A) Accepting wagers on a maximum of fifteen (15) runners per race in each
of the pools referred to in paragraph I above.
(B) Accepting wagers in any integral multiple of $1 to a maximum of $1,000.
(C) Accepting and storing wagers on each race and pool held or operated at
the site from the time of opening of wagering at the site on the day
such race or pool is held or operated, and ending at the time of
closing of wagering for such race or pool. Also, accepting and storing
wagers for any one future race or performance on specified pools up
until the time of closing of wagering for such future race or
performance.
(D) Providing those reports listed on Schedule "C" attached hereto.
(E) Providing for an accounting of outstanding live tickets as an integral
part of the system during the racing season in which such outstanding
tickets were purchased. At the conclusion of such racing season,
AUTOTOTE shall deliver to OWNER such listing of outstanding tickets
listing serial number, date of purchases, bet details and value of each
such ticket.
(F) Canceling any ticket prior to the close of wagering of the race for
which the ticket was purchased, and reducing the appropriate pool or
pools by the amount(s) so wagered.
(G) Provide for the display of wagering information on the infield board
and auxiliary odds boards.
(H) Making available up to six (6) channels of color video output to
OWNER'S closed circuit TV supplier for use over such network.
(1) Order of finish of the first four (4) runners and payoff prices for
the first three official finishers for the base set amount or for
$2.00 wagers.
15
<PAGE> 16
MOUNTAINEER PARK
SCHEDULE "D" (CONTINUED)
(2) Probable pays or probable odds for all Daily Double and Perfecta
combinations.
(3) Teller assignments (name and window number).
(4) All Pay cyclic display, consisting of results and prices for each
race during current performance.
(5) Win Odds, Time of Day, Post Time and Minutes to Post.
(6) Lead runner totals for Trifecta pools.
(I) Provide update information for the following video display units:
(1) Executive Information Console - The Executive Information Console is
an additional control console provided to allow a racetrack's
management the ability to obtain the most current information and
statistics about the currently running performance. This console can
be used to report a variety of types of information, such as total
money wagered during the performance or betting totals of a
specified race, that may be relevant to the racetrack management.
(2) Public information Console - The Public Information Console is an
additional video display console which would normally be used at a
racetrack's public information (non betting) window. The console is
used to obtain race results and prices from any previous race during
the current race meet for use in responding to patrons requests for
information.
2. TERMINALS
(A) Each terminal shall be capable of:
(1) Printing and issuing standard length tickets for all pools and
denominations as described in paragraph l.A.
(2) Reading, transmitting to and receiving from the central totalisator
data for betting slips and cashing winning tickets and branding on
such winning tickets their total value and an integral portion of
their unique serial number.
(3) Accommodating up to four compound wagers on each standard length
ticket issued.
(4) Providing status indicators and error messages to terminal
operators.
(5) Providing special terminal functions to the terminal operators which
allow them to report to the system draws or returns of cash and
final cash balance at end of performance, inquire of the system
current cash position and convert their terminal to calculator mode.
16
<PAGE> 1
[INTERNATIONAL GAME TECHNOLOGY LETTERHEAD]
EXHIBIT 10(07)
June 19, 1995
Mr. Ted Arneault, President
Mountaineer Park & Resort, Inc.
Route 2 South
Chester, West Virginia
RE: Master Lease Agreement #154920 and Schedule 2 thereto
Dear Mr. Arneault:
On April 27, 1995, IGT (f/k/a IGT-North America) entered into Schedule 2 to the
above referenced Master Lease Agreement dated on or about August 12, 1994
("Lease"), with Mountaineer Park, Inc. The Lease was additionally secured by the
Guaranty from Winners Entertainment, Inc., dated August 10, 1994.
At your request, IGT is shipping the equipment on Schedule 2 prior to your
licensure renewal hearing. In consideration of the agreement by IGT to ship at
this time, it must have your acceptance of a modification to the Master Lease
Agreement. Therefore, it is agreed that in the unlikely event that your license
is not granted and you would not be permitted to take delivery and operate the
equipment, that you will be responsible for paying to IGT the following:
1. The actual costs incurred in the shipment of the equipment from Reno to
Chester, West Virginia, as well as the costs incurred in returning them
to Reno.
2. The actual costs of any storage which may result from your inability to
take delivery, or any such storage that may be incurred as a result of
actions taken by the appropriate regulatory body.
3. The actual costs incurred by IGT personnel in the installation or
removal of such equipment.
4. A charge equal to Fifteen (15%) Percent of the total value of the
equipment for restocking expenses incurred by IGT. It is agreed that
this is a fair estimation of costs which are difficult to define and
determine and in no way constitutes a penalty or forfeiture.
It is intended that the agreement in this letter shall constitute an amendment
of the Lease as provided in paragraph 15. Even though not required by the
Guaranty, Winners Entertainment, Inc., does hereby agree that to induce IGT to
ship at this time is sufficient consideration to support the extension of its
guarantee to these expenses.
<PAGE> 2
[INTERNATIONAL GAME TECHNOLOGY LETTERHEAD]
All other provisions of the Master Lease Agreement and supporting documents that
are not inconsistent with this amendment are ratified and confirmed.
IGT (f/k/a IGT-North America)
/s/ James A. Young
James A. Young
Director, Video Gaming
ACCEPTED AND AGREED: ACCEPTED AND AGREED:
Mountaineer Park, Inc. Winners Entertainment, Inc.
By: /s/ Edson R. Arneault By: /s/ Edson R. Arneault
----------------------------- -----------------------------
Its: President Its: President
<PAGE> 3
[INTERNATIONAL GAME TECHNOLOGY LETTERHEAD]
LESSEE'S ACKNOWLEDGMENT OF
INSURANCE OBLIGATION
As Lessee under Master Equipment Lease No. 1154920 dated August 10, 1994 with
IGT (f/k/a IGT - North America) as Lessor, we hereby acknowledge our obligation
to promptly furnish a Certificate or Evidence of Insurance providing coverage on
the Equipment in our Lease Schedule 2 dated April 25, 1995.
IGT and its Successors and Assigns, as their interests may appear," shall show
as Loss Payee and additional insureds. The Equipment will be insured for
replacement value.
Please be advised that this request has been made of:
McMurty & Bell
P.O.Box 309
Los Gatos, CA 95030
(408) 358-6081
and that such Certificate or Evidence of Insurance will be shortly forthcoming
to Lessor's Insurance Coordinator c/o IGT, P.O. Box 10120, Reno, NV 89510-0120.
LESSEE:
Mountaineer Park. Inc.
d/b/a Mountaineer Racetrack and Resort
By: /s/ Edson R. Arneault
-----------------------------
Its: President
Date: April 28, 1995
<PAGE> 1
[INTERNATIONAL GAME TECHNOLOGY LETTERHEAD]
EXHIBIT 10(08)
AMENDMENT TO
MASTER LEASE AGREEMENT
This amendment to the Master Lease Agreement by and among IGT, a Nevada
corporation ("IGT"), Mountaineer Park, Inc., a West Virginia corporation, dba
Mountaineer Park ("Lessee") and Winners Entertainment, Inc., a Delaware
corporation, as Guarantor.
Whereas, IGT and Lessee did enter into Master Lease Agreement, No
154920, dated on or about August 10, 1994, which had attached to it certain
exhibits, inter alia, ones entitled "Lease Schedule 1" and "Lease Schedule 2";
Whereas, Guarantor did execute a Guaranty dated August 10, 1994,
securing the performance by the Lessee of the obligations of the Master Lease
Agreement and, inter alia, the payments required by the Lease Schedules I and 2;
Whereas, the parties have agreed to adopt an amended and consolidated
Lease Schedule as part of the Master Lease Agreement;
Whereas, the parties entered into a letter agreement dated June 22,
1995, regarding IGT technicians to service the equipment for a period of thirty
(30) days after completion of the installation;
Whereas, the parties desire to extend the period for IGT technicians to
continue such service;
Now, therefore, in consideration of the mutual covenants contained
herein as well as in the Master Lease Agreement the parties agree as follows:
1. The recitals above are true and correct and are incorporated herein
by reference.
2. The Amendment to Lease Schedules I and 2 attached hereto as Exhibit
"A" shall replace those applicable provisions of the Lease Schedules l and 2
attached to the Master Lease Agreement dated August 10, 1994, and all parties
agree that they and the terms of it shall be governed by the Master Lease
Agreement, and all supporting documents attached to it.
3. Lessee agrees that IGT technicians shall have continuing access to
Mountaineer Park to perform such service as Lessee shall request. However, this
continuing service capability by IGT technicians shall in no event be construed
as extending any IGT warranty required by the Master Lease Agreement, or
otherwise. IGT technicians assigned to this function will obtain any permits
required by West Virginia lottery authorities.
<PAGE> 2
EXHIBIT A
Amendment To Lease Schedules 1 and 2 To Master Lease Agreement No. 154920
Dated August 10, 1994
1. The Periodic Rental Payments due pursuant to Schedule 1 dated August 10,
1994 and Schedule 2 dated April 27, 1995 to Master Lease Agreement No. 154920
dated August 10, 1994, are hereby consolidated and amended to be in the amounts
shown below ("Consolidated Periodic Rental Payment").
Payment Due Dates:
------------------
March and April, 1996
May through October, 1996
November, 1996 through January, 1999
Payments are due on the 15th day of each month.
Consolidated Periodic
Rental Payment:
---------------
$ 119,470.94
$ 183,175.64
$ 119,470.94
2. In addition to the Consolidated Periodic Rental Payments shown above
Lessee shall also remit interest at the rate of fifteen percent (15%) per annum
on the past due Periodic Rental Payments that were previously due under Lease
Schedules 1 and 2. Interest payments shall be in the amounts and due on the
dates shown below:
Due Date Interest Payment
-------- ----------------
3/15/96 $ 4,777.85
4/15/96 $ 4,777.85
5/15/96 $ 4,777.85
6/15/96 $ 3,981.54
7/15/96 $ 3,185.24
8/15/96 $ 2,388.93
9/15/96 $ 1,592.62
10/15/96 $ 796.31
4. All other provisions of the Master Lease Agreement and its exhibits or
supporting documents that are not inconsistent with this Amendment are hereby
ratified and confirmed.
Dated this 26th day of March, 1996.
IGT MOUNTAINEER PARK, INC.
By: /s/ By: /s/ Edson R. Arneault
----------------------------- ----------------------------
Its: Credit Manager Its: President
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
----------------------------
Its: President
<PAGE> 1
EXHIBIT 10(09)
MUTUAL RELEASE
THIS MUTUAL RELEASE, entered into by and between Dublin Energy
Corporation, an Ohio Corporation, and all of its subsidiaries, affiliates,
officers, directors, employees, agents and representatives, including Edward R.
Knezevich, located at 5890 Sawmill Road, Post Office Box 340, Dublin, Ohio
43017, and hereinafter referred to collectively as "Dublin", and Winners
Entertainment, Inc., a Delaware Corporation, Mountaineer Park, Inc., and
Mountaineer Magic, Inc., both West Virginia corporations, and all of their
subsidiaries, affiliates, officers, directors, employees, agents and
representatives, including Edson R. Arneault, individually, hereinafter referred
to collectively as "Winners", is intended by the parties to effect the legal
consequences provided by Section 1541 of the California Civil Code, that is, the
extinguishment of obligations as herein set forth.
Disputes and differences have arisen between the parties with reference
to the manner and amount of payment for services provided by Dublin to Winners.
The parties execute this Mutual Release to settle such disputes and differences.
In consideration of the mutual relinquishment of their respective legal
rights with reference to the disputes and in consideration of the payment by
Winners of Sixty Thousand Eight Hundred Fifty (60,850) shares of common stock of
Winners Entertainment, Inc. (the "Shares") to be issued in the name of and
delivered to "Dublin Energy Corporation" on the terms and conditions contained
herein, Dublin and Winners do hereby remise, release, acquit, satisfy and
forever discharge each other of and from all manner of actions, causes of
action, suits, debts, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, executions, claims and demands
whatsoever, in law or in equity, which either such party ever had, now has, or
which any personal representative, successor, heir or assign of either such
party hereafter can, shall or may have against the other party by reason of any
matter, cause or thing whatsoever, from the beginning of time to the date of
this instrument.
All of the Shares shall be issued contemporaneously with the execution
of this Mutual Release, subject to the restrictions of Rule 144 of the
Securities Act of 1933, as amended; however, 10,850 of such Shares shall be
subject to registration rights. By acknowledgment below, Winners agrees to
include said 10,850 shares for purposes of registration in a registration
statement to be filed at Winners' expense with and for approval by the
Securities and Exchange Commission at the earliest practical time from the date
hereof. Such registration shall be attempted on a best-efforts basis with no
assurances as to
<PAGE> 2
the time of approval by the Securities and Exchange Commission or that approval
will be obtained at all. In the event such registration is not completed within
one year from the date that this Mutual Release has been executed by Dublin,
Winners shall then issue to Dublin, 10,850 additional shares of Winners
common stock, subject to the restrictions of Rule 144 and without registration
rights, and thereafter, Winners shall have no further obligations to Dublin of
any kind whatsoever.
IN WITNESS WHEREOF, the undersigned have duly executed this Mutual
Release this 18th day of October, 1995.
Witness: DUBLIN ENERGY CORPORATION
By: /s/ Pamela M. Turman By: /s/ Edward R. Knezevich
--------------------------- -----------------------------
Pamela M. Turman Edward R. Knezevich, President
By: /s/ Edward R. Knezevich
-----------------------------
Edward R. Knezevich, Individual
Acknowledged and accepted this 25th day of October, 1995 at Chester, West
Virginia
Witness: WINNERS ENTERTAINMENT, INC.
By: /s/ Julie B. Waring By: /s/ Edson R. Arneault
------------------------ -------------------------------
Julie B. Waring Edson R. Arneault, President
MOUNTAINEER PARK, INC.
By: /s/ Edson R. Arneault
-------------------------------
Edson R. Arneault, President
MOUNTAINEER MAGIC, INC.
By: /s/ Edson R. Arneault
-------------------------------
Edson R. Arneault, President
By: /s/ Edson R. Arneault
-------------------------------
Edson R. Arneault, Individual
<PAGE> 1
[WINNERS ENTERTAINMENT, INC. LETTERHEAD]
EXHIBIT 10(10)
November 17, 1995
Mr. Donald G. Saunders
32251 Pepper Tree Bend
San Juan Capistrano, California 92675
Dear Mr. Saunders:
The purpose of this letter is to set forth our understanding of the terms of an
agreement to issue shares of the Common Stock of Winners Entertainment, Inc.
(the "Company") to you in compensation for your services to the Company.
1. The company agrees to issue 200,000 shares of the Company's Common Stock
(the "Shares") as compensation for your consulting services to the Company from
January 15, 1992 to December 31, 1992. in connection with the consideration by
the Company of merger and acquisition possibilities and candidates. The issuance
of the Shares shall constitute full payment for your performance of such
services for the Company during such period.
2. The Company agrees to register the Shares on a Registration Statement on
Form S-8 under the Securities Act of 1933 as soon as possible.
3. The certificates representing the Shares will be delivered upon
registration pursuant to paragraph 2 without any legend restricting the resale
of the Shares. The Company agrees to file all reports and take all other actions
necessary to keep the Registration Statement on Form S-8 effective for a period
of not less than six months commencing on the date of the Shares.
4. This letter agreement sets forth the entire understanding of the parties
with respect to the subject matter hereof; supersedes any and all prior
agreements, arrangements and understandings with respect to the subject matter
hereof; and may be modified only by another written instrument duly executed by
both parties.
5. This letter agreement may be executed in one or more counterparts, each
of which shall be deemed to constitute an original and all of which taken
together shall constitute one and the same agreement.
6. This letter agreement may not be assigned by operation of law or
otherwise, but shall be binding on the heirs, legal representatives and
successors of the respective parties hereto.
If the foregoing comports with your understanding and is acceptable to you,
please execute this letter agreement where indicated below.
Very truly yours,
WINNERS ENTERTAINMENT, INC.
By /s/ Edson R. Arneault
-------------------------------
Edson R. Arneault
Accepted and agreed to this 17th day of November, 1995 at San Juan Capistrano,
California.
/s/ Donald G. Saunders
----------------------------
Donald G. Saunders
<PAGE> 1
EXHIBIT 10(11)
PROMISSORY NOTE NO. 1
$150,000.00 U.S. Grand Cayman, Cayman Islands, BWI
March 20, 1996
FOR VALUE RECEIVED, the undersigned, Mountaineer Park, Inc., a West
Virginia corporation ("the Maker"), promises to pay to AstraFund, Ltd., a Cayman
Island, BWI corporation along with each subsequent holder or holders of this
Note (the "Holder"), the sum of One Hundred Fifty Thousand Dollars ($150,000.00
U.S.) on or before April 22, 1996.
All payments on account hereof shall be made to AstraFund, Ltd., c/o
Cliff R. Bodden, Managing Director, at Corporate Centre at Safehaven, West Bay
Road - 31 450 SMB, Grand Cayman, Cayman Islands, British West Indies, or such
other place as the Holder may designate in writing delivered or mailed to the
Maker.
The whole of the amount of this Note shall become immediately due and
payable, without notice, at the option of the Holder hereof, in the case of an
Event of Default, as hereinafter defined, notice of the exercise of such option
being hereby waived. As used in this Note, an Event of Default shall be: (i) the
failure of the Maker to make any payment in account hereof within 10 days after
demand by Holder by the terms hereof, (ii) an assignment by maker forthe benefit
of its creditors, or a substantial part of Maker's assets are subjected to lien
by reason of failure to pay debt, or Maker applies for relief under any
provision of the U.S. Bankruptcy Code or any other law for the protection of its
creditors, or Maker is otherwise declared bankrupt or insolvent, or (iii) the
breach by Maker of any of the representations contained in the paragraph next
following, the in each and every such case, the balance shall become immediately
due and payable without demand or notice, at the option of the Holder hereof.
Maker represents that (i) the first deed of trust currently held by
Bennett Management & Development Corporation to secure Maker's outstanding
$10,200,000.00 (U.S.) construction loan from Bennett, constitutes the sole deed
of trust on Mountaineer Race Track & Resort, (ii) Maker shall pledge no security
interest in Mountaineer Race Track & Resort in excess of $10,200,000.00 (U.S.)
without first paying Holder the balance of this Note, (iii) Maker shall not sell
or otherwise dispose of Mountaineer Race Track & Resort, or the real property
described on Exhibit "A" attached hereto and made a part hereof, unless the
Holder is paid in full, (iv) Maker has outstanding trade payables at Mountaineer
Race Track & Resort of approximately $1,800,000.00 (U.S.), (v) the entire amount
of loan proceeds provided to Maker pursuant to this Note shall be used
exclusively by Maker to pay such trade payables, and (vi) a written report of
the application of the subject loan proceeds to reduce such trade payables shall
be provided by Maker to Holder upon request.
In the event that the Holder for any reason shall deem it necessary to
refer this Note to an attorney for enforcement of any rights hereunder, by suit
or otherwise, reasonable attorney's fees, together with all costs and expenses
of any such action, shall be a part of the obligations of the Maker and the
Holder may take judgment for all such amounts. Maker may prepay the full amount
due hereon, at any time, without penalty.
All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered
personally by overnight or second day courier, or by registered or certified
mail, return receipt requested, properly addressed and postage prepaid, as
follows:
Initials /s/ ERA
1
<PAGE> 2
If to Holder: If to Maker:
AstraFund, Ltd. Mountaineer Park, Inc.
Attention: Cliff R. Bodden Attention: Edson R. Arneault
Corporate Centre at Safehaven State Route 2 South
West Bay Road - 31 450 SMB Post Office Box 358
Grand Cayman, Cayman Islands Chester, West Virginia 28034
British West Indies (304) 387-2400
(809) 945-3880
The date notice shall be deemed given is the date of receipt of such
notice except in the case of an addressee's refusal to accept delivery or in the
case of a change of address of which no notice was properly provided. In either
such case, notice shall be deemed given upon the date it is sent to the last
known address. Notice of a change of address shall have been properly given when
such new address, and the date such new address shall become effective, is sent
in the manner set forth above.
This Note shall be assignable, and Maker, for itself, its heirs, legal
representatives, successors and assigns, respectively, expressly waives
presentment for payment, notice of dishonor, protest, notice of protest, all
other notices (except as expressly provided herein) and diligence by the Holder
without in any way modifying, altering, releasing, affecting, or limiting their
respective liabilities.
Any and all amounts to be paid hereunder shall be paid in good funds,
without setoff, counter claim or deduction. All amounts payable hereunder are
payable in lawful money of the United States of America.
This Note shall be governed, as to usury, by the laws of the Cayman
Islands, BWI and as to other matters by the laws of the State of West Virginia.
The Maker consents to the jurisdiction of the courts of the Cayman Islands, BWI
as to matters involving usury and to the federal courts of the State of West
Virginia for other matters and waives all defenses of forum non conveniens, lack
of venue, or personal jurisdiction with respect to any action brought on this
Note in such courts.
This Note shall be binding upon the Maker and its heirs, executors,
administrators, personal representatives, successors and assigns and shall inure
to the benefit of the Holder and its heirs, executors, administrators, personal
representatives, successors and assigns.
Whenever possible, each provision of this Note shall be interpreted in
suit manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited by or invalid under such law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Note.
This Note shall not be modified, and no terms of this Note shall be
waived except by a written instrument signed by the Maker and the Holder. The
term "Maker" as used in this Note shall mean and have reference to,
collectively, all parties and each of them directly or indirectly obligated for
the indebtedness evidenced by this Note, whether as principal maker, endorser,
guarantor, or otherwise, together with their respective heirs, administrators,
legal representatives, successors and assigns of each of the foregoing.
Failure to exercise any of the foregoing options contained in this Note
shall not constitute a waiver of the right to exercise the same or any other
option at any subsequent
INITIALS: /s/ ERA
2
<PAGE> 3
time in respect to any other event. The acceptance by Holder of any payment
hereunder that is less than payment in full of all amounts due and payable at
the time a full payment is due shall not constitute a waiver of the right to
exercise any of the foregoing options contained in this Note at that time or at
any subsequent time or nullify any prior exercise of any such option without the
express written consent of the Holder.
MAKER AND HOLDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
ANY AND ALL RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
(INCLUDING, BUT NOT LIMITED TO, ANY CLAIMS, CROSS-CLAIMS AND THIRD-PARTY CLAIMS)
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE. THE OTHER LOAN DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED HEREIN. MAKER HEREBY CERTIFIES THAT NO
REPRESENTATIVE OR AGENT OF THE HOLDER OR THE HOLDER'S COUNSEL HAS REPRESENTED ,
EXPRESSLY OR OTHERWISE, THAT THE HOLDER WOULD NOT, IN THE EVENT OF SUCH
LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. MAKER
ACKNOWLEDGES THAT THE HOLDER HAS BEEN INDUCED TO ENTER INTO THIS LOAN, INCLUDING
THIS NOTE, BY, INTER ALIA, THE PROVISIONS OF THIS PARAGRAPH.
IN WITNESS WHEREOF, in Grand Cayman, Cayman Islands, BWI, this Note has
been executed and delivered by the Maker as of the day and year hereinabove set
forth.
MAKER: MOUNTAINEER PARK, INC.,
a West Virginia corporation
By: /s/ Edson R. Arneault (seal)
-------------------------------
EDSON R. ARNEAULT, President
British West Indies )
Grand Cayman, Cayman Islands )
BEFORE ME, the undersigned authority personally appeared EDSON R.
ARNEAULT, as President of Mountaineer Park, Inc., a West Virginia corporation,
who after being duly sworn under oath, states that he has freely and voluntarily
executed this Promissory Note, with full corporate authority to do so, on this
20th day of March, 1996.
/s/ A. Hernandez
-------------------------------
NOTARY PUBLIC
ASSIGNMENT
PAY TO THE ORDER OF PAUL MELSON WITH RECOURSE.
Date: 20/3/96 ASTRAFUND, LTD,
a Cayman Islands corporation
By: /s/ Cliff R. Bodden
-------------------------------
CLIFF R. BODDEN, Director
3
<PAGE> 4
SCHEDULE OF SUBSTANTIALLY IDENTICAL
PROMISSORY NOTES
The following promissory notes are substantially identical in all material
respects to Promissory Note No. 1 identified as Exhibit 10(11) in Item 14 of
Part IV, with the exception of the due dates for the notes which are as
indicated below:
Promissory Note No. 2 by Mountaineer Park, Inc. to AstraFund, Ltd.,
dated March 20, 1996, and due May 22, 1996
Promissory Note No. 3 by Mountaineer Park, Inc. to AstraFund, Ltd.,
dated March 20, 1996, and due June 22, 1996
Promissory Note No. 4 by Mountaineer Park, Inc. to AstraFund, Ltd.,
dated March 20, 1996, and due July 22, 1996
Promissory Note No. 5 by Mountaineer Park, Inc. to AstraFund, Ltd.,
dated March 20, 1996, and due August 22, 1996
<PAGE> 1
EXHIBIT 10(12)
IRREVOCABLE AND UNCONDITIONAL
GUARANTY OF PAYMENT
THIS GUARANTY OF PAYMENT dated as of the 20TH day of MARCH, 1996 (the
"Guaranty"), from WINNERS ENTERTAINMENT, INC., a Delaware corporation, (the
"Guarantor"), to AstraFund, Ltd., a Cayman Islands, BWI corporation (the
"Lender").
WITNESSETH:
Whereas, prior to, or contemporaneously with, the execution of this
Guaranty, MOUNTAINEER PARK, INC., a West Virginia corporation, (the "Borrower")
will execute and deliver a promissory note (the "Note") to Lender identified as
Promissory Note No. 1 evidencing a loan from Lender to Borrower in the amount of
ONE HUNDRED FIFTY THOUSAND AND NO/100 ($150,000.00) Dollars (the "Loan"); and
WHEREAS, the Lender requires as an inducement and a prerequisite to its
consummating and funding of the Loan that the Guarantor deliver this Guaranty;
and
WHEREAS, the Guarantor desires that the Lender consummate and fund the
Loan with Borrower and is willing to deliver this Guaranty as an inducement to
the Lender so to do;
NOW, THEREFORE, in consideration of the foregoing, the Guarantor hereby
agrees with the Lender as follows:
I. REPRESENTATIONS AND WARRANTIES OF GUARANTOR
SECTION 1.1 REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR
The Guarantor hereby represents and warrants as of the date of delivery
as follows:
(a) That it is an active Delaware corporation and is subject to service
of process in the State of Delaware, and that it has the capacity to enter into
this Guaranty and to execute and deliver this Guaranty.
(b) The execution and delivery of this Guaranty and compliance with the
terms hereof under the circumstances contemplated hereby will not constitute on
the part of the Guarantor a breach of or a default under any agreement or other
instrument to which the Guarantor is a party or any existing law, administrative
regulation, court order or consent decree to which the Guarantor is subject, or
by which any of his properties are bound.
(c) This Guaranty is necessary to promote and further the business of
the Guarantor and the assumption by the Guarantor of its obligations hereunder
will result in direct financial benefits to the Guarantor.
(d) There is no action, suite, proceeding or investigations at law or in
equity or before or by any court, public board or body pending or, to his
knowledge, threatened against or affecting the Guarantor or to the best of its
corporate officers' knowledge, any basis therefor, wherein an unfavorable
decision, ruling or finding would adversely affect the transactions contemplated
by the Loan Documents (as hereinafter defined), or which, in any way, would
adversely affect the validity of the Note or any of the Loan Documents or any
other agreement or instrument to which the Guarantor is a party and which is
used or contemplated for use in consummation of the transactions contemplated by
the Agreement.
SECTION 1.2 COVENANTS OF THE GUARANTOR
Until payment of the Note shall have been made, the Guarantor covenants
and agrees:
<PAGE> 2
(a) That it will furnish to the Lender, within ninety (90) days after
the end of each fiscal year, upon written request, financial statements prepared
by Guarantor, such financial statements to be prepared in a compilation or
review format, of the Guarantor's assets and liabilities in a form acceptable to
the Lender, and
(b) If Guarantor is a corporation, it will not, without the prior
written consent of the Lender, directly or indirectly, transfer, sell,
hypothecate, grant a security interest in or in any way encumber or dispose of
all or any part of his interest in the common stock in the Borrower, nor shall
the Guarantor, without the prior written consent of the Lender, permit stock
dividends, stock splits or recapitalizations of the Borrower.
II. GUARANTY
SECTION 2.1 THE GUARANTY
(a) The Guarantor does hereby absolutely and unconditionally guarantee
to the Lender the full and prompt payment of the principal of, interest on, and
any other amounts due pursuant to the provisions of the Note, whether at
maturity, through proceedings for collection, by acceleration or otherwise.
(b) The Guarantor further absolutely and unconditionally guarantees to
the Lender in accordance with the Agreement the full and prompt payment of all
amounts due and payable from the Borrower pursuant to the Loan Documents. For
all purposes hereunder, "Loan Documents" shall mean the Promissory Note and all
other documents executed by the Borrower in connection with the Loan.
(c) The Guarantor further absolutely and unconditionally agrees to pay
all reasonable expenses and charges, legal or otherwise (including court costs
and reasonable attorneys' fees) paid or incurred by the Lender, or its
successors or assigns, in realizing upon any of the payments or enforcing any of
the covenants hereby guaranteed or in enforcing this Guaranty.
SECTION 2.2 GUARANTY ABSOLUTE AND UNCONDITIONAL
This Guaranty shall be a continuing, absolute and unconditional guaranty
and shall remain in full force and effect until payment of the Note (as defined
in this Agreement) shall have been made. The obligations of the Guarantor
hereunder shall arise absolutely and unconditionally when and as the Loan, or
any part thereof, shall have been funded by the Lender.
SECTION 2.3 OPERATION OF GUARANTY
(a) This is a guaranty of payment and not of collection, and the
Guarantor expressly waives any right to require that any action be brought
against the Borrower or to require that report be had to any security.
(b) If the Borrower shall default in full and prompt payment of the
principal on the Note, or any other amounts due pursuant to the Loan Documents,
when and as the same shall become due, whether at maturity, through proceedings
for collection, by acceleration or otherwise, and whether on account of the
failure of the Borrower to make such payment pursuant to the Note or otherwise,
the Guarantor, within three (3) days after demand by the Lender, without notice
other than such demand and without the necessity of further action by the
Lender, will promptly and fully make such payments, provided, however, that no
such demand shall be effective until the third business day after such default
shall occur.
(c) All payments by the Guarantor shall be made in any coin or currency
of the United States of America which on the respective dates of payment thereof
is legal tender for the payment of public and private debts. Each default in
payment of the principal on the Note or any other obligations of the Borrower
under the Loan Documents shall give rise to a separate cause of action
hereunder, and separate suits may be brought hereunder as each cause of action
arises.
INITIALS: /s/ ERA
2
<PAGE> 3
SECTION 2.4 OBLIGATIONS OF GUARANTOR ABSOLUTE AND UNCONDITIONAL
The obligations of the Guarantor hereunder shall be absolute and
unconditional and shall not be impaired, modified, released or limited by any
occurrence or condition whatsoever, including, without limitation (a) any
compromise, settlement, release, waiver, renewal, extension, indulgence or
modification of or change in any way of the obligations and liabilities of the
Borrower contained in the Note or any of the Loan Documents, (b) any impairment,
modification, release or limitation of the liability of the Borrower or their
assets, or any other security for the due performance of the Borrower's
obligations under the Loan Documents, in bankruptcy or in dissolution, or any
remedy for enforcement thereof, resulting from the operation of any present or
future provision of the Federal Bankruptcy Code, as amended or other statute or
from the decision of any court, (c) the assertion or exercise by the Lender of
any rights or remedies under any Loan Documents or its delay in or failure to
assert or exercise any such rights or remedies, (d) the assignment or mortgaging
or the purported assignment or mortgaging of any property or rights as security
for the Note, including all or any part of the rights of the Borrower in the
property, (e) the extension of the time for payment by the Borrower of the
principal of, the Note or other sums or any part thereof owing or payable under
any of the terms and provisions of the Loan Documents or the extension or any
renewal of any part thereof, (f) the modification or amendment of any duty,
agreement or obligation of the Borrower set forth in any of the Loan Documents,
(g) the voluntary or involuntary liquidation, dissolution, sale or other
disposition of all or substantially all of the assets, marshalling of assets and
liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of, or other
similar proceedings affecting, the Guarantor or any of its assets, or the
disaffirmance of this proceeding, (h) the release or discharge of the Guarantor
from the performance or observance of any agreement, covenant, term or condition
contained in any of such instruments by operation of law, (i) the receipt and
acceptance by the Lender of drafts, checks or other instruments for the payment
thereof, (j) the nonenforceability of any of the Loan Documents, (k) the failure
to give notice to the Guarantor of the occurrence of a default under the Note,
any Loan Document of this Guaranty, (l) the mortgage, pledge or other transfer
or conveyance for security or sale, transfer, assignment or other disposition by
the Borrower of all or any portion of their respective interests in the property
described in the Note regardless of whether such transaction would have the
effect of relieving the Borrower of liability under the Agreement, or (m) the
impossibility or illegality of performance on the part of the Borrower of any of
its obligations under or in connection with the Loan Documents.
SECTION 2.5 WAIVER OF NOTICE
The Guarantor unconditionally waives (a) notice of any of the matters
referred to in Section 2.4 thereof and (b) any demand (except as specified in
Section 2.3 hereof), proof or notice of nonpayment of the principal of the Note
or other payments of money required by the Loan Documents or of default by the
Borrower in performing and keeping any other covenants, conditions or agreements
required of Borrower under any of the Loan Documents.
SECTION 2.6 NO RIGHT OF SET-OFF
No act of commission or omission of any kind or at any time upon the
part of the Lender, or its successors or assigns, in respect of any matter
whatsoever shall in any way affect or impair the rights of the Lender to enforce
any right, power or benefit of the Lender under this Guaranty, and no set-off,
claim, reduction or diminution of any obligation or any defense of any kind or
nature which the Guarantor has or may have against the Lender, or any successor
or assignee, shall be available to the Guarantor or against the Lender, or any
such successor or assignee, in any suit or action brought by the Lender, or such
successors or assigns, to enforce any right, power or benefit under this
Guaranty. Nothing in this Guaranty shall be construed as a waiver by the
Guarantor of any rights or claims it may have against the Lender under this
Guaranty or otherwise, but any recovery upon such rights and claims shall be had
from the Lender separately, it being the intent of this Guaranty that the
Guarantor shall be unconditionally and absolutely obligated to perform fully all
of its obligations, agreements and covenants hereunder.
INITIALS: /s/ ERA
3
<PAGE> 4
SECTION 2.7 SUBROGATION
The Guarantor shall, to the extent of any payment made by it pursuant to
this Guaranty, be subrogated to all rights of the Lender as to all payments and
damages payable by the Borrower with respect to which such payments have been
made by the Guarantor, but until payment of the Note and all other sums due and
owing by Borrower under the Loan Documents shall have been made, such right of
subrogation on the part of the Guarantor shall be in all respects subordinate to
all rights and claims of the Lender for all other payments or damages which
shall be or become due and payable by the Borrower under the provisions of the
Note and the Loan Documents.
III. DEFAULT
SECTION 3.1 EVENTS OF DEFAULT
The following shall be events of default hereunder:
(a) Failure by the Guarantor to make any payment required to be made
under this Guaranty.
(b) After notice shall have been given by the Lender to the Guarantor,
failure by the Guarantor to observe and perform any other obligation, covenant
or performance on Guarantor's part to be observed or performed under this
Guaranty and the continuation of such failure for a period of three (3) days.
(c) Failure by the Guarantor to satisfy any final judgment against the
Guarantor for the payment of money within thirty (30) days after entry thereof
if, at the end of such thirty (30) day period, there shall be undischarged any
final judgment which shall alone or in the aggregate exceed Twenty-Five Thousand
($25,000.00) Dollars (a judgment shall not be deemed a final judgment if any
appeal or further proceedings relating thereto shall be pending and a
supersedeas bond shall have been posted, or if the time within which any party
may seek an appeal or further proceedings shall not have expired).
(d) The entry of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Guarantor in any involuntary case
under the federal bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Guarantor or for any substantial part of
Guarantor's property or ordering the winding up or liquidation of Guarantor's
affairs and such decree or order continues without being stayed and in effect
for a period of sixty (60) consecutive days.
(e) The commencement by the Guarantor of a voluntary case under the
federal bankruptcy laws as now constituted or hereafter amended, or any other
applicable federal or state bankruptcy, insolvency or other similar law, or the
consent to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, sequestrator (or other similar official) of the Guarantor
or for any substantial part of Guarantor's property, or the making by Guarantor
of any assignment for the benefit of creditors, or the taking of action by the
Guarantor to authorize or effect any of the foregoing.
(f) Failure by the Guarantor to pay when due or within any applicable
grace period, any amount owing on account of indebtedness for money borrowed or
for deferred purchases of property, or the failure by Guarantor to observe or
perform any covenant or undertaking on its part to be observed or performed in
any agreement evidencing, securing or relating to such indebtedness, resulting,
in any such case, in an event of default or acceleration by the holder of such
indebtedness.
(g) Any report, certificate, financial statement or other instrument
furnished to the Lender by the Guarantor in connection herewith or any of the
representations of the Guarantor contained in this Guaranty shall be untrue or
incorrect in any material respect.
INITIALS: /s/ ERA
4
<PAGE> 5
SECTION 3.2 REMEDIES UPON DEFAULT
Upon the occurrence of any event of default, the Lender may proceed to
enforce this Guaranty and the provisions hereof by any proper suit, action or
proceeding, at law or in equity.
IV. GENERAL PROVISIONS
SECTION 4.1 SUCCESSORS AND ASSIGNS
This Guaranty shall be binding upon the Guarantor, and Guarantor's
heirs, personal representatives, successors and assigns, and all rights against
the Guarantor arising under this Guaranty shall be for the sole benefit of the
Lender, and its representative successors and assigns, all of whom shall be
entitled to enforce performance and observance of this Guaranty to the same
extent as if they were parties hereto.
SECTION 4.2 REMEDIES
The Lender shall be entitled to bring any suit, action or proceeding
against the Guarantor for the enforcement of any provision of this Guaranty
without exhausting any other remedies which it may have pursuant to the terms of
the Note or any Loan Documents and without resort to any other security held by
or available to the Lender. The remedies herein provided are cumulative and are
note exclusive of any remedies provided by law.
SECTION 4.3 NOTICES
All notices and demands given or required to be given by any party
hereto to any other party shall be in writing and shall be deemed to have been
properly given and received for all purposes if delivered in person, sent by
telex, telegram or facsimile or delivery by same day or overnight courier
service, or three (3) business days after having been deposited in any post
office, branch post office, or mail depository maintained by the U.S. Postal
Service and sent by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows (or sent to such other address as any
party shall specify to the other party pursuant to the provisions of this
Section):
If to Guarantor: Winners Entertainment, Inc.
Attention: Edson R. Arneault
State Route 2 South
P.O. Box 368
Chester, West Virginia 26034
(304) 387-2400
If to Lender: AstraFund, Ltd.
Attention: Cliff R. Bodden
Corporate Centre at Safehaven
West Bay Road - 31 450 SMB
Grand Cayman, Cayman Islands
British West Indies
(809) 945-3880
SECTION 4.4 AMENDMENTS
No modification, amendment or waiver of any provision of the Guaranty
nor consent to any departure by the Guarantor therefrom shall in any event be
effective unless the same shall be in writing and signed by the Lender and such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given. No notice to or demand on the Guarantor in any case
shall entitle the Guarantor to any other or further notice or demand in the
same, similar or other circumstances.
INITIALS: /s/ ERA
5
<PAGE> 6
SECTION 4.5 DISCHARGE OF GUARANTOR
Upon payment of the Note and all other amounts due under Section 2.1
hereof, all liability of the Guarantor hereunder shall cease and be discharged
and the Lender shall execute and deliver to the Guarantor as the Guarantor shall
reasonably request, an appropriate instrument or instruments in writing
evidencing the release and discharge of the Guarantor from any and all further
liability under this Guaranty.
SECTION 4.6 EFFECTS OF DELAY AND WAIVERS
No delay or omission to exercise any right or power accruing upon any
default, omission or failure of performance hereunder shall impair any such
right or power or shall be construed to be a waiver thereof, but any such right
and power may be exercised from time to time and as often as may be deemed
expedient. In order to entitle the Lender to exercise any remedy now or
hereafter existing at law or in equity or by statute, it shall not be necessary
to give any notice, other than such notice as may be herein expressly required.
In the event any provision contained in this Guaranty should be breached by any
party and thereafter waived by the other party so empowered to act, such waiver
shall be limited to the particular breach hereunder. No waiver, amendment,
release or modification of this Guaranty shall be established by conduct, custom
or course of dealing, but solely by an instrument in writing duly executed by
the parties thereunto duly authorized by this Guaranty.
SECTION 4.7 COUNTERPARTS
This Guaranty may be executed simultaneously in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
SECTION 4.8 SEVERABILITY
The invalidity or nonenforceability of any one or more phrases,
sentences, clauses or sections contained in this Guaranty shall not affect the
validity or enforceability of the remaining portions of this Guaranty, or any
part thereof.
SECTION 4.9 GOVERNING LAW AND JURISDICTION
This Guaranty shall be governed by and construed in accordance with the
laws of the Cayman Islands, BWI, as to usury and as to all other matters by the
laws of the State of West Virginia.
SECTION 4.10 JURISDICTION: NOTICES AND SERVICE OF PROCESS WAIVER
The Guarantor hereby irrevocably: (a) agrees that any suit, action or
other legal proceeding arising out of this Guaranty may be brought in the courts
of the Cayman Islands, BWI, as to matters involving usury and to the courts of
the United States federal Court for the State of West Virginia for other
matters; (b) consents to the jurisdiction of each such court in any such suit,
action or proceeding; (c) waives any objection which they may have to laying of
the venue of any other matter in any suit, action, or other proceeding arising
from or in any way connected with this Guaranty or the Loan Documents and waive
the right to bring any counterclaims, cross-claims or other actions, other than
those which are considered compulsory by the laws of the State of West Virginia
in any suit, action or other proceeding arising from or in any connected with
this Guaranty or the Loan Documents. For such time as the Guarantor's
obligations under Section 2 of this Guaranty shall not have been satisfied or
discharged in full, the Guarantor irrevocably agreed and consents that any
service of process made by registered or certified mail to the address provided
in Section 4.3 hereof or such other address as may be furnished by the Guarantor
to the Lender in writing, shall be taken and held to be valid personal service
upon Guarantor and that any such service of process was made upon Guarantor
according
INITIALS: /s/ ERA
6
<PAGE> 7
to the laws governing the validity and requirements of such service in such
state, and Guarantor waives all claim of error by reason of any such service.
SECTION 4.11 SURVIVAL OF REPRESENTATIONS, ETC.
All covenants, agreements, representations and warranties made herein
and in the certificates delivered pursuant hereto shall survive the making by
the Lender of the Loan secured by this Guaranty and shall continue in full force
and effect so long as any portion of the Note is outstanding and unpaid and the
Agreement has not bee terminated.
SECTION 4.12 HEADINGS
Article and Section headings in this Guaranty are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any purpose.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
executed as of the date first above written.
WITNESS: GUARANTOR:
WINNERS ENTERTAINMENT, INC.,
/s/ A. Hernandez a Delaware corporation
- -------------------------
A. Hernandez
By: /s/ Edson R. Arneault (seal)
----------------------------
EDSON R. ARNEAULT, President
British West Indies )
Grand Cayman, Cayman Islands )
BEFORE ME, the undersigned authority personally appeared EDSON R.
ARNEAULT, as President of Winners Entertainment, Inc., a Delaware corporation,
who after being duly sworn, under oath, states that he has freely and
voluntarily executed this Promissory Note, with full corporate authority to do
so, on this 20th day of March, 1996.
/s/ A. Hernandez
---------------------------
NOTARY PUBLIC
(Print name of Notary)
A. HERNANDEZ
---------------------------
7
<PAGE> 8
SCHEDULE OF SUBSTANTIALLY IDENTICAL
IRREVOCABLE AND UNCONDITIONAL GUARANTYS OF PAYMENT
The following Irrevocable and Unconditional Guarantys of Payment are
substantially identical in all material respects to the Irrevocable and
Unconditional Guaranty of Payment of Promissory Note No. 1 identified as
Exhibit 10(12) in Item 14 of Part IV, with the exception that the promissory
note guaranteed in each case is different as indicated below:
Irrevocable and Unconditional Guaranty of Payment by Winners
Entertainment, Inc., dated March 20, 1996, of Promissory Note No. 2 by
Mountaineer Park, Inc. to AstraFund, Ltd., dated March 20, 1996.
Irrevocable and Unconditional Guaranty of Payment by Winners
Entertainment, Inc., dated March 20, 1996, of Promissory Note No. 3 by
Mountaineer Park, Inc. to AstraFund, Ltd., dated March 20, 1996.
Irrevocable and Unconditional Guaranty of Payment by Winners
Entertainment, Inc., dated March 20, 1996, of Promissory Note No. 4 by
Mountaineer Park, Inc. to AstraFund, Ltd., dated March 20, 1996.
Irrevocable and Unconditional Guaranty of Payment by Winners
Entertainment, Inc., dated March 20, 1996, of Promissory Note No. 5 by
Mountaineer Park, Inc. to AstraFund, Ltd., dated March 20, 1996.
<PAGE> 1
[WINNERS ENTERTAINMENT, INC. LETTERHEAD]
EXHIBIT 17
April 26, 1995
The Board of Directors
Winners Entertainment, Inc.
30448 Rancho Viejo Road, Suite 110
San Juan Capistrano, California 92675
Re: Resignation as director and officer
Gentlemen:
For some time I have reflected on the accomplishments of Winners Entertainment,
and its prospects for the future. It is with a great deal of personal
satisfaction that I have had the opportunity to guide the Company through its
fragile beginnings to become the successful business it is today. I have always
considered the interests of the Company first, however, Winners has now reached
a point of viability which allows me to direct attention to certain personal
matters which, of necessity, have been previously ignored. Although I have
enjoyed directing the Company to date, with the shareholders' interests in mind,
I believe that I can transfer my leadership responsibilities to others at this
time.
Therefore, subject to the terms of the attached proposed April 26, 1995
Agreement, I hereby tender my resignation as director and officer of the
Company, its subsidiaries and affiliates to become effective immediately upon
acceptance by the board of directors.
Very truly yours,
/s/ Michael R. Dunn
Michael R. Dunn
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM DECEMBER 31,
1995 CONSOLIDATED STATEMENT OF OPERATIONS AND DECEMBER 31, 1995 CONSOLIDATED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 1,233,000
<SECURITIES> 0
<RECEIVABLES> 596,000
<ALLOWANCES> (360,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,972,000
<PP&E> 20,885,000
<DEPRECIATION> (2,785,000)
<TOTAL-ASSETS> 25,747,000
<CURRENT-LIABILITIES> 9,258,000
<BONDS> 10,607,000
0
0
<COMMON> 32,048,000
<OTHER-SE> (26,064,000)
<TOTAL-LIABILITY-AND-EQUITY> 25,747,000
<SALES> 24,979,000
<TOTAL-REVENUES> 24,979,000
<CGS> 21,800,000
<TOTAL-COSTS> 30,425,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 557,000
<INCOME-PRETAX> (5,446,000)
<INCOME-TAX> (133,000)
<INCOME-CONTINUING> (5,313,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,313,000)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
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