<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1999.
REGISTRATION NO. 333-77737
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
---------------------
LEISURE TIME CASINOS & RESORTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 7980 34-1763271
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
4258 COMMUNICATIONS DRIVE
NORCROSS, GEORGIA 30093
(770) 923-9900
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
ALAN N. JOHNSON
4258 COMMUNICATIONS DRIVE
NORCROSS, GEORGIA 30093
(770) 923-9900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With Copies to:
<TABLE>
<S> <C>
THOMAS S. SMITH, ESQ. ROBERT W. WALTER, ESQ.
KEVIN J. KANOUFF, ESQ. STACEY L. BOWERS, ESQ.
SMITH MCCULLOUGH, P.C. BERLINER ZISSER WALTER & GALLEGOS, P.C.
4643 SOUTH ULSTER STREET, SUITE 900 1700 LINCOLN STREET
DENVER, COLORADO 80237 SUITE 4700
(303) 221-6000 DENVER, COLORADO 80203
(303) 830-1700
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
following the date on which the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock............................... 1,265,000 shares(2) $13.00 $16,445,000 $4,572.00
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Representative's Warrants(3)............... 1 Warrant $ -- $ 100 $ 1.00
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Common Stock Underlying Representative's
Warrants................................. 110,000 shares(4)(5) $15.60 $ 1,716,000 $ 478.00
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Total............................. $18,161,100 $5,050.00
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</TABLE>
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
(2) Includes 165,000 shares that the underwriters have the option to purchase
from the registrant to cover over allotments, if any.
(3) To be issued to the representative of the underwriters.
(4) In accordance with Rule 416 under the Securities Act of 1933, as amended, a
presently indeterminable number of shares of common stock are registered
hereunder which may be issued in the event provisions preventing dilution
become operative, as provided in the representative's warrants. No
additional registration fee has been paid for these shares of common stock.
(5) Issuable upon exercise of the representative's warrants for the purchase of
common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
Leisure Time will amend and complete the information in this prospectus.
Although Leisure Time is permitted by US federal securities laws to offer these
securities using this prospectus, Leisure Time may not sell them or accept an
offer to buy them until the registration statement filed with the Commission
relating to these securities has been declared effective by the Commission. This
prospectus is not an offer to sell these securities or Leisure Time's
solicitation of an offer to buy these securities in any jurisdiction where that
would not be permitted or legal.
SUBJECT TO COMPLETION, DATED AUGUST 9, 1999
PROSPECTUS
1,100,000 SHARES OF COMMON STOCK
[LEISURE TIME LOGO]
This is an initial public offering of shares of common stock of Leisure
Time Casinos & Resorts, Inc. Leisure Time expects that the public offering price
of the common stock will be between $11.00 and $13.00 per share.
Leisure Time principally develops, manufactures and sells programmable
touchscreen video gaming machines. In addition, Leisure Time operates an
offshore gaming vessel and a gaming machine route and is renovating a hotel
property that Leisure Time anticipates will include space where Leisure Time
will be able to display its video pulltab and bingo machines for marketing to
charities. Leisure Time plans to list the common stock on the Nasdaq National
Market(R) under the symbol "LTCR."
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price................ $ $
Underwriting discounts............... $ $
Proceeds to Leisure Time............. $ $
</TABLE>
The underwriters have a 45 day option to purchase up to an additional
165,000 shares from Leisure Time to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters expect to deliver the common stock on .
SCHNEIDER SECURITIES, INC.
, 1999
<PAGE> 3
[GATEFOLD]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward Looking Statements.................................. 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Dilution.................................................... 15
Capitalization.............................................. 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 31
Management.................................................. 67
Security Ownership of Certain Beneficial Owners and
Management................................................ 77
Description of Securities................................... 79
Shares Eligible for Future Sale............................. 80
Underwriting................................................ 81
Legal Matters............................................... 83
Experts..................................................... 83
Index to Financial Statements............................... F-1
</TABLE>
UNLESS OTHERWISE STATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE OVERALLOTMENT OPTION BY THE UNDERWRITERS.
<PAGE> 5
PROSPECTUS SUMMARY
Please refer to the Business section for a diagram that will help you
better understand Leisure Time and its related companies. This summary
highlights information contained elsewhere in this prospectus. This summary does
not contain all of the information that you should consider before investing in
the common stock.
Leisure Time. Leisure Time principally develops, manufactures and sells
programmable touch screen video gaming machines that offer players a choice of
up to 12 different games of chance on one machine. Leisure Time's proprietary
software features various well known games such as:
- poker;
- blackjack;
- keno;
- slots; and
- bingo
as well as other games developed by Leisure Time. Each machine is programmed by
Leisure Time prior to delivery with from one to 12 games selected by the
location operator from a menu of approximately 50 games with multiple payout
options. Since its acquisition of its video gaming machine manufacturing
operations in September 1996, Leisure Time has:
- successfully expanded its installed base of video gaming machines;
- introduced software upgrades designed to enhance player appeal and
engender operator loyalty; and
- increased recurring revenue through the sale of new and upgraded game
software.
The video gaming machines manufactured by Leisure Time are used in:
- retail locations such as taverns, restaurants, supermarkets, drug stores
and convenience stores;
- small and medium sized casinos operated by Native American tribes;
- smaller casinos with limited floor space; and
- gaming arcades and bingo halls.
In addition to seeking recurring revenue from software upgrades on a
growing base of installed video gaming machines, Leisure Time has recently
implemented strategies designed to enhance recurring revenue through:
- the sale of video pulltab machines and the refillable, replaceable
pulltab cartridges used in the machines;
- purchase and operation of a "cruise to nowhere" vessel out of Gloucester,
Massachusetts that offers a range of gaming activities in international
waters, including Leisure Time's video gaming machines, table games and
traditional "slot" games;
- acquisition of a multiple retail location base of video gaming machines
that Leisure Time will own and operate or provide to third parties on a
revenue sharing basis, known as a gaming route;
- acquisition of a hotel now undergoing renovation that is next to Lake
Erie in Cleveland, Ohio and that Leisure Time plans will include space
where Leisure Time will be able to display its video pulltab and bingo
machines for marketing to charities; and
- acquisition of a finance company to finance purchases of video gaming
machines from Leisure Time.
1
<PAGE> 6
Strategy. Leisure Time's objectives are to be a leading provider of video
gaming, pulltab and bingo products and related software and to expand its gaming
operations to increase recurring revenue. Key strategies to achieve Leisure
Time's objectives include to:
- increase the installed base of Pot O Gold and Pulltab Gold product lines;
- leverage growth in installed products to increase recurring revenue from
software sales;
- continue to identify and develop new touchscreen video games and game
enhancements;
- increase revenue through addition of gaming vessels and passengers;
- expand gaming machine route operations;
- promote acceptance and use of video pulltab and bingo products; and
- selectively explore domestic acquisition opportunities and international
expansion.
Factors that could impact Leisure Time attaining its objectives include:
- the possible discontinuance of gaming in South Carolina;
- a decrease in popularity of Leisure Time's video gaming machines;
- technological innovations in video gaming machines;
- competition;
- increased regulation of the gaming industry;
- the inability of Leisure Time to acquire additional gaming vessels;
- the inability of Leisure Time to secure suitable docking facilities for
its gaming vessels;
- availability of financing; and
- adverse outcome of pending lawsuits.
2
<PAGE> 7
Financial Performance. The following tables represent total revenue, total
gross profit, net income (loss) before income taxes, and the net income (loss)
for Leisure Time Technology (predecessor) for the years ended June 30, 1994,
1995 and 1996. In September 1996 Leisure Time commenced operations by acquiring
Leisure Time Technology. The same information is presented for Leisure Time for
the fiscal years ended June 30, 1997 and 1998 and for the nine months ended
March 31, 1999:
<TABLE>
<S> <C>
[TOTAL REVENUE GRAPH] [TOTAL GROSS PROFIT GRAPH]
This bar graph shows Leisure Time's total This bar graph shows Leisure Time's total
revenues by year and for the nine months. The gross profit by year and for the nine months.
figures range from $15.5 million to $45.1 The figures range from $6.8 million to $22.6
million. million.
[NET INCOME BEFORE INCOME TAXES GRAPH] [NET INCOME (LOSS) GRAPH]
This bar graph shows Leisure Time's net income This bar graph shows Leisure Time's net income
from operations before income taxes by year (loss) by year and for the nine months. The
and for the nine months. The figures range figures range from $.2 million to $3.2 million
from $.3 million to $5.2 million except for except for 1998 which shows a loss of $1.1
1998 which shows a loss of $1.4 million. million.
</TABLE>
Leisure Time's principal executive offices are located at 4258
Communications Drive, Norcross, Georgia 30093. Leisure Time's telephone number
is (770) 923-9900 and its facsimile number is (770) 923-3344.
Leisure Time has a website on the World Wide Web at
www.leisuretimecasinos.com. Leisure Time's website is not intended to be and
should not be considered a part of this prospectus.
THE OFFERING
Securities offered......... 1,100,000 shares of common stock
Shares of common stock to
be outstanding after the
offering................. 6,271,829 shares
The 6,271,829 shares of common stock outstanding do not include up to
165,000 shares of common stock that will be outstanding if the underwriters
exercise their overallotment option. In addition to the 6,271,829 shares of
common stock outstanding after the offering, Leisure Time may issue 5,573,267
shares of common stock on exercise of currently outstanding options and
warrants.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the financial data for Leisure Time's
business for the years ended June 30, 1997 and 1998, and for the nine months
ended March 31, 1998 and 1999. As Leisure Time Technology is considered a
predecessor, similar information is presented for Leisure Time Technology for
the years ending June 30, 1994, 1995 and 1996 and for the period July 1, 1996 to
September 13, 1996. Leisure Time Technology was acquired on September 13, 1996.
Leisure Time Financial was not acquired until April 1, 1999. Florida Casino
Cruises was not acquired until May 4, 1999.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
LEISURE TIME TECHNOLOGY LEISURE TIME
(F/K/A U.S. GAMES, INC.)(1) CASINOS & RESORTS, INC. AND SUBSIDIARIES(2)
------------------------------------------------- -----------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE NINE MONTHS
FOR THE YEAR ENDED JUNE 30, JULY 1, 1996 TO ENDED ENDED ENDED MARCH 31,
------------------------------ SEPTEMBER 13, JUNE 30, JUNE 30, -----------------------
1994 1995 1996 1996 1997 1998 1998 1999
-------- -------- -------- ---------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $ 15,494 $ 22,393 $ 28,291 $ 2,671 $ 29,838 $ 28,643 $ 22,268 $ 45,056
Cost of goods sold..... 8,657 12,429 15,677 1,300 16,616 16,517 12,377 22,475
Gross profit........... 6,837 9,964 12,614 1,371 13,222 12,126 9,891 22,581
Operating expenses..... 4,612 6,322 9,158 2,997 6,796 13,252 8,459 17,369
Net income (loss)
before income
taxes................ 2,225 3,642 3,456 (1,626) 6,426 (1,126) 1,432 5,212
Income tax benefit
(expense)............ (811) (1,343) (1,293) 554 (1,738) 197 (629) (1,975)
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss)...... $ 1,414 $ 2,299 $ 2,163 $ (1,072) $ 4,688 $ (929) $ 803 $ 3,237
======== ======== ======== ======== ========== ========== ========== ==========
Earnings (loss) per
common
share -- basic....... $ 2.05 $ 3.34 $ 3.14 $ (1.56) $ 1.08 $ (.21) $ .18 $ .69
======== ======== ======== ======== ========== ========== ========== ==========
Earnings (loss) per
common share --
diluted.............. $ 2.05 $ 3.34 $ 3.14 $ (1.56) $ .65 $ (.21) $ .08 $ .42
======== ======== ======== ======== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding -- basic... 688,850 688,850 688,850 688,850 4,343,397 4,516,528 4,505,380 4,663,648
======== ======== ======== ======== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding -- diluted... 688,850 688,850 688,850 688,850 7,664,903 4,516,528 9,839,303 7,726,386
======== ======== ======== ======== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Represents the financial results of Leisure Time Technology, a predecessor
to Leisure Time acquired by Leisure Time on September 13, 1996.
(2) The following information is presented for Leisure Time for the years ended
June 30, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue..................................................... $ -- $ -- $ --
Cost of goods sold.......................................... -- -- --
Gross profit................................................ -- -- --
Operating expenses.......................................... 595 1,014 1,397
Net loss.................................................... $ (595) $ (1,014) $ (1,397)
========= ========= =========
Loss per common share -- basic.............................. $ (0.20) $ (0.33) $ (0.35)
========= ========= =========
Weighted average number of common shares
outstanding -- basic...................................... 2,993,206 3,109,273 4,010,650
========= ========= =========
</TABLE>
4
<PAGE> 9
The following table sets forth a summary of Leisure Time's balance sheet as
of March 31, 1999.
The as adjusted column reflects:
- Leisure Time's receipt of the estimated net proceeds from the sale of
1,100,000 shares of common stock at an assumed initial public offering
price of $12.00 per share, after deducting underwriting discounts and
estimated underwriting expenses.
<TABLE>
<CAPTION>
LEISURE TIME TECHNOLOGY LEISURE TIME CASINOS & RESORTS, INC.
(F/K/A U.S. GAMES, INC.) AND SUBSIDIARIES
------------------------ ---------------------------------------------------
JUNE 30, JUNE 30, MARCH 31, 1999
------------------------ --------------------------- ---------------------
1994 1995 1996 1996 1997 1998 ACTUAL AS ADJUSTED
------ ------ ------ ------- ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 185 $ 44 $4,158 $ 2 $ 1,089 $ 888 $ 2,540 $13,920
Working capital (deficit).............. 2,213 429 5,305 (2,274) (56) (3,891) (313) 11,067
Total assets........................... 6,000 3,769 7,918 380 19,523 22,413 29,840 41,220
Long-term liabilities.................. -- 100 -- 15 10,097 9,186 11,226 11,226
Total stockholders' equity............. 3,849 1,208 6,490 (1,984) 4,273 3,706 8,611 19,991
Total liabilities and stockholders'
equity............................... 6,000 3,769 7,918 380 19,523 22,413 29,840 41,220
</TABLE>
The foregoing table does not give effect to:
- 200,000 shares of common stock and warrants to purchase 400,000 shares of
common stock issued after March 31, 1999, upon the conversion of $250,000
of debt;
- 6,998 shares of common stock issued after March 31, 1999, upon the
conversion of approximately $17,500 of debt;
- 49,996 shares of common stock issued for approximately $265,000 after
March 31, 1999, upon the exercises of an option and warrants;
- 2,000 shares of common stock and warrants issued after March 31, 1999,
for $20,000;
- 100,000 shares of common stock and an option issued after March 31, 1999,
in connection with the acquisition of Leisure Time Financial;
- 80,000 shares of common stock and warrants issued after March 31, 1999,
in connection with the acquisition of Florida Casino Cruises;
- 5,573,267 shares of common stock issuable on exercise of outstanding
options and warrants; and
- 110,000 shares of common stock issuable on exercise of the
representative's warrants.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF CASH FLOWS AND OTHER
DATA:
Cash flow (used in) provided by operating
activities..................................... $ (629) $ 7,379 $ 2,592 $ 3,684 $ 5,710
Cash flow used by investing activities........... (292) (6,862) (3,097) (3,585) (4,024)
Cash flow provided by (used in) financing
activities..................................... 904 570 304 302 (34)
EBITDA (loss).................................... (1,329) 8,523 1,578 3,257 8,793
</TABLE>
"EBITDA" reflects net income or loss plus depreciation, amortization and
net interest expense, income taxes and stock based compensation expense, if any.
EBITDA is a measure used by analysts and investors as an indicator of operating
cash flow because it excludes the impact of movements in working capital items,
non-cash charges and financing costs. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered a substitute for other measures of performance. EBITDA as
calculated by Leisure Time may not be comparable to EBITDA as calculated and
reported by other companies.
5
<PAGE> 10
RISK FACTORS
You should carefully consider the following risks before you decide to buy
Leisure Time's common stock. The risks and uncertainties described below are not
the only ones facing Leisure Time. Additional risks and uncertainties not
presently known to Leisure Time or that Leisure Time currently deems immaterial
may also impair Leisure Time's business.
If any of the events described in the following risks actually occur,
Leisure Time's business, financial condition and results of operations could be
materially adversely affected. In such case, the trading price of Leisure Time's
common stock could decline and you could lose all or part of your investment.
LEISURE TIME'S HISTORICAL SALES ARE CONCENTRATED IN ONE GEOGRAPHIC MARKET THAT
MAY BECOME SATURATED CAUSING A REDUCTION OF LEISURE TIME'S SALES IN THAT STATE
AND A REDUCTION IN THE VALUE OF YOUR INVESTMENT
The majority of Leisure Time's sales of video gaming machines over the past
few years has been in South Carolina. Leisure Time believes that the market for
its video gaming machines in South Carolina may level off over the next two
years as a result of factors including:
- increased regulation;
- market saturation;
- competition; and
- general economic conditions in South Carolina.
Leisure Time has marketed and been less successful in selling its video gaming
machines in the Native American markets in Kansas, Michigan, Minnesota, New
Mexico, New York, North Carolina and Wisconsin. Leisure Time plans to market its
video gaming machines in other jurisdictions. A decline in sales of video gaming
machines in South Carolina combined with the failure of Leisure Time to sell
video gaming machines in other jurisdictions would materially adversely affect
Leisure Time's revenue and ability to achieve a profit.
A REFERENDUM IN NOVEMBER 1999 COULD MAKE GAMING ILLEGAL IN SOUTH CAROLINA IN
JUNE 2000; UNTIL THE REFERENDUM IS HELD, LEISURE TIME EXPECTS REDUCED SALES OF
LEISURE TIME'S VIDEO GAMING MACHINES IN SOUTH CAROLINA, WHICH WOULD MATERIALLY
ADVERSELY AFFECT LEISURE TIME'S REVENUE AND BUSINESS
On November 2, 1999, South Carolina is to have a referendum which could
make gaming illegal in South Carolina after June 30, 2000. Leisure Time's sales
in South Carolina have recently decreased and may continue at reduced levels
until the referendum is held. If the referendum makes gaming illegal in South
Carolina after June 30, 2000, Leisure Time's sales in South Carolina will
further decline after November 2, 1999 and sales of video gaming machines and
revenue from gaming route operations will terminate by June 30, 2000, causing an
adverse impact on Leisure Time's ability to achieve a profit in the future.
COURT INTERPRETATIONS LIMITING THE PAYOUT OF VIDEO GAMING MACHINES IN SOUTH
CAROLINA HAVE DECREASED LEISURE TIME'S SALES IN SOUTH CAROLINA
Courts in South Carolina have interpreted a South Carolina statute to limit
to $125 per day per machine the total amount of cash that can be paid to any
individual at the conclusion of play by that individual on that machine. The
interpretations have decreased Leisure Time's sales of video gaming machines in
South Carolina resulting in a decrease in Leisure Time's revenue. Leisure Time
anticipates it will incur a significant loss for at least the first fiscal
quarter ending September 30, 1999, primarily due to the decreased sales.
6
<PAGE> 11
A DECREASE IN THE POPULARITY OF THE PRODUCT LINE OF VIDEO GAMING MACHINES FROM
WHICH LEISURE TIME HAS RECEIVED SUBSTANTIALLY ALL OF ITS REVENUE COULD
MATERIALLY ADVERSELY AFFECT LEISURE TIME'S REVENUE AND DECREASE THE VALUE OF
YOUR INVESTMENT
Substantially all of Leisure Time's revenue has resulted from the sale of
the Pot O Gold product line of video gaming machines. A decrease in the
popularity of the Pot O Gold product line of video gaming machines with gaming
patrons could materially adversely affect Leisure Time's revenue and decrease
the value of your investment. The popularity of the Pot O Gold may decrease
because of the introduction by competitors of other, more popular video gaming
machines.
LEISURE TIME FACES SIGNIFICANT COMPETITION IN THE SALE OF VIDEO GAMING MACHINES
WHICH COULD MATERIALLY ADVERSELY AFFECT LEISURE TIME
The video gaming machine industry in which Leisure Time competes is
characterized by intense competition. The competition is based on the following:
- the ability of a video gaming machine to generate wins because players
want to play the video gaming machine;
- the ease of use, ease of service and support of video gaming machines;
and
- training, distribution, name recognition and price of video gaming
machines.
International Game Technology, Inc. is the largest manufacturer of gaming
machines and is a significant competitor of Leisure Time. IGT has, and other
competitors may have, greater financial and technical resources than Leisure
Time and IGT has, and other competitors may have, larger customer bases and
wider distribution channels than Leisure Time that may enable them to move
rapidly into Leisure Time's market and acquire significant market share.
Competition from IGT or another competitor would likely result in:
- reductions in the price Leisure Time charges for video gaming machines;
- reduced operating margins; and
- loss of market share.
Increased competition from IGT or another competitor will likely materially
adversely affect Leisure Time's revenue.
LEISURE TIME'S BUSINESS COULD BE ADVERSELY AFFECTED IF LEISURE TIME FAILS TO
MAINTAIN ITS EXISTING LICENSES OR OBTAIN NEW LICENSES
Leisure Time must maintain its existing licenses and approvals to sell
video gaming machines in its current markets. Leisure Time must also obtain
necessary licenses in all additional jurisdictions in which it intends to
distribute its video gaming machines. The loss of a license in a particular
jurisdiction will prohibit Leisure Time from distributing in that jurisdiction
and may prohibit Leisure Time from selling its video gaming machines in other
jurisdictions. The loss of one or more licenses held by Leisure Time could have
a material adverse effect on its revenue.
The licensing and approval processes can involve extensive investigation
into Leisure Time and its:
- officers;
- directors;
- principal stockholders; and
- products.
7
<PAGE> 12
The licensing and approval process can require significant expenditures of
time and resources by Leisure Time. Leisure Time must comply with all applicable
regulations for its activities in any international jurisdictions into which it
expands. Leisure Time may not receive licensing approvals in the jurisdictions
in which it is currently seeking such approvals.
ADOPTION OR CHANGES IN GAMING LAWS OR REGULATIONS COULD ADVERSELY AFFECT LEISURE
TIME'S SALES OF VIDEO GAMING MACHINES
Gaming laws and regulations, including the imposition of gaming taxes,
could be adopted or changed which could materially adversely affect Leisure
Time's sales of video gaming machines.
A FAILURE OF ADDITIONAL JURISDICTIONS TO LEGALIZE GAMING COULD CAUSE LOWER
DEMAND FOR LEISURE TIME'S VIDEO GAMING MACHINES AND A REDUCTION IN LEISURE
TIME'S REVENUE
If new jurisdictions do not legalize gaming, Leisure Time believes that the
demand for video gaming machines could decline and Leisure Time's revenue will
be materially adversely affected.
ENACTMENT INTO LAW OF RECOMMENDATIONS BY THE NATIONAL GAMBLING IMPACT AND POLICY
COMMISSION COULD ADVERSELY AFFECT LEISURE TIME'S BUSINESS
In 1997, Congress created the National Gambling Impact and Policy
Commission to conduct a comprehensive study of all matters relating to the
economic and social impact of gaming in the United States. The commission issued
a report on June 18, 1999. The report contained recommendations for legislative,
regulatory and administrative action with respect to the expansion of legalized
gaming, the nature of such legalized gaming, the study and treatment of
compulsive gambling and the regulation of Native American tribal gaming. The
commission recommended:
- that it was "time to consider a pause in the expansion of gambling";
- that states should not authorize any further convenience gambling
operations and should cease or rollback existing operations of this type;
- that jurisdictions considering the introduction of new forms of gaming or
the significant expansion of existing gaming operations should sponsor
comprehensive gambling impact statements;
- that "cruises to nowhere" should be prohibited unless the state from
which the cruise originates adopts legislation specifically legalizing
such cruises consistent with existing law; and
- that states adopt restrictions on political contributions from entities,
corporate, private or tribal, that have applied for or have been granted
the privilege of operating gambling facilities.
Any such recommendations, if enacted into law, could adversely affect the gaming
industry and have a material adverse effect on Leisure Time's ability to sell
its video gaming machines.
THE VIDEO GAMING MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE WHICH
COULD LEAD TO VIDEO GAMING MACHINES THAT ARE TECHNOLOGICALLY SUPERIOR AND MORE
POPULAR THAN LEISURE TIME'S MACHINES WHICH COULD DECREASE LEISURE TIME'S SALES
The video gaming industry is characterized by rapid technological change
and frequent new product announcements and enhancements. The emergence of video
gaming machines that are technologically superior to Leisure Time's video gaming
machines or that achieve higher levels of player acceptance would materially
adversely affect Leisure Time's ability to sell its video gaming machines and
reduce Leisure Time's revenue. Leisure Time's future success depends to a large
extent upon Leisure Time's ability to design, manufacture and market video
gaming machines that take full advantage of state-of-the-art hardware and
software and that achieve high levels of player acceptance.
8
<PAGE> 13
LEISURE TIME HAS INCURRED AND MAY CONTINUE TO INCUR LOSSES IN OPERATING ITS
OFFSHORE GAMING VESSEL
Leisure Time has incurred losses in operating its first offshore gaming
vessel in Massachusetts and the prior owner incurred losses in operating the
vessel in Florida. Leisure Time has plans to operate additional offshore gaming
vessels. If Leisure Time is unable to generate sufficient revenue to cover
expenses incurred in operating offshore gaming vessels, Leisure Time may
continue to incur losses from operating offshore gaming vessels.
THE ADOPTION OF LAWS OR ORDINANCES IN GLOUCESTER, MASSACHUSETTS PROHIBITING
LEISURE TIME'S OFFSHORE GAMING VESSEL FROM OPERATING OUT OF THAT PORT COULD
ADVERSELY IMPACT LEISURE TIME'S REVENUES
Leisure Time currently operates one offshore gaming vessel out of
Gloucester, Massachusetts. Gloucester or other local governing bodies could
enact laws or ordinances that prohibit Leisure Time's offshore gaming vessel
from operating out of that port. Leisure Time's revenues from the offshore
gaming vessel would cease until and unless Leisure Time were able to begin
operating the offshore gaming vessel from a different location.
THERE ARE LIMITATIONS ON EXPANSION OF OFFSHORE GAMING VESSEL OPERATIONS WHICH
COULD AFFECT LEISURE TIME'S PLANS FOR ADDING GAMING VESSELS
Leisure Time plans to expand its offshore gaming vessel operations to other
United States ports. The availability of desirable ports is affected by:
- the population base of the area surrounding the port;
- existence or absence of intense competition;
- the presence of the port in an established vacation market;
- availability of suitable docking facilities and water depth;
- the refusal of jurisdictions to permit offshore gaming vessels to dock at
ports in the jurisdiction;
- ability to comply with federal, state and local laws;
- favorable weather and sea conditions; and
- proximity to international waters.
If Leisure Time is unable to expand its offshore gaming vessel operations into
additional ports, its revenue might be materially adversely affected.
LEISURE TIME'S OFFSHORE GAMING VESSEL IS AFFECTED BY ADVERSE WEATHER WHICH COULD
DECREASE THE NUMBER OF CUSTOMERS TAKING CRUISES
The number of customers taking cruises on Leisure Time's gaming vessel
decreases significantly immediately before and after poor weather and high seas
are encountered. Leisure Time's offshore gaming vessel operations and resulting
revenue are and will be adversely affected by adverse weather and sea
conditions.
LEISURE TIME'S OFFSHORE GAMING VESSEL AND GAMING ROUTE OPERATIONS FACE
COMPETITION FROM OTHER ENTERTAINMENT ACTIVITIES WHICH COULD ADVERSELY AFFECT THE
NUMBER OF CUSTOMERS TAKING CRUISES
Leisure Time competes with a variety of other entertainment activities in
the areas where Leisure Time operates its offshore gaming vessel and has its
gaming route operations. Such entertainment activities include land based
gaming, resort attractions, sporting events and other recreational activities.
Any increase in the popularity of these other activities could materially
adversely affect Leisure Time's revenue from gaming route operations.
9
<PAGE> 14
LEISURE TIME COULD INCUR UNINSURED LOSSES FROM OFFSHORE GAMING VESSEL OPERATIONS
IN EXCESS OF INSURANCE COVERAGE RESULTING IN MATERIAL LOSSES TO LEISURE TIME
Leisure Time maintains $15,000,000 of liability and property insurance
related to its offshore gaming vessel operations. Leisure Time could suffer
uninsured losses as a result of an accident or catastrophic event affecting
Leisure Time's offshore gaming vessel operations. Any uninsured loss could cause
Leisure Time to incur material losses.
LEISURE TIME MAY NOT BE ABLE TO RECOUP ITS HOTEL INVESTMENT WHICH COULD CAUSE A
FINANCIAL LOSS TO LEISURE TIME AND REDUCE THE VALUE OF YOUR INVESTMENT
Leisure Time plans to make a significant investment renovating a hotel.
Leisure Time has no experience in operating a hotel. Leisure Time may not be
able to recoup its investment in the hotel. This could materially adversely
affect Leisure Time's financial condition and ability to achieve a profit.
THERE IS COMPETITION FOR LEISURE TIME'S HOTEL WHICH COULD AFFECT LEISURE TIME'S
ABILITY TO GENERATE REVENUE FROM THE HOTEL
The hotel that Leisure Time is renovating will encounter significant
competition from several other lodging facilities in the area. The hotel was
vacant and was not operated for approximately seven years prior to Leisure Time
purchasing the hotel. The previous failure and closing of the hotel may be an
indication that the hotel will not succeed in generating sufficient revenue
after it is renovated and reopened by Leisure Time. This may materially
adversely affect Leisure Time's ability to achieve a profit.
LEISURE TIME COULD ENCOUNTER SIGNIFICANT COMPETITION IN GAMING ROUTE OPERATIONS
WHICH COULD REDUCE LEISURE TIME'S REVENUE AND ABILITY TO ADD ADDITIONAL GAMING
ROUTE OPERATIONS
Leisure Time currently has a gaming route in South Carolina in which
Leisure Time shares, with the proprietors of the establishments where the video
gaming machines are located, a percentage of the revenue from the video gaming
machines. Numerous others have gaming routes in South Carolina and many are
adding locations to their gaming routes. The establishment of gaming routes by
others could reduce the revenue from Leisure Time's gaming route locations and
limit Leisure Time's ability to open or acquire additional gaming route
locations on terms acceptable to Leisure Time.
LEISURE TIME MAY NOT BE ABLE TO RECOUP ITS INVESTMENT IN GAMING ROUTE OPERATIONS
WHICH COULD CAUSE LEISURE TIME TO REDUCE OR WRITE OFF THE VALUE OF ITS
INVESTMENT
Leisure Time plans to operate and acquire additional gaming route
locations. A lack of play on video gaming machines on Leisure Time's gaming
routes because of the unpopularity of the machines or their placement in an
undesirable location could result in Leisure Time not being able to recoup the
cost of the video gaming machines Leisure Time places in additional locations.
For the same reasons, Leisure Time may not be able to recoup the investment it
makes if it acquires additional gaming route locations. A failure to recoup
Leisure Time's investment could require Leisure Time to reduce or write off the
value of its investment, thereby materially adversely affecting Leisure Time's
ability to achieve a profit.
THE ADOPTION OF LAWS RESTRUCTURING OR PROHIBITING GAMING ROUTE OPERATIONS BY
STATES IN ADDITION TO SOUTH CAROLINA COULD ADVERSELY AFFECT LEISURE TIME'S
BUSINESS
In addition to South Carolina, other states could adopt laws that restrict
or prohibit gaming route operations. In the event such laws are adopted, Leisure
Time's revenue would be materially adversely affected.
LEISURE TIME HAS MINIMAL WORKING CAPITAL AND SUBSTANTIAL DEBT WHICH COULD LIMIT
LEISURE TIME'S ABILITY TO BORROW ADDITIONAL AMOUNTS OR RESULT IN A FORECLOSURE
ON LEISURE TIME'S ASSETS
As of March 31, 1999, Leisure Time had a working capital deficit of
approximately $313,000 and at June 30, 1999, had approximately $15.2 million in
debt with interest rates ranging from 6.64% to 10.25% that
10
<PAGE> 15
is due between January 2000 and November 2003. Leisure Time may not be able to
service its debt if Leisure Time experiences a decrease in cash flow. The
significant level of debt may increase Leisure Time's vulnerability to general
adverse economic and industry conditions, including increases in interest rates,
and may limit Leisure Time's ability to borrow additional funds. Leisure Time's
debt is secured by a significant portion of Leisure Time's assets. If Leisure
Time is unable to service its debt and the lenders foreclose upon its assets,
Leisure Time's financial condition and ability to operate would be materially
adversely affected.
LEISURE TIME'S FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED BY CURRENT
LITIGATION WHICH COULD RESULT IN MATERIAL JUDGMENTS AGAINST LEISURE TIME
ADVERSELY AFFECTING LEISURE TIME'S LIQUIDITY
Leisure Time recently paid a judgment of approximately $3.3 million
including interest against Leisure Time resulting from litigation with one of
its former video gaming machine distributors. Leisure Time has filed a lawsuit
against the same distributor alleging the distributor failed to complete a
purchase order. The distributor has counterclaimed against Leisure Time and has
filed another lawsuit against Leisure Time alleging similar claims to those the
distributor alleged in the lawsuit in which it was awarded the judgment. Any
additional judgment awarded the distributor could have an adverse effect upon
Leisure Time's liquidity.
In addition, Leisure Time is currently involved in a lawsuit filed by a
former officer of a subsidiary of Leisure Time that alleges Leisure Time failed
to issue to him options to purchase 200,000 shares of Leisure Time's common
stock at a price of $1.00 per share and claims unspecified damages as a result
of the failure. Any such issuance could potentially cause dilution to shares of
common stock that you purchase and result in Leisure Time incurring compensation
expense. Any judgment awarded the former officer for damages could have an
adverse effect on Leisure Time's liquidity. Leisure Time is unable to predict
the outcome of this litigation.
DISPUTES WITH FORMER HOLDERS OF CONVERTIBLE PROMISSORY NOTES COULD CAUSE THE
ISSUANCE OF ADDITIONAL SECURITIES WHICH COULD DILUTE YOUR INVESTMENT
In January 1999, Leisure Time paid in full the remaining balance of 11%
convertible promissory notes after the notes were accelerated as a result of a
default in payment by Leisure Time. The notes were convertible into units
consisting of 920,000 shares of Leisure Time's common stock and warrants to
purchase 920,000 shares of Leisure Time's common stock at a price of $1.75 and
920,000 shares of Leisure Time's common stock at a price equal to 120% of the
offering price of an initial public offering by Leisure Time. The former holders
of the notes have claimed that they reserved their respective rights to convert
their notes even though they accepted full payment of the notes. Leisure Time
believes that the conversion features of the notes have expired. It is possible
that the holders of the notes could bring an action to attempt to exercise their
conversion rights. Leisure Time cannot predict the outcome of any such
litigation. Leisure Time may attempt to settle this matter by issuing shares of
Leisure Time's common stock and warrants to purchase shares of Leisure Time's
common stock. Any adverse judgment against Leisure Time as a result of this
matter or any issuance of Leisure Time's common stock or warrants as a result of
this matter could dilute your investment.
EFFECTIVELY MANAGING LEISURE TIME'S GROWTH MAY BE DIFFICULT CAUSING AN ADVERSE
IMPACT ON LEISURE TIME'S OPERATING RESULTS AND REDUCE THE VALUE OF YOUR
INVESTMENT
Leisure Time has recently experienced significant growth and expects to
continue to grow rapidly by pursuing strategies intended to expand its business
domestically and internationally. This growth is likely to place a significant
strain on Leisure Time's financial, managerial and other resources. To manage
its growth, Leisure Time must continue to implement effective systems and hire
additional employees. Leisure Time's ability to manage its growth effectively
will depend on Leisure Time's ability to continue to improve its operational,
financial and management information systems and to attract, motivate and train
key employees. Leisure Time's ability to conduct business efficiently will be
materially adversely affected if Leisure Time is unable to effectively manage
its growth. This could cause an adverse impact on Leisure Time's operating
results and reduce the value of your investment.
11
<PAGE> 16
LEISURE TIME NEEDS ADDITIONAL CAPITAL FOR ITS LONG-TERM GROWTH WITHOUT WHICH ITS
GROWTH WILL BE LIMITED
Leisure Time will need additional capital after this offering in order to
implement its long-term growth strategy. Leisure Time may be unable to obtain
such additional capital when needed. Leisure Time may have to scale back its
long-term growth strategy if it is not successful in raising additional capital.
ALL OF LEISURE TIME'S OUTSTANDING SHARES OF COMMON STOCK ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS COULD
CAUSE THE MARKET PRICE OF LEISURE TIME'S COMMON STOCK TO DROP SIGNIFICANTLY,
EVEN IF LEISURE TIME'S BUSINESS IS DOING WELL
After this offering, Leisure Time will have outstanding 6,271,829 shares of
common stock. This includes the 1,100,000 shares Leisure Time is selling in this
offering, and an additional 2,047,743 shares that are currently outstanding, all
of which may be resold in the public market immediately. The remaining
approximately 50% or 3,124,086 shares, of Leisure Time's outstanding shares of
common stock may be sold over the next year under the provisions of Rule 144.
All but 177,884 shares of the 5,171,829 shares presently outstanding are subject
to an agreement these shareholders have with the representative of the
underwriters prohibiting their resale in the public market for a period of 180
days to one year after the date of this prospectus without the consent of the
representative of the underwriters. However, the representative of the
underwriters can waive this restriction and allow these shareholders to sell
their shares at any time. As restrictions on resale end, the market price could
drop significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them.
EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL AFTER THE
OFFERING TO THE POSSIBLE DETRIMENT OF PURCHASERS IN THIS OFFERING
After the offering, the existing stockholders of Leisure Time will own
approximately 82% of Leisure Time's outstanding common stock. Alan N. Johnson
will own approximately 35% of Leisure Time's outstanding common stock (excluding
shares issuable on exercise of options). The existing stockholders will be able
to control all matters requiring stockholder approval and Alan N. Johnson will
be able to influence most matters presented to stockholders for approval.
LEISURE TIME MAY BE UNABLE TO MAKE ATTRACTIVE ACQUISITIONS OR INTEGRATE ACQUIRED
COMPANIES INTO LEISURE TIME, LIMITING LEISURE TIME'S GROWTH OR DISRUPTING ITS
OPERATIONS
One of Leisure Time's strategies is to selectively explore domestic
acquisition opportunities. Leisure Time may not be able to make attractive
acquisitions or integrate the acquired companies into Leisure Time. The failure
of Leisure Time to make attractive acquisitions could impede Leisure Time's
planned growth. Leisure Time's inability to successfully integrate an acquired
company into Leisure Time could disrupt Leisure Time's operations.
ANTI-TAKEOVER PROVISIONS AND THE RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF LEISURE TIME DIFFICULT DEPRIVING STOCKHOLDERS OF THE
ABILITY TO TAKE ADVANTAGE OF AN ATTRACTIVE BID
Leisure Time's articles of incorporation provide that its board of
directors may issue preferred stock without stockholder approval. In addition,
Leisure Time's articles of incorporation provide that:
- directors will be elected for three-year terms, with approximately
one-third of the board of directors standing for election each year;
- the affirmative vote of stockholders holding not less than two-thirds of
the votes entitled to be cast in the election of directors is required to
alter or repeal the staggered board provision;
- directors may only be removed for cause; and
- directors may be removed for cause only by the affirmative vote of
stockholders holding not less than two-thirds of all stock entitled to
vote.
12
<PAGE> 17
The issuance of preferred stock and the existence of anti-takeover provisions in
Leisure Time's articles of incorporation might discourage third party bids to
acquire Leisure Time. As a result, Leisure Time's stockholders may not be able
to take advantage of an attractive bid that might increase the value of their
investment.
ANTI-TAKEOVER PROVISIONS IN EMPLOYMENT AGREEMENTS WILL LIKELY INHIBIT A THIRD
PARTY ACQUISITION OF LEISURE TIME DEPRIVING STOCKHOLDERS OF THE ABILITY TO TAKE
ADVANTAGE OF AN ATTRACTIVE BID
Leisure Time has employment agreements with five of its executive officers
and an employee pursuant to which they can require Leisure Time to repurchase
their common stock upon the occurrence of a change in control of Leisure Time.
Leisure Time also is required to issue low priced options to replace their
current options upon the occurrence of a change in control of Leisure Time. If
enforceable, these provisions will likely inhibit a third party from acquiring
Leisure Time without the consent of these persons. As a result, Leisure Time's
stockholders may not be able to take advantage of an attractive bid that might
increase the value of their investment.
FORWARD LOOKING STATEMENTS
Some of the statements contained in this prospectus under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" are forward-looking. They
include statements that involve risks and uncertainties that might materially
adversely affect Leisure Time's operating results in the future. Most of these
risks are beyond Leisure Time's control. Actual results may differ materially
from those suggested by the forward-looking statements for various reasons,
including those discussed above.
13
<PAGE> 18
USE OF PROCEEDS
Based on an assumed initial public offering price of $12.00 per share, the
net proceeds from the sale of the shares of common stock are estimated to be
approximately $11.4 million.
Leisure Time intends to use the net proceeds as follows:
- approximately $4.0 million for acquisitions;
- approximately $3.4 million as working capital, including the payment of
accounts payable;
- approximately $2.0 million to develop a new Pot O Gold line of video
gaming machines and to develop new software; and
- approximately $2.0 million to expand manufacturing and research and
development facilities.
Leisure Time currently has proposed the acquisition of Best Amusement,
Inc., a company that has a gaming route operation in South Carolina. Except for
such proposal, Leisure Time has no agreements, arrangements or understandings
with respect to any acquisitions of additional gaming routes or any other gaming
or other businesses or assets. Any net proceeds realized from the exercise of
the underwriters' over-allotment option will be used as working capital.
Leisure Time reserves the right to change the uses of the proceeds if
market conditions or unexpected changes in operating conditions or results of
operations occur. The amounts actually expended for each use may vary
significantly depending upon a number of factors including, but not limited to,
future growth, the amount expended for acquisitions and the amount of cash
generated by Leisure Time's operations. If the board of directors determines
that the proposed uses of proceeds are not in the best interests of Leisure
Time, the board of directors will decide how the proceeds will be used. Net
proceeds not immediately required to be used will be invested principally in
investment grade, interest-bearing securities.
DIVIDEND POLICY
Leisure Time has never declared nor paid any dividends on its common stock.
Leisure Time currently anticipates that all earnings will be retained for use in
Leisure Time's business and that no cash dividends will be paid to stockholders.
One of Leisure Time's loan agreements prohibits Leisure Time from paying, in any
fiscal year, dividends in excess of Leisure Time's net income for such fiscal
year. Another of Leisure Time's loan agreements prohibits Leisure Time from
paying dividends if Leisure Time is in default on the loan. Leisure Time is
currently in compliance with all material terms of its loan agreements. Any
payment of cash dividends in the future on the common stock will depend on
Leisure Time's:
- financial condition;
- results of operations;
- current and anticipated cash requirements;
- plans for expansion;
- existing or future debt obligations and any restrictions imposed by such
obligations; and
other factors deemed relevant by the board of directors.
14
<PAGE> 19
DILUTION
Leisure Time's net tangible book value as of March 31, 1999 was $227,000,
or approximately $.05 per share.
Net tangible book value per share represents Leisure Time's tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
of the 1,100,000 shares of common stock offered hereby at an assumed initial
public offering price of $12.00 per share, the net tangible book value of
Leisure Time as of March 31, 1999, would have been $11,607,000 or $1.99 per
share of common stock. This amount represents an immediate increase in net
tangible book value of $1.94 per share of common stock to the existing holders
of common stock and an immediate dilution of $10.01 per share of common stock to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of common
stock..................................................... $12.00
Net tangible book value per share of common stock as of
March 31, 1999......................................... $ .05
Increase in net tangible book value per share of common
stock attributable to new investors.................... 1.94
Net tangible book value per share of common stock after the
offering.................................................. 1.99
------
Dilution in net tangible book value per share of common
stock to new
investors................................................. $10.01
======
</TABLE>
The following table sets forth as of March 31, 1999, the number of shares
of common stock acquired, the total cash consideration paid and the average cash
price per share of common stock paid to Leisure Time by Leisure Time's
stockholders and by new investors at an assumed initial public offering price of
$12.00 per share before deducting underwriting discounts and other estimated
offering expenses payable by Leisure Time.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 4,732,835 81.1% $ 5,152,000 28.1% $ 1.09
New investors........................... 1,100,000 18.9 13,200,000 71.9 $12.00
--------- ----- ----------- -----
Total......................... 5,832,835 100.0% $18,352,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table excludes:
- 200,000 shares of common stock and warrants to purchase 400,000 shares of
common stock issued after March 31, 1999, upon the conversion of $250,000
of debt;
- 6,998 shares of common stock issued after March 31, 1999, upon the
conversion of approximately $17,500 of debt;
- 49,996 shares of common stock issued for approximately $265,000 after
March 31, 1999, upon the exercises of an option and warrants;
- 2,000 shares of common stock and warrants issued after March 31, 1999,
for $20,000;
- 100,000 shares of common stock and an option issued after March 31, 1999,
in connection with the acquisition of Leisure Time Financial;
- 80,000 shares of common stock and warrants issued after March 31, 1999,
in connection with the acquisition of Florida Casino Cruises;
- 5,573,267 shares of common stock issuable on exercise of outstanding
options and warrants; and
- 110,000 shares of common stock issuable on exercise of the
representative's warrants.
15
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of Leisure Time as of
March 31, 1999. Leisure Time's capitalization is presented:
- on an actual basis; and
- on an as adjusted basis to reflect:
- Leisure Time's receipt of the estimated net proceeds from the sale of
1,100,000 shares of common stock at an assumed initial public offering
price of $12.00 per share, after deducting underwriting discounts and
other estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long term debt (net of current portion)..................... $11,226 $11,226
======= =======
Stockholders' equity:
Preferred Stock, par value $0.001 per share; 5,000,000
shares authorized; no shares issued or outstanding..... $ -- $ --
Common Stock, par value $0.001 per share; 45,000,000
shares authorized; 4,732,835 shares issued and
outstanding, and 5,832,835 shares issued and
outstanding, as adjusted............................... 5 6
Additional paid-in capital................................ 5,147 16,526
Retained earnings......................................... 3,459 3,459
------- -------
Total stockholders' equity........................ $ 8,611 $19,991
======= =======
Total capitalization.............................. $19,837 $31,217
======= =======
</TABLE>
The foregoing table does not give effect to:
- 200,000 shares of common stock and warrants to purchase 400,000 shares of
common stock issued after March 31, 1999, upon the conversion of $250,000
of debt;
- 6,998 shares of common stock issued after March 31, 1999, upon the
conversion of approximately $17,500 of debt;
- 49,996 shares of common stock issued for approximately $265,000 after
March 31, 1999, upon the exercises of an option and warrants;
- 2,000 shares of common stock and warrants issued after March 31, 1999,
for $20,000;
- 100,000 shares of common stock and an option issued after March 31, 1999,
in connection with the acquisition of Leisure Time Financial;
- 80,000 shares of common stock and warrants issued after March 31, 1999,
in connection with the acquisition of Florida Casino Cruises;
- 5,573,267 shares of common stock issuable on exercise of outstanding
options and warrants; and
- 110,000 shares of common stock issuable on exercise of the
representative's warrants.
16
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and are qualified by reference to the financial
statements and notes beginning on page F-1. The unaudited data at and for the
nine months ended March 31, 1999 include, in the opinion of Leisure Time, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of Leisure Time's financial position at that date and results
of operations for that period. The results of operations for the nine months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full fiscal year or future periods.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
LEISURE TIME TECHNOLOGY
(F/K/A U.S. GAMES, INC.)(1)
-------------------------------------------------
JULY 1, 1996
FOR THE YEAR ENDED JUNE 30, TO
------------------------------ SEPTEMBER 13,
1994 1995 1996 1996
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Manufacturing........................ $ 15,494 $ 22,393 $ 28,291 $ 2,671
Gaming............................... -- -- -- --
Other................................ -- -- -- --
-------- -------- -------- --------
Total revenue.................. 15,494 22,393 28,291 2,671
-------- -------- -------- --------
Cost of goods sold:
Manufacturing........................ 8,657 12,429 15,677 1,300
Gaming............................... -- -- -- --
Other................................ -- -- -- --
-------- -------- -------- --------
Total cost of goods sold....... 8,657 12,429 15,677 1,300
-------- -------- -------- --------
Gross profit:
Manufacturing........................ 6,837 9,964 12,614 1,371
Gaming............................... -- -- -- --
Other................................ -- -- -- --
-------- -------- -------- --------
Total gross profit............. 6,837 9,964 12,614 1,371
-------- -------- -------- --------
Selling, general and administrative
expenses............................. 3,696 5,023 8,284 2,856
Research and development costs......... 778 1,134 800 132
Stock based compensation............... -- -- -- --
Interest, net.......................... 138 165 74 9
Litigation............................. -- -- -- --
-------- -------- -------- --------
Total operating expenses....... 4,612 6,322 9,158 2,997
-------- -------- -------- --------
Net (loss) income before income tax
benefit (expense).................... 2,225 3,642 3,456 (1,626)
Income tax benefit (expense)........... (811) (1,343) (1,293) 554
-------- -------- -------- --------
Net income (loss)...................... $ 1,414 $ 2,299 $ 2,163 $ (1,072)
======== ======== ======== ========
Earnings (loss) per common
share -- basic....................... $ 2.05 $ 3.34 $ 3.14 $ (1.56)
======== ======== ======== ========
Earnings (loss) per common
share -- diluted..................... $ 2.05 $ 3.34 $ 3.14 $ (1.56)
======== ======== ======== ========
Weighted average number of common
shares outstanding -- basic.......... 688,850 688,850 688,850 688,850
======== ======== ======== ========
Weighted average number of common
shares outstanding -- diluted........ 688,850 688,850 688,850 688,850
======== ======== ======== ========
<CAPTION>
LEISURE TIME
CASINOS & RESORTS, INC. AND SUBSIDIARIES(2)
-----------------------------------------------------
FOR THE FOR THE
YEAR YEAR FOR THE NINE MONTHS
ENDED ENDED ENDED MARCH 31,
JUNE 30, JUNE 30, -----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Manufacturing........................ $ 29,838 $ 28,643 $ 22,268 $ 41,037
Gaming............................... -- -- -- 3,738
Other................................ -- -- -- 281
---------- ---------- ---------- ----------
Total revenue.................. 29,838 28,643 22,268 45,056
---------- ---------- ---------- ----------
Cost of goods sold:
Manufacturing........................ 16,616 16,517 12,377 21,796
Gaming............................... -- -- -- 400
Other................................ -- -- -- 279
---------- ---------- ---------- ----------
Total cost of goods sold....... 16,616 16,517 12,377 22,475
---------- ---------- ---------- ----------
Gross profit:
Manufacturing........................ 13,222 12,126 9,891 19,241
Gaming............................... -- -- -- 3,338
Other................................ -- -- -- 2
---------- ---------- ---------- ----------
Total gross profit............. 13,222 12,126 9,891 22,581
---------- ---------- ---------- ----------
Selling, general and administrative
expenses............................. 5,615 8,727 4,243 14,908
Research and development costs......... 469 642 462 174
Stock based compensation............... -- -- -- 1,400
Interest, net.......................... 712 840 748 887
Litigation............................. -- 3,043 3,006 --
---------- ---------- ---------- ----------
Total operating expenses....... 6,796 13,252 8,459 17,369
---------- ---------- ---------- ----------
Net (loss) income before income tax
benefit (expense).................... 6,426 (1,126) 1,432 5,212
Income tax benefit (expense)........... (1,738) 197 (629) (1,975)
---------- ---------- ---------- ----------
Net income (loss)...................... $ 4,688 $ (929) $ 803 $ 3,237
========== ========== ========== ==========
Earnings (loss) per common
share -- basic....................... $ 1.08 $ (.21) $ .18 $ .69
========== ========== ========== ==========
Earnings (loss) per common
share -- diluted..................... $ .65 $ (.21) $ .08 $ .42
========== ========== ========== ==========
Weighted average number of common
shares outstanding -- basic.......... 4,343,397 4,516,528 4,505,380 4,663,648
========== ========== ========== ==========
Weighted average number of common
shares outstanding -- diluted........ 7,664,903 4,516,528 9,839,303 7,726,386
========== ========== ========== ==========
</TABLE>
- ---------------
(1) Represents the financial results of Leisure Time Technology, a predecessor
to Leisure Time acquired by Leisure Time on September 13, 1996.
17
<PAGE> 22
(2) The following information is presented for Leisure Time for the years ended
June 30, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue................................................ $ -- $ -- $ --
Cost of goods sold..................................... -- -- --
Gross profit........................................... -- -- --
Selling, general and administrative expenses........... 572 809 1,342
Interest............................................... 23 205 55
Net loss............................................... $ (595) $ (1,014) $ (1,397)
========= ========= =========
Earnings (loss) per common share -- basic.............. $ (0.20) $ (0.33) $ (0.35)
========= ========= =========
Weighted average number of common shares outstanding --
basic................................................ 2,993,206 3,109,273 4,010,650
========= ========= =========
</TABLE>
18
<PAGE> 23
The following table sets forth a summary of the balance sheets of Leisure
Time Technology and Leisure Time as of the dates indicated.
The as adjusted column reflects:
- Leisure Time's receipt of the estimated net proceeds from the sale of
1,100,000 shares of common stock at an assumed initial public offering
price of $12.00 per share, after deducting underwriting discounts and
estimated underwriting expenses.
<TABLE>
<CAPTION>
LEISURE TIME TECHNOLOGY LEISURE TIME CASINOS & RESORTS, INC.
(F/K/A U.S. GAMES, INC.) AND SUBSIDIARIES
------------------------ ---------------------------------------------------
JUNE 30, JUNE 30, MARCH 31, 1999
------------------------ --------------------------- ---------------------
1994 1995 1996 1996 1997 1998 ACTUAL AS ADJUSTED
------ ------ ------ ------- ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 185 $ 44 $4,158 $ 2 $ 1,089 $ 888 $ 2,540 $13,920
Working capital (deficit).............. 2,213 429 5,305 (2,274) (56) (3,891) (313) 11,067
Total assets........................... 6,000 3,769 7,918 380 19,523 22,413 29,840 41,220
Long-term liabilities.................. -- 100 -- 15 10,097 9,186 11,226 11,226
Total stockholders' equity............. 3,849 1,208 6,490 (1,984) 4,273 3,706 8,611 19,991
Total liabilities and stockholders'
equity............................... 6,000 3,769 7,918 380 19,523 22,413 29,840 41,220
</TABLE>
The foregoing table does not give effect to:
- 200,000 shares of common stock and warrants to purchase 400,000 shares of
common stock issued after March 31, 1999, upon the conversion of $250,000
of debt;
- 6,998 shares of common stock issued after March 31, 1999, upon the
conversion of approximately $17,500 of debt;
- 49,996 shares of common stock issued for approximately $265,000 after
March 31, 1999, upon the exercises of an option and warrants;
- 2,000 shares of common stock and warrants issued after March 31, 1999,
for $20,000;
- 100,000 shares of common stock and an option issued after March 31, 1999,
in connection with the acquisition of Leisure Time Financial;
- 80,000 shares of common stock and warrants issued after March 31, 1999,
in connection with the acquisition of Florida Casino Cruises;
- 5,573,267 shares of common stock issuable on exercise of outstanding
options and warrants; and
- 110,000 shares of common stock issuable on exercise of the
representative's warrants.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF CASH FLOWS AND OTHER DATA:
Cash flow (used in) provided by operating activities... $ (629) $ 7,379 $ 2,592 $ 3,684 $ 5,710
Cash flow used by investing activities................. (292) (6,862) (3,097) (3,585) (4,024)
Cash flow provided by financing activities............. 904 570 304 302 (34)
EBITDA (loss).......................................... (1,329) 8,523 1,578 3,257 8,793
</TABLE>
"EBITDA" reflects net income or loss plus depreciation, amortization and
net interest expense, income taxes and stock based compensation expense, if any.
EBITDA is a measure used by analysts and investors as an indicator of operating
cash flow because it excludes the impact of movements in working capital items,
non-cash charges and financing costs. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered a substitute for other measures of performance. EBITDA as
calculated by Leisure Time may not be comparable to EBITDA as calculated and
reported by other companies.
19
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto and the other financial information included
elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Leisure Time's actual results
could differ materially from those anticipated in these forward looking
statements as a result of any number of factors, including those set forth under
"risk factors" and elsewhere in this prospectus.
OVERVIEW
Leisure Time's manufacturing and gaming operations are the segments of
Leisure Time's business that generated revenue during the nine months ended
March 31, 1999. The following chart provides revenue, cost of goods sold and
gross profit information for these two segments and for corporate operations as
a percentage of total revenue, cost of goods sold and gross profit for Leisure
Time for the nine months ended March 31, 1999.
<TABLE>
<CAPTION>
ITEM MANUFACTURING GAMING CORPORATE AND OTHER
- ---- ------------- ------ -------------------
<S> <C> <C> <C>
Revenue....................................... 91% 8% 1%
Cost of goods sold............................ 97 2 1
Gross profit.................................. 85 15 --
</TABLE>
RECENT DEVELOPMENTS AFFECTING FIRST QUARTER RESULTS
As a result of the referendum that will be held in South Carolina in
November 1999, Leisure Time's sales of video gaming machines in South Carolina
have decreased significantly. Leisure Time anticipates it will incur a
significant loss for at least the first fiscal quarter ending September 30,
1999, primarily due to decreased sales.
MANUFACTURING
Description. Leisure Time's largest business segment is the manufacture and
sale of video gaming and pulltab machines. The Pot O Gold product line comprises
Leisure Time's principal product line. Since September 1996, Leisure Time and
its distributors have sold the Pot O Gold product line of video gaming machines
in 10 states in the United States and in Argentina, Brazil and Norway. In 1998,
Leisure Time completed its first video pulltab machine called the Pulltab Gold.
A major component of the Pulltab Gold machine is the replaceable cartridge that
contains encrypted electronic pulltabs. Each cartridge has a finite number of
pulltabs and, when they are depleted, the cartridge must be returned to Leisure
Time to be refilled. Additionally, Leisure Time is currently developing a video
bingo machine that Leisure Time expects to introduce in the fourth quarter of
1999.
Historically, Leisure Time has sold software as a part of its video machine
manufacturing operations. Leisure Time plans to expand its software sales
through sales of new games, chip upgrades and new operating boards. One time
software sales relate to changes in the operating software that are necessary to
comply with technological or regulatory changes, such as the year 2000 issue and
South Carolina regulations. Leisure Time has completed the software revisions
necessary for its video gaming machines to be year 2000 compliant and is selling
the software to the current owners of the Pot O Gold product line of machines.
South Carolina has required that all owners of video gaming machines comply with
new requirements that each video gaming machine be electronically connected
through a data communication device with a state centralized processing center
by February 1, 2000. By December 1, 1999, the owners must have in place
contracts to purchase the data communication device. Leisure Time has developed
a data communication device that, if approved, will enable most South Carolina
operators of Leisure Time video gaming machines to comply with these provisions.
To date, all expenses related to the development of software and software
upgrades have been expensed as incurred.
20
<PAGE> 25
Analysis and Trends. For the nine months ended March 31, 1999, Leisure
Time's manufacturing segment accounted for 97% of Leisure Time's total revenue
and 85% of gross profit. Approximately 95% of revenue and 94% of gross profit
generated by the manufacturing segment resulted from sales of the Pot O Gold
product line. The remaining 5% of revenue and 6% of gross profit generated by
the manufacturing segment related to the sale of software.
During the last calendar quarter of 1998, the formal distribution
agreements with two customers that collectively accounted for 65% of Leisure
Time's total sales for the six months ended December 31, 1998, were terminated
or not renewed by Leisure Time in accordance with the provisions of the
agreements. Thereafter, Leisure Time directly began distributing its video
gaming machines in South Carolina. In addition, the two distributors continued
to purchase Leisure Time's video gaming machines for distribution in South
Carolina. For the three months ended March 31, 1999, the two distributors
accounted for approximately 18% and 8%, respectively, of Leisure Time's sales in
South Carolina. As the purchases of Leisure Time's video gaming machines by the
two distributors declined, Leisure Time has increased its direct sales of video
gaming machines in South Carolina. Accordingly, Leisure Time does not anticipate
that the termination of the distribution agreements with the two distributors
will materially adversely affect Leisure Time's sales in South Carolina.
Leisure Time's profit margin on the sale of video gaming machines in South
Carolina has improved as a result of eliminating use of third party distributors
in South Carolina in the fourth calendar quarter of 1998.
Leisure Time plans to continue to expand its market for the Pot O Gold
product line of video gaming machines through the development of new video
gaming machines and game software, additional marketing and obtaining licenses
in states in which it is not currently licensed. One such state is California.
Leisure Time understands that the office of the Governor of California is
currently negotiating gaming compacts with California-based Native American
tribes. If compacts are concluded, Leisure Time anticipates selling its Pot O
Gold product line of video gaming machines in California in the fourth quarter
of calendar 1999 or the first quarter of calendar 2000. Leisure Time believes
that sales to the various Native American tribes in California could have a
material positive effect on its revenue.
Leisure Time anticipates increasing sales of its Pulltab Gold machines as
more operators and regulators discover the benefits that video pulltab
technology provides to charitable organizations that sponsor pulltab and bingo
games. Leisure Time believes that the primary benefit that video pulltab
technology provides to charitable organizations that sponsor pulltab and bingo
games are:
- enhanced tracking and accountability through data collection devices
incorporated in each machine;
- extended hours of operation, thus increasing opportunities for revenue
generation; and
- improved earnings potential through enhancing the speed of play.
As the number of Pulltab Gold machines sold increases, so will the number
of cartridges that will need to be refilled and replaced by Leisure Time.
Leisure Time realizes a higher profit margin on cartridge sales than on machine
sales. The frequency of cartridges that need to be refilled depends upon how
quickly they are used. Leisure Time's experience to date is that the cartridge
in each Pulltab Gold machine is replaced approximately every two weeks.
Leisure Time acquired an equipment financing company in April 1999 to
provide financing to persons who purchase Leisure Time's video gaming, pulltab
and bingo machines. Financing in South Carolina had previously been provided by
Leisure Time's distributors.
If the referendum is passed in South Carolina in November 1999, video
gaming machine operators will be required to purchase software that will enable
their machines to gather data and communicate with a statewide central computer
system. Operators that fail to comply with these regulations may have their
games confiscated. Of the approximately 17,000 Pot O Gold product line of video
gaming machines in South Carolina, Leisure Time believes that approximately
15,000 will require upgrading to include a data communication device.
21
<PAGE> 26
Leisure Time expects that its data communication device will be approved
before December 1, 1999. Therefore, if the referendum is passed, by December 1,
1999 the South Carolina operators who own video gaming machines will be required
to enter into a contract to purchase a data communication device from Leisure
Time or IGT if the operators intend to continue to operate their video gaming
machines in South Carolina after January 31, 2000. IGT is a competitor of
Leisure Time. Leisure Time currently estimates that it will receive revenue of
approximately $5.1 million from the sale of the data communication device in
South Carolina by January 31, 2000. Leisure Time can provide no assurances that
its data communication device will be approved or that the sales will occur or
by what date they will occur.
Factors that could adversely impact Leisure Time's manufacturing revenue
and associated income include:
- failure of Leisure Time's data communication device to be approved in
South Carolina;
- failure of Leisure Time to achieve significant sales of its data
communication device in South Carolina;
- the discontinuance of gaming in South Carolina;
- decreasing demand for video machines in South Carolina and elsewhere;
- failure of new jurisdictions to permit gaming or video games operated by
charitable organizations;
- increasing competition that could affect the number of video machines
sold and decrease Leisure Time's gross margin; and
- regulatory changes or the belief that regulatory changes could be
implemented that limit gaming in jurisdictions where Leisure Time sells
its machines.
GAMING
Offshore Gaming Cruises
Description. Leisure Time's second largest revenue generating segment for
the nine months ended March 31, 1999, was offshore gaming cruises. Leisure Time
currently has two offshore gaming vessels. The first vessel, the Vegas Express,
was chartered under a long term arrangement in March 1998 from an independent
third party. Through June 1998, Leisure Time completed significant renovations
to the vessel and in July 1998 the vessel commenced offshore gaming cruises from
Gloucester, Massachusetts. Florida Casino Cruises owns the Vegas Express and was
purchased by Leisure Time in May 1999. Leisure Time's second vessel is the
Leisure Lady, which was purchased in January 1997 and since that time has
undergone repairs and renovations. Until Leisure Time locates a port for the
Leisure Lady, Leisure Time cannot predict when the Leisure Lady will commence
offshore gaming cruises. Leisure Time also owns the Biloxi Belle, a dockside
gaming vessel located on the Mississippi River that Leisure Time plans to
renovate when a site is located for the vessel.
Analysis and Trends. For the nine months ended March 31, 1999, Leisure
Time's offshore gaming cruise segment accounted for 8% of Leisure Time's total
revenue and 15% of gross profit. All of the revenue and gross profit were
derived from the operations of the Vegas Express.
The passenger count on the Vegas Express has increased during the 1999
summer season as compared to the 1998 summer season. Leisure Time believes that
at least five offshore gaming vessels are necessary to adequately service the
New England area and to allow Leisure Time to achieve certain anticipated
operating efficiencies. Leisure Time currently is investigating the possible
acquisition of additional vessels for this and other areas. It is planned that
the Biloxi Belle will commence dockside gaming during the third or fourth
quarters of the fiscal year ending June 30, 2000.
Factors that could adversely impact Leisure Time's results from operating
offshore gaming cruises include:
- the adoption of laws or ordinances by Gloucester, Massachusetts that
would require the Vegas Express to discontinue offshore gaming cruises
from Gloucester;
22
<PAGE> 27
- a failure to recoup startup and continuing costs of operating one or more
offshore gaming vessels;
- a failure to locate a port for the Leisure Lady;
- increased competition;
- adverse weather; and
- uninsured losses.
Gaming Route Operations
Description. Leisure Time's third segment of business is gaming route
operations. Gaming route operations involve the installation, operation and
servicing of video gaming machines under various types of revenue participation
agreements. Leisure Time first realized revenue from this segment in February
1999, when Leisure Time acquired a small number of gaming route locations in
South Carolina.
Analysis and Trends. Through March 1999, Leisure Time has received nominal
revenue from its gaming route operations. Leisure Time anticipates that
significant revenue can be generated from gaming route operations if Leisure
Time acquires or establishes a significant base of gaming route locations.
Leisure Time anticipates building this base through the acquisition or
establishment of gaming route operations. Leisure Time plans to acquire or
establish additional gaming routes in South Carolina if the voters of South
Carolina do not vote in November 1999 to eliminate gaming in South Carolina.
Additional states that Leisure Time has identified as potential markets for
gaming route operations include Louisiana, Montana and New Mexico. Leisure Time
is investigating several gaming route operations for acquisition and has
proposed the acquisition of one company that has gaming route operations in
South Carolina. However, Leisure Time has not finalized any agreements,
understandings or arrangements with respect to any acquisitions of additional
gaming routes.
Factors that could adversely impact Leisure Time's results of gaming route
operations include:
- changes in competitive or other conditions that cause location owners to
seek an increased share of revenue under revenue sharing arrangements;
- inability to acquire new routes or expand existing routes such that
Leisure Time can realize operating efficiencies associated with larger
route operations;
- a failure to realize sufficient revenue such that the cost of route
acquisitions exceeds Leisure Time's expected return on invested capital;
and
- adoption of laws that make gaming illegal or otherwise that adversely
affect gaming.
HOSPITALITY
Description. Leisure Time's fourth segment consists of a hotel overlooking
Lake Erie in the Cleveland, Ohio metropolitan area. Leisure Time is currently
renovating the hotel.
Analysis and Trends. When renovations of the hotel are complete, it is
expected to have approximately 210 rooms, a conference center, enclosed swimming
pool and other amenities. Leisure Time anticipates that the hotel will be open
in early 2000. Leisure Time plans that a portion of the space in the hotel will
be used by Leisure Time as a showcase to market Leisure Time's Pulltab Gold and
bingo machines to charitable organizations in Ohio.
Factors related to the hotel that could adversely impact Leisure Time's
operating results and financial condition include:
- a failure to borrow sufficient funds to complete the renovation of the
hotel;
- a failure to recoup the significant investment in the hotel;
- a failure to obtain an experienced manager of the hotel; and
- losses incurred in operating the hotel.
23
<PAGE> 28
REVENUE RECOGNITION
Leisure Time's accounting policy is to recognize manufacturing revenue as
the product is shipped.
Offshore gaming cruise revenue is the net win from gaming activities, which
is the difference between gaming wins and losses. Gaming revenue also includes
ticket sales and food and beverage revenue generated from each offshore gaming
cruise. Gaming revenue does not include the retail amount of tickets and food
and beverages provided gratuitously to customers, which if material, reduces
revenue as promotional allowances.
Revenue from gaming route operations is recognized at the time the play
activity takes place and is based upon the terms of the individual revenue
participation agreement.
No revenue has been generated from the hotel and no revenue was generated
from equipment financing until after March 31, 1999.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
total revenue of those items included in Leisure Time's consolidated statements
of operations.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total revenue............................................... 100% 100% 100% 100% 100%
Cost of goods sold.......................................... 56 56 58 56 50
--- --- --- --- ---
Gross profit................................................ 44 44 42 44 50
Selling, general and administrative expenses................ 29 19 30 19 33
Research and development costs.............................. 3 2 2 2 --
Stock based compensation.................................... -- -- -- -- 3
Interest expense, net....................................... -- 2 3 3 2
Litigation.................................................. -- -- 11 14 --
--- --- --- --- ---
Total operating expenses.......................... 32 23 46 38 39
Income (loss) before income taxes........................... 12 21 (4) 6 11
Income tax benefit (expense)................................ 5 (6) 1 (3) (4)
--- --- --- --- ---
Net income (loss)................................. 7% 15% 3% 3% 7%
=== === === === ===
</TABLE>
As indicated on page 30, information for 1996 represents the results of
operations for Leisure Time Technology (f/k/a U.S. Games, Inc.), a predecessor
to Leisure Time. No separate presentation or discussion is provided for these
statements because adjustments due to the acquisition make the results of
operations not comparable. The information for the fiscal year ended June 30,
1997 includes the results of operations for Leisure Time for the year ended June
30, 1997 and the results of operations for Leisure Time Technology from
September 13, 1996 (date of acquisition) to June 30, 1997.
Leisure Time had no revenue for the fiscal year ended June 30, 1996, but
incurred a net loss in the amount of $1.4 million due to general and
administrative expenses and interest.
24
<PAGE> 29
The following chart provides information as to material changes in Leisure
Time's historical statements of operations for the nine months ended March 31,
1999 as compared to the nine months ended March 31, 1998:
<TABLE>
<CAPTION>
STATEMENTS OF INCREASE PERCENTAGE
OPERATIONS ITEM (DECREASE) CHANGE REASON FOR CHANGE
- --------------- -------------- ---------- -----------------
<S> <C> <C> <C>
Manufacturing revenue $18.8 Million 84% Increased sales in South
Carolina due to a favorable
resolution of uncertainties
regarding the continued legality
of gaming in November 1998
Offshore gaming cruise revenue $ 3.7 Million N/A Commenced offshore gaming
cruises in July 1998
Cost of manufacturing revenue $ 9.4 Million 76% Increased sales in South
Carolina
Cost of offshore gaming cruise $ 0.4 Million N/A Direct costs incurred in
revenue connection with commencement of
offshore gaming cruises in July
1998
Selling, general and $10.7 Million 251% $6.0 million related to costs
administrative expenses associated with the Vegas
Express, including startup and
low season maintenance, payroll
and establishing a reservations
system; $4.0 million related to
increased manufacturing
overhead; $0.7 million related
to renovation of the Leisure
Lady
Research and development costs $ (.3 Million) (62%) Reduced research and development
Stock based compensation $ 1.4 Million N/A No comparable amount in prior
period
Interest expense, net $ 0.1 Million 19% Increased borrowings principally
related to refinancing of
Leisure Lady and acquisition of
Biloxi Belle
Litigation $(3.0 Million) N/A Judgment recorded in fiscal 1998
with no comparable amount in
fiscal 1999
Total operating expenses $ 8.9 Million 105%
Income taxes $ 1.3 Million 214% Increase in income in fiscal six
months correlates to increase in
taxes payable
Net income $ 2.4 Million 303%
</TABLE>
25
<PAGE> 30
The following chart provides information as to material changes in Leisure
Time's historical statements of operations for the fiscal year ended June 30,
1998, as compared to the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
STATEMENTS OF INCREASE PERCENTAGE
OPERATIONS ITEM (DECREASE) CHANGE REASON FOR CHANGE
--------------- -------------- ---------- -----------------
<S> <C> <C> <C>
Manufacturing revenue $(1.2 Million) (4%) Decreased sales in South
Carolina due to uncertainties
regarding the continued legality
of gaming
Cost of manufacturing revenue $(0.1 Million) (0.6%) Decreased sales in South
Carolina
Gross profit $(1.1 Million) (8%) Higher labor and material costs
and higher facility costs as a
result of a move of facilities
Selling, general and $ 3.1 Million 55% Increased activities, including
administrative expenses an increase of $.7 million in
salaries; $.5 million due to
increased costs associated with
the amortization for a full year
of the covenant not to compete
related to the purchase of
Leisure Time Technology in
September 1996; new corporate
facilities which resulted in
depreciation and amortization
costs of $.5 million; costs of
$.5 million associated with the
startup operations of the Vegas
Express; a $.2 million increase
in rent; and $.7 million due to
increased marketing and
investigation of other product
lines
Research and development costs $ 0.2 Million 37% Increased research and
development related to video
pulltab machines and to video
gaming machines for use in
foreign countries
Interest expense, net $ 0.1 Million 18% Increased borrowings primarily
related to refinancing of
Leisure Lady
Litigation $ 3.0 Million N/A Judgment recorded in fiscal 1998
Total operating expenses $ 6.5 Million 95%
Income taxes $(1.9 Million) (111%) Effective tax rate of tax
benefit in fiscal 1998 is less
than effective tax rate in
fiscal 1997 due to nondeductible
goodwill amortization
Net income $(5.6 Million) (120%)
</TABLE>
As discussed elsewhere in this prospectus, Leisure Time acquired Leisure
Time Technology in September 1996. Prior to the acquisition, Leisure Time was in
the development stage. Leisure Time Technology (f/k/a U.S. Games, Inc.) is
considered a predecessor to Leisure Time. The following chart provides
information as to material changes in Leisure Time's historical sales and cost
of sales for the combined year ended June 30, 1997, as compared to the fiscal
year ended June 30, 1996, for Leisure Time Technology. The combined year ended
June 30, 1997 includes the period from July 1, 1996 through
26
<PAGE> 31
September 13, 1996 (prior to the acquisition) and September 14, 1996 through
June 30, 1997 (after the acquisition). No other comparisons will be made due to
the differences created by the acquisition.
<TABLE>
<CAPTION>
STATEMENTS OF INCREASE PERCENTAGE
OPERATIONS ITEM (DECREASE) CHANGE REASON FOR CHANGE
--------------- ------------ ---------- -----------------
<S> <C> <C> <C>
Manufacturing revenue $4.2 Million 15% Increased sales in South Carolina
and to Native American tribes
Cost of manufacturing revenue $2.2 Million 14% Increased sales in South Carolina
and to Native American tribes
Gross profit $2.0 Million 16%
</TABLE>
Cost of manufacturing revenue and gross profit decreased in the period
after the acquisition from September 14, 1996 through June 30, 1997 as compared
to the period before the acquisition from July 1, 1996 to September 13, 1996.
This decrease was due primarily to an increase in depreciation expense resulting
from the use of the purchase method of accounting.
LIQUIDITY AND CAPITAL RESOURCES
Since the acquisition of Leisure Time Technology in September 1996, Leisure
Time has funded its operations primarily through revenue generated by the sale
of video gaming machines. Leisure Time has acquired its assets, such as the
Vegas Express and the Leisure Lady offshore gaming vessels and its hotel
property, through long term debt and cash available from operations. As of March
31, 1999, Leisure Time had a working capital deficit of approximately $313,000.
The following information relates to Leisure Time's sources and uses of
cash during the nine months ended March 31, 1999.
Leisure Time generated $5.7 million of cash from operations that resulted
primarily from:
- net income of $3.2 million;
- $1.4 million in stock based compensation
- $1.3 million in depreciation;
- a $1.2 million increase in accounts payable; and
- a $1.9 million increase in income taxes payable.
Leisure Time utilized $4.0 million in cash in investing activities related
primarily to the purchase of:
- the Biloxi Belle for $1.5 million;
- the hotel for approximately $1.0 million; and
- approximately $1.7 million of equipment for the manufacturing and gaming
segment.
Leisure Time received cash from financing activities that consisted of:
- receipt of proceeds of approximately $5.3 million of long term debt.
Leisure Time used this cash as follows:
- approximately $2.8 million to refinance the debt on the Leisure Lady;
- approximately $1.5 million to finance the purchase of the Biloxi Belle;
and
- approximately $1.0 million to finance the purchase of the hotel.
27
<PAGE> 32
Leisure Time paid approximately $5.4 million of the following debt:
- approximately $3.0 million to refinance the Vegas Express; and
- approximately $2.4 million to pay other debt at maturity.
Leisure Time's current financial plan requires capital to be used during
the next 12 months as follows:
- approximately $4.0 million for acquisition;
- approximately $2.0 million to develop a new Pot O Gold line of video
gaming machines and to develop new software;
- approximately $2.0 million to expand manufacturing and research and
development;
- approximately $9.5 million to renovate the hotel; and
- approximately $1.0 million as capital for the equipment financing
business.
Leisure Time believes that the proceeds from the offering together with
cash flow and additional debt financing it may obtain will be sufficient for it
to satisfy its short term capital needs.
Leisure Time has a $1.0 million working capital credit facility.
As of June 30, 1999, Leisure Time had:
- borrowed all $1.0 million under the working capital credit facility;
- obtained additional financing in the amount of $3.4 million by financing
a judgment it paid in May 1999; the amount financed must be repaid in
installments of approximately $308,000 each month for twelve months
commencing July 18, 1999;
- acquired additional debt in the amount of $2.4 million in connection with
the acquisition of Leisure Time Financial; and
- refinanced the Vegas Express acquired as part of the acquisition of
Florida Casino Cruises, Inc. in the amount of $4.8 million.
Leisure Time's long term liquidity needs will consist primarily of working
capital to pay for receivables and inventory as Leisure Time grows and to pay
for long term investments. These investments could include vessels used for
gaming operations, businesses that Leisure Time acquires, such as gaming routes,
and facilities in which to operate its business. Future profits retained in the
business as well as bank debt or additional equity financing will be necessary
to pay for these needs. To date, Leisure Time has obtained debt financing from
various financial institutions. There can be no assurances that Leisure Time
will obtain long term liquidity for the future from these or any other sources.
If unable to obtain its long term liquidity, then Leisure Time may have to scale
back its long-term growth strategy.
Leisure Time has entered into a license agreement to operate its hotel
under the Radisson franchise system. Leisure Time expects to secure bank or
other institutional financing to complete the planned hotel renovations. If
Leisure Time is unsuccessful in obtaining this financing at all or at
competitive rates, Leisure Time may elect to extend its renovation schedule or
to sell the hotel.
In January 1999, Leisure Time entered into an agreement with an
unaffiliated financing company to guarantee loans made to third parties to
purchase Leisure Time's video gaming machines. At May 31, 1999, such guarantees
totaled approximately $860,000. If Leisure Time is required to perform under
such guarantees with respect to a material principal amount, its liquidity could
be adversely affected.
INFLATION
Although Leisure Time cannot accurately anticipate the effect of inflation
on its operations, Leisure Time does not believe that inflation has had, or is
likely in the foreseeable future to have, a material effect on its financial
condition or operating results.
YEAR 2000 COMPLIANCE
Leisure Time is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000" problem
is pervasive and complex as virtually every computer
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operation will be affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems will properly recognize
date-sensitive information when 1999 changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
All of Leisure Time's material internal information technology and
non-information technology systems are year 2000 compliant. Leisure Time
expended approximately $75,000 in making all of its internal IT and non-IT
systems year 2000 compliant.
All of Leisure Time's primary suppliers have stated that they are year 2000
compliant, except for:
- the supplier of sheet metal for Leisure Time's video gaming machine
cabinets;
- an electronics supplier; and
- a supplier of electronics distribution software.
These suppliers represent less than 10% of Leisure Time's primary suppliers.
Leisure Time has not yet completed its full assessment of the potential effect a
failure of one or more of the three primary suppliers to be year 2000 compliant
will have on Leisure Time's operations. As a contingency plan, Leisure Time will
work with suppliers in reviewing and correcting identified problems. If
ascertained that a supplier will be unable to supply Leisure Time with needed
inventory, Leisure Time will divert purchases to alternate suppliers. Currently,
Leisure Time is defining and refining the list of approved alternate suppliers
as a precaution against a present supplier's inability to fulfill orders,
thereby minimizing, if not eliminating, disruptions to manufacturing. In the
unlikely event no approved alternate supplier can be identified, inventory
levels of the specific product will be reviewed with the present supplier and
raised to provide a buffer against potential outages. Leisure Time will continue
to monitor the lead-times of products and the market to ensure availability of
supplies. Leisure Time does not anticipate incurring significant additional
costs as a result of purchasing from alternative suppliers.
Leisure Time is including year 2000 compliance warranty language in all of
its purchase orders placed with its suppliers during the last two quarters of
1999.
INTRODUCTION OF THE EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and a new currency called the "Euro." These countries agreed to adopt the Euro
as their common legal currency on that date. The Euro trades on currency
exchanges and is available for non-cash transactions. The existing sovereign
currencies will remain legal tender in these countries until January 1, 2002. On
that date the Euro is scheduled to replace the sovereign legal currencies of the
member countries.
Leisure Time plans to sell its video gaming machines in countries that have
adopted the Euro. Leisure Time will evaluate the impact the implementation of
the Euro will have on its business operations, but does not expect the Euro to
have a material effect on its competitive position. Leisure Time can provide no
assurance that the implementation of the Euro will not have a material adverse
effect on its financial condition and operating results. In addition, Leisure
Time cannot accurately predict the impact the Euro will have on currency
exchange rates or its currency exchange risk. Leisure Time has historically
priced its foreign sales in dollars and, as a result, Leisure Time has had no
material need to hedge any foreign currency exposure. If competitive conditions
require Leisure Time to sell its products for the Euro or other currencies, it
may engage in currency hedging to manage this exposure in the future if
appropriate for it to do so.
ACCOUNTING STANDARDS NOT YET ADOPTED BY LEISURE TIME
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." Statement 132 revises employers'
disclosures about pension and other postretirement benefit plans. Statement 132
does not change the measurement or recognition of those plans, but requires
additional information on changes in benefit obligations and fair values of plan
assets and eliminates certain disclosures previously
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required by SFAS Nos. 87, 88 and 106. Statement 132 is effective for financial
statements with fiscal years beginning after December 15, 1997.
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During June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement 133 establishes new
standards by which derivative financial instruments must be recognized in an
entity's financial statements. Besides requiring derivatives to be included on
balance sheets at fair value, Statement 133 generally requires that gains and
losses from later changes in a derivative's fair value be recognized currently
in earnings. Statement 133 also unifies qualifying criteria for hedges involving
all kinds of derivatives, requiring that a company document, designate and
assess the effectiveness of its hedges. Statement 133 is required to be adopted
by Leisure Time in 2000.
Leisure Time has not determined what additional disclosures, if any, may be
required by the provisions of Statements 132, and 133 but does not expect
adoption of these statements to have a material effect on its results of
operations.
During April 1998, Statement of Position 98-5, "Reporting the Costs of
Start-Up Activities" was issued. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is required to be
adopted by Leisure Time in 1999. Upon adoption, Leisure Time does not anticipate
SOP 98-5 will have a material impact on its financial statement presentation,
financial position or results of operations.
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BUSINESS
Leisure Time:
- manufactures and distributes video gaming and video pulltab machines,
related software and replacement cartridges for video pulltab machines;
- owns and operates one and owns and plans to operate another offshore
gaming vessel and one dockside gaming vessel;
- owns and operates video gaming machines; and
- owns and is renovating a hotel which Leisure Time plans will feature
video pulltab and bingo machines operated by charities.
The chart below should help you understand Leisure Time's structure.
<TABLE>
<S> <C>
LEISURE TIME CASINOS & RESORTS, INC. is a Colorado corporation formed on
LOGO February 4, 1993. Leisure Time principally develops, manufactures and
sells programmable video gaming machines and related software.
LEISURE TIME TECHNOLOGY, INC. was acquired by Leisure Time in September
1996 and it develops, manufactures and sells programmable video gaming
machines and related software.
SOLUTIA GAMING SYSTEMS is developing new video games and new video game
software.
LEISURE TIME CRUISE CORPORATION conducts offshore gaming cruises on the
"Vegas Express" and plans to conduct offshore gaming cruises on the
"Leisure Lady."
LEISURE EXPRESS CRUISE, LLC owns Florida Casino Cruises, Inc.
FLORIDA CASINO CRUISES, INC. owns the "Vegas Express" offshore gaming
vessel.
LEISURE BELLE CRUISE, LLC owns and is refurbishing the "Biloxi Belle," a
dockside gaming vessel for use in Mississippi.
LEISURE TIME GAMING, INC. owns One Eyed Jacks Gaming, Inc. and
distributes video gaming machines in South Carolina.
ONE EYED JACKS GAMING, INC. operates a video gaming route in which it
shares the revenue with location operators.
LEISURE TIME HOSPITALITY, INC. is renovating a hotel property that it
anticipates will include space where Leisure Time will be able to display
its video pulltab and bingo machines for marketing to charities.
LEISURE TIME FINANCIAL CORP. provides equipment financing for purchas-
ers of Leisure Time's products and other equipment.
LEISURE TIME INTERNATIONAL, LTD. operates as a foreign international
sales corporation.
</TABLE>
All of the entities are wholly-owned by Leisure Time Casinos & Resorts,
Inc.
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INDUSTRY BACKGROUND
U.S. Gaming Machine Market. Bear Stearns & Co. Inc. has estimated in an
update to its 1998 Global Gaming Almanac that there were approximately 417,000
gaming machines installed in the United States at the end of 1998. The estimates
in the Almanac are based on industry data gathered by Bear Stearns. The industry
data will continue to be updated by Bear Stearns. However, after the date of
this prospectus, Leisure Time does not intend to update the estimated Bear
Stearns' information or provide other similar estimated information. In 1997,
traditional slot machines accounted for approximately 64% of the total U.S.
gaming machine market. Video gaming machines, like those manufactured and sold
by Leisure Time, accounted for approximately 32% of the total U.S. gaming
machine market. The following table represents Bear Stearns' estimate of the
gaming machines installed in the U.S.:
<TABLE>
<CAPTION>
1996 1997 1998E 1999E 2000E 2001E 2002E CAGR*
------- ------- ------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INSTALLED BASE (BEGINNING OF PERIOD).... 321,386 367,340 401,516 416,705 445,565 453,740 462,965
New Machines............................ 45,955 34,176 14,545 27,860 9,175 9,225 23,875
Replacement Machines.................... 30,204 31,222 25,068 34,889 38,511 40,093 43,438
INSTALLED BASE (END OF PERIOD).......... 367,340 401,516 416,705 444,565 453,740 462,965 486,840 12.4%
</TABLE>
- ---------------
* Compound annual growth rate.
Source: Bear Stearns & Co. Inc. estimates
The following table represents Bear Stearns' forecast of the demand for new
gaming machines in the U.S.:
<TABLE>
<CAPTION>
1996 1997 1998 1999E 2000E 2001E 2002E CAGR*
------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL MACHINE DEMAND........................... 76,159 65,398 39,613 62,749 47,686 49,318 67,313
New Machines................................... 45,955 34,176 14,545 27,860 9,175 9,225 23,875 5.0%
% of Total..................................... 60.3% 52.3% 36.7% 44.4% 19.2% 18.7% 35.5%
Replacement Machines........................... 30,204 31,222 25,068 34,889 38,511 40,093 43,438 7.4%
% of Total..................................... 39.7% 47.7% 63.3% 55.6% 80.8% 81.3% 64.5%
</TABLE>
- ---------------
* Compound annual growth rate.
Source: Bear Stearns & Co. Inc. estimates
Leisure Time believes that traditional slot machines are currently losing
market share to video gaming machines. Leisure Time believes that the increased
demand for video gaming machines results from:
- legalization of gaming in new jurisdictions;
- casino expansion; and
- replacement of older machines.
Demand for gaming equipment is influenced by the legalization of gaming in
the U.S. Leisure Time believes that the increased legalization and popularity of
gaming as a component of the "leisure time" industry has presented growth
opportunities for Leisure Time. In the last decade, the introduction of
riverboat gaming in the Midwest U.S., the expansion of Native American casino
gaming, the growth in state markets and government-sponsored gaming have
expanded markets for video gaming machines. While Leisure Time anticipates
future growth in the gaming industry, the rate of growth in the U.S. market has
diminished since the substantial growth experienced in the early 1990's. The
further expansion of gaming will continue to be the subject of public debate
with legalization typically requiring a public referendum or other legislative
action.
Leisure Time believes that video gaming machines have a useful life cycle
of approximately seven to ten years. Replacement cycle times are driven by
market preferences and technical advancements and may shorten the typical life
cycle. Leisure Time believes that replacement occurs as a result of
technological advancements, new designs, graphic improvements and improved audio
quality, the development of new games, general wear and tear from use and the
evolving preferences of players. The replacement market has
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also expanded due to increased competition in the industry to provide customers
more entertaining and sophisticated games than traditional slot machines.
Replacement Market. Leisure Time has concentrated its sales and marketing
efforts in South Carolina because it has achieved its greatest success in
selling its video gaming machines in South Carolina. As a result, most of its
video gaming machine revenue is derived from South Carolina. According to the
South Carolina Video Game Machine quarterly report for the 3rd and 4th quarters
of 1997, there were approximately 30,000 video gaming machines in operation in
the state. According to the same report, of these 30,000 video gaming machines,
approximately 17,000 were video gaming machines manufactured by Leisure Time.
This represents a better than 50% market share in video gaming machines for
Leisure Time in South Carolina.
Assuming gaming is not discontinued in South Carolina, Leisure Time
believes that there is a market opportunity as operators in South Carolina and
elsewhere consider replacing their existing video gaming machines. Leisure Time
believes that operators will evaluate available video gaming and other machines
and will, in certain cases, consider new types of machines with the objective of
maximizing revenue. Bear Stearns & Co. Inc. estimates the demand for the
replacement market in the U.S. was approximately 30,000 machines in 1996, and
will grow to approximately 43,000 machines in 2002. Conversely, Bear Stearns
estimates that the demand for new machines (from new properties and expansions)
was approximately 46,000 machines in the U.S. in 1996, declining to
approximately 24,000 machines in 2002. This suggests that the replacement market
will represent a greater proportion of total gaming machine sales in the future.
Demand for replacement products is dependent, in part, upon the willingness of
owners or operators to incur the costs associated with replacing existing gaming
machines with new machines.
The existence of Leisure Time's video gaming machines that operators may
decide to replace in South Carolina and elsewhere, coupled with the Bear
Stearns' estimate that there are 417,000 installed gaming machines in the U.S.,
creates an opportunity for the sale by Leisure Time of new video gaming machines
to replace currently installed machines.
STRATEGY
Leisure Time's objectives are to be a leading provider of video gaming,
pulltab and bingo products and related software and to expand its gaming
operations to increase recurring revenue. Key strategies to achieve Leisure
Time's objectives include:
Increase Installed Base of Pot O Gold, Pulltab Gold and Bingo Product Lines
Leisure Time intends to continue increasing its installed base of video
gaming and pulltab products by:
- continuing to market its Pot O Gold product line to newly established
casinos and route operators both in existing markets and in jurisdictions
in which gaming is legalized, including to Native American tribes;
- selling the Pot O Gold product line to replace existing video gaming
machines;
- placing Pot O Gold, Pulltab Gold and bingo products in locations owned or
operated on a revenue sharing basis by Leisure Time;
- seeking to expand its market for Pulltab Gold and bingo products by
promoting its video pulltab and video bingo machines for use by
charitable organizations;
- providing casino and route customers with equipment financing to
facilitate increased sales; and
- offering a wide variety of interactive touchscreen video games featuring
new designs, graphic improvements, improved audio quality, sophisticated
data communication capabilities, customized formats and features designed
to increase player appeal.
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Leverage Growth in Installed Products to Increase Recurring Revenue From
Software Sales
To date, most of Leisure Time's revenue has been derived from the sale of
video gaming machines. As its installed product base has grown, Leisure Time has
experienced an increase in customers for, and sales of:
- newly developed game software;
- software enhancements for existing games; and
- cartridge replacements for video pulltab machines.
Because software and cartridge sales have a lower associated cost of goods
sold than Leisure Time's other products, Leisure Time believes growth in
software and cartridge sales will have a favorable impact on Leisure Time's
gross profit. In addition, growth in the installed base of machines offers
Leisure Time the opportunity to spread software research and development costs
over a wider base, thereby reducing development costs per machine or game sold.
Leisure Time believes it can leverage its growing installed base of video gaming
machines to expand software and cartridge sales to existing and new customers.
Continue to Identify and Develop New Touchscreen Video Games and Game
Enhancements
Leisure Time intends to continue to pursue the development and introduction
of new and enhanced video games designed to increase player appeal. The
objectives of Leisure Time's continuing research and development activities are
to:
- develop new video games and game enhancements using common platforms,
thereby enhancing manufacturing efficiencies and accelerating development
times;
- identify new games or enhancements with substantial player appeal;
- enhance player entertainment using improved sound and graphics;
- incorporate attractive bonus features and local game preference options;
- increase operator appeal through reliability improvements and use of
sophisticated security and data communication devices; and
- promote early identification of trends in patron preferences.
Leisure Time believes that achievement of these objectives may result in
increased revenue, creation of economies of scale and improved earning power for
Leisure Time's video gaming, video pulltab and video bingo machines.
Increase Revenue Through Addition of Gaming Vessels and Passengers
Leisure Time expects to commence the operation of and to acquire additional
offshore gaming vessels in the future that are expected to be based in ports
near that of its currently operating offshore gaming vessel. By achieving
density within adjacent markets sharing similar demographic profiles, Leisure
Time will seek to:
- increase its rate of market penetration;
- spread the costs of centralized services such as reservations,
advertising and promotion and management and training over a larger base
of vessels;
- obtain volume pricing discounts for fuel, food and beverage and port
services;
- concentrate its marketing and promotional activities to develop loyalty
among patrons and thereby increase revenue; and
- expand the installed base of Leisure Time video gaming machines to
broaden market awareness of its products.
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As Leisure Time expands its offshore gaming vessel operations, Leisure Time
anticipates increasing its market presence, realizing economies of scale and
utilizing its cumulative experience to achieve operating efficiencies. Subject
to licensing, Leisure Time expects to initiate dockside gaming operations in
Mississippi and may increase additional dockside installations as it gains
operating experience in this market.
Expand Gaming Machine Route Operations
Leisure Time acquired its first gaming machine route in South Carolina in
February 1999. Leisure Time expects to expand its gaming route operations
through:
- acquisition of additional locations in South Carolina if gaming is not
discontinued in South Carolina;
- acquisition or establishment of routes in Louisiana, Montana, New Mexico
and selected other states; and
- addition of route locations in establishments not currently served by
existing route operations.
Leisure Time believes that creation of additional gaming route operations
will offer benefits such as:
- recurring revenue;
- increases in market share for the Pot O Gold product line, thereby
facilitating additional software sales; and
- opportunities for Leisure Time to increase video gaming product sales to
the replacement market.
Promote Acceptance and Use of Video Pulltab and Bingo Products
Leisure Time intends to complete the renovation of its hotel overlooking
Lake Erie in early 2000. Leisure Time anticipates that a portion of the space in
the hotel will be used to showcase Leisure Time's video pulltab and video bingo
machines for marketing to charities. Leisure Time's video pulltab machines
offer, and Leisure Time's video bingo machines will offer, a number of benefits
over traditional paper pulltabs and bingo games, including:
- enhanced tracking and accountability through data collection devices
incorporated in each machine;
- extended hours of operation, thus increasing opportunities for revenue
generation; and
- improved earnings potential through enhancing the speed of play.
Leisure Time will seek to use its hotel facility to demonstrate these
benefits for charitable organizations active in these forms of fundraising,
thereby:
- increasing its market presence;
- increasing revenue from machine sales; and
- increasing recurring revenue from software and cartridge sales.
Selectively Explore Domestic Acquisition and International Expansion
Opportunities
Leisure Time expects to pursue acquisitions of domestic companies engaged
in:
- development and sale of software designed for the gaming market;
- operation or ownership of offshore gaming vessels;
- gaming route operations; and
- purchase, ownership or licensing of rights to proprietary games or
enhancements.
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Leisure Time will selectively evaluate potential international expansion
opportunities as they become available. Although Leisure Time has proposed the
acquisition of a company that has gaming route operations, Leisure Time
currently has no formal agreement for any acquisition. Leisure Time's
acquisition strategy will continue to focus on enhancing video machine sales,
promoting recurring revenue through increased software sales and gaming
operations and offering leading technologies in the video gaming industry.
POT O GOLD PRODUCT LINE
Leisure Time's principal video gaming machine is the Pot O Gold product
line. The retail price for a video gaming machine in the Pot O Gold product line
varies from approximately $5,400 to approximately $8,500 depending on the
features included. This product line offers three video gaming machines, the Pot
O Gold, Shamrock Poker and Keno Gold, which share a common central processing
unit. The common central processing unit contains all of the components of a
single video gaming machine with software and cosmetic variations. Leisure
Time's common central processing unit strategy allows:
- a streamlined manufacturing process with lower inventories;
- the versatility to develop new games through software updates and
cosmetic changes; and
- a synergy between all of the games in the product line where the
improvement of one game is useable to improve other games.
Leisure Time's principal video gaming machine, the Pot O Gold, features a
multi-game video package, including poker, blackjack, keno, slots and bingo,
that can be chosen by the operator from a library of approximately 50 games. The
Pot O Gold is designed to enable the player to have a desirable level of
interactivity without excessively slowing play. Leisure Time believes that the
Pot O Gold provides a balance of player interactivity and game sequence that
results in desired entertainment quality and continuing player interest to
maximize revenue for the operator. The Shamrock Poker and Keno Gold video gaming
machines that are a part of the Pot O Gold product line are similar to the Pot O
Gold with different games and cosmetics.
The current technology in the Pot O Gold product line is designed to offer
the operator game play configurations that Leisure Time believes are unmatched
by other current video gaming machines. The Pot O Gold product line has the
ability to display up to 12 games represented by icons on the video monitor. The
player may choose any one game for individual play from this menu. Each game
program may be set by the operator for up to six different percentages of the
total amount bet that will be paid to the player. This enables the operator to
select the desired percentage payout of each game for the targeted market.
A standard feature of the Pot O Gold product line, usually an option
offered at extra cost by other manufacturers, is a built-in LED display located
above the video monitor which offers a "progressive jackpot." The "progressive
jackpot" is a prize that a player may win by striking a combination of symbols
or cards. The "progressive jackpot" is set at a base amount that varies
according to the value of the coin or token denomination for which the machine
is set. The base amount and the progressive rate of each game is easily
configured by the operator.
Leisure Time believes that the Pot O Gold product line is attractive to
operators because of its:
- large library of approximately 50 games from which the operator may
choose;
- ability to utilize different percentage payouts set by the operator;
- ability to display 12 games from which the player may choose;
- multi-colored LED display and progressive jackpot feature; and
- ability to provide an interactive experience for the player.
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Leisure Time believes the negative attributes of the Pot O Gold product
line as compared with other video gaming machine products are:
- the Pot O Gold has a slightly larger cabinet than most other video gaming
machines which limits the number of Pot O Gold machines that an operator
is able to place in a given location;
- the bill acceptor on the Pot O Gold is currently located on the left side
of the machine whereas the industry standard is to have the bill acceptor
located on the right side and the difference may limit the earning
potential of the machine; and
- the Pot O Gold has one basic cabinet style whereas most manufacturers
offer a variety of cabinet styles and the one cabinet style may limit the
operator in the placement of the machines.
Leisure Time believes that it has developed a successful formula that
creates a higher level of entertainment and video game appeal that generates
player loyalty and revenue for operators. Leisure Time carefully evolves its
product designs to take advantage of the latest technology and materials with a
modern look and play that still retains the critical elements of the Pot O Gold
product line identity.
Leisure Time has implemented a product quality construction and design
improvements program and in the third quarter of 1999 plans to introduce its
current Pot O Gold product line with:
- new graphic art on the machine glass;
- signs that are located above the machines to identify the machines; and
- new game software graphic presentations of the most popular games which
will feature additional variations of game pay-table configurations to
meet new market requirements.
Also, in the third or fourth quarter of 1999, Leisure Time plans to introduce
its current Pot O Gold product line in upgraded and redesigned cabinets. The new
cabinets will include newly designed upright cabinets in the traditional "round
top," "square top" and "no top" versions and will feature two versions of the
front of the machine which will enable the bill acceptor to be placed on the
right or left side of the machines as specified by route operators and by casino
operators. The new designs will be engineered to house the latest industry
standard bill acceptors and other hardware to facilitate the interface and
integration with casino and route operations.
The Pot O Gold product line library of games has been developed to meet
various market and jurisdictional requirements in the United States and
internationally. Leisure Time is designing and developing new game software for
its video gaming machines. The new games will be sold separately to owners of
Leisure Time's video gaming machines.
Leisure Time believes that the experience it has gained from its current
markets will assist it in marketing the Pot O Gold product line in other
jurisdictions.
New Pot O Gold Video Gaming Machine. Leisure Time is currently developing a
new Pot O Gold video gaming machine. Leisure Time anticipates that the new Pot O
Gold video gaming machine will be available in the first quarter of 2000.
Leisure Time's Pot O Gold video gaming machine has historically been based upon
various combinations of poker, blackjack, keno, slots and bingo style video
games that are custom tailored for each gaming jurisdiction according to
regulatory requirements and player preferences. The new video gaming machine
will incorporate this and other desirable features of the current Pot O Gold
video gaming machine. The new video gaming machine will also feature updated
memory and software functions for the latest integrated banknote currencies,
validation acceptors and industry standard required interfaces to all major on
line data systems providers.
Leisure Time plans to incorporate personal computer technology in its next
generation of video gaming machines because personal computer technology:
- expedites the game development process by utilizing commercially
available hardware and software development tools which are readily
available from many different suppliers;
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- is cheaper than custom technology;
- is familiar to operators and players alike; and
- offers increased speed, video resolution and color depth and compact disk
audio quality.
Leisure Time believes that the newly redesigned video gaming machines will
enable it to expand its market, including in traditional casinos and in
jurisdictions where Leisure Time is or plans to be licensed. Most or all of the
jurisdictions where Leisure Time has applied for licenses or plans to apply for
licenses require that all gaming machines meet the hardware and software
configurations of the applicable jurisdiction. These requirements are dictated
by the computer system installed in the casino property that links all installed
machines to collect data for security, financial and maintenance information.
PULLTAB GOLD PRODUCT LINE AND PLANNED VIDEO BINGO PRODUCT LINE
Pulltab Gold Product Line. Leisure Time has developed a product line of
video machines that offer the popular game of pulltabs. The Pulltab Gold video
machine is Leisure Time's first pulltab product. The retail price of a Pulltab
Gold video machine will be approximately $3,995. It was designed to address what
Leisure Time believes are the growing concerns of pulltab operators and
regulators. Frequently, paper pulltabs are used in environments that require
integrity and accountability levels that cannot easily be achieved with paper
pulltabs. Pulltabs are often sold by attendants or sales representatives that
receive gratuities. Leisure Time believes that this invites corruption because
the attendants or sales representatives coach patrons to purchase from a
particular box or to avoid a box that has no large winners left. Some pulltab
boxes purchased for resale can be manipulated to pay out less by removing some
of the winners. The winners are often shipped from the factory bound separate
from the losers. Ensuring that the proper funds are received for pulltabs sold
is often another labor-intensive activity, increasing the overhead of the
operation.
Leisure Time's Pulltab Gold video machine provides pulltab cartridges that
cannot be manipulated and automates many of the tasks associated with paper
pulltab operations. Leisure Time believes that the Pulltab Gold video machine
increases not only the integrity of the game, but also the profit potential for
the operator. Leisure Time believes that regulators and operators alike are
realizing that there are no solid arguments against the application of
technology, such as that contained in the Pulltab Gold, to bring heightened
security and play appeal to the game.
The Pulltab Gold video machine is comprised of one or more
touchscreen-based video pulltab dispensers that are used by patrons to play the
game of pulltabs. Each machine has a minimum of a bill acceptor for taking cash
and a printer for either printing pulltabs or vouchers in high security
situations. Instead of using printed pulltabs for determining gameplay outcomes,
the Pulltab Gold system utilizes encrypted electronic pulltabs stored inside
operator-replaceable cartridges. Each cartridge currently contains 40,000
pulltabs. Leisure Time believes that these cartridges add significantly to the
simplicity and security of the Pulltab Gold machine. Cartridges are recyclable
and are filled in random order at Leisure Time's manufacturing facility. No one
knows the sequence of the various winners and losers. Encrypted data is used to
discourage hackers from manipulating the cartridges. Leisure Time sells the
replacement cartridges directly to Pulltab Gold operators. The retail price of a
replacement cartridge is approximately $800, or $0.02 per pulltab.
Each Pulltab Gold video machine can be configured to contain its own set of
cartridges or a number of the Pulltab Gold video machines can be linked into
what is called a bank. Only one of the machines contains the cartridges and is
considered the master machine. The other machines in the bank are called slaves
and receive pulltabs from the master machine. This allows everyone playing the
same game to play out of the same cartridge and to compete for the available
prizes. Leisure Time believes that this is an important aspect of many pulltab
operations, since it puts players in competition with each other, not with the
pulltab operator.
To help ensure a smooth operation, the cartridges in the master machine are
organized as pairs. One cartridge is opened for use and when that cartridge is
emptied the machine automatically opens the other in the pair. This allows the
operator to replace the empty cartridge without disrupting play and without the
players knowing that a new cartridge was opened.
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Since it is common for a pulltab operation to offer many different games,
the Pulltab Gold video machine can accommodate up to eight different games at
one time, meaning that up to sixteen cartridges can be loaded into the master
machine. For added flexibility, the choice of how many games and which games are
available on each machine is separately configurable. Games installed in the
master do not have to be enabled for play on the master. If desired, an
eight-machine bank can be configured to have each machine playing only one game,
with a different game on each machine. Conversely, all eight machines could have
all eight games available. The bank size limit for cartridge-based machines is
32, but Leisure Time recommends that there be no more than 20 machines on a bank
if the master machine is going to be available for play.
There are approximately 30 graphics sets for the Pulltab Gold from which an
operator may choose. Leisure Time can match any of these graphics sets to any of
over 150 lot payables that have been created for various pulltab games. Leisure
Time can also customize pulltab cartridges to a particular jurisdiction's
regulatory requirements.
Video Bingo. Leisure Time is currently developing a video bingo machine. In
1997 Leisure Time believes that there were approximately 37,000 licensed bingo
halls operating in 46 states and the District of Columbia. Most people learn to
play bingo in church basements or at charity fund-raisers. Bingo is one of the
oldest and most popular types of entertainment in the country and provides
revenue for both suppliers and sponsors. Leisure Time believes that bingo is
exciting because it involves risk, reward, and in many cases, big dollar prizes
all housed in a unique social environment that people value. Current laws are
changing to allow bigger prizes and faster games and technology is now capable
of delivering those games.
Traditional bingo is played on a paper bingo card. Players "mark" the card
face with an ink dauber when the bingo number is called. Most skilled paper
bingo players can manage up to 20 paper cards a time. As players are able to
play more cards at one time, their odds of winning greatly improve.
Leisure Time believes that video bingo combines the excitement of
traditional paper bingo with the advanced multimedia and networking capabilities
of the latest computers. With the aid of these computers, called player
stations, video bingo players are capable of playing as many as 600 bingo cards
simultaneously. Leisure Time believes that, because a significant majority of
players who use video bingo player stations also purchase paper cards, the use
of Leisure Time's video bingo player stations will generate additional revenue
for bingo hall operators. Leisure Time is developing the following video bingo
related products:
- Frame Relay Network. Leisure Time has developed and plans to implement a
state-of-the-art telecommunications infrastructure that will be used as
the backbone for Leisure Time's wide area network, progressive jackpot
video bingo games. With this network Leisure Time anticipates being able
to monitor, service and upgrade its products from a single location. The
frame relay network may also be used to deliver other services such as
e-mail, Internet access, video-conferencing, software upgrades and voice
communications.
- Progressive Jackpot Bingo Game. In the third quarter of 1999, Leisure
Time expects to have developed a nationwide, progressive jackpot bingo
game. By linking player stations and progressive jackpot prize pools
locally, regionally and nationally into a single bingo game, Leisure Time
will be able to offer prizes surpassing those offered by single bingo
halls and casinos. Leisure Time expects these progressive jackpots to
enhance player attraction, generate increased revenue for the operator
and promote long-term player participation. All of the development for
the nationwide, progressive jackpot bingo game is completed. The
development of animation, data base and accounting software is in
process.
- Network Operations Center. Once the progressive jackpot bingo game is
completed, Leisure Time plans to complete its network operations center.
Leisure Time expects the network operations center to be completed in the
third quarter of 1999. The network operations center will maintain
Leisure Time's frame relay communications network. This network
operations center will also monitor Leisure Time's wide area networked,
progressive jackpot video bingo games.
- Sit-Down Player Station. Leisure Time anticipates that its video bingo
player station will be available in the third quarter of 1999. The video
bingo player station is simply a hardware modification to the
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nationwide, progressive jackpot bingo game. The standard sit-down player
station will use 15" and 17" monitors that will be mounted on a table
where players mark bingo cards. This will give players the ability to
play traditional paper bingo concurrently with video bingo. Leisure Time
also plans to develop a next-generation video bingo sit-down cabinet
using three full-color, 15" touch-screen LCD panels that will be mounted
side-by-side. With this design, Leisure Time will be able to offer 200%
more viewable area than that of a conventional 19" sit-down cabinet. The
casino operator will have control over the "attraction mode graphics."
Instead of manually replacing static attraction graphics, using software,
the operator will be able to display full-motion advertisements on the
LCD panels. Leisure Time believes that this design will offer durability,
longevity, flexibility and esthetic appeal all in a footprint that is
smaller than that of today's existing 19" sit-down cabinets.
- Player Tracking/Cashless Gaming. In the fourth quarter of 1999, Leisure
Time plans to have developed a player tracking system for its video bingo
player stations. The player tracking system will be developed after the
jackpot bingo game is completed. This system will store player account
information, player tracking information and the player's personalized
game preferences. A copy of the player's account information will be
stored in a high-performance database that is updated in real time. Any
time the player is logged into a player station, the database will
automatically update the player's account information including credits,
spendings, winnings and player points. This information will be available
to the player from any player station. The database will be updated,
through Leisure Time's high-speed frame relay network, to all
participating locations. This will allow the player to use the player's
player card to play Leisure Time's video bingo games at any participating
location. The casino operator will be able to use player tracking to
monitor its player base and for marketing and promotions. This system
will be the basis for implementing a cashless gaming environment.
- Enhanced Player Services. In the fourth quarter of 1999, Leisure Time
plans to offer enhanced services to the player. The enhanced player
services is a software feature that will be developed after the
completion of the progressive jackpot bingo game. These services will
enable the player to order food, drinks or merchandise directly from the
player station, monitor the player's point information and make
reservations for future gaming events. Other services may include
Internet access, personalized e-mail accounts and e-commerce capabilities
directly accessed from the player station. The player will be able to
access the services offered and still continue to play without
interruption.
- Handheld Video Bingo Units. In the first quarter of 2000, Leisure Time
plans to have developed a wireless, touch-screen handheld video bingo
player station. The handheld video bingo player station is basically the
progressive jackpot bingo game with fewer features. This station will
give the video bingo player the same advantage over the paper bingo
player as the standard sit down station with the added benefits of
portability and a smaller footprint. The station will be offered with
either a monochrome LCD panel or a full color LCD panel. Leisure Time
anticipates that various video bingo games will be able to be played from
any location within a casino using the handheld unit.
- Continuing Game Development. In the first quarter of 2000 Leisure Time
plans to continue developing new interactive linked video bingo games
with even larger progressive jackpots. These games will operate on
Leisure Time's frame relay network and will be available for play 24
hours a day, 365 days a year. They will include such features as
multi-game and multi-level buy-in, ever-increasing progressive jackpot
prizes, player interaction and fast-paced game play. As facilitator of
these linked games, Leisure Time has the opportunity to enter into
revenue sharing arrangements with each facility operating these games. In
addition to the revenue from the initial sale of games, Leisure Time will
have the opportunity to generate revenue directly proportional to
gameplay for the life of the game. Leisure Time also expects reduced
development cost and time for these games due to the versatility of
Leisure Time's universal gaming platform and Leisure Time's planned
high-speed frame relay network backbone.
Leisure Time's estimates of the completion dates for the above items are
based upon the various stages of development of each of the above items.
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SOFTWARE SALES AND DEVELOPMENT
Assuming passage of the referendum in South Carolina in November 1999,
Leisure Time believes that it will realize material revenue during the fourth
calendar quarter of 1999 and the first calendar quarter of 2000 through the sale
of a data communication device that may be required to be installed into all
video gaming machines in South Carolina and through the sale of year 2000
software upgrades for its installed video gaming machines.
Data Communication Device. If a referendum is passed in South Carolina on
November 2, 1999, all gaming devices in South Carolina will be required to be
connected with the state's central computer system. This proposal has required
the development of a data communication device that will collect and forward
accounting information to the system. Leisure Time has responded to this
requirement with its latest product, the N-DAT 1000(TM). The retail price of the
N-DAT 1000(TM) will be approximately $1,895. Leisure Time has worked closely
with an independent testing laboratory for the gaming industry to ensure that
development efforts closely follow regulatory requirements. The laboratory is
testing the N-DAT 1000(TM) and Leisure Time expects approval before December 1,
1999. Leisure Time can provide no assurances that its data communication device
will be approved. Of the approximately 30,000 video gaming machines in South
Carolina, approximately 17,000 are Pot-O-Gold product line machines. A data
communication device is required for every five video gaming machines. Further,
under the proposed law, each Pot O Gold will need new software that sets single
payout percentages per machine. The retail price of the software will be
approximately $795. Leisure Time believes that due to its established customer
base in the state, sales of the N-DAT 1000(TM) and new payout software will be a
significant source of revenue. No N-DAT 1000(TM)'s have been sold. If sales
commence, Leisure Time expects revenue of up to approximately $5.1 million from
the sale of the N-DAT 1000(TM) and that most of the revenue will be realized by
January 31, 2000. Leisure Time provides no assurances as to the amount of
revenue or by when the revenue will be received.
Year 2000 Software. Leisure Time has developed and is selling software
upgrades for its video gaming machines which enable the machines to operate past
the year 2000. Leisure Time is making this year 2000 software upgrade available
to the owners of its currently installed video gaming machines. The retail price
of the year 2000 software upgrade is approximately $500.
Software Development. In addition to Leisure Time's sales of the data
communication device and year 2000 software, Leisure Time anticipates receiving
recurring revenue from the sale of software upgrades which each currently have a
retail price of approximately $750. Leisure Time believes that it has created
games that are user friendly, entertaining and comfortable to play for extended
periods of time and that instill in the player a desire to return to play again.
Leisure Time plans to incorporate the aspects of its current software into its
future generation of games.
Leisure Time believes that the basis for competition in most gaming markets
is driven by two primary elements: the costs of the gaming equipment and the
potential profit to the location operator. Many of the games developed by
Leisure Time are offered as software upgrades. These software upgrade packages
allow the operator to change existing games and cabinet glass display artwork
without changing the actual video gaming machine. For many operators, this
process can extend the life of the video gaming machine. Leisure Time believes
that as its base of installed video gaming machines increases, its market for
software upgrades will also increase. Leisure Time's software upgrades have a
greater gross margin than sales of its video gaming machines. Software
engineering personnel are being added to help Leisure Time attain its goal of
developing approximately six new games per year for existing video gaming
machines. Leisure Time plans to continue developing new game software to support
its current Pot O Gold product line for approximately 2 to 3 years. After that
time, owners of the current Pot O Gold video gaming machine will have to
purchase a new circuit board from Leisure Time to be able to use new game
software developed by Leisure Time. Leisure Time plans to introduce the next
generation of its Pot O Gold video gaming machine with new systems and games in
the second quarter of 2000.
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RESEARCH AND DEVELOPMENT EXPENSES
During the fiscal years ended June 30, 1996, 1997 and 1998 and during the
nine months ended March 31, 1999, Leisure Time spent $0, $469,000, $642,000 and
$174,000 on research and development, all of which was conducted and paid for by
Leisure Time.
MANUFACTURING AND SERVICING
Leisure Time's manufacturing facility is approximately 40,000 square feet.
In a work week of four ten-hour days with 45 employees and a supervisory staff,
Leisure Time is able to produce up to 400 video gaming machines. Leisure Time
conducts both sub-assembly and final assembly operations. Leisure Time's
manufacturing operation builds the components at the sub-assembly stage and, in
turn, the sub-assemblies are placed in stations where they are incorporated into
a final assembly or cabinet. As the cabinet moves along the production line from
station to station, sub-assembled components, complete components or parts are
built into the cabinet. The completed video gaming machine is then tested to
ensure the software is functioning properly and all operating standards are met.
After testing, the video gaming machine is packaged for shipment to the
customer.
As of June 30, 1999, Leisure Time had a backlog of orders of approximately
$8.4 million that Leisure Time believes is firm. Leisure Time anticipates that
all of the backlog at June 30, 1999, will be filled by the end of August 1999.
Leisure Time believes that backlog may not be a meaningful indicator of revenue
expected in future periods. As of June 30, 1998, Leisure Time had a backlog of
orders of approximately $.3 million.
As of March 31, 1999, Leisure Time had an inventory value of approximately
$4.1 million that Leisure Time maintains to meet the delivery and repair
requirements of its customers. Leisure Time's inventory increases in
anticipation of orders and a significant amount of Leisure Time's current assets
is invested in inventory and accounts receivable until payment is received from
the sale of video machines.
Leisure Time currently services the video gaming machines it sells. Leisure
Time is considering expanding its service operations by becoming an authorized
repair center for manufacturers of items such as bill acceptors and printers so
that Leisure Time can service video gaming machines sold by others. Leisure Time
has not yet been authorized as a repair center by any other manufacturer.
SALES AND MARKETING OF VIDEO MACHINES
Leisure Time believes that the experience it has gained from the markets
where its video gaming machines are currently located will assist its marketing
personnel in developing new markets. In order to achieve these goals, Leisure
Time believes in utilizing experienced gaming industry personnel for its sales
and marketing efforts. These gaming personnel are able to interface, guide and
advise the operator on methods that will contribute to profitability for the
operator.
Leisure Time has developed a customer base for its video gaming machines in
South Carolina, on Native American reservations in several states, in Brazil and
in Norway. Leisure Time plans to continue to expand its customer base in those
areas and is evaluating the marketing of its video gaming machines in other
states and countries.
Leisure Time believes that in order to be successful in expanding the
market for its video gaming machines into new states and jurisdictions, a good
customer relationship needs to be established by a professional and experienced
sales and service organization. Leisure Time is continuing to create such a
sales and service organization to support market opportunities in the various
geographical areas of the United States and in the international market. The
sales organization utilizes a central reporting system linked to Leisure Time's
headquarters that is complemented by sales policies, training, market analysis
and operations meetings held on a regular basis.
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As of June 30, 1999, Leisure Time had nine employees engaged in sales and
marketing. Of the nine employees, at least seven have at least five years of
experience in the gaming industry. Leisure Time plans to add additional sales
and marketing people in the near future.
Leisure Time has appointed Sao Paulo Games Comercial LTDA as the exclusive
distributor of the Pot O Gold product line in Brazil. Sao Paulo purchases the
Pot O Gold machines at a fixed price for resale or for Sao Paulo's use. The
agreement is in effect until December 31, 2000, if Sao Paulo purchases a minimum
number of Pot O Gold machines each calendar quarter. If not, Leisure Time has
the right to terminate the agreement. The agreement will be automatically
renewed for two one-year terms unless either party determines not to renew the
agreement. Leisure Time also has orally agreed that Sao Paulo can test market
the Pot O Gold product line in Argentina. If the test marketing proves
successful, it is contemplated that Sao Paulo would become a distributor for the
Pot O Gold product line in Argentina.
Leisure Time received total revenue of approximately $5.7 million, $3.2
million and $65,833 from sales in foreign countries during Leisure Time's fiscal
years ended June 30, 1999, 1998 and 1997, respectively. The following chart
provides information pertaining to the revenue Leisure Time received from sales
in foreign countries:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30 ARGENTINA BRAZIL NORWAY
- ---------- --------- ---------- --------
<S> <C> <C> <C>
1999................................................ $141,875 $5,232,652 $202,330
1998................................................ -- 3,210,691 --
1997................................................ -- 65,833 --
</TABLE>
Leisure Time did not commence sales in Norway until Leisure Time's fiscal
year ended June 30, 1999. Leisure Time anticipates that Leisure Time will derive
additional revenue from Norway in the future. Leisure Time's Pot O Gold product
line is being test marketed in Argentina. Leisure Time cannot predict whether or
not Leisure Time will ever derive any significant revenue from Argentina in the
future.
Leisure Time has no significant long-lived assets in any foreign country.
In the Native American bingo/casino markets, laws are changing to allow for
games with a higher level of player interaction that will generate more player
interest. Leisure Time believes that these changes will provide an increase in
video bingo revenue and a demand for more video bingo player stations. In some
Native American bingo markets, operators are beginning to replace paper bingo
games with video bingo games.
Laws are changing in the charity bingo markets as well. These changes allow
for wide area networked, progressive jackpot games and games with larger cash
prizes. Leisure Time believes that these changes will facilitate an increase of
the current player base and thus an increased demand for Leisure Time's video
pulltabs and bingo gaming machines. Leisure Time markets and plans to market
sit-down video pulltabs and bingo machines, wireless portable video bingo units
and wide area networked, progressive jackpot units within the charity markets.
Leisure Time's video bingo player stations will be marketed to Native
American bingo/casino venues and charity bingo halls. Leisure Time can sell,
lease or rent video bingo player stations to both markets. Leisure Time plans to
enter into one to three year contracts under which it will receive a portion of
the revenue generated by the player stations where permitted by applicable law
or, to a lesser extent, a fixed rate per bingo session. Although capital
intensive, Leisure Time believes that the "revenue share" agreement is typical
within the bingo industry where permitted by applicable law and has been
profitable for the vendor of the machines.
Leisure Time has sold approximately 100 Pulltab Gold machines in Ohio.
Leisure Time intends to increase its marketing efforts for Pulltab Gold machines
in Ohio and in other jurisdictions where pulltab operations may be conducted.
Leisure Time also plans to enter into distribution agreements and/or
strategic alliances with qualified representatives where jurisdictional and/or
particular market situations make it advantageous to do so. For
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example, Leisure Time acted as a nonexclusive agent on a commission basis for
the sale to a casino in Europe of casino signs, electronic progressive meters
and animated technology manufactured by a European company.
During the fiscal year ended June 30, 1998, Drews Distributing, Inc. and
Collins Entertainment Corp. accounted for approximately 47% and 23% of Leisure
Time's total sales. During the nine months ended March 31, 1999, Drews
Distributing, Inc., Collins Entertainment Corp. and Sao Paulo accounted for
approximately 33%, 11% and 10% of Leisure Time's total sales. Leisure Time's
distributor agreements with Drews Distributing, Inc. and Collins Entertainment
Corp. were terminated or not renewed in November and December, 1998,
respectively. Leisure Time is currently in litigation with both former
distributors. See "-- Litigation."
GAMING VESSELS
Offshore Gaming Cruises. Leisure Time currently owns two offshore gaming
vessels, the Vegas Express and the Leisure Lady. The Vegas Express is in the
"cruise-to-nowhere" business. It is planned that the Leisure Lady will be in the
"cruise-to-nowhere" business if a suitable port is located for her offshore
gaming operations. Leisure Time may also attempt to sell the Leisure Lady.
Federal law allows gaming on a vessel once the vessel has left state waters. On
the East Coast of the United States, state waters generally extend three miles
from land. Each offshore gaming cruise vessel departs from its respective port
and returns to the same port without any intervening stops, hence the name
"cruise-to-nowhere."
The "cruise-to-nowhere" industry began in the mid-1980s in Florida. Until
1992, only foreign flagged vessels could have gaming equipment on board. In
1992, United States flagged vessels were permitted to have gaming equipment on
board. The new law provides that any state could "opt out" and make "cruises-to-
nowhere" illegal in that particular state. To date, only California and Hawaii
have done so.
The Vegas Express operates out of Gloucester, Massachusetts, which is
approximately 35 miles north of Boston, Massachusetts. The Vegas Express began
operations in July 1998. Until Leisure Time locates a port for the Leisure Lady,
Leisure Time cannot predict when the Leisure Lady will commence offshore gaming
cruises. In addition to offering full gaming casinos that include reel and video
slot machines, blackjack, roulette, dice and poker, the cruises offer dining,
dancing and entertainment. The cruises last from four to six hours.
The Vegas Express is a United States flagged vessel. She is approximately
202 feet long and approximately 38 feet wide with a capacity for approximately
426 gaming passengers. In addition, she has approximately 277 positions in which
to place gaming machines.
The Leisure Lady is a United States flagged vessel. She is approximately
137 feet long and approximately 45 feet wide with a capacity for approximately
400 gaming passengers. She has approximately 257 positions in which to place
gaming machines.
The Vegas Express, weather permitting, conducts nine cruises each week
during the winter months and two cruises each day during the summer months. The
current price for a cruise on the Vegas Express is $39.00. The price for a
cruise on the Leisure Lady will depend on the port, the market, the competition
in the market, the day of the week, the time of day, the time of year and
whether or not it is a holiday season. Leisure Time offers various discount
passenger rates to groups, charterers of an entire vessel, and others and offers
various special fares and complimentary fare programs for its rated casino
patrons.
The offshore gaming cruise business is subject to seasonal fluctuations as
a result of adverse weather conditions. The revenue derived from offshore gaming
cruises suffers as a direct result of inclement weather, decreasing both the
number of cruises conducted and passenger counts. In addition, passenger counts
are lower immediately before and immediately after inclement weather conditions.
Other than local, occupational, liquor and food licensing and permitting,
Leisure Time's offshore gaming cruise vessels are not subject to gaming
regulation or licensing. Gaming cruise vessels are regulated by the United
States Coast Guard and are periodically inspected for regulatory compliance.
Both the Vegas Express and the Leisure Lady hold current certificates of
inspection from the United States Coast Guard.
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Marketing. Leisure Time focuses and will focus its marketing in areas
primarily within a 50 mile radius of Gloucester. Leisure Time must attract
passengers from both the local and tourist populations to offset to some degree
the seasonal fluctuations that are known to occur in the Massachusetts tourist
industry. Leisure Time focuses its efforts on local markets and on tourists
visiting the local markets on vacation. Leisure Time markets its offshore gaming
cruises through general advertising, direct mailings, travel agents and Leisure
Time's own sales and reservation personnel.
Dockside Vessel. Leisure Time has acquired the Biloxi Belle, a dockside
gaming vessel that is currently located on the Mississippi River. The Biloxi
Belle is approximately 217 feet long and approximately 40 feet wide with a
capacity for approximately 1,900 passengers. The Biloxi Belle has approximately
780 gaming positions. Leisure Time plans to renovate the Biloxi Belle when a
site is located for the vessel. Leisure Time plans to have the Biloxi Belle
operational during the third or fourth quarters of the fiscal year ending June
30, 2000, provided Leisure Time becomes licensed in Mississippi. Leisure Time
intends to locate the Biloxi Belle as a riverboat operation on the Mississippi
River in Mississippi. The competition for the Biloxi Belle will include the many
other riverboats and dockside gaming vessels and land-based casinos within a 200
mile radius from where the Biloxi Belle is finally located. If Leisure Time does
not become licensed in Mississippi, Leisure Time will attempt to sell the Biloxi
Belle or move it to a different location.
Reservations System. Leisure Time is developing a central reservations
system that will link each port to a web site via the Internet. This system also
will enable customers to make their own reservations "on line," monitor their
"frequent traveler" information and purchase Leisure Time merchandise. Leisure
Time believes this centralization will allow it to operate each vessel more
efficiently, control passenger counts and enable guest services to utilize
capacity in each vessel by offering more than one port, time and vessel to the
customer. The system is also expected to allow Leisure Time to verify credit
card information and inform passengers via e-mail of new promotions.
GAMING MACHINE ROUTE OPERATIONS
In February 1999, Leisure Time acquired a gaming machine route operation in
South Carolina. A gaming machine route operation involves the installation,
operation and servicing of video gaming machines under revenue participation
agreements with local retail establishments, such as taverns, restaurants,
supermarkets, drug stores and convenience stores. Leisure Time's route operation
currently has 17 locations containing approximately 74 video gaming machines in
various parts of South Carolina. Leisure Time's agreements for its locations
generally are in the form of revenue sharing agreements and give Leisure Time
the exclusive right to install gaming machines at such locations. The agreements
are generally terminable by either party on 30 days' written notice.
Leisure Time believes that gaming machine route operations will provide
Leisure Time with a long-term, stable revenue source. Accordingly, unless gaming
is discontinued in South Carolina, Leisure Time intends to acquire additional
gaming machine route operations in South Carolina. Leisure Time intends to
either establish or acquire gaming machine route operations in other states with
the initial focus being on Louisiana, Montana and New Mexico. Although Leisure
Time has proposed the acquisition of a company that currently operates gaming
routes, Leisure Time has no formal agreements for the acquisition of any gaming
machine route operations.
Market. Leisure Time believes that the single biggest factor in determining
the success of gaming machine routes is player demand. Based on reported revenue
for the locations, Leisure Time's Pot 0 Gold video gaming machine product line
has been the most popular video gaming machine route product line in South
Carolina. Leisure Time believes that the Pot O Gold product line will continue
to be the game of choice in South Carolina.
Leisure Time attempts to attract and retain gaming machine route patrons
through direct mailings which offer an attractive selection of video gaming
machines. Prior to installing video gaming machines at a location, Leisure Time
studies the market potential and customer base and determines the appropriate
video gaming machine mix for the location. Most of the video gaming machines in
Leisure Time's route operation have progressive jackpots.
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In marketing its services to location owners, Leisure Time emphasizes
quality of service. Leisure Time operates and services its video gaming machines
using its own employees, who routinely repair and maintain Leisure Time's video
gaming machines in order to improve reliability and in-service time. Leisure
Time believes that its video gaming machines and related equipment in its route
locations are well maintained and in good working condition.
In addition to physically servicing the gaming machines, employees of
Leisure Time may also remove coins and bills from the machines, refill machines
that have exhausted their supply of coins and provide payment of jackpots in
excess of machine limits. The services provided by Leisure Time can vary based
on the terms of its revenue sharing arrangements with location owners.
Possible Acquisition. Leisure Time has proposed the acquisition of Best
Amusement, Inc., a company that has gaming route operations in South Carolina.
The owner of Best Amusement, Inc. has orally indicated to Leisure Time that he
agrees with the proposal. If the acquisition is consummated as proposed, the
owner would receive the following from Leisure Time:
- at the closing, $2 million plus machine license renewal fees paid by Best
Amusement, Inc.;
- at the closing, 363,640 shares of Leisure Time's common stock;
- an agreement by Leisure Time to repurchase the 363,640 shares if the
owner is not able to sell them for at least $13.00 per share one year
after the date of closing;
- an additional $2 million 90 days after the closing;
- up to $75,000 in income taxes associated with Best Amusement, Inc.'s
income prior to the closing; and
- a three year consulting agreement that will pay the owner $7,500 per
month plus a commission of 10% of the first $500,000 and 5% of any amount
over $500,000 paid by Best Amusement, Inc. upon acquisition of a gaming
route from the owner of the route.
Best Amusement, Inc. has approximately 65 locations containing
approximately 333 video gaming machines.
Management believes that the acquisition is not probable at this time
because there are several significant issues, including the development of a
satisfactory tax structure, that must be resolved before the acquisition can
occur. There are no assurances Leisure Time and the owner will enter into an
agreement for the acquisition or that the acquisition will occur.
RELATED BUSINESSES
Hotel. In June 1998, Leisure Time acquired a hotel property in the
Cleveland, Ohio area that Leisure Time plans to open in the first quarter of
2000. The hotel has been closed for approximately seven years and was formerly
operated as a Howard Johnson Plaza hotel. Leisure Time is currently renovating
the hotel and, when completed, it is planned that the hotel will have
approximately 210 rooms, all with a view of Lake Erie, a full-service conference
center, an enclosed swimming pool, a fitness center and a restaurant. Leisure
Time has entered into a license agreement with Radisson Hotels International,
Inc. to operate the hotel under the Radisson franchise system. The license
agreement entitles Leisure Time to use the Radisson system and marks and
requires Leisure Time to name the hotel the "Radisson Hotel Lakefront
Cleveland." The license agreement is for a term of 20 years and requires that
the hotel to be open no later than April 30, 2000. Leisure Time paid Radisson an
initial license fee of $35,000 and is required to pay Radisson the following
additional fees:
- a royalty fee of 4% of the daily gross revenue derived from the operation
of the hotel;
- a promotion, marketing and advertising fee of 1 3/4% of the daily gross
room sales;
- a reservation fee of 2 % of the daily gross room sales;
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- set fees for reservations through Radisson's global distribution system,
other reservation systems and Radisson's internet website;
- $0.75 per occupied guest room per night for participation in system
advertising and marketing programs; and
- any other fees and charges incurred with respect to participation in
system advertising and marketing programs and for services rendered by
Radisson for which a fee is charged.
Leisure Time will be required to operate the hotel either directly or through a
management company approved by Radisson. The hotel will be required to be
operated pursuant to Radisson's standards. Most transfers of the hotel will
require the approval of Radisson.
Leisure Time is currently investigating an affiliation with a national
restaurant chain that, if obtained, would result in the hotel restaurant being
operated by an independent third party.
Leisure Time has approximately 100 Pulltab Gold machines that it has sold
in Ohio. Leisure Time plans that a portion of the space in the hotel will be
used to display Leisure Time's Pulltab Gold and video bingo machines for
marketing to charities.
The total cost per room to Leisure Time in renovating the hotel is
approximately $50,000, including real property acquisition costs. Leisure Time
anticipates that approximately $9.5 million will be spent by Leisure Time in
renovating the hotel. Leisure Time plans to finance most of the amount needed
for the renovation with construction financing. Upon execution of Radisson's
standard license agreement and finalization of Radisson build-out
specifications, Leisure Time will seek both construction and permanent financing
for the hotel. Leisure Time has had preliminary discussions with several
mortgage brokers as well as direct lenders who have expressed interest in the
financing. No commitments for financing have been received. If financing is not
obtained, Leisure Time will have to curtail the project.
Finance Company. Leisure Time began its financing operations in April 1999,
when it acquired Leisure Time Financial. Leisure Time Financial was established
in 1989 as a service oriented lessor of diversified types of equipment. Leisure
Time Financial provides equipment financing to qualified applicants in the small
to middle markets in Minnesota and in the surrounding five states. The primary
objective of Leisure Time Financial is to provide financing services to
purchasers of Leisure Time's video gaming, pulltab and bingo machines as well as
to purchasers of other equipment.
Leisure Time believes that having financing available for a vendor's
products enhances the ability of a vendor to market the products. Leisure Time
believes that the financing program will enhance its marketing efforts for its
machines and provide a potential new profit center.
Leisure Time Financial's marketing efforts historically have been directed
at establishing vendor relationships and calling on equipment users primarily in
the printing, construction and machine tool industries. As of June 30, 1999,
Leisure Time Financial had three people engaged in marketing Leisure Time
Financial's financing arrangements.
Leisure Time Financial has acquired a lease accounting operating system to
assure year 2000 compliance and manage the volume of information associated with
originating and servicing of financing arrangements. Leisure Time Financial
expects to upgrade and enhance its administrative and technical capabilities in
order to provide professional service to its customers and accurate reporting
for Leisure Time. Leisure Time Financial's marketing strategy is to increase its
volume of lease originations by:
- maintaining a strong, experienced sales force;
- establishing a network of independent lease brokers;
- structuring relationships with small and medium-sized local accounting
firms; and
- supplying lease programs to rural community banks that do not have
internal leasing capabilities.
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Many of these community banks provide funding for Leisure Time Financial's
current lease portfolio.
Leisure Time Financial competes for equipment financing with brokers, major
bank leasing companies and three other small lease companies in the
Minneapolis-St. Paul area that are similar in size to Leisure Time Financial.
Each of these companies is successful in that market.
Leisure Time Financial had unaudited net income of approximately $74,000
and $19,000 on revenue of approximately $633,000 and $102,000 for the year ended
December 31, 1998, and for the three months ended March 31, 1999, respectively.
COMPETITION
Video Machines. The video gaming machine market is highly competitive and
is dominated by a small number of manufacturers. Leisure Time believes that the
principal competitive factors in this market are the appeal of the machine to
players, knowledge of customer requirements and player preferences, service,
support and training, distribution, name and product recognition and price. The
principal competitors in the video gaming machine market are IGT and WMS
Industries, Inc. IGT may be viewed as a dominant competitor. Leisure Time
estimates that IGT had a market share in video game machines of 70% and that WMS
Industries had a market share of 15% in 1998. Additional competitors or
potential competitors include Acres Gaming, Inc., Atronic Casino Technology,
Inc., Anchor Games, Aristocrat Leisure Limited, Bally Gaming, a subsidiary of
Alliance Gaming Corporation, Casino Data Systems, Innovative Gaming Corporation
of America, Sigma Games, Inc. and Video Lottery Consultants, Inc. Companies in
historically unrelated industries, such as Sega, have technological resources
that could give them a competitive advantage in developing multimedia-based
video gaming machines. There can be no assurance that other companies in the
video gaming or multimedia market will not successfully enter the market for
video gaming machines, nor can there be any assurance that the manufacturers of
traditional slot machines will not develop products that are superior to, or
that achieve greater market acceptance than, Leisure Time's video gaming
machines.
Oasis Gaming, Infinity and Diamond Games are Leisure Time's most
significant competitors in the pulltab video machine industry.
Worldlink Gaming Corporation and Multimedia Games, Inc. are Leisure Time's
significant competitors in the wide area networked, progressive jackpot bingo
industry and GameTech and Bingo King are Leisure Time's significant competitors
in the video bingo industry.
In general, Leisure Time's existing competitors, as well as many potential
new competitors, have significantly greater financial and technical resources
than Leisure Time, as well as more established customer bases and distribution
channels, which may afford them competitive advantages. Increased competition is
likely to result in price reductions, reduced operating margins and loss of
market share, any of which could materially and adversely affect Leisure Time's
business, operating results and financial condition.
Gaming Route Operations. Leisure Time currently has very few locations from
which it shares in the revenue from video gaming machines. All of these
locations are within South Carolina. Competition from other locations having
video gaming machines in South Carolina has increased and, if gaming is not
discontinued in South Carolina, will likely increase in the future. Additional
competition will reduce income from the locations from which Leisure Time
currently, and in the future, may derive revenue. Leisure Time plans to acquire
or establish additional gaming route operations. Leisure Time may be unable to
acquire or establish additional gaming route operations on acceptable terms.
Offshore Gaming Cruises. Competition for Leisure Time's offshore gaming
cruises arises from all forms of entertainment available in the general area in
which the cruises operate. At the present time, there are only two other
offshore gaming cruise operators in the Boston, Massachusetts area and there are
no local land-based casinos. An influx of operators into Massachusetts will
place a premium on new port locations that will make expansion more expensive
and cause greater competition for customers. If the Leisure Lady commences
operations, Leisure Time will be subject to the same competitive factors within
the area of operations. Any material increase in competition could have an
adverse impact upon Leisure Time's operating results and financial condition.
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Leisure Time intends to acquire additional vessels that Leisure Time can
renovate and use as offshore gaming vessels. At this time, however, Leisure Time
has no agreements for the acquisition of any such additional vessels.
REGULATION
General. The manufacture and distribution of gaming machines and the
operation of gaming facilities are subject to extensive federal, state, local
and foreign regulation. The laws and regulations of the various jurisdictions in
which Leisure Time or its subsidiaries operate and into which Leisure Time or
its subsidiaries may expand their gaming and gaming related operations vary in
their technical requirements. These laws and regulations are subject to
amendment from time to time and virtually all of these jurisdictions require:
- licenses;
- permits;
- documentation of qualification (including evidence of financial
stability);
and other forms of approval for companies engaged in the manufacture and
distribution of gaming devices and the operation of gaming facilities, as well
as for the officers, directors, major shareholders and key personnel of such
operations. Any person who acquires a controlling interest in Leisure Time would
have to meet the requirements of all governmental bodies that regulate Leisure
Time's gaming business.
Leisure Time or its subsidiaries are subject to government regulation in a
number of different jurisdictions related to their operation as a manufacturer
and distributor of gaming devices, operator of offshore and future dockside
gaming vessels, and operator of video gaming routes. Leisure Time or its
subsidiaries are licensed in the following jurisdictions to manufacture gaming
devices for sale to Native Americans:
- Kansas;
- Michigan;
- Minnesota;
- New Mexico;
- New York;
- North Carolina; and
- Wisconsin.
Leisure Time or its subsidiaries have applied for gaming or gaming device
related licenses and approvals in Montana and Ontario, Canada. Leisure Time or
its subsidiaries intend to apply for licenses to distribute gaming devices in
Arizona, Mississippi, New Mexico (charities and fraternal organizations) and
Nevada. Regulatory investigations and licensing or other forms of approval may
relate to Leisure Time, its subsidiaries and their key personnel. Because of
this, the regulatory approval process may be lengthy and expensive.
Generally gaming devices may not be manufactured, distributed or operated
unless appropriate licenses are obtained from regulatory authorities in each
jurisdiction. Ordinarily, licenses may only be obtained by filing an
application. A regulatory agency within a jurisdiction usually may deny the
application if it believes the applicant did not satisfy the particular
requirements for licensing in that jurisdiction. Furthermore, each such
regulatory agency usually retains jurisdiction with respect to licensees and may
take disciplinary action. These actions may include the suspension or revocation
of the license or the imposition of a monetary fine. Changes in such laws,
regulations and procedures or the initiation of disciplinary action against
Leisure Time or its subsidiaries could have an adverse effect on Leisure Time's
operations.
As indicated above, most of the jurisdictions in which Leisure Time or its
subsidiaries conduct business or intend to conduct business in the future
require various approvals in connection with the manufacture and distribution of
gaming devices. However, some jurisdictions allow manufacturers or distributors
to operate
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under a temporary government approval or on a transactional basis during the
pendency of a comprehensive background investigation. There can be no assurances
that any government approval currently applied for or intended to be applied for
will be given or renewed.
It should be noted that most jurisdictions in which Leisure Time or its
subsidiaries conduct business, or intends to conduct business in the future,
require gaming devices to meet standards and specifications established by each
jurisdiction. Moreover, most jurisdictions require gaming devices to be reviewed
and approved either by the regulatory agency or an independent testing
laboratory prior to the gaming device being sold or offered for public play. In
evaluating the suitability of any applicant, the regulatory agency will examine
the prior compliance with laws and regulations in other jurisdictions where
Leisure Time or its subsidiaries have been operating. There can be no assurance
that any approval applied for or required of Leisure Time or its subsidiaries in
this regard will be received. Nor can there be any assurances that any approval
already received by Leisure Time or its subsidiaries will be maintained, or that
additional approvals will not be required.
Federal Registration. The Federal Gambling Devices Act of 1962 makes it
unlawful for any person to manufacture, deliver or receive gaming machines,
gaming machine devices and components across interstate boundaries unless that
person has first registered with the Attorney General of the United States.
Leisure Time or its subsidiaries that are involved in gaming activities are
required to register annually with the Attorney General of the United States in
connection with the sale, distribution or operation of gaming machines. In
addition, various record keeping and equipment identification requirements are
imposed by the Federal Act. Violation of the Federal Act may result in seizure
or forfeiture of equipment, as well as other penalties.
Native American Gaming. Leisure Time or its subsidiaries distribute gaming
devices to gaming operations located on some Native American lands. Gaming on
Native American lands, including the terms and conditions under which gaming
equipment can be sold or leased to Native American tribes, is or may be subject
to regulation under the:
- laws of the tribes;
- laws of the host states;
- Indian Gaming Regulatory Act of 1988, which is administered by the
National Indian Gaming Commission;
- Secretary of the U.S. Department of Interior; and
- provisions of statutes relating to contracts with Native American tribes,
which are administered by the Secretary.
As a precondition to gaming involving gaming devices, the Indian Gaming
Regulatory Act requires that the tribe and the state have entered into a written
tribal-state compact that specifically authorizes such gaming, and that has been
approved by the Secretary, with notice of such approval published in the Federal
Register. Tribal-state compacts vary from state to state. Many require that
equipment suppliers meet ongoing registration and licensing requirements of the
state or tribe. Some impose background check requirements on the officers,
directors, and shareholders of the gaming equipment suppliers. Some also require
that either tribal regulatory agencies or state regulatory agencies license the
manufacturer or distributor. Leisure Time or its subsidiaries have received
approvals from a number of tribal regulatory agencies. There can be no
assurances that such approvals will be renewed, or that any additional approvals
required, will be obtained. Failure to obtain such renewals or approvals may
have a material adverse impact on the operations of Leisure Time.
Bingo. Bingo is legal in 46 states and the District of Columbia (the
exceptions are Arkansas, Hawaii, Tennessee and Utah). Nonprofit or charity
organizations sponsor bingo games for fund raising purposes, while Native
American tribes, casinos and government-sponsored entities operate bingo games
for profit. Video bingo systems are permitted for use by charitable
organizations in 26 states. Under the Indian Gaming Regulatory Act, video bingo
may be played on Native American reservations in the 46 states where bingo is
legal. Leisure Time believes video bingo is currently played on Native American
reservations in 28 states.
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Pulltabs. Leisure Time currently sells the Pulltab Gold machine only in
Ohio. In Ohio, video pulltab machines may only be sold to and operated by
charitable organizations. Leisure Time believes that the law relating to the
legality of the sale and use of video pulltabs in many jurisdictions is unclear.
Before Leisure Time sells its Pulltab Gold machines in additional jurisdictions,
Leisure Time will review the applicable law to determine whether or not video
pulltabs may be legally sold in the jurisdictions.
Arizona. Leisure Time anticipates that it or one of its subsidiaries will
file an application to be licensed as a manufacturer, a distributor, or both, in
the state of Arizona. The Arizona Department of Gaming regulates manufacturers
and distributors and their operations on Native American lands. Manufacturers
and distributors of gaming devices and services must be licensed by the Tribal
Gaming Office and certified by the state gaming agency prior to the sale or
lease of any gaming devices or services. As in other gaming jurisdictions, the
burden of proving suitability to receive a gaming license rests with the
applicant. Qualifications for licensure and suitable methods of operations for
licensees are similar to other state requirements described in various sections
above. Upon payment of an annual fee, a tribal license or state certification is
effective for one year after the date of issuance. Persons who have applied for
renewal may continue to operate under the expired license until the tribal
office or state agency take action on the renewal application. There can be no
assurances that any application filed will be granted. Any denial may have an
adverse effect on the operations and financial condition of Leisure Time.
Mississippi. Leisure Time plans to apply for a manufacturing and
distributing license in Mississippi. The manufacture and distribution of gaming
equipment, as well as the ownership and operation of gaming facilities, are
subject to extensive state and local regulation in Mississippi. This regulation
comes primarily from the licensing and regulatory control of the Mississippi
Gaming Commission and the Mississippi State Tax Commission.
The Mississippi Gaming Control Act, that legalized dockside casino gaming
in Mississippi, was enacted in June of 1990. Although not identical, the
Mississippi Act is similar to the Nevada Gaming Control Act described below. The
Mississippi Commission has also adopted regulations that are similar to the
Nevada gaming regulations described below.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to:
- prevent unsavory or unsuitable persons from having any direct or indirect
involvement with gaming at any time or in any capacity;
- establish and maintain responsible accounting practices and procedures;
- maintain effective control over the financial practices of licensees,
including establishing minimum procedures for internal fiscal affairs and
the safeguarding of assets and revenue, providing reliable record keeping
and making periodic reports to the Mississippi Commission;
- prevent cheating and fraudulent practices;
- provide a source of state and local revenue through taxation and
licensing fees; and
- ensure that gaming licensees, to the extent practicable, employ
Mississippi residents.
The regulations are subject to amendment and interpretation by the
Mississippi Commission. Changes in Mississippi law or regulations may limit or
otherwise materially affect the types of gaming that may be conducted and could
have an adverse effect on Leisure Time and Leisure Time's proposed operations.
If Leisure Time applies, Leisure Time will be subject to the licensing and
regulatory control of the Mississippi Commission, and will be required to submit
detailed financial and operating reports to the Mississippi Commission. Leisure
Time will also be required to provide any other information requested by the
Mississippi Commission. If Leisure Time is not able to satisfy the requirements
of the Mississippi Act, Leisure Time will not be able to manufacture or
distribute gaming devices in the state of Mississippi. Leisure Time must
maintain a license from the Mississippi Commission in order to manufacture and
distribute gaming products in Mississippi. Such licenses are issued by the
Mississippi Commission subject to conditions, including continued compliance
with all applicable state laws and regulations.
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Mississippi gaming, manufacturer and distributor licenses are not
transferable, and are issued for a period of two years. These licenses must be
renewed every two years after initial licensure. No person may become a
stockholder of, or receive any percentage of profits from, a licensed subsidiary
of a holding company without first obtaining licenses and approvals from the
Mississippi Commission.
Officers and some employees of Leisure Time and the officers, directors and
some employees of Leisure Time's subsidiaries must also be found suitable or be
licensed by the Mississippi Commission. In addition, any person having a
material relationship or involvement with Leisure Time or its subsidiaries may
be required to be found suitable, in which case those persons must pay the costs
and fees associated with such investigation. The Mississippi Commission may deny
an application for a finding of suitability for any cause it deems reasonable.
Changes in the positions of officers, directors and some employees must be
reported to the Mississippi Commission. In addition to its authority to deny an
application for a finding of suitability, the Mississippi Commission can
disapprove a change in such positions. The Mississippi Commission has the power
to require Leisure Time and its registered or licensed subsidiaries to suspend
or dismiss officers, directors and other key employees or sever relationships
with other persons who refuse to file appropriate applications or whom the
authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject
to immediate suspension. The Mississippi Commission must refuse to issue a work
permit to a person who has been convicted of a felony, committed some
misdemeanors or knowingly violated the Mississippi Act and it may refuse to
issue a work permit to a gaming employee for any other reasonable cause.
The Mississippi Commission may, at any time, investigate and require the
finding of suitability of any record or beneficial stockholder of Leisure Time.
Mississippi law requires any person who acquires more than five percent of the
common stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of the publicly traded
corporation must apply for a finding of suitability by the Mississippi
Commission and must pay the costs and fees that the Mississippi Commission
incurs in conducting the investigation. The Mississippi Commission has generally
exercised its discretion to require a finding of suitability of any beneficial
owner of more than five percent of a public company's common stock. The
Mississippi Commission has adopted a policy that permits certain institutional
investors to own up to 10% of a registered public company's stock without a
finding of suitability. If a stockholder who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. Any person found unsuitable and who holds,
directly or indirectly, any ownership of the securities beyond such time as the
Mississippi Commission prescribes may be guilty of a misdemeanor. Leisure Time
would be subject to disciplinary action if, after receiving notice that a person
is unsuitable to be a stockholder or to have any other relationship with Leisure
Time or its licensed subsidiaries, Leisure Time:
- paid the unsuitable person any dividend or other distribution on the
voting securities of Leisure Time;
- recognized the exercise, directly or indirectly, of any voting rights
conferred by securities held by the unsuitable person;
- paid the unsuitable person any remuneration in any form for services
rendered or otherwise, except in certain limited and specific
circumstances; or
- failed to pursue all lawful efforts to require the unsuitable person to
divest himself of the securities, including, if necessary, the immediate
purchase of the securities for cash at fair market value.
Management believes that compliance with the licensing procedures and
regulatory requirements of the Mississippi Commission will not affect the
marketability of Leisure Time's securities.
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Leisure Time may be required to disclose to the Mississippi Commission the
identities of the holders of any debt securities. In addition, the Mississippi
Commission may, in its discretion:
- require holders of debt securities of registered companies to file
applications;
- investigate such holders; and
- require such holders to be found suitable to own such debt securities.
Although the Mississippi Commission generally does not require the
individual holders of obligations, such as notes, to be investigated and found
suitable, the Mississippi Commission retains the discretion to do so for many
reasons, including a debt default and the potential that the debt holder may
exercise material influence over the gaming operations of the registered
company. Any holder of debt securities required to apply for a finding of
suitability must pay all investigative fees and costs of the Mississippi
Commission in connection with the investigation.
Leisure Time's licensed subsidiaries will be required to maintain a current
ledger of the holders of their equity securities in Mississippi. Leisure Time
will be required to maintain a list of stockholders in the principal office of
its licensed subsidiary. The equity holder and stockholder lists must be
available for inspection by the Mississippi Commission at any time. If any
securities are held in trust by an agent or nominee, the record holder may be
required to disclose the identity of the beneficial owner to the Mississippi
Commission. A failure to make such a disclosure may be grounds for finding the
stockholder of record unsuitable. Leisure Time would be required to render
maximum assistance to the Mississippi Commission in determining the identity of
any beneficial owner of its stock.
The Mississippi Act requires that the certificates representing securities
of a publicly traded corporation bear a restrictive legend stating that such
securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Mississippi Commission has the authority to grant a
waiver of this requirement, as well as the power to impose additional
restrictions on the holders of Leisure Time's securities at any time.
Most loans, leases, sales of securities and similar transactions by a
licensed subsidiary must be reported to or approved by the Mississippi
Commission. A licensed subsidiary may not make a public offering of its
securities, but may pledge or mortgage its assets to secure the obligations of
an affiliate pursuant to a public offering if it obtains the prior approval of
the Mississippi Commission. Registered companies may not publicly offer their
securities without the prior approval of the Mississippi Commission if any part
of the proceeds of the offering will be used to finance the construction,
acquisition or operation of a gaming facility in Mississippi or to retire or
extend obligations incurred for one or more such purposes. Such approval, if
given, does not constitute a recommendation or approval of the investment merits
of the securities subject to the offering.
Changes in control of registered or licensed companies through merger,
consolidation, acquisition of assets, management or consulting agreements or any
form of takeover and some recapitalizations and stock repurchases cannot occur
without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors, and
other persons having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate licensees in Mississippi and corporations
whose stock is publicly traded that are affiliated with those licensees may be
injurious to stable and productive corporate gaming. The Mississippi Commission
has established a regulatory scheme to lessen the potential adverse effects of
these business practices on Mississippi's gaming industry by promoting
Mississippi's policy to:
- assure the financial stability of corporate licensees and their
affiliates;
- preserve the beneficial aspects of conducting business in the corporate
form; and
- promote a neutral environment for the orderly governance of corporate
affairs.
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Approvals are generally required from the Mississippi Commission before a
registered company may make exceptional repurchases of voting securities above
the current market price (commonly called "greenmail") or before a corporate
acquisition opposed by management may be consummated. Mississippi's gaming
regulations also require prior approval by the Mississippi Commission if the
registered company adopts a plan of recapitalization proposed by its board of
directors opposing a tender offer made directly to the stockholders for the
purpose of acquiring control of the registered company.
Neither the registered company nor any licensed subsidiary may engage in
foreign gaming outside of Mississippi without the prior approval of the
Mississippi Commission. The Mississippi Commission distinguishes between gaming
operations, i.e., operating a casino, and manufacturing or distributing gaming
equipment for foreign gaming approval purposes. Licensees are not required to
obtain prior Mississippi Commission approval to manufacture or distribute gaming
equipment outside Mississippi. Licensees are required to obtain prior
Mississippi Commission approval to operate a casino outside Mississippi. The
Mississippi Commission may require determinations that, among other things,
there are means for the Mississippi Commission to have access to information
concerning the out-of-state gaming operations of the registered company and its
licensed affiliates. The registered company and its licensed subsidiaries must
obtain foreign gaming approval from the Mississippi Commission prior to engaging
in any future gaming operations outside of Mississippi.
If the Mississippi Commission decides that a licensed subsidiary violated a
gaming law or regulation, the Mississippi Commission could limit, suspend or
revoke the license of the subsidiary. In addition, the licensed subsidiary, the
registered company and the individuals involved could be subject to substantial
fines for each separate violation. The limitation, conditioning, suspension, or
revocation of any license could adversely affect a registered company's
operations in a material manner.
Manufacturers and distributors of gaming devices pay annual license fees as
well as any applicable corporate income and franchise taxes.
Montana. One of Leisure Time's subsidiaries has an application pending in
Montana. All gambling activities in Montana are regulated by the Department of
Justice, Gambling Control Division. All distributors, manufacturers and route
operators must obtain a license from the Department before engaging in
operations. The qualifications for licensure are similar to other state
requirements of gaming licenses as described in various sections above. There
can be no assurances that the application filed will be granted. Any denial may
have an adverse effect on the operations and financial condition of Leisure
Time.
Nevada. Should Leisure Time or its subsidiaries wish to pursue a license in
Nevada, Leisure Time would be required to be registered with the Nevada Gaming
Commission as a publicly traded company and be found suitable as the sole
shareholder of any subsidiary applying for the license in Nevada. Leisure Time's
subsidiary would apply to be licensed as a manufacture and distributor of gaming
devices. Accordingly it is important to note that the ownership and operation of
gaming facilities in Nevada, as well as the manufacture and distribution of
gaming devices, are subject to extensive state and local regulation. Publicly
traded parent corporations and holding companies of Nevada gaming licensees, as
well as the licensed subsidiaries, are subject to the Nevada Gaming Control Act,
the regulations promulgated pursuant to the Nevada Gaming Control Act and
various local regulations. A registered company and its gaming operations and
companies are subject to the licensing and regulatory control of the Nevada
Commission, the State Gaming Control Board, the Clark County Liquor Gaming
Licensing Board and possibly other local agencies throughout the State of
Nevada, including the City of Las Vegas.
The laws, regulations and supervisory procedures of the Nevada gaming
authorities have their genesis in various declarations of public policy which
are concerned with, among other things, the:
- prevention of unsavory or unsuitable persons from having a direct or
indirect involvement with gaming at any time or in any capacity;
- establishment and maintenance of responsible accounting practices and
procedures;
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- maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for internal
fiscal affairs and the safeguarding of assets and revenue, providing
reliable record keeping and requiring the filing of periodic reports with
the Nevada gaming authorities;
- prevention of cheating and fraudulent practices; and
- creation of a source of state and local revenue through taxation and
licensing fees.
Neither gaming licenses nor the registration approvals given to publicly
traded corporations are transferable. Changes in such laws, regulations and
procedures could have an adverse effect on Leisure Time's operation.
Since Leisure Time would be required to be registered with the Nevada
Commission as a publicly traded corporation and be found suitable as the sole
shareholder of any Leisure Time subsidiary applying for a license in Nevada,
Leisure Time would be required to submit, upon application and on a periodic
basis, detailed financial and operating reports to the Nevada Commission and
Nevada Board. Additionally, the actual applicant subsidiary company may be
required to furnish any other information requested by the Nevada Commission. No
person could become a stockholder of, or receive any percentage of profits from
the licensed Nevada operating companies without first obtaining licenses and
approvals from the Nevada gaming authorities.
The Nevada gaming authorities may investigate any individual who has a
material relationship to, or material involvement with, any registered company
or its licensed subsidiary in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee.
Officers, directors and some key employees of the licensed subsidiary must file
applications with the Nevada gaming authorities and may be required to be
licensed or found suitable by the Nevada gaming authorities. Officers, directors
and key employees of the registered company who are actively and directly
involved in the gaming activities of the licensed subsidiary may be required to
be licensed or found suitable by the Nevada gaming authorities. The Nevada
gaming authorities may deny an application for licensing for any cause deemed
reasonable. A finding of suitability is comparable to licensing, and both
require the submission of detailed personal and financial information followed
by a thorough investigation. An applicant for licensing or for a finding of
suitability must pay all of the costs of the investigation. Changes in licensed
positions with the registered company or its licensed subsidiary must be
reported to the Nevada gaming authorities. In addition to their authority to
deny an application for a finding of suitability or licensure, the Nevada gaming
authorities also have jurisdiction to disapprove a change in a corporate
position.
If the Nevada gaming authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the registered company or its licensed subsidiary, the
companies involved would be required to sever all relationships with such a
person. Additionally, the Nevada Commission may require the registered company
or its licensed subsidiary to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or questions
pertaining to licensing are not subject to judicial review in Nevada.
Leisure Time and any of its subsidiaries applying for licensure in Nevada
would be required to submit detailed financial and operating reports to the
Nevada Commission. Substantially all loans, leases, sales of securities and
similar financing transactions by Leisure Time and its subsidiary would be
required to be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by the licensed
subsidiary or the registered company, the gaming licenses or registration held
by the registered company and its licensed subsidiary could be limited,
conditioned, suspended or revoked subject to compliance with statutory and
regulatory procedures. Moreover, at the discretion of the Nevada Commission, the
registered company and its licensed subsidiary and persons involved could be
subject to substantial fines for each separate violation of the Nevada Act.
The beneficial holder of the registered company's voting securities may be
required to file an application, be investigated and have the holder's
suitability as a beneficial holder of the registered company's voting
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securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of the investigation incurred
by the Nevada gaming authorities in conducting such an investigation. Also, the
Clark County Liquor Gaming Licensing Board and the City of Las Vegas have taken
the position that they have the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
The Nevada Act requires any person who acquires more than five percent of
the registered company's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of the registered company's voting securities apply to the Nevada Commission
for a finding of suitability within 30 days after the Chairman of the Nevada
Board mails written notice requiring such a filing. An "institutional investor,"
as defined in the Nevada Act, which acquires more than 10%, but not more than
15% of the registered company's voting securities may apply to the Commission
for a waiver of such a finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An institutional
investor shall be deemed to hold the voting securities for investment purposes
if the voting securities were acquired and held in the ordinary course of
business and not for the purpose of causing:
- the election of a majority of the members of the board of directors of
the registered company;
- change in the registered company's corporate charter, bylaws, management,
policies or operations of the registered company, or any of its gaming
affiliates; or
- any other action which the Nevada Commission finds to be inconsistent
with holding the registered company's voting securities for investment
purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include:
- voting on all matters voted on by stockholders;
- making financial and other inquiries of management of the type normally
made by securities analysts for informational purposes and not to cause a
change in its management, policies or operations; and
- such other activities as the Nevada Commission may determine to be
consistent with such investment intent.
If the Nevada Commission grants a waiver to an "institutional investor",
the waiver does not include a waiver or exemption from the requirement for prior
approval to "acquire control" of a registered corporation. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial information
including a list of beneficial owners. The applicant is required to pay all
costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restriction
applies to a record owner if the record owner, after request, fails to identify
the beneficial owners. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock of a registered
corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The registered company is
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be a stockholder or to have any other relationship with the
registered company or its subsidiaries, the registered company:
- pays that person any dividend or interest upon voting securities of the
registered company;
- allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person;
- pays remuneration in any form to that person for services rendered or
otherwise; or
- fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities for cash at fair market value.
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The Nevada Commission may require the holder of any debt security of a
registered corporation to file applications, be investigated and be found
suitable to own the debt security of the registered corporation. If the Nevada
Commission determines that a person is unsuitable to own such security, then the
registered corporation can be sanctioned, including the loss of its approvals,
if without the prior approval of the Nevada Commission, it:
- pays to the unsuitable person any dividend, interest, or any distribution
whatsoever;
- recognizes any voting right by such unsuitable person in connection with
such securities;
- pays the unsuitable person remuneration in any form; or
- makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation, or similar transaction.
The registered company is required to maintain a current stockholder list
in Nevada, which may be examined by the Nevada gaming authorities at any time.
If any securities are held in trust by an agent or by a nominee, the record
stockholder may be required to disclose the identity of the beneficial owner to
the Nevada gaming authorities. A failure to make such a disclosure may be
grounds for finding the record holder unsuitable. The registered company is also
required to render assistance in determining the identity of the beneficial
owner. The Nevada Commission has the power to require the registered company's
stock certificates to bear a legend indicating that the securities are subject
to the Nevada Act.
If registered in Nevada, Leisure Time could not publicly offer its
securities without the prior approval of the Nevada Commission if the securities
or the proceeds therefrom are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend obligations incurred
for such purposes. Any such approval would not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities. Any representation to the contrary is unlawful. A company which is
not subject to the jurisdiction of the Nevada Gaming Commission may publicly
offer its securities without obtaining the prior approval of the Nevada
Commission provided the proceeds are not used for any of the purposes described
above. None of the proceeds from the offering will be used in Nevada for any of
the purposes described.
Application for approval of a public offering of securities may be filed
without complete documentation related thereto if the documents and information
are supplied to the Nevada Board and Nevada Commission as they become available
in accordance with the normal and customary practice of the securities industry.
Additionally, the Nevada Commission may, either generally or specifically,
exempt any person, security or transaction from application pursuant to its
regulations regarding publicly traded corporations.
Changes in control of the registered company or its subsidiaries through
merger, consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities seeking
to acquire control of a registered corporation must satisfy the Nevada Board and
the Nevada Commission in a variety of stringent standards prior to assuming
control of such registered corporation. The Nevada Commission may also require
controlling stockholders, officers, directors and other persons having a
material relationship or involvement with the entity proposed to acquire
control, to be investigated and licensed as part of the approval process related
to the transaction.
License fees and taxes, computed in various ways dependent upon the type of
gaming activity involved, are payable to the State of Nevada and to the counties
and cities in which the Nevada licensee's respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either:
- a percentage of gross revenue received;
- the number of gaming devices operated; or
- the number of table games operated.
A casino entertainment tax is also paid by casino operations where
entertainment is furnished in connection with the selling of food or
refreshments. Nevada licensees that hold a license as an operator of a slot
route, or a manufacturer or distributor's license, must pay fees and taxes to
the State of Nevada.
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Any person who is licensed, required to be licensed, registered, or
required to be registered, or is under common control with such a person and who
proposes to become involved in a gaming venture outside the State of Nevada is
required to deposit with the Nevada Board, and thereafter maintain, a revolving
fund in the amount of $10,000.00 to pay the expenses of investigation by the
Nevada Board of the person's participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, licensees are required to comply with reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they:
- knowingly violate any laws of the foreign jurisdiction pertaining to the
foreign gaming operation;
- fail to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations;
- engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees; or
- employ a person in the foreign operation who has been denied a license or
finding of suitability in Nevada on the basis of personal unsuitability.
It is important to note that the granting of any registrations, amendment
of orders of registration, findings of suitability, approvals or licenses to be
sought is discretionary with the Nevada gaming authorities. The burden of
demonstrating the suitability or desirability of a business transaction is at
all times upon the applicants. Any licensing or approval process requires the
submission of detailed financial, business and possible personal information,
and the completion or a thorough investigation.
South Carolina. In 1993, South Carolina passed the Video Games Machine Act.
This Act provides a statutory and regulatory framework for the operation of
video poker. These limitations include a limit of five machines in a single
place or premises and the prohibition of:
- advertising for the playing of these games;
- offering or giving of anything free to encourage people to play the
games;
- playing of games on Sunday; and
- paying jackpots for the playing of machines to anyone under 21 years of
age.
A license fee of $4,000 per video gaming machine must be paid every two years in
South Carolina.
The South Carolina legislature has called for a referendum to be held on
November 2, 1999, pursuant to which South Carolina voters will be asked to vote
on proposals that would amend the Video Game Machine Act to:
- change the $125 limit on the payout per video gaming machine per day per
person to $500 per payout;
- authorize a maximum $3.00 bet;
- authorize a gaming tax; and
- extend the date by which each video gaming machine must be electronically
connected through a data communication device with a state centralized
processing center from July 30, 1999 to February 1, 2000; or
- make all gaming in South Carolina illegal after June 30, 2000.
Ohio. Leisure Time is not required to obtain a gaming license to sell the
Pulltab Gold machines in Ohio. The Pulltab Gold machines in Ohio must be
operated by a charity. The Attorney General of Ohio takes the position that the
charity must be a religious, educational, veteran's, fraternal, service,
nonprofit medical, volunteer rescue service, volunteer fire fighter's, senior
citizen's, youth athletic, amateur athletic, or youth athletic park
organization. Further, the charity must receive all proceeds, except for prizes
paid out, from the operation of the machines.
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Regulation of Offshore Gaming Cruises. In 1992, the Federal Government
enacted an amendment to the Gambling Devices Act or Johnson Act. This amendment
was designed to make the laws pertaining to gaming activities on United States
flag cruise vessels and foreign flag vessels essentially the same. Prior to
being amended, the Johnson Act forbade gaming on United States flagged vessels
but allowed foreign flagged vessels to carry gaming equipment into United States
ports. The 1992 amendment gave United States flagged vessels the right to
repair, transport, possess, or use a gambling device on a United States flag
vessel outside the boundary of any state, which is three miles from the
shoreline, in the case of states having an ocean coast. Once inside the boundary
of a state, the transport or possession of gambling devices is permitted so long
as the gambling device is not repaired or used on or removed from the vessel.
The Amendment provides the opportunity for each state to "opt out" of its
provisions by enacting a statute which would prohibit such operations by
gambling vessels from ports in that state. Leisure Time's gambling vessel
operations take place only from states having an ocean coast.
In March 1996, a bill was introduced into the Florida State House of
Representatives to ban all "cruises-to-nowhere" originating from Florida. This
bill was not reported out of committee. However, there can be no assurances that
at some time in the future a bill "opting out" will not be introduced by Florida
or another state's legislating body.
A bill has been introduced into the current session of Congress entitled
the "Cruises-to-Nowhere Act of 1999" which would change existing federal law.
This bill, if passed and signed into law, would make "cruises-to-nowhere"
illegal unless an individual state enacts a law to permit such activity. If
enacted, this bill could have a material negative impact on Leisure Time's
"cruises-to-nowhere" operations if Massachusetts or nearby states did not enact
laws permitting these cruises.
The Gambling Ship Act generally prohibits any citizen, resident of the
United States or any other person within the jurisdiction of the United States
from establishing, operating or owning an interest in a gambling ship on the
high seas or otherwise within the jurisdiction of the United States. However,
the Gambling Ship Act specifically provides for operations such as those
conducted by Leisure Time's gaming cruise vessels by excluding "covered voyages"
which are, in effect defined as cruises to nowhere on which stakes are paid. Any
person who violates the Gaming Ship Act is subject to a fine of up to $10,000 or
imprisonment of not more than two years and the vessels used in violation of the
Act could be forfeited to the United States government.
If Leisure Time's operations should violate the Gambling Ship Act by
repairing or using gambling devices on or removing gaming devices from a vessel
while it is within the boundary of a state, the vessel on which such violation
occurred could be forfeited to the United States without compensation.
Alternatively, Leisure Time could be required to change its operations to ensure
that future violations did not occur. The forfeiture of a vessel or a material
change in Leisure Time's offshore gaming cruise operations could result in a
material decrease in revenue.
Argentina. Leisure Time has orally agreed to allow Sao Paulo Games
Commercial LTDA to test market the Pot O Gold product line in Argentina. The
discussions on this agreement are preliminary in nature. Leisure Time believes
that the operation of such games in Argentina is lawful because Argentina does
not have laws or regulations related to the operation or distribution of the
games. There can be no assurances that any future laws and regulations would not
adversely affect Leisure Time.
Brazil. Manufacturers and distributors do not have to be specifically
licensed to sell gaming devices in Brazil. Leisure Time Technology is required
to have its hardware and software approved by Brazilian regulators. The only
video gaming machines that are legal in Brazil are video gaming machines that
only offer bingo or keno. Brazilian regulators have approved Leisure Time's Pot
O Gold Super Pick Keno. Sao Paulo Games Commercial LTDA is the exclusive
distributor of the game in Brazil. Sao Paulo Games must submit all modifications
or alterations to the approved game for approval.
Norway. Manufacturers and distributors do not have to be specifically
licensed to sell gaming devices in Norway. Leisure Time Technology is required
to have its hardware and software approved by the Norwegian Department of
Justice before Leisure Time Technology's video gaming machines can be sold in
Norway. To date, the hardware and software for three of Leisure Time
Technology's video gaming machines have been approved for sale in Norway.
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A new lottery act, recently proposed in Norway's Parliament, would require
manufacturers and distributors to be licensed. The act would also establish a
regulatory agency to administer all licensing matters. This act is expected to
be enacted, and be effective January 1, 2000. It is not anticipated that any
manufacturer or distributor will be required to be licensed until January 1,
2001. There can be no assurances that the act will be favorable to Leisure Time.
Ontario. The manufacture, sale and distribution of gaming devices for use
or play in the Canadian Province of Ontario are subject to the administrative
rules of the Ontario Gaming Commission. Such activities are subject to licensing
and regulatory control of the Ontario Commission. The Ontario gaming regulations
are very similar to state gaming regulations previously described.
Leisure Time Technology has applied to the Ontario Alcohol and Gaming
Commission for registration as a Casino Gaming-Related Supplier. Following
review of the initial filing, the Deputy Registrar issued notice of a proposed
order to refuse the application for registration, but no such order has been
issued. Leisure Time Technology has amended its initial filing to address issues
of concern to the Deputy Registrar and has asked for and been granted a hearing
for the purpose of resolving those issues in November 1999.
Application of Future or Additional Regulatory Requirements. In the future,
Leisure Time Technology intends to seek the necessary registrations, licenses,
approvals and findings of suitability in other states and foreign jurisdictions
in which Leisure Time Technology identifies significant sales potential for its
products. However, there can be no assurance that such necessary approvals will
be obtained and will not be revoked. If an approval is required by a regulatory
authority and Leisure Time Technology fails to seek or does not receive the
necessary license, Leisure Time Technology may be prohibited from selling its
products in the respective jurisdiction or may be required to sell its products
through other licensed entities at a reduced profit to Leisure Time Technology.
PROPRIETARY RIGHTS
Leisure Time's success depends in part on its proprietary technology.
Leisure Time relies on a combination of:
- copyrights;
- trade secret and trademark law;
- nondisclosure agreements; and
- technical safeguards
to protect its software, documentation and other written materials.
As a part of its confidentiality procedure, Leisure Time generally enters
into nondisclosure agreements with its employees and consultants and limits
access to its software, documentation and other written materials.
Despite Leisure Time's efforts to protect its proprietary rights,
unauthorized third parties may be able to copy its products or to reverse
engineer or obtain and use information that Leisure Time regards as proprietary.
Leisure Time cannot provide assurances that competitors will not independently
develop technology that is substantially equivalent or superior to Leisure
Time's technology. Policing unauthorized use of Leisure Time's products is
difficult. Leisure Time is unable to determine the extent to which software
piracy of its products exists. Software piracy may be a continuing and
persistent problem.
Leisure Time has no patents and has two patent applications pending for a
type of keno game that is not currently being offered by Leisure Time and for a
progressive feature on a video blackjack game in the near future. Leisure Time
may not be issued any patents and any patents issued may not provide Leisure
Time with coverage that will be useful to protect Leisure Time against
infringement by others.
Leisure Time has obtained trademark registration from the United States
Patent and Trademark Office for the names of a few of its video gaming machine
games. The registrations terminate at various times in
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2008. Leisure Time has also applied to the United States Patent and Trademark
Office to register the names Leisure Time Casinos & Resorts, Leisure Time,
Leisure Time Gaming, Inc., Leisure Time Technology and Leisure Casino Cruises.
Leisure Time believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technological leadership
position within the industry than are the various legal protections.
HISTORY OF LEISURE TIME'S ACQUISITIONS
Summary of Business Development. Leisure Time was incorporated in February
1993. Until September 1996, Leisure Time was a development stage company seeking
a business opportunity. In September, 1996, Leisure Time acquired Leisure Time
Technology (which was then known as U.S. Games, Inc.). Leisure Time Technology
is engaged in the manufacture and sale of video gaming and pulltab machines.
In February 1997, Leisure Time acquired the Leisure Lady, an offshore
gaming vessel, and in April 1998, Leisure Time chartered the Vegas Express, an
offshore gaming vessel. In May 1999, Leisure Time acquired the corporation that
owns the Vegas Express. The Vegas Express commenced offshore gaming cruises in
July 1998. Until Leisure Time locates a port for the Leisure Lady, Leisure Time
cannot predict when the Leisure Lady will commence offshore gaming cruises.
In September, 1998, Leisure Time acquired the hotel property that Leisure
Time is renovating in the Cleveland, Ohio area.
In February 1999, Leisure Time acquired a gaming route in South Carolina.
Acquisition of Leisure Time Technology. In September 1996, Leisure Time
acquired Leisure Time Technology (which was then known as U.S. Games, Inc.) in a
transaction in which a wholly-owned subsidiary of Leisure Time merged into
Leisure Time Technology. The total consideration that was to be paid by Leisure
Time was approximately $1.7 million in cash at closing, contingent payments
which totaled $2.5 million and $4.1 million in notes payable. The agreements
pertaining to the contingent payments had a provision which entitled Leisure
Time to an early payment discount. Leisure Time exercised the provision and paid
a total of $2.9 million during the year ended June 30, 1997, to extinguish any
further obligations remaining under the contingent payment agreements.
As a part of the transaction, Leisure Time also entered into $1.6 million
of deferred compensation contracts with a number of individuals. These contracts
provided for the payment of defined amounts, generally for a period of up to six
years, commencing on a monthly basis in November 1996. As of December 31, 1998,
Leisure Time had paid a total of $1.1 million pursuant to the deferred
compensation agreements.
Also, in connection with the acquisition, Leisure Time entered into a
noncompete agreement with the former stockholder of Leisure Time Technology. The
agreement is payable through September 2006 in 10 annual installments of
$730,000 which includes interest imputed at 6.64%. As of December 31, 1998,
Leisure Time had paid a total of $1.5 million pursuant to the noncompete
agreement.
In order to generate a portion of the cash necessary for the acquisition,
Leisure Time borrowed $1.6 million pursuant to two different series of 11%
convertible promissory notes. The first series of notes aggregating $210,000 was
convertible into units consisting of one share of common stock and a warrant to
purchase one share of common stock at a conversion rate of $2.50 per share.
Through March 31, 1999, these notes were converted into 76,978 shares of common
stock and warrants to purchase 76,978 shares of common stock at $2.50 per share.
The second series of notes aggregating $1.4 million was convertible into units,
at a price of $1.25 per unit, consisting of one share of common stock and a
warrant to purchase shares of Leisure Time's common stock at prices of $1.75 and
120% of the offering price of an initial public offering of common stock by
Leisure Time. The second series of notes contained an anti-dilution provision
that required the issuance of additional warrants after shares and shares
issuable on exercise of outstanding options and warrants exceeded a total of
10,000,000 shares of common stock exclusive of the 120% warrants. After a
default in
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payment on the original principal amount of the second series of notes, $1.2
million of the notes in default were called for acceleration and Leisure Time
paid the remaining interest and principal due in January, 1999. The holders of
the notes that were called for acceleration have asserted that they retained
their conversion rights under the notes.
Acquisition of Vessels. Leisure Time owns the Leisure Lady and the Biloxi
Belle. The Leisure Lady was acquired by Leisure Time in February 1997 for a
total consideration of approximately $2.6 million in cash and 150,000 shares of
Leisure Time's common stock. The Biloxi Belle was acquired in December 1998 for
approximately $1.5 million in cash.
In May 1999, Leisure Time purchased the outstanding stock of the
corporation that owns the Vegas Express. The total consideration was $4.1
million in cash, 80,000 shares of common stock and three year warrants to
purchase 80,000 shares of common stock at $10.00 per share. Leisure Time and the
previous owner also agreed that the previous owner would pay 50% of any of the
disclosed liabilities of the corporation that exceed $1.45 million. As of March
31, 1999, Leisure Time had advanced $2.0 million of the purchase price to the
corporation. Prior to the acquisition of the Vegas Express, Leisure Time had a
bareboat charter agreement for the use of the Vegas Express. The agreement
commenced on April 22, 1998 and was extended through April 21, 1999. Charter
payments were $100,000 per month until January 1999, at which time they
decreased to $50,000 per month. In addition to the charter payments, beginning
in January 1999, Leisure Time paid the owner of the Vegas Express a set fee per
passenger per month in excess of 12,000 passengers. In addition to the monthly
charter payments payable under the bareboat charter agreement, Leisure Time
advanced approximately $50,000 to the owner of the Vegas Express in December
1998. Leisure Time had a third mortgage of approximately $1.7 million on the
Vegas Express which was released when Leisure Time acquired the corporation.
Leisure Time also entered into a three month consulting agreement with the sole
stockholder of the owner of the Vegas Express pursuant to which Leisure Time
paid the sole stockholder $55,000 per month for the months of February and March
1999.
Acquisition of Gaming Route Operation. In February 1999, Leisure Time
acquired a gaming route consisting of 12 locations containing 47 video gaming
machines in South Carolina from Phillip C. Caldwell, the Vice President and
Chief Operating Officer of Leisure Time Gaming. Mr. Caldwell had acquired these
locations and video gaming machines in October 1998, for $70,000. Leisure Time
paid Mr. Caldwell $39,000 for the gaming route operation by forgiving debt owed
by Mr. Caldwell to Leisure Time.
Leisure Time has received unaudited revenue of approximately $35,000 and
$7,000 from its gaming route operations for the months of February and March
1999.
Acquisition of Hotel. Leisure Time acquired the hotel property for
approximately $1 million, of which approximately $500,000 has been paid. The
balance was paid by the execution of a promissory note in the amount of
approximately $545,000 that bears interest at 10% per annum and is due in
September 2003.
Acquisition of Finance Company. In April 1999, Leisure Time acquired all of
the outstanding stock of Leisure Time Financial from David M. Pote in exchange
for 100,000 shares of Leisure Time's common stock and an option to purchase
100,000 shares of common stock at $6.00 per share. The option had a value of
$400,000 based on a value of $10.00 per share of Leisure Time's common stock.
The option vests as to 20,000 shares on each of the first through fifth
anniversaries of the grant date and expires ten years after each respective
vesting date. The option terminates as to any unvested portion if Mr. Pote
ceases to be either a director, officer or employee of Leisure Time or one if
its subsidiaries. In addition, Leisure Time provided additional funding to
Leisure Time Financial and Leisure Time Financial paid Mr. Pote approximately
$153,000 due on a loan from Mr. Pote to Leisure Time Financial. Leisure Time
Financial and Mr. Pote entered into a three-year employment agreement in April
1999 under which Mr. Pote serves as the Senior Vice President of Leisure Time
Financial. Mr. Pote receives a base salary of $125,000 per year plus benefits.
The employment agreement contains a non-competition clause prohibiting Mr. Pote
from competing with Leisure Time during the term of the employment agreement and
for a period of six months thereafter.
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FACILITIES
The following chart provides information pertaining to the facilities
currently leased by Leisure Time:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
LOCATION USE SQUARE FOOTAGE MONTHLY RENTAL EXPIRATION
- -------- --- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Norcross, GA......... Executive offices and 57,000 $20,663 1/2005
manufacturing
facility
Norcross, GA......... Offices 7,200 $ 3,900 4/2000
Tulsa, OK............ Offices and research 2,500 $ 3,125 2/2002
and development
Spartanburg, SC...... Offices and warehouse 9,000 $ 3,600 12/1999
Gloucester, MA....... Dock and parking N/A $10,300 12/2000
Hyannis, MA.......... Restaurant and 5,000 $16,667 4/2000
apartments plus passenger
Marina N/A fees
Hyannis, MA.......... Office 1,860 $ 2,248 4/2000
Hyannis, MA.......... Employee housing 5,000 $ 2,500 4/2000
Dania, FL............ Dock, ticket booth N/A $ 6,500 plus rent 5/2000
and boarding area based upon number of
passengers
Edina, MN............ Office 1,533 $ 2,107 5/2002
Avon, OH............. Office 1,250 $ 1,500 6/2000
New Orleans, LA...... Condominium/office 4,200 $ 2,500 10/2002
</TABLE>
Leisure Time also owns a hotel property in Cleveland, Ohio, that is
encumbered by a mortgage of approximately $545,000.
EMPLOYEES
As of June 30, 1999, Leisure Time employed 300 persons, 231 of whom were
employed on a full time basis. The approximate number of employees in each
operation follows:
- 37 in manufacturing;
- 28 in engineering and research and development;
- 159 in offshore gaming and related restaurant;
- 11 in gaming routes;
- 10 in renovating the hotel;
- 3 in equipment financing; and
- 9 in sales and marketing.
The balance are management employees and staff that are involved in executive
management and administration of Leisure Time. There are no union or collective
bargaining agreements between Leisure Time and its employees and employee
relations are considered by Leisure Time to be excellent.
LITIGATION
On October 30, 1996, Drews Distributing, Inc. filed a complaint against
Leisure Time Technology, Inc. in the United States District Court for the
District of South Carolina (Case No.: 7 96 3307 13) in which Drews alleged,
among other things, that Leisure Time Technology breached the Exclusive
Distribution Agreement dated November 27, 1995, that was entered into between
Leisure Time Technology (which was then known as U.S. Games, Inc.) and Drews.
After a trial to the Court, the Court found that Leisure Time Technology
breached the agreement by selling the Pot O Gold video game machines to others
in South Carolina. The Court held that, as a direct and proximate result of such
breach, Drews suffered actual damages in the amount
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of approximately $3.1 million. Leisure Time Technology appealed the decision to
the United States Court of Appeals for the Fourth Circuit (Record No. 97-2391)
which affirmed the judgment. Leisure Time Technology then filed a petition for
rehearing by the Fourth Circuit which was denied. Leisure Time Technology paid
the judgment in full in May 1999.
On October 19, 1998, James J. Oden, the former Vice President, Chief
Operating Officer, Chief Financial Officer, Treasurer and Secretary of Leisure
Time Technology, filed a complaint against Leisure Time and Leisure Time
Technology in the United States District Court for the Northern District of
Georgia (Civil Action File No. 1 98-CV-3033) alleging that Leisure Time and
Leisure Time Technology had breached an alleged employment agreement with Mr.
Oden because Leisure Time granted incentive stock options to Mr. Oden for
200,000 shares exercisable at $2.50 per share rather than nonqualified stock
options for 200,000 shares exercisable at $1.00 per share. Further, Mr. Oden
alleges that the stock options he should have received should have been
exercisable without being conditioned upon a particular schedule and should not
have expired upon the termination of his employment. Mr. Oden claims that the
value of Leisure Time's common stock on October 19, 1998, exceeded $15.00 per
share and seeks an unspecified amount of damages. Leisure Time and Leisure Time
Technology filed answers denying Mr. Oden's claims and have filed a motion for
summary judgment which is currently pending.
On June 10, 1998, Collins Entertainment Corp. filed a complaint against
Leisure Time Technology in the Court of Common Pleas for the Fifth Judicial
Circuit, Richland County, State of South Carolina. Collins alleges, among other
things, that Leisure Time Technology breached the Sales Distribution Agreement
dated May 13, 1992 that was entered into between Leisure Time Technology (which
was then known as U.S. Games, Inc.) and Collins by not supplying Collins with
Pot O Gold machines for resale in South Carolina. Collins further alleges that
Leisure Time Technology used unfair and/or deceptive means of restraining trade
in violation of the South Carolina Unfair Trade Practices Act by limiting the
supply of Pot O Gold machines in South Carolina. Collins requests that it be
granted damages in an amount to be determined at trial and that the damages be
trebled. In interrogatory responses, Collins alleges that its actual damages are
approximately $1.3 million. Collins also requested that it be granted a
temporary restraining order and preliminary injunction against Leisure Time
Technology.
This litigation follows an earlier lawsuit regarding the same contract
filed by Collins against Leisure Technology in South Carolina District Court on
November 7, 1996 (the "Prior Litigation") which resulted in a jury verdict
returned on October 30, 1997, in favor of Collins in the amount of $0.
Leisure Time Technology had the Collins action removed to the United States
District Court for the District of South Carolina, Anderson Division (Civil
Action No.: 3-98-1887-17). In September 1998, the Court denied Collins' request
for a temporary restraining order and preliminary injunction. Leisure Time
Technology has filed an Answer and Counterclaim in which Leisure Time Technology
denies various allegations, asserts various affirmative defenses and
counterclaims that Collins sold new Pot O Gold games as used games thereby
constituting an unfair and deceptive act in trade or commerce in South Carolina
in violation of the South Carolina Unfair Trade Practices Act. Leisure Time
further alleges that Collins' actions in selling Pot O Gold games in violation
of the terms of the Agreement resulted in a judgment being entered against
Leisure Time in favor of Drews in the amount of approximately $3.1 million and
constituted tortious interference with contract. Leisure Time Technology's
Exclusive Distribution Agreement with Drews allowed Leisure Time Technology to
sell Pot O Gold games directly to Collins for Collins' own use only, but not for
resale by Collins. Leisure Time Technology alleges that Collins agreed to this
limitation. The Court determined that, by continuing to sell the games to
Collins with actual or constructive knowledge that Collins was reselling those
games, Leisure Time breached its Exclusive Distribution Agreement with Drews and
awarded damages based on each of the resales made by Collins. Leisure Time
requests that it be granted damages to be determined at trial and that the
damages be trebled.
On March 24, 1999, the Court struck various of Leisure Time Technology's
answers as being res judicata or collaterally estopped because of the prior
litigation between Collins and Leisure Time and dismissed Leisure Time
Technology's counterclaims mentioned above. Each stricken paragraph contained a
defense the essence of which was that the agreement between Leisure Time
Technology and Collins was either not
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binding or had been modified so as to prohibit Collins from reselling Pot-O-Gold
machines in South Carolina. The order also struck Leisure Time Technology's
counterclaims for violation of the South Carolina Unfair Trade Practices Act,
contractual and common law indemnification, and tortious interference with
contract. Leisure Time Technology filed a motion for reconsideration or in the
alternative, for immediate appeal. On June 29, 1999, the Court denied Leisure
Time Technology's motions and issued an amended order affirming the Court's
March 24, 1999 order. Leisure Time Technology intends to defend the lawsuit
vigorously.
On December 14, 1998, Leisure Time Technology filed a lawsuit against Drews
in the Superior Court of Gwinnett County, State of Georgia (Civil Action No.:
98-A-97614) in which Leisure Time Technology alleges that Drews breached the
Exclusive Distribution Agreement dated November 27, 1995, by failing to pay
Leisure Time Technology $2.7 million for a portion of the memory board upgrade
kits for Pot O Gold machines that Drews had ordered but did not pickup from
Leisure Time Technology and by failing to pay Leisure Time Technology $5 million
for a portion of the Pot O Gold machines Drews had ordered but did not pickup
from Leisure Time Technology. It is also Leisure Time Technology's position
that, in connection with Leisure Time Technology's development and sale of new
T-340+ circuit boards, Drews agreed that if a South Carolina end user purchased
a Pot O Gold machine which contained the old T-340 circuit board, the end user
could purchase the new T-340+ circuit board from Drews and then return his old
T-340 circuit board to Leisure Time Technology. Drews agreed to arrange for end
users to return the replaced T-340 circuit boards to Leisure Time Technology for
reuse. It is Leisure Time Technology's position that the T-340 circuit board and
its technology are trade secrets of Leisure Time Technology and that, by
allowing its customers to keep the old T-340 circuit boards and not return them
to Leisure Time Technology, Drews has indirectly misappropriated Leisure Time
Technology's technology and trade secrets. Leisure Time Technology requests that
Leisure Time Technology be granted damages to be proved at trial, interest and
attorneys' fees, specific performance and an order enjoining the
misappropriation.
Drews has filed an answer and counterclaim in this action in which Drews
alleges that Leisure Time Technology has continued to breach the agreement, that
Leisure Time Technology's breach was accompanied by a fraudulent act and that
Leisure Time Technology committed fraudulent nondisclosure of material facts in
connection with the agreement. Drews is claiming actual damages in an amount to
be proved at trial for the loss of sales, for the diminution of the price of
games sold by Drews due to a loss of exclusivity, for the refusal of Leisure
Time Technology to sell games at the contract price and due to the sales by
Collins and other in violation of the agreement. Drews is also requesting
punitive damages. Drews' counterclaims are similar to the claims by Drews in the
case in which Drews recovered a judgment in the amount of approximately $3.1
million. In that case, the Court made no finding of any fraudulent acts by
Leisure Time Technology.
On March 25, 1999, Drews filed a complaint against Leisure Time Technology
and Phillip C. Caldwell in the Court of Common Pleas for the Fifth Judicial
Circuit, Richland County, South Carolina, essentially repeating the allegations
asserted in its counterclaim against Leisure Time Technology in the Gwinnett
County, Georgia action. Specifically, Drews alleges that Leisure Time Technology
breached the Distribution Agreement by continuing to sell Pot-O-Gold machines to
Collins, directly selling machines in South Carolina and "illegally raising the
prices of video games." Drews also alleges claims for breach of contract
accompanied by a fraudulent act, fraudulent nondisclosure of a material fact and
tortious interference with Drews' alleged contracts with Darlington Music
Company and Gold Strike/American Bingo and Gaming. Drews seeks unspecified "past
damages," actual damages, punitive damages and attorneys' fees.
An unfavorable outcome in any of the outstanding lawsuits could have a
material adverse effect on the financial condition of Leisure Time.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Leisure Time has filed a registration statement with the SEC registering
the common stock offered by this prospectus. This prospectus does not contain
all of the information in the registration statement and its exhibits and
schedules. For further information about Leisure Time and its common stock,
please refer to the registration statement and the exhibits and schedules filed
with the SEC.
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<PAGE> 71
A copy of the registration statement and its exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048, and copies of all or any part of the
registration statement may be obtained from such offices upon the payment of the
fees prescribed by the SEC. The SEC maintains a website that contains
registration statements, reports, proxy and other information regarding
registrants that file electronically with the SEC. The address of the website is
http://www.sec.gov.
Leisure Time intends to furnish annual reports to stockholders containing
audited financial statements and will also make available quarterly reports and
such other periodic reports as it may determine to be appropriate or as may be
required by law.
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MANAGEMENT
The directors, executive officers, other officers and key employees of
Leisure Time and its subsidiaries are as follows:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS OF LEISURE TIME AGE POSITION
- ------------------------------------------------ --- --------
<S> <C> <C>
Alan N. Johnson............................ 58 Chairman of the Board, President and
Chief Executive Officer
Elden W. Rance............................. 61 Executive Vice President, Chief
Financial Officer, Treasurer,
Assistant Secretary and Director
R. Thomas Klingel.......................... 52 Executive Vice President of
Engineering, Research and Development
and Director
Gerald J. Boyle............................ 68 Vice President, Secretary and Director
Eric R. Dey................................ 40 Vice President of Finance
Richard D. Sly............................. 64 Assistant Secretary and Director
Lester E. Bullock.......................... 46 Director
</TABLE>
<TABLE>
<CAPTION>
OTHER OFFICERS AND KEY EMPLOYEES AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Phillip C. Caldwell................... 37 Vice President and Chief Operating
Officer of Leisure Time Gaming
Anne M. Ellison....................... 41 Vice President of Human Resources of
Leisure Time
Joseph C. Grunda...................... 47 Vice President of Licensing and
Compliance/General Counsel and
Assistant Secretary of Leisure Time
Kelly J. Macke........................ 33 Vice President of U.S. Sales and
Marketing of Leisure Time
Keko Mottes........................... 48 Vice President of Sales and Marketing
of Leisure Time
Mary J. Olszewski..................... 41 Controller of Leisure Time
John J. Pasierb....................... 52 Vice President of Engineering and
Research and Development of Leisure
Time
David M. Pote......................... 55 Senior Vice President of Leisure Time
Financial
John W. Salter........................ 44 Vice President of Operations of
Leisure Time Technology
Gary W. Watkins....................... 45 President and Director of Solutia
Gaming Systems
</TABLE>
Directors are elected for a three-year term, with approximately one-third
of the board of directors standing for election each year. Each director holds
office until the expiration of the director's term, until the director's
successor has been duly elected and qualified or until the earlier of their
resignation, removal or death. All of Leisure Time's officers and key employees,
except Richard D. Sly, spend substantially all of their time on Leisure Time's
business and affairs.
Alan N. Johnson has been the Chairman of the Board and President of Leisure
Time since 1993 and the Chief Executive Officer of Leisure Time since 1997. Alan
N. Johnson also serves in the following capacity with the following wholly-owned
operating subsidiaries of Leisure Time:
- Leisure Time Technology -- Director, Chairman, President and Chief
Executive Officer;
- Leisure Time Cruise -- Director and President;
- Leisure Express Cruise -- President and Chief Executive Officer;
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<PAGE> 73
- Florida Casino Cruises -- Director, President and Chief Executive
Officer;
- Leisure Time Gaming -- Director, President and Chief Executive Officer;
- One Eyed Jacks Gaming -- Director, President and Chief Executive Officer;
- Leisure Time Hospitality -- President;
- Leisure Time Financial -- Director, President and Chief Executive
Officer; and
- Leisure Time International -- Director and President.
Mr. Johnson studied transportation law at Fenn College, Engineering at Case
Western Reserve and hazardous materials removal and control at Georgia Institute
of Technology.
Elden W. Rance has been the Executive Vice President, Chief Financial
Officer, Treasurer and a director of Leisure Time since 1998 and an Assistant
Secretary of Leisure Time since 1999. Elden W. Rance also serves in the
following capacities with the following wholly owned subsidiaries of Leisure
Time:
- Leisure Time Technology -- Director, Executive Vice President, Secretary
and Treasurer;
- Leisure Time Cruise -- Director, Executive Vice President, Treasurer and
Secretary;
- Leisure Express Cruise -- Executive Vice President, Treasurer and
Secretary;
- Florida Casino Cruises -- Director and Secretary;
- Leisure Belle Cruise -- Executive Vice President, Treasurer and
Secretary;
- Leisure Time Gaming -- Director, Executive Vice President, Secretary and
Treasurer;
- One Eyed Jacks Gaming -- Director, Executive Vice President, Secretary
and Treasurer;
- Leisure Time Hospitality -- Director, Secretary and Treasurer;
- Leisure Time Financial -- Director, Executive Vice President, Secretary
and Treasurer; and
- Leisure Time International -- Director, Vice President and Treasurer.
From 1988 to 1998, Mr. Rance was employed as the President of Rance &
Associates, a financial consulting firm that specialized in expert evaluations
for banking litigation, finance acquisition and reorganizations. From 1989 to
1994, Mr. Rance was the Chairman and Chief Executive Officer of RP Capital
Corporation, a full service regional leasing company that Leisure Time acquired
in April 1999. Mr. Rance graduated from the Graduate School of Commercial
Lending of the University of Oklahoma and the Graduate School of Banking of the
University of Colorado.
R. Thomas Klingel has been the Executive Vice President of Engineering,
Research and Development since 1999 and a director of Leisure Time since 1997.
From 1997 to 1999, Mr. Klingel was Executive Vice President of Marketing, Sales,
Compliance and Licensing of Leisure Time. From 1992 to 1996, Mr. Klingel was
Executive Vice President of U.S. Games, Inc. which is now Leisure Time
Technology, Inc. Mr. Klingel attended Western Michigan University and received a
master of business administration degree in management and international studies
from Georgia State University.
Eric R. Dey has been the Vice President of Finance since July 1999. Mr. Dey
was the Corporate Controller with Excel Communications, Inc., a
telecommunications company, from 1994 to 1999. From 1993 to 1994, Mr. Dey was
the Corporate Controller for Brinks Home Security, a security company that is a
subsidiary of Pittston Corporation. From 1984 to 1993, Mr. Dey was with the
Pepsi Cola Company, a diversified food and beverage company, in various
positions the latest being the Manager of Financial Operations. Mr. Dey is a
Certified Public Accountant. Mr. Dey graduated from Western Michigan University
with a bachelor of science degree in business administration and from The
University of Dallas with a masters degree in business administration.
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Gerald J. Boyle has been the Vice President and the Secretary of Leisure
Time since 1997 and a director of Leisure Time since 1994. From 1987 to the
present, Mr. Boyle has been an independent accountant with a concentration in
consulting for small emerging companies. Mr. Boyle graduated with a bachelor of
commerce degree in accounting from Sir George William University.
Richard D. Sly has been an Assistant Secretary of Leisure Time since 1997
and a director of Leisure Time since 1993. Mr. Sly was a Vice President of
Leisure Time from 1993 to 1997 and the Secretary of Leisure Time from 1993 to
1997. Mr. Sly has been employed by Richard Sly Architect, Inc., an architectural
firm owned by him, since 1970. Mr. Sly graduated from Ohio State University with
a bachelor of architecture degree. In addition to providing architectural
services for the hotel for which Mr. Sly is compensated separately, Mr. Sly
provides services as a part time employee of Leisure Time.
Lester E. Bullock has been a director of Leisure Time since 1998 and has
been a Vice President and the Chief Operating Officer of Leisure Time Cruise
Corporation since 1998. From 1994 to 1998, Mr. Bullock was the President and
Chief Executive Officer and a director of Europa Cruise Corporation, a day
cruise operator. From 1992 to 1994, Mr. Bullock was the General Manager and then
the Vice President of Operations of Europa Cruise Corporation. Mr. Bullock
graduated from Arizona State University with a bachelor of science degree in
business administration.
Phillip C. Caldwell has been the Vice President and Chief Operating Officer
of Leisure Time Gaming, Inc. and an employee of Leisure Time since 1998. From
1995 to 1998, Mr. Caldwell was the Vice President and COO of Thunderbird
Carolina Inc., a distributor of gaming machines. From 1982 to 1995, he was the
Vice President of Operations of Drews Distributing Company, a distributor of
gaming machines. Mr. Caldwell attended Richmond Technical Center and Spartanburg
Technical College.
Anne M. Ellison has been the Vice President of Human Resources of Leisure
Time since 1998. From 1997 to 1998, Ms. Ellison was the Human Resources Manager
for Intellisourse, an outsourcing service provider. From 1988 to 1997, Ms.
Ellison was the Human Resources Manager for Oglethorpe Power, a private electric
utility. Ms. Ellison graduated from Georgia State University with a bachelor of
science degree in office administration.
Joseph C. Grunda has been the Vice President of Licensing and
Compliance/General Counsel and an Assistant Secretary of Leisure Time since
1999. From 1981 to 1999, Mr. Grunda was a partner in the law firm of Grunda &
Grunda. Mr. Grunda graduated from the College of Wooster with a bachelor of arts
degree and from Ohio Northern University with a doctor of jurisprudence degree.
Kelly J. Macke has been the Vice President of U.S. Sales and Marketing of
Leisure Time since May 1999. Mrs. Macke was an Account Executive with Leisure
Time Technology from January 1997 to May 1999. From 1994 to 1997, Mrs. Macke was
a licensed insurance agent with Sedgwick, an insurance broker. From 1991 to
1994, Mrs. Macke was an Account Executive with Hogg Robinson, an insurance
broker. Mrs. Macke attended Lorain County Community College. Kelly J. Macke is
the daughter of Alan N. Johnson.
Keko Mottes has been the Vice President of Sales and Marketing of Leisure
Time since 1999. From 1998 to 1999, Mr. Mottes was the Vice President of
International Sales and New Market Development of Leisure Time Technology, Inc.
From 1987 to 1998, Mr. Mottes was the Director of International Sales at Bally
Gaming, Inc., a gaming machine manufacturer. Mr. Mottes attended The High
Technical Institute of San Michele, Italy and also holds a Slot and
Coin-Operated Electro Technician Certification from Bally Continental, Ltd. in
Belgium.
Mary J. Olszewski has been the Corporate Controller of Leisure Time since
1998 and was the Controller of Leisure Time Technology from 1994 to 1998. Ms.
Olszewski graduated from Michigan Technological University with a bachelor of
science in business administration.
John J. Pasierb has been the Vice President of Engineering and Research and
Development of Leisure Time since 1999. From 1998 to 1999, Mr. Pasierb was the
Vice President of Engineering and Research and Development of Leisure Time
Technology. From 1994 to 1998, Mr. Pasierb was the President of Acclaim
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Coin-Operated Amusement, a wholly-owned subsidiary of Acclaim Entertainment.
From 1992 to 1994, Mr. Pasierb was Vice President of Engineering of American
Laser Games. Mr. Pasierb graduated from Western Michigan University with a
master of science degree in engineering.
David M. Pote has been the Senior Vice President of RP Capital Corporation
since 1999. Mr. Pote was the President, a director and the majority owner of RP
Capital Corporation for over the past five years. Mr. Pote graduated from Le
Moyne College with a bachelors degree in accounting and from the State
University of New York at Buffalo with a masters degree in business
administration.
John W. Salter has been the Vice President of Operations of Leisure Time
Technology since 1999. From 1997 to 1998, when he became employed by Leisure
Time Technology, Mr. Salter was the plant manager for ACCO, NA, a manufacturer
of office storage boxes. Prior to 1996, Mr. Salter was an operations manager for
the Simmons Company, a mattress manufacturer. Mr. Salter graduated from Clemson
University with a bachelor of science degree in administrative management.
Gary W. Watkins has been the President and a director of Solutia Gaming
Systems, Inc. since 1998. From 1996 to 1998, Mr. Watkins was the President of
Worldlink Gaming, Inc., a Class II electronic game developer. From 1994 to 1996,
Mr. Watkins was the Vice President of Research and Development of Multimedia
Games, Inc., a Class II electronic game developer. Mr. Watkins graduated from
the University of Tulsa with a degree in business management.
COMMITTEES OF THE BOARD OF DIRECTORS
Within 90 days after the date of this prospectus, Leisure Time plans to add
at least two non-employee directors. The board of directors will then create and
maintain a compensation committee and an audit committee. The compensation
committee and the audit committee will be composed of at least the two non-
employee directors. The primary functions of the compensation committee will be
to review and make recommendations to the board of directors with respect to the
compensation, including bonuses, of Leisure Time's officers and to administer
the grants under Leisure Time's stock option plan. The functions of the audit
committee will be to review the scope of the audit procedures employed by
Leisure Time's independent auditors, to review with the independent auditors
Leisure Time's accounting practices and policies and recommend to whom reports
should be submitted within Leisure Time, to review with the independent auditors
their final audit reports, to review with Leisure Time's internal and
independent auditors Leisure Time's overall accounting and financial controls,
to be available to the independent auditors during the year for consultation, to
approve the audit fee charged by the independent auditors, to report to the
board of directors with respect to such matters and to recommend the selection
of the independent auditors.
COMPENSATION OF DIRECTORS
Leisure Time does not currently pay its directors any cash compensation for
their services as directors. Leisure Time expects to compensate directors in the
future with cash and options to purchase Leisure Time's common stock. Directors
are reimbursed for expenses incurred in connection with meetings of the board of
directors or committees thereof.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, Leisure Time had no compensation committee and all
of the directors of Leisure Time who were officers of Leisure Time during the
fiscal year ended June 30, 1998, participated in deliberations of Leisure Time's
board of directors concerning executive officer compensation.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by Leisure Time for services rendered in all capacities to Leisure Time and its
subsidiaries for the fiscal years ended June 30, 1999, 1998, and 1997 to those
persons who were (i) the chief executive officer of Leisure Time during the
fiscal year ended June 30, 1999, and (ii) the other most highly compensated
executive officers of Leisure Time and of
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Leisure Time's subsidiaries whose annual salary and bonus paid by Leisure Time
exceeded $100,000 for the fiscal year ended June 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
YEAR ANNUAL COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITIONS ENDED ------------------- SECURITIES
AT JUNE 30, 1999 JUNE 30, SALARY BONUS UNDERLYING OPTIONS
- ---------------------------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Alan N. Johnson............................... 1999 $452,797 $102,356 --
Chairman of the Board, President and Chief 1998 357,544 3,847 --
Executive Officer 1997 483,881 -- 206,400
Elden W. Rance................................ 1999 $219,247 $ 55,847 --
Executive Vice President, Chief Financial 1998 26,539 -- 562,500
Officer and Treasurer 1997 -- -- --
R. Thomas Klingel............................. 1999 $212,217 $ 27,185 --
Executive Vice President of Marketing, 1998 177,024 2,597 --
Sales, Compliance and Licensing 1997 370,865 -- 204,300
Gerald J. Boyle............................... 1999 $155,481 $ 32,873 --
Vice President and Secretary 1998 157,500 -- --
1997 145,317 -- --
John J. Pasierb............................... 1999 $120,679 $ 2,404 100,000
Vice President of Engineering and Research 1998 -- -- --
and Development 1997 -- -- --
Timmie A. Godwin.............................. 1999 $144,115 $ 17,924 100,000
Vice President and Chief Operating Officer 1998 100,332 1,731 --
of Leisure Time Technology, Inc. until 1997 99,765 13,502 --
February 1999
</TABLE>
Leisure Time provides Alan N. Johnson, Elden W. Rance, R. Thomas Klingel
and John J. Pasierb with automobiles and pays the related insurance and
maintenance. The total amounts paid by Leisure Time for the automobiles,
insurance and maintenance for the fiscal years ended June 30, 1999, 1998 and
1997 for each individual did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus paid to each individual.
No options were granted by Leisure Time to Alan N. Johnson, Elden W. Rance,
R. Thomas Klingel or Gerald J. Boyle during Leisure Time's fiscal year ended
June 30, 1999. The following table provides information with respect to options
granted during Leisure Time's fiscal year ended June 30, 1999, to John J.
Pasierb and Timmie A. Godwin:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANT
NUMBER OF SHARES GRANTED TO EXERCISE EXPIRATION DATE
NAME UNDERLYING OPTION EMPLOYEES PRICE DATE VALUE
- ---- ----------------- --------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
John J. Pasierb............... 100,000 8.3% $6.00 11/8/2003- $141,000
12/31/2006
Timmie A. Godwin.............. 100,000 8.3% $6.00 Expired $609,000
5/14/99
</TABLE>
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Leisure Time utilizes the Black-Scholes option pricing model to calculate
the grant date fair value of each individual option grant. The following
assumptions were utilized: dividend yield of 0.0%; expected average annual
volatility of 0.0%; average annual risk-free interest rate of 5.44%; and
expected terms of 5 and 8 years.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION VALUES
------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Alan N. Johnson............. 0 0 1,060,456/ 0 $11,291,162/$ 0
Elden W. Rance.............. 0 0 562,500/ 0 3,375,000/ 0
R. Thomas Klingel........... 0 0 124,300/80,000 1,179,560/ 760,000
Gerald J. Boyle............. 0 0 50,292/ 0 477,774/ 0
John J. Pasierb............. 0 0 40,000/60,000 240,000/ 360,000
Timmie A. Godwin............ 40,000 $240,000 0/ 0 0/ 0
</TABLE>
The value realized and fiscal year end option values are based on an
assumed initial public offering price of $12.00 per share of the common stock
less the exercise prices of the options.
No options to purchase Leisure Time's common stock were exercised by
Messrs. Johnson, Rance, Klingel, Boyle or Pasierb during Leisure Time's fiscal
year ended June 30, 1999. Leisure Time loaned Timmie A. Godwin $240,000 to
exercise his option for 40,000 shares. The loan bears no interest and is payable
on demand. The loan is secured by the 40,000 shares.
EMPLOYMENT AGREEMENTS
Alan N. Johnson has an employment agreement with Leisure Time that
terminates on June 30, 2003. Elden W. Rance, R. Thomas Klingel, Gerald J. Boyle
and Richard D. Sly have employment agreements with Leisure Time that terminate
on June 30, 2001. Under the employment agreements, the current annual base
salaries of Alan N. Johnson, Elden W. Rance, R. Thomas Klingel, Gerald J. Boyle
and Richard D. Sly are $600,000, $300,000, $150,000, $165,000 and $41,250,
respectively. Each of the employment agreements is renewed automatically after
its termination date for succeeding one year periods unless Leisure Time or the
employee gives written notice of nonrenewal at least 180 days prior to the
expiration of any such renewal date. Each of the employment agreements contains
provisions that the employee will not disclose confidential information and will
not compete with Leisure Time for various periods after termination or
expiration of their employment agreements.
Each of the employment agreements contains a provision that, at any time
after a "change in control" of Leisure Time, the employee has the option to
cause Leisure Time to repurchase all or any portion of the common stock of
Leisure Time then owned by the employee at the higher of (i) the book value
thereof as of the last day of the month prior to the date of notice, or (ii) the
last sale price of a share of Leisure Time's common stock or the last price at
which the common stock was sold by Leisure Time or by a stockholder of Leisure
Time to any person (other than the employee). Also, upon a change of control of
Leisure Time, each employee is automatically granted options to purchase the
same number of shares of Leisure Time's common stock as are issuable upon
exercise of options to purchase Leisure Time's common stock then owned by the
employee. Such new options will have a ten year exercise period and an exercise
price of $0.01 per share.
A "change in control" is deemed to have occurred if:
- at any time any one person, or more than one person acting as a group,
acquires beneficial ownership of the voting securities of Leisure Time
that together with the voting securities beneficially owned by such
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<PAGE> 78
person or group, constitute more than 20% of the total voting power of
Leisure Time's outstanding voting securities;
- the appointment or election of a majority of the members of Leisure
Time's board of directors who are appointed or elected during any 24
month period but are not endorsed in writing by a majority of those
members of Leisure Time's board of directors who were directors prior to
the date of the appointment or election of the first such new directors
comprising a majority of the board of directors; or
- one person or more than one person acting as a group, acquires (or has
acquired during the 12 month period ending on the date of the most recent
acquisition by such person or persons) assets from Leisure Time that have
a total fair market value equal to or greater than one-third of the total
fair market value of all of Leisure Time's assets immediately before the
acquisition or acquisitions.
Bernard C. Johnson, an employee of Leisure Time and the brother of Alan N.
Johnson, has an employment agreement with Leisure Time that terminates on June
30, 2001, and has the same confidentiality, noncompetition and change in control
provisions as the employment agreements discussed above.
Leisure Time has an employment agreement with Eric R. Dey that will
terminate in June 2002. The employment agreement contains provisions that Mr.
Dey will not disclose confidential information and will not compete with Leisure
Time for various periods after termination or expiration of his employment
agreement. Further, Mr. Dey's employment agreement contains a provision that at
any time after a "change in control" of Leisure Time, Mr. Dey, at his option,
will have the right to terminate the employment agreement and Leisure Time will
be required to pay Mr. Dey 299% of Mr. Dey's compensation. In addition, a
"change in control" of Leisure Time will cause Mr. Dey's option to become fully
exercisable.
Joseph C. Grunda has an employment agreement with Leisure Time that
terminates on February 28, 2002. Keko Mottes and John J. Pasierb have employment
agreements with Leisure Time that terminate on January 31, 2002. John W. Salter
has an employment agreement with Leisure Time that terminates on December 7,
2001. David M. Pote, Jr. has an employment agreement with Leisure Time that
terminates on April 1, 2002. Gary W. Watkins has an employment agreement with
Leisure Time that terminates on May 31, 2002. Each of these employment
agreements contains provisions that the employee will not disclose confidential
information and will not compete with Leisure Time for various periods after
termination or expiration of their employment agreements.
CONSULTING AGREEMENT
Effective March 31, 1998, Leisure Time entered into a consulting agreement
with Anthony J. Siciliano, the former Executive Vice President and a former
director of Leisure Time. Pursuant to the consulting agreement, Mr. Siciliano is
required to provide a maximum of ten hours of management consulting per week for
Leisure Time and its subsidiaries. Mr. Siciliano is paid an amount of $5,000 per
month, together with the amount he pays to maintain his current health
insurance, and any out-of-pocket expenses incurred by him in performing his
consulting duties. The consulting agreement automatically terminates on December
31, 2008.
STOCK OPTION PLAN
Leisure Time has an incentive and nonstatutory stock option plan that
authorizes Leisure Time to grant incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended, and to grant
nonstatutory stock options. The stock option plan currently relates to a total
of 4,500,000 shares of common stock. Leisure Time has agreed with the
representative that all options granted under the plan after the date of this
prospectus until options to purchase a total of 3,000,000 shares have been
granted will be granted at no less than fair market value. Thereafter and until
the next meeting of Leisure Time's stockholders, any options granted relating to
the next 1,500,000 shares only may be granted at no less than the greater of the
fair market value of the common stock on the date of grant or 120% of the public
offering price of the common stock.
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<PAGE> 79
Options to purchase 2,220,977 shares of common stock have been granted
under the plan that are outstanding. The options are exercisable at between
$2.50 and $12.00 per share, vest over various periods of time and terminate
between 2003 and 2008. Of the outstanding options granted under the stock option
plan, executive officers of Leisure Time have been granted options to purchase
823,200 shares of common stock and other employees have been granted options to
purchase 1,397,777 shares of common stock. The outstanding options have a
weighted average exercise price of approximately $6.90 per share.
The stock option plan is administered by Leisure Time's board of directors
or a committee thereof which determines the terms of options granted, including
the exercise price, the number of shares of common stock subject to the option,
and the terms and conditions of exercise. No option granted under the stock
option plan is transferable by the optionee other than by will or the laws of
descent and distribution and each option is exercisable during the lifetime of
the optionee only by such optionee. The board of directors currently administers
the stock option plan.
Leisure Time has also granted nonqualified options to purchase 2,587,348
shares of Leisure Time's common stock outside of the stock option plan. Of these
options, executive officers of Leisure Time have been granted options to
purchase 1,147,348 shares of common stock that are exercisable at between $1.00
to $2.50 per share, are fully vested and terminate between 2005 and 2013. These
options have a weighted average exercise price of approximately $1.44 per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Colorado Business Corporation Act,
Leisure Time has adopted provisions in its articles of incorporation which
provide that its directors will not be personally liable to Leisure Time or its
stockholders for monetary damages for a breach of fiduciary duty as a director,
except that the provisions will not eliminate or limit the directors' liability
as a result of:
- a breach of the director's duty of loyalty to Leisure Time or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- voting for or assenting to a distribution, which, after giving effect to
the distribution, would result in (a) Leisure Time not being able to pay
its debts as they become due in the usual course of business, or (b)
Leisure Time's total assets being less than the sum of its total
liabilities plus amounts needed to satisfy preferential rights upon
dissolution of Leisure Time; or
- any transaction from which the director directly or indirectly derives
any improper personal benefit.
Leisure Time's articles of incorporation state that Leisure Time shall
indemnify, to the maximum extent permitted by law, any person who is or was a
director, officer, agent, fiduciary or employee of Leisure Time against any
claim, liability or expense arising against or incurred by such person made
party to a proceeding because such person served in any of such capacities or
because the person is or was serving another entity as a director, officer,
partner, trustee, employee, fiduciary or agent at Leisure Time's request. The
articles of incorporation also permit Leisure Time to purchase and maintain
insurance providing such indemnification. Leisure Time's bylaws also provide for
indemnification of such persons and for the advancement of expenses to such
persons.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and control persons of Leisure
Time pursuant to the foregoing provisions, or otherwise, Leisure Time has been
advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
CERTAIN TRANSACTIONS
Effective November 1, 1997, Leisure Time entered into a lease with Alan N.
Johnson relating to a condominium/office for Leisure Time located in the New
Orleans, Louisiana area. The lease expires on
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<PAGE> 80
October 31, 2002, and Leisure Time pays Alan N. Johnson rent of $2,500 per month
plus all association fees related to the condominium/office. Prior to November
1, 1997, Leisure Time had been reimbursing Mr. Johnson $1,600 per month for the
lease payments and association fees he paid for another condominium/ office
located in the New Orleans, Louisiana area.
Leisure Time leases approximately 1,250 square feet of office space from
Alan N. Johnson in Avon, Ohio, where the offices of Alan N. Johnson and Gerald
J. Boyle are located. Leisure Time pays $1,500 per month for the office space
pursuant to a lease that will terminate in June 2000.
Leisure Time leases 11 automobiles from J-Way Leasing, Ltd., a company
owned by Alan N. Johnson. The leases are for either 36 months or 48 months and
have various dates of expiration. Leisure Time reimburses J-Way Leasing, Ltd.
for the down payments J-Way Leasing, Ltd. pays on each of the automobiles and
pays J-Way Leasing, Ltd. a monthly payment equivalent to the monthly payments
(plus 5%) that J-Way Leasing, Ltd. pays for each automobile. Leisure Time did
not pay any amount to J-Way Leasing, Ltd. during the fiscal year ended June 30,
1998. The total amount paid by Leisure Time to J-Way Leasing, Ltd. for the nine
months ended March 31, 1999, was $89,000.
In June 1998, Leisure Time became a party to a purchase agreement and
amendment in place of Alan N. Johnson to purchase Leisure Time's hotel property
located in the Cleveland, Ohio area. In connection with the transaction, Leisure
Time reimbursed Alan N. Johnson $40,000 for the deposits he had made in
connection with the purchase agreement and amendment. Mr. Johnson originally
entered into the purchase agreement and amendment relating to the hotel property
in his name because he was concerned that, if Leisure Time was disclosed as the
true purchaser, the seller would increase the purchase price. At the time the
hotel property was purchased by Leisure Time, Alan N. Johnson was required to
guarantee the obligations of Leisure Time to the seller. Mr. Johnson received no
compensation for guaranteeing such obligations.
In September 1997, Leisure Time deposited $300,000 with an attorney to be
used as a deposit against the purchase price of a vessel that was involved in a
bankruptcy proceeding. When the purchase of the vessel did not occur, the
attorney returned the $300,000 to Alan N. Johnson to be held on behalf of
Leisure Time. After the advance, Alan N. Johnson owed Leisure Time a total of
$371,000 which included the $300,000 non-interest bearing advance, a note for
$55,000 and $16,000 of expenses owed by Mr. Johnson to Leisure Time. In 1998,
Leisure Time credited against the $371,000:
- $40,000 of rentals and association fees that were owed to Alan N. Johnson
for the condominium/office in New Orleans, Louisiana that Leisure Time
leases from Alan N. Johnson;
- a deposit of $18,000 that Alan N. Johnson had paid on behalf of Leisure
Time to a potential acquisition candidate of Leisure Time;
- $40,000 that Alan N. Johnson had deposited in connection with the
purchase of Leisure Time's hotel in the Cleveland, Ohio area;
- $135,000 that Alan N. Johnson had paid on an invoice of Leisure Time;
- $84,000 that offset accrued wages payable to Alan N. Johnson;
- $35,000 that offset rent that was payable to Alan N. Johnson;
- $6,000 that was paid as advances toward car rentals payable to J-Way
Leasing, Ltd.; and
- $13,000 for accrued interest payable to Alan N. Johnson.
In October 1998, Leisure Time Cruise Corporation borrowed $3 million from
Foothill Capital Corporation. The loan is secured by the assets of Leisure Time
Cruise Corporation, including the Leisure Lady, and is guaranteed by Leisure
Time Technology, Leisure Time and Alan N. Johnson. Mr. Johnson received no
compensation for guaranteeing the loan.
Mr. Johnson has also guaranteed a $1 million line of credit that Leisure
Time has with Merrill Lynch Business Financial Services, Inc. The line of credit
is secured by substantially all of the assets of Leisure Time
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<PAGE> 81
and is guaranteed by Leisure Time Technology, Leisure Time Cruise Corporation
and Alan N. Johnson. Mr. Johnson received no compensation for guaranteeing the
line of credit.
In May 1999, Leisure Express Cruise, LLC and Florida Casino Cruises, Inc.
borrowed a total of $5 million from Foothill Capital Corporation. The loans are
secured by the assets of Leisure Express Cruise, LLC and Florida Casino Cruises,
Inc., including the Vegas Express, and are guaranteed by Leisure Time, Leisure
Time Technology and Leisure Time Cruise Corporation. Alan N. Johnson also
guaranteed $1,000,000 of the loan. Mr. Johnson's guaranty will be extinguished
upon the completion of this offering. Mr. Johnson received no compensation for
guaranteeing the loans.
Alan N. Johnson owns 51% of Leisure Time Europe Ltd., which was formed in
February 1998 and acts as the distributor of Leisure Time's video gaming
machines to charities in Norway. Leisure Time sells the video gaming machines to
Leisure Time Europe, which adds a markup to the price and resells the video
gaming machines to the charities. The markup ranges from $400 to $1,200 per
video gaming machine depending on the number of video gaming machines sold to
the particular charity. Leisure Time Europe also services the video gaming
machines. From its inception through March 31, 1999, Leisure Time Europe has
realized a gross amount of approximately $40,000 from markups on the video
gaming machines sold in Norway. The remaining 49% of Leisure Time Europe is
owned by unaffiliated parties.
Commencing in July 1998, Leisure Time began to use the services of Richard
Sly Architect, Inc. to perform architectural services in connection with Leisure
Time's hotel property. Richard D. Sly is the Assistant Secretary and a director
of Leisure Time and owns Richard Sly Architect, Inc. Richard Sly Architect, Inc.
charges Leisure Time its standard fees for architectural services rendered. The
total amount paid by Leisure Time to Richard Sly Architect, Inc. during the year
ended June 30, 1999 was approximately $42,000.
Between July 1, 1997 and the date Leisure Time Financial was acquired by
Leisure Time, Leisure Time Financial and David M. Pote arranged equipment and
working capital financing for Leisure Time for which they received approximately
$50,000 and $12,500, respectively.
Leisure Time believes that the aforementioned transactions were made on
terms as fair to Leisure Time as those that Leisure Time could have obtained
from unrelated third parties at arms-length negotiations.
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<PAGE> 82
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of Leisure Time's common stock, as of the date of this prospectus, and as
adjusted to reflect the sale of 1,100,000 shares of common stock offered by this
prospectus, by:
- each person who is known by Leisure Time to own beneficially more than 5%
of Leisure Time's outstanding shares of common stock;
- each of Leisure Time's executive officers and directors;
- all executive officers and directors of Leisure Time as a group; and
- each other person listed in the Summary Compensation Table.
Shares of common stock not outstanding but deemed beneficially owned by
virtue of the right of an individual to acquire the shares of common stock
within 60 days are treated as outstanding only when determining the amount and
percentage of common stock owned by such individual. Except as noted, each
person has sole voting and investment power with respect to the shares of common
stock shown.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
PRIOR TO THE OFFERING
NAME AND, IF OVER 5%, ----------------------------- PERCENTAGE OWNED
ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS AFTER THE OFFERING
- --------------------------- --------- ---------------- ------------------
<S> <C> <C> <C>
Alan N. Johnson.................................... 3,202,456(1) 51.4% 43.7%
1284 Miller Road
Avon, Ohio 44011
Elden W. Rance..................................... 562,500(2) 9.8 8.2
4258 Communications Drive
Norcross, Georgia 30093
R. Thomas Klingel.................................. 124,300(3) 2.3 1.9
Gerald J. Boyle.................................... 350,292(4) 6.7 5.5
4258 Communications Drive
Norcross, Georgia 30093
Eric R. Dey........................................ 12,500(5) * *
Richard D. Sly..................................... 325,500(6) 6.2 5.2
13920 West Lake Road
Vermillion, Ohio 44089
Lester E. Bullock.................................. 20,000(7) * *
Directors and Executive Officers as a group (6
persons)......................................... 4,597,548(8) 65.3 56.4
John J. Pasierb.................................... 40,000(9) * *
Timmie A. Godwin................................... 40,000 * *
Anthony J. Siciliano............................... 357,500(10) 7.1 5.8
18 Neil Drive
Smithtown, New York 11787
David K. Vanco..................................... 917,643(11) 15.7 13.2
1 South Piermont Drive
North Barrington, Illinois 60010
</TABLE>
- ---------------
* Less than 1%.
(1) The shares owned by Alan N. Johnson include 1,060,456 shares of common
stock underlying presently exercisable options.
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<PAGE> 83
(2) The shares owned by Elden W. Rance represent 562,500 shares of common stock
underlying a presently exercisable option.
(3) The shares owned by R. Thomas Klingel represent 124,300 shares of common
stock underlying the exercisable portions of options.
(4) The shares owned by Gerald J. Boyle include 50,292 shares of common stock
underlying a presently exercisable option.
(5) The shares owned by Eric R. Dey represent 12,500 shares of common stock
underlying the exercisable portion of an option.
(6) The shares owned by Richard D. Sly include 43,000 shares of common stock
underlying a presently exercisable option.
(7) The shares owned by Lester E. Bullock represent 20,000 shares of common
stock underlying the exercisable portion of an option.
(8) The shares owned by the directors and executive officers includes the
shares set forth above.
(9) The shares owned by John J. Pasierb represent 40,000 shares of common stock
underlying the exercisable portion of an option.
(10) The shares owned by Anthony J. Siciliano include 75,000 shares of common
stock underlying a presently exercisable option and include 141,250 shares
owned by Mr. Siciliano's wife, Mary E. Siciliano.
(11) The shares owned by David K. Vanco include 661,643 shares of common stock
underlying a presently exercisable option and a presently exercisable
warrant and a warrant that will be exercisable at 120% of the offering
price of a share of common stock in this offering.
CUSTODY OF SHARES
The representative has required each of the directors and one nondirector
officer of Leisure Time to deposit their pro rata percentage of a total of
500,000 shares of common stock or options to purchase common stock of Leisure
Time owned by such officers and directors into an custody account pursuant to a
custody agreement with American Securities Transfer & Trust, Inc. The common
stock and options to purchase common stock deposited in the custody account will
be subject to release to the officers and directors of Leisure Time on the
earlier to occur of:
- the approval of the South Carolina referendum on November 2, 1999, that
will permit video gaming machine payouts to continue in South Carolina;
- the Governor of California has entered into a gaming compact with at
least 10 Native American tribes located in California on a date that is
prior to the date that is twelve months from the date of this prospectus;
- Leisure Time has successfully completed a subsequent underwritten public
offering of Leisure Time's common stock in a gross amount of at least
$30,000,000 or at a price per share of at least $20;
- Leisure Time attains net income after tax of at least $17.0 million for
the year ended June 30, 2000;
- Leisure Time attains net income after tax of at least $32.0 million for
the year ended June 30, 2001; or
- Leisure Time having been merged or consolidated with another company
which is the survivor to the transaction or having sold all or
substantially all of its assets and the relevant transaction was approved
by the holders of a majority of Leisure Time's outstanding voting
securities exclusive of any such securities held by any party to the
custody agreement.
In the event none of the criteria for release specified above is reached by
Leisure Time, the shares held in custody shall remain in custody until a date
that is seven years from the date of this prospectus.
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<PAGE> 84
DESCRIPTION OF SECURITIES
The following is a summary description of Leisure Time's capital stock. A
complete description is contained in Leisure Time's articles of incorporation
and bylaws.
Leisure Time's authorized capital stock consists of 45,000,000 shares of
common stock and 5,000,000 shares of preferred stock, which Leisure Time may
issue in one or more series as determined by the board of directors. There are
currently 5,171,829 shares of common stock issued and outstanding that are held
of record by approximately 161 stockholders.
COMMON STOCK
Each holder of record of common stock is entitled to one vote for each
share held on all matters properly submitted to the stockholders for their vote.
Cumulative voting in the election of directors is not authorized.
Holders of outstanding shares of common stock are entitled to those
dividends declared by the board of directors out of legally available funds,
and, in the event of liquidation, dissolution or winding up of the affairs of
Leisure Time, holders are entitled to receive ratably the net assets of Leisure
Time available to the stockholders. Holders of outstanding shares of common
stock have no preemptive, conversion or redemption rights. All of the issued and
outstanding shares of common stock are, and all unissued common stock when
offered and sold will be, duly authorized, validly issued, fully paid and
nonassessable. To the extent that additional common stock of Leisure Time may be
issued in the future, the relative interests of the then existing stockholders
may be diluted.
PREFERRED STOCK
Leisure Time's board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of preferred stock with such dividend,
redemption, conversion, and exchange provisions as may be provided by the board
of directors with regard to such particular series. Any series of preferred
stock may possess voting, dividend, liquidation and redemption rights superior
to those of the common stock. The rights of the holders of common stock will be
subject to and may be adversely affected by the rights of the holders of any
preferred stock that may be issued in the future. Issuance of a new series of
preferred stock, or providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire, or discourage a third party from acquiring, the
outstanding common stock of Leisure Time and make removal of the board of
directors more difficult. No series of preferred stock has been designated, no
shares of preferred stock are currently issued and outstanding and Leisure Time
has no present plans to issue any shares of preferred stock.
ANTI-TAKEOVER PROVISIONS
Leisure Time's articles of incorporation and bylaws contain provisions that
may make it more difficult for a third party to acquire, or may discourage
acquisition bids for, Leisure Time. The board of directors of Leisure Time is
authorized, without action of its stockholders, to issue authorized but
undesignated and unissued preferred stock and authorized but unissued common
stock. The existence of authorized but undesignated and unissued preferred stock
and authorized but unissued common stock might enable Leisure Time to discourage
or make it more difficult to obtain control of Leisure Time by means of a
merger, tender offer, proxy contest or otherwise. The documents provide further
that:
- directors may be elected for three-year terms, with approximately
one-third of the board of directors standing for election each year;
- to alter or repeal the staggered board provision or other measures in the
articles of incorporation relating to the matters listed in this
paragraph, the affirmative vote of the holders of not less than two-
thirds of the votes cast by the holders of all stock entitled to vote in
the election of directors is required;
- directors may only be removed for cause; and
- directors may be removed for cause only by the affirmative vote of
holders of not less than two-thirds of the common stock.
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<PAGE> 85
Leisure Time has employment agreements with five of its executive officers
under which the officers may require Leisure Time to repurchase their common
stock upon the occurrence of a change in control of Leisure Time. In addition,
Leisure Time will issue low priced options to replace the officers' current
options upon the occurrence of a change in control of Leisure Time. If
enforceable, these provisions will likely inhibit a third party from acquiring
Leisure Time without the consent of these executive officers.
TRANSFER AGENT AND REGISTRAR
Leisure Time has retained American Securities Transfer & Trust, Inc. to
serve as the transfer agent and registrar for the common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Leisure Time will have 6,271,829 shares
of common stock outstanding. If the underwriters' over-allotment option is
exercised in full, 6,436,829 shares of common stock will be outstanding. Of the
6,271,829 shares, the 1,100,000 shares of common stock sold in this offering
(and any shares sold by Leisure Time upon exercise of the underwriters'
over-allotment option) and 2,047,743 shares of common stock that may be sold
pursuant to Rule 144(k) will be freely transferable by persons other than
"affiliates" of Leisure Time without restriction or registration under the
Securities Act of 1933.
The remaining 3,124,086 outstanding shares of common stock are "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933 and
may not be sold in the absence of registration unless an exemption from
registration is available, including the exemption contained in Rule 144. Of
such shares, 2,760,000 shares become eligible for sale under Rule 144 commencing
90 days after the date of this prospectus. Pursuant to the terms of the
underwriting agreement, the representative has required that the shares of
common stock owned by Leisure Time's officers and directors and all but 177,884
shares of common stock owned by the other current stockholders may not be sold
until at least 180 days after the date of this prospectus without the prior
written consent of the representative. After 180 days, the current stockholders
of Leisure Time, who are not officers or directors, have the right to sell up to
20% of the shares of common stock owned by them, up to a maximum aggregate
amount of 150,000 shares. All contractual restrictions on sales of Leisure
Time's common stock lapse 12 months after the date of this prospectus or upon an
earlier underwritten offering by Leisure Time. In the absence of agreements with
the representative, the outstanding restricted common stock could be sold in
accordance with Rule 144.
In general, under Rule 144 as currently in effect, a stockholder who has
beneficially owned shares of common stock for at least one year is entitled to
sell, within any three-month period, a number of "restricted" shares that does
not exceed the greater of 1% of the then outstanding shares of common stock or
the average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to manner of sale limitations,
notice requirements and the availability of current public information about
Leisure Time. Rule 144(k) provides that a stockholder who is not deemed to be an
"affiliate" and who has beneficially owned shares of common stock for at least
two years is entitled to sell such shares at any time under Rule 144(k) without
regard to the limitations described above.
In addition to the shares of common stock that are currently outstanding, a
total of 5,573,267 shares of common stock have been reserved for issuance upon
exercise of outstanding options and warrants to purchase shares of common stock
at exercise prices of between $1.00 and $12.00 per share and upon conversion of
outstanding convertible notes into common stock and warrants and upon the
exercise of the warrants. Approximately six months after the date of this
prospectus, Leisure Time plans to file a registration statement on Form S-8 to
register the shares of common stock that have been reserved for issuance upon
exercise of the outstanding options. Once registered, the shares of common stock
issued upon exercise of such options will be freely tradeable without
restriction under the Securities Act of 1933 except for shares held by an
"affiliate" of Leisure Time, which shares will remain subject to restrictions.
Upon conclusion of this offering, Leisure Time will also issue the
representative warrants to purchase 110,000 shares of common stock at $ per
share.
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<PAGE> 86
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for which Schneider Securities, Inc. is acting as the
underwriters' representative, have severally agreed to purchase from Leisure
Time the shares of common stock set forth opposite their names and will purchase
the shares of common stock at the price to public less underwriting discount set
forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Schneider Securities, Inc...................................
---------
Total............................................. 1,100,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations are
subject to conditions precedent and that the underwriters are committed to
purchase all shares of common stock offered in this prospectus (other than those
covered by the over-allotment option described below) if the underwriters
purchase any shares of common stock.
The representative has advised Leisure Time that the underwriters propose
to offer the shares of common stock directly to the public at the price to
public set forth on the cover page of this prospectus, and that they may allow
to dealers that are members of the National Association of Securities Dealers,
Inc., concessions not in excess of $ . After the initial public
distribution of the common stock is completed, the price of the common stock may
change as a result of market conditions. No change in such terms will change the
amount of proceeds to be received by Leisure Time as set forth on the cover page
of this prospectus. The representative has further advised Leisure Time that the
underwriters do not intend to confirm sales to any accounts over which any of
them exercises discretionary authority.
Leisure Time has agreed to pay the representative a nonaccountable expense
allowance of 2 1/2% of the aggregate public offering price of the shares of
common stock offered by this prospectus, including shares of common stock sold
on exercise of the over-allotment option. Leisure Time has paid $50,000 against
the non-accountable expense allowance to the representative. Leisure Time has
also agreed to pay all expenses in connection with qualifying the shares of
common stock offered hereby for sale under the laws of such states as the
representative may designate.
Leisure Time has granted the underwriters an option, exercisable for 45
days after the date of this prospectus, to purchase up to 165,000 additional
shares of common stock at the same price as the initial shares of common stock
offered. The underwriters may purchase the shares of common stock solely to
cover over-allotments, if any, in connection with the sale of the shares of
common stock offered by this prospectus. If the over-allotment option is
exercised in full, the total public offering price, underwriting discounts,
nonaccountable expense allowance and proceeds to Leisure Time will be
$ , $ , $ and $ , respectively.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which create a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when the shares of common stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the common stock to be
higher than it would otherwise be in the absence of such transactions.
Neither Leisure Time nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In
82
<PAGE> 87
addition, neither Leisure Time nor any of the underwriters makes any
representation that the underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The representative has required that all but 177,884 of the shares of
common stock owned by officers, directors and the current stockholders may not
be sold until at least 180 days after the date of this prospectus without the
prior written consent of the representative. After such 180 day period, the
current stockholders of Leisure Time, who are not officers or directors and who
have entered into an agreement with the representative, have the right to sell
up to 20% of the shares of common stock owned by them, up to a maximum aggregate
amount of 150,000 shares. Officers or directors may not sell any of the common
stock they own without the prior written consent of the representative until 12
months after the date of this prospectus. Collectively, these periods in which
the common stock of Leisure Time cannot be offered, sold or otherwise disposed
of, are referred to in this prospectus as the "lock-up period." The
representative has no present intention to waive or shorten the lock-up period.
The lock-up period lapses in total 12 months after the date of this Prospectus
or upon completion of an earlier underwritten offering by Leisure Time.
In connection with this offering, Leisure Time will sell to the
representative for a total purchase price of $100, the representative's warrants
for the purchase of common stock entitling the representative or its assigns to
purchase 110,000 shares of common stock at an exercise price of 133% of the
public offering price listed on the cover of this prospectus for five years from
the date of this prospectus. The representative's warrants will contain
customary anti-dilution provisions and provide for the cashless exercise of the
representative's warrants utilizing securities of Leisure Time, which may
include the implicit value of the representative's warrants being surrendered.
Leisure Time will set aside and at all times have available a sufficient number
of shares of common stock to be issued upon exercise of the representative's
warrants. The representative's warrants and underlying shares of common stock
will be restricted from sale, transfer, assignment or hypothecation for a period
of one year after the date of this prospectus, except to officers of the
representative, co-underwriters, selling group members and their officers or
partners. Thereafter, the representative's warrants and underlying shares of
common stock will be transferable provided such transfer is in accordance with
the provisions of the Securities Act of 1933. Subject to limitations and
exclusions, Leisure Time has agreed, at the request of the representative, to
register the warrants and the shares of common stock issuable upon exercise of
the representative's warrants under the Securities Act of 1933.
For a period of five years after the date hereof, the representative has
the right to have an observer attend meetings of Leisure Time's board of
directors and receive the compensation (excluding grants of options) and
expenses paid to Leisure Time's directors.
Prior to this offering, there has not been a public market for Leisure
Time's common stock. The public offering price of the common stock has been
determined by arms-length negotiation between Leisure Time and the
representative. There is no direct relation between the offering price of the
common stock and the assets, book value or net worth of Leisure Time. Among the
factors considered by Leisure Time and the representative in pricing the common
stock were the results of operations, the current financial condition and future
prospects of Leisure Time, the experience of management, the amount of ownership
to be retained by present stockholders, the general condition of the economy and
the securities markets and the demand for securities of companies considered
comparable to Leisure Time.
In connection with this offering, Leisure Time and the underwriters have
agreed to indemnify each other against liabilities, including liabilities under
the Securities Act of 1933, and if such indemnification is unavailable or
insufficient, Leisure Time and the underwriters have agreed to damage
contribution arrangements based upon relative benefits received from this
offering and relative fault resulting in such damage.
83
<PAGE> 88
LEGAL MATTERS
The validity of the common stock being offered by this prospectus has been
passed upon for Leisure Time by Smith McCullough, P.C., Denver, Colorado. Thomas
S. Smith, a stockholder and director of Smith McCullough, P.C., beneficially
owns 50,000 shares of Leisure Time's common stock and an option to purchase
125,000 shares of Leisure Time's common stock. Certain legal matters will be
passed upon for the representative by Berliner Zisser Walter & Gallegos, P.C.
EXPERTS
The consolidated balance sheets of Leisure Time Casinos & Resorts, Inc. and
subsidiaries at June 30, 1997 and 1998 and the consolidated statements of
operations, stockholders' equity and cash flows for the years ended June 30,
1996, 1997 and 1998 included in this prospectus have been included herein in
reliance on the report of Ehrhardt Keefe Steiner & Hottman PC, independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated balance sheets of Leisure Time Technology, Inc. (f/k/a
U.S. Games, Inc.) at June 30, 1996 and September 13, 1996 and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
June 30, 1996 and the period from July 1, 1996 to September 13, 1996 included in
this prospectus have been included herein in reliance on the report of Ehrhardt
Keefe Steiner & Hottman PC, independent certified public accountants, given on
the authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Florida Casino Cruises, Inc. at December
31, 1997 and 1998 and the consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997 and 1998 included in
this prospectus have been included herein in reliance on the report of Ehrhardt
Keefe Steiner & Hottman PC, independent certified public accountants, given on
the authority of that firm as experts in accounting and auditing.
With respect to the unaudited interim consolidated financial information
for the nine months and three months ended March 31, 1998 and 1999, the
independent certified public accountants have not audited or reviewed such
consolidated financial information and have not expressed an opinion or any
other form of assurance with respect to such consolidated financial information.
The pro forma combined statement of income for the year ended June 30, 1998
and the nine months ended March 31, 1999 and the pro forma combined balance
sheet as of March 31, 1999 have not been audited or reviewed by the independent
certified public accountants and they do not express an opinion or purport to
give any other form of assurance on them.
84
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEISURE TIME CASINOS & RESORTS, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statement of Stockholders' Equity............ F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements.................. F-8
LEISURE TIME TECHNOLOGY, INC. (F/K/A U.S. GAMES, INC.)
Independent Auditors' Report................................ F-33
Financial Statements
Balance Sheets............................................ F-34
Statements of Operations.................................. F-35
Statement of Stockholder's Equity......................... F-36
Statements of Cash Flows.................................. F-37
Notes to Financial Statements............................... F-39
FLORIDA CASINO CRUISES, INC.
Independent Auditors' Report................................ F-43
Financial Statements
Balance Sheets............................................ F-44
Statements of Operations.................................. F-45
Statement of Stockholder's Equity......................... F-46
Statements of Cash Flows.................................. F-47
Notes to Financial Statements............................... F-48
UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Combined Statement of Income (Loss) For
the Year Ended June 30, 1998.............................. F-53
Unaudited Pro Forma Combined Statement of Income (Loss) For
the Nine Months Ended March 31, 1999...................... F-54
Unaudited Pro Forma Combined Balance Sheet As of March 31,
1999...................................................... F-55
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-56
</TABLE>
F-1
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Leisure Time Casinos &
Resorts, Inc. and Subsidiaries
Norcross, Georgia
We have audited the accompanying consolidated balance sheets of Leisure
Time Casinos & Resorts, Inc. and Subsidiaries as of June 30, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of
Leisure Time Casinos & Resorts, Inc. and Subsidiaries at June 30, 1997 and 1998,
and the consolidated results of their operations and cash flows for each of the
three years in the period ended June 30, 1998 in conformity with generally
accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman
P.C.
August 19, 1998
Denver, Colorado
F-2
<PAGE> 91
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents................................. $ 1,089 $ 888 $ 2,540
Current portion of notes receivable (Note 5).............. -- 26 4
Trade accounts receivable, less allowance of $31 at June
30, 1997 and 1998 and March 31, 1999.................... 868 1,747 2,749
Receivable -- other....................................... -- 250 1
Inventories, net (Note 2)................................. 2,873 2,445 4,068
Prepaid expenses and other................................ 124 207 267
Deferred tax asset -- current (Note 8).................... 88 67 61
Officer advances (Note 5)................................. 55 -- --
------- ------- -------
Total current assets................................ 5,097 5,630 9,690
------- ------- -------
Property and equipment, net (Notes 3 and 6)................. 3,837 4,216 8,123
Goodwill, net of accumulated amortization of $535 and $1,145
at June 30, 1997 and 1998, respectively, and $1,601
(unaudited) at March 31, 1999............................. 5,563 4,953 4,495
Non-compete agreement, net of accumulated amortization of
$413 and $935 at June 30, 1997 and 1998, respectively, and
$1,325 (unaudited) at March 31, 1999 (Note 7)............. 4,801 4,279 3,889
Other assets, net (Note 3).................................. 173 750 188
Deposits.................................................... 52 1,961 2,339
Deferred tax asset -- long term (Note 8).................... -- 571 1,079
Long-term portion of notes receivable (Note 5).............. -- 53 37
------- ------- -------
Total assets........................................ $19,523 $22,413 $29,840
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line-of-credit (Notes 5 and 10)........................... $ -- $ -- $ 4
Current portion of long-term notes payable (Note 6)....... 1,766 2,127 402
Current portion of capital leases (Note 5)................ 18 39 22
Current portion of other long-term liabilities (Note 7)... 509 539 80
Note payable -- officer (Note 5).......................... 3 -- --
Accounts payable.......................................... 961 1,510 2,713
Accrued expenses (Note 4)................................. 1,392 4,844 4,335
Income taxes payable...................................... 504 462 2,409
Deferred revenue.......................................... -- -- 38
------- ------- -------
Total current liabilities........................... 5,153 9,521 10,003
------- ------- -------
Long-term liabilities
Long-term portion of notes payable (Note 6)............... 4,092 4,243 6,399
Long-term portion of capital leases (Note 5).............. 41 53 150
Deferred income taxes payable (Note 8).................... 507 -- --
Other long-term liabilities (Note 7)...................... 5,457 4,890 4,677
------- ------- -------
Total long-term liabilities......................... 10,097 9,186 11,226
------- ------- -------
Total liabilities................................... 15,250 18,707 21,229
------- ------- -------
Commitments and contingencies (Notes 5, 6, 7, 9, 10 and 16)
Stockholders' equity (Notes 12 and 13) Preferred stock, no
par value; 5,000,000 shares authorized; none issued....... -- -- --
Common stock, $.001 par value; 45,000,000 shares
authorized; 4,505,380 (June 30, 1997), 4,639,154 (June
30, 1998) and 4,732,835 (March 31, 1999 (unaudited))
issued and outstanding.................................. 4 5 5
Additional paid-in capital................................ 3,118 3,479 5,147
Retained earnings......................................... 1,151 222 3,459
------- ------- -------
Total stockholders' equity.......................... 4,273 3,706 8,611
------- ------- -------
Total liabilities and stockholders' equity.......... $19,523 $22,413 $29,840
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 92
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED JUNE 30, ENDED MARCH 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Manufacturing........................................ $ -- $ 29,838 $ 28,643 $ 22,268 $ 41,037
Gaming............................................... -- -- -- -- 3,738
Other................................................ -- -- -- -- 281
---------- ---------- ---------- ---------- ----------
Total revenue.................................. -- 29,838 28,643 22,268 45,056
---------- ---------- ---------- ---------- ----------
Cost of goods sold
Manufacturing........................................ -- 16,616 16,517 12,377 21,796
Gaming............................................... -- -- -- -- 400
Other................................................ -- -- -- -- 279
---------- ---------- ---------- ---------- ----------
Total cost of goods sold....................... -- 16,616 16,517 12,377 22,475
---------- ---------- ---------- ---------- ----------
Gross profit
Manufacturing........................................ -- 13,222 12,126 9,891 19,241
Gaming............................................... -- -- -- -- 3,338
Other................................................ -- -- -- -- 2
---------- ---------- ---------- ---------- ----------
Total gross profit............................. -- 13,222 12,126 9,891 22,581
---------- ---------- ---------- ---------- ----------
Selling, general and administrative expenses (Note
14).................................................. 1,343 5,615 8,727 4,243 14,908
Research and development costs......................... -- 469 642 462 174
Stock based compensation (Note 12)..................... -- -- -- -- 1,400
Interest expense, net.................................. 54 712 840 748 887
Litigation (Note 10)................................... -- -- 3,043 3,006 --
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 1,397 6,796 13,252 8,459 17,369
---------- ---------- ---------- ---------- ----------
Net income (loss) before income tax benefit
(expense)............................................ (1,397) 6,426 (1,126) 1,432 5,212
Income tax benefit (expense) (Note 8).................. -- (1,738) 197 (629) (1,975)
---------- ---------- ---------- ---------- ----------
Net income (loss)...................................... $ (1,397) $ 4,688 $ (929) $ 803 $ 3,237
========== ========== ========== ========== ==========
Earnings (loss) per common share -- basic (Note 15).... $ (.35) $ 1.08 $ (.21) $ .18 $ .69
========== ========== ========== ========== ==========
Earnings (loss) per common share -- diluted (Note
15).................................................. $ (.35) $ .65 $ (.21) $ .08 $ .42
========== ========== ========== ========== ==========
Weighted average number of common shares outstanding --
basic (Note 15)...................................... 4,010,650 4,343,397 4,516,528 4,505,380 4,663,648
========== ========== ========== ========== ==========
Weighted average number of common shares outstanding --
diluted (Note 15).................................... 4,010,650 7,664,903 4,516,528 9,839,303 7,726,386
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 93
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT/
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance -- June 30, 1995................................... 3,738,208 $ 4 $ 479 $(1,940) $(1,457)
Common stock issued for cash at rates ranging from
$1.00 - $2.50 a share (Note 13).......................... 426,400 -- 870 -- 870
Net loss for the year...................................... -- -- -- (1,397) (1,397)
--------- ---- ------ ------- -------
Balance -- June 30, 1996................................... 4,164,608 4 1,349 (3,337) (1,984)
Common stock issued upon conversion of debt and as
extensions on notes payable at rates ranging from
$1.00 - $2.80 per share (Note 13)........................ 85,292 -- 176 -- 176
Common stock issued for cash at rates ranging from
$.50 - $2.50 a share (Note 13)........................... 167,400 -- 163 -- 163
Stock issued for services valued at $2.50 a share (Note
13)...................................................... 38,080 -- 95 -- 95
Repurchase of common stock at $2.00 a share (Note 13)...... (100,000) -- -- (200) (200)
Issuance of options and warrants with imputed values of
$.45 - $.78 per share (Note 12).......................... -- -- 85 -- 85
Shares issued for acquisition of vessel valued at $2.50 a
share (Note 13).......................................... 150,000 -- 375 -- 375
Forgiveness of accrued officer wages payable (Note 13)..... -- -- 875 -- 875
Net income for the year ended June 30, 1997................ -- -- -- 4,688 4,688
--------- ---- ------ ------- -------
Balance -- June 30, 1997................................... 4,505,380 4 3,118 1,151 4,273
Common stock issued for cash at $2.80 a share (Note 13).... 33,900 1 94 -- 95
Conversion of debt at rates ranging from $2.50 to $2.80 a
share (Note 13).......................................... 99,874 -- 267 -- 267
Net loss for the year ended June 30, 1998.................. -- -- -- (929) (929)
--------- ---- ------ ------- -------
Balance -- June 30, 1998................................... 4,639,154 5 3,479 222 3,706
Common stock issued upon exercise of options (Note 13)
(unaudited).............................................. 100 -- -- -- --
Conversion of debt at $2.50 a share (Note 13)
(unaudited).............................................. 31,491 -- 79 -- 79
Issuance of options with an imputed value of $4.00 a share
(Note 12) (unaudited).................................... -- -- 1,400 -- 1,400
Common stock issued upon exercise of warrants (Note 13)
(unaudited).............................................. 60,090 -- 169 -- 169
Common stock issued for cash at $10.00 a share (Note 13)
(unaudited).............................................. 2,000 -- 20 -- 20
Net income for the nine months ended March 31, 1999
(unaudited).............................................. -- -- -- 3,237 3,237
--------- ---- ------ ------- -------
Balance at March 31, 1999 (unaudited)...................... 4,732,835 $ 5 $5,147 $ 3,459 $ 8,611
========= ==== ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 94
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, MARCH 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................................... $(1,397) $ 4,688 $ (929) $ 803 $ 3,237
------- ------- ------- ------- -------
Adjustments to reconcile net income (loss) to cash
provided by operating activities
Write off of acquisition costs..................... 32 -- -- -- --
Net loss on disposal of assets..................... -- 49 96 -- --
Note issued for interest payment................... -- 33 -- -- --
Issuance of stock options.......................... -- 85 -- 1,400
Deferred taxes..................................... -- 1,046 (1,057) (949) (502)
Common stock issued for note extensions............ -- 31 -- -- --
Common stock issued for services................... -- 95 -- -- --
Depreciation and amortization...................... 14 1,385 1,864 1,077 1,294
Changes in certain assets and liabilities
Receivables...................................... -- (496) (879) 24 (753)
Inventories...................................... -- (1,082) 389 12 (1,623)
Prepaids and other assets........................ -- 348 (823) (9) (60)
Employee advances................................ (18) 18 (4) -- --
Officer advances................................. (37) -- 55 55 --
Accounts payable................................. 246 256 549 (690) 1,203
Accrued expenses................................. 531 419 3,452 2,783 (509)
Income taxes payable............................. -- 504 (42) 636 1,947
Notes receivable................................. -- -- (79) (58) 38
Deferred revenue................................. -- -- -- -- 38
------- ------- ------- ------- -------
768 2,691 3,521 2,881 2,473
------- ------- ------- ------- -------
Net cash (used by) provided by operating
activities.................................. (629) 7,379 2,592 3,684 5,710
------- ------- ------- ------- -------
Cash flows from investing activities
Acquisition of business net of cash acquired......... -- (1,329) -- -- --
Purchase of equipment................................ (23) (120) (1,188) (1,009) (1,711)
Purchase of vessel................................... -- (2,873) -- -- (1,500)
Purchase of hotel property and land.................. -- -- -- -- (1,020)
Acquisition costs paid............................... (162) -- -- -- --
Deposits............................................. (107) (45) (1,909) (2,576) 207
Contingent payments.................................. -- (2,495) -- -- --
------- ------- ------- ------- -------
Net cash used by investing activities......... (292) (6,862) (3,097) (3,585) (4,024)
------- ------- ------- ------- -------
Cash flows from financing activities
Proceeds from issuance of common stock............... 870 164 94 -- 189
Repurchase of common stock........................... -- (200) -- -- --
Line-of-credit, net.................................. -- -- -- -- 4
Proceeds from long-term debt......................... 40 1,700 3,000 3,000 5,328
Loan fees............................................ -- -- -- (38)
Payment on long-term debt............................ (6) (1,017) (2,758) (2,684) (5,490)
Payments on capital leases........................... -- -- (29) (11) (27)
Payments on note payable -- officer.................. -- (77) (3) (3) --
------- ------- ------- ------- -------
Net cash provided by financing activities..... 904 570 304 302 (34)
------- ------- ------- ------- -------
Net increase (decrease) in cash........................ (17) 1,087 (201) 401 1,652
Cash and cash equivalents -- beginning of year or
period............................................... 19 2 1,089 1,089 888
------- ------- ------- ------- -------
Cash and cash equivalents -- end of year or period..... $ 2 $ 1,089 $ 888 $ 1,490 $ 2,540
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 95
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Schedule of non-cash investing and financing activities:
During the year ended June 30, 1996, the Company acquired $19 of
certain property by obtaining a loan from the selling company. The asset is
included in vehicles.
During the year ended June 30, 1997, the Company incurred various
noncash transactions related to the acquisition completed in September
1996.
During the year ended June 30, 1997, the Company issued stock toward
the purchase of a vessel ($375) and related to the conversion of debt
($145) (Note 13). Additionally, the Company issued notes payable to reduce
current liabilities in the amount of $56 and incurred long-term debt to
finance the acquisition of vehicles for $82.
During the year ended June 30, 1997, officers of the Company forgave
$875 of accrued wages related to prior years.
During the years ended June 30, 1997 and 1998, and the period ended
March 31, 1999, the Company acquired fixed assets by incurring capital
lease obligations in the amount of $67, $63 and $107 (unaudited),
respectively.
During the year ended June 30, 1998, the Company recorded a $250
receivable for an insurance claim on damaged property with a net book value
of $250.
During the year ended June 30, 1998, and the period ended March 31,
1999, the Company converted $267 and $79 (unaudited), respectively, of debt
to equity by issuing capital stock to the debt holders.
Supplemental disclosure of cash flow information:
Cash paid for interest for the years ended June 30, 1996, 1997 and
1998 and for the nine months ended March 31, 1998 and 1999 was
approximately $28, $551, $1,084, $600 (unaudited) and $841 (unaudited),
respectively.
Cash paid for income taxes for the years ended June 30, 1996, 1997 and
1998 and for the nine months ended March 31, 1998 and 1999 was $1,311,
$189, $982, $768 (unaudited) and $529 (unaudited), respectively.
See notes to consolidated financial statements.
F-7
<PAGE> 96
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Leisure Time Casinos & Resorts, Inc. ("Casinos") was incorporated on
February 4, 1993, and was a development stage enterprise until September 1996.
In September 1996, Casinos acquired U.S. Games, Inc. Leisure Time
Technology, Inc. (f/k/a U.S. Games, Inc.) ("Technology") is incorporated in
Georgia and develops, manufactures and sells video gaming machines (Note 17).
Technology is licensed to sell video gaming machines in Kansas, Michigan,
Minnesota, New Mexico (for gaming on Native American reservations), New York,
North Carolina, Wisconsin and is in compliance with South Carolina regulations
regarding the sale of gaming machines. The Company has applied to become
licensed in Mississippi, Montana and Ontario, Canada and intends to apply to
become licensed in Arizona, New Mexico (for charities and fraternal
organizations) and Nevada.
Leisure Time Cruise Corporation ("Cruises") was incorporated on October 17,
1997, in the state of Colorado and conducts offshore gaming cruises on the
"Vegas Express" gaming vessel. In July 1998, Cruises began operating cruise to
nowhere gaming excursions (Notes 9 and 18). In May 1999, Leisure Express Cruise,
LLC, a Colorado limited liability company, acquired Florida Casino Cruises,
Inc., the corporation that owns the Vegas Express. Leisure Belle Cruise, LLC is
a Colorado limited liability company that owns and is refurbishing a gaming
vessel. Leisure Lady Cruise, LLC is a Colorado limited liability company and
currently has no operations.
Leisure Time Hospitality, Inc. is incorporated in Ohio and owns a hotel
property that is being redeveloped in the Cleveland metropolitan area.
Leisure Time Gaming, Inc. is incorporated in South Carolina and began
operating a gaming route through a subsidiary during March 1999.
Leisure Time International, Ltd. is incorporated in Barbados and currently
operates as a Foreign International Sales Corp. (FISC).
Casinos acquired Leisure Time Financial Corp. (f/k/a RP Capital,
Corporation) in April 1999.
Solutia Gaming Systems, Inc. is incorporated in Oklahoma and is developing
new gaming machines.
Interim Information
The accompanying unaudited consolidated financial statements as of March
31, 1998 and 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
consolidated operations for the nine month periods ended March 31, 1998 and
1999, (b) the consolidated financial position at March 31, 1999, (c) the
consolidated statements of cash flows for the nine month periods ended March 31,
1998 and 1999 and (d) the consolidated changes in stockholders' equity for the
nine month period ended March 31, 1999 have been made.
The results for the nine month period ended March 31, 1999 are not
necessarily indicative of the results for the entire fiscal year ending June 30,
1999.
F-8
<PAGE> 97
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Principals of Consolidation
The consolidated financial statements include the accounts of Casinos and
its wholly owned subsidiaries, collectively referred to as the Company. All
significant intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, receivables,
prepaid expenses, accounts payable and accrued expenses approximate the fair
values as of June 30, 1997 and 1998 and March 31, 1999 (unaudited) because of
the relatively short maturity of these instruments.
The carrying amounts of notes payable and debt outstanding also approximate
their fair values as of June 30, 1997 and 1998 and March 31, 1999 (unaudited)
because interest rates on these instruments approximate the interest rate on
debt with similar terms available to the Company.
Inventories
Inventories are stated at the lower of cost or market and consist primarily
of raw material, parts manufactured by others, work in process and finished
goods. Work-in-process and finished goods include raw materials, direct labor
and manufacturing overhead. Cost is determined using the first-in, first-out
method for all inventories.
Property and Equipment
Property and equipment are stated at cost. Depreciation on equipment,
vehicles and furniture is calculated using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset.
Product Software Development Costs
The Company capitalizes product software development costs when product
technological feasibility is established and concluding when the product is
ready for its intended use. Software development costs are amortized on the
straight-line method over an expected useful life of three years. As of March
31, 1999, the Company had not incurred any significant software development
costs, as such no amounts had been capitalized.
Organizational Costs
Organizational costs and other start-up related expenditures are expensed
as incurred.
F-9
<PAGE> 98
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Non-Compete Agreement
The Company has a non-compete agreement with the former stockholder of
Technology. The amount shown on the balance sheet represents the present value
of amounts to be paid. The cost is being amortized using the straight-line
method over 10 years, the life of the agreement.
Goodwill
Goodwill, resulting from the acquisition of Technology, is being amortized
using the straight-line method over 10 years.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation of Long-Lived Assets
The Company assesses valuation of long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of. The
Company periodically evaluates the carrying value of long-lived assets to be
held and used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.
Revenue Recognition
Manufacturing and other revenue is recognized as the product is shipped.
Gaming revenue is the net win from gaming activities, which is the
difference between gaming wins and losses. Gaming revenue also includes ticket
sales and food and beverage revenue generated from each cruise. Gaming revenue
does not include the retail amount of tickets or food and beverages provided
gratuitously to customers, which, if material, reduces revenue as promotional
allowances.
Revenue from gaming route operations is recognized at the time the play
activity takes place and is based upon the terms of the individual revenue
participation agreement.
Deferred revenue, which represents customer cruise deposits, is included in
the balance sheet when received and is recognized as passenger fare revenue upon
completion of the voyage.
Research and Development
All research and development costs are expensed as incurred.
F-10
<PAGE> 99
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Earnings (Loss) Per Share
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", basic earnings per share is
computed by dividing net income by the number of weighted average common shares
outstanding during the year. Diluted earnings per share is computed by dividing
net income by the number of weighted average common shares outstanding during
the year, including potential common shares, which for the years ended June 30,
1996, 1997 and 1998, and the periods ended March 31, 1998 and 1999, consisted
solely of convertible debt, stock options and warrants outstanding. The Company
uses the treasury stock method in computing diluted earnings per share, by
recognizing the use of proceeds that could be obtained upon the exercise of
options and warrants to repurchase the Company's stock at the fair market value
(Notes 12 and 15).
ANTIDILUTIVE SECURITIES EXCLUDED FROM DILUTIVE EARNINGS PER SHARE
As of June 30, 1996:
<TABLE>
<CAPTION>
SECURITY PRICE SHARES
-------- ----------- ---------
<S> <C> <C>
Stock options....................................... $1.00-$2.80 1,707,500
Warrants............................................ $2.50-$3.00 405,236
</TABLE>
As of June 30, 1998:
<TABLE>
<CAPTION>
SECURITY PRICE SHARES
-------- ----------- ---------
<S> <C> <C>
Stock options....................................... $ .10-$6.00 3,370,648
Warrants............................................ $1.00-$3.00 429,022
Convertible notes payable........................... $1.25-$2.50 3,214,990
</TABLE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist primarily of temporary cash investments.
The Company places its cash investments with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any one
institution. The Company does, however, on occasion exceed the Federal Deposit
Insurance Corporation federally insured limits and the Securities Investors
Protection Corporation insured limits and exceeded these amounts by
approximately $1,691 and $1,251 at June 30, 1997 and 1998 and $2,292 at March
31, 1999 (unaudited), respectively.
Use of Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
for the years ended June 30, 1996, 1997 and 1998, were $37, $173 and $69,
respectively, and for the periods ended March 31, 1998 and 1999 were $96
(unaudited) and $576 (unaudited), respectively.
F-11
<PAGE> 100
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Recently Issued Accounting Pronouncements
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" ("Statement 132"), which revises employers' disclosures
about pension and other postretirement benefit plans. Statement 132 does not
change the measurement or recognition of those plans, but requires additional
information on changes in benefit obligations and fair values of plan assets and
eliminated certain disclosures previously required by SFAS Nos. 87, 88 and 106.
Statement 132 is effective for financial statements with fiscal years beginning
after December 15, 1997.
During June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement 133 establishes new
standards by which derivative financial instruments must be recognized in any
entity's financial statements. Besides requiring derivatives to be included on
balance sheets at fair value, Statement 133 generally requires that gains and
losses from later changes in a derivative's fair value be recognized currently
in earnings. Statement 133 also unifies qualifying criteria for hedges involving
all kinds of derivatives, requiring that a company document, designate and
assess the effectiveness of its hedges. Statement 133 is required to be adopted
by the Company in 2000. Management, however, does not expect the impact from
this statement to have a material impact on the financial statement
presentation, financial position or results of operations.
The Company has not determined what additional disclosures, if any, may be
required by the provisions of Statement 132 and 133 but does not expect adoption
of these statements to have a material effect on its results of operations.
During April 1998, Statement of Position 98-5, "Reporting in the Costs of
Start-Up Activities" was issued. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is required to be
adopted by the Company for the fiscal year ended June 30, 2000. Upon adoption,
the Company does not anticipate this will have a material impact on the
financial statement presentation, financial position or results of operations.
Reclassifications
Certain reclassifications have been made to the June 30, 1996, 1997 and
1998 financial statements in order to conform to the March 31, 1998 (unaudited)
and 1999 (unaudited) presentation.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------- MARCH 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and parts made by others.................. $1,827 $2,181 $2,622
Work-in-process......................................... 110 -- 517
Finished goods.......................................... 1,046 374 1,039
------ ------ ------
Total......................................... 2,983 2,555 4,178
Inventory reserve....................................... (110) (110) (110)
------ ------ ------
$2,873 $2,445 $4,068
====== ====== ======
</TABLE>
F-12
<PAGE> 101
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
NOTE 3 -- PROPERTY AND EQUIPMENT AND OTHER ASSETS
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------- MARCH 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment
Vehicles.............................................. $ 120 $ 182 $ 363
Hotel property........................................ -- -- 670
Land.................................................. -- -- 350
Construction in progress.............................. -- -- 311
Vessels............................................... 3,457 3,901 5,620
Furniture and fixtures................................ 170 82 126
Machinery and equipment............................... 603 507 1,607
Leasehold improvements................................ 41 268 307
------ ------ -------
4,391 4,940 9,354
Less accumulated depreciation......................... (554) (724) (1,231)
------ ------ -------
$3,837 $4,216 $ 8,123
====== ====== =======
Other assets consist of the following:
Purchased software.................................... $ 173 $ -- $ --
Capitalized loan fees, net of accumulated amortization
of $23 (unaudited) at March 31, 1999............... -- -- 63
Compensating balance (Note 6)......................... -- 750 125
------ ------ -------
$ 173 $ 750 $ 188
====== ====== =======
</TABLE>
NOTE 4 -- ACCRUED EXPENSES
<TABLE>
<CAPTION>
JUNE 30,
--------------- MARCH 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Litigation (Note 10).................................... $ 421 $3,200 $3,200
Advanced deposits....................................... -- 666 --
Accrued interest........................................ 394 270 215
Accrued wages, benefits and payroll taxes............... 365 596 329
Miscellaneous taxes..................................... 70 88 171
Other accruals.......................................... 142 24 420
------ ------ ------
$1,392 $4,844 $4,335
====== ====== ======
</TABLE>
F-13
<PAGE> 102
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
NOTE 5 -- RELATED PARTY
<TABLE>
<CAPTION>
JUNE 30,
----------- MARCH 31,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable and advances -- officer. Fully repaid during
the year ended June 30, 1998.............................. $58 $ -- $--
=== ==== ===
Notes Receivable
Notes receivable -- related party, interest at 8% per annum
with monthly payments of $2 commencing July 1998 through
July 2001 when all remaining balances are payable in full;
without collateral; including accrued interest of $2 at
June 30, 1998 and $0 (unaudited) at March 31, 1999........ $-- $ 77 $39
Note receivable -- related party............................ -- 2 2
--- ---- ---
-- 79 41
Less current portion...................................... -- (26) (4)
--- ---- ---
Long-term portion......................................... $-- $ 53 $37
=== ==== ===
</TABLE>
Capital Leases
The Company leases vehicles under capital leases with a related company.
The future minimum lease payments due under capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999........................................................ $ 39
2000........................................................ 33
2001........................................................ 24
2002........................................................ 4
----
100
Less amount representing interest........................... (8)
----
Present value of future net minimum lease payments under
capital leases............................................ 92
Less current portion...................................... (39)
----
$ 53
====
</TABLE>
As of June 30, 1997 and 1998, the net book value of equipment under capital
leases was $58 and $87, respectively.
OTHER TRANSACTIONS
The Company leases a condominium/office from the Company's president. The
lease expires on October 31, 2002 and requires rental payments of $3 per month
net/net/net plus all association fees related to the condominium/office.
The Company leases office space in Ohio from the Company's president at a
rate of $2 per month. The term of the lease extends through June 2000. Rent
expense for the years ended June 30, 1997 and 1998, were
F-14
<PAGE> 103
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
$18 and $18, respectively. Accrued rent related to this lease was $76 and $0 at
June 30, 1997 and 1998, respectively.
The Company leases 11 automobiles from J-Way Leasing, Ltd., a company owned
by the Company's president. The leases are for 36 months to 48 months and have
various dates of expiration through November 2001. The Company reimburses J-Way
Leasing, Ltd. for the down payments J-Way Leasing, Ltd. pays on each of the
automobiles and pays J-Way Leasing, Ltd. a monthly payment equivalent to the
monthly payments (plus 5%) that J-Way Leasing, Ltd. pays for each automobile. No
amounts were paid by the Company to J-Way Leasing, Ltd. for the years ended June
30, 1996, 1997, 1998 but for the nine months ended March 31, 1999, $89 was paid.
In September 1997, the Company advanced $300 to the Company's president.
After the advance, he owed the Company a total of $371 which included the $300
advance, a note for $55 and $16 of expenses owed by him to the Company. During
the year ended June 30, 1998, the Company credited against the $371 (i) $40 of
rentals that were owed to the president for the condominium/office, (ii) a
deposit of $18 that he had made on behalf of the Company to a potential
acquisition candidate of the Company, (iii) $40 that he had deposited in
connection with the purchase of the Company's hotel in the Cleveland, Ohio area,
(iv) $135 that he had paid on an invoice of the Company, (v) $84 that offset
accrued wages payable to the president, (vi) $34 that offset rent that was
payable to him, (vii) $7 that was paid as advances toward car rentals payable to
J-Way Leasing, Ltd., and (viii) $13 for accrued interest payable to the
president.
In October 1998, Cruises borrowed $3,000 from Foothill Capital Corporation.
The loan is secured by the assets of Cruises, including the Leisure Lady, and is
guaranteed by Technology, Casinos and the Company's president, none of which
received any compensation for guaranteeing the loan.
The Company's president has also guaranteed a $1,000 line-of-credit that
the Company has with a finance company. The line-of-credit is secured by
substantially all of the assets of Leisure Time and is guaranteed by Technology,
Cruises and the Company's president, none of which received any compensation for
guaranteeing the line-of-credit (Note 10).
The Company's president owns 51% of Leisure Time Europe Ltd. which was
formed in February 1998 and acts as the distributor of Technology's video gaming
machines to charities in Norway. Technology sells the video gaming machines to
Leisure Time Europe which resells the video gaming machines to the charities.
Leisure Time Europe also services the video gaming machines. The remaining 49%
is owned by unaffiliated third parties.
F-15
<PAGE> 104
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
NOTE 6 -- LONG-TERM DEBT AND LINE-OF-CREDIT
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
7.80% to 9.99% notes payable -- monthly payments
including interest totaling $3, due from January 2000
through November 2001, collateralized by
automobiles.......................................... $ 36 $ 27 $ 20
11% convertible promissory notes payable to
individuals, principal and interest payable in 24
equal monthly payments commencing September 1997; due
September 1999. Notes are convertible into units, at
$1.25 and $2.50 per unit, consisting of one share of
common stock and warrants allowing the holder to
purchase shares of the Company's common stock at
$2.50 per share...................................... 201 96 76
6.64% promissory notes payable to individuals in
connection with the purchase of U.S. Games, monthly
payments computed based on a percentage of the
previous month's gross sales. Payment is applied
against accrued interest first and then as a
reduction of unpaid principal. Annual payments must
at least equal the accrued and unpaid interest on the
remaining outstanding principal balance. The
Company's obligation is satisfied on the earliest to
occur; (i) the date all accrued and unpaid interest
and principal are paid, (ii) or October 10, 2002..... 3,864 2,874 1,507
Note payable to a finance company, the first six
monthly installments are for accrued and unpaid
interest only. The next forty-eight monthly
installments of $37 include principal and interest at
a fixed rate of 8.90%, unpaid principal and interest
due June 2003. Collateralized by a first preferred
mortgage on a vessel, a first priority security
interest in all non-gaming equipment and other
property used in connection with the operation of the
vessel, all earnings, insurances and requisition
compensation of the vessel and a $125 compensating
balance at March 31, 1999............................ -- -- 1,500
Note payable to a finance company with variable
interest at a rate equal to one (1.0) percentage
point above the reference rate (9% combined rate at
March 31, 1999). Payable in sixty installments of $50
plus interest commencing December 1, 1998 and
continuing until November 1, 2003 when all remaining
principal and interest are due. Collateralized by
certain equipment.................................... -- -- 2,750
Notes payable to a finance company, payable in monthly
installments of $1 to $4 including interest at fixed
rates of 11.73% to 12.25%, due June 2001 to November
2003 Collateralized by security interests in certain
equipment and vessels................................ -- -- 189
</TABLE>
F-16
<PAGE> 105
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a finance company, payable in monthly
installments of $5 including interest at a fixed rate
of 10.25%, due July 2003. Collateralized by a
security interest in certain equipment............... -- -- 214
Note payable to a company collateralized by a mortgage
deed on a hotel with interest at the rate of 10% per
annum. The interest rate is adjusted quarterly
beginning September 15, 1999 to four and 75/100
percentage points (4.75%) above the weekly average
yield on US Treasury securities adjusted to a
constant of one year as made available by the Federal
Reserve Board. This note is payable in one payment of
$100 plus interest on September 15, 1999 and
quarterly payments of principal and interest
beginning December 15, 1999 and amortized over a four
(4) year period ending on September 15, 2003.
However, the Company may pay this note in full by
paying $525 plus interest on the principal sum due on
or before September 14, 1999. The Company must also
pay such additional charges as are set forth in a
certain mortgage deed................................ -- -- 545
11% convertible promissory notes payable to
individuals, paid in full January 1999............... 1,325 773 --
Notes payable -- individuals and law firms. Paid in
full during the year ended June 30, 1998............. 392 -- --
10% note payable -- stockholder. Paid in full during
the period ended March 31, 1999...................... 40 40 --
Note payable to a finance company. Paid in full during
the period ended March 31, 1999...................... -- 2,560 --
------- ------- ------
5,858 6,370 6,801
Less current portion................................... (1,766) (2,127) (402)
------- ------- ------
Total long-term debt................................... $ 4,092 $ 4,243 $6,399
======= ======= ======
</TABLE>
LINE-OF-CREDIT
In January 1999, the Company established a $1,000 line-of-credit with a
finance company that expires on January 31, 2000. Interest is variable at a per
annum rate equal to the sum of 3.25% plus the 30-day Commercial Paper Rate (as
published in The Wall Street Journal), based upon actual days elapsed over a 360
day year (Note 5).
F-17
<PAGE> 106
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
NOTE 7 -- LONG-TERM LIABILITIES
Deferred Compensation Contracts
The Company assumed $1,644 (undiscounted) of deferred compensation
contracts with certain individuals related to the acquisition of Technology in
September 1996. These contracts provide for the payment of defined amounts,
generally for up to a period of six years on a monthly basis. The amounts are
computed by taking a percentage of the previous month's gross sales. The present
value of the future amounts estimated to be payable is being accrued for
financial reporting purposes at an imputed interest rate of 6.64%, and
originally amounted to $1,354 (discounted). As of March 31, 1999 (unaudited),
approximately $1,268 of deferred compensation payments have been made. Of these
payments, $1,018 has been recorded as a reduction to the liability. The
remaining $250 has been recorded as interest expense.
Noncompete Agreement
In connection with the acquisition of Technology, the Company entered into
a noncompete agreement with the former stockholder of Technology in the amount
of $7,300 (undiscounted). The agreement is payable through September 2006 in 10
annual installments of $730 which include interest imputed at 6.64%. The present
value of the future amounts to be payable is accrued for financial reporting
purposes at the imputed interest rate of 6.64% and originally amounted to
$5,214. The corresponding asset is being amortized over the life of the
agreement, which is 10 years.
A summary of long-term liabilities at June 30, 1997 and 1998 and March 31,
1999 is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------
1997 1998
---------------------------- ----------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
TOTAL PORTION PORTION TOTAL PORTION PORTION
------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deferred compensation contracts........ $ 752 $125 $ 627 $ 599 $130 $ 469
Noncompete agreement................... 5,214 384 4,830 4,830 409 4,421
------ ---- ------ ------ ---- ------
$5,966 $509 $5,457 $5,429 $539 $4,890
====== ==== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
CURRENT LONG-TERM
TOTAL PORTION PORTION
------ ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Deferred compensation contracts........ $ 336 $80 $ 256
Noncompete agreement................... 4,421 -- 4,421
------ --- ------
$4,757 $80 $4,677
====== === ======
</TABLE>
F-18
<PAGE> 107
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
The annual aggregate maturities of long-term debt and long-term liabilities
at June 30, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING LONG-TERM LONG-TERM
JUNE 30, DEBT LIABILITIES TOTAL
- ----------- --------- ----------- -------
<S> <C> <C> <C>
1999.................................................. $2,127 $ 539 $ 2,666
2000.................................................. 1,450 573 2,023
2001.................................................. 1,505 612 2,117
2002.................................................. 1,038 652 1,690
2003.................................................. 250 560 810
Thereafter............................................ -- 2,493 2,493
------ ------ -------
$6,370 $5,429 $11,799
====== ====== =======
</TABLE>
NOTE 8 -- INCOME TAXES
The Company files a consolidated tax return that includes the operations of
Technology and Cruises.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------ ---------------
1996 1997 1998 1998 1999
----- ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
U.S. Federal............................ $ -- $ 517 $ 780 $1,452 $2,308
State and local......................... -- 175 80 126 169
----- ------ ------- ------ ------
-- 692 860 1,578 2,477
----- ------ ------- ------ ------
Deferred
U.S. Federal............................ (484) 928 (1,008) (906) (491)
State and local......................... (26) 118 (49) (43) (11)
Valuation allowance..................... 510 -- -- -- --
----- ------ ------- ------ ------
-- 1,046 (1,057) (949) (502)
----- ------ ------- ------ ------
$ -- $1,738 $ (197) $ 629 $1,975
===== ====== ======= ====== ======
</TABLE>
F-19
<PAGE> 108
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Rate Reconciliation
The reconciliation of income tax expense (benefit) by applying the Federal
statutory tax rates to the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate..................... (34.0)% 34.0% (34.0)% 34.0% 34.0%
State income taxes, net of federal income
tax benefit.............................. -- 1.8 4.7 5.9 2.2
Nondeductible expenses including
nondeductible goodwill................... .5 1.5 12.9 7.2 2.0
Deferred expenses including litigation and
stock based compensation................. (3.0) (10.2) (1.1) (3.2) (.3)
Valuation allowance........................ 36.5 -- -- -- --
----- ----- ----- ----- -----
--% 27.1% (17.5)% 43.9% 37.9%
===== ===== ===== ===== =====
</TABLE>
The net current deferred tax asset and the net long-term deferred tax
(liability) asset in the accompanying consolidated balance sheets consists of
the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------- MARCH 31,
1997 1998 1999
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred taxes
Current deferred tax asset............................ $ 88 $ 67 $ 61
Current deferred tax liability........................ -- -- --
----- ------ ------
Net current deferred tax asset........................ 88 67 61
Long-term deferred taxes
Long-term deferred tax asset.......................... 415 1,398 1,829
Long-term deferred tax liability...................... (922) (827) (750)
----- ------ ------
Net long-term deferred tax (liability) asset.......... (507) 571 1,079
----- ------ ------
$(419) $ 638 $1,140
===== ====== ======
</TABLE>
The principal temporary differences that result in the above deferred tax
assets and liabilities are differences in the methods for calculating
depreciation, amortization, compensation expense related to options and certain
expenses accrued for financial reporting purposes not deductible for tax
purposes until paid.
NOTE 9 -- LEASES
The Company has a noncancellable operating lease for its office space in
Norcross, Georgia that expires January 2005 and requires monthly payments of
$21. Rental expenses for this operating lease were approximately $254 and $252
during the years ended June 30, 1997 and 1998, respectively.
The Company had a Bareboat Charter Agreement for the use of the Vegas
Express. The original agreement commenced on April 22, 1998 and was to expire in
April 1999, as amended. Charter payments were $100 per month until January 22,
1999 at which time they became $50 per month. Additionally,
F-20
<PAGE> 109
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
beginning on January 22, 1999, the Company paid the owner of the Vegas Express
$3.00 per passenger per month in excess of 12,000 passengers. Lease expenses for
this Charter were approximately $0, $0 and $100 during the years ended June 30,
1996, 1997 and 1998, respectively, and $0 and $750 (unaudited) for the nine
months ended March 31, 1998 and 1999, respectively. The Company purchased the
corporation that owned the boat in May 1999 (Note 18).
In addition, the Company has operating leases that expire through May 2002
for various office equipment, office facilities, dock and parking. These leases
require monthly payments totaling $28.
Future minimum lease payments pursuant to these leases are approximately as
follows:
<TABLE>
<CAPTION>
RELATED
YEAR ENDING NON-RELATED PARTY
JUNE 30, PARTY (NOTE 5) TOTAL
- ----------- ----------- -------- ------
<S> <C> <C> <C>
1999................................................... $1,104 $ 30 $1,134
2000................................................... 487 30 517
2001................................................... 356 30 386
2002................................................... 263 30 293
2003................................................... 264 10 274
Thereafter............................................. 431 -- 431
------ ---- ------
$2,905 $130 $3,035
====== ==== ======
</TABLE>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Litigation
The Company had an agreement with the first distributor which allowed the
Company to sell machines to a second distributor for its own use. There is a
disagreement between the Company and the first distributor as to whether or not
the agreement set up an exclusive relationship. During the year ended June 30,
1997, the first distributor filed suit against the Company alleging breach of
contract. During the year ended June 30, 1998, the United States District Court
of South Carolina awarded a $3,065 judgement in favor of the first distributor.
As such, the Company has increased the corresponding accrual to that amount plus
interest by recording a charge to income in the amount of $2,779. In April 1999,
the judgment was affirmed on appeal. The judgment was paid in full on May 26,
1999.
On October 19, 1998, the former Vice President, Chief Operating Officer,
Chief Financial Officer, Treasurer and Secretary ("Individual") of Technology
filed a complaint against the Company in the United States District Court for
the Northern District of Georgia alleging that the Company had breached an
alleged employment agreement with the Individual because the Company granted
incentive stock options to the Individual for 200,000 shares exercisable at
$2.50 per share rather than nonqualified stock options for 200,000 shares
exercisable at $1.00 per share. Further, the Individual alleges that the stock
options he should have received should have been exercisable without being
conditioned upon a particular schedule and should not have expired upon the
termination of his employment. The Individual alleges that he has been damaged
in an undetermined amount. The Company has filed an answer denying the claims
and intends to vigorously defend the lawsuit.
On June 10, 1998, the second distributor filed a complaint against the
Company in the Court of Common Pleas for the Fifth Judicial Circuit, Richland
County, State of South Carolina in which the second distributor alleges, among
other things, that the Company breached a sales distribution agreement by not
supplying the second distributor with Pot O Gold machines for resale in South
Carolina and further the Company used
F-21
<PAGE> 110
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
unfair and/or deceptive means of restraining trade in violation of the South
Carolina Unfair Trade Practices Act by limiting the supply of Pot O Gold
machines in South Carolina. The second distributor requests that it be granted
damages in an amount to be determined at trial and that the damages be trebled.
In interrogatory responses, the second distributor has alleged actual damages of
approximately $1,300. At the same time it requested that it be granted a
temporary restraining order and preliminary injunction against the Company.
This litigation follows an earlier lawsuit regarding the same contract
filed by the second distributor against the Company in South Carolina District
Court on November 7, 1996 (the "Prior Litigation") which resulted in a jury
verdict returned on October 30, 1997, in favor of the second distributor in the
amount of $0.
The Company had the lawsuit removed to the United States District Court for
the District Court of South Carolina, Anderson Division. On September 2, 1998,
the Court denied the second request for temporary restraining order and
preliminary injunction. The Company has filed an Answer and Counterclaim in
which it denies various allegations, asserts various affirmative defenses and
counterclaims that the Company sold new Pot O Gold games as used games thereby
constituting an unfair and deceptive act in trade or commerce in South Carolina
in violation of the Unfair Trade Practices Act and that the second distributor's
actions in selling Pot O Gold games in violation of the terms of the Agreement
resulted in a judgment being entered against the Company in favor of the first
distributor in the amount of $3,065. The Company requests that it be granted
damages to be determined at trial and that the damages be trebled.
On March 24, 1999, the Court struck various of the Company's answers as
being res judicata or collaterally estopped because of the prior litigation
between the second distributor and the Company and dismissed their counterclaims
mentioned above. Each stricken paragraph contained a defense the essence of
which was that the agreement between the second distributor and the Company
distributor was either not biding or had been modified so as to prohibit the
second distributor from reselling Pot-O-Gold machines in South Carolina. The
order also struck the Company's counterclaims for violation of the South
Carolina Unfair Trade Practices Act, contractual and common law indemnification,
and tortuous interference with contract. The Company has filed a motion for
reconsideration or in the alternative, for immediate appeal.
On December 14, 1998, the Company filed a lawsuit against the first
distributor in the Superior Court of Gwinnett County, State of Georgia in which
the Company alleges that the first distributor breached the Exclusive
Distribution Agreement dated November 27, 1995, by failing to pay the Company
$2,667 for a portion of the memory board upgrade kits for Pot O Gold machines
that the first distributor had ordered from the Company and by failing to pay
the Company $5,040 for a portion of the Pot O Gold machines the first
distributor had ordered from the Company. The Company also alleges that the
first distributor misappropriated "trade secrets" of the Company and requests
that it be granted damages to be proved at trial, interest and attorneys' fees,
specific performance and an order enjoining the misappropriation.
The first distributor has filed an answer and counterclaim in this action
which the first distributor alleges that Leisure Time Technology has continued
to breach the agreement, that Leisure Time Technology's breach was accompanied
by a fraudulent act and that Leisure Time Technology committed fraudulent
nondisclosure of material facts in connection with the agreement. The first
distributor is claiming actual damages in an amount to be proved at trial for
the loss of sales, for the diminution of the price of games sold by the first
distributor due to a loss of exclusivity, for the refusal of Leisure Time
Technology to sell games at the contract price and due to the sales by Collins
and others in violation of the agreement. The first distributor is also
requesting punitive damages. The first distributor's counterclaims are similar
to the claims by the first distributor in the case in which the first
distributor recovered a judgment in the amount of approximately $3,065. In that
case, the Court made no finding of any fraudulent acts by Leisure Time
Technology.
F-22
<PAGE> 111
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
On March 25, 1999, the first distributor filed a complaint against the
Company and a vice president of one of its subsidiaries in the Court of Common
Pleas for the Fifth Judicial Circuit, Richland County, South Carolina,
essentially repeating the allegations asserted in its counterclaim against the
Company in the Gwinnett County, Georgia action. Specifically, the first
distributor alleges that the Company breached the Distribution Agreement by
continuing to sell Pot-O-Gold machines to the second distributor, directly
selling machines in South Carolina and "illegally raising the prices of video
games." The first distributor also alleges claims for breach of contract
accompanied by a fraudulent act, fraudulent nondisclosure of a material fact and
tortious interference with the first distributors alleged contracts with other
companies. The first distributor seeks unspecified "past damages", actual
damages, punitive damages and attorneys' fees.
Any unfavorable outcome related to any outstanding litigation could have a
material adverse effect on the financial condition of the Company.
Guarantees
In 1999, the Company entered into a series of agreements with a third party
financing source to guarantee loans made to unaffiliated purchasers of gaming
machines from the Company. $1,300 of loans have been guaranteed under these
agreements at April 30, 1999.
Purchase Agreement
In June 1998, the Company entered into a purchase agreement for a hotel,
with consideration approximating $1,020. As of June 30, 1998, the Company had
$85 on deposit towards the purchase price. The remainder was paid as follows;
$50 in July and August 1998, $290 in September 1998 and the balance by the
execution of a promissory note in the amount of $545 bearing interest at 10%
balance due in five years from the closing date.
Employment Agreements
The Company has entered into a five year employment agreement with the
Company's president. The agreement contains an anti-dilutive provision that
requires the issuance of additional options upon a change in control, as defined
in the agreement. Additionally, upon a change in control, the officer has the
option to cause the Company to repurchase all or any portion of the common stock
owned by the officer at a price as defined in the agreement. This agreement is
automatically renewed after the termination date for succeeding one year periods
unless the Company or the officer gives written notice of nonrenewal.
The Company has also entered into three year employment agreements with the
Company's chief financial officer, compliance and licensing director, secretary,
assistant secretary and another employee. The agreements contain anti-dilutive
provisions that require the issuance of additional options upon a change in
control, as defined in the agreement. Additionally, upon a change in control,
the officers have the option to cause the Company to repurchase all or any
portion of the common stock then owned by each officer at a price as defined in
the agreement. These agreements are automatically renewed after the termination
date for succeeding one year periods unless the Company or the officer gives
written notice of nonrenewal.
Nine other employees have employment agreements with the Company or its
subsidiaries that expire at various times through February 2002.
F-23
<PAGE> 112
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Consulting Agreement
Effective March 1998, the Company entered into a consulting agreement with
the former executive vice president ("Individual") of the Company. Pursuant to
the consulting agreement, the Individual is required to provide a maximum of ten
hours of management consulting per week for the Company and its subsidiaries. He
is to be paid $5 per month, plus an amount to maintain his current health
insurance, and out-of-pocket expenses incurred by him in performing his
consulting duties. This consulting agreement automatically terminates on
December 31, 2008.
NOTE 11 -- BUSINESS AND CREDIT CONCENTRATIONS
For the year ended June 30, 1997, two customers accounted for approximately
18% and 60% of the Company's total sales. As of June 30, 1997, the Company had
approximately $75, or 8%, of total trade accounts receivable due from these two
customers.
For the year ended June 30, 1998, two customers accounted for approximately
23% and 47% of the Company's total sales. As of June 30, 1998, the Company had
approximately $39, or 2%, of total trade accounts receivable due from these two
customers.
For the period ended March 31, 1999 (unaudited), three customers accounted
for approximately 11%, 33% and 10%, respectively, of the Company's total sales.
As of March 31, 1999, the Company had approximately $787, or 29%, of total trade
accounts receivable due from these three customers.
The majority of Leisure Time's sales of video gaming machines over the
years ending June 30, 1997 and 1998 and for the nine months ending March 31,
1999, have been in South Carolina. For the years ending June 30, 1997 and 1998
and the nine months ended March 31, 1999, 78%, 67% and 66%, respectively, of the
Company's sales were derived from South Carolina.
NOTE 12 -- STOCK OPTIONS AND WARRANTS
Stock Option Plan
The Company has a 1997 Incentive and Nonstatutory Stock Option Plan
("Plan") which authorizes the Company to grant incentive stock options within
the meaning of Section 422A of the Internal Revenue Code of 1986, as amended,
and to grant nonstatutory stock options. The Plan allows for a total of
4,500,000 shares of Common Stock to be granted. The Plan is administered by the
Company's Board of Directors or a committee thereof which determines the terms
of options granted, including the exercise price, the number of shares of Common
Stock subject to the option, and the terms and conditions of exercise. No
incentive option granted under the Plan is transferable by the optionee other
than by will or the laws of descent and distribution and each incentive option
is exercisable during the lifetime of the optionee only by such optionee.
Stock Option Activity
During the year ended June 30, 1997, the Company issued 1,100,648 stock
options exercisable at prices ranging from $.10 to $2.80 per share, which
represented fair market value at the respective dates of grant. These options
expire from April 2002 through June 2007. No expense has been recognized for
issuances to employees. However, for 130,000 options issued to non-employees,
$59 of expense has been recognized at imputed values ranging from $.45 to $.48
per option, which approximated fair market value at the time of issuance prior
to the acquisition of U.S. Games.
F-24
<PAGE> 113
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
During the year ended June 30, 1998, the Company issued 562,500 stock
options exercisable at $6.00 per share, which represented fair value at the date
of grant. These options expire June 2008.
In November 1998 (unaudited), the Company issued 500,000 employee stock
options exercisable at $6.00 per share, which approximated fair value. These
options expire through December 2007.
In December 1998 (unaudited), the Company issued 190,000 employee stock
options exercisable at $6.00 per share that expire from December 2003 through
December 2007. $760 of compensation expense was recorded in connection with
these options using a value of $10.00 per share.
In January 1999 (unaudited), the Company issued 110,000 employee stock
options exercisable at $6.00 per share that expire from January 2004 through
January 2008. $440 of compensation expense was recorded in connection with these
options using a value of $10.00 per share.
In March 1999 (unaudited), the Company issued 50,000 employee stock options
exercisable at $6.00 per share that expire from February 2004 through February
2007. $200 of compensation expense was recorded in connection with these options
using a value of $10.00 per share.
In March 1999 (unaudited), the Company issued 330,000 employee stock
options exercisable at $10.00 per share, which approximated fair value. These
options expire from March 2004 through March 2007.
Stock Warrant Activity
During the year ended June 30, 1997, the Company issued 142,413 common
stock warrants in conjunction with various stock issuances. These warrants have
exercise prices ranging from $1.00 to $2.80 per share and expire from June 1999
through May 2005. $26 of expense has been recognized as a result of issuances of
93,321 of common stock warrants to nonemployees in exchange for services
provided. The imputed value of these warrants ranged from $.46 to $ .78 per
warrant, which approximated fair value at the time of issuance prior to the
acquisition of U.S. Games.
During the year ended June 30, 1998, the Company issued 41,988 common stock
warrants in conjunction with various stock issuances. These warrants have
exercise prices of $2.50 per share, which approximated fair value, and expire
from July 1999 through June 2000.
During the period ended March 31, 1999 (unaudited), the Company issued
31,491 common stock warrants in conjunction with various debt conversions. These
warrants have exercise prices of $2.50 per share and expire from July 2000
through March 2001.
During the period ended March 31, 1999 (unaudited), 2,000 units containing
2,000 warrants and 2,000 shares of common stock, were sold for cash at $10.00
per unit. These warrants have exercise prices of $10.00 per share, which
approximates fair value, and expire March 2002 (Note 13).
F-25
<PAGE> 114
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Stock Warrant Activity
The following is a summary of options and warrants granted, exercised and
expired:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE FAIR EXERCISE PRICE
EXERCISE PRICE VALUE OF OF OPTIONS
OF OPTIONS OPTIONS AND CURRENTLY EXERCISABLE AND WARRANTS
AND WARRANTS ---------------------- -- CURRENTLY
OPTIONS WARRANTS WARRANTS GRANTED OPTIONS WARRANTS EXERCISABLE
--------- -------- -------------- ------------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, June 30,
1995................... 1,687,500 275,307 $1.44 1,687,500 275,307 $1.44
--------- ------- -----
Granted................ 20,000 129,929 .19 .40
--------- ------- -----
Outstanding June 30,
1996................... 1,707,500 405,236 1.53 1,707,500 405,236 1.53
--------- ------- -----
Granted................ 1,100,648 142,413 .84 .88
Exercised.............. -- (32,500) .03
--------- ------- -----
Outstanding June 30,
1997................... 2,808,148 515,149 1.80 2,488,148 515,149 1.74
--------- ------- -----
Granted................ 562,500 41,988 .92 2.34
Exercised.............. -- (91,786) .07
Expired................ -- (36,329) .03
--------- ------- -----
Outstanding June 30,
1998................... 3,370,648 429,022 1.91 3,110,648 429,022 1.74
--------- ------- -----
Granted (unaudited).... 830,000 33,491 .45 2.13
Granted at less than
fair market value
(unaudited).......... 350,000 -- .15 6.09
Exercised
(unaudited).......... (100) (60,090) .13
Expired (unaudited).... (210,000) (62,817) .08
--------- ------- -----
Outstanding March 31,
1999 (unaudited)....... 4,340,548 339,606 $3.56 3,618,548 339,606 $1.17
========= ======= ===== ========= ======= =====
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------------------
OPTIONS AND
OPTIONS AND WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF OPTIONS AND NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
WARRANTS EXERCISE PRICE OUTSTANDING PRICE LIFE EXERCISABLE PRICE
----------------------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.10 - $2.80................... 2,935,654 $1.65 6.0 years 2,704,163 $1.58
$6.00 - $10.00................. 1,744,500 6.76 7.0 years 1,253,991 7.06
--------- ----- --------- ---------- -----
4,680,154 $3.56 6.4 years $3,958,154 $1.17
========= ===== ========== =====
</TABLE>
The above table does not include 3,341,000 shares and warrants that may
have originally been required to be issued upon the conversion of the 11%
convertible promissory notes payable to individuals as discussed in Note 6. Upon
conversion, 1,060,000 shares and 80,500 shares of common stock would have to be
issued at $1.25 and $2.50 per share, respectively. Additionally, two sets of
1,060,000 common stock warrants would have been issued allowing the holders to
purchase shares of the Company's common stock at $1.75 a share and 120% of the
offering price of an initial public offering by the Company. In addition, 80,500
common stock warrants allowing the holder to purchase shares at $2.50 per share
would have been issued. In January 1999, the Company paid off the majority of
these convertible promissory notes payable in full. As such, the
F-26
<PAGE> 115
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Company believes that the conversion features that would have entitled the
noteholders the right to acquire up to 3,180,000 shares of the Company's common
stock have expired.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost is recognized for the issuances of stock
options to employees when the exercise price approximates market. Pursuant to
the Accounting Principles Board Opinion No. 25 ("APB 25"), the Company does
recognize compensation expense on issuances of stock options to employees when
the exercise price is less than the fair value, for the difference between the
fair value of the stock and the option exercise price. During the period ended
March 31, 1999, $1,400 of compensation expense was recognized.
Had compensation cost for the Company's issuances of all stock options
during the year ended June 30, 1997 and 1998 and the nine months ended March 31,
1999 (unaudited) been determined based on the fair value at the date of grant
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and earnings (loss) per share for those periods would have been decreased
(increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
JUNE 30,
---------------- MARCH 31,
1997 1998 1999
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net income (loss) -- as reported....................... $4,688 $ (929) $3,237
Net income (loss) -- pro forma......................... 3,700 (1,431) 1,260
Earnings (loss) per share -- diluted -- as reported.... .65 (.21) .42
Earnings (loss) per share -- diluted -- pro forma...... .48 (.32) .16
</TABLE>
The Company utilizes the Black-Scholes option-pricing model to calculate
the fair value of each individual issuance of options or warrants with the
following assumptions used for grants through the nine months ended March 31,
1999: dividend yield of 0.0%; expected average annual volatility of 0.0%;
average annual risk-free interest rate of 5.44%; and expected terms of 3 to 5
years.
NOTE 13 -- STOCKHOLDERS' EQUITY
Preferred Stock
The Company's board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of preferred stock with such dividend,
redemption, conversion, and exchange provisions as may be provided by the board
of directors with regard to such particular series. Any series of preferred
stock may possess voting, dividend, liquidation and redemption rights superior
to those of the common stock. The rights of the holders of common stock will be
subject to and may be adversely affected by the rights of the holders of any
preferred stock that may be issued in the future. Issuance of a new series of
preferred stock, or providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire, or discourage a third party from acquiring, the
outstanding common stock of the Company and make removal of the board of
directors more difficult. As of March 31, 1999, no series of preferred stock has
been designated and no shares of preferred stock are currently issued and
outstanding.
Common Stock Activity
During the years ended June 30, 1996, 1997 and 1998, the Company sold
426,400, 167,400 and 33,900 shares of common stock, respectively, for cash at
prices ranging from $.50 and $2.80 per share.
F-27
<PAGE> 116
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
During the period ended March 31, 1999 (unaudited), the Company issued
60,190 shares of common stock in conjunction with the exercise of options and
warrants for cash at prices ranging from $2.80 and $3.00 per share pursuant to
the original agreements.
During the period ended March 31, 1999 (unaudited), 2,000 units containing
2,000 shares of common stock and 2,000 warrants, were sold for cash at $10.00
per unit (Note 12).
During the period ended March 31, 1999 (unaudited), 31,491 shares of common
stock were issued at $2.50 per share in satisfaction of $79 of notes payable and
accrued interest.
During the years ended June 30, 1997 and 1998, the Company issued 85,292
and 99,874 shares of common stock, respectively, as extensions on notes payable
and in conjunction with the conversion of certain notes payable. During the year
ended June 30, 1997, 31,100, shares were issued at a value of $1.00 per share in
connection with the extensions. During the years ended June 30, 1997 and 1998,
54,192 and 99,874 shares, respectively, were issued at rates ranging from $2.50
to $2.80 per share in satisfaction of $145 and $267, respectively, of notes
payable and accrued interest.
During the year ended June 30, 1997, officers of the Company forgave $875
of accrued officer wages related to prior years.
In October 1996, the Company issued 38,080 shares of common stock in
exchange for services provided. These shares were valued at $2.50 per share.
In December 1996, the Company repurchased 100,000 shares of previously
issued common stock at a rate of $2.00 per share.
In June 1997, in connection with the acquisition of a certain vessel, the
Company issued 150,000 shares of common stock valued at $2.50 a share.
NOTE 14 -- BUSINESS SEGMENTS
As of the period ending March 31, 1999, the Company has two reportable
segments: manufacturing and gaming. Prior to the period ended March 31, 1999,
the Company had only one operational segment; therefore, reportable segment
information is being presented only for the period ended March 31, 1999. The
manufacturing segment is responsible for the development, manufacturing and
sales of gaming equipment. The gaming segment operates gaming cruise ships and
gaming routes. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company's
reportable segments are strategic business units that offer different products
and services. They are managed separately because each business requires
different technology and marketing strategies.
Operating results and other financial data are presented for the two
reportable segments of the Company for the period ended March 31, 1999. Revenue
includes sales to external customers within that segment. Cost of goods sold
includes costs associated with revenue within the segments. Depreciation and
amortization includes expenses related to depreciation and amortization directly
allocated to the segment. Consolidated income tax expense and deferred tax
assets are included with corporate and other.
F-28
<PAGE> 117
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Identifiable assets are those assets used in segment, corporate and other
operations, which consist primarily of cash, receivables, inventory, prepaid
expenses, machinery, equipment, deposits and intangibles.
<TABLE>
<CAPTION>
CORPORATE
MANUFACTURING GAMING AND OTHER CONSOLIDATED
------------- ------- --------- ------------
<S> <C> <C> <C> <C>
March 31, 1999 (unaudited):
Revenue............................... $41,037 $ 3,738 $ 281 $45,056
Cost of goods sold.................... 21,796 400 279 22,475
Depreciation and amortization......... 893 357 44 1,294
Selling, general and administrative
expenses........................... 5,014 7,362 2,532 14,908
Segment profit (loss)................. 14,553 (3,836) (7,480) 3,237
Identifiable assets................... 14,846 10,964 4,030 29,840
</TABLE>
NOTE 15 -- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation for basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator
Numerator for basic earnings
per share -- net income
(loss)...................... $ (1,397) $ 4,688 $ (929) $ 803 $ 3,237
Effect of interest saved on
assumed conversion of
convertible debt............ (A) 298 (A) 28 2
---------- ---------- ---------- ---------- ----------
Numerator for diluted earnings
per share -- adjusted net
income (loss)............... $ (1,397) $ 4,986 $ (929) $ 831 $ 3,239
========== ========== ========== ========== ==========
Denominator
Denominator for basic earnings
per share -- weighted
average shares.............. 4,010,650 4,343,397 4,516,528 4,505,380 4,663,648
Effect of weighted average
dilutive securities
Options and warrants........ (A) 2,418,609 (A) 4,193,423 3,009,071
Convertible debt............ (A) 902,897 (A) 1,140,500 53,667
---------- ---------- ---------- ---------- ----------
Denominator for diluted
earnings per
share -- adjusted weighted
average shares.............. 4,010,650 7,664,903 4,516,528 9,839,303 7,726,386
========== ========== ========== ========== ==========
Basic earnings (loss) per
share....................... $ (.35) $ 1.08 $ (.21) $ .18 $ .69
========== ========== ========== ========== ==========
Diluted earnings (loss) per
share....................... $ (.35) $ .65 $ (.21) $ .08 $ .42
========== ========== ========== ========== ==========
</TABLE>
- ---------------
(A) Where the inclusion of potential common shares and other adjustments is
antidilutive, such shares are excluded from the computation.
F-29
<PAGE> 118
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
NOTE 16 -- RETIREMENT SAVINGS PLAN
The Company has a defined contribution retirement savings plan which covers
all employees age 21 or older with 1,000 hours of annual service. The Company
matches 50% of each $1.00 that the employee contributes up to 6% of
compensation. Company contributions vest as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED
---------------- ------
<S> <C>
1.................................................... 25%
2.................................................... 25%
3.................................................... 25%
4.................................................... 25%
</TABLE>
Contributions for the years ending June 30, 1997 and 1998 were $103 and
$85, respectively, and for the nine months ending March 31, 1998 and 1999 were
$0 and $56, respectively.
NOTE 17 -- BUSINESS ACQUISITION
On September 13, 1996, the Company acquired the outstanding stock of U.S.
Games, Inc. ("Subsidiary"), a Georgia corporation. Total consideration was
approximately $1,700 in cash at closing, contingent payments which totaled
$2,496 and $4,128 in notes payable.
The contingent payments were required based upon sales of Pot-O-Gold(TM)
machines and were satisfied in the year ended June 30, 1997.
In addition to the purchase of stock, the Company assumed deferred
compensation agreements with certain employees of the Subsidiary (Note 7) and
entered into a non compete agreement with the former stockholder of the
Subsidiary (Note 7).
In order to generate a portion of the necessary cash for the acquisition,
the Company borrowed $1,610 pursuant to 11% convertible promissory note payable
agreements due May 30, and September 1, 1999. These notes were convertible into
units, at prices of $1.25 and $2.50 per unit, consisting of one share of common
stock and warrants allowing the holder to purchase shares of the Company's stock
at prices of $1.75, $2.50 and 120% of the offering price of an initial public
offering by the Company. A majority of these notes contained an anti-dilutive
provision that required the issuance of additional warrants upon conversion
under certain circumstances after shares, options and warrants exceed 10,000,000
shares of common stock outstanding exclusive of the 120% warrants. No value was
ascribed to the warrant as the Company was selling stock for cash immediately
prior to the acquisition at prices less than $1.25 per share.
F-30
<PAGE> 119
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
The following details the net assets acquired as of September 13, 1996,
pursuant to the acquisition:
<TABLE>
<S> <C>
Cash........................................................ $ 372
Accounts receivable, net.................................... 371
Inventory................................................... 1,517
Property, plant and equipment, net.......................... 314
Other assets................................................ 1,952
Liabilities................................................. (2,300)
Notes payable sellers....................................... (4,128)
-------
Deficit at date of purchase................................. (1,902)
Total consideration paid for stock.......................... (4,196)
-------
Net goodwill...................................... $ 6,098
=======
</TABLE>
This transfer has been accounted for as a purchase and the results of
operations of the Subsidiary are included from the date of acquisition,
September 13, 1996. Goodwill is being amortized over 10 years.
The following unaudited pro forma data summarizes the results of operations
for the periods indicated as if the acquisition of Leisure Time Technology, Inc.
had been completed as of the beginning of the periods presented. The pro forma
data gives effect to actual operating results prior to the acquisition, adjusted
to include depreciation of fixed assets, amortization of intangibles and
additional interest expense. These pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisition occurred as of the beginning of the periods presented or that may be
obtained in the future.
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
------- -------
<S> <C> <C>
Revenues.................................................... $28,292 $32,532
Net income.................................................. 590 4,216
Basic earnings per share.................................... .15 .97
Diluted earnings per share.................................. .15 .55
</TABLE>
NOTE 18 -- SUBSEQUENT EVENTS
Acquisition
In April 1999, Casinos acquired all of the outstanding stock of Leisure
Time Financial Corp. (f/k/a RP Capital Corporation) from David M. Pote in
exchange for 100,000 shares of Casinos' common stock and an option to purchase
100,000 shares of common stock at $6.00 per share with an imputed value of $400
based on a fair value of $10.00 per share. The option vests as to 20,000 shares
on each of the first through fifth anniversaries of the grant date and expires
ten years after each respective vesting date. The option terminates as to any
unvested portion if Mr. Pote ceases to be either a director, officer or employee
of Casinos or one of its subsidiaries. In addition, Casinos provided additional
funding to Leisure Time Financial Corp. and Leisure Time Financial Corp. paid
Mr. Pote approximately $153 due on a loan from Mr. Pote to Leisure Time
Financial Corp. Leisure Time Financial Corp. and Mr. Pote entered into a
three-year employment agreement in April 1999 under which Mr. Pote serves as the
Senior Vice President of Leisure Time Financial Corp. The employment agreement
contains a non-competition clause prohibiting Mr. Pote from competing with
Casinos during the term of the employment agreement and for a period of six
months thereafter.
F-31
<PAGE> 120
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND 1999 IS UNAUDITED)
Purchase Agreements
In May 1999, the Company purchased all the issued and outstanding shares of
Florida Casino Cruises, Inc. ("Owner") the corporation that owns the Vegas
Express for total consideration valued at $5,086. The consideration consisted of
$4,169, 80,000 shares of the Company's common stock valued at $10 per share and
warrants to purchase an additional 80,000 shares of the Company's common stock
at a price of $10 per share with an imputed value of $117. These warrants expire
in three years. As of March 31, 1999, the Company had advanced $2,069 of the
purchase price to the Owner which was represented by a third mortgage on the
vessel. Additionally, the Company will assume responsibility for any disclosed
and undisclosed accounts payable relating to the vessel up to $1,450 plus 50% of
any amounts in excess of $1,450 and the assumption of a bank mortgage in the
amount of $1,300. In addition to the monthly charter payments payable under the
Bareboat Charter agreement, the Company has made payments totaling $270 to a
former stockholder of the Owner. In addition, the Company made the monthly
payment for July 1998 related to the second mortgage on the vessel in the amount
of $45.
F-32
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
To the Stockholder
Leisure Time Technology, Inc.
(f/k/a U.S. Games, Inc.)
We have audited the accompanying balance sheets of Leisure Time Technology,
Inc. (f/k/a U.S. Games, Inc.) as of June 30, 1996 and September 13, 1996 and the
related statements of operations, stockholder's equity, and cash flows for the
year then ended and the period from July 1, 1996 to September 13, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Leisure Time Technology,
Inc. (f/k/a U.S. Games, Inc.) at June 30, 1996 and September 13, 1996, and the
results of its operations and its cash flows for the year then ended and the
period from July 1, 1996 to September 13, 1996 in conformity with generally
accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
August 15, 1997
Denver, Colorado
F-33
<PAGE> 122
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 13,
1996 1996
-------- -------------
<S> <C> <C>
Current assets
Cash...................................................... $4,158 $ 372
Trade accounts receivable, less allowance for doubtful
accounts of $26 at June 30 and September 13, 1996,
respectively........................................... 219 371
Other receivables......................................... 116 --
Inventories (Note 2)...................................... 1,725 1,517
Income taxes refundable................................... 249 365
Prepaid expenses and other................................ 78 75
Deferred tax asset (Note 5)............................... 188 626
------ ------
Total current assets.............................. 6,733 3,326
------ ------
Property and equipment
Machinery and equipment................................... 681 687
Leasehold improvements.................................... 37 41
------ ------
718 728
Less accumulated depreciation............................. (391) (414)
------ ------
Net property and equipment........................ 327 314
Purchased software, less accumulated amortization of $637
and $724 at June 30, and September 13, 1996, respectively
(Note 4).................................................. 576 489
Debt issuance cost, less accumulated amortization of $293 at
June 30, 1996............................................. 49 --
Other assets................................................ 233 353
------ ------
$7,918 $4,482
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current installments of long-term liabilities (Note 6).... $ -- $ 119
Trade accounts payable.................................... 441 324
Accrued expenses (Note 3)................................. 987 579
------ ------
Total current liabilities......................... 1,428 1,022
Other long-term liabilities (Note 6)........................ -- 1,234
------ ------
Total long-term liabilities....................... -- 1,234
------ ------
Total liabilities................................. 1,428 2,256
------ ------
Commitments and contingencies (Notes 6 and 7)
Stockholder's equity (Note 9)
Common stock, no par value; 5,000,000 shares authorized;
688,850 shares issued.................................. -- --
Paid-in capital........................................... 820 --
Retained earnings......................................... 5,712 2,226
Treasury stock, 350 common shares, at cost................ (42) --
------ ------
Total stockholders' equity........................ 6,490 2,226
------ ------
$7,918 $4,482
====== ======
</TABLE>
See notes to financial statements.
F-34
<PAGE> 123
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED FROM JULY 1, TO
JUNE 30, SEPTEMBER 13,
1996 1996
------------ ---------------
<S> <C> <C>
Revenue..................................................... $28,291 $ 2,671
Cost of goods sold.......................................... 15,677 1,300
------- -------
Gross profit.............................................. 12,614 1,371
------- -------
Selling, general and administrative expenses................ 8,284 1,502
Deferred compensation (Note 6).............................. -- 1,354
Research and development costs.............................. 800 132
Interest expense, net....................................... 74 9
------- -------
Total operating expenses.......................... 9,158 2,997
------- -------
Income (loss) before income taxes........................... 3,456 (1,626)
Income tax expense (Note 5)................................. (1,293) 554
------- -------
Net income (loss)................................. $ 2,163 $(1,072)
======= =======
Earnings (loss) per share -- basic and diluted.............. $ 3.14 $ (1.56)
======= =======
Weighted average number of common shares outstanding --basic
and diluted............................................... 688,850 688,850
======= =======
</TABLE>
See notes to financial statements.
F-35
<PAGE> 124
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
STATEMENT OF STOCKHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- PAID-IN RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- ------ ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995.......... 688,850 $ -- $ 343 $ 3,549 $(42) $ 3,850
Income tax benefit related to the
exercise of non-qualified stock
options.......................... -- -- 477 -- -- 477
Net income......................... -- -- -- 2,163 -- 2,163
-------- ----- ----- ------- ---- -------
Balances at June 30, 1996.......... 688,850 -- 820 5,712 (42) 6,490
Exercise of options and warrants at
prices ranging from $.01 to $3.60
(Note 9)......................... 343,998 862 -- -- -- 862
Purchase of common stock recorded
at cost (Note 10)................ (343,998) (862) (820) (2,415) 42 (4,055)
Net loss for period from July 1,
1996 to September 13, 1996....... -- -- -- (1,072) -- (1,072)
-------- ----- ----- ------- ---- -------
Balance at September 13, 1996...... 688,850 $ -- $ -- $ 2,225 $ -- $ 2,225
======== ===== ===== ======= ==== =======
</TABLE>
See notes to financial statements.
F-36
<PAGE> 125
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FROM JULY 1, TO
ENDED JUNE 30, SEPTEMBER 13,
1996 1996
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)......................................... $2,163 $(1,072)
------ -------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization.......................... 672 77
Deferred compensation agreement........................ -- 1,353
Deferred tax benefit................................... (113) (438)
Changes in assets and liabilities
Trade accounts receivable............................ 2,236 (152)
Inventories.......................................... (108) 208
Income taxes refundable.............................. 227 --
Prepaid expenses..................................... (46) (113)
Other receivables.................................... (115) 116
Trade accounts payable............................... (238) (117)
Accrued expenses..................................... 200 (408)
Income taxes payable................................. (33) --
------ -------
2,682 526
------ -------
Net cash provided by (used in) operating
activities..................................... 4,845 (546)
------ -------
Cash flows from investing activities
Capital expenditures...................................... (112) (64)
Other assets.............................................. (100) 16
Purchase of software...................................... (10) --
------ -------
Net cash used in investing activities............. (222) (48)
------ -------
Cash flows from financing activities
Payments on notes payable................................. (500) --
Payments on long-term debt................................ (150) --
Repurchase of common stock................................ -- (3,192)
------ -------
Net cash used in financing activities............. (650) (3,192)
------ -------
Net increase (decrease) in cash............................. 3,973 (3,786)
Cash at beginning of year................................... 185 4,158
------ -------
Cash at end of year......................................... $4,158 $ 372
====== =======
</TABLE>
See notes to financial statements.
F-37
<PAGE> 126
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Supplemental disclosure of cash flow information
Cash paid during 1996 and the period from July 1, 1996 to September
13, 1996 for interest was $28 and $53, respectively.
Cash paid during 1996 and the period from July 1, 1996 to September
13, 1996 for income taxes was $1,311 and $189, respectively.
Supplemental disclosures of non cash financing and investing activities
During the year ended June 30, 1996, the Company recorded a debt
issuance cost of $342 in exchange for warrants with a fair market value of
$342 in connection with obtaining a line-of-credit.
During the year ended June 30, 1996, the Company recorded a credit to
paid-in-capital in the amount of $477 for the income tax benefit related to
stock options.
See notes to financial statements.
F-38
<PAGE> 127
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Leisure Time Technology, Inc. (f/k/a U.S. Games, Inc.) (the "Company"),
develops, manufactures and sells video amusement games and video gaming
machines. The Company is licensed to sell video gaming machines in Michigan,
Minnesota, New York, North Carolina, and Wisconsin and is in compliance with
South Carolina regulations regarding the sale of gaming machines. The Company is
in the process of becoming licensed in Arizona, Mississippi, Montana, Nevada and
Ontario, and has established relationships for international sales in Europe and
South America.
On September 13, 1996, the Company was acquired by Leisure Time Casinos &
Resorts, Inc. and operates as a wholly owned subsidiary (Note 10).
Inventories
Inventories are stated at the lower of cost or market and consist primarily
of raw material, work in process and finished goods. Work-in-process and
finished goods include raw materials, direct labor and manufacturing overhead.
Cost is determined using the first-in, first-out method for all inventories.
Property and Equipment
Property and equipment are stated at cost. Depreciation on equipment is
calculated using the straight-line method over the estimated lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset.
Purchased Software
Purchased software is being amortized over a period of three years.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue Recognition
Revenue is recognized as products are shipped.
Research and Development
All research and development costs are expensed as incurred.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist primarily of temporary cash investments.
The Company places its cash investments with high credit quality financial
institutions and, by policy limits the amount of credit exposure to any one
institution.
F-39
<PAGE> 128
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
in order to conform to the September 13, 1996 presentation.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 13,
1996 1996
-------- -------------
<S> <C> <C>
Raw materials............................................... $1,211 $1,023
Work-in-process............................................. 98 144
Finished goods.............................................. 526 460
------ ------
Total............................................. 1,835 1,627
Inventory reserve........................................... (110) (110)
------ ------
$1,725 $1,517
====== ======
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 13,
1996 1996
-------- -------------
<S> <C> <C>
Accrued wages and benefits.................................. $159 $ 74
Deferred compensation....................................... 152 --
Advanced deposits........................................... 116 --
Other accrued expenses...................................... 560 505
---- ----
$987 $579
==== ====
</TABLE>
NOTE 4 -- PURCHASED SOFTWARE
The Company recorded an intangible asset of approximately $1,200 for
software rights and source code. The asset is being amortized over three years
and has net balances of $576 and $489 at June 30, 1996 and September 13, 1996,
respectively. Prior to the purchase of the software and source code, the Company
paid royalties for the use of the software.
NOTE 5 -- INCOME TAXES
Due to the acquisition (Note 10), the Company will be included in the
consolidated tax return with the Parent for the period after the date of
acquisition. The accompanying tax provision has been computed assuming that the
Company files on a separate return basis.
F-40
<PAGE> 129
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense (benefit) for the year ended June 30, 1996 and the
period from July 1, 1996 to September 13, 1996 consists of:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 13,
1996 1996
-------- -------------
<S> <C> <C>
Current
U.S. Federal.............................................. $1,176 $(109)
State and local........................................... 230 (7)
------ -----
1,406 (116)
------ -----
Deferred
U.S. Federal.............................................. (106) (411)
State and local........................................... (7) (27)
------ -----
(113) (438)
------ -----
$1,293 $(554)
====== =====
</TABLE>
Actual income tax expense differs from expected income tax expense
(computed by applying the U.S. Federal statutory income tax rate of 34% to
income before income taxes), as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 13,
1996 1996
-------- -------------
<S> <C> <C>
Computed expected income tax expense........................ 34.0% 34.0%
Increase (decrease) in income tax expense resulting from
State income taxes, net of federal income tax effect...... 5.2 --
Nondeductible expenses.................................... .5 --
Other..................................................... (2.3) --
---- ----
37.4% 34.0%
==== ====
</TABLE>
The net deferred tax asset liability in the accompanying balance sheets
includes the following deferred tax assets and liabilities:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 13,
1996 1996
-------- -------------
<S> <C> <C>
Current deferred taxes
Current deferred tax asset................................ $ 375 $626
Current deferred tax liability............................ (187) --
----- ----
Net current deferred tax asset.................... $ 188 $626
===== ====
</TABLE>
The principal temporary differences that result in the above deferred tax
assets and liabilities are differences in the methods for calculating
depreciation, amortization and certain expenses accrued for financial reporting
purposes not deductible for tax purposes until paid.
The Company generated net operating loss carryforwards of $328 based upon
operations from July 1, 1996 through September 13, 1996.
NOTE 6 -- LONG-TERM LIABILITIES
Deferred Compensation Contracts
The Company entered into $1,644 (undiscounted) of deferred compensation
contracts with certain individuals. These contracts provide for the payment of
defined amounts, generally for up to a period of six years commencing on a
monthly basis in November 1996. Initially, the payments will be computed based
on the number of Pot-O-Gold(TM) machines sold each month multiplied by the
agreed upon rate for the amount
F-41
<PAGE> 130
LEISURE TIME TECHNOLOGY, INC.
(F/K/A U.S. GAMES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
sold. As of March 1, 1997, the amounts will be computed by taking a percentage
of the previous month's gross sales. The present value of the future amounts
estimated to be payable were accrued for financial reporting purposes at an
imputed interest rate of 6.64%, and originally amounted to $1,353 (discounted).
A summary of long-term liabilities at September 13, 1996 are as follows:
<TABLE>
<CAPTION>
CURRENT LONG-TERM
TOTAL PORTION PORTION
------ ------- ---------
<S> <C> <C> <C>
Deferred compensation contracts........................... $1,353 $119 $1,234
====== ==== ======
</TABLE>
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company has a noncancellable operating lease for its office space that
expires January 31, 1998. Rental expenses for this operating lease were
approximately $234 and $43 during the year ended June 30, 1996 and for the
period from July 1, 1996 to September 13, 1996, respectively.
Future lease payments under the operating lease are approximately $365.
Litigation
The Company has an agreement with a distributor which allowed the Company
to sell machines to a second company for their own use. There is a disagreement
between the Company and its distributor as to whether or not the agreement set
up an exclusive relationship. In the opinion of counsel and management, neither
disagreement will result in material losses in excess of amounts provided for in
the accompanying financial statements.
Profit Sharing
The Company has a profit sharing plan which covers substantially all
employees. Contributions are determined at the sole discretion of management and
are charged to current operations. Contributions were $48 for the year ended
June 30, 1996.
Additionally, the Company has a 401(k) feature. This feature does not
create an obligation for the Company.
NOTE 8 -- BUSINESS AND CREDIT CONCENTRATIONS
In 1996, two customers accounted for approximately 27% and 53% of the
Company's total sales.
For the period July 1, 1996 to September 13, 1996, two customers accounted
for approximately 18% and 60% of the Company's total sales.
NOTE 9 -- STOCKHOLDERS' EQUITY
Prior to the acquisition, options and warrants to acquire 343,998 shares of
the Company's common stock were exercised for $862.
NOTE 10 -- BUSINESS ACQUISITION
On September 13, 1996, the Company was acquired by Leisure Time Casinos &
Resorts, Inc.
In connection with the acquisition, shares which had been issued upon the
exercise of options and warrants were repurchased for $4,055.
F-42
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Florida Casino Cruises, Inc.
Naples, Florida
We have audited the accompanying balance sheet of Florida Casino Cruises,
Inc. as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Florida Casino Cruises, Inc.
at December 31, 1997 and 1998, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, at December 31, 1998, the Company had a stockholders'
deficit of $5,599 and a net deficiency in working capital that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 2. The financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.
Ehrhardt Keefe Steiner & Hottman
P.C.
April 8, 1999
Denver, Colorado
F-43
<PAGE> 132
FLORIDA CASINO CRUISES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash...................................................... $ 1 $ -- $ --
Cash -- restricted........................................ -- 207 163
Accounts receivable....................................... 2 2 2
Prepaid expenses.......................................... 15 -- --
------- ------- -------
Total current assets.............................. 18 209 165
------- ------- -------
Property and equipment (Notes 3 and 5)...................... 4,471 4,388 4,757
Less accumulated depreciation............................. (1,933) (2,371) (2,485)
------- ------- -------
Total property and equipment...................... 2,538 2,017 2,272
------- ------- -------
Other assets
Deposits.................................................. 10 1 --
Loan acquisition fee, net of accumulated amortization of
$3 (1997), $6 (1998) and $14 (1999).................... 26 16 15
------- ------- -------
Total other assets................................ 36 17 15
------- ------- -------
Total assets................................................ $ 2,592 $ 2,243 $ 2,452
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable -- stockholder (Note 4)...................... $ 2,341 $ 2,191 $ 2,191
Mortgage payable -- related party (Note 4)................ 700 -- --
Current portion of long-term debt (Note 5)................ 609 855 855
Accounts payable.......................................... 806 646 657
Accrued expenses.......................................... 607 834 874
Accrued interest -- stockholder (Note 4).................. 406 646 646
------- ------- -------
Total current liabilities......................... 5,469 5,172 5,223
Long-term liabilities
Notes payable (Note 5).................................... 1,621 970 834
Other liabilities (Note 9)................................ 357 1,700 2,069
------- ------- -------
Total long-term liabilities....................... 1,978 2,670 2,903
------- ------- -------
Total liabilities........................................... 7,447 7,842 8,126
------- ------- -------
Commitments and contingencies (Note 8)
Stockholders' deficit
Common stock, $1 par value, 130 shares authorized, 79
shares issued and outstanding.......................... -- -- --
Additional paid-in capital................................ 430 430 430
Accumulated deficit....................................... (5,285) (6,029) (6,104)
------- ------- -------
(4,855) (5,599) (5,674)
------- ------- -------
Total liabilities and stockholders' deficit................. $ 2,592 $ 2,243 $ 2,452
======= ======= =======
</TABLE>
See notes to financial statements.
F-44
<PAGE> 133
FLORIDA CASINO CRUISES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ---------------------
1997 1998 1998 1999
--------- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales revenue..................................... $ 2,396 $ -- $ -- $ --
Cost of sales..................................... 1,143 -- -- --
-------- ------- ---------- --------
Gross profit............................ 1,253 -- -- --
Operating expenses
General and administrative expenses............. 2,761 793 204 138
Litigation expenses (Note 8).................... 527 225 -- --
Loss on abandonment of assets................... 814 -- 2 --
Interest expense, net........................... 442 426 106 87
-------- ------- ---------- --------
Total operating expenses................ 4,544 1,444 312 225
-------- ------- ---------- --------
Net loss before other income...................... (3,291) (1,444) (312) (225)
Other revenue
Miscellaneous income (expense).................. -- -- 7 --
Bareboat charter income (Note 7)................ -- 700 -- 150
-------- ------- ---------- --------
Total other revenue..................... -- 700 7 150
-------- ------- ---------- --------
Net loss.......................................... $ (3,291) $ (744) $ (305) $ (75)
======== ======= ========== ========
Loss per share -- basic and diluted............... $(30,757) $(9,418) $(3,860.76) $(948.66)
======== ======= ========== ========
Weighted average number of common shares
outstanding -- basic and diluted................ 107 79 79 79
======== ======= ========== ========
</TABLE>
See notes to financial statements.
F-45
<PAGE> 134
FLORIDA CASINO CRUISES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT/
--------------- PAID-IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
------ ------ ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1996....................... 121 $ -- $ 680 $ -- $(1,044) $ (364)
Common stock repurchased from stockholder (Note
9)............................................... (42) -- (250) -- (950) (1,200)
Net loss for the year.............................. -- -- -- -- (3,291) (3,291)
----- ----- ----- ----- ------- -------
Balance -- December 31, 1997....................... 79 -- 430 -- (5,285) (4,855)
Net loss for the year.............................. -- -- -- -- (744) (744)
----- ----- ----- ----- ------- -------
Balance -- December 31, 1998....................... 79 -- 430 -- (6,029) (5,599)
Net loss for the three months ended March 31, 1999
(unaudited)...................................... -- -- -- -- (75) (75)
----- ----- ----- ----- ------- -------
Balance -- March 31, 1999 (unaudited).............. 79 $ -- $ 430 $ -- $(6,104) $(5,674)
===== ===== ===== ===== ======= =======
</TABLE>
See notes to financial statements.
F-46
<PAGE> 135
FLORIDA CASINO CRUISES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------
1997 1998 1998 1999
--------- -------- ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net (loss) income....................................... $(3,291) $ (744) $ (305) $ (75)
------- ------ ------ -----
Adjustments to reconcile net loss to cash (used by)
provided by operating activities
Write off of start-up costs.......................... 76 -- -- --
Loss on disposition of fixed assets.................. 860 63 2 --
Depreciation and amortization........................ 666 464 114 114
Changes in certain assets and liabilities --
Accounts receivable................................ 225 -- -- --
Inventories........................................ 25 -- -- --
Prepaids........................................... 122 16 15 1
Other current assets............................... 10 9 -- 1
Accounts payable................................... 522 (160) (149) 11
Other accrued expenses............................. 725 467 295 40
------- ------ ------ -----
3,231 859 277 167
------- ------ ------ -----
Net cash (used by) provided by operating
activities.................................... (60) 115 (28) 92
------- ------ ------ -----
Cash flows from investing activities
Purchase of equipment................................... (448) -- -- --
Proceeds from fixed asset sale.......................... 5 3 -- --
------- ------ ------ -----
Net cash (used by) provided by investing
activities.................................... (443) 3 -- --
------- ------ ------ -----
Cash flows from financing activities
Proceeds from long-term debt -- stockholder............. 465 (150) (141) --
Advances received (Note 10)............................. 881 1,343 1,343 --
Payment on long-term debt............................... (525) (405) (446) (136)
Payments on note payable -- stockholder................. (500) (700) (700) --
------- ------ ------ -----
Net cash provided by financing activities....... 321 88 56 (136)
------- ------ ------ -----
Net (decrease) increase in cash........................... (182) 206 28 (44)
Cash and cash equivalents -- beginning of year............ 183 1 1 207
------- ------ ------ -----
Cash and cash equivalents -- end of year.................. $ 1 $ 207 $ 29 $ 163
======= ====== ====== =====
</TABLE>
Supplemental disclosures:
Interest paid during December 31, 1997 and 1998 was $50 and $176,
respectively.
Interest paid during the three months ended March 31, 1998 and 1999
was $57 and $87, respectively.
Schedule of non-cash investing activities:
During the year ended December 31, 1997, long-term debt was incurred
to finance the acquisition of treasury stock for $1,200.
See notes to financial statements.
F-47
<PAGE> 136
FLORIDA CASINO CRUISES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Florida Casino Cruises, Inc. (the Company), a Georgia corporation, owns and
operates the ship Vegas Express, which operated out of the port of Dania,
Florida in 1997 and operates out of the port of Gloucester Massachusetts in
1998. The Vegas Express makes daily cruises into international water where it
provides its passengers with various "Las Vegas" style gambling and
entertainment. The Company began its operations in 1993.
Restricted Cash
The Company has restricted cash pursuant to the Charter Hire of the vessel.
The monthly charter payment is being deposited in an account titled Leisure
Express Cruise, LLC and monies are used for vessel mortgage and expenses.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Accordingly, the financial statements do not include
a provision for income taxes because the earnings and losses are included in the
stockholders' personal income tax returns and are based on their personal tax
strategies.
Property and Equipment
The ship is depreciated over fifteen years using the straight-line method.
Ship improvements, related equipment and other equipment are recorded at cost
and are depreciated over their estimated useful lives, which range from five to
ten years.
Revenue Recognition
Casino revenue consists of net gaming wins. Food and beverage revenue
include the aggregate amounts generated by those departments.
Casino promotional allowances consist principally of the retail value of
complimentary food and beverages, admissions and entertainment provided to
casino patrons.
Unearned cruise revenue, which represents customer cruise deposits, is
included in the balance sheet when received and is recognized as passenger fare
or food revenue upon completion of the voyage.
Use of Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Drydock Costs
The Company uses the deferral method to account for major repairs and
maintenance in drydock whereby costs are capitalized when incurred and amortized
over the period to the next drydock.
F-48
<PAGE> 137
FLORIDA CASINO CRUISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- CONTINUED OPERATIONS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, as shown in the accompanying financial
statements, the Company has an accumulated deficit of $6,029 and a deficit in
stockholders' equity of $5,599 through December 31, 1998. In addition, total
current liabilities exceed total current assets by approximately $4,963.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn are dependent upon the Company's ability to meet its financing requirements
on a continuing basis and to succeed in its future operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
The Company has entered into an agreement to lease the vessel through April
1999 and the sole shareholder of the Company entered into an agreement to sell
the stock of the Company at the end of the lease (Notes 7 and 10).
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Property and equipment
Casino equipment.......................................... $ 665 $ 595
Ship and related equipment................................ 3,277 3,264
Dock improvements......................................... 437 437
Leasehold improvements.................................... 92 92
------- -------
4,471 4,388
Less accumulated depreciation............................. (1,933) (2,371)
------- -------
$ 2,538 $ 2,017
======= =======
</TABLE>
NOTE 4 -- RELATED PARTY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Note Payable -- Stockholder
Note payable -- stockholder, interest at 10% per annum;
all unpaid principal and interest due on demand;
without collateral. Accrued interest of $406 (1997) and
$646 (1998)............................................ $2,341 $2,191
Mortgage Payable
Mortgage payable -- stockholder, paid in full in 1998..... 700 --
------ ------
$3,041 $2,191
====== ======
</TABLE>
F-49
<PAGE> 138
FLORIDA CASINO CRUISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Note payable -- insurance note, paid in full in 1998........ $ 10 $ --
Note payable -- vendor, paid in full in 1998................ 50 --
Note payable -- bank, interest at prime plus 2%, (which was
10.5% at December 31, 1998) payable in monthly payments of
interest and principal of $45 due November 2007,
collateralized by ship Vegas Express...................... 1,735 1,390
Note payable vendor, interest at 10%, monthly payments of
interest and principal of $17, due May 1999,
collateralized by slot machines........................... 435 435
------ ------
2,230 1,825
Less current portion........................................ (609) (855)
------ ------
Total long-term debt.............................. $1,621 $ 970
====== ======
</TABLE>
The aggregate annual maturities of long-term debt at December 31, 1998, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999........................................................ $ 855
2000........................................................ 500
2001........................................................ 470
------
$1,825
======
</TABLE>
NOTE 6 -- LEASES
Prior to entering into the Bareboat Charter agreement (Note 7), the Company
conducted its operations from facilities (boat dock, ticket book, and boarding
area) that are leased under a five-year non-cancelable lease expiring on May 31,
2000 with monthly rent payments of $6,500.
The minimum rental payments required under the above operating lease as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999........................................................ $ 78
2000........................................................ 33
----
$111
====
</TABLE>
Rental expense totaled approximately $39 and $16 in 1997 and 1998,
respectively.
NOTE 7 -- BAREBOAT CHARTER
The Company has a Bareboat Charter agreement that expires April 1999.
Revenue related to this Charter equals $100 a month until December 31, 1998 and
$50 a month until the expiration date (Note 10). Additionally, beginning in
January 1999, the Company receives $3.00 per passenger per month in excess of
12,000 passengers. Lease revenue for this Charter was approximately $700 during
the year ended December 31, 1998.
F-50
<PAGE> 139
FLORIDA CASINO CRUISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Various lawsuits, claims and proceedings of a nature considered normal to
its business are pending against the Company. The most significant of these are
described below:
The Company is involved in litigation regarding use taxes. The Florida
Department of Revenue and Sales and Use Tax Division suit is for $290 which
includes $188 of tax. This amount has been accrued in the accompanying financial
statements.
The Company is engaged in litigation with vendors for back payment on goods
and services. The Company has accrued for the back payments and those amounts
are reflected in the balance sheet.
The Company has personal injury claims pending and its insurance company is
engaged in litigation on behalf of the Company. Personal injury judgments were
entered against the Company totaling $225 which are recorded in the accompanying
financial statements. The Company is appealing the judgment for $200.
The state of Georgia has filed a lien against the boat for non-payment of
taxes. The lien was filed in Savannah in the amount of $146 which has been
accrued for and is reflected in the balance sheet.
The state of Florida has brought suit against the Company alleging that the
ship must obtain a watercraft registration permit in the state of Florida to
operate on the state's inner waterways. The Company is vigorously contesting
this issue and a conclusion regarding the outcome has not been reached. The
amount of loss, if any, related to this litigation has not been estimated.
Effective July 1998, the ship operates out of the port in Gloucester,
Massachusetts.
NOTE 9 -- STOCKHOLDERS' EQUITY
During 1997, the Company repurchased 42 shares of common stock for $1,200,
the Company paid $150 into escrow and issued a note for $1,050 payable monthly
with an interest rate of 9%.
NOTE 10 -- SUBSEQUENT EVENT
In May 1999, the sole shareholder of the Company sold all of the Company's
issued and outstanding common stock to the corporation ("Corporation") that
chartered the vessel through the bareboat charter agreement (Note 7). Total
consideration given in exchange for all the issued and outstanding shares of the
Company's common stock was $4,169, 80,000 shares of the Corporation's common
stock valued at $10 per share and warrants to purchase an additional 80,000
shares of the Corporation's common stock at a price of $10 per share. The
warrants expire in three years. Additionally, the Corporation will assume
responsibility for any disclosed accounts payable relating to the vessel up to
$1,450 plus 50% of any amounts in excess of $1,450 and assume a bank mortgage in
the amount of $1,300. As of December 31, 1997 and 1998, the Company had received
advances on the purchase price from the corporation of $357 and $1,700,
respectively, which is represented by a third mortgage on the vessel.
F-51
<PAGE> 140
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The unaudited pro forma combined balance sheet as of March 31, 1999 gives
effect to the business combination of Leisure Time Casinos & Resorts, Inc. and
Subsidiaries and Florida Casino Cruises, Inc. effective March 31, 1999.
The unaudited pro forma combined statements of income (loss) for the year
ended June 30, 1998 and the period ended March 31, 1999 gives effect to the
business combinations between Leisure Time Casinos & Resorts, Inc. and
Subsidiaries and Florida Casino Cruises, Inc. effective July 1, 1997.
These financial statements include the related pro forma adjustments
described in the notes thereto. The transactions between Leisure Time Casinos &
Resorts, Inc. and Subsidiaries and Florida Casino Cruises, Inc. have been
accounted for as combinations of companies under the purchase method of
accounting. These pro forma statements are not necessarily indicative of the
results of operations as they might have been had the transactions become
effective on the above mentioned dates.
A separate pro forma combined balance sheet for the acquisition of U.S.
Games, Inc. is not included as the acquisition took place September 14, 1996 and
is included in the historical balance sheet of Leisure Time Casinos & Resorts,
Inc. and Subsidiaries as of June 30, 1998.
The unaudited pro forma combined financial statements should be read in
conjunction with the separate historical financial statements and notes thereto
of Leisure Time Casinos & Resorts, Inc. and Subsidiaries and Florida Casino
Cruises, Inc.
F-52
<PAGE> 141
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
LEISURE TIME ADJUSTMENTS
CASINOS & ACQUISITION
RESORTS, INC. FLORIDA CASINO ADJUSTMENTS
AND CRUISES, ---------------- PRO FORMA
SUBSIDIARIES INC.* TOTAL DEBIT CREDIT COMBINED
------------- -------------- ------- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Manufacturing...................................... $ 28,643 $ -- $28,643 $ -- $ -- $ 28,643
Gaming............................................. -- -- -- -- -- --
Other.............................................. -- 342 342 -- -- 342
---------- ------- ------- ----- ------ ----------
Total revenue................................ 28,643 342 28,985 -- -- 28,985
---------- ------- ------- ----- ------ ----------
Cost of goods sold
Manufacturing...................................... 16,517 -- 16,517 -- -- 16,517
Gaming............................................. -- -- -- -- -- --
Other.............................................. -- 174 174 -- -- 174
---------- ------- ------- ----- ------ ----------
Total cost of goods sold..................... 16,517 174 16,691 -- -- 16,691
---------- ------- ------- ----- ------ ----------
Gross profit
Manufacturing...................................... 12,126 -- 12,126 -- -- 12,126
Gaming............................................. -- -- -- -- -- --
Other.............................................. -- 168 168 -- -- 168
---------- ------- ------- ----- ------ ----------
Total gross profit (loss).................... 12,126 168 12,294 -- -- 12,294
---------- ------- ------- ----- ------ ----------
Selling, general and administrative expenses......... 8,727 2,091 10,818(5) 140(6) 50 10,908
Research and development costs....................... 642 -- 642 -- -- 642
Interest expense, net................................ 840 438 1,278 -- -- 1,278
Other (income)....................................... -- (50) (50)(6) 50 -- --
Litigation........................................... 3,043 -- 3,043 -- -- 3,043
---------- ------- ------- ----- ------ ----------
Total operating (income) expenses............ 13,252 2,479 15,731 190 50 15,871
---------- ------- ------- ----- ------ ----------
Net income (loss) before income tax benefit
(expense).......................................... (1,126) (2,311) (3,437) (190) 50 (3,577)
Income tax benefit (expense)......................... 197 -- 197 --(4) 1,126 1,323
---------- ------- ------- ----- ------ ----------
Net income (loss).................................... $ (929) $(2,311) $(3,240) $(190) $1,176 $ (2,254)
========== ======= ======= ===== ====== ==========
Net income (loss) -- diluted......................... $ (929) $ (2,254)
========== ==========
Net income (loss) per common share -- basic.......... $ (.21) $ (.50)
========== ==========
Net income (loss) per common share --................ $ (.21) $ (.50)
========== ==========
Weighted average number of common shares
outstanding -- basic............................... 4,516,528 4,516,528
========== ==========
Weighted average number of common shares
outstanding -- diluted............................. 4,516,528 4,516,528
========== ==========
</TABLE>
- ---------------
* The financial statements for Florida Casino Cruises are for the twelve months
ended June 30, 1998.
For all other footnotes please see page F-56.
F-53
<PAGE> 142
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
LEISURE TIME ADJUSTMENTS
CASINOS & ACQUISITION
RESORTS, INC. FLORIDA CASINO ADJUSTMENTS
AND CRUISES, ---------------- PRO FORMA
SUBSIDIARIES INC.* TOTAL DEBIT CREDIT COMBINED
------------- -------------- ------- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Manufacturing...................................... $ 41,037 $ -- $41,037 $ -- $ -- $ 41,037
Gaming............................................. 3,738 -- 3,738 -- -- 3,738
Other.............................................. 281 -- 281 -- -- 281
---------- ----- ------- ----- ---- ----------
Total revenue................................ 45,056 -- 45,056 -- -- 45,056
---------- ----- ------- ----- ---- ----------
Cost of goods sold
Manufacturing...................................... 21,796 -- 21,796 -- -- 21,796
Gaming............................................. 400 -- 400 -- -- 400
Other.............................................. 279 -- 279 -- -- 279
---------- ----- ------- ----- ---- ----------
Total cost of goods sold..................... 22,475 -- 22,475 -- -- 22,475
---------- ----- ------- ----- ---- ----------
Gross profit
Manufacturing...................................... 19,241 -- 19,241 -- -- 19,241
Gaming............................................. 3,338 -- 3,338 -- -- 3,338
Other.............................................. 2 -- 2 -- -- 2
---------- ----- ------- ----- ---- ----------
Total gross profit (loss).................... 22,581 -- 22,581 -- -- 22,581
---------- ----- ------- ----- ---- ----------
Selling, general and administrative expenses......... 14,908 534 15,442(5) 105(6) 750 14,797
Research and development costs....................... 174 -- 174 -- -- 174
Stock based compensation............................. 1,400 -- 1,400 -- -- 1,400
Interest expense, net................................ 887 300 1,187 -- -- 1,187
Other income......................................... -- (750) (750)(6) 750 -- --
Litigation........................................... -- -- -- -- -- --
---------- ----- ------- ----- ---- ----------
Total operating (income) expenses............ 17,369 84 17,453 855 750 17,558
---------- ----- ------- ----- ---- ----------
Net income (loss) before income tax benefit
(expense).......................................... 5,212 (84) 5,128 (855) 750 5,023
Income tax benefit (expense)......................... (1,975) -- (1,975) --(4) 116 (1,859)
---------- ----- ------- ----- ---- ----------
Net income (loss).................................... $ 3,237 $ (84) $ 3,153 $(855) $866 $ 3,164
========== ===== ======= ===== ==== ==========
Net income (loss) -- diluted......................... $ 3,237 $ 3,164
========== ==========
Net income (loss) per common share -- basic.......... $ .69 $ .68
========== ==========
Net income (loss) per common share -- diluted........ $ .42 $ .41
========== ==========
Weighted average number of common shares
outstanding -- basic............................... 4,663,648 4,663,648
========== ==========
Weighted average number of common shares
outstanding -- diluted............................. 7,726,386 7,726,386
========== ==========
</TABLE>
- ---------------
* The financial statements for Florida Casino Cruises, Inc. are for the nine
months ended March 31, 1999 which includes the information contained in the
three months ended March 31, 1999 located elsewhere in this prospectus.
For all other footnotes please see page F-56.
F-54
<PAGE> 143
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR
LEISURE TIME FLORIDA CASINO
CASINOS & CRUISES, INC.
RESORTS, INC. FLORIDA CASINO ACQUISITION
AND CRUISES, ------------------ PRO FORMA
SUBSIDIARIES INC. TOTAL DEBIT CREDIT COMBINED
------------- -------------- ------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents........................ $ 2,540 $ 163 $ 2,703 $ --(1) $2,100 $ 603
Current portion of notes receivable.............. 4 -- 4 -- -- 4
Trade accounts receivable........................ 2,749 2 2,751 -- -- 2,751
Receivable -- other.............................. 1 -- 1 -- -- 1
Inventories, net................................. 4,068 -- 4,068 -- -- 4,068
Prepaid expenses and other....................... 267 -- 267 -- -- 267
Deferred tax asset -- current.................... 61 -- 61 -- -- 61
-------- ------- ------- ------ ------ -------
Total current assets....................... 9,690 165 9,855 -- 2,100 7,755
-------- ------- ------- ------ ------ -------
Property and equipment, net........................ 8,123 2,272 10,395(3) 5,384 -- 15,779
Goodwill, net...................................... 4,495 -- 4,495 -- -- 4,495
Non-compete agreement, net......................... 3,889 -- 3,889 -- -- 3,889
Other assets, net.................................. 188 15 203 -- -- 203
Deposits........................................... 2,339 -- 2,339 --(2) 2,069 270
Deferred tax asset -- long term.................... 1,079 -- 1,079 -- -- 1,079
Long-term portion of notes receivable.............. 37 -- 37 -- -- 37
-------- ------- ------- ------ ------ -------
Total assets............................... $ 29,840 $ 2,452 $32,292 $5,384 $4,169 $33,507
======== ======= ======= ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line-of-credit................................... $ 4 $ -- $ 4 $ -- $ -- $ 4
Current portion of long-term notes payable....... 402 855 1,257(3) 389 -- 868
Current portion of capital leases................ 22 -- 22 -- -- 22
Current portion of other long-term liabilities... 80 -- 80 -- -- 80
Notes payable -- stockholder..................... -- 2,100 2,100(1) 2,100 -- --
Accounts payable................................. 2,713 657 3,370 -- -- 3,370
Accrued expenses................................. 4,335 1,611 5,946(3) 818 -- 5,128
Income taxes payable............................. 2,409 -- 2,409 -- -- 2,409
Deferred revenue................................. 38 -- 38 -- -- 38
-------- ------- ------- ------ ------ -------
Total current liabilities.................. 10,003 5,223 15,226 3,307 -- 11,919
-------- ------- ------- ------ ------ -------
Long-term liabilities
Long-term portion of notes payable............... 6,399 834 7,233 -- -- 7,233
Long-term portion of capital leases.............. 150 -- 150 -- -- 150
Other long-term liabilities...................... 4,677 2,069 6,746(2) 2,069 -- 4,677
-------- ------- ------- ------ ------ -------
Total long-term liabilities................ 11,226 2,903 14,129 2,069 -- 12,060
-------- ------- ------- ------ ------ -------
Total liabilities.......................... 21,229 8,126 29,355 5,376 -- 23,979
-------- ------- ------- ------ ------ -------
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 5,000,000 shares
authorized; none issued........................ -- -- -- -- -- --
Common stock, $.001 par value; 45,000,000 shares
authorized; 4,505,380 (1997) and 4,639,154
(1998) issued and outstanding.................. 5 -- 5 -- -- 5
Additional paid-in capital....................... 5,147 430 5,577(3) 430(3) 917 6,064
Retained earnings (accumulated deficit).......... 3,459 (6,104) (2,645) --(3) 6,104 3,459
-------- ------- ------- ------ ------ -------
8,611 (5,674) 2,937 430 7,021 9,528
-------- ------- ------- ------ ------ -------
Total liabilities and stockholders'
equity................................... $ 29,840 $ 2,452 $32,292 $5,806 $7,021 $33,507
======== ======= ======= ====== ====== =======
</TABLE>
For all footnotes please see page F-56.
F-55
<PAGE> 144
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The acquisition of Florida Casino Cruises, Inc. included the following
assets and liabilities as detailed below for a total purchase price of $5,086.
The Company issued 80,000 shares of common stock valued at $10.00 per share,
warrants to purchase 80,000 shares of common stock at $10.00 per share with an
imputed value of $117 and paid $4,169 in cash for the outstanding stock of
Florida Casino Cruises, Inc. As of March 31, 1999, the Company had advanced
$2,069 to Florida Casino Cruises, Inc. prior to the acquisition. The purchase
price has been allocated as follows:
<TABLE>
<CAPTION>
ASSET CATEGORY VALUATION
-------------- ---------
<S> <C>
Cash........................................................ $ 163
Other assets................................................ 17
Property, plant and equipment, net.......................... 7,656
Liabilities assumed......................................... (2,750)
-------
Total consideration given......................... $ 5,086
=======
</TABLE>
The following adjustments were made to the unaudited pro forma combined
financial statements:
1 To record the additional cash paid of $2,100 which was used to pay
the outstanding shareholder debt.
2 To offset the advances made to Florida Casino Cruises, Inc.
3 To record the acquisition of Florida Casino Cruises, Inc. by:
-- recognizing the $5,384 increase in the property and equipment
-- reducing the current portion of long-term debt to agree with the
amount assumed by Leisure Time Casinos & Resorts, Inc.
-- reducing the accrued expenses to agree with the amount assumed by
Leisure Time Casinos & Resorts, Inc.
-- eliminating the additional paid in capital of Florida Casino
Cruises, Inc.
-- eliminating the accumulated deficit of Florida Casino Cruises,
Inc.
-- recording the value of the shares of common stock and common stock
options issued
4 To recognize pro forma income tax expense (benefit) at a flat 37%
effective rate for fiscal year ending June 30, 1998 and the period ended
March 31, 1999.
5 To recognize additional depreciation on the vessel acquired in
connection with the acquisition of Florida Casino Cruises, Inc. for the
year ending June 30, 1998 and the period ended March 31, 1999. The vessel
is depreciated using the straight line method over 15 years.
6 To eliminate the bareboat charter fees paid by Leisure Time Casinos
& Resorts, Inc. to Florida Casino Cruises, Inc.
F-56
<PAGE> 145
[GATEFOLD]
<PAGE> 146
1,100,000 SHARES
[LEISURE TIME LOGO]
COMMON STOCK
------------------------
PROSPECTUS
, 1999
------------------------
SCHNEIDER SECURITIES, INC.
UNTIL , 1999, ALL DEALERS SELLING SHARES OF THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable by Leisure Time Casinos & Resorts, Inc. ("Leisure Time")
in connection with the issuance and distribution of the securities being
registered hereby are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 5,050
NASD Filing Fee............................................. 2,317
Nasdaq National Market Filing Fee........................... 66,875
Accounting Fees and Expenses................................ 140,000*
Legal Fees and Expenses..................................... 170,000*
Blue Sky Fees and Expenses.................................. 10,000*
Representatives' Non-Accountable Expense Allowance.......... 330,000**
Printing, Freight and Engraving............................. 160,000*
Miscellaneous............................................... 11,758*
--------
Total............................................. $896,000*
========
</TABLE>
- ---------------
* Estimated.
** Estimated based on an assumed offering price of $12.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Leisure Time has a $10,000,000 directors and officers liability insurance
policy. This insurance policy insures the past, present and future officers and
directors of Leisure Time, with certain exceptions, from claims arising out of
any error, misstatement, misleading statement, act, omission, neglect, or breach
of duty committed or attempted, or allegedly committed or attempted.
Section 7-109-102 of the Colorado Business Corporation Act permits a
Colorado corporation to indemnify any person made a party to a proceeding
because the person is or was a director against liability incurred in the
proceeding if such person acted in good faith and, in the case of conduct in an
official capacity with the corporation, that the director's conduct was in the
corporation's best interests and, in all other cases, that the director's
conduct was at least not opposed to the best interests of the corporation or,
with regard to criminal proceedings, the director had no reasonable cause to
believe the director's conduct was unlawful.
Article Fifth of Leisure Time's Articles of Incorporation, as amended,
filed as Exhibit 3.1 to this registration statement provides that a director of
Leisure Time shall not be personally liable to Leisure Time or its stockholders
for monetary damages for breach of fiduciary duty as a director; except that the
provision does not eliminate or limit the liability of a director to Leisure
Time or its stockholders for monetary damages otherwise existing for: (i) any
breach of the director's duty of loyalty to Leisure Time or its stockholders;
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law; (iii) acts involving unlawful distributions
as specified in the Colorado Business Corporation Act; or (iv) any transaction
from which the director derived an improper personal benefit. Further, Article
Fifth states that any repeal or modification of the foregoing by the
stockholders of Leisure Time shall not adversely affect any right or protection
of a director of Leisure Time existing at the time of such repeal or
modification.
Article Sixth of Leisure Time's Articles of Incorporation, as amended,
filed as Exhibit 3.1 to this registration statement provides in paragraph 3 that
Leisure Time shall indemnify to the maximum extent permitted by law in effect
from time to time, any person who is or was a director, officer, agent,
fiduciary or employee of Leisure Time against any claim, liability or expense
arising against or incurred by such person made party to a proceeding because
such person is or was a director, officer, agent, fiduciary or employee of
Leisure Time or because such person is or was serving another entity as a
director, officer, partner, trustee, employee, fiduciary or agent at Leisure
Time's request. Article Sixth also provides that Leisure Time shall
II-1
<PAGE> 148
have the authority to the maximum extent permitted by law to purchase and
maintain insurance providing such indemnification.
Article VI of the Bylaws of Leisure Time, filed as Exhibit 3.3 to this
registration statement includes provisions requiring Leisure Time to indemnify
any person acting on behalf of Leisure Time who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
and whether formal or informal, by reason of the fact that such person is or was
a director, officer, employee, fiduciary or agent of Leisure Time, or is or was
serving at the request of Leisure Time as a director, officer, partner, trustee,
employee, fiduciary or agent of any foreign or domestic profit or nonprofit
corporation or of any partnership, joint venture, trust, profit or nonprofit
unincorporated association, limited liability company, or other enterprise or an
employee benefit plan against reasonably incurred expenses (including attorneys'
fees), judgments, penalties, fines (including any excise tax assessed with
respect to an employee benefit plan) and amounts paid in settlement reasonably
incurred by such person in connection with such action, suit or proceeding if it
is determined by disinterested directors that such person conducted himself or
herself in good faith and that such person reasonably believed (i) in the case
of conduct in such person's official capacity with Leisure Time, that such
person's conduct was in Leisure Time's best interest, or (ii) in all other cases
(except criminal cases) that such person's conduct was at least not opposed to
Leisure Time's best interest, or (iii) in the case of any criminal proceeding,
that such person had no reasonable cause to believe such person's conduct was
unlawful. No indemnification shall be made with respect to any claim, issue or
matter in connection with a proceeding by or in the right of Leisure Time in
which the person being indemnified is adjudged liable to Leisure Time or in
connection with any proceeding charging that the person being indemnified
derived an improper personal benefit, whether or not involving action in an
official capacity, in which such person was adjudged liable on the basis that
such person derived an improper personal benefit. Further, indemnification in
connection with a proceeding brought by or in the right of Leisure Time shall be
limited to reasonable expenses, including attorneys' fees, incurred in
connection with the proceeding. Reasonable expenses (including attorneys' fees)
incurred in defending an action, suit or proceeding may be paid by Leisure Time
to any person being indemnified in advance of the final disposition of the
action, suit or proceeding upon receipt of (i) a written affirmation by the
person being indemnified as to such person's good faith and belief that such
person met the standards of conduct described by the Bylaws, (ii) a written
undertaking, executed personally or on behalf of the person being indemnified,
to repay such advances if it is ultimately determined that such person did not
meet the prescribed standards of conduct, and (iii) a determination is made by a
disinterested director of Leisure Time (as described in the Bylaws) that the
facts then known to a disinterested director would not preclude indemnification.
The Bylaws require that Leisure Time report in writing to stockholders with or
before notice of the next meeting of stockholders of any indemnification of or
advance of expenses to any director under the indemnification provisions of the
Bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is information as to all securities of Leisure Time sold by
Leisure Time within the past three years which were not registered under the
Securities Act of 1933, as amended ("Securities Act"). Leisure Time does not
consider issuances of options to employees to purchase Leisure Time's common
stock to be sales.
(a) On May 18, 1996, Leisure Time issued a ten year option to David K.
Vanco to purchase 250,000 shares of Leisure Time's common stock at an exercise
price of $2.50 per share as consideration for David K. Vanco acting as a finder
of financing for Leisure Time. Leisure Time issued the option in reliance on the
exemption from registration under Section 4(2) of the Securities Act. Such
person had available to him all material information concerning Leisure Time.
The certificate evidencing the option bears a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(b) On May 29, 1996, Leisure Time issued to ABCD Associates, Ltd. ("ABCD")
a $100,000 11% Convertible Promissory Note Due May 29, 1999, in consideration
for a ABCD making a $100,000 loan to Leisure Time. The note is convertible into
units each consisting of (i) one share of common stock and (ii) one warrant to
purchase one share of common stock for $2.50. The conversion price for each unit
is $2.50. Beginning on June 29, 1997, and continuing to date, ABCD has converted
each monthly payment due on the
II-2
<PAGE> 149
note into 1,666 shares of common stock and warrants to purchase 1,666 shares of
common stock at an exercise price of $2.50 per share. Leisure Time issued the
note, the shares of common stock and the warrants in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act. Such company
represented to Leisure Time that it acquired the note and the warrants for its
own account and not with a view to distribution and that it had available to it
all material information concerning Leisure Time. The certificates evidencing
the note and the warrants bear a restrictive legend under the Securities Act. No
underwriter was involved in the transaction.
(c) On July 8, 1996, Leisure Time issued to Eileen Lynch 13,301 shares of
common stock and warrants to purchase 13,301 shares of the common stock
exercisable at a price of $2.50 per share in exchange for the conversion of a
$28,000 promissory note plus $5,252.50 of interest. Leisure Time issued the
shares and warrants in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act. Such person represented to Leisure Time that
she acquired the shares and the warrants for her own account and not with a view
to distribution and that she had available to her all material information
concerning Leisure Time. The certificates evidencing the shares of common stock
and the warrants bear a restrictive legend under the Securities Act. No
underwriter was involved in the transaction.
(d) On July 31, 1996, Leisure Time issued to Paul F. Frymark a $110,000 11%
Convertible Promissory Note Due May 30, 1999 as consideration for Paul F.
Frymark making a $110,000 loan to Leisure Time. The note is convertible into
units each consisting of (i) one share of common stock and (ii) one warrant to
purchase one share of common stock for $2.50. The conversion price for each unit
is $2.50. Beginning on June 24, 1997, and continuing to date, such person has
converted each monthly payment on the note into 1,833 shares of common stock and
warrants to purchase 1,833 shares of common stock at an exercise price of $2.50
per share. Leisure Time issued the note, shares of common stock and warrants in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act. Such person represented to Leisure Time that he acquired the
note, the shares of common stock and the warrants for his own account and not
with a view to distribution and that he had available to him all material
information concerning Leisure Time. The certificates evidencing the note, the
shares of common stock and the warrants each bear a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(e) On August 9, 1996, Leisure Time issued 90,000 shares of its common
stock to Jerry E. Russell for $0.50 per share. Leisure Time issued the shares in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act. Such person represented to Leisure Time that he acquired the
shares for his own account and not with a view to distribution and that he had
available to him all material information concerning Leisure Time. The
certificate evidencing the shares bears a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(f) On August 22, 1996, Leisure Time issued to various investors $1,400,000
principal amount of 11% convertible promissory notes due September 1, 1999. The
notes are convertible into units, each consisting of (i) one share of common
stock, (ii) one warrant to purchase one share of common stock at an exercise
price of $1.75 per share and (iii) one warrant to purchase one share of common
stock at an exercise price equal to 120% of the initial public offering price of
the common stock. Leisure Time issued the notes in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act. Such persons
represented to Leisure Time that they acquired the notes for their own accounts
and not with a view to distribution and that they had available to them all
material information concerning Leisure Time. The certificates evidencing the
notes bear a restrictive legend under the Securities Act. No underwriter was
involved in the transaction.
(g) On August 26, 1996, Leisure Time issued to Lewis J. Thomas 4,892 shares
of Leisure Time's common stock and warrants to purchase 4,892 shares of Leisure
Time's common stock at an exercise price of $2.50 per share in exchange for the
conversion of a $10,080 promissory note plus $2,150 of interest. Leisure Time
issued the shares and warrants in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act. Such person represented to
Leisure Time that he acquired the shares and the warrants for his own account
and not with a view to distribution and that he had available to him all
material information concerning Leisure Time. The certificates evidencing the
shares and the warrants each bear a restrictive legend under the Securities Act.
No underwriter was involved in the transaction.
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<PAGE> 150
(h) On August 30, 1996, Leisure Time issued 50,000 shares of its common
stock to T. D. Reese for $1.00 per share. Leisure Time issued the shares in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act. Such person represented to Leisure Time that he acquired the
shares for his own account and not with a view to distribution and that he had
available to him all material information concerning Leisure Time. The
certificate evidencing the shares bears a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(i) In September 1996, Leisure Time issued an option to purchase 90,000
shares of its common stock at an exercise price of $0.10 per share to Jerry E.
Russell in connection with a loan of $40,000 made by Jerry E. Russell to Leisure
Time. Leisure Time issued the option in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act. Such person
represented to Leisure Time that he acquired the option for his own account and
not with a view to distribution and that he had available to him all material
information concerning Leisure Time. The certificate evidencing the option bears
a restrictive legend under the Securities Act. No underwriter was involved in
the transaction.
(j) On September 12, 1996, Leisure Time issued warrants to Urban Systems
entitling Urban Systems to purchase 8,598 shares of common stock for $2.50 per
share in exchange for the extension of certain accounts payable due to Urban
Systems. Leisure Time issued the warrants in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act. Such company
represented to Leisure Time that it acquired the warrants for its own account
and not with a view to distribution and that it had available to it all material
information concerning Leisure Time. The certificate evidencing the warrants
bears a restrictive legend under the Securities Act. No underwriter was involved
in the transaction.
(k) On October 9, 1996, Leisure Time issued to Mercantile Bank warrants to
purchase 35,000 shares of common stock for $1.00 per share in exchange for
previous services rendered in 1993. Leisure Time issued the warrants in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act. Such company represented to Leisure Time that it acquired the warrants for
its own account and not with a view to distribution and that it had available to
it all material information concerning Leisure Time. The certificate evidencing
the warrants bears a restrictive legend under the Securities Act. No underwriter
was involved in the transaction.
(l) On November 25, 1996, Leisure Time issued to Stephen J. Hendricks an
option to purchase 40,000 shares of Leisure Time's common stock at an exercise
price of $1.00 per share in exchange for previous services rendered from 1993 to
1995. Leisure Time issued the option in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act. Such person had
available to him all material information concerning Leisure Time. The
certificate evidencing the option bears a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(m) On December 31, 1996, Leisure Time issued 18,080 shares of Leisure
Time's common stock and warrants to purchase 38,080 shares of Leisure Time's
common stock at $2.50 per share to Kerry Lee Hoffman as consideration for Kerry
Lee Hoffman acting as a finder of financing for Leisure Time. Leisure Time
issued the shares and the warrants in reliance on the exemption from
registration under Section 4(2) of the Securities Act. Such person represented
to Leisure Time that he acquired the shares and the warrants for his own account
and not with a view to distribution and that he had available to him all
material information concerning Leisure Time. The certificates evidencing the
shares and the warrants bear a restrictive legend under the Securities Act. No
underwriter was involved in the transaction.
(n) On December 31, 1996, Leisure Time issued 20,000 shares of its common
stock to Hoffman Midwest Sales, Inc. in consideration for Hoffman Midwest Sales,
Inc. acting as a finder of financing for Leisure Time. Leisure Time issued the
shares in reliance on the exemption from registration under Section 4(2) of the
Securities Act. Such company represented to Leisure Time that it acquired the
shares for its own account and not with a view to distribution and that it had
available to it all material information concerning Leisure Time. The
certificate evidencing the shares bears a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
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<PAGE> 151
(o) On April 2, 1997, Leisure Time issued to Alan N. Johnson, A. J.
Siciliano, Michael A. Siciliano, Elaine M. Barron, Gerald J. Boyle, Sandra J.
Boepple, Raymond G. Boyle, Howard P. Boyle, Richard D. Sly, Richard E. Sly and
Randi Sly Strittmather options to purchase 41,556, 75,000, 20,000, 20,000,
50,292, 20,000, 20,000, 20,000, 43,000, 20,000 and 20,000 shares of Leisure
Time's common stock, respectively, at an exercise price of $2.50 per share.
Leisure Time issued the options in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act. Such persons had available to
them all material information concerning Leisure Time. The certificates
evidencing the options bear a restrictive legend under the Securities Act. No
underwriter was involved in the transaction.
(p) On June 26, 1997, Leisure Time extended the expiration dates of
warrants issued to various persons to purchase 128,115 shares of Leisure Time's
common stock at a price of $2.50 per share. Leisure Time issued the warrants in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act. Such persons represented to Leisure Time that they originally
acquired the warrants for their own account and not with a view to distribution
and that they had available to them all material information concerning Leisure
Time. The certificates evidencing the warrants bear a restrictive legend under
the Securities Act. No underwriter was involved in the transaction.
(q) On June 30, 1997, Leisure Time issued to David K. Vanco warrants to
purchase 11,643 shares of Leisure Time's common stock at an exercise price of
$2.80 per share in exchange for David K. Vanco making a loan to Leisure Time.
Such person had available to him all material information concerning Leisure
Time. The certificate evidencing the warrants bears a restrictive legend under
the Securities Act. No underwriter was involved in the transaction.
(r) On December 12, 1997, Leisure Time extended the expiration dates of
warrants issued to various persons to purchase 122,907 shares of common stock
from March 31, 1998 to March 31, 1999. The extensions were granted due to delays
by Leisure Time in conducting a public offering. Leisure Time originally issued
the warrants in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act. Such persons represented to Leisure Time
that they acquired the warrants for their own account and not with a view to
distribution and that they had available to them all material information
concerning Leisure Time. The certificates evidencing the warrants bear a
restrictive legend under the Securities Act. No underwriter was involved in the
transaction.
(s) Between March 1999 and April 1999, Leisure Time issued 4,000 units
consisting of 4,000 shares of its common stock and three year warrants to
purchase 4,000 shares of its common stock to several persons for $10.00 per
unit. Leisure Time issued the units in reliance upon the exemption from
registration provided by Section 4(2) and Regulation D of the Securities Act.
Such persons represented to Leisure Time that they acquired the units for their
own accounts and not with a view to distribution and that they had available to
them all material information concerning Leisure Time. The certificates
evidencing the shares and warrants bear a restrictive legend under the
Securities Act. No underwriter was involved in the transaction.
(t) On April 1, 1999, Leisure Time issued 100,000 shares of its common
stock and an option to purchase 100,000 shares of its common stock at $6.00 per
share to David M. Pote, Jr. in exchange for all of the outstanding stock of RP
Capital Corporation. Leisure Time issued the shares and option in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act.
Such person represented to Leisure Time that he acquired the shares and option
for his own account and not with a view to distribution and that he had
available to him all material information concerning Leisure Time. The
certificates evidencing the shares and option bear a restrictive legend under
the Securities Act. No underwriter was involved in the transaction.
(u) In March 1999, fourteen persons exercised outstanding warrants to
purchase 60,090 shares of Leisure Time's common stock. Leisure Time issued the
shares in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act. Such persons had available to them all material
information concerning Leisure Time. The certificates evidencing the shares bear
a restrictive legend under the Securities Act. No underwriter was involved in
the transaction.
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<PAGE> 152
(v) On May 4, 1999, Leisure Time issued 80,000 shares of its common stock
and a warrant to purchase 80,000 shares of its common stock at $10.00 per share
to J. Kent Manley as part consideration for all of the outstanding stock of
Florida Casino Cruises, Inc. Leisure Time issued the shares in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. Such
person represented to Leisure Time that he acquired the shares and warrant for
his own account and not with a view to distribution and that he had available to
him all material information concerning Leisure Time. The certificates
evidencing the shares and warrant bear a restrictive legend under the Securities
Act. No underwriter was involved in the transaction.
(w) In June 1999, Leisure Time issued an option to purchase 50,000 shares
of its common stock at an exercise price of $10.00 per share to Richard A.
Harpootlian in consideration of Richard A. Harpootlian providing services in the
past to assist Leisure Time in having its data communications device approved
for use in the state of South Carolina. Leisure Time issued the option in
reliance upon exemption from registration provided by Section 4(2) of the
Securities Act. The option is nontransferable other than by will or pursuant to
the laws of descent and distribution. Such person had available to him all
material information concerning Leisure Time. The certificate evidencing the
option bears a restrictive legend under the Securities Act. No underwriter was
involved in the transaction.
(x) In June 1999, Leisure Time issued 9,996 shares of its common stock upon
exercise of outstanding warrants that have previously been issued to ABCD as
described in paragraph (b) above. Leisure Time issued the shares in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act. ABCD represented to Leisure Time that it acquired the shares for its own
account and not with a view to distribution and that it had available to it all
material information concerning Leisure Time. The certificate evidencing the
option bears a restrictive legend under the Securities Act. No underwriter was
involved in the transaction.
(y) In June 1999, David K. Vanco converted his $250,000 11% Convertible
Promissory Note Due September 1, 1999, into 200,000 shares of Leisure Time's
common stock, warrants to purchase 200,000 shares of Leisure Time's common stock
at $1.75 per share and warrants to purchase 200,000 shares of Leisure Time's
common stock at 120% of the public offering price per share of Leisure Time's
initial public offering. Leisure Time issued the shares of common stock and
warrants in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act. Such person represented to Leisure Time that he acquired
the shares of common stock and the warrants for his own account and not with a
view to distribution and that he had available to him all material information
concerning Leisure Time. The certificates evidencing the shares of common stock
and the warrants each bear a restrictive legend under the Securities Act. No
underwriter was involved in the transaction.
(z) In May 1999, one person exercised an outstanding employee option to
purchase 40,000 shares of Leisure Time's common stock. Leisure Time issued the
shares in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act. Such person had available to him all material information
concerning Leisure Time. The certificate evidencing the shares bears a
restrictive legend under the Securities Act. No underwriter was involved in the
transaction.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of all exhibits filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------
<C> <S>
1.0 -- Form of Underwriting Agreement.
1.1 -- Form of Selected Dealers Agreement.*
</TABLE>
II-6
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------
<C> <S>
2.0 -- Agreement and Plan of Reorganization dated as of August
30, 1996, among U.S. Games, Inc., Leisure Time Casinos &
Resorts, Inc., Leisure Acquisition, Inc. and Certain
Holders of U.S. Games, Inc. Outstanding Stock, Options
and Warrants together with Exhibits C, D, E, F, G, H and
J thereto. The other schedules and exhibits to the
Agreement and Plan of Reorganization are listed therein
and copies thereof will be furnished supplementally to
the United States Securities and Exchange Commission upon
request.*
2.1 -- Amended and Restated Asset Purchase Agreement dated as of
January 31, 1997, between Leisure Time Casinos & Resorts,
Inc. and Star of Cincinnati, Inc.*
2.2 -- Accord and Satisfaction and Release of Mortgages
Agreement dated as of February 3, 1997, by Leisure Time
Casinos & Resorts, Inc., Star of Cincinnati, Inc. and
Henry E. Davis Trustee.*
3.0 -- Articles of Incorporation of Leisure Time Casinos &
Resorts, Inc. dated February 4, 1993.*
3.1 -- Articles of Amendment to the Articles of Incorporation of
Leisure Time Casinos & Resorts, Inc. filed on April 3,
1997.*
3.2 -- Articles of Amendment to the Articles of Incorporation of
Leisure Time Casinos & Resorts, Inc. filed on May 12,
1999.*
3.3 -- Bylaws of Registrant adopted May 12, 1999.*
4.0 -- Form of Representatives Warrant for the Purchase of
Common Stock.*
5.0 -- Opinion of Smith McCullough, P.C. on Legality of Common
Stock.*
10.0 -- 1997 Incentive and Nonstatutory Stock Option Plan.*
10.1 -- Amendment No. 1 to 1997 Incentive and Nonstatutory Stock
Option Plan.*
10.2 -- Form of 11% Convertible Promissory Note Due September 1,
1999.*
10.3 -- 11% Convertible Promissory Note Due May 29, 1999.*
10.4 -- 11% Convertible Promissory Note Due May 30, 1999.*
10.5 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Alan N.
Johnson, Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Alan N. Johnson and Amendment to
Employment Agreement dated effective February 22, 1999,
between Leisure Time Casinos & Resorts, Inc. and Alan N.
Johnson.*
10.6 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Gerald
J. Boyle and Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Gerald J. Boyle.*
10.7 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Elden W.
Rance, Amendment to Employment Agreement dated effective
September 9, 1998, between Leisure Time Casinos &
Resorts, Inc. and Elden W. Rance and Amendment to
Employment Agreement dated effective February 22, 1999,
between Leisure Time Casinos & Resorts, Inc. and Elden W.
Rance.*
10.8 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and R.
Thomas Klingel and Amendment to Employment Agreement
dated effective September 9, 1998, between Leisure Time
Casinos & Resorts, Inc. and R. Thomas Klingel.*
</TABLE>
II-7
<PAGE> 154
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------
<C> <S>
10.9 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Richard
D. Sly and Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Richard D. Sly.*
10.10 -- Employment Agreement dated effective March 1, 1999,
between Leisure Time Casinos & Resorts, Inc. and Keko
Mottes.*
10.11 -- Employment Agreement dated effective March 1, 1999,
between Leisure Time Casinos & Resorts, Inc. and John J.
Pasierb.*
10.12 -- Employment Agreement dated effective April 20, 1999,
between Leisure Time Casinos & Resorts, Inc. and Joseph
C. Grunda.*
10.13 -- Lease Agreement dated December 1, 1997, between Leisure
Time Technology, Inc. and Weeks Realty, L.P.*
10.14 -- Lease Agreement dated October 31, 1997, between Alan N.
Johnson and Leisure Time Casinos & Resorts, Inc.*
10.15 -- Purchase Agreement dated March 23, 1998, between Lisa
Lemon, Inc. and Al Johnson.*
10.16 -- Amendment to Purchase Agreement dated June 26, 1998,
between Lisa Lemon, Inc. and Al Johnson.*
10.17 -- Assignment dated September 11, 1998, from Al Johnson to
Leisure Time Hospitality, Inc.*
10.18 -- Promissory Note dated September 15, 1998, from Leisure
Time Hospitality, Inc. to Lisa Lemon, Inc. and Guaranty
of Alan N. Johnson thereof.*
10.19 -- Mortgage Deed dated September 15, 1998, from Leisure Time
Hospitality, Inc. to Lisa Lemon, Inc.*
10.20 -- Bareboat Charter Party dated as of June 22, 1998, between
Florida Casino Cruises, Inc. and Leisure Express Cruise
LLC.*
10.21 -- Addendum to Bareboat Charter Agreement.*
10.22 -- Purchase Option Agreement dated as of June 22, 1998,
between Florida Casino Cruises, Inc. and Leisure Express
Cruise, LLC.*
10.23 -- $3,000,000 Secured Promissory Note dated October 9, 1998,
from Leisure Time Cruise Corporation to Foothill Capital
Corporation.*
10.24 -- Security Agreement dated October 9, 1998, between
Foothill Capital Corporation and Leisure Time Cruise
Corporation.*
10.25 -- First Preferred Ship Mortgage dated October 9, 1998,
between Leisure Time Cruise Corporation and Foothill
Capital Corporation.*
10.26 -- Equipment Security Agreement dated October 9, 1998,
between Foothill Capital Corporation and Leisure Time
Technology, Inc.*
10.27 -- Continuing Guaranty dated October 9, 1998, from Leisure
Time Technology, Inc. to Foothill Capital Corporation.*
10.28 -- Continuing Guaranty dated October 9, 1998, from Leisure
Time Casinos & Resorts, Inc. to Foothill Capital
Corporation.*
10.29 -- Continuing Guaranty dated October 9, 1998, from Alan N.
Johnson to Foothill Capital Corporation.*
10.30 -- $1,500,000 Promissory Note dated December 17, 1998, from
Leisure Belle Cruise LLC to General Electric Capital
Corporation.*
</TABLE>
II-8
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------
<C> <S>
10.31 -- $1,500,000 Loan and Security Agreement dated December 17,
1998, between Leisure Belle Cruise, LLC and General
Electric Capital Corporation.*
10.32 -- Guaranty Agreement dated December 17, 1998, from Leisure
Time Casinos & Resorts, Inc. to General Electric Capital
Corporation.*
10.33 -- Guaranty Agreement dated December 17, 1998, from Leisure
Time Technologies, Inc. to General Electric Capital
Corporation.*
10.34 -- First Preferred Ship Mortgage dated December 17, 1998,
from Leisure Belle Cruise, LLC in favor of General
Electric Capital Corporation.*
10.35 -- Consulting Agreement dated March 31, 1998 between Leisure
Time Casinos & Resorts, Inc. and A. J. Siciliano.*
10.36 -- Bareboat Charter Party dated as of January 22, 1999,
between Florida Casino Cruises, Inc. and Leisure Express,
LLC.*
10.37 -- Purchase Option Agreement dated as of January 22, 1999,
between Florida Casino Cruises, Inc. and Leisure Express,
LLC.*
10.38 -- Consulting Agreement dated as of February 1, 1999,
between and Kent Manley and Leisure Time Cruise
Corporation.*
10.39 -- Dockage Agreement and Lease dated as of June 1, 1998,
between Rowe Square Corporation and Leisure Express
Cruise, LLC.*
10.40 -- Distribution Agreement dated January 23, 1998, between
Leisure Time Technology, Inc. and Sao Paulo Games
Comercial LTDA.*
10.41 -- Amendment to the Contract for Distribution dated January
22, 1998, between Leisure Time Technology, Inc. and Sao
Paulo Games Comercial LTDA.*
10.42 -- Stock Purchase Agreement dated April 22, 1999, between J.
Kent Manley and Leisure Express Cruise, LLC.*
10.43 -- $2,100,000 Secured Promissory Note dated April 22, 1999,
from Leisure Express Cruise, LLC to Foothill Capital
Corporation.*
10.44 -- Security Agreement dated April 22, 1999, between Foothill
Capital Corporation and Leisure Express Cruise, LLC.*
10.45 -- $3,225,000 Secured Promissory Note dated April 22, 1999,
from Florida Casino Cruises, Inc. to Foothill Capital
Corporation.*
10.46 -- Security Agreement darted April 22, 1999, between
Foothill Capital Corporation and Florida Casino Cruises,
LLC.*
10.47 -- Continuing Guaranty dated April 22, 1999, from Leisure
Express Cruise, LLC to Foothill Capital Corporation.*
10.48 -- First Preferred Ship Mortgage dated April 22, 1999,
between Florida Casino Cruises, Inc. and Foothill Capital
Corporation.*
10.49 -- Amendment No. 1 to Loan Documents dated April 22, 1999,
between Foothill Capital Corporation and Leisure Time
Cruise Corporation.*
10.50 -- Amendment to and Confirmation of Guaranty dated April 22,
1999, by Leisure Time Technology, Inc. in favor of
Foothill Capital Corporation.*
10.51 -- Amendment to and Confirmation of Guaranty dated April 22,
1999, by Leisure Time Casinos & Resorts, Inc. in favor of
Foothill Capital Corporation.*
10.52 -- Amendment to and Confirmation of Guaranty dated April 22,
1999, by Alan N. Johnson in favor of Foothill Capital
Corporation.*
10.53 -- Second amendment to First Ship Mortgage dated April 22,
1999, between Leisure Time Cruise Corporation and
Foothill Capital Corporation.*
</TABLE>
II-9
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
----------- --------------------------------
<C> <S>
10.54 -- Pledge Agreement dated April 22, 1999, between Leisure
Express Cruise LLC and Foothill Capital Corporation.*
10.55 -- Continuing Guaranty dated April 22, 1999, from Leisure
Time Cruise Corporation in favor of Foothill Capital
Corporation.*
10.56 -- Continuing Guaranty dated April 22, 1999, from Florida
Casino Cruises, Inc. in favor of Foothill Capital
Corporation.*
10.57 -- Continuing Guaranty dated April 22, 1999, from Alan N.
Johnson in favor of Foothill Capital Corporation.*
10.58 -- Master Agreement and Lease between Leisure Express
Cruise, LLC and Shoestring Properties Limited Partnership
dated April 29, 1999.*
10.59 -- Marina Lease dated April 29, 1999 between Shoestring
Properties Limited Partnership and Leisure Time Cruise
Corporation.*
10.60 -- Dockside Lease dated April 29, 1999 between Shoestring
Properties Limited Partnership and Leisure Time Cruise
Corporation.*
10.61 -- First Amendment to Lease Agreement dated April 9, 1999
between Leisure Time Technology Inc. and Weeks Realty,
LP.*
10.62 -- Form of Unlimited Guaranty in favor of Firestone
Financial Corp.*
10.63 -- WCMA Loan and Security Agreement No. 701-07H43 dated
November 16, 1998, between Merrill Lynch Business
Financial Services, Inc. and Leisure Time Casinos &
Resorts, Inc. and Letter Agreement dated February 18,
1999.*
10.64 -- Lease dated May 10, 1999, by and between Alan N. Johnson
and Leisure Time Casinos & Resorts, Inc.*
10.65 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Bernard
C. Johnson and Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Bernard C. Johnson.*
10.66 -- Promissory Note dated June 18, 1999, from Leisure Time
Casinos & Resorts, Inc. to American International
Specialty Lines Insurance Company.*
10.67 -- Employment Agreement dated effective July 6, 1999,
between Leisure Time Casinos & Resorts, Inc. and Eric R.
Dey.*
10.68 -- License Agreement effective July 12, 1999, between
Radisson Hotels International, Inc. and Leisure Time
Hospitality, Inc.*
10.69 -- Form of Custody Agreement.
10.70 -- Letter dated July 26, 1999 from Merrill Lynch Business
Financial Services, Inc. to Leisure Time Casinos &
Resorts, Inc.
21 -- Subsidiaries of the Registrant.
23.0 -- Consents of Ehrhardt Keefe Steiner & Hottman PC.
23.1 -- Consent of Smith McCullough, P.C. (included in Exhibit
5.0).*
23.2 -- Consent of Bear Stearns & Co. Inc. dated April 29, 1999.*
24.0 -- Powers of Attorney.*
27.0 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Previously filed.
II-10
<PAGE> 157
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change in such information in the registration
statement.
(2) That for purposes of determining liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-11
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Avon, State of Ohio on
August 6, 1999.
LEISURE TIME CASINOS & RESORTS, INC.
By: /s/ ALAN N. JOHNSON
----------------------------------
Alan N. Johnson, President and
Chief Executive Officer
By: /s/ ELDEN W. RANCE
----------------------------------
Elden W. Rance, Chief Financial
Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<C> <C> <S>
/s/ GERALD J. BOYLE* Director August 6, 1999
- -----------------------------------------------------
Gerald J. Boyle
/s/ LESTER E. BULLOCK* Director August 6, 1999
- -----------------------------------------------------
Lester E. Bullock
/s/ ALAN N. JOHNSON Director August 6, 1999
- -----------------------------------------------------
Alan N. Johnson
/s/ R. THOMAS KLINGEL* Director August 6, 1999
- -----------------------------------------------------
R. Thomas Klingel
/s/ ELDEN W. RANCE Director August 6, 1999
- -----------------------------------------------------
Elden W. Rance
/s/ RICHARD D. SLY* Director August 6, 1999
- -----------------------------------------------------
Richard D. Sly
*By /s/ ALAN N. JOHNSON August 6, 1999
-------------------------------------------------
Alan N. Johnson, Attorney-in-Fact
</TABLE>
II-12
<PAGE> 159
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1.0 -- Form of Underwriting Agreement.
1.1 -- Form of Selected Dealers Agreement.*
2.0 -- Agreement and Plan of Reorganization dated as of August
30, 1996, among U.S. Games, Inc., Leisure Time Casinos &
Resorts, Inc., Leisure Acquisition, Inc. and Certain
Holders of U.S. Games, Inc. Outstanding Stock, Options
and Warrants together with Exhibits C, D, E, F, G, H and
J thereto. The other schedules and exhibits to the
Agreement and Plan of Reorganization are listed therein
and copies thereof will be furnished supplementally to
the United States Securities and Exchange Commission upon
request.*
2.1 -- Amended and Restated Asset Purchase Agreement dated as of
January 31, 1997, between Leisure Time Casinos & Resorts,
Inc. and Star of Cincinnati, Inc.*
2.2 -- Accord and Satisfaction and Release of Mortgages
Agreement dated as of February 3, 1997, by Leisure Time
Casinos & Resorts, Inc., Star of Cincinnati, Inc. and
Henry E. Davis Trustee.*
3.0 -- Articles of Incorporation of Leisure Time Casinos &
Resorts, Inc. dated February 4, 1993.*
3.1 -- Articles of Amendment to the Articles of Incorporation of
Leisure Time Casinos & Resorts, Inc. filed on April 3,
1997.*
3.2 -- Articles of Amendment to the Articles of Incorporation of
Leisure Time Casinos & Resorts, Inc. filed on May 12,
1999.*
3.3 -- Bylaws of Registrant adopted May 12, 1999.*
4.0 -- Form of Representatives Warrant for the Purchase of
Common Stock.*
5.0 -- Opinion of Smith McCullough, P.C. on Legality of Common
Stock.*
10.0 -- 1997 Incentive and Nonstatutory Stock Option Plan.*
10.1 -- Amendment No. 1 to 1997 Incentive and Nonstatutory Stock
Option Plan.*
10.2 -- Form of 11% Convertible Promissory Note Due September 1,
1999.*
10.3 -- 11% Convertible Promissory Note Due May 29, 1999.*
10.4 -- 11% Convertible Promissory Note Due May 30, 1999.*
10.5 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Alan N.
Johnson, Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Alan N. Johnson and Amendment to
Employment Agreement dated effective February 22, 1999,
between Leisure Time Casinos & Resorts, Inc. and Alan N.
Johnson.*
10.6 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Gerald
J. Boyle and Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Gerald J. Boyle.*
10.7 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Elden W.
Rance, Amendment to Employment Agreement dated effective
September 9, 1998, between Leisure Time Casinos &
Resorts, Inc. and Elden W. Rance and Amendment to
Employment Agreement dated effective February 22, 1999,
between Leisure Time Casinos & Resorts, Inc. and Elden W.
Rance.*
</TABLE>
<PAGE> 160
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.8 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and R.
Thomas Klingel and Amendment to Employment Agreement
dated effective September 9, 1998, between Leisure Time
Casinos & Resorts, Inc. and R. Thomas Klingel.*
10.9 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Richard
D. Sly and Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Richard D. Sly.*
10.10 -- Employment Agreement dated effective March 1, 1999,
between Leisure Time Casinos & Resorts, Inc. and Keko
Mottes.*
10.11 -- Employment Agreement dated effective March 1, 1999,
between Leisure Time Casinos & Resorts, Inc. and John J.
Pasierb.*
10.12 -- Employment Agreement dated effective April 20, 1999,
between Leisure Time Casinos & Resorts, Inc. and Joseph
C. Grunda.*
10.13 -- Lease Agreement dated December 1, 1997, between Leisure
Time Technology, Inc. and Weeks Realty, L.P.*
10.14 -- Lease Agreement dated October 31, 1997, between Alan N.
Johnson and Leisure Time Casinos & Resorts, Inc.*
10.15 -- Purchase Agreement dated March 23, 1998, between Lisa
Lemon, Inc. and Al Johnson.*
10.16 -- Amendment to Purchase Agreement dated June 26, 1998,
between Lisa Lemon, Inc. and Al Johnson.*
10.17 -- Assignment dated September 11, 1998, from Al Johnson to
Leisure Time Hospitality, Inc.*
10.18 -- Promissory Note dated September 15, 1998, from Leisure
Time Hospitality, Inc. to Lisa Lemon, Inc. and Guaranty
of Alan N. Johnson thereof.*
10.19 -- Mortgage Deed dated September 15, 1998, from Leisure Time
Hospitality, Inc. to Lisa Lemon, Inc.*
10.20 -- Bareboat Charter Party dated as of June 22, 1998, between
Florida Casino Cruises, Inc. and Leisure Express Cruise
LLC.*
10.21 -- Addendum to Bareboat Charter Agreement.*
10.22 -- Purchase Option Agreement dated as of June 22, 1998,
between Florida Casino Cruises, Inc. and Leisure Express
Cruise, LLC.*
10.23 -- $3,000,000 Secured Promissory Note dated October 9, 1998,
from Leisure Time Cruise Corporation to Foothill Capital
Corporation.*
10.24 -- Security Agreement dated October 9, 1998, between
Foothill Capital Corporation and Leisure Time Cruise
Corporation.*
10.25 -- First Preferred Ship Mortgage dated October 9, 1998,
between Leisure Time Cruise Corporation and Foothill
Capital Corporation.*
10.26 -- Equipment Security Agreement dated October 9, 1998,
between Foothill Capital Corporation and Leisure Time
Technology, Inc.*
10.27 -- Continuing Guaranty dated October 9, 1998, from Leisure
Time Technology, Inc. to Foothill Capital Corporation.*
10.28 -- Continuing Guaranty dated October 9, 1998, from Leisure
Time Casinos & Resorts, Inc. to Foothill Capital
Corporation.*
10.29 -- Continuing Guaranty dated October 9, 1998, from Alan N.
Johnson to Foothill Capital Corporation.*
</TABLE>
<PAGE> 161
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.30 -- $1,500,000 Promissory Note dated December 17, 1998, from
Leisure Belle Cruise LLC to General Electric Capital
Corporation.*
10.31 -- $1,500,000 Loan and Security Agreement dated December 17,
1998, between Leisure Belle Cruise, LLC and General
Electric Capital Corporation.*
10.32 -- Guaranty Agreement dated December 17, 1998, from Leisure
Time Casinos & Resorts, Inc. to General Electric Capital
Corporation.*
10.33 -- Guaranty Agreement dated December 17, 1998, from Leisure
Time Technologies, Inc. to General Electric Capital
Corporation.*
10.34 -- First Preferred Ship Mortgage dated December 17, 1998,
from Leisure Belle Cruise, LLC in favor of General
Electric Capital Corporation.*
10.35 -- Consulting Agreement dated March 31, 1998 between Leisure
Time Casinos & Resorts, Inc. and A. J. Siciliano.*
10.36 -- Bareboat Charter Party dated as of January 22, 1999,
between Florida Casino Cruises, Inc. and Leisure Express,
LLC.*
10.37 -- Purchase Option Agreement dated as of January 22, 1999,
between Florida Casino Cruises, Inc. and Leisure Express,
LLC.*
10.38 -- Consulting Agreement dated as of February 1, 1999,
between and Kent Manley and Leisure Time Cruise
Corporation.*
10.39 -- Dockage Agreement and Lease dated as of June 1, 1998,
between Rowe Square Corporation and Leisure Express
Cruise, LLC.*
10.40 -- Distribution Agreement dated January 23, 1998, between
Leisure Time Technology, Inc. and Sao Paulo Games
Comercial LTDA.*
10.41 -- Amendment to the Contract for Distribution dated January
22, 1998, between Leisure Time Technology, Inc. and Sao
Paulo Games Comercial LTDA.*
10.42 -- Stock Purchase Agreement dated April 22, 1999, between J.
Kent Manley and Leisure Express Cruise, LLC.*
10.43 -- $2,100,000 Secured Promissory Note dated April 22, 1999,
from Leisure Express Cruise, LLC to Foothill Capital
Corporation.*
10.44 -- Security Agreement dated April 22, 1999, between Foothill
Capital Corporation and Leisure Express Cruise, LLC.*
10.45 -- $3,225,000 Secured Promissory Note dated April 22, 1999,
from Florida Casino Cruises, Inc. to Foothill Capital
Corporation.*
10.46 -- Security Agreement darted April 22, 1999, between
Foothill Capital Corporation and Florida Casino Cruises,
LLC.*
10.47 -- Continuing Guaranty dated April 22, 1999, from Leisure
Express Cruise, LLC to Foothill Capital Corporation.*
10.48 -- First Preferred Ship Mortgage dated April 22, 1999,
between Florida Casino Cruises, Inc. and Foothill Capital
Corporation.*
10.49 -- Amendment No. 1 to Loan Documents dated April 22, 1999,
between Foothill Capital Corporation and Leisure Time
Cruise Corporation.*
10.50 -- Amendment to and Confirmation of Guaranty dated April 22,
1999, by Leisure Time Technology, Inc. in favor of
Foothill Capital Corporation.*
10.51 -- Amendment to and Confirmation of Guaranty dated April 22,
1999, by Leisure Time Casinos & Resorts, Inc. in favor of
Foothill Capital Corporation.*
10.52 -- Amendment to and Confirmation of Guaranty dated April 22,
1999, by Alan N. Johnson in favor of Foothill Capital
Corporation.*
10.53 -- Second amendment to First Ship Mortgage dated April 22,
1999, between Leisure Time Cruise Corporation and
Foothill Capital Corporation.*
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.54 -- Pledge Agreement dated April 22, 1999, between Leisure
Express Cruise LLC and Foothill Capital Corporation.*
10.55 -- Continuing Guaranty dated April 22, 1999, from Leisure
Time Cruise Corporation in favor of Foothill Capital
Corporation.*
10.56 -- Continuing Guaranty dated April 22, 1999, from Florida
Casino Cruises, Inc. in favor of Foothill Capital
Corporation.*
10.57 -- Continuing Guaranty dated April 22, 1999, from Alan N.
Johnson in favor of Foothill Capital Corporation.*
10.58 -- Master Agreement and Lease between Leisure Express
Cruise, LLC and Shoestring Properties Limited Partnership
dated April 29, 1999.*
10.59 -- Marina Lease dated April 29, 1999 between Shoestring
Properties Limited Partnership and Leisure Time Cruise
Corporation.*
10.60 -- Dockside Lease dated April 29, 1999 between Shoestring
Properties Limited Partnership and Leisure Time Cruise
Corporation.*
10.61 -- First Amendment to Lease Agreement dated April 9, 1999
between Leisure Time Technology Inc. and Weeks Realty,
LP.*
10.62 -- Form of Unlimited Guaranty in favor of Firestone
Financial Corp.*
10.63 -- WCMA Loan and Security Agreement No. 701-07H43 dated
November 16, 1998, between Merrill Lynch Business
Financial Services, Inc. and Leisure Time Casinos &
Resorts, Inc. and Letter Agreement dated February 18,
1999.*
10.64 -- Lease dated May 10, 1999, by and between Alan N. Johnson
and Leisure Time Casinos & Resorts, Inc.*
10.65 -- Employment Agreement dated effective July 1, 1998,
between Leisure Time Casinos & Resorts, Inc. and Bernard
C. Johnson and Amendment to Employment Agreement dated
effective September 9, 1998, between Leisure Time Casinos
& Resorts, Inc. and Bernard C. Johnson.*
10.66 -- Promissory Note dated June 18, 1999, from Leisure Time
Casinos & Resorts, Inc. to American International
Specialty Lines Insurance Company.*
10.67 -- Employment Agreement dated effective July 6, 1999,
between Leisure Time Casinos & Resorts, Inc. and Eric R.
Dey.*
10.68 -- License Agreement effective July 12, 1999, between
Radisson Hotels International, Inc. and Leisure Time
Hospitality, Inc.*
10.69 -- Form of Custody Agreement.
10.70 -- Letter dated July 26, 1999 from Merrill Lynch Business
Financial Services, Inc. to Leisure Time Casinos &
Resorts, Inc.
21 -- Subsidiaries of the Registrant.
23.0 -- Consents of Ehrhardt Keefe Steiner & Hottman PC.
23.1 -- Consent of Smith McCullough, P.C. (included in Exhibit
5.0).*
23.2 -- Consent of Bear Stearns & Co. Inc. dated April 29, 1999.*
24.0 -- Powers of Attorney.*
27.0 -- Financial Data Schedule.*
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 1.0
1,100,000 SHARES OF COMMON STOCK
LEISURE TIME CASINOS & RESORTS, INC.
UNDERWRITING AGREEMENT
________, 1999
Schneider Securities, Inc.
1120 Lincoln Street
Suite 900
Denver, Colorado 80203
Dear Sirs:
Leisure Time Casinos & Resorts, Inc., a Colorado corporation (the
"Company"), hereby confirms its agreement with you (who are sometimes
hereinafter referred to as the "Representative") and with the other members of
the underwriting group (the "Underwriters") named on Schedule 1 hereto as
follows:
1. Introductory. Subject to the terms and conditions herein contained,
the Company proposes to sell to the several Underwriters an aggregate of
1,100,000 shares (the "Firm Shares") of the Company's Common Stock, par value
$.001 per share (the "Common Stock"). The Company also proposes to sell to the
several Underwriters not more than 165,000 additional shares of Common Stock
(15% of the number of shares constituting the Firm Shares) if requested by the
Representative as provided in Section 3 of this Agreement. Any and all shares of
Common Stock to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Additional Shares." The Firm Shares and any
Additional Shares are collectively referred to herein as the "Shares."
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
a. The Company has filed with the United States Securities and
Exchange Commission (the "Commission") a registration statement, and
may have filed one or more amendments thereto, on Form S-1
(Registration No. 333-77737), including in such registration statement
and each such amendment a facing sheet, the information called for by
Part I, audited consolidated financial statements for the past three
fiscal years or such other period as may be appropriate, the
information called for by Part II, the undertakings to deliver
certificates, file reports and file post-effective amendments, the
required signatures, consents of experts, exhibits, a related
preliminary prospectus (a "Preliminary Prospectus") and any other
<PAGE> 2
information or documents which are required for the registration of the
Shares, and the warrants referred to in Section 5(p) (the
"Representative's Warrants") and the shares referred to in Section 5(p)
purchasable upon exercise of the Representative's Warrants (the
"Representative's Warrant Shares"), under the Securities Act of 1933,
as amended (the "Act"). As used in this Agreement, the term
"Registration Statement" means such registration statement, including
incorporated documents, all exhibits and consolidated financial
statements and schedules thereto, as amended, when it becomes
effective, and shall include the information with respect to the
Shares, the Representative's Warrants, and the Representative's Warrant
Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A
of the General Rules and Regulations promulgated under the Act (the
"Regulations"), which information is deemed to be included therein when
it becomes effective as provided by Rule 430A; the term "Preliminary
Prospectus" means each prospectus included in the Registration
Statement, or any amendments thereto, before it becomes effective under
the Act and any prospectus filed by the Company with the consent of the
Representative pursuant to Rule 424(a) of the Regulations; and the term
"Prospectus" means the final prospectus included as part of the
Registration Statement, except that if the prospectus relating to the
securities covered by the Registration Statement in the form first
filed on behalf of the Company with the Commission pursuant to Rule
424(b) of the Regulations shall differ from such final prospectus, the
term "Prospectus" shall mean the prospectus as filed pursuant to Rule
424(b) from and after the date on which it shall have first been used.
b. When the Registration Statement becomes effective, and at
all times subsequent thereto, to and including the Closing Date (as
defined in Section 3) and each Additional Closing Date (as defined in
Section 3), and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Representative
or any dealer, and during such longer period until any post-effective
amendment thereto shall become effective, the Registration Statement
(and any post-effective amendment thereto) and the Prospectus (as
amended or as supplemented if the Company shall have filed with the
Commission any amendment or supplement to the Registration Statement or
the Prospectus) will contain all statements which are required to be
stated therein in accordance with the Act and the Regulations, will
comply with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no event will have occurred
-2-
<PAGE> 3
which should have been set forth in an amendment or supplement to the
Registration Statement or the Prospectus which has not then been set
forth in such an amendment or supplement; and no Preliminary
Prospectus, as of the date filed with the Commission, included any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; except that no representation or warranty is
made in this Section 2(b) with respect to statements or omissions made
in reliance upon and in conformity with written information furnished
to the Company as stated in Section 8(b) with respect to the
Underwriters by or on behalf of the Underwriters expressly for
inclusion in any Preliminary Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto.
c. Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement, or
suspending the registration or qualification of the Shares, the
Representative's Warrants, and the Representative's Warrant Shares, nor
has any of such authorities instituted or threatened to institute any
proceedings with respect to a Stop Order.
d. Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract,
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement.
e. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Colorado,
with full power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates, and permits
of and from, and declarations and filings with, all federal, state,
local, and other governmental authorities and all courts and other
tribunals, to own, lease, license, and use its properties and assets
and to carry on the business in the manner described in the Prospectus.
Each of the Subsidiaries of the Company (the "Subsidiaries") is a
corporation duly organized and validly existing in good standing under
the laws of the jurisdiction of its organization, with full corporate
power and authority to own, lease, and operate its properties and to
conduct its
-3-
<PAGE> 4
business as described in the Prospectus. The Company and each
Subsidiary is duly qualified to do business and is in good standing in
every jurisdiction in which its ownership, leasing, licensing, or use
of property and assets or the conduct of its business makes such
qualifications necessary. The Company has no Subsidiaries except as
disclosed in the Prospectus.
f. The authorized capital stock of the Company consists of
45,000,000 shares of Common Stock, of which 5,171,829 shares of Common
Stock are issued and outstanding, 5,573,267 shares of Common Stock are
reserved for issuance upon the exercise of currently outstanding
options, and warrants, 2,221,200 shares of Common Stock are reserved
for issuance upon the exercise of the remaining options authorized
under the Company's option plan; and 5,000,000 shares of Preferred
Stock, none of which are issued or outstanding. Each outstanding share
of Common Stock is validly authorized, validly issued, fully paid, and
nonassessable, without any personal liability attaching to the
ownership thereof, and has not been issued and is not owned or held in
violation of any preemptive rights of stockholders. There is no
commitment, plan, or arrangement to issue, and no outstanding option,
warrant, or other right calling for the issuance of, any share of
capital stock of the Company or any security or other instrument which
by its terms is convertible into, exercisable for, or exchangeable for
capital stock of the Company, except as set forth above, and as may be
properly described in the Prospectus.
<PAGE> 5
g. The consolidated financial statements of the Company
included in the Registration Statement and the Prospectus fairly
present with respect to the Company the consolidated financial
position, the results of operations, and the other information
purported to be shown therein at the respective dates and for the
respective periods to which they apply. Such consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles, except to the extent that certain footnote
disclosures regarding any stub period may have been omitted in
accordance with the applicable rules of the Commission under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
consistently applied throughout the periods involved, are correct and
complete, and are in accordance with the books and records of the
Company. The accountants whose reports on the audited consolidated
financial statements are filed with the Commission as a part of the
Registration Statement are, and during the periods covered by their
reports included in the Registration Statement and the Prospectus were,
independent certified public accountants with respect to the Company
within the meaning of the Act and the Regulations. No other financial
-4-
<PAGE> 6
statements are required by Form S-1 or otherwise to be included in the
Registration Statement or the Prospectus. There has at no time been a
material adverse change in the consolidated financial condition,
results of operations, business, properties, assets, liabilities, or
future prospects of the Company from the latest information set forth
in the Registration Statement or the Prospectus, except as may be
properly described in the Prospectus.
h. There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or investigation pending, or, to
the knowledge of the Company, threatened, or proposed with respect to
the Company or any of its Subsidiaries, operations, businesses,
properties, or assets, except as may be properly described in the
Prospectus or such as individually or in the aggregate do not now have
and will not in the future have a material adverse effect upon the
operations, business, properties, or assets of the Company. The Company
and each Subsidiary is not in violation of, or in default with respect
to, any law, rule, regulation, order, judgment, or decree except as may
be properly described in the Prospectus or such as in the aggregate do
not now have and will not in the future have a material adverse effect
upon the operations, business, properties, or assets of the Company,
nor is the Company required to take any action in order to avoid any
such violation or default.
i. The Company has good and marketable title in fee simple
absolute to all real properties and good title to all other properties
and assets which the Prospectus indicates are owned by it, free and
clear of all liens, security interests, pledges, charges, encumbrances,
and mortgages except as may be properly described in the Prospectus or
such as in the aggregate do not now have and will not in the future
have a material adverse effect upon the operations, business,
properties, or assets of the Company. No real property owned, leased,
licensed, or used by the Company lies in an area which is, or to the
knowledge of the Company will be, subject to zoning, use, or building
code restrictions which would prohibit, and no state of facts relating
to the actions or inaction of another person or entity or his or its
ownership, leasing, licensing, or use of any real or personal property
exists or will exist which would prevent, the continued effective
ownership, leasing, licensing, or use of such real property in the
business of the Company as presently conducted or as the Prospectus
indicates it contemplates conducting, except as may be properly
described in the Prospectus or such as in the aggregate do not now have
and will not in the future have a material adverse effect upon the
operations, business, properties, or assets of the Company.
-5-
<PAGE> 7
j. Neither the Company nor any other party is now or is
expected by the Company to be in violation or breach of, or in default
with respect to complying with, any material provision of any contract,
agreement, instrument, lease, license, arrangement, or understanding
which is material to the Company, and each such contract, agreement,
instrument, lease, license, arrangement, and understanding is in full
force and is the legal, valid, and binding obligation of the parties
thereto and is enforceable as to them in accordance with its terms. The
Company enjoys peaceful and undisturbed possession under all leases and
licenses under which it is operating. The Company is not a party to or
bound by any contract, agreement, instrument, lease, license,
arrangement, or understanding, or subject to any charter or other
restriction, which has had or may in the future have a material adverse
effect on the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company.
The Company and each of the Subsidiaries is not in violation or breach
of, or in default with respect to, any term of its Articles of
Incorporation (or other charter document) or by-laws.
k. All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises,
technology, know-how and other intangible properties and assets (all of
the foregoing being herein called "Intangibles") that the Company owns
or has pending, or under which it is licensed, are in good standing and
uncontested. Except as otherwise disclosed in the Registration
Statement, the Intangibles are owned by the Company, free and clear of
all liens, security interests, pledges, and encumbrances. The Company
has filed an application with the United States Patent and Trademark
Office to register "Leisure Time Casinos & Resorts" as a registered
trademark. There is no right under any Intangible necessary to the
business of the Company as presently conducted or as the Prospectus
indicates it contemplates conducting (except as may be so designated in
the Prospectus). The Company has not infringed, is not infringing, and
has not received notice of infringement with respect to asserted
Intangibles of others. To the knowledge of the Company, there is no
infringement by others of Intangibles of the Company. To the knowledge
of the Company, there is no Intangible of others which has had or may
in the future have a materially adverse effect on the financial
condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company.
l. Neither the Company nor any of the Subsidiaries, nor any
director, officer, agent, employee, or other person associated with or
acting on behalf of the Company has,
-6-
<PAGE> 8
directly or indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended by
the International Anti-Bribery Act of 1998; or made any bribe, rebate,
payoff, influence payment, kickback, or other unlawful payment. Each of
the Company and the Subsidiaries has not accepted any material
advertising allowances or marketing allowances from suppliers to the
Company and, to the extent any advertising allowance has been accepted,
the Company has provided proper documentation to the supplier with
respect to advertising as to which the advertising allowance has been
granted.
m. The Company has all requisite power and authority to
execute and deliver, and to perform thereunder each of this Agreement
and the Representative's Warrants. All necessary corporate proceedings
of the Company have been duly taken to authorize the execution and
delivery, and performance thereunder by the Company of this Agreement
and the Representative's Warrants. This Agreement has been duly
authorized, executed, and delivered by the Company, is a legal, valid,
and binding obligation of the Company, and is enforceable as to the
Company in accordance with its terms. The Representative's Warrants
have been duly authorized by the Company and, when executed and
delivered by the Company, will be a legal, valid, and binding
obligation of the Company, and will be enforceable against the Company
in accordance with its terms. No consent, authorization, approval,
order, license, certificate, or permit of or from, or declaration or
filing with, any federal, state, local, or other governmental authority
or any court or other tribunal is required by the Company for the
execution and delivery, or performance thereunder by the Company of
this Agreement or the Representative's Warrants except filings under
the Act which have been or will be made before the Closing Date and
such consents consisting only of consents under "blue sky" or
securities laws which are required in connection with the transactions
contemplated by this Agreement and which have been obtained at or prior
to the date of this Agreement. No consent of any party to any contract,
agreement, instrument, lease, license, arrangement, or understanding to
which the Company is a party, or to which any of its properties or
assets are subject, is required for the execution or delivery, or
performance thereunder of this Agreement or the Representative's
Warrants; and the execution and delivery, and performance thereunder of
this Agreement and the Representative's Warrants will not violate,
result in a breach of, conflict
-7-
<PAGE> 9
with, or (with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate or result in a breach of any term of the
Articles of Incorporation or by-laws of the Company, or violate, result
in a breach of, or conflict with any law, rule, regulation, order,
judgment, or decree binding on the Company or to which any of its
operations, businesses, properties, or assets are subject.
n. The Shares, the Representative's Warrants and the
Representative's Warrant Shares are validly authorized and reserved for
issuance. The Shares, when issued and delivered in accordance with this
Agreement and the Representative's Warrant Shares, when issued and
delivered upon exercise of the Representative's Warrants, and upon
payment of the exercise price therefor, will be validly issued, fully
paid, and nonassessable, without any personal liability attaching to
the ownership thereof, and will not be issued in violation of any
preemptive rights of stockholders, and the Underwriters will receive
good title to the Shares purchased, the Representative will receive
good title to the Representative's Warrants purchased and any purchaser
of the Representative >s Warrant Shares will receive good title
thereto, all such title free and clear of all liens, security
interests, pledges, charges, encumbrances, stockholders' agreements,
and voting trusts.
o. The Shares, the Representative's Warrants and the
Representative's Warrant Shares conform to all statements relating
thereto contained in the Registration Statement and the Prospectus.
p. Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as may otherwise be properly described in the Prospectus, the Company
has not (i) issued any securities or incurred any liability or
obligation, primary or contingent, for borrowed money, (ii) entered
into any transaction not in the ordinary course of business, or (iii)
declared or paid any dividend on its capital stock.
q. Neither the Company nor any of its officers, directors, or
affiliates (as defined in the Regulations), has taken or will take,
directly or indirectly, prior to the termination of the distribution of
securities contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the Company, or
which has caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company, to facilitate
the sale or resale of the Shares.
-8-
<PAGE> 10
r. The Company has not incurred any liability for a fee,
commission, or other compensation on account of the employment of a
broker or finder in connection with the transactions contemplated by
this Agreement.
s. The Company has obtained from each officer, director and
person or entity that beneficially owns the Company's Common Stock his,
her or its enforceable written agreement that for a period of 12 months
from the Effective Date or until the Company completes an underwritten
public offering after the offering of the Shares, whichever is earlier,
he, she or it will not, without the Representative's prior written
consent, sell or undertake any related action described in such written
agreement, the Company's Common Stock owned by such person prior to the
Effective Date. Notwithstanding the foregoing, commencing 180 days
after the Effective Date, the stockholders of the Company who are not
officers or directors of the Company shall have the right to sell up to
20% of the shares of Common Stock owned by them, up to a maximum
aggregate amount of 150,000 shares of Common Stock, through and until
expiration of the 12 month restriction provided herein. Any such sales
will comply with applicable exemptions from the registration
requirements of the ActPublic or private sales of Common Stock by such
persons shall not include gifts, intra-family transfers or transfers
for estate planning purposes, which shall be exempt from the foregoing
provisions. The Company agrees not to sell its Common Stock for 12
months from the Effective Date except (i) with the Representative's
prior written consent, (ii) in an underwritten public offering, (iii)
in connection with an acquisition, (iv) upon the exercise of currently
outstanding options or warrants, (v in exchange for any rights that the
holders of previously outstanding convertible debt may assert against
the Company, (vi) upon the exercise of options granted pursuant to the
Company's stock option plan, or (vii) upon exercise of the
Representative's Warrants.
t. Except as otherwise provided in the Registration Statement,
no person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing
or effectiveness of the Registration Statement.
u. The Company is eligible to use Form S-1 for registration of
the Shares, the Representative's Warrants and the Representative's
Warrant Shares.
v. No unregistered securities of the Company, of an affiliate
of the Company or of a predecessor of the Company have been sold within
three years prior to the date hereof, except as described in the
Registration Statement.
-9-
<PAGE> 11
w. Except as set forth in the Registration Statement, there is
and at the Closing Date there will be no action, suit or proceeding
before any court, arbitration tribunal or governmental agency,
authority or body pending or, to the knowledge of the Company,
threatened which might result in judgments against the Company not
adequately covered by insurance or which collectively might result in
any material adverse change in the condition (financial or otherwise),
the business or the prospects of the Company or would materially affect
the properties or assets of the Company.
x. The Company has filed all federal and state tax returns
which are required to be filed by it and has paid all taxes shown on
such returns and all assessments received by it to the extent such
taxes have become due. All taxes with respect to which the Company is
obligated have been paid or adequate accruals have been set up to cover
any such unpaid taxes.
y. Except as set forth in the Registration Statement:
i. The Company has obtained all permits, licenses and
other authorizations which are required under the
Environmental Laws for the ownership, use and operation of
each location operated or leased by the Company (the
"Property"), all such permits, licenses and authorizations, if
any, obtained are in effect, no appeal nor any other action is
pending to revoke any such permit, license or authorization,
and the Company is in full compliance with all terms and
conditions of all such permits, licenses and authorizations,
if any, obtained by the Company.
ii. To the best knowledge of the Company's executive
officers, the Company and the Property are in compliance with
all Environmental Laws including, without limitation, all
restrictions, conditions, standards, limitations,
prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws or contained in
any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered,
promulgated or approved thereunder.
iii. The Company has not, and to the best knowledge
of the Company's executive officers, no other person has,
released, placed, stored, buried or dumped any Hazardous
Substances, Oils, Pollutants or Contaminants or any other
wastes produced by, or resulting from, any business,
commercial, or industrial activities, operations, or
processes, on, beneath, or adjacent to the Property or any
property formerly owned, operated or leased by the Company
except for inventories of such substances to be
-10-
<PAGE> 12
used, and wastes generated therefrom, in the ordinary course
of business of the Company (which inventories and wastes, if
any, were and are stored or disposed of in accordance with
applicable laws and regulations and in a manner such that
there has been no release of any such substances into the
environment).
iv. Except as provided to the Representative, there
exists no written or tangible report, synopsis or summary of
any asbestos, toxic waste or Hazardous Substances, Oils,
Pollutants or Contaminants investigation made with respect to
all or any portion of the assets of the Company (whether or
not prepared by experts and whether or not in the possession
of the executive officers of the Company).
v. Definitions: As used herein:
(1) Environmental Laws means all federal,
state and local laws, regulations, rules and
ordinances relating to pollution or protection of the
environment, including, without limitation, laws
relating to Releases or threatened Releases of
Hazardous Substances, Oils, Pollutants or
Contaminants into the indoor or outdoor environment
(including, without limitation, ambient air, surface
water, groundwater, land, surface and subsurface
strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage,
Release, transport or handling of Hazardous
Substances, Oils, Pollutants or Contaminants.
(2) Hazardous Substances, Oils, Pollutants
or Contaminants means all substances defined as such
in the National Oil and Hazardous Substances
Pollutant Contingency Plan, 40 C.F.R. '300.6, or
defined as such under any Environmental Law.
(3) Release means any release, spill,
emission, discharge, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environmental
(including, without limitation, ambient air, surface
water, groundwater, and surface or subsurface strata)
or into or out of any property, including the
movement of Hazardous Substances, Oils, Pollutants or
Contaminants through or in the air, soil, surface
water, groundwater or any property.
z. No authorization, approval, consent or order of, or filing
with, any Federal, Native American, state or local governmental body,
authority, self regulatory authority, agency
-11-
<PAGE> 13
or official (collectively, the entities and persons having jurisdiction
over the manufacture, sale and operations of gaming devices are
referred to as "Gaming Authorities"), including specifically from the
Gaming Authorities in the States of Kansas, Michigan, Minnesota, New
Mexico (with respect to Native American tribes only), New York, North
Carolina, South Carolina and Wisconsin and the Kingdom of Norway and
Brazil (collectively, the "Gaming Jurisdictions") is necessary in
connection with the issuance and sale of the Shares and the
consummation of the transactions contemplated hereby, except such as
may be required by the NASD or have been obtained under the applicable
laws, rules and regulations maintained and enforced by the Gaming
Authorities in their respective jurisdictions (collectively, the
"Gaming Laws"), the Act, or state securities or Blue Sky laws or
regulations.
aa. To the extent required, (i) the Company, each of the
Subsidiaries and each of the persons listed under the caption
"Management" in the Registration Statement has all material
certificates, consents, exemptions, orders, permits, licenses,
authorizations or other approvals or rights (each, an "Authorization")
of and from, and has made all material declarations and filings with
the Gaming Authorities, and holds all such Authorizations with respect
to engaging in gaming operations, offshore gaming cruises and the
manufacture of gaming machines in the Gaming Jurisdictions or that are
required to own, lease, license and use its properties and assets and
to conduct its current business in the manner described in the
Prospectus, (ii) all such Authorizations are valid and in full force
and effect, (iii) the Company, each of the Subsidiaries and each of the
persons listed under the caption "Management" in the Registration
Statement is in compliance in all material respects with the terms and
conditions of all such Authorizations and with the rules and
regulations of the Gaming Authorities and governing bodies having
jurisdiction with respect thereto, and (iv) neither the Company nor any
Subsidiary nor any of the persons listed under the caption "Management"
in the Registration Statement has received any notice of proceedings
relating to the revocation or modification of any such Authorization
and no such Authorization contains any restrictions that are materially
burdensome to any of them. To the best knowledge of the Company and
each of the persons listed under the caption "Management" in the
Registration Statement, the Company and all such persons do not have
any reason to believe that any Gaming Authority is considering
modifying, limiting, conditioning, suspending, revoking or not renewing
any such Authorization of the Company, any of the Subsidiaries or any
of the persons listed under the caption "Management" in the
Registration Statement or that any Gaming Authority or any other
governmental agency is investigating the Company or any of the
Subsidiaries or related parties (other than normal overseeing reviews
of the Gaming Authorities incident to the gaming activities of the
Company and the Subsidiaries). To the best knowledge of the Company and
each of the persons listed under the caption "Management" in the
Registration Statement, neither the Company, its Subsidiaries nor any
of the persons listed under the caption "Management" in the
Registration Statement has any reason to believe that there is an
existing basis for any of the Gaming Authorities to deny the renewal of
current gaming licenses held by any of them.
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<PAGE> 14
bb. The Company, through one of its Subsidiaries, has applied
to the Gaming Authorities for licensing to sell gaming machines and
engage in gaming operations in the State of Montana and in the
Province of Ontario, Canada. The Company has not received any
communication (whether written or oral) threatening or stating that the
Company's or the Subsidiary's application for licensing in any of such
jurisdictions, or the qualification or licensing of those persons
listed under the caption "Management" in the Prospectus, has been or
will be denied. Each license application filed by the Company or any
Subsidiary with such jurisdictions complies as to form with the gaming
laws of each of the respective jurisdictions in which such applications
are filed, is correct in all material respects, presents fairly the
information purported to be shown and has not been modified, withdrawn
or abandoned by the Company or a Subsidiary.
cc. To the best of the Company's knowledge, neither the
Company nor any of the Subsidiaries has engaged in any business or
operations of any variety in any state or jurisdiction in which the
applicable gaming laws would require the Company or its Subsidiaries to
have been licensed in order to conduct such business or operations,
except as otherwise permitted by the gaming laws of any such
jurisdiction.
dd. The Company's and its Subsidiaries' conduct of offshore
gaming activities in international waters is in accordance with
applicable United States and international laws, rules and regulations,
or exemptions therefrom, and the Company and its Subsidiaries have
complied in all material respects with the jurisdictional and other
requirements imposed on such activities. Neither the Company nor any of
the Subsidiaries has been notified of any violation, breach or conduct
that would constitute a violation of applicable gaming laws within the
State of Massachusetts.
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<PAGE> 15
ee. The Company and each of its Subsidiaries has conducted its
gaming route operations within the State of South Carolina in
accordance with applicable laws, rules and regulations established by
the Gaming Authorities within the State of South Carolina. The Company
and each of its Subsidiaries is in material compliance with each
individual revenue sharing agreement by and between the Company, or any
of its Subsidiaries and third parties. All of the above representations
and warranties shall survive the performance or termination of this
Agreement.
3. Purchase, Sale, and Delivery of the Shares. On the basis of the
representations, warranties, covenants, and agreements of the Company herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to sell to the Underwriters, severally and not jointly, and the
Underwriters, severally and not jointly, agree to purchase from the Company the
number of Firm Shares set forth opposite the Underwriters' names in Schedule 1
hereto.
The purchase price per Firm Share to be paid by the Underwriters shall
be $______. The initial public offering price of the Shares shall be $______.
Payment for the Firm Shares by the Underwriters shall be made by wire
transfer or by certified or official bank check in clearing house funds, payable
to the order of the Company at the offices of Schneider Securities, Inc., 1120
Lincoln Street, Suite 900, Denver, Colorado 80203, or at such other place in
Denver, Colorado as the Representative shall determine and advise the Company by
at least two full days' notice in writing, upon delivery of the Shares to the
Representative. Such delivery and payment shall be made at 10:00 a.m., Mountain
Time, on the third business day following the time of the initial public
offering, as defined in Section 10(a) hereof, unless the Commission declares the
Registration Statement effective after 4:30 p.m. Eastern time, in which event
delivery and payment shall be made on the fourth (4th) business day following
the time of the initial public offering. The time and date of such delivery and
payment are herein called the "Closing Date."
In addition, the Company hereby grants to the Representative the option
to purchase all or a portion of the Additional Shares as may be necessary to
cover over-allotments, at the same purchase price per Additional Share as the
price per Firm Share provided for in this Section 3. The Representative may
purchase Additional Shares when exercising such option, in its sole discretion.
This option may be exercised by the Representative on the basis of the
representations, warranties, covenants, and agreements of the Company herein
contained, but subject to the terms and conditions herein set forth, at any time
and from time to time on or before the 45th day following the Effective Date of
the Registration Statement, by written notice by the Representative to the
Company. Such notice shall set forth the aggregate number of Additional Shares
as to which the option is being exercised, and the time and date, as determined
by the Representative, when such Additional Shares are to be delivered (such
time and date are herein called an "Additional Closing Date"); provided,
however, that no Additional Closing Date shall be earlier than the Closing Date
nor earlier than the third business day after the date on which the notice of
the exercise of the option shall have been given nor later than the eighth
business day after the date on which such notice shall have been given; and
further provided, that not more than two Additional Closings shall be noticed
and held following purchase of Additional Shares by the Representative.
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<PAGE> 16
Payment for the Additional Shares shall be made by wire transfer or by
certified or official bank check in clearing house funds payable to the order of
the Company at the offices of Schneider Securities, Inc., 1120 Lincoln Street,
Suite 900, Denver, Colorado, or at such other place in Denver, Colorado as you
shall determine and advise the Company by at least two full days' notice in
writing, upon delivery of certificates representing the Additional Shares to
you.
Certificates for the Shares purchased shall be registered in such name
or names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date or Additional Closing
Date, as applicable. The Company shall permit you to examine and package such
certificates for delivery at least one full business day prior to any such
closing with respect thereto.
If for any reason one or more Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 10 hereof) to purchase and pay for the
number of Firm Shares agreed to be purchased by such Underwriter, the Company
shall immediately give notice thereof to the Representative, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by the Representative of such notice, to purchase or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon among
the Representative and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, the Firm Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements with respect to all such Firm Shares, the number of Firm
Shares which each non-defaulting Underwriter is otherwise obligated to purchase
under the Agreement shall be automatically increased pro rata to absorb the
remaining Firm Shares which the defaulting Underwriter or Underwriters agreed to
purchase; provided, however, that the non-defaulting Underwriters shall not be
obligated to purchase the Firm Shares which the defaulting Underwriter or
Underwriters agreed to purchase in excess of 10% of the total number of Shares
which such non-defaulting Underwriter agreed to purchase hereunder, and provided
further that the non-defaulting Underwriters shall not be obligated to purchase
any Firm Shares which the defaulting Underwriter or Underwriters agreed to
purchase if such additional purchase would cause the Underwriter to be in
violation of the net capital rule of the Commission or other applicable law. If
the total number of Firm Shares which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the Company shall have the right, within 24 hours next
succeeding the 24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to the Representative for the purchase
of such Firm Shares on the terms herein set forth. In any such case, either the
Representative or the Company shall have the right to postpone the Closing for
not more than seven business days after the date originally fixed as the Closing
in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
24-hour periods stated above for the purchase of all the Firm Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter, except
the Company shall be liable for actual expenses incurred by the Representative
as provided in Section 10 hereof, and without any liability on the part of any
non-defaulting Underwriter to the Company.
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<PAGE> 17
Nothing contained herein shall relieve any defaulting Underwriter of
its liability, if any, to the Company or to the remaining Underwriters for
damages occasioned by its default hereunder.
4. Offering. The Underwriters are to make a public offering of the
Shares as soon, on or after the effective date of the Registration Statement, as
the Representative deems it advisable so to do. The Shares are to be initially
offered to the public at the initial public offering price as provided for in
Section 3 (such price being herein called the "public offering price"). After
the initial public offering, you may from time to time increase or decrease the
price of the Shares in your sole discretion, by reason of changes in general
market conditions or otherwise.
5. Covenants of the Company. The Company covenants that it will:
a. Use its best efforts to cause the Registration Statement to
become effective as promptly as possible. If the Registration Statement
has become or becomes effective with a form of Prospectus omitting
certain information pursuant to Rule 430A of the Regulations, or filing
of the Prospectus is otherwise required under Rule 424(b), the Company
will file the Prospectus, properly completed, pursuant to Rule 424(b)
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing.
b. Notify you immediately, and confirm such notice in writing,
(i) when the Registration Statement and any post-effective amendment
thereto become effective, (ii) of the receipt of any comments from the
Commission or the "blue sky" or securities authority of any
jurisdiction regarding the Registration Statement, any post-effective
amendment thereto, the Prospectus, or any amendment or supplement
thereto, and (iii) of the receipt of any notification with respect to a
Stop Order or the initiation or threatening of any proceeding with
respect to a Stop Order. The Company will use its best efforts to
prevent the issuance of any Stop Order and, if any Stop Order is
issued, to obtain the lifting thereof as promptly as possible.
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<PAGE> 18
c. During the time when a prospectus relating to the Shares is
required to be delivered hereunder or under the Act or the Regulations,
comply so far as it is able with all requirements imposed upon it by
the Act, as now existing and as hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Shares and
Representative's Warrant Shares in accordance with the provisions
hereof and the Prospectus. If, at any time when a prospectus relating
to the Shares or Representative's Warrant Shares is required to be
delivered hereunder or under the Act or the Regulations, any event
shall have occurred as a result of which, in the reasonable opinion of
counsel for the Company or counsel for the Representative, the
Registration Statement or the Prospectus, as then amended or
supplemented, contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, or if, in the opinion of
either of such counsel, it is necessary at any time to amend or
supplement the Registration Statement or the Prospectus to comply with
the Act or the Regulations, the Company will immediately notify you and
promptly prepare and file with the Commission an appropriate amendment
or supplement (in form and substance satisfactory to you) which will
correct such statement or omission or which will effect such compliance
and will use its best efforts to have any such amendment declared
effective as soon as possible.
d. Deliver without charge to you such number of copies of each
Preliminary Prospectus as you may reasonably request and, as soon as
the Registration Statement or any amendment thereto becomes effective
or a supplement is filed, deliver without charge to you two signed
copies of the Registration Statement or such amendment thereto, as the
case may be, including exhibits, and two copies of any supplement
thereto, and deliver without charge to you such number of copies of the
Prospectus, the Registration Statement, and amendments and supplements
thereto, if any, without exhibits, as you may reasonably request for
the purposes contemplated by the Act.
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<PAGE> 19
e. Endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes effective, to
qualify the Shares and Representative's Warrant Shares for offering and
sale under the "blue sky" or securities laws of such jurisdictions as
you may designate; provided, however, that no such qualification shall
be required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is
not then subject. In each jurisdiction where such qualification shall
be effected, the Company will, unless you agree in writing that such
action is not at the time necessary or advisable, file and make such
statements or reports at such times as are or may be required by the
laws of such jurisdiction.
f. Make generally available (within the meaning of Section
11(a) of the Act and the Regulations) to its security holders as soon
as practicable, but not later than fifteen (15) months after the date
of the Prospectus, an earnings statement (which need not be certified
by independent certified public accountants unless required by the Act
or the Regulations, but which shall satisfy the provisions of Section
11(a) of the Act and the Regulations) covering a period of at least 12
months beginning after the effective date of the Registration
Statement.
g. For a period of 12 months after the date of the Prospectus,
not, without your prior written consent, offer, issue, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock (or any security or
other instrument which by its terms is convertible into, exercisable
for, or exchangeable for shares of Common Stock) except as provided in
Section 3 and except (i) with the Representative's prior written
consent, (ii) in an underwritten public offering, (iii) in connection
with an acquisition, (iv) upon the exercise of currently outstanding
options or warrants, (v) in exchange for any rights that the holders of
previously outstanding convertible debt may assert against the Company,
(vi) upon the exercise of options granted pursuant to the Company's
stock option plan, or (vii) upon exercise of the Representative's
Warrants.
h. For a period of five years after the Effective Date of the
registration statement, furnish you, without charge, the following:
i. Within 105 days after the end of each fiscal year,
three copies of consolidated financial statements certified by
independent certified public accountants, including a balance
sheet, statement of operations, and statement of cash flows of
the Company and its then existing Subsidiaries, with
supporting schedules, prepared in accordance with generally
accepted accounting principles, at the end of such fiscal year
and for the 12 months then ended;
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<PAGE> 20
ii. As soon as practicable after they have been sent
to stockholders of the Company or filed with the Commission,
three copies of each annual and interim financial and other
report or communication sent by the Company to its
stockholders or filed with the Commission;
iii. As soon as practicable, two copies of every
press release and every material news item and article in
respect of the Company or its affairs which was released by
the Company;
iv. Notice of any regular or special meeting of the
Company's Board of Directors concurrently with the sending of
such notice to the Company's directors; and
v. Such additional documents and information with
respect to the Company and its affairs and the affairs of any
of its Subsidiaries as you may from time to time reasonably
request.
i. Within 90 days after the Effective Date, designate an Audit
Committee and a Compensation Committee, the members of which shall be
subject to your reasonable approval, which will generally supervise the
financial affairs of the Company and review executive compensation,
respectively.
j. Furnish to you as early as practicable prior to the Closing
Date and any Additional Closing Date, as the case may be, but not less
than two full business days prior thereto, a copy of the latest
available unaudited interim consolidated financial statements of the
Company which have been read by the Company's independent certified
public accountants, as stated in their letters to be furnished pursuant
to Section 7(e).
k. File no amendment or supplement to the Registration
Statement or Prospectus at any time, whether before or after the
Effective Date of the Registration Statement, unless such filing shall
comply with the Act and the Regulations and unless you shall previously
have been advised of such filing and furnished with a copy thereof, and
you and counsel for the Representative shall have approved such filing
in writing within a reasonable time of receipt thereof.
l. Comply with all periodic reporting and proxy solicitation
requirements which may from time to time be applicable to the Company
as a result of the Company's registration under the Exchange Act on a
registration statement on Form 8-A .
m. Comply with all provisions of all undertakings contained in
the Registration Statement.
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<PAGE> 21
n. Prior to the Closing Date or any Additional Closing Date,
as the case may be, issue no press release or other communication,
directly or indirectly, and hold no press conference and grant no
interviews with respect to the Company, the financial condition,
results of operations, business, properties, assets, or liabilities of
the Company, or this offering, without your prior written consent.
o. Appoint American Securities Transfer & Trust, Inc. as its
transfer agent.
p. On or prior to the Closing Date, sell to the Representative
for a total purchase price of $100, Representative's Warrants entitling
the Representative or its assigns to purchase 110,000 shares of Common
Stock at a price equal to 133% of the public offering price of the
Shares, with the terms of the Representative's Warrants, including
exercise period, anti-dilution provisions, exercise price, exercise
provisions, transferability, and registration rights, to be in the form
filed as an exhibit to the Registration Statement.
q. Until expiration of the Representative's Warrants, keep
reserved sufficient shares of Common Stock for issuance as
Representative's Warrant Shares upon full exercise of the
Representative's Warrants.
r. Adopt procedures for the application of the net proceeds it
receives from the sale of the Shares and apply the net proceeds from
the sale of the Shares substantially in the manner set forth in the
Registration Statement, which does not contemplate repayment of debt to
officers, directors, stockholders or affiliates of the Company, unless
any deviation from such application is in accordance with the
Registration Statement and occurs only after approval by the Board of
Directors of the Company and then only after the Board of Directors has
obtained the written opinion of recognized legal counsel experienced in
federal and state securities laws as to the propriety of any such
deviation.
s. Within the time period which the Prospectus is required to
be delivered under the Act, comply, at its own expense, with all
requirements imposed upon it by the Act, as now or hereafter amended,
by the Rules and Regulations, as from time to time may be enforced, and
by any order of the Commission, so far as necessary to permit the
continuance of sales or dealing in the Shares.
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<PAGE> 22
t. At the Closing, deliver to the Representative true and
correct copies of the Articles of Incorporation of the Company and all
amendments thereto, all such copies to be certified by the Secretary of
the Company; true and correct copies of the by-laws of the Company and
of the minutes of all meetings of the directors and stockholders of the
Company held prior to the Closing which in any way relate to the
subject matter of this Agreement or the Registration Statement.
u. Use all reasonable efforts to comply or cause to be
complied with the conditions precedent to the several obligations of
the Underwriters in Section 7 hereof.
v. File with the Commission all required information
concerning use of proceeds of the Public Offering in Forms 10-Q and
10-K in accordance with the provisions of the Exchange Act and to
provide a copy of such reports to the Representative and its counsel.
w. Supply to the Representative and the Representative's
counsel at the Company's cost, two bound volumes each containing
material documents relating to the offering of the Shares within a
reasonable time after the Closing, not to exceed 90 days.
x. As soon as possible prior to the Effective Date, and as a
condition of the Underwriter's obligations hereunder, (i) if requested
by the Representative, have the Company listed on an accelerated basis,
and to maintain such listing for not less than ten years from the
Closing Date, in Standard & Poor's Standard Corporation Records; and
(ii) have the Common Stock quoted on the Nasdaq National Market as of
the Effective Date, on the Closing Date, on the Additional Closing Date
and thereafter for at least ten years provided the Company is in
compliance with the Nasdaq National Market maintenance requirements.
y. Continue, for a period of at least five years following the
Effective Date of the Registration Statement, to appoint such auditors
as are reasonably acceptable to the Representative, which auditors
shall (i) prepare consolidated financial statements in accordance with
Regulation S-X under the General Rules and Regulations of the Act and
(ii) examine (but not audit) the Company's consolidated financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the
Company's 10-Q quarterly report and the mailing of quarterly financial
information to security holders.
z. Within 90 days of the Effective Date of the Registration
Statement, obtain "key man" life insurance policies in the amount of
$1,000,000 each on the lives of Alan N. Johnson and Elden W. Rance,
with the Company designated as the beneficiary of such policy, and pay
the annual premiums thereon for a period of not less than five years
from the Effective Date of the Registration Statement.
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<PAGE> 23
aa. Cause its transfer agent to furnish the Representative a
duplicate copy of the daily transfer sheets prepared by the transfer
agent during the six-month period commencing on the Effective Date of
the Registration Statement and instruct the transfer agent to timely
provide, upon the request of the Representative, duplicate copies of
such transfer sheets and/or a duplicate copy of a list of stockholders,
all at the Company's expense, for a period of 42 years after such
six-month period.
bb. Refrain from filing a Form S-8 registration statement for
a period of six months from the Effective Date of the Registration
Statement without the Representative's prior written consent.
cc. Afford the Representative the right, but not the
obligation, commencing on the Effective Date and surviving for a period
of three years, to designate an observer to attend meetings of the
Board of Directors. The designee, if any, and the Representative will
receive notice of each meeting of the Board of Directors in accordance
with Colorado law. Any such designee will receive reimbursement for all
reasonable costs and expenses incurred in attending meetings of the
Board of Directors, including but not limited to, food, lodging and
transportation, together with such other fee or compensation (but
excluding options or securities) as is paid by the Company to other
members of the Board of Directors. Moreover, to the extent permitted by
law, the Representative and its designee shall be indemnified for the
actions of such designee as an observer to the Board of Directors and
in the event the Company maintains a liability insurance policy
affording coverage for the acts of its officers and/or directors, to
the extent permitted under such policy, each of the Representative and
its designee shall be an insured under such policy.
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<PAGE> 24
6 Payment of Expenses. The Company hereby agrees to pay all expenses
(subject to the last sentence of this Section 6) in connection with the
offering, including but not limited to (a) the preparation, printing, filing,
distribution, and mailing of the Registration Statement and the Prospectus,
including NASD, SEC, Nasdaq filing and/or application fees, and the printing,
filing, distribution, and mailing of this Agreement, any Agreement Among
Underwriters, Selected Dealers Agreement, preliminary and final Blue Sky
Memorandums, material to be circulated to the Underwriters by you and other
incidental or related documents, including the cost of all copies thereof and of
the Preliminary Prospectuses and of the Prospectus, and any amendments or
supplements thereto, supplied to the Representative in quantities as herein
above stated, (b) the issuance, sale, transfer, and delivery of the Firm Shares,
Additional Shares, the Representative's Warrants and the Representative's
Warrant Shares, including, without limitation, any original issue, transfer or
other taxes payable thereon and the costs of preparation, printing and delivery
of certificates representing such securities, as applicable, (c) the
qualification of the Firm Shares, Additional Shares, the Representative's
Warrants and the Representative's Warrant Shares under state or foreign "blue
sky" or securities laws, which qualification shall be undertaken by counsel to
the Representative at the Company's expense, (d) the fees and disbursements of
counsel for the Company and the accountants for the Company, (e) the listing of
the Shares on the Nasdaq National Market and (f) the Representative's
non-accountable expense allowance equal to 3% of the aggregate gross proceeds
from the sale of the Shares. Prior to or immediately following the Closing Date,
the Company shall bear the costs of tombstone announcements if requested to do
so by the Representative.
The Company has previously remitted to the Representative the sum of
$50,000, which sum has been credited as a partial payment in advance of the
non-accountable expense allowance provided for in Section 6(f) above.
7 Conditions of Underwriters' Obligations. The Underwriters' obligation
to purchase and pay for the Firm Shares and Additional Shares, as provided
herein, shall be subject to the continuing accuracy of the representations and
warranties of the Company contained herein and in each certificate and document
contemplated under this Agreement to be delivered to you, as of the date hereof
and as of the Closing Date (or the Additional Closing Date, as the case may be),
to the performance by the Company of its obligations hereunder, and to the
following conditions:
a. The Registration Statement shall have become effective not
later than 5:00 p.m., Mountain time, on the date of this Agreement or
such later date and time as shall be consented to in writing by you.
b. At the Closing Date and any Additional Closing Date, you
shall have received the favorable opinion of Smith McCullough, P.C.,
counsel for the Company, dated the date of delivery, addressed to you,
and in form and scope satisfactory to your counsel, to the effect that:
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<PAGE> 25
i. The Company is a corporation duly organized,
validly existing, and in good standing under the laws of the
State of Colorado, with full power and authority, and counsel
has no knowledge that the Company does not have all necessary
consents, authorizations, approvals, orders, certificates, and
permits of and from, and declarations and filings with, all
federal, state, local, and other governmental authorities and
all courts and other tribunals, to own, lease, license, and
use its properties and assets and to conduct its business in
the manner described in the Prospectus. The Company is duly
qualified to do business and is in good standing in every
jurisdiction in which its ownership, leasing, licensing, or
use of property and assets or the conduct of its business
makes such qualification necessary;
ii. Each Subsidiary is a corporation duly organized
and validly existing in good standing under the laws of the
jurisdiction of its organization, with full corporate power
and authority to own, lease, and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement
thereto); and all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable, and are owned by the
Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security
interest, or, to the best knowledge of such counsel after
reasonable inquiry, any other security interest, lien, adverse
claim, equity or other encumbrance;
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<PAGE> 26
iii. The authorized capital stock of the Company as
of the date of this Agreement consisted of 45,000,000 shares
of Common Stock, of which 5,171,829 shares of Common Stock are
issued and outstanding, 5,573,267 shares of Common Stock are
reserved for issuance upon the exercise of outstanding options
and warrants and 2,221,000 shares of Common Stock are reserved
for issuance upon the exercise of the remaining options
authorized under the Company's option plan; and 5,000,000
shares of Preferred Stock, none of which are issued and
outstanding; and there have been no changes in the authorized
and outstanding capital stock of the Company since the date of
this Agreement, except as contemplated by the Registration
Statement and the Prospectus. Each outstanding share of
capital stock is validly authorized, validly issued, fully
paid, and nonassessable, with no personal liability attaching
to the ownership thereof, has not been issued and is not owned
or held in violation of any preemptive right of stockholders.
There is no commitment, plan, or arrangement to issue, and no
outstanding option, warrant, or other right calling for the
issuance of, any share of capital stock of the Company or any
security or other instrument which by its terms is convertible
into, exercisable for, or exchangeable for capital stock of
the Company, except as set forth above, and except as is
properly described in the Prospectus. There is outstanding no
security or other instrument which by its terms is convertible
into or exchangeable for capital stock of the Company, except
as described in the Prospectus;
iv. To the knowledge of counsel, there is no
litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending,
threatened, or proposed (or any basis therefor) with respect
to the Company or any of its respective operations,
businesses, properties, or assets, except as is properly
described in the Prospectus or such as individually or in the
aggregate do not now have and will not in the future have a
material adverse effect upon the operations, business,
properties, or assets of the Company. To the knowledge of
counsel, the Company is not in violation of, or in default
with respect to, any law, rule, regulation, order, judgment,
or decree, except as may be properly described in the
Prospectus or such as in the aggregate have been disclosed to
the Representative and do not now have and will not in the
future have a material adverse effect upon the operations,
business, properties, or assets of the Company; nor is the
Company required to take any action in order to avoid any such
violation or default;
v. Based upon the certificates received from the
Company's officers, neither the Company nor any other party is
now or is expected by the Company to be in violation or breach
of, or in default with respect to, complying with any material
provision of any contract, agreement, instrument, lease,
license, arrangement, or understanding which is material to
the Company;
vi. Neither the Company nor any Subsidiary is in
violation or breach of, or in default with respect to, any
term of its Articles of Incorporation or by-laws;
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<PAGE> 27
vii. The Company has all requisite power and
authority to execute and deliver and to perform thereunder
this Agreement and the Representative's Warrants. All
necessary corporate proceedings of the Company have been taken
to authorize the execution and delivery and performance
thereunder by the Company of this Agreement and the
Representative's Warrants. Each of this Agreement and the
Representative's Warrants have been duly authorized, executed
and delivered by the Company, and is a legal, valid, and
binding obligation of the Company, and (subject to applicable
bankruptcy, insolvency, and other laws affecting the
enforceability of creditors' rights generally) enforceable as
to the Company in accordance with its respective terms. No
consent, authorization, approval, order, license, certificate,
or permit of or from, or declaration or filing with, any
federal, state, local, or other governmental authority or any
court or other tribunal is required by the Company for the
execution or delivery, or performance thereunder by the
Company of this Agreement or the Representative's Warrants
(except filings under the Act which have been made prior to
the Closing Date, and consents consisting only of consents
under "blue sky" or securities laws which are required in
connection with the transactions contemplated by this
Agreement, and which counsel has been advised by counsel to
the underwriters have been obtained on or prior to the date
the Registration Statement becomes effective under the Act).
No consent of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding to
which the Company is a party, or to which any of its
properties or assets are subject, is required for the
execution or delivery, or performance thereunder of this
Agreement or the Representative's Warrants; and the execution
and delivery and performance thereunder of this Agreement and
the Representative's Warrants will not violate, result in a
breach of, conflict with, or (with or without the giving of
notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement, or
understanding, or violate or result in a breach of any term of
the Articles of Incorporation or by-laws of the Company, or
violate, result in a breach of, or conflict with any law,
rule, regulation, order, judgment, or decree binding on the
Company or to which any of its operations, businesses,
properties, or assets are subject;
viii. The Shares are, and the Representative's
Warrant Shares will be upon exercise of the Representative's
Warrants, validly authorized, validly issued, fully paid, and
nonassessable and are not issued in violation of any
preemptive rights of shareholders, and the Underwriters will
have received good title to the Shares purchased by them from
the Company upon payment therefor, free and clear of all
liens, security interests, pledges, charges, encumbrances,
shareholders' agreements, and voting trusts. The
Representative's Warrant Shares have been duly and validly
reserved for issuance pursuant to the terms of the
Representative's Warrants. The Shares, the Representative's
Warrants and the Representative's Warrant Shares conform to
all statements relating thereto contained in the Registration
Statement or the Prospectus;
-26-
<PAGE> 28
ix. To the knowledge of counsel, all contracts,
agreements, instruments, leases, and licenses that are
required to be described in the Registration Statement or the
Prospectus have been properly described therein. To the
knowledge of counsel, all contracts, agreements, instruments,
leases, or licenses required to be filed as an exhibit to the
Registration Statement have been filed with the Commission as
an exhibit to or have been incorporated as an exhibit by
reference into the Registration Statement;
x. Insofar as statements in the Prospectus purport to
summarize the status of litigation or the provisions of laws,
rules, regulations, orders, judgments, decrees, contracts,
agreements, instruments, leases, or licenses such statements
have been prepared or reviewed by such counsel and to the
knowledge of such counsel accurately reflect the status of
such litigation and provisions purported to be summarized and
are correct in all material respects;
xi. Except as provided in the Registration Statement,
no person or entity has the right to require registration of
shares of Common Stock or other securities of the Company
because of the filing or effectiveness of the Registration
Statement;
xii. The Registration Statement has become effective
under the Act. No Stop Order has been issued and no
proceedings for that purpose have been instituted or
threatened;
xiii. The Registration Statement and the Prospectus,
and any amendment or supplement thereto, comply as to form in
all material respects with the requirements of the Act and the
Regulations;
xiv. Such counsel has no knowledge that either the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains any untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading (except that no opinion need be expressed as to the
consolidated financial statements and other financial data and
schedules which are or should be contained therein);
-27-
<PAGE> 29
xv. Such counsel has no knowledge of any event which
has occurred since the Effective Date which should have been
set forth in an amendment or supplement to the Registration
Statement or the Prospectus that has not been set forth in
such an amendment or supplement;
xvi. The Company is not currently offering any
securities for sale except as described in the Registration
Statement;
xvii. Such counsel has no knowledge of any promoters,
affiliates, parents or Subsidiaries of the Company except as
are described in the Registration Statement;
xviii. To such counsel's knowledge, the Company and
its Subsidiaries own or possess, free and clear of all liens
or encumbrances and rights thereto or therein by third
parties, the requisite licenses or other rights to use all
trademarks, copyrights, service marks, service names, trade
names and licenses necessary to conduct business (including
without limitation, any such licenses or rights described in
the Registration Statement as being owned or possessed by the
Company or any Subsidiary) (all of which are collectively
referred to herein as the "Intellectual Property"); there is
actual or, to counsel's knowledge, pending or threatened
claim, proceeding or action by any person pertaining to or
which challenges the exclusive rights of the Company with
respect to any of the Company's Intellectual Property; based
on a review of all the Company's products, proposed products
and Intellectual Property to the knowledge of such counsel
such products, proposed products or Intellectual Property do
not infringe on any trademarks, copyrights, service marks,
service names, trade names or valid patents or patents pending
held by third parties known to the Company and such counsel;
xix. The Company is not a party to any agreement
giving rise to any obligation by the Company or any Subsidiary
to pay any third-party royalties or fees of any kind
whatsoever with respect to any technology developed, employed,
used or licensed by the Company or any Subsidiary, other than
is disclosed in the Prospectus;
xx. The Shares are eligible for quotation on the
Nasdaq National Market; and
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<PAGE> 30
xxi. The issued and outstanding shares of Common
Stock and all other securities issued and sold or exchanged by
the Company were not required to be registered under any
applicable federal securities laws and regulations when issued
and sold or exchanged and were issued and sold or exchanged in
compliance with applicable exemptions from registration under
federal securities laws.
In rendering such opinion, counsel may exclude therefrom any
matters pertaining to any and all gaming laws, rules and regulations.
Such opinion shall be governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA
Section of Business Law (1991) and shall be subject to the
qualifications, exceptions, definitions, limitations on coverage and
other limitations set forth therein and in such opinion. Qualifications
in such opinion as to knowledge or the absence of knowledge shall be
based upon and limited to the "Actual Knowledge" (as defined in the
Accord) of the "Primary Lawyer Group" (as identified in such opinion).
In rendering such opinion, such legal counsel shall be entitled to rely
upon Public Authority Documents and upon information provided by client
officials in written Certificates provided that copies of such Public
Authority Documents and Certificates are attached as exhibits to the
written opinion of legal counsel. The term "Public Authority Documents"
shall have the meaning ascribed to it in the Legal Opinion Accord of
the ABA Section of Business Law (1991).
c. At the Closing Date and any Additional Closing Date, you
shall have received a signed opinion of gaming counsel for the Company,
dated the date of delivery, addressed to you, and in form and scope
satisfactory to you and your counsel.
-29-
<PAGE> 31
d. On or prior to the Closing Date and any Additional Closing
Date, as the case may be, you shall have been furnished such
information, documents, certificates, and opinions as you may
reasonably require for the purpose of enabling you to review the
matters referred to in this Section 7, and in order to evidence the
accuracy, completeness, or satisfaction of any of the representations,
warranties, covenants, agreements, or conditions herein contained, or
as you may reasonably request.
e. At the Closing Date and any Additional Closing Date, as the
case may be, you shall have received a certificate of the chief
executive officer and of the chief financial officer of the Company,
dated the Closing Date or such Additional Closing Date, as the case may
be, to the effect that the conditions set forth in Section 7(a) have
been satisfied, that as of the date of this Agreement and as of the
Closing Date or such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein were and
are accurate, and that as of the Closing Date or such Additional
Closing Date, as the case may be, the obligations to be performed by
the Company hereunder on or prior thereto have been fully performed.
f. At the time this Agreement is executed and at the Closing
Date and any Additional Closing Date, as the case may be, you shall
have received letters from Ehrhardt Keefe Steiner & Hottman PC,
Certified Public Accountants, addressed to you and dated the date of
delivery but covering a period within three business days of such date,
in form and substance satisfactory to you.
g. All proceedings taken in connection with the issuance,
sale, transfer, and delivery of the Firm Shares and the Additional
Shares shall be satisfactory in form and substance to you and to
counsel for the Representative, and you shall have received a favorable
opinion from counsel to the Company, dated as of the Closing Date or
the Additional Closing Date, as the case may be, with respect to such
of the matters set forth under Sections 7(b) and 7(c) and with respect
to such other related matters as you may reasonably request.
h. The NASD, upon review of the terms of the public offering
of the Firm Shares and the Additional Shares shall not have objected to
your participation in such offering.
i. The Company shall have received notice that the Common
Stock will be quoted on the Nasdaq National Market as of the Effective
Date.
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<PAGE> 32
Any certificate or other document signed by any officer of the Company
and delivered to you or to counsel for the Representative shall be deemed a
representation and warranty by such officer individually and by the Company
hereunder to the Representative as to the statements made therein. If any
condition to your obligations hereunder to be fulfilled prior to or at the
Closing Date or any Additional Closing Date, as the case may be, is not so
fulfilled, you may terminate this Agreement or, if you so elect, in writing
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8 Indemnification and Contribution.
a. Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Underwriters, the
Representative, and each of their officers, directors, partners,
employees, agents, and counsel, and each person, if any, who controls
the Representative or any one of the Underwriters within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any
and all loss, liability, claim, damage, and expense whatsoever (which
shall include, for all purposes of this Section 8, but not be limited
to, attorneys' fees and any and all expense whatsoever incurred in
investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when
incurred arising out of, based upon, or in connection with (i) any
untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration
Statement, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or (B) in any
application or other document or communication (in this Section 8
collectively called an "application") in any jurisdiction in order to
qualify the Common Stock under the "blue sky" or securities laws
thereof or filed with the Commission or any securities exchange; or any
omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (ii) any breach of any representation, warranty,
covenant, or agreement of the Company contained in this Agreement. The
foregoing agreement to indemnify shall be in addition to any liability
the Company may otherwise have, including liabilities arising under
this Agreement; however, the Company shall have no liability under this
Section 8 if such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company as
stated in Section 8(b) with respect to the Underwriters by or on behalf
of the Underwriters expressly for inclusion in any Preliminary
Prospectus, the Registration Statement, or the Prospectus, or any
amendment or supplement thereto, or in any application, as the case may
be.
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<PAGE> 33
If any action is brought against the Underwriters, the
Representative or any of their officers, directors, partners,
employees, agents, or counsel, or any controlling persons of an
Underwriter or the Representative (an "indemnified party") in respect
of which indemnity may be sought against the Company pursuant to the
foregoing paragraph, such indemnified party or parties shall promptly
notify the Company in writing of the institution of such action (but
the failure so to notify shall not relieve the Company from any
liability it may have other than pursuant to this Section 8(a)) and the
Company shall promptly assume the defense of such action, including the
employment of counsel (satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties
shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense
of such indemnified party or parties unless the employment of such
counsel shall have been authorized in writing by the Company in
connection with the defense of such action or the Company shall not
have promptly employed counsel satisfactory to such indemnified party
or parties to have charge of the defense of such action or such
indemnified party or parties shall have reasonably concluded that there
may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses
shall be borne by the Company. Anything in this paragraph to the
contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written
consent. The Company agrees promptly to notify the Underwriters and the
Representative of the commencement of any litigation or proceedings
against the Company or against any of its officers or directors in
connection with the sale of the Shares, any Preliminary Prospectus, the
Registration Statement, or the Prospectus, or any amendment or
supplement thereto, or any application.
-32-
<PAGE> 34
b. The Underwriters agree to indemnify and hold harmless the
Company, the Company's counsel, each director of the Company, each
officer of the Company who shall have signed the Registration
Statement, each other person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company to
the Underwriters in Section 8(a), but only with respect to statements
or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement, or the Prospectus (as from time to time amended
and supplemented), or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written
information furnished to the Company as stated in this Section 8(b)
with respect to the Underwriters by or on behalf of the Underwriters
expressly for inclusion in any Preliminary Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement thereto,
or in any application, as the case may be; provided, however, that the
obligation of the Underwriters to provide indemnity under the
provisions of this Section 8(b) shall be limited to the amount which
represents the product of the number of Firm Shares and Additional
Shares sold hereunder and the initial public offering price per Share
set forth on the cover page of the Prospectus. For all purposes of this
Agreement, the amounts of the selling concession and reallowance set
forth in the Prospectus, the information under "Underwriting" and the
identification of counsel to the Representative under "Legal Matters"
constitute the only information furnished in writing by or on behalf of
the Underwriters expressly for inclusion in any Preliminary Prospectus,
the Registration Statement, or the Prospectus (as from time to time
amended or supplemented), or any amendment or supplement thereto, or in
any application, as the case may be. If any action shall be brought
against the Company or any other person so indemnified based on any
Preliminary Prospectus, the Registration Statement, or the Prospectus,
or any amendment or supplement thereto, or any application, and in
respect of which indemnity may be sought against the Underwriters
pursuant to this Section 8(b), the Underwriters shall have the rights
and duties given to the Company, and the Company and each other person
so indemnified shall have the rights and duties given to the
indemnified parties, by the provisions of Section 8(a).
-33-
<PAGE> 35
c. In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this
Section 8 is for any reason held to be unavailable to the Underwriters
or the Company, then the Company shall contribute to the damages paid
by the several Underwriters, and the several Underwriters shall
contribute to the damages paid by the Company; provided, however, that
no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. In
determining the amount of contribution to which the respective parties
are entitled, there shall be considered the relative benefits received
by each party from the sale of the Firm Shares and Additional Shares
(taking into account the portion of the proceeds of the offering
realized by each), the parties' relative knowledge and access to
information concerning the matter with respect to which the claim was
asserted, the opportunity to correct and prevent any statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not
be equitable if the amount of such contribution were determined by pro
rata or per capita allocation (even if the Underwriters were treated as
one entity for such purpose). No Underwriter or person controlling such
Underwriter shall be obligated to make contribution hereunder which in
the aggregate exceeds the total public offering price of the Firm
Shares and Additional Shares purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages which such
Underwriter and its controlling persons have otherwise been required to
pay in respect of the same or any substantially similar claim. The
Underwriters' obligations to contribute hereunder are several in
proportion to their respective underwriting obligations and not joint.
For purposes of this Section, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act shall have the
same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act, shall have the same rights to
contribution as the Company. Anything in this Section 8(c) to the
contrary notwithstanding, no party shall be liable for contribution
with respect to the settlement of any claim or action effected without
its written consent. This Section 8(c) is intended to supersede any
right to contribution under the Act, the Exchange Act, or otherwise.
9 Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriters and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Representative, the Underwriters or
any indemnified person, or by or on behalf of the Company or any person or
entity which is entitled to be indemnified under Section 8(b), and shall survive
termination of this Agreement or the delivery of the Firm Shares and Additional
Shares to the Underwriters for a period equal to the statute of limitations for
claims related hereto, but not to exceed an aggregate of five years from the
date hereof. In addition, the provisions of Sections 5(a), 6, 8, 9, 10, and 12
shall survive termination of this Agreement, whether such termination occurs
before or after the Closing Date or any Additional Closing Date.
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<PAGE> 36
10 Effective Date of This Agreement and Termination Thereof.
a. This Agreement shall be executed within 24 hours of the
Effective Date of the Registration Statement and shall become effective
on the Effective Date or at the time of the initial public offering of
the Shares, whichever is earlier. The time of the initial public
offering shall mean the time, after the Registration Statement becomes
effective, of the release by the Representative for publication of the
first newspaper advertisement which is subsequently published relating
to the Shares or the time, after the Registration Statement becomes
effective, when the Shares are first released by the Representative for
offering by dealers by letter or telegram, whichever shall first occur.
The Representative or the Company may prevent this Agreement from
becoming effective without liability of any party to any other party,
except as noted below in this Section 10, by giving the notice
indicated in Section 10(c) before the time this Agreement becomes
effective.
b. The Representative shall have the right to terminate this
Agreement at any time prior to the Closing Date or any Additional
Closing Date, as the case may be, by giving notice to the Company if
there shall have been a general suspension of, or a general limitation
on prices for, trading in securities on the New York Stock Exchange or
the American Stock Exchange or in the over-the-counter market; or if
there shall have been an outbreak of major hostilities or other
national or international calamity; or if a banking moratorium has been
declared by a state or federal authority; or if a moratorium in foreign
exchange trading by major international banks or persons has been
declared; or if there shall have been a material interruption in the
mail service or other means of communication within the United States;
or if the Company shall have sustained a material or substantial loss
by fire, flood, accident, hurricane, earthquake, theft, sabotage, or
other calamity or malicious act which, whether or not such loss shall
have been insured, will, in the Representative's opinion, make it
inadvisable to proceed with the offering, sale, or delivery of the Firm
Shares and Additional Shares, as the case may be; or if there shall
have been such material and adverse change in the market for securities
in general so as to make it inadvisable to proceed with the offering,
sale, and delivery of the Shares, as the case may be, on the terms
contemplated by the Prospectus due to the impaired investment quality
of the Shares; or if the Dow Jones Industrial Average shall have fallen
by 15% or more from its closing price on the day immediately preceding
the date that the Registration Statement is declared effective by the
Commission.
c. If the Representative elects to prevent this Agreement from
becoming effective as provided in this Section 10, or to terminate this
Agreement, it shall notify the Company promptly by telephone, telex, or
telegram, confirmed by letter. If, as so provided, the Company elects
to prevent this Agreement from becoming effective, the Company shall
notify the Representative promptly by telephone, telex, or telegram,
confirmed by letter.
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<PAGE> 37
d. Anything in this Agreement to the contrary notwithstanding
other than Section 10(e), if this Agreement shall not become effective
by reason of an election pursuant to this Section 10 or if this
Agreement shall terminate or shall otherwise not be carried out prior
to January 29, 2000 because (i) of any reason solely within the control
of the Company or its stockholders and not due to the breach of any
representation, warranty or covenant or bad faith of the
Representative, (ii) the Company unilaterally withdraws the proposed
Public Offering from the Representative in favor of another
underwriter, (iii) the Company does not permit the Registration
Statement to become effective, (iv) of any material discrepancy in any
representation by the Company and/or its officers, directors,
stockholders, agents, advisers or representatives, made in writing,
including but not limited to the Registration Statement, to the
Representative, (v) the Company is, directly and/or indirectly,
negotiating with other persons or entities of whatsoever nature
relating to a possible Public Offering of its securities, or (vi) of
any failure on the part of the Company to perform any covenant or
agreement or satisfy any condition of this Agreement by it to be
performed or satisfied, then, in any of such events, the Company shall
be obligated to reimburse the Representative for its out-of-pocket
expenses on an accountable basis. Should the Representative be required
to account for "out-of-pocket" expenses, any expense incurred by the
Representative shall be deemed to be reasonable and unobjectionable
upon a reasonable showing by the Representative that such expenses were
incurred, directly or indirectly, in connection with the proposed
transaction and/or relationship of the parties hereto, as described
herein. In no event will the Representative be entitled to
reimbursement of accountable expenses exceeding $100,000, inclusive of
the $50,000 advanced against the non-accountable expense allowance. The
Representative will return to the Company any portion of the $50,000
payment previously received that is not used in the payment of
accountable expenses if the Public Offering is not completed.
e. Notwithstanding any election hereunder or any termination
of this Agreement, and whether or not this Agreement is otherwise
carried out, the provisions of Sections 5(a), 6, 8, 9, and 10 shall not
be in any way affected by such election or termination or failure to
carry out the terms of this Agreement or any part hereof.
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<PAGE> 38
11 Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the
Representative, shall be mailed, delivered, or sent by facsimile transmission
and confirmed by original letter, to Schneider Securities, Inc., 1120 Lincoln
Street, Suite 900, Denver, Colorado 80203, Attention: Keith Koch, with a copy to
Robert W. Walter, Esq., Berliner Zisser Walter & Gallegos, P.C., 1700 Lincoln
Street, Suite 4700, Denver, Colorado 80203; or if sent to the Company shall be
mailed, delivered, or telexed or telegraphed and confirmed by letter, to Leisure
Time Casinos & Resorts, Inc., 4258 Communications Drive, Norcross, Georgia,
30093, Attention: Alan N. Johnson, President, with a copy to Thomas S. Smith,
Esq. , Smith McCullough, P.C., 4643 South Ulster Street, Suite 900, Denver,
Colorado 80237. All notices hereunder shall be effective upon receipt by the
party to which it is addressed.
12. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company, and the persons and
entities referred to in Section 8 who are entitled to indemnification or
contribution, and their respective successors, legal representatives, and
assigns (which shall not include any buyer, as such, of the Firm Shares and
Additional Shares) and no other person shall have or be construed to have any
legal or equitable right, remedy, or claim under or in respect of or by virtue
of this Agreement or any provision herein contained.
13. Construction. This Agreement shall be construed in accordance with
the laws of the State of Colorado, without giving effect to conflict of laws.
Time is of the essence in this Agreement. The parties acknowledge that this
Agreement was initially prepared by the Representative, and that all parties
have read and negotiated the language used in this Agreement. The parties agree
that, because all parties participated in negotiating and drafting this
Agreement, no rule of construction shall apply to this Agreement which construes
ambiguous language in favor of or against any party by reason of that party's
role in drafting this Agreement.
If the foregoing correctly sets forth the understanding between us,
please so indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement between us.
Very truly yours,
LEISURE TIME CASINOS & RESORTS, INC.
By:
-----------------------------------------------
Alan N. Johnson, President
By:
-----------------------------------------------
Elden W. Rance, Executive Vice President
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<PAGE> 39
Accepted as of the date first above written.
Denver, Colorado
SCHNEIDER SECURITIES, INC.
for itself and any other Underwriters:
By:
-----------------------------------------------
Thomas Schneider, Chief Executive Officer
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<PAGE> 40
LEISURE TIME CASINOS & RESORTS, INC.
(A COLORADO CORPORATION)
SCHEDULE 1
This Schedule sets forth the name of each Underwriter referred to in
the Underwriting Agreement and the number of Shares to be sold by the Company.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Schneider Securities, Inc.
Total 1,100,000
=========
</TABLE>
-39-
<PAGE> 1
EXHIBIT 10.69
CUSTODY AGREEMENT
CUSTODY AGREEMENT, effective as of the 3rd day of August, 1999, by and
among certain of the shareholders listed on Exhibit A to this Custody Agreement
(the "Shareholders" or "Shareholder") of LEISURE TIME CASINOS & RESORTS, INC., a
Colorado corporation, (the "Company"), SCHNEIDER SECURITIES, INC. (the
"Representative") and AMERICAN SECURITIES TRANSFER & TRUST, INC. (the
"Custodian").
WHEREAS, the Shareholders are the record and beneficial owners of
certain of the Company's $0.001 par value common stock ("Common Stock") or of
options to purchase shares of Common Stock, all as more fully reflected on
Exhibit A to this Custody Agreement;
WHEREAS, the Company and the Representative of the several underwriters
(the "Underwriters") intend to enter into an underwriting agreement (the
"Underwriting Agreement") pursuant to which the Company will sell in a public
offering pursuant to the registration provisions of the Securities Act of 1933,
as amended (the "1933 Act");
WHEREAS, as a condition to closing the proposed public offering of the
Company (the "Offering"), the Representative has required the Shareholders to
deposit an aggregate of 500,000 shares of Common Stock and/or shares of Common
Stock underlying options to purchase Common Stock owned by such Shareholders in
custody with the Custodian as reflected on Exhibit A (the "Custodial Shares");
and
WHEREAS, the Shareholders wish to deposit the Custodial Shares in
custody in order to fulfill the requirements of the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, terms and conditions hereinafter set forth, the parties to this
Custody Agreement agree as follows:
SECTION 1. DESIGNATION AND DEPOSIT OF CUSTODIAL SHARES.
a. The Custodial Shares to be deposited in custody pursuant to this
Custody Agreement consist of 500,000 shares of Common Stock of the Company and
are owned of record as of the date of this Custody Agreement by the Shareholders
identified on Exhibit A.
b. On the date on which the Securities and Exchange Commission declares
the Company's Registration Statement on Form S-1 (Reg. No. 333-77737) effective
under the 1933 Act (the "Effective Date"), the Shareholders shall deliver to the
Custodian any and all certificates representing the Custodial Shares and a stock
power endorsed in blank with a medallion guarantee. Promptly after the Effective
Date, the Custodian shall deliver a receipt therefor and, if requested by a
Shareholder, a new certificate representing each Shareholder's shares of Common
Stock represented by the certificates delivered but which are not subject to
this Custody Agreement.
<PAGE> 2
SECTION 2. TITLE OF ACCOUNT. All certificates representing the
Custodial Shares delivered to the Custodian pursuant to this Agreement shall be
deposited on the Effective Date by the Custodian in an account designated
substantially as follows: "Leisure Time Casinos & Resorts, Inc. Custodial Share
Account" (the "Custody Account").
SECTION 3. TRANSFER OF CUSTODIAL SHARES DURING CUSTODY PERIOD.
a. During the Custody Period (as defined below) none of the Custodial
Shares deposited in the Custody Account shall be sold, pledged, hypothecated or
otherwise transferred or delivered out of the Custody Account except as follows:
i. transfers by operation of law occasioned by the death or
incapacity of the Shareholder shall be recorded upon presentation to
the Company by the personal representative or guardian of a deceased or
incapacitated Shareholder of appropriate documents regarding the
necessity for transfer and of which transfer the Company has approved
in writing and notified the Custodian and the Representative; and
ii. transfers of ownership of certificates representing the
Custodial Shares, certificates for which have been deposited to the
Custody Account, shall remain subject to the restrictions imposed
hereby, including those persons, if any, who become holders, by any
means provided herein, of the Custody Shares during the Custody Period.
SECTION 4. DURATION OF CUSTODY PERIOD.
a. The Custody Period shall commence on the Effective Date and shall
terminate on the earlier of the date on which all Custodial Shares have been
returned to the Shareholders pursuant to Sections 6(a), 6(b), 6(c), 6(d), 6(e),
6(f), or 6(g) below.
b. This Agreement shall be of no force or effect in the event the
Underwriting Agreement is not executed on the Effective Date in accordance with
its terms.
SECTION 5. RECEIPT OF DISTRIBUTIONS AND DIVIDENDS. During the term of
the Custody Period, if the Company issues any distributions, dividends, rights
or other property with respect to the Common Stock, then, in such event, the
Company shall be authorized to send evidence of such distributions, dividends,
rights or other property directly to the Custodian, which is hereby authorized
to hold and retain possession of all such evidences of distributions, dividends,
rights or other property until termination of the Custody Period in accordance
with Section 6 below. In the event the Custodial Shares are distributed to the
Shareholders pursuant to Sections 6(a), 6(b), 6(c), 6(d), 6(e), 6(f) or 6(g)
below, then the Custodian will distribute evidences of such distributions,
dividends, rights, or other property in the form the Custodian received such
distributions, dividends, rights or other property from the Company. If the
Company recapitalizes, splits or combines its shares, such shares shall be
substituted, on a pro rata basis for the Custodial Shares. The Company will
notify the Custodian of the occurrence of the events listed in this section.
2
<PAGE> 3
SECTION 6. RELEASE AND DELIVERY OF CUSTODIAL SHARES.
a. In the event the Custodian receives written notice from the
Representative and the Company confirming the approval of the South Carolina
referendum on November 2, 1999 that will permit video gaming machine payouts to
continue in South Carolina, the Custodian shall return to each Shareholder his
or her share of the Custodial Shares as are listed on Exhibit A. The Custodian
shall return the Custodial Shares only to the person named as the holder of
record in Exhibit A to this Custody Agreement, as modified by any transfers made
pursuant to Section 3 above.
b. In the event that on or prior to a date that is twelve months from
the Effective Date the Custodian receives written notice from the Representative
and the Company confirming that the Governor of California has entered into a
gaming compact with at least 10 Native American tribes located in California,
the Custodian shall return to each Shareholder his or her share of the Custodial
Shares as are listed on Exhibit A. The Custodian shall return the Custodial
Shares only to the person named as the holder of record in Exhibit A to this
Custody Agreement, as modified by any transfers made pursuant to Section 3
above.
c. In the event that on or prior to a date that is twelve months from
the Effective Date the Custodian receives written notice from the Representative
and the Company confirming that the Company has successfully completed a
subsequent underwritten public offering of the Company's Common Stock in a gross
amount of at least $30 million or a price per share of at least $20.00, the
Custodian shall immediately return to each Shareholder his or her share of the
Custodial Shares as are listed on Exhibit A. The Custodian shall return the
Custodial Shares only to the person named as the holder of record in Exhibit A
to this Custody Agreement, as modified by any transfers made pursuant to Section
3 above. In the event that the date is more than twelve months from the
Effective Date, the Representative, in its discretion, may return to each
Shareholder his or her pro rata share of the Custodial Shares.
d. In the event the Custodian receives written notice from the
Representative and the Company confirming the Company had net income after tax
of at least $17 million for the year ended June 30, 2000, the Custodian shall
return to each Shareholder a certificate for his or her share of the Custodial
Shares as are listed on Exhibit A. The Custodian shall return each certificate
only to the person named as the holder of record in Exhibit A hereto, as
modified by any transfers made pursuant to Section 3 above.
e. In the event the Custodian receives written notice from the
Representative and the Company confirming the Company had net income after tax
of at least $32 million for the year ended June 30, 2001, the Custodian shall
return to each Shareholder a certificate for his or her share of the Custodial
Shares as are listed on Exhibit A. The Custodian shall return each certificate
only to the person named as the holder of record in Exhibit A hereto, as
modified by any transfers made pursuant to Section 3 above.
3
<PAGE> 4
f. In the event the Custodian receives written notice from the
Representative and the Company confirming that the Company has been merged or
consolidated with another company which is the survivor to the transaction, or
that the Company has sold all or substantially all of its assets and the
relevant transaction was approved by the holders of a majority of the Company's
outstanding voting securities exclusive of any such securities held by any party
to this Agreement, the Custodian shall immediately prior to the closing of any
such transaction return to each Shareholder a certificate for his or her share
of the Custodial Shares as are listed on Exhibit A. The Custodian shall return
each certificate only to the person named as the holder of record in Exhibit A
hereto, as modified by any transfers made pursuant to Section 3 above.
g. In the event none of the criteria for release specified in
subparagraphs (a), (b), (c), (d), (e) or (f) above is reached by the Company,
the Custodial Shares shall remain in the Custody Account until a date that is
seven years from the Effective Date. Upon termination of the Custody Period
pursuant to the provisions of this Section 6(g), the Custodian shall, as
promptly as possible, return to each Shareholder a certificate for his or her
share of the Custodial Shares as are listed on Exhibit A remaining in the
Custody Account by means of registered mail, return receipt requested. The
Custodian shall return each certificate only to the person named as the holder
of record in Exhibit A hereto, as modified by any transfers made pursuant to
Section 3 above.
h. At such time as the Custodian shall have returned all Custodial
Shares as provided in this Section, the Custodian shall be discharged completely
and released from any and all further liabilities and responsibilities under
this Custody Agreement.
i. The determination of the criteria described above shall be solely
the responsibility of the Company and the Representative, and the Custodian
shall have no liability or responsibility therefor.
SECTION 7. VOTING RIGHTS. During the Custody Period, the Shareholder,
or any transferee receiving all or a portion of the Custody Shares pursuant to
Section 3 of this Custody Agreement, shall have the right to vote the Custodial
Shares (to the extent the Custodial Shares have voting rights) in the Custodial
Account at any and all shareholder meetings without restriction, except as is
set forth in Section 6.f of this Custody Agreement.
SECTION 8. LIMITATION OF LIABILITY OF CUSTODIAN. In acting pursuant to
this Custody Agreement, the Custodian shall be protected fully in every
reasonable exercise of its discretion and shall have no obligation hereunder to
either the Shareholders or to any other party except as expressly set forth
herein. In performing any of its duties hereunder, the Custodian shall not incur
any liability to any person for any damages, losses or expenses, except for
willful default or negligence and it shall, accordingly, not incur any such
liability with respect to (1) any action taken or omitted in good faith upon
advice of its counsel, counsel for the Company or counsel for the Representative
given with respect to any question relating to the duties and responsibilities
of the Custodian under this Agreement, and (2) any action taken or omitted in
reliance upon any instrument, including written notices provided for herein, not
only to its due execution and validity and effectiveness of its provisions, but
also to the truth and accuracy of any information
4
<PAGE> 5
contained therein, which the Custodian shall in good faith believe to be
genuine, to have been signed and presented by a proper person or persons and to
be in compliance with the provisions of this Agreement.
SECTION 9. INDEMNIFICATION. The Company, the Representative and the
Shareholders shall indemnify and hold harmless the Custodian against any and all
losses, claims, damages, liabilities and expenses, including reasonable costs of
investigation and counsel fees and disbursements, which may be imposed upon the
Custodian or incurred by the Custodian in connection with its acceptance of
appointment as Custodian or the performance of its duties hereunder, including
any litigation arising from this Custody Agreement or involving the subject
matter of this Custody Agreement.
SECTION 10. PAYMENT OF FEES. The Company shall be responsible for all
reasonable fees and expenses of the Custodian incurred by it in the course of
performing under this Custody Agreement.
SECTION 11. CHANGE OF CUSTODIAN. In the event the Custodian notifies
the Company and the Representative that its acceptance of the duties of
Custodian has been terminated by the Custodian, or in the event the Custodian
files for protection under the United States Bankruptcy Code or is liquidated or
ceases operations for any reason, the Company and the Representative shall have
the right to jointly designate a replacement Custodian who shall succeed to the
rights and duties of the Custodian hereunder. Any such replacement Custodian
shall be a trust or stock transfer company experienced in stock transfer, escrow
and related matters and shall have a minimum net worth of $5 million. Upon
appointment of such successor Custodian, the Custodian shall be discharged from
all duties and responsibilities hereunder.
SECTION 12. NOTICES. All notices, demands or requests required or
authorized hereunder shall be deemed given sufficiently if in writing and sent
by registered mail or certified mail, return receipt requested and postage
prepaid and by facsimile or cable:
In the case of the Representative to:
Schneider Securities, Inc.
The Chancery
1120 Lincoln Street, Suite 900
Denver, Colorado 80203
Attention: Thomas J. O'Rourke, President
With a copy to (which shall not constitute notice):
Robert W. Walter, Esq.
Berliner Zisser Walter & Gallegos, P.C.
One Norwest Center, Suite 4700
1700 Lincoln Street
Denver, Colorado 80203-4547
5
<PAGE> 6
In the case of the Custodian to:
American Securities Transfer & Trust, Inc.
12039 West Alameda Parkway
Lakewood, Colorado 80228
Attn: Corporate Trust Department
In the case of the Company to:
Leisure Time Casinos & Resorts, Inc.
4258 Communications Drive
Norcross, Georgia 30093
With a copy to (which shall not constitute notice):
Thomas S. Smith, Esq.
Smith McCullough, P.C.
4643 South Ulster Street, Suite 900
Denver, Colorado 80237
In the case of the Shareholders to:
Alan N. Johnson Elden W. Rance
1284 Miller Road 4258 Communications Drive
Avon, Ohio 44011 Norcross, Georgia 30093
R. Thomas Klingel Gerald J. Boyle
4258 Communications Drive 1284 Miller Road
Norcross, Georgia 30093 Avon, Ohio 44011
Eric R. Dey Richard D. Sly
4258 Communications Drive 12920 West Lake Road
Norcross, Georgia 30093 Vermillion, Ohio 44089
Lester E. Bullock
4258 Communications Drive
Norcross, Georgia 30093
SECTION 13. COUNTERPARTS. This Custody Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same Custody Agreement. Facsimile signatures shall
be accepted as original signatures for all purposes.
6
<PAGE> 7
SECTION 14. GOVERNING LAW. The validity, interpretation and
construction of this Custody Agreement and of each part hereof shall be governed
by the laws of the State of Colorado.
SECTION 15. DISPUTES. In the event of any disputes between the parties
hereto as to the facts of default, the validity of the instructions contained
herein or any other fact or matter relating to this Agreement, the Escrow Agent
is instructed (i) that it shall be under no obligation to act, except under
process or order of court, or until it has been adequately indemnified to its
full and complete satisfaction, and shall sustain no liability for its failure
to act pending such process or court order or indemnification; and (ii) that it
may, in its sole and absolute discretion, deposit the property described herein
or so much thereof as remains in its hands with the then Clerk, or acting Clerk,
of the District Court of the City and County of Denver, State of Colorado, and
interplead the parties thereto, and upon so depositing such property and filing
its compliant in interpleader it shall be relieved of all liability under the
terms hereof as to the property so deposited and shall be entitled to recover in
such interpleader action, from the other parties thereto, its reasonable
attorney fees and related costs and expenses incurred in commencing such action
and furthermore, the parties hereto for themselves, their successors and assigns
do hereby submit themselves to the jurisdiction of said court and do hereby
appoint the then Clerk, or acting Clerk, of said court as their Agent for the
Service of all process in connection with such proceedings. The institution of
any such interpleader action shall not impair the rights of the Escrow Agent as
provided under the terms of this Agreement.
SECTION 15. OPTIONS. In the event that any of the Shareholders
exercises any options that are deposited pursuant to this Custody Agreement, no
certificates evidencing the Common Stock underlying such options will be issued
by Custodian unless and until the Custodian receives written notification from
such Shareholder that the shares of Common Stock issuable upon such exercise are
not Custodial Shares.
IN WITNESS WHEREOF, the Shareholders, the Company, the Representative
and the Custodian have executed this Custody Agreement to be effective as of the
day and year first above written.
AMERICAN SECURITIES TRANSFER & TRUST,
INC., AS CUSTODIAN
By:
----------------------------------
Title:
-------------------------------
By:
----------------------------------
Title:
-------------------------------
7
<PAGE> 8
LEISURE TIME CASINOS & RESORTS, INC.
By:
----------------------------------
Title:
-------------------------------
SCHNEIDER SECURITIES, INC.
By:
----------------------------------
Title:
-------------------------------
THE SHAREHOLDERS:
By:
----------------------------------
Alan N. Johnson
By:
----------------------------------
Elden W. Rance
By:
----------------------------------
R. Thomas Klingel
By:
----------------------------------
Gerald J. Boyle
By:
----------------------------------
Eric R. Dey
8
<PAGE> 9
By:
----------------------------------
Richard D. Sly
By:
----------------------------------
Lester E. Bullock
9
<PAGE> 10
EXHIBIT A
TO CUSTODY AGREEMENT
<TABLE>
<CAPTION>
TOTAL SHARES UNDERLYING
NAME TOTAL SHARES OPTIONS
---- ------------ -----------------------
<S> <C> <C>
Alan N. Johnson 348,000
Elden W. Rance 61,150
R. Thomas Klingel 13,500
Gerald J. Boyle 38,100
Eric R. Dey 1,650
Richard D. Sly 35,400
Lester E. Bullock 2,200
</TABLE>
10
<PAGE> 1
EXHIBIT 10.70
Private Client Group
Merrill Lynch Business
Financial Services Inc.
222 North LaSalle Street
[MERRILL LYNCH LOGO] 17th Floor
Chicago, Illinois 60601
(312) 269-4435
FAX: (312) 845-9093
July 26, 1999
Leisure Time Casino & Resorts, Inc.
4258 Communications Drive
Norcross, GA 30093
RE: WCMA LINE OF CREDIT INCREASE
Ladies & Gentlemen:
This Letter Agreement will serve to confirm certain agreements of Merrill Lynch
Business Financial Services Inc. ("MLBFS") and Leisure Time Casino & Resorts,
Inc. ("Customer") with respect to: (i) that certain WCMA LOAN AND SECURITY
AGREEMENT NO. 701-07H43 between MLBFS and Customer (including any previous
amendments and extensions thereof), and (ii) all other agreements between MLBFS
and Customer or any party who has guaranteed or provided collateral for
Customer's obligations to MLBFS (a "Guarantor") in connection therewith
(collectively, the "Loan Documents"). Capitalized terms used herein and not
defined herein shall have the meaning set forth in the Loan Documents.
Subject to the terms hereof, effective as of the "Effective Date" (as defined
below), the Loan Documents are hereby amended as follows:
(a) The term "Maximum WCMA Line of Credit" shall mean $1,000,000.00.
(b) The annual "Line Fee" is hereby increased to $10,000.00. In connection with
the increase in the Maximum WCMA Line of Credit pursuant hereto, a portion of
such new Line Fee in the amount of $2,500.00 (the "Increase Fee") is now due and
owing. Customer hereby authorizes and directs MLBFS to charge the Increase Fee
to WCMA Account No. 701-07H43 on or at any time after the Effective Date. Once
charged, the Increase Fee is non-refundable.
Except as expressly amended hereby, the Loan Documents shall continue in full
force and effect upon all of their terms and conditions.
By their execution of this Letter Agreement, the below-named Guarantors hereby
consent to the foregoing modifications to the Loan Documents, and hereby agree
that the "Obligations" under their Unconditional Guaranty shall extend to and
include the Obligations of Customer under the Loan Documents, as amended hereby.
Customer and said Guarantors acknowledge, warrant and agree, as a primary
inducement to MLBFS to enter into this Agreement, that: (a) no Default or Event
of Default has occurred and is continuing under the Loan Documents; (b) each of
the warranties of Customer in the Loan Documents are true and correct as of the
date hereof and shall be deemed remade as of the date hereof; (c) neither
Customer nor any of said Guarantors have any claim against MLBFS or any of its
affiliates arising out of or in connection with the Loan Documents or any other
matter
<PAGE> 2
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Leisure Time Casino & Resorts, Inc.
July 23, 1999
Page No. 2
whatsoever; and (d) neither Customer nor any of said Guarantors have any
defense to payment of any amounts owing, or any right of counterclaim for any
reason under, the Loan Documents.
Provided that no Event of Default, or event which with the giving of notice,
passage of time, or both, would constitute an Event of Default, shall then have
occurred and be continuing under the terms of the Loan Documents, the amendments
and agreements in this Letter Agreement will become effective on the date (the
"Effective Date") upon which: (a) Customer and the Guarantors shall have
executed and returned the duplicate copy of this Letter Agreement enclosed
herewith; and (b) an officer of MLBFS shall have reviewed and approved this
Letter Agreement as being consistent in all respects with the original internal
authorization hereof.
Notwithstanding the foregoing, if Customer and the Guarantors do not execute
and return the duplicate copy of this Letter Agreement within 14 days from the
date hereof, or if for any other reason (other than the sole fault of MLBFS)
the Effective Date shall not occur within said 14-day period, then all of said
amendments and agreements will, at the sole option of MLBFS, be void.
Very truly yours,
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
By: /s/ Lisa Childs
-------------------------------------------
Lisa Childs
Division Documentation Manager
<PAGE> 3
Accepted:
LEISURE TIME CASINO & RESORTS, INC.
By: /s/ Elden Rance
--------------------------------
Printed Name: Elden Rance
----------------------
Title: E.V.B.
-----------------------------
Approved:
- -----------------------------------
Michael R. Pace
/s/ Al Johnson
- -----------------------------------
Al Johnson
LEISURE TIME TECHNOLOGY
By: Elden Rance
--------------------------------
Printed Name: Elden Rance
----------------------
Title: E.V.B.
-----------------------------
LEISURE TIME CRUISE CORPORATION
By: /s/ Elden Rance
--------------------------------
Printed Name: Elden Rance
----------------------
Title: E.V.B.
-----------------------------
<PAGE> 1
EXHIBIT 21
Subsidiaries
------------
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
Leisure Time Technology, Inc. Georgia
Solutia Gaming Systems, Inc. Oklahoma
Leisure Time Cruise Corporation Colorado
Leisure Express Cruise, LLC Colorado
Florida Casino Cruises, Inc. Georgia
Leisure Belle Cruise, LLC Colorado
Leisure Time Gaming, Inc. South Carolina
One Eyed Jacks Gaming, Inc. South Carolina
Leisure Time Hospitality, Inc. Ohio
Leisure Time Financial Corp. Minnesota
Leisure Time International, Ltd. Barbados
</TABLE>
<PAGE> 1
EXHIBIT 23.00
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-77737 of Leisure Time Casinos & Resorts, Inc. of our report dated August 19,
1998 appearing in the Prospectus, which is part of such Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
Ehrhardt Keefe Steiner & Hottman PC
Denver, Colorado
August 6, 1999
<PAGE> 2
EXHIBIT 23.00
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-77737 of Leisure Time Casinos & Resorts, Inc. of our report dated August 15,
1997 appearing in the Prospectus, which is part of such Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
Ehrhardt Keefe Steiner & Hottman PC
Denver, Colorado
August 6, 1999
<PAGE> 3
EXHIBIT 23.00
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-77737 of Leisure Time Casinos & Resorts, Inc. of our report dated April 8,
1999 appearing in the Prospectus, which is part of such Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
Ehrhardt Keefe Steiner & Hottman PC
Denver, Colorado
August 6, 1999
