UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________. Commission
file Number: 000-17637
Leisure Time Casinos & Resorts, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 34-1763271
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1258 Communications Drive
Norcross, Georgia 30093
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (770) 923-9900
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Securities registered pursuant to Section 12(g) of the Act:
common stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and, (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 17, 2000, the aggregate market value of the Registrant's
voting stock held by non-affiliates was $1,321,178 based on the closing price of
$0.438 per share as of that date. As of October 17, 2000, Registrant had
5,918,301 shares of its $0.001 par value common stock issued and outstanding.
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TABLE OF CONTENTS
PART I
Item Page
1. Business..............................................................3
2. Properties...........................................................15
3. Legal Proceedings....................................................15
4. Submission of Matters to a Vote of Security Holders..................20
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................20
6. Selected Financial Data..............................................21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operation..........................................20
7A. Quantitative and Qualitative Disclosures About Market Risk............25
8. Financial Statements and Supplementary Data..........................27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................27
PART III
10. Directors and Executive Officers of the Registrant...................28
11. Executive Compensation...............................................32
12. Security Ownership of Certain Beneficial Owners and Management.......36
13. Certain Relationships and Related Transactions.......................38
PART IV
14. Exhibits, Financial Schedules, and Reports on Form 8-K...............41
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PART I
ITEM 1. BUSINESS
Leisure Time Casinos & Resorts, Inc. ("Leisure Time") was incorporated on
February 4, 1993, and was a development stage enterprise until September 1996.
Leisure Time Technology, Inc. (f/k/a U.S. Games, Inc.) ("Technology") is
incorporated in Georgia and develops, manufactures and sells video gaming
machines. Technology is licensed to sell video gaming machines to Native
American tribes, or distributors, in California, Kansas, Michigan, Minnesota,
Montana, New Mexico, New York, North Carolina, Wisconsin. In addition,
Technology is licensed by the states for the sale of gaming devices in
Minnesota, Montana and Wisconsin.
In September 2000, the State of Arizona as well as the Viejas Indian Tribe
in California denied gaming licenses to Leisure Time citing the financial
condition of Leisure Time. Leisure Time has also been denied gaming licenses
with the Pueblo of Isleta Gaming Commission and Pueblo of Sandia Tribal Gaming
Commission, both in New Mexico.
Leisure Time Cruise Corporation ("Cruises") was incorporated on October
17, 1997, in the state of Colorado and conducted offshore gaming cruises on the
"Vegas Express" gaming vessel from July, 1998 until October 31, 1999 when it was
placed in dry-dock. In May 1999, Leisure Express Cruise, LLC, a Colorado limited
liability company, acquired Florida Casino Cruises, Inc., the corporation that
owns the Vegas Express. Cruises also owns the "Leisure Lady", another gaming
vessel that has not been placed in operation. Leisure Belle Cruise, LLC is a
Colorado limited liability company that owned a dry-docked gaming vessel that
was sold in a foreclosure proceeding by the holder of a loan on the vessel.
Leisure Lady Cruise, LLC is a Colorado limited liability company and currently
has no operations. Effective April 19, 2000, Leisure Time decided to discontinue
this business segment and is investigating alternatives for disposing the net
assets of this segment. Leisure Time has guaranteed the outstanding debt from a
financial institution related to vessels that operated in the offshore gaming
cruise segment.
Leisure Time Hospitality, Inc. is incorporated in Ohio and owns a hotel
property that was being redeveloped in the Cleveland metropolitan area.
Effective April 19, 2000, Leisure Time decided to discontinue this business
segment and has a proposal to dispose of Leisure Time Hospitality, Inc. to an
entity affiliated with the president of Leisure Time.
Leisure Time Gaming, Inc. is incorporated in South Carolina and operated a
gaming route in South Carolina from March 1999 to June 30, 2000. Leisure Time
Gaming, Inc. is attempting to revive its route operation using redemption games
in the State of Georgia.
Leisure Time International, Ltd. is incorporated in Barbados and currently
operates as a Foreign International Sales Corp. (FISC).
Leisure Time acquired Leisure Time Financial Corp. (f/k/a RP Capital,
Corporation) ("Financial") in April 1999. Financial is incorporated in the state
of Minnesota and finances various types of equipment acquisitions under direct
financing leases and loans secured by existing equipment and sells leases and
loans to financial institutions. Effective April 19, 2000, Leisure Time agreed
to sell stock of this business back to the previous owner.
Solutia Gaming Systems, Inc. is incorporated in Oklahoma and was developing
new gaming machines. The Oklahoma office has been closed and relocated to
Norcross, Georgia. Solutia Gaming Systems, Inc. markets other than Class III
gaming devices in markets where other than Class III devices are not prohibited.
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Leisure Time manufactures and distributes video gaming and video
pulltab machines, related software and replacement cartridges for video pulltab
machines and owns and operates video gaming machines.
On September 20, 1999, Leisure Time completed a public offering of
700,000 shares of Leisure Time's common stock at $12.00 per share. Leisure Time
incurred an aggregate of approximately $1,184,000 of expenses in connection with
the offering, including underwriting discounts ($672,000), expenses paid to or
for the underwriter ($232,000), and other expenses of the offering ($280,000).
After deducting the total expenses, Leisure Time received net offering proceeds
of approximately $7,216,000. The net offering proceeds have been used for:
- approximately $4.2 million as working capital, including the payment
of accounts payable;
- approximately $1.0 million to develop a new Pot-O-Gold line of video
game machines and related software
In March of 1999, a court decision discontinued legalized gaming in
South Carolina effective July 1, 2000. This resulted in the elimination of the
largest market for Leisure Time's video gaming machines. From November 1999 to
March 2000, Leisure Time's principal effort was developing games to be
introduced into California that allowed gaming on Indian reservations starting
in March 2000. Leisure Time believed that entry into the California market would
produce a significant market for Leisure Time's machines. The market in
California did not develop as quickly as Leisure Time had anticipated. As a
result of this and the discontuance of gaming in South Carolina, Leisure Time
has continued to lose money from operations and has been unable to pay its
vendors and debt holders. This has resulted in several lawsuits being filed
against Leisure Time. In September 2000, the State of Arizona as well as the
Viejas Indian Tribe in California denied gaming licenses to Leisure Time citing
the financial condition of Leisure Time. Leisure Time has also been denied
gaming licenses with the Pueblo of Isleta Gaming Commission and Pueblo of Sandia
Tribal Gaming Commission, both in New Mexico. As a result of these denials,
Leisure Time expects to have licenses denied, revoked or not renewed in other
jurisdictions. As a result of this denial Leisure Time is no longer confident
that it can market certain lines of inventory and its gaming machines in
significant quantities. These factors, among others, may indicate that Leisure
Time will be unable to continue as a going concern for a reasonable period of
time.
Leisure Time has cut its costs significantly in 2000 and is
continuing to reduce its costs so that it can achieve profitable operations.
Additionally, Leisure Time is pursuing opportunities in other gaming
jurisdictions and markets to attempt to expand its potential customer base.
However, there can be no assurances that the attempted expansions will increase
revenue or that Leisure Time will be able to return to a profitable position
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:
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- 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 are 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.
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.
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 is 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.
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
Because the South Carolina Supreme Court ruled gaming to be illegal in the
state after June 30, 2000, Leisure Time no longer believes that it will realize
material revenue through the sale of a data communication device that it
developed for use on video gaming machines in South Carolina or through the sale
of software upgrades for its installed video gaming machines. Based upon this
belief, Leisure Time impaired 100% of its capitalized software costs during the
fourth quarter of 2000.
RESEARCH AND DEVELOPMENT EXPENSES
During the fiscal years ended June 30, 1998, 1999 and 2000, Leisure
Time spent, $642,000, $1,445,000 and $3,276,000 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. Other than management and supervisory staff, Leisure Time operates its
manufacturing facility with temporary employees and produces video gaming
machines as needed to complete orders. 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, 2000, Leisure Time had a backlog of orders of
approximately $500,000 that Leisure Time believes is firm. Substantially all
of the backlog at June 30, 2000, was filled by the end of August 2000. Leisure
Time believes that backlog may not be a meaningful indicator of revenue expected
in future periods. As of June 30, 1999, Leisure Time had a backlog of orders of
approximately $8.4 million.
As of June 30, 2000, Leisure Time had an inventory value of approximately
$9.0 million. Leisure Time's inventory value decreased dramatically as a result
of the denial of licenses in Arizona, California and New Mexico and as a result
of the South Carolina Supreme Court's ruling that gaming was illegal in South
Carolina after June 30, 2000. Based upon these conditions, Leisure Time recorded
a reserve on inventory of $5,727. Approximately $1.3 million of the inventory
consists of inventory related to a data communications device that was developed
for use in South Carolina.
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 several states, Brazil and 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.
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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.
As of June 30, 2000, Leisure Time had four employees engaged in
sales and marketing. Of the four employees, at least two 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 Commercial 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 $3.6 million,
$5.7 million and $3.2 million from sales in foreign countries during Leisure
Time's fiscal years ended June 30, 2000, 1999 and 1998, respectively. The
following chart provides information pertaining to the revenue Leisure Time
received from sales in foreign countries:
Year Ended June 30 Argentina Brazil Norway
--------- ------ ------
2000 $ -- $3,190,249 $431,326
1999 141,875 5,232,652 202,330
1998 -- 3,210,691 --
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.
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 has
discontinued its gaming route operation due to the decision of the South
Carolina Supreme Court that gaming was illegal in South Carolina after June 30,
2000. Leisure Time is attempting to revive its route operation using redemption
games in the State of Georgia.
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SALE OF BUSINESSES
On May 7, 2000, Leisure Time sold all of the outstanding stock of Financial
to the previous owner. Consideration for the purchase of the shares was the
delivery by the previous owner of 100,000 shares of Leisure Time's stock and the
unvested portion (60,000 shares) of an option to purchase additional stock of
Leisure Time. The previous owner in return accepted the financial condition of
Financial as it existed on the date of sale, subject to the following: a)
transfer to Leisure Time of a lease from a related party receivable in the
approximate amount of $114,391, including interest, together with all right to
the equipment or residuals; and b) Financial assuming/retraining tax
obligations, including penalty and interest, to the state of Minnesota for the
period April - June, 1999. Leisure Time retained responsibility for any taxes
due for the period July 1999 through the date of closing.
During April 2000, the Comapny agreed to sell all of the outstanding stock
of Leisure Time Hospitality, Inc. to the president of the Company. The president
purchased Hospitality for $1,300 which is the estimated fair market value of the
hotel and property located in Cleveland.
CUSTOMERS
For the fiscal year ended June 30, 1998, two customers accounted for
approximately 23% and 47% of Leisure Time's total sales. As of June 30, 1998,
Leisure Time had approximately $39, or 2%, of total trade accounts receivable
due from these two customers.
For the fiscal year ended June 30, 1999, two customers accounted for
approximately 29% and 11% of Leisure Time's total sales. As of June 30, 1999,
Leisure Time had approximately 17% and 13% of total trade receivables due from
two customers.
For the year ended June 30, 2000, four customers accounted for
approximately 13%, 14%, 14% and 10% of Leisure Time's total sales. As of June
30, 2000, Leisure Time had approximately $191, or 42%, of total trade accounts
receivable due from these four customers.
The majority of Leisure Time's sales of video gaming machines for the
years ending June 30, 1998, 1999 and 2000 were in South Carolina. For the years
ending June 30, 1998, 1999 and 2000, 67%, 75%, and 35%, respectively, of Leisure
Time's sales were derived from South Carolina, however gaming was declared
illegal in South Carolina after June 30, 2000.
COMPETITION
Video Machines. The video gaming machine market is highly
competitive and is dominated by a small number of manufacturers. Leisure Time
believes that its lack of licenses to sell gaming machines in states that
require licenses places it at an extreme competitive disadvantage. In addition,
Leisure Time believes that the other 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.
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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.
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 and any lender, holder of an evidence of
indebtedness or other person who would be in a position to exercise significant
influence over the gaming activities of Leisure Time may be required to submit
to the jurisdiction of any gaming authority which has issued a license or
approval to Leisure Time.
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. Leisure Time or its
subsidiaries are licensed in the following jurisdictions to manufacture gaming
devices for sale to Native Americans or distributors:
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- Kansas;
- California;
- Michigan;
- Minnesota;
- Montana;
- New Mexico;
- New York; and
- Wisconsin.
Leisure Time was denied gaming licenses in Arizona, by the Viejas
Indian Tribe in California and by the Pueblo of Isleta and the Pueblo of Sandia
in New Mexico in August and September 2000. As a result of these denials,
Leisure Time anticipates that its licenses will be denied, revoked or not
renewed in other jurisdictions.
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, the initiation of disciplinary action against
Leisure Time or its subsidiaries, or adverse court decisions having general
applicability 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 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.
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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 United States including the Indian Gaming
Regulatory Act of 1988, which is administered by the National Indian
Gaming Commission, and the Johnson Act which is administered by the U.
S. Department of Justice;
- Secretary of the U. S. Department of Interior; and
- provisions of compacts 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, key personnel, 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.
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.
10
<PAGE>
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.
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.
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.
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.
11
<PAGE>
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 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.
Employees
As of October 17, 2000, Leisure Time employed 49 persons, all of
whom were employed on a full time basis. The approximate number of employees in
each operation follows:
- 6 in manufacturing;
- 16 in engineering and research and development; and
- 4 in sales and marketing.
The balance of Leisure Time's employees 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.
12
<PAGE>
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
Location Use Approximate Monthly Rental Lease Expiration
-------- --- Square Footage -------------- ----------------
--------------
<S> <C> <C> <C> <C>
Norcross, GA Executive offices and 57,000 $20,663 1/2005
manufacturing facility
Avon, OH Office 1,250 $1,500 6/2000
New Orleans, LA Condominium/office 4,200 $2,500 10/2002
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On December 27, 1999 American International Specialty Lines Insurance
Co. and A. I. Credit Corp. filed a complaint against Leisure Time in the United
States District Court for the Southern District of New York, (Civil Action No.
99 CV12369) alleging that Leisure Time defaulted on the payment of a note and
breach of contract by failing to pay in accordance with a premium finance
agreement. The plaintiffs request that they be granted damages in the amount of
$2,688,088.54 plus interest at a rate of 7.6% per annum on the note and, in the
alternative, $2,773,377.00 plus interest, together with the costs and
disbursements of the action, including attorneys' fees, for breach of the
finance agreement. The trial scheduled for September 12, 2000, was continued. On
February 15, 2000, Leisure Time filed an answer. On August 24, 2000, the
plaintiff filed for summary judgment. On September 25, 2000, Leisure Time filed
a response to the plaintiff's motion for summary judgment. The parties are
awaiting the Court's ruling.
On January 26, 2000, Ceronix, Inc. filed a complaint against Technology
in the State Court of Gwinnett County, State of Georgia, (Civil Action No.
00-C-06277-4), alleging that Technology had failed to pay on an account. Ceronix
requested that it be granted damages in the amount of $135,937 plus interest,
attorneys' fees and costs of the action. Technology's answer to the complaint
was filed on May 9, 2000. Ceronix was awarded a judgment in the principal amount
of $135,819 on May 9, 2000. On July 7, 2000 the parties negotiated a payoff of
the judgment. The judgment was totally satisfied on September 10, 2000.
On March 8, 2000, Hammond Electronics Inc. filed a complaint against
Technology in the State Court of Gwinnett County, State of Georgia, (Case No:
00-C-1602-2). Plaintiff requested that it be granted damages in the amount of
$116,640 and judgment for $155,427 principal, $4,828 pre-judgment interest to
date, plus continuing pre-judgment interest and post-judgment interest at a rate
of 18% per annum. On August 9, 2000, the Court granted summary judgment in favor
of plaintiff in the amount of $155,427.77, $5,175.50 pre-judgment interest and
post-judgment interest at the lawful rate and court costs. The parties
negotiated a payment plan to satisfy the judgment whereby Technology agreed to
pay $20,000.00 on August 31, 2000 and $10,000.00 monthly thereafter until paid
in full.
On April 28, 2000, General Electric Capital Corporation filed a
complaint against the Biloxi Belle, her engines, tackle, etc., in rem, and
Leisure Belle Cruise, L.L.C. in personam in the U.S. District Court, Eastern
District of Louisiana (Civil Action No. 00-1287) alleging that defendants
breached their obligation under a loan with a principal balance of $1,382,825.
The plaintiff requested that the Biloxi Belle's, rigging, tackle, apparel,
furniture, engines and all other necessaries thereunto appertaining and
belonging be condemned and sold to pay the demands and claims. On August 14,
2000, the Court ordered the sale of the Biloxi Belle to be held on August 30,
2000. On August 30, 2000, the Biloxi Belle was sold to the only bidder, General
Electric Capital Corporation, for $100,000.00.
13
<PAGE>
On June 18, 1998, Collins Entertainment Corporation filed a complaint
against Technology in the United States District Court for the District of South
Carolina, Anderson Division, (Civil Action No. 3:98-1887 13), alleging breach of
contract and violation of the South Carolina Unfair Trade Practices Act.
Plaintiff requested damages in the amount of $1.3 million. The trial was held on
June 20 through June 22, 2000, resulting in an award for the plaintiff in the
amount of $190,000.00, interest at 6.375%, plus costs. Plaintiff filed a motion
for new trial and additur on July 3, 2000. Defendant filed a motion in
opposition on July 14, 2000. On August 28, 2000, the plaintiff's motion was
denied. On September 26, 2000, plaintiff filed a notice of appeal in the United
States District Court for the District of South Carolina, Columbia Division.
On March 25, 1999, Drews Distributing, Inc. filed a complaint against
Technology and Phillip C. Caldwell, in the Court of Common Pleas, Fifth Judicial
Circuit, State of South Carolina, City of Richland, (Civil Action No.
99CP401068), alleging breach of a distribution agreement, illegal raising of
prices, breach of contract by fraudulent act, fraudulent non-disclosure of
material fact, and tortuous interference of contract. The plaintiff requested an
award of $2,000.00 for every game resold by Collins. The exact number has not
yet been determined. The case is in the discovery/pre-trial process. The Court
has indicated that if the case is not settled by October 25, 2000, the case will
be removed to the Federal District Court.
On December 14, 1998, Technology filed a complaint against Drews
Distributing, Inc., a South Carolina corporation, in the Superior Court of
Gwinnett County, State of Georgia (Civil Action No. 98-A-9761-4), alleged breach
of a distribution agreement and misappropriation of trade secrets. Leisure Time
seeks specific performance and damages. The case is in the discovery/pre-trial
process.
On October 19, 1998, James J. Oden, filed a complaint against Leisure
Time and Technology in the U.S. District Court, Northern District of Georgia,
Atlanta Division, (Civil Action No. 1:98-CV-3033), alleging breach of oral
employment agreement. The plaintiff requested damages for failure of defendants
to issue plaintiff an option for 200,000 shares exercisable at $1.00 per share.
On July 10, 2000, the Court granted summary judgment in favor of Leisure Time
and Technology. Plaintiff filed a notice of appeal on July 24, 2000. This case
has been set for mediation on October 26, 2000.
On July 31, 2000, Duke-Weeks Realty, Limited Partnership filed a
complaint against Technology in the Magistrate Court of Gwinnett County, State
of Georgia (Civil Action No. 00M11868), alleging non-payment of rent. Plaintiff
sought judgment for $119,367.33 rent, $2,356.95 interest, plus $12,197.43
attorney's fees. On August 29, 2000, the parties entered into an agreement by a
consent order with schedule of re-payment plan, reinstatement of the lease, and
a limited personal guarantee by Alan N. Johnson, the president of Leisure Time.
Leisure Time paid $44,979.68 on August 29, 2000 and agreed to pay $33,521.50 on
October 1, November 1, and December 1, in order to satisfy the consent order.
On August 2, 2000, KSM Electronics, Inc. filed a complaint against
Technology in the Magistrate Court of Gwinnett County, State of Georgia (Civil
Action No. 00-A07048 1), alleging non-payment on account. Plaintiff seeks
judgment for $46,759.60 principal, plus pre-judgment interest accruing on the
principal indebtedness at the per diem rate of $23.06 from July 31, 2000 until
the date of judgment. Defendant's answer and defenses were filed on August 31,
2000. The case is in the discovery/pre-trial process.
14
<PAGE>
On August 4, 2000, Arrow/Bell Components Group of Arrow Electronics,
Inc., filed a complaint against Technology in the United States District Court
for the Northern District of Georgia, Atlanta Division, (Civil Action No. 1
00-CV-2011), alleging non-payment on account. Plaintiff seeks judgment for
$936,809.30 plus inventory carrying charges, costs, attorneys' fees, costs of
action, and such other and further relief. Defendant's answer and defenses were
filed on August 31, 2000. The case is in the discovery/pre-trial process.
On August 25, 2000, Spectral Response, Inc. filed a complaint against
Leisure Time and Technology in the State Court of Gwinnett County, State of
Georgia, (Civil Action No. 00_C_5242-4), alleging non-payment on account.
Plaintiff requests damages in the amount of $958,501.13, prejudgment interest at
the rate of 18% per annum, plus $7,987.51 in interest which accrued at 10% per
annum prior to July 15, 2000, plus attorneys' fees; plus post-judgment interest
at the rate of 18% per annum; all court costs and such other and further relief
as the Court considers just, fair and appropriate. Defendant filed an answer on
September 28, 2000. The case is in the discovery/pre-trial process.
On September 11, 2000, Merrill Lynch Business Financial Services, Inc.
filed a complaint against Leisure Time; Technology; Cruises; Leisure Time
International, Ltd.; Leisure Time Gaming, Inc.; Solutia Gaming Systems, Inc.;
Leisure Belle Cruise, LLC; Leisure Time Hospitality, Inc.; Leisure Express
Cruise, LLC; Financial; Florida Casino Cruises, Inc. d/b/a FCC Advertising; and
Alan N. Johnson, an individual, Michael R. Pace, an individual, in the Superior
Court of Gwinnett County, State of Georgia, (Civil Action No. 00-A-8358 7),
alleging Breach of Contract and default under an Agreement and Guaranties.
Plaintiff requests damages in the amount of $1,026,590.55 plus interest,
including reasonable attorneys' fees and expenses, and other costs of collection
in the amount provided for in such statute, as determined at trial. Defendants
were granted an extension of time to file their answer and/or defenses until
November 13, 2000.
On September 12, 2000, Phillip C. Caldwell filed a complaint against
Leisure Time, Technology and Leisure Time Gaming, Inc., in the Court of Common
Pleas, State of South Carolina, County of Spartanburg, (Civil Action No.
2000-CP-42-2524), alleging that he was denied the opportunity to exercise his
options, that he is owed expenses and that Leisure Time was unjustly enriched.
Plaintiff seeks judgment of $1,900,875.00 regarding the options and $4,746.16
for expenses. Defendant's answer is due on October 25, 2000.
On August 17, 2000, Atlantic Dry Dock Corporation filed a complaint
against Florida Casino Cruises, Inc., Leisure Express Cruise, LLC, Cruises and
Leisure Time in the United States District Court for the Northern District of
Georgia, Atlanta Division, (Civil Action No. 1 00-CV-2128), alleging breach of
maritime contract. Plaintiff requests a constructive trust for repair funds in
the amount of $299,863.00 plus additional interest, costs and attorneys' fees.
Plaintiff filed for attachment and garnishment to any and all freights,
accounts, monies, hires, disbursements, fees, advances, cash, or otherwise, etc.
being held by First Union National Bank and/or its agents and affiliates.
Defendants' response to the complaint is due on October 25, 2000.
On September 28, 2000, Wynn & Wynn, P.C. filed a complaint against Cruises,
in the Commonwealth of Massachusetts, District Court Department, Taunton
Division, (Civil Action No. 0031CV0669) requesting damages in the amount of
$39,683.18 plus interest, costs and attorneys' fees. Defendant's answer is due
October 23, 2000.
15
<PAGE>
On June 27, 2000, Bowne of Dallas, Inc. filed a complaint against
Leisure Time in the District Court Dallas County, Texas, I-162nd Judicial
District, (Civil Action No. 00-04789). Plaintiff seeks judgment for $260,364.26,
attorneys' fees, plus pre-judgment and post-judgment interest at the highest
rates allowed by law, costs of suit and other and further relief, both special
and general, legal and equitable. On August 25, 2000, Leisure Time filed a
notice of special appearance objecting to jurisdiction. A hearing was held on
September 19, 2000. The Court requested briefs after the hearing. The Court
ruled that Leisure Time should be given the opportunity to correct an affidavit.
A hearing is set for October 24, 2000.
On August 23, 2000, Prime Technological Services, Inc. filed a
complaint against Leisure Time and Alan Johnson in the United States District
Court for the Northern District of Georgia, Atlanta Division, (Civil Action No.
00-CV-2186) alleging that the defendants violated Section 10(b) and Rule 10b-5
of the Securities Exchange Act of 1934 by making material misrepresentations
involving the issuance of preferred stock and alleging breach of contract.
Plaintiff requested damages in the amount of $2,690,555, the exact amount to be
determined by jury as compensatory damages; costs of litigation and attorneys'
fees, and other relief the Court deems just and proper. Defendants' answer was
filed on October 12, 2000.
On February 9, 2000, Tripp Enterprises, Inc., a Nevada corporation,
filed a complaint against Leisure Time, Technology and DOES 1 through 10,
inclusive, in the Second Judicial District Court, State of Nevada, Washoe
County, (Civil Action No. CV00-00628), requesting damages in the amount of
$29,404.00 plus interest at a rate of 1 1/2% per month since March 31, 1999. The
case was settled by payments of $2,500.00 per month. $3,567.00 remains as an
outstanding balance.
On August 28, 2000, Atlanta Marriott Gwinnett Place, Inc. filed a
complaint against Technology in the State Court of Gwinnett County, State of
Georgia, (Civil Action No. 00-C-5273-1), alleging non-payment on account.
Plaintiff requests damages in the amount of $5,342.01, plus $287.14 pre-judgment
interest, plus continuing pre-judgment interest, and post-judgment interest at
the rate of 18% per annum on the principal amount, plus court costs. Defendant
filed an answer on September 28, 2000. The case is in the discovery/ pretrial
process.
On August 7, 2000, Alliant Foodservice, Inc. filed a complaint against
Cruises in the Commonwealth of Massachusetts, District Court of Massachusetts,
Peabody District Court, (Civil Action No. 0086 CV 0348), alleging damages in the
amount of $14,131.68 plus interest in the amount of $162.26 and attorney's fees
of $2,119.75 for a total of $16,413.69. An entry of default against Cruises was
filed on September 14, 2000.
On July 24, 2000, Reliable Construction Heaters filed a complaint
against Leisure Time Hospitality, Inc. in the Cleveland Municipal Court Cuyahoga
County, Ohio, (Civil Action No. 00CVF 15927), alleging defendant rented
equipment on three different months and failed to pay. Plaintiff seeks judgment
in the amount of $6,710.47 plus interest at a rate of 10% plus costs. On August
28, 2000, defendant entered into a stipulated order granting leave of court to
move or plead on or before September 25, 2000. Defendant filed an answer on
September 25, 2000. The case is in the discovery/ pretrial process.
Defaults
Leisure Time Hospitality, Inc. has been served with a notice of default of
a promissory note dated September 15, 1998 in the amount of $545,000.00 that it
gave in connection with the purchase of the hotel property. Leisure Time
Hospitality, Inc. has also received notice of demolition of the hotel by the
City of Cleveland, Ohio. The hearing has been continued to a date to be
determined.
16
<PAGE>
Leisure Time has defaulted on a payment of $730,000 under the
non-competition agreement with Michael Pace that was due on September 15, 2000.
By certified letter dated October 6, 2000, Leisure Time has been served with
notice of default regarding the nonpayment of the non-competition agreement with
Michael Pace in the amount of $730,000 that was due on September 13, 2000.
Unpaid Invoices
Leisure Time has unpaid invoices to suppliers that are over 90 days old
in the approximate amount of $1,900,000.
The following lawsuits and legal claims have had no material change in their
status since December 31, 1999:
- Civil Action No.: 98-A-9761-4 between Technology and Drews
Distributing, Inc.
- Civil Action No.: 99-CP-401068 between Drews Distributing, Inc. and
Technology.
Administrative Hearings
On June 10, 1999, Maria Luberto, filed a complaint against Leisure Time in
the Commonwealth of Massachusetts, Commission Against Discrimination, (Case No:
M.C.A.D. C.A.#: 99-BEM-1619). The complaint alleges sex/gender harassment,
sex/gender discrimination, age discrimination, hostile work environment,
retaliation and constructive termination. The case is the discovery stage.
On April 26, 2000, Sandra Gibson filed a workers compensation complaint
(WC Case No. 9926617) against Leisure Time. The matter is in the discovery
stage.
It is Leisure Time's policy to vigorously defend litigation, however,
Leisure Time has entered into settlements of claims in the past, and may do so
in the future, whenever management deems the circumstances appropriate. Any
unfavorable outcome related to any outstanding litigation could have a material
adverse effect on the financial condition of Leisure Time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of Leisure Time's shareholders during
Leisure Time's fiscal quarter ended June 30, 2000.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information
Leisure Time's common stock is currently traded on the Nasdaq National
Market under the symbol LTCR. The following table shows the range of high and
low closing bid quotations for the common stock, for each quarterly period since
the common stock became publicly traded on September 15, 2000. These quotations
represent prices between dealers and do not include retail markups, markdowns,
or commissions and may not necessarily represent actual transactions.
Fiscal Quarter Ended: High Low
--------------------- ---- ---
June 30, 2000 $ 5.25 $ 2.00
March 31, 2000 8.625 3.50
December 31, 1999 11.00 5.75
The Nasdaq National Market requires companies with securities traded on
the Nasdaq National Market to maintain certain continuing listing standards.
Leisure Time currently does not meet certain of these continuing listing
standards and, therefore, faces the possibility of being delisted from such
market. By letter dated September 26, 2000, the Nasdaq National Market notified
Leisure Time that Leisure Time had failed to maintain a minimum market value of
public float of $5,000,000 over a certain 30 day period as required. The letter
also stated that Leisure Time has until December 26, 2000 to regain compliance
with the marketplace rules of the Nasdaq National Market. If Leisure Time fails
to do this and is delisted, the market price of Leisure Time's common stock may
be materially adversely affected.
Holders
As of October 17, 2000, Leisure Time had approximately 150 holders of
record of Leisure Time's common stock.
Dividends
Leisure Time has not declared cash dividends on its common stock since
its inception and does not anticipate paying any dividends in the foreseeable
future.
Recent Sales of Unregistered Securities
Leisure Time has not sold any unregistered securities during its
last fiscal year ended June 30, 2000 that were not previously reported in a
Quarterly Report on Form 10-Q. Leisure Time does not consider issuances of
options to employees and directors to purchase Leisure Time's common stock to be
sales.
18
<PAGE>
ITEM 6. 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.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Leisure Time Technology
(f/k/a U.S. Games, Inc.)(1)
--------------------------
For the Leisure Time Casinos & Resorts, Inc. and Subsidiaries (2)
Year Ended uly 1, 1996 to ---------------------------------------------------------
June 30, September 13, For the Year Ended June 30,
1996 1996 1997 1998 1999 2000
----------- ------------- ---------- ---------- ---------- ----------
Revenue $ 28,291 $ 2,671 $ 29,838 $ 28,643 $ 56,869 $ 15,566
<S> <C> <C> <C> <C> <C> <C>
Cost of goods sold 15,677 1,300 16,616 16,517 30,107 10,761
----------- -------------- ---------- ---------- ---------- ----------
Gross profit 12,614 1,371 13,222 12,126 26,789 4,805
----------- -------------- ---------- ---------- ---------- ----------
Selling, general and administrative
expenses 8,284 2,856 5,615 8,727 10,395 11,214
Inventory impairment - - - - - 7,355
Research and development costs 800 132 469 642 1,445 3,276
Stock based compensation - - - - 1,500 -
Interest, net 74 9 712 840 622 1,249
Litigation - - - 3,043 318 1,739
----------- -------------- ---------- ---------- ---------- ----------
Total operating expenses 9,158 2,997 6,796 13,252 14,280 24,833
Net (loss)_ income before income tax
benefit (expense) 3,456 (1,626) 6,426 (1,126) 12,509 (20,028)
Income tax benefit (expense) (1,293) 554 (1,738) 197 (4,628) 1,310
----------- -------------- ---------- ---------- ---------- ----------
Net income from continuing operations
(loss) 2,163 (1,072) 4,688 (929) 7,881 (18,718)
----------- -------------- ---------- ---------- ---------- ----------
Loss from operations of discontinued operations - - - - (3,449) (1,760)
Loss on disposal of discontinued
operations including provision of
$1,903 for operating losses during
phases out period - - - - - (7,066)
----------- -------------- ---------- ---------- ---------- ----------
Loss from discontinued operations - - - - (3,449) (8,826)
Net income (loss) before dividends paid 2,163 (1,072) 4,688 (929) 4,432 (27,544)
----------- -------------- ---------- ---------- ---------- ----------
Dividends declared - - - - - 157
----------- -------------- ---------- ---------- ---------- ----------
Net income (loss) available to common
shareholders 2,163 (1,072) 4,688 (929) 4,432 (27,701)
=========== ============== ========== ========== ========== ==========
Earnings (loss) per common share -
continuing operations 3.14 (1.56) 1.08 (.21) 1.66 (3.25)
=========== ============== ========== ========== ========== ==========
Earnings (loss) per common share -
discontinued operations - - - - (.73) (1.53)
=========== ============== ========== ========== ========== ==========
Earnings (loss) per common share -
basic 3.14 (1.56) 1.08 (.21) .93 $ (4.81)
=========== ============== ========== ========== ========== ==========
Earnings (loss) per common share -
diluted 3.14 (1.56) .65 (.21) .56 $ (4.81)
=========== ============== ========== ========== ========== ==========
Weighted average number of common
shares outstanding - basic 688,850 688,850 4,343,397 4,516,528 4,755,771 5,753,815
=========== ============== ========== ========== ========== ==========
Weighted average number of common
shares outstanding - diluted 688,850 688,850 7,664,903 4,516,528 7,898,220 5,753,815
=========== ============== ========== ========== ========== ==========
</TABLE>
(1) Represents the financial results of Leisure Time Technology, a predecessor
to Leisure Time acquired by Leisure Time on September 13, 1996.
<PAGE>
(2) The following information is presented for Leisure Time (prior to the
acquisition of Leisure Time Technology) for the years ended June 30, 1996
For the Year ended
June 30, 1996
Revenue $ -
Cost of goods sold -
Gross profit -
Selling, general and administrative expenses 1,342
Interest 55
Net loss (1,397)
==============
Earnings (loss) per common share - basic $ (0.35)
==============
Weighted average number of common shares
outstanding - basic 4,010,650
==============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which
are intended to be covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future operations, including
plans and objectives relating to expansion and the general development of our
business. These forward-looking statements are based on current expectations
that involve numerous risks and uncertainties. Related assumptions involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the assumptions could be inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Annual Report on Form 10-K will prove to be accurate. In light of the
significant uncertainties inherent in the forward looking statements, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
OVERVIEW
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. Leisure Time also sells a 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.
Leisure Time's second largest revenue generating segment has been offshore
gaming cruises. Leisure Time currently has two offshore gaming vessels. The
first vessel, the Vegas Express, operated offshore gaming cruises from
Gloucester, Massachusetts until October 31, 1999. Leisure Time's second vessel
is the Leisure Lady, which was purchased in January 1997 but was never placed in
operation. Effective March 31, 2000, Leisure Time has decided to discontinue
this business segment and is investigating alternatives for disposing of the net
assets of this segment. Leisure Time also owned the Biloxi Belle, a dockside
gaming vessel that was located on the Mississippi River. Because of Leisure
Time's default on the note payable this vessel was seized and sold at sheriff's
auction on August 30, 2000.
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's only gaming route operations were in South Carolina and these operations
were discontinued on June 30, 2000. Because of a South Carolina Supreme Court
ruling, these routes became illegal on July 1, 2000.
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 document.
<PAGE>
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 consolidate statements
of operations.
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Total revenue 100% 100% 100%
Cost of goods sold 58 53 69
------- ------- -------
Gross profit 42 47 31
Selling, general and administrative expenses 30 18 72
Inventory impairment - - 47
Research and development costs 2 2 21
Stock based compensation - 2 -
Interest expense, net 3 1 8
Litigation 11 1 11
------- ------- -------
Total operating expenses 46 24 159
Income (loss) before income taxes (4) 22 (128)
Income tax benefit (expense) 1 (8) 8
Income (loss) from continuing operations (3) 14 (120)
Loss from operations of discontinued operations - (6) (11)
Loss on disposal of discontinued operations
including provision of $1,903 for operating losses
during phase out period - - (45)
Loss from discontinued operations - (6) (56)
Income (loss) before dividends paid (3) 8 (176)
Dividends paid - - 1
Net income (loss) (3)% 8% (177)%
</TABLE>
The following chart provides information as to material changes in Leisure
Time's statements of operations for the year ended June 30, 1999 as compared to
the same period ended June 30, 2000:
<TABLE>
<CAPTION>
Increase
Statements of (Decrease) Percentage
Operations Item Millions Change Reason for Change
----------------- ----------- -------------- -----------------------
<S> <C> <C> <C>
Revenues $ (41.33) -72.6% Decreased sales in South Carolina
Supreme Court ruling that determined
that gaming was illegal in South
Carolina.
Cost of goods sold $ (19.35) -64.3% Decreased sales in South Carolina.
Selling, general and
administrative expenses $ 0.82 7.9% Increased due to increased litigation expenses.
Inventory adjustment $ 7.36 100.0% Increased due to the write down of
inventory associated with the South
Carolina Supreme Court ruling that
determined that gaming was illegal in South
Carolina.
Research and development costs
$ 1.83 126.7% Increased to the design and development of new
products for release in 2000.
Interest expense, net $ 0.63 100.8%
Total operating expenses $ 10.55 73.9%
Income taxes
$ (5.94) -128.3% Decrease in income resulting in a decrease in tax
expense.
Net loss from continuing
operations
$ 26.60 337.5% Increase due to a write down of obsolete inventory
of $7.4 million, guarantee of debt of .4 million, and
decreased sales due to South Carolina ruling.
Net loss from discontinued
operations $ 5.38 -155.9% Decreased due to loss estimates.
Net loss $ 31.98 721.5%
</TABLE>
<PAGE>
The following chart provides information as to material changes in Leisure
Time's historical statements of operations for the fiscal year ended June 30,
1999 as compared to the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Increase
Statements of (Decrease) Percentage
Operations Item Millions Change Reason for Change
----------- -------------- -----------------
<S> <C> <C> <C>
Manufacturing $ 28.2 98% Increased sales in South Carolina due to a
favorable resolution of uncertainties regarding
the continued legality of gaming in Novmeber
1998.
Cost of manufacturing revenue
$ 13.6 82% Increased sales in South Carolina.
Selling, general and
administrative expenses $ 1.7 19% Increase in expense related to manufacturing overhead.
Research and development costs
$ .8 125% Increased research and development related to development
of location controller for South Carolina.
Stock based compensation $ 1.5 N/A No comparable amount in prior period.
Interest expense, net
$ .2 26% Increased borrowings principally related to increased
inventory levels.
Litigation
$ (2.7) 90% Judgement recorded in fiscal 1998 with cost of litigation
appeal recorded in fiscal 1999.
Total operating expenses $ 1.0 7%
Income taxes
$ 4.8 2,449% Increase in income in fiscal year correlates to increase
in tax expense.
Net income from continuing
operations $ 8.8 948%
Net loss from discontinued
operations $ 3.5 N/A No comparable amount in prior period.
Net income $ 5.4 577%
</TABLE>
Below is a detailed description of the events, which may affect the year-end
results.
RECENT DEVELOPMENTS THAT WILL AFFECT RESULTS FOR THE FORESEEABLE FUTURE
The South Carolina Supreme Court has ruled that the gaming referendum that was
to be held on November 2, 1999, in South Carolina is unconstitutional. As a
result of the ruling, video gaming became illegal in South Carolina after June
30, 2000. The ruling has eliminated Leisure Time's future video poker machine
sales in South Carolina and has adversely impacted Leisure Time's revenue and
earnings for fiscal 2000 and will for the foreseeable future. The sale of video
poker machines in South Carolina accounted for approximately 75% and 35% of
Leisure Time's revenue for the year ended June 30, 1999 and the year ended June
30, 2000, respectively. The discontinuance of video poker machine sales in South
Carolina also will affect Leisure Time's ability to sell other related products
in South Carolina.
<PAGE>
Leisure Time believes that the majority of the machines that were in South
Carolina will ultimately be converted to redemption games or end up in other
gaming jurisdictions. As a result, Leisure Time will attempt to continue to sell
software to convert or upgrade games. Solutia has signed exclusive distribution
agreements with BestCo for Georgia and West Virginia and a distributor agreement
for North Carolina. Under the terms of the agreements, BestCo. Inc. will
distribute Leisure Time's redemption gaming machines, boards and software. These
products, which range from conversion kits and software upgrades to machines,
will focus almost exclusively on the redemption market, where coupons for prizes
are distributed to players, upon completion of play. The agreements are
three-year agreements, which call for minimum purchases by Bestco of 3,000
units, 5,000 units and 5,000 units, respectively, for the next three years ended
June 30. The Company did not receive orders for 3,000 units.
Leisure Time continues to assess the impact of the ruling in South Carolina on
its operations and is committed to replacing potential lost sales by pursuing
new markets.
In November 1999, Technology received a manufacturers license from the State of
Montana's Department of Justice Gambling Control Division. In April 20, 2000,
Technology received approvals from the State of Montana to begin selling its
Pot-O-Gold multi-game machines in Montana. The approvals from the State of
Montana Department of Justice Gambling Control Division enable Technology to
move forward with its two-year distribution agreement with Summit Amusements and
Distribution LTD. Under the agreement, Summit has been appointed a non-exclusive
distributor for the sale of Technology's products in Montana, including the
Pot-O-Gold machine that includes the Touch Easy Keno, Super Ball Keno and four
Poker games.
On September 25, 2000 the State of Montana Gambling Control Division gave
Technology a Notice of Proposed Department Action and Opportunity for Hearing,
based on suitability for license. Technology has requested a hearing to resist
the Proposed Departmental Action.
In September 2000, Leisure Time and Technology entered into Settlement
Agreements with the Arizona Department of Gaming whereby the companies were
denied state certification based solely on Section 5(f)(6) of Pascua Yaqui Tribe
of Arizona Gaming Compact, dated June 24, 1993. Also, Alan N. Johnson, Elden W.
Rance and Gerald J. Boyle, were denied licenses by the Arizona Department of
Gaming. Leisure Time and the stated officers agreed to not reapply for licensing
for a period of three years from the date of the settlement.
In August 2000, Technology entered into a Settlement Agreement with the Viejas
Tribal Government Gaming Commission whereby the license was denied based on
Technology's distressed financial condition and based on Section 4.04(i) of the
Gaming Ordinance (having a gaming license denied by another jurisdiction,
Arizona.) Technology may reapply for a gaming license after three years from the
date of this settlement. However, Technology has been orally advised by the
Viejas Tribal Government that Leisure Time would not be licensed as long as Alan
N. Johnson was associated with Leisure Time. In a letter dated September 2000,
the Commissioner, Norman H. DesRosiers, waived the order prohibiting the sales
or service agreement or business transactions between Viejas and Technology for
the purposes of completing the compliance upgrade/conversion of the 200
Technology gaming devices in question. Viejas and Technology may engage in
whatever business transactions are necessary until November 4, 2000.
In September 2000, Leisure Time received a Notice of Provisional Revocation of
Vendor Gaming License from the Pueblo of Isleta Gaming Commission stating that
Technology's license has been revoked immediately, halting any and all business
transactions. In October 2000, Technology filed a request for reconsideration
review.
In August 2000, Technology received notice from the Minnesota Department of
Public Safety of its intent to revoke the temporary manufacturer's license, by
Consent Order based on a Minnesota statute which requires the Commissioner of
the Department of Public Safety to revoke a license if the licensee has "had a
license or permit revoked or denied by another jurisdiction for a violation of a
law or rule related to gaming." Technology did not agree nor sign the Consent
Order. The Commissioner may choose to initiate a contested case against
Technology for the purpose of taking disciplinary action against the license.
In addition, Leisure Time is experiencing difficulty in obtaining new licenses
due to the financial condition of Leisure Time and the denials in the
jurisdictions mentioned above. Leisure Time's denial of gaming licenses in these
jurisdictions may affect its ability to renew and receive gaming licenses in
other jurisdictions.
Leisure Time had hoped to market its Pot-O-Gold product line to newly
established casinos and route operators both to Native American tribes in
California, where a number of California-based Native American tribes currently
conduct gaming. The voters in California adopted a constitutional amendment in
March 2000. In May 2000, the constitutional amendment, in conjunction with the
compacts, legalized Native American gaming in California when a list of compacts
with Native American tribes was published in the Federal Register. Leisure Time
had anticipated that sales to the various Native American tribes in California
would have a material positive effect on Leisure Time's revenue in fiscal year
2001, however with the denial of the gaming license by the Veijas Indian
Reservation and the fact that Leisure Time is experiencing difficulty obtaining
licenses in other jurisdictions these sales will more than likely not be
realized.
In addition, Leisure Time has suspended offshore gaming operations of the Vegas
Express, the cruise-to-nowhere gaming vessel located in Gloucester,
Massachusetts, effective October 31, 1999. As a result, losses have been reduced
dramatically for this business segment as the vessel's related operating
expenses have virtually disappeared. Leisure Time intends to sell this segment
and has been seeking to do so.
The loss of the South Carolina market has had a material adverse effect on
Leisure Time's revenue and earnings in fiscal 2000 and Leisure Time expects to
feel the impact of the loss of this key market for the foreseeable future.
Fiscal 2001 results are dependent upon Leisure Time moving into new markets
outside the United States, beginning the introduction of new products, and
fulfilling orders to existing customers. Leisure Time's fiscal 2001 results are
dependent on Leisure Time increasing revenues through increased sales. If
Leisure Time is unable to increase revenues, Leisure Time's fiscal 2001 will
result in significant loses and Leisure Time's ability to be a going concern
will be in doubt.
LIQUIDITY AND CAPITAL RESOURCES
Historically, 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
through long term debt and cash available from operations. As of June 30, 2000,
Leisure Time had negative working capital of approximately $16,200,000. In
addition, Leisure Time is in default on all of its long-term debt.
Leisure Time will need to raise capital to satisfy its debt and continue in
existence.
The following information relates to Leisure Time's sources and uses of cash
during the twelve months ended June 30, 2000.
Leisure Time utilized $2.4 million of cash in operations related primarily to:
- a net loss of $27.7 million; effect of non-cash change of:
- a $7.4 million decrease due to the inventory write down;
- $12 million in discontinued assets
- $1.7 million of depreciation and amortization;
- a $1 million impairment of software and cash-generating items of:
- a $2.8 million decrease in prepaids and other assets;
- a $ .5 million decrease in accounts payable
- a $ .4 million net decrease in accrued expenses and other; and debt
guarantee
- a $.33 million increase in income taxes receivable
Leisure Time used $.4 million in cash in investing activities related primarily
to the purchase of equipment for the manufacturing and gaming segment.
Leisure Time received approximately $ .4 million in cash from financing
activities related primarily to:
- the receipt of net proceeds of approximately $5 million from the issuance
of common and preferred stock; and
- the net payout of approximately $4.5
million of short term and long term debt.
Leisure Time is in default on sixteen items of long-term debt, totaling
approximately $12,800,000.
Cash generated from operations may not be sufficient to meet working capital
requirements for fiscal 2001. Therefore, additional debt or equity financing may
be required for Leisure Time to satisfy its short term capital needs. If Leisure
Time does not generate sufficient cash from operations and if additional debt or
equity financing cannot be obtained, Leisure Time may not be able to continue as
a going concern. Leisure Time's long-term liquidity needs consist primarily of
working capital to finance receivables and inventory and to pay off debt. Future
profits, if any, 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
is in default of debt financing from various financial institutions. Thus it is
doubtful that Leisure Time will obtain long-term liquidity in the future from
these or any other sources. If unable to obtain its long-term liquidity, then
Leisure Time will have to scale back its long-term growth strategy or may be
unable to continue in existence.
In addition, Leisure Time is reviewing its non-core businesses and is attempting
to sell off some assets in an attempt to reduce bank debt and improve operating
cash flow. Some of the initiatives Leisure Time has currently undertaken include
the following:
- Leisure Time has suspended offshore gaming operations for the Vegas
Express, a cruise-to-nowhere gaming vessel that was located in
Gloucester, Massachusetts. Effective April 19, 2000, Leisure Time has
decided to discontinue offshore gaming operations and is investigating
alternatives for disposing of the net assets of the offshore gaming
operations.
- Leisure Time has reorganized its Atlanta operations to focus on its
core businesses. - Leisure Time has decided to suspend payments on the
financing for its offshore gaming vessels until a buyer can be found
for the vessels. Leisure Time is currently working with one of the
financing companies to restructure one of the loans and is attempting
to dispose of the vessels. - Leisure Time has sold its hotel division.
Management of Leisure Time is currently assessing its current situation to
determine what cause of action is appropriate and what direction to focus sales.
Leisure Time will need to raise capital, satisfy debt and generate sales if it
is to continue in existence.
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 Leisure Time's installed product base has grown, Leisure
Time has experienced an increase in customers' demand for sales of:
- newly developed game software;
- software enhancements for existing games; and
- cartridge replacements for video pulltab
With this in mind, Leisure Time is focusing in the near future on foreign sales
and sales of redemption machines. It has not yet been determined if the sales in
these markets are of a sufficient size to support Leisure Time.
YEAR 2000 COMPLIANCE
Leisure Time has not experienced any year 2000 system failures resulting from
internal or external sources. Leisure Time will continue to monitor its system
for any year 2000 failures. However, Leisure Time does not expect any such
failures.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Leisure Time has no market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements that constitute Item 8 are
attached at the end of this Annual Report on Form 10-K. An Index to these
Consolidated Financial Statements is also included in Item 14 (a) of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Leisure Time did not change its independent accountants during Leisure
Time's last two fiscal years or any subsequent interim period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Leisure Time are as follows:
NAME AGE POSITION
---- --- --------
Alan N. Johnson 59 Chairman of the Board, President,
Chief Executive Officer and Director
Gerald J. Boyle 69 Vice President, Secretary and
Director
Joseph C. Grunda 48 Vice President of Licensing and
General Counsel and Assistant
Secretary
Kelly L. Macke 35 Vice President of U. S. Sales and
Marketing
John J. Pasierb 53 Vice President of Engineering and
Research and Development and
President and Chief Executive
Officer of Technology
Richard D. Sly 65 Assistant Secretary and Director
Lester E. Bullock 47 Director
Per-Arne Skogstad 48 Director
Carl A. Williams 60 Director
Alan N. Johnson and Kelly L. Macke are father and daughter.
20
<PAGE>
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, 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 and Chairman;
- Leisure Time Cruise -- Director and President;
- Leisure Express Cruise -- President and Chief Executive
Officer;
- Florida Casino Cruises -- Director and President;
- 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.
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 form Sir George William University.
Joseph C. Grunda has been the Vice President of Licensing and General
Counsel or Vice President of Licensing and Compliance/General Counsel and an
Assistant Secretary of Leisure Time since 1999. Mr. Grunda has resigned as an
officer of Leisure Time effective November 2000. 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.
John J. Pasierb has been the Vice President of Engineering and
Research and Development of Leisure Time since 1999 and the President and Chief
Executive officer of Technology since January 2000. 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 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.
21
<PAGE>
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 the Director of Acquisitions or 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.
Per-Arne Skogstad has been a director of Leisure Time since December
1999. Mr. Skogstad has been the Director General of the Civil Aviation Authority
in Norway since March 1999. From 1995 to 1999, he was Director General of the
Department of Civil Affairs of the Ministry of Justice and Police of Norway. He
has also served as the Assistant Director General of the Department of Research
at the University of Oslo and was the Head of the Housing Department of the
Student's Welfare Organization of Rogaland. Mr. Skogstad has a Master of
Political Science from the Institute of Public Administration and Organization,
at the University of Bergen, Norway and is a graduate in Economy and
Administration from the State University College of Rogaland, Stravanger,
Norway.
Carl Williams has been a director of Leisure Time since April 2000. Mr.
Williams is retired. Previous to his retirement he was the owner of a business
in Cleveland, Ohio.
Committees of the Board of Directors
The board of directors has a compensation committee and an audit
committee. The compensation committee and the audit committee are composed of
Per-Arne Skogstad and Carl A. Williams, the two non-employee directors. The
primary functions of the compensation committee are 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 are 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 currently pays it non-employee directors cash
compensation of $3,500 per directors' meeting attended and committee meeting
attended that is held separately from a directors' meeting for their services as
directors and each receives an option to purchase 15,000 shares of Leisure
Time's common stock at market value on the date of grants. Directors are
reimbursed for expenses incurred in connection with meetings of the board of
directors or committees thereof.
22
<PAGE>
Compensation Committee Interlocks and Insider Participation
Leisure Time's compensation committee consists of Per-Arne Skogstad and
Carl A. Williams.
Section 16(a) Beneficial Ownership Reporting Compliance
To Leisure Time's knowledge, during Leisure Time's fiscal year ended June
30, 2000, there were no directors or officers or more than 10% shareholders who
failed to timely file a Form 3, Form 4 or Form 5, other than Gerald J. Boyle,
Lester E. Bullock, Eric R. Dey, Anne M. Ellison, Joseph C. Grunda, Alan N.
Johnson, R. Thomas Klingel, Kelley L. Macke, Keko Mottes, John J. Pasierb, Elden
W. Rance, Per-Arne Skogstad, Richard D. Sly and Carl A. Williams who were all
late in filing their Forms 3.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain information pertaining to the
compensation paid by us and our subsidiaries during our last three fiscal years
for services rendered by Alan N. Johnson, Elden W. Rance, R. Thomas Klingel,
Gerald J. Boyle and John J. Pasierb.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Securities
Name and Period Ended Underlying
Principal Position September 30, Salary ($) Bonus ($) Options (#)
------------------ ------------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Alan N. Johnson 2000 588,463 60,000 --
Chairman of the 1999 452,797 102,356 6,111
Board of Directors 1998 357,544 3,847 --
President and
CEO
Elden W. Rance 2000 342,131 30,000 2,038
Executive Vice President, 1999 219,247 54,847 --
Chief Financial Officer and 1998 26,539 -- --
Treasurer until July 13, 2000
R. Thomas Klingel 2000 196,960 15,000 1,360
Executive Vice President of 1999 212,217 27,185 --
Marketing, Sales, Compliance 1998 177,024 2,597 --
and Licensing or President
and Chief Executive Officer
of Solutia Gaming Systems,
Inc. until April 2000
Gerald J. Boyle 2000 172,933 16,250 1,020
Vice President and Secretary 1999 155,481 32,873 --
1998 157,500 --
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Securities
Name and Period Ended Underlying
Principal Position September 30, Salary ($) Bonus ($) Options (#)
------------------ ------------- ---------- --------- -----------
<S> <C> <C> <C> <C>
John J. Pasierb 2000 174,757 12,500 1,782
Vice President of 1999 120,679 2,404 100,000
Engineering and Research and 1998 -- -- --
Development until January
1999, President and Chief
Executive Officer of
Technology since January 1999
Eric R. Dey 2000 148,442 34,276 51,020
Chief Financial Officer 1999 -- -- --
until May 2000, Vice 1998 -- -- --
President of Finance until
October 1999
Joseph C. Grunda 2000 126,725 8,250 680
Vice President of Licensing 1999 27,652 -- --
and Compliance/General 1998 -- -- --
Counsel and Assistant
Secretary
Kelly L. Macke 2000 105,311 -- 680
Vice President of U.S. Sales 1999 83,995 3,150 --
and Marketing 1998 75,650 -- --
</TABLE>
Leisure Time provides Alan N. Johnson and provided Elden W. Rance and
R. Thomas Klingel with automobiles and pays or paid the related insurance and
maintenance. The total amounts paid by Leisure Time for automobiles, insurance
and maintenance for the fiscal years ended June 30, 2000, 1999 and 1998 for each
individual did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus paid to each individual.
25
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information with respect to options granted
during Leisure Time's fiscal year ended June 30, 2000, to Alan N. Johnson, Elden
W. Rance, R. Thomas Klingel, Gerald J. Boyle, Eric R. Dey, John J. Pasierb,
Joseph C. Grunda and Kelly L. Macke:
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in Fiscal Exercise
Name Granted Year Price Expiration Date
--------------------- -------------------- ----------------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Alan N. Johnson 6,111 3.4% $2.13 11/04 - 12/04
Elden W. Rance 2,038 1.1% $2.13 11/04 - 12/04*
R. Thomas Klingel 1,360 0.8% $2.13 11/04 - 12/04*
Gerald J. Boyle 166 0.1% $2.13 11/04 - 12/04*
John J. Pasierb 1,782 1.0% $2.13 11/04 - 12/04*
Eric R. Dey 1,020 0.6% $2.13 11/04 - 12/04*
50,000 28.2% $12.00 7 7/05/04 - 7/05/07
Joseph C. Grunda 680 0.4% $2.13 11/04 - 12/04*
Kelly L. Macke 680 0.4% $2.13 ` 11/04 - 12/04*
</TABLE>
*Cancelled and exchanged for cash effective June 22, 2000.
Aggregate Option exercised in Last Fiscal Year and Fiscal Year End Option Values
No options were exercised by Alan N. Johnson, Elden W. Rance, R. Thomas
Klingel, Gerald J. Boyle, John J. Pasierb, Eric R. Dey, Joseph C. Grunda or
Kelly L. Macke during Leisure Time's fiscal year ended June 30, 2000. The
following table provides information with respect to them concerning unexercised
options to purchase our common stock held by them as of the end of the fiscal
year ended June 30, 2000:
26
<PAGE>
Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable(1)
Alan N. Johnson 1,018,900/-0- $1,015,625/-0-
Elden W. Rance 562,500/-0- -0-/-0-
R. Thomas Klingel 164,300/40,000 -0-/-0-
Gerald J. Boyle 50,292/50,292 -0-/-0-
John J. Pasierb 60,000/40,000 -0-/-0-
Eric R. Dey 12,500/-0- -0-/-0-
Joseph C. Grunda 20,000/20,000 -0-/-0-
Kelly L. Macke 126,250/1,250 $156,250/-0-
(1) Calculated by multiplying the difference between the exercise price and the
closing bid price of $2.25 per share on June 30, 2000 by the applicable shares.
Does not give consideration to commissions or other market conditions.
Employment Agreements
Alan N. Johnson has an employment agreement with Leisure Time that
terminates on June 30, 2003. 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,
Gerald J. Boyle and Richard D. Sly are $600,000, $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.
27
<PAGE>
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 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.
Joseph C. Grunda has an employment agreement with Leisure Time that
terminates on February 28, 2002. John J. Pasierb has an employment agreement
with Leisure Time that terminates on January 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 of the underwriters of Leisure Time's public offering 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.
28
<PAGE>
Options to purchase 764,900 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
246,400 shares of common stock and other employees have been granted options to
purchase 518,500 shares of common stock. The outstanding options have an average
exercise price of approximately $7.03 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
2,477,348 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.
29
<PAGE>
ITEM 12. 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 October 17, 2000, 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 named in Item 11
and Leisure Time's directors;
- all current 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.
Share of Common Stock
Name and Address, Beneficially Owned
If Over 5%, of Beneficial Owner Prior to the Offering
Number Percent of Class
Alan N. Johnson 3,202,456(1) 45.8%
1284 Miller Road
Avon, OH 44011
Gerald J. Boyle 350,292(2) 5.9
4258 Communications Drive
Norcross, GA 30093
Richard D. Sly 325,920(3) 5.5
13920 West Lake Road
Vermillion, OH 44089
Lester E. Bullock 20,850(4) *
John S. Pasteno 41,782(5) *
Per-Arne Skogstad *
15,000(6)
Carl A. Williams -0- *
30
<PAGE>
Directors and Current Executive
officers as a group (6 persons) 4,113,700(8) 56.3%
R. Thomas Klingel -0- -0-
Elden W. Rance -0- -0-
Anthony J. Siciliano 301,000(9) 5.1%
18 Neil Drive
Smithtown, NY 11787
David K. Vanco 917,643(10)
1 South Piermont Drive
North Barrington, IL 60010
* Less than 1%.
(1) The shares owned by Alan N. Johnson include 1,066,567 shares of
common stock underlying presently exercisable options.
(2) The shares owned by Gerald J. Boyle include 50,292 shares of
common stock underlying presently exercisable options.
(3) The shares owned by Richard D. Sly include 43,420 shares of common
stock underlying presently exercisable options.
(4) The shares owned by Lester E. Bullock represent 40,000 shares of
common stock underlying the exercisable portion of an option.
(5) The shares owned by John J. Pasierb represent 41,782 shares of
common stock underlying the exercisable portion of options.
(6) The shares owned by Per-Arne Skogstad represent 5,000 shares of
common stock underlying the presently exercisable portion of an option for
15,000 shares.
(7) Carl A. Williams owns an option to purchase 15,000 shares none of
which will be exercisable until April 19, 2001.
(8) The shares owned by the directors and executive officers include
the shares set forth above and 2,000 shares owned by Joseph C. Grunda,
20,000 shares underlying the presently exercisable portions of an option
owned by Joseph C. Grunda and 126,250 shares underlying presently
exercisable portions of options owned by Kelly L. Macke.
(9) 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.
(10) 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.
31
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, Cruises borrowed $3,000,000 from Foothill Capital
Corporation. The loan is secured by the assets of Cruises, including the Leisure
Lady, and is guaranteed by Technology and Leisure Time. In May 1999, Leisure
Express Cruise, LLC and Florida Casino Cruises, Inc. borrowed a total of
approximately $5.4 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,
Technology and Cruises. Alan N. Johnson also guaranteed $1,000,000 of all of the
loans from Foothill Capital Corporation. Mr. Johnson received no compensation
for guaranteeing the loans.
Mr. Johnson has also guaranteed a $1,000,000 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 and is guaranteed
by Technology, Cruises and Mr. Johnson. Mr. Johnson received no compensation for
guaranteeing the line of credit.
Mr. 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 June 30, 1999, Leisure Time Europe has
realized a gross amount of approximately $40,000 from markups on the video
gaming machines sold in Norway. Leisure Time has reserved $33,000 associated
with sales to Leisure Time Europe. The remaining 49% of Leisure Time Europe is
owned by unaffiliated parties.
Leisure Time leases a condominium/office from Mr. Johnson. The lease
expires on October 31, 2002 and requires rental payments of $3,000 per month
net/net/net plus all association fees related to the condominium/office. Rent
expense for the years ended June 30, 1999 and 2000 were $30,000 and $13,000,
respectively.
Leisure Time leases office space in Ohio from Mr. Johnson at a rate of
$2,000 per month. The term of the lease extends through June 2000. Rent expenses
for the years ended June 30, 1999 and 2000, were $18,000 and $18,000
respectively. Accrued rent related to this lease was $18,000 and $9,000 at June
30, 1999 and 2000, respectively.
Leisure Time leases 12 automobiles from J-Way Leasing, Ltd., a company
owned by Mr. Johnson. The leases are for 36 months to 48 months and have various
dates of expiration through December 2002. 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. No
amounts were paid by Leisure Time to J-Way Leasing, Ltd. for the year ended June
30, 1998, but for the years ended June 30, 1999 and June 30, 2000, $61,000 and
$63,000, respectively, was paid.
32
<PAGE>
In October 1998, Cruises borrowed $3,000,000 from Foothill Capital
Corporation. The loan is secured by the assets of Cruises, including the Leisure
Lady, and is guaranteed by Technology, Casinos and Mr. Johnson, none of which
received any compensation for guaranteeing the loan. This loan is currently in
default.
Mr. Johnson has also guaranteed $1,000,000 of $8,400,000 of notes payable.
The notes payable are secured by substantially all the assets of Cruises and
Florida Casino Cruises and are guaranteed by Technology and Cruises. Mr.
Johnson, Technology and Cruises received no compensation for guaranteeing the
notes payable.
Mr. Johnson has also guaranteed a $1,000,000 line-of-credit that Leisure
Time 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
Mr. Johnson, none of which received any compensation for guaranteeing the
line-of-credit.
Mr. Johnson has advanced approximately $362,000 to Leisure Time. Leisure
Time issued Mr. Johnson a demand promissory note in the amount of $295,381.37
for a portion of the advances. The amount of the promissory note was offset by
$116,956 due from Mr. Johnson to Leisure Time. The balance of the promissory
note bears interest at 6% per annum. The note is secured by certain gaming
machines.
Leisure Time uses the architectural services of Richard D. Sly who is also
the assistant secretary and a director of Leisure Time. These services are being
performed in connection with Leisure Time's renovation of the hotel property.
For the year ended June 30, 2000, approximately $27,000 was paid in connection
with these services.
The brother of Mr. Johnson is the owner of a consulting business that was
paid $140,000 during the year ended June 30, 2000. The same person was also an
employee of Leisure Time and was paid $60,000 during the year ended June 30,
2000.
The brother of the president of Leisure Time owes Leisure Time $86 through
a lease receivale at June 30, 2000.
In October 16, 2000, an affiliate of Mr. Johnson offered to purchase all of
the outstanding stock of Leisure Time Hospitality, Inc. for the sum of
$1,300,000 minus the approximately $360,000 due on the note for the hotel
property owned by Leisure Time Hospitality, Inc. and the $83,900 of accounts
payable of Leisure Time Hospitality, Inc. The net purchase price would be paid
by a note that would bear interest at prime, plus 2% would be due on April 25,
2000, and would be secured by a second mortgage on the hotel property. The board
of directors of Leisure Time is currently considering the acceptance of this
offer.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
-----
Independent Auditors' Reports F-1 Consolidated Balance Sheets
as of September 30, 2000 and 1999 F-3
Consolidated Statements of Operations for the three year p
period ended September 30, 2000 F-5
Consolidated Statements of Comprehensive Income (loss) for the
three year period ended September 30, 2000 F-7
Consolidated Statements of Stockholders' Equity (Deficit) for the
three year period ended September 30, 2000 F-8
Consolidated Statements of Cash Flows for the three year period ended
September 30, 2000 F-9
Notes to Consolidated Financial Statements F-12
All schedules are omitted because the required information is not present in
amounts sufficient to require submission of the schedule or because the
information required is included in the Consolidated Financial Statements and
Notes thereto.
Financial Statement Schedules
None.
Exhibits
See "EXHIBIT INDEX"
Current Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on October 20, 2000.
LEISURE TIME CASINOS & RESORTS, INC.
By:/s/Alan N. Johnson
--------------------------
Alan N. Johnson, President and
Chief Executive Officer
By:/s/Gary W. Knox
--------------------------
Gary W. Knox, Chief Financial
Officer and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
---------- ------ -----
/s/Gerald J. Boyle
---------------------
Gerald J. Boyle Director October 20, 2000
/s/Lester E. Bullock
---------------------
Lester E. Bullock Director October 20, 2000
/s/Alan N. Johnson
---------------------
Alan N. Johnson Director October 20, 2000
/s/ Richard D. Sly
---------------------
Richard D. Sly Director October 20, 2000
---------------------
Per-Arne Skogstad Director
/s/ Carl A. Williams
---------------------
Carl A. Williams Director October 20, 2000
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
LEISURE TIME CASINOS AND RESORTS, INC.
EXHIBITS
TO
ANNUAL REPORT ON
FORM 10-K
FOR THE
FISCAL YEAR ENDED
JUNE 30, 2000
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
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 Articles of Amendment to the Articles of Incorporation of Leisure Time
Casinos & Resorts, Inc. filed on December 10, 1999.***
3.4 Bylaws of Leisure Time Casinos & Resorts, Inc. adopted May 12, 1999.*
4.0 Form of Representatives Warrant for the Purchase 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.*
34
<PAGE>
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.*
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.*
10.10Employment Agreement dated effective March 1, 1999, between Leisure Time
Casinos & Resorts, Inc. and Keko Mottes.*
10.11Employment Agreement dated effective March 1, 1999, between Leisure Time
Casinos & Resorts, Inc. and John J. Pasierb.*
10.12Employment Agreement dated effective April 20, 1999, between Leisure Time
Casinos & Resorts, Inc. and Joseph C. Grunda.*
10.13Lease Agreement dated December 1, 1997, between Leisure Time Technology,
Inc. and Weeks Realty, L.P.*
10.14Lease Agreement dated October 31, 1997, between Alan N. Johnson and
Leisure Time Casinos & Resorts, Inc.*
10.15Purchase Agreement dated March 23, 1998, between Lisa Lemon, Inc. and Al
Johnson.*
10.16Amendment to Purchase Agreement dated June 26, 1998, between Lisa Lemon,
Inc. and Al Johnson.*
10.17Assignment dated September 11, 1998, from Al Johnson to Leisure Time
Hospitality, Inc.*
10.18Promissory Note dated September 15, 1998, from Leisure Time Hospitality,
Inc. to Lisa Lemon, Inc. and Guaranty of Alan N. Johnson thereof.*
10.19Mortgage Deed dated September 15, 1998, from Leisure Time Hospitality,
Inc. to Lisa Lemon, Inc.*
10.20Bareboat 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.*
10.22Purchase 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.*
10.24Security Agreement dated October 9, 1998, between Foothill Capital
Corporation and Leisure Time Cruise Corporation.*
10.25First Preferred Ship Mortgage dated October 9, 1998, between Leisure Time
Cruise Corporation and Foothill Capital Corporation.*
10.26Equipment Security Agreement dated October 9, 1998, between Foothill
Capital Corporation and Leisure Time Technology, Inc.*
10.27Continuing Guaranty dated October 9, 1998, from Leisure Time Technology,
Inc. to Foothill Capital Corporation.*
35
<PAGE>
10.28Continuing Guaranty dated October 9, 1998, from Leisure Time Casinos &
Resorts, Inc. to Foothill Capital Corporation.*
10.29Continuing 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.*
10.31$1,500,000 Loan and Security Agreement dated December 17, 1998, between
Leisure Belle Cruise, LLC and General Electric Capital Corporation.*
10.32Guaranty Agreement dated December 17, 1998, from Leisure Time Casinos &
Resorts, Inc. to General Electric Capital Corporation.*
10.33Guaranty Agreement dated December 17, 1998, from Leisure Time
Technologies, Inc. to General Electric Capital Corporation.*
10.34First Preferred Ship Mortgage dated December 17, 1998, from Leisure Belle
Cruise, LLC in favor of General Electric Capital Corporation.*
10.35Consulting Agreement dated March 31, 1998 between Leisure Time Casinos &
Resorts, Inc. and A. J. Siciliano.
10.36Bareboat Charter Party dated as of January 22, 1999, between Florida
Casino Cruises, Inc. and Leisure Express, LLC.*
10.37Purchase Option Agreement dated as of January 22, 1999, between Florida
Casino Cruises, Inc. and Leisure Express, LLC.*
10.38Consulting Agreement dated as of February 1, 1999, between and Kent Manley
and Leisure Time Cruise Corporation.*
10.39Dockage Agreement and Lease dated as of June 1, 1998, between Rowe Square
Corporation and Leisure Express Cruise, LLC.*
10.40Distribution Agreement dated January 23, 1998, between Leisure Time
Technology, Inc. and Sao Paulo Games Commercial LTDA.*
10.41Amendment to the Contract for Distribution dated January 22, 1998,
between Leisure Time Technology, Inc. and Sao Paulo Games Commercial
LTDA.*
10.42Stock 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.*
36
<PAGE>
10.44Security 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.*
10.46Security Agreement darted April 22, 1999, between Foothill Capital
Corporation and Florida Casino Cruises, LLC.*
10.47Continuing Guaranty dated April 22, 1999, from Leisure Express
Cruise, LLC to Foothill Capital Corporation.*
10.48First Preferred Ship Mortgage dated April 22, 1999, between Florida
Casino Cruises, Inc. and Foothill Capital Corporation.*
10.49Amendment No. 1 to Loan Documents dated April 22, 1999, between
Foothill Capital Corporation and Leisure Time Cruise Corporation.*
10.50Amendment to and Confirmation of Guaranty dated April 22, 1999, by
Leisure Time Technology, Inc. in favor of Foothill Capital
Corporation.*
10.51Amendment to and Confirmation of Guaranty dated April 22, 1999, by
Leisure Time Casinos & Resorts, Inc. in favor of Foothill Capital
Corporation.*
10.52Amendment to and Confirmation of Guaranty dated April 22, 1999, by
Alan N. Johnson in favor of Foothill Capital Corporation.*
10.53Second amendment to First Ship Mortgage dated April 22, 1999, between
Leisure Time Cruise Corporation and Foothill Capital Corporation.*
10.54Pledge Agreement dated April 22, 1999, between Leisure Express Cruise
LLC and Foothill Capital Corporation.*
10.55Continuing Guaranty dated April 22, 1999, from Leisure Time Cruise
Corporation in favor of Foothill Capital Corporation.*
10.56Continuing Guaranty dated April 22, 1999, from Florida Casino
Cruises, Inc. in favor of Foothill Capital Corporation.*
10.57Continuing Guaranty dated April 22 1999, from Alan N. Johnson in
favor of Foothill Capital Corporation.*
10.58Master Agreement and Lease between Leisure Express Cruise, LLC and
Shoestring Properties Limited Partnership dated April 29, 1999.*
10.59Marina Lease dated April 29, 1999 between Shoestring Properties
Limited Partnership and Leisure Time Cruise Corporation.*
37
<PAGE>
10.60Dockside Lease dated April 29, 1999 between Shoestring Properties Limited
Partnership and Leisure Time Cruise Corporation.*
10.61First 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.*
10.63WCMA 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.*
10.64Lease dated May 10, 1999, by and between Alan N. Johnson and Leisure Time
Casinos & Resorts, Inc.*
10.65Employment 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.*
10.66Promissory Note dated June 18, 1999, from Leisure Time Casinos & Resorts,
Inc. to American International Specialty Lines Insurance Company.*
10.67Employment Agreement dated effective July 6, 1999, between Leisure Time
Casinos & Resorts, Inc. and Eric R. Dey.*
10.68License Agreement effective July 12, 1999, between Radisson Hotels
International, Inc. and Leisure Time Hospitality, Inc.*
10.69 Form of Custody Agreement.*
10.70Letter dated July 26, 1999 from Merrill Lynch Business Financial Services,
Inc. to Leisure Time Casinos & Resorts, Inc.*
10.71Form of Consulting Agreement between Schneider Securities, Inc. and Leisure
Time Casinos & Resorts, Inc.*
10.72Solutia Gaming Systems, Inc.'s Exclusive Distribution Agreement dated
November 9, 1999.**
10.73Solutia Gaming Systems, Inc.'s Exclusive Distribution Agreement of
Individual Games dated November 9, 1999.**
10.74Subscription Agreement dated December 10, 1999, between Prime Technological
Services and Leisure Time Casinos & Resorts, Inc. (without exhibits B, C or
D).***
10.76Promissory Note in the amount of $98,880 and dated December 10, 1999, from
Leisure Time Casinos & Resorts, Inc. to Mogo Financial Management
Company.***
10.77Consulting Agreement dated December 10, 1999, by and between Leisure Time
Casinos & Resorts, Inc. and Mogo Financial Company d/b/a Mogo Technical
Consultants.***
10.78Promissory Note dated June 1, 2000, from Leisure Time Casinos & Resorts,
Inc. to Alan N. Johnson.****
21 Subsidiaries of the Registrant.****
27.0 Financial Data Schedule.
38
<PAGE>
* Items incorporated by reference to Leisure Time Casinos & Resorts, Inc.'s
Registration Statement on Form S-1, (File No. 333-77737).
** Items incorporated by reference to Leisure Time Casinos & Resorts, Inc.'s
Quarterly Report on Form 10-Q from the Quarter Ended September 30, 1999.
*** Items incorporated by reference to Leisure Time Casinos & Resorts, Inc.'s
Current Report on Form 8-K dated December 10, 1999.
**** Filed as an exhibit hereto.
<PAGE>
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
and Independent Auditors' Report
June 30, 1999 and 2000
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
-----
Leisure Time Casinos & Resorts, Inc. and Subsidiaries
Independent Auditors' Report...............................................F - 2
Consolidated Financial Statements
Consolidated Balance Sheets........................................F - 4
Consolidated Statements of Operations..............................F - 5
Consolidated Statement of Stockholders' Equity.....................F - 6
Consolidated Statements of Cash Flows .............................F - 7
Notes to Consolidated Financial Statements.................................F - 9
<PAGE>
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, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2000. 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, 1999 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended June 30, 2000 in conformity with generally accepted
accounting principles.
<PAGE>
Board of Directors and Stockholders
Leisure Time Casinos &
Resorts, Inc. and Subsidiaries
Page Two
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, the Company has a deficit in stockholders' equity of
$3,978,000 at June 30, 2000 and a net loss from continuing operations of
$18,718,000 for the year then ended. The Company is in default on most of its
debt and has been sued by several note holders and creditors for collection. In
addition, the Company has recently been denied gaming licenses by four
jurisdictions. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
October 6, 2000
Denver, Colorado
<PAGE>
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30,
--------------------------------
1999 2000
------------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,636 $ 275
Notes receivable - related party - current (Note 8) - 69
Trade accounts receivable, less allowance of $191 (1999) and $219 (2000) 1,689 233
Receivable - other 18 12
Current portion of net investment in direct financing leases 1 -
Inventories, net (Note 4) 10,643 3,363
Prepaid expenses and other 905 305
Deferred tax asset - current (Note 11) 180 -
Income tax receivable - 325
Net assets of discontinued operations (Note 6) 9,249 -
------------- ------------
Total current assets 25,321 4,582
------------- ------------
Property and equipment, net (Note 5) 1,359 875
Note receivable - related party - long-term (Note 8) - 12
Financial interest in collateral (Note 6) 7,423 7,807
Goodwill, net of accumulated amortization of $1,786 (1999) and $2,280 (2000) 4,344 3,531
Non-compete agreement, net of accumulated amortization of $1,456 (1999) and
$1,977 (2000) (Note 19) 3,758 3,237
Other assets, net (Note 5) 1,084 78
Deposits 124 166
------------- ------------
Total assets $ 43,413 $ 20,288
============= ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Line-of-credit (Note 9) $ 960 $ 1,034
Current portion of long-term notes payable (Note 9) 6,660 11,738
Current portion of capital leases 63 -
Current portion of other long-term liabilities (Note 10) 466 466
Accounts payable 7,157 2,538
Accrued expenses (Note 7) 1,915 1,829
Income taxes payable 1,723 -
Net liabilities of discontinued operations (Note 6) - 3,143
------------- ------------
Total current liabilities 18,944 20,748
------------- ------------
Long-term liabilities
Long-term portion of notes payable (Note 9) 7,299 -
Long-term portion of capital leases 93 -
Deferred income taxes payable (Note 11) 386 -
Other long-term liabilities (Note 10) 4,156 3,518
------------- ------------
Total long-term liabilities 11,934 3,518
------------- ------------
Total liabilities 30,878 24,266
------------- ------------
Commitments and contingencies (Notes 9, 10, 12, 13 and 15)
Stockholders' equity (deficit)(Notes 15 and 16)
Preferred stock, no par value; 5,000,000 shares authorized; 523,579 shares
issued and outstanding at June 30, 2000, liquidation preference of $5,392,790 - 4,964
Common stock, $.001 par value; 45,000,000 shares authorized; 5,171,829
(1999) and 5,918,301 (2000) issued and outstanding 5 6
Additional paid-in capital 8,116 14,339
Common stock subscription (240) (240)
Retained earnings (accumulated deficit) 4,654 (23,047)
------------- ------------
Total stockholders' equity (deficit) 12,535 (3,978)
------------- ------------
Total liabilities and stockholders' equity (deficit) $ 43,413 $ 20,288
============= ============
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue $ 28,643 $ 56,896 $ 15,566
Cost of goods sold 16,517 30,107 10,761
-------------- -------------- --------------
Gross profit 12,126 26,789 4,805
-------------- -------------- --------------
Selling, general and administrative expenses 8,727 10,395 11,214
Inventory impairment (Note 3) - - 7,355
Research and development costs 642 1,445 3,276
Stock based compensation (Note 15) - 1,500 -
Interest expense, net 840 622 1,249
Litigation (Note 13) 3,043 318 1,739
-------------- -------------- --------------
Total operating expenses 13,252 14,280 24,833
-------------- -------------- --------------
Net income (loss) before income tax benefit (expense) (1,126) 12,509 (20,028)
Income tax (expense) benefit (Note 11) 197 (4,628) 1,310
-------------- -------------- --------------
Net income (loss) from continuing operations (929) 7,881 (18,718)
-------------- -------------- --------------
Loss from operations of discontinued operations (Note 6) - (3,449) (1,760)
Loss on disposal of discontinued operations including provision of
$1,903 for operating losses during phase out period (Note 6) - - (7,066)
-------------- -------------- --------------
Loss from discontinued operations - (3,449) (8,826)
-------------- -------------- --------------
Net income (loss) before preferred stock dividends (929) 4,432 (27,544)
-------------- -------------- --------------
Dividends declared - - 157
-------------- -------------- --------------
Net income (loss) available to common shareholders $ (929) $ 4,432 $ (27,701)
============== ============== ==============
Earnings (loss) per common share - continuing operations (Note 17) $ (.21) $ 1.66 $ (3.25)
============== ============== ==============
Earnings (loss) per common share - discontinued operations (Note 17) $ - $ (.73) $ (1.53)
============== ============== ==============
Earnings (loss) available to common shareholders per common share - basic
(Note 17) $ (.21) $ .93 $ (4.81)
============== ============== ==============
Earnings (loss) available to common shareholders per common share -
diluted (Note 17) $ (.21) $ .56 $ (4.81)
============== ============== ==============
Weighted average number of common shares outstanding - basic (Note 17) 4,516,528 4,755,771 5,753,815
============== ============== ==============
Weighted average number of common shares outstanding - diluted (Note 17) 4,516,528 7,898,220 5,753,815
============== ============== ==============
</TABLE>
<PAGE>
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Common Accumulated
------------------------ --------------------- Paid-in Stock Deficit/
Shares Amount Shares Amount Capital Subscrip- Retained
tion Earnings Total
--------- --------- --------- ------ ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 - $ - 4,505,380 $ 4 $ 3,118 $ - $ 1,151 $ 4,273
Common stock issued for
cash at $2.80 a share - - 33,900 1 94 - - 95
Conversion of debt at
rates ranging from
$2.50 to $2.80 a share - - 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
Conversion of debt at
$2.50 a share - - 38,489 - 96 - - 96
Issuance of options
with imputed values of
$1.46 to $4.00 a share - - - - 2,017 - - 2,017
Common stock issued
upon exercise of
options, warrants and
debt conversion
features - - 310,186 - 684 - - 684
Common stock issued for
cash at $10.00 a share - - 4,000 - 40 - - 40
Common stock issued for
acquisition - - 180,000 - 1,800 - - 1,800
Common stock
subscription - - - - - (240) - (240)
Net income for the year
ended June 30, 1999 - - - - - - 4,432 4,432
--------- --------- --------- ------ ------- --------- -------- --------
Balance - June 30, 1999 - - 5,171,829 5 8,116 (240) 4,654 12,535
Common stock issued in
public offering, net
of costs of $1,926 for
cash at $12.00 a share
(Note 16) - - 700,000 1 6,473 - - 6,474
Common stock issued
upon exercise of
options, warrants and
debt conversion
features (Note 15) - - 31,472 - - - - -
Convertible preferred
stock issued at $10.00
a share for
satisfaction of debt
(Note 16) 523,759 4,964 - - - - - 4,964
Common stock reacquired
through the disposal
of RP Capital
(Note 20)
- - (100,000) - (1,400) - - (1,400)
Issuance of common
stock in satisfaction
of lawsuit (Note 13) - - 115,000 - 1,150 - - 1,150
Net loss for the year
ended June 30, 2000 - - - - - - (27,701) (27,701)
--------- --------- --------- ------ ------- --------- -------- --------
Balance - June 30, 2000 523,759 $ 4,964 5,918,301 $ 6 $14,339 $ (240) $(23,047) $ (3,978)
========= ========= ========= ====== ======= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Consolidated Statements of Cash Flows
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------------
1998 1999 2000
--------------- --------------- -----------
<C> <C> <C>
Cash flows from operating activities
<S> Net (loss) income $ (929) $ 4,432 $ (27,701)
--------------- --------------- -----------
Adjustments to reconcile net (loss) income to cash
provided by (used by) operating activities
Allowance for doubtful accounts - 161 -
Net loss on disposal of assets 96 13 397
Stock based compensation - 1,500 -
Deferred taxes (1,057) 844 (206)
Common stock issued for settlement agreement - - 1,150
Inventory impairment - - 7,355
Assumption of guaranteed customer debt - - 400
Impairment of other assets - - 1,006
Depreciation and amortization 1,864 1,923 1,676
Changes in certain assets and liabilities
Receivables (879) 2,630 1,381
Net investment in direct financing leases - - 1
Income taxes receivable - - (325)
Inventories 389 (8,198) 2,542
Prepaids and other assets (823) (647) 600
Employee advances (4) - -
Officer advances 55 - -
Accounts payable 549 5,644 (448)
Accrued expenses 3,452 (3,725) (23)
Income taxes payable (42) 1,261 (1,723)
Notes receivable (79) 79 -
Net assets (liabilities) of discontinued operations - (9,249) 10,608
--------------- --------------- -----------
Total adjustments 3,521 (7,764) 24,391
--------------- --------------- -----------
Net cash provided by (used by) operating activities 2,592 (3,332) (3,310)
--------------- --------------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,188) - (368)
Other assets - 558 -
Deposits (1,909) 137 (42)
Proceeds on the sale of fixed assets - - 20
--------------- --------------- -----------
Net cash (used by) provided by investing activities (3,097) 695 (390)
--------------- --------------- -----------
Cash flows from financing activities
Proceeds from issuance of common stock 94 484 6,474
Line-of-credit, net - 960 74
Proceeds from notes payable 3,000 12,063 -
Loan fees - (275) -
Payment on notes payable (2,221) (7,976) (4,508)
Payments on capital leases (29) (64) (63)
Payments on long-term debt (537) (807) (638)
Payments on note payable - officer (3) - -
--------------- --------------- ----------
Net cash provided by financing activities 304 4,385 1,339
--------------- --------------- -----------
Net (decrease) increase in cash (201) 1,748 (2,361)
Cash and cash equivalents- beginning of year or period 1,089 888 2,636
--------------- --------------- -----------
Cash and cash equivalents- end of year or period $ 888 $ 2,636 $ 275
=============== =============== ===========
</TABLE>
Continued on next page.
See notes to consolidated financial statements.
F-7
<PAGE>
Consolidated Statements of Cash Flows
(In thousands, except share and per share amounts)
Continued from previous page.
Schedule of non-cash investing and financing activities:
During the years ended June 30, 1998 and 1999, the Company acquired fixed
assets by incurring capital lease obligations in the amount of $63 and
$128, 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 1999, the Company converted $267
and $96, respectively, of debt to equity by issuing capital stock to the
debt holders.
During the year ended June 30, 1999, the Company incurred various non-cash
transactions related to the acquisitions completed in April and May 1999
(Note 19).
In 1999, the Company issued stock for a note related to the exercise of
options totaling $240,000.
During the year ended June 30, 2000:
The Company converted $3,613 of accounts payable into a short-term notes
payable.
The Company issued 523,759 shares of Convertible Series A Preferred Stock
to a vendor for a total consideration of $5,238, consisting of the
satisfaction of a $2,000 promissory note payable, a credit for the
payment of interest of $133, $558 of accounts payable, and a deposit of
$2,547 against future purchases of inventory by the Company from the
vendor.
The Company incurred a transaction fee of $274 related to the issuance of
the 523,759 shares of Convertible Series A Preferred Stock and offset the
fee against additional paid-in capital. Payment of the fee consisted of
$175 in cash and the balance in the form of a promissory note for $99.
The Company offset $434 of capitalized initial public offering costs,
against additional paid-in capital, which were paid prior to June 30,
1999.
Supplemental disclosure of cash flow information:
Cash paid for interest for the years ended June 30, 1998, 1999 and 2000
was approximately $1,084, $1,658 and $908, respectively.
Cash paid for income taxes for the years ended June 30, 1998, 1999 and
2000 was $982, $540 and $0, respectively.
F-8
<PAGE>
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Note 1 - Summary of Significant Accounting Policies
Organization
Leisure Time Casinos & Resorts, Inc. ("Casinos") was incorporated in Colorado on
February 4, 1993, and was a development stage enterprise until September 1996.
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 to
Native American tribes in California, Kansas, Michigan, Minnesota, Montana, New
Mexico, New York, North Carolina, Wisconsin and is in compliance with South
Carolina regulations regarding the sale of gaming machines. In addition,
Technology is licensed by the state for the sale of gaming devices in Minnesota,
Montana and Wisconsin. In August and September 2000, the Company was notified
that the Viejas tribe in California, the state of Arizona, the Pueblo Sandia
Tribe and the Pueblo Isleta Tribe in Arizona had denied its license due to,
among other items, the financial condition of the Company.
Leisure Time Cruise Corporation ("Cruises") was incorporated on October 17,
1997, in the state of Colorado and conducted offshore gaming cruises on the
"Vegas Express" gaming vessel from July, 1998 until October 31, 1999. In May
1999, Leisure Express Cruise, LLC, a Colorado limited liability company,
acquired Florida Casino Cruises, Inc., the corporation that owned the Vegas
Express. Cruises also owned the "Leisure Lady", another gaming vessel that has
not been placed in operation. Leisure Belle Cruise, LLC is a Colorado limited
liability company that owns a dry-docked gaming vessel. Leisure Lady Cruise, LLC
is a Colorado limited liability company and currently has no operations.
Effective April 16, 2000, the Company has decided to discontinue this business
segment and is investigating alternatives for disposing the net assets of this
segment (Note 6).
Leisure Time Hospitality, Inc. is incorporated in Ohio and owns a hotel property
that was being redeveloped in the Cleveland metropolitan area. Effective April
26, 2000, the Company has sold the stock of this business to an affiliate of the
President of the Company (Note 20).
Leisure Time Gaming, Inc. is incorporated in South Carolina and operated a
gaming route from March 1999 to June 30, 2000. It intends to revitalize its
route operations with Redemption Games in the state of Georgia.
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)
("Financial") in April 1999 (Note 19). Financial is incorporated in the state of
Minnesota and finances various types of equipment acquisitions under direct
financing leases and loans secured by existing equipment and sells leases and
loans to financial institutions. Effective April 16, 2000, the Company sold the
stock of this business back to the previous owner (Note 20).
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
Solutia Gaming Systems, Inc. is incorporated in Oklahoma and is developing new
gaming machines. The Oklahoma office has been closed and relocated to Georgia.
Solutia markets other than class 3 gaming devices to markets that do not accept
class 3 devices.
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, 1999 and 2000 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, 1999 and 2000 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.
At June 30, 2000, the Company had impaired $8,000 of inventory based on their
determination that the value of this inventory may not be realized (Note 3).
Property and Equipment
Property and equipment are stated at cost. Depreciation 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.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
Product Software Development Costs
During the year ended June 30, 1999, the Company capitalized product software
development costs when product technological feasibility is established and
concluding when the product is ready for its intended use. Software development
costs were amortized on the straight-line method over an expected useful life of
three years. As of June 30, 2000, the Company impaired $2,486 of capitalized
software as the market for this software was South Carolina, which effective
July 1, 2000, no longer permits gaming.
Organizational Costs
Organizational costs and other start-up related expenditures are expensed as
incurred.
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. This agreement is in default. 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.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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.
Leasing revenue on direct financing leases consists of interest earned on the
present value of the lease payments. Leasing revenue also includes profit from
the sale to third parties of the Company's interest in direct finance leases.
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.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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, 1998, 1999
and 2000, 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 (Note 17).
Antidilutive Securities Excluded from Dilutive Earnings Per Share
As of June 30, 1998:
Security Price Shares
---------------------------- --------------------- ----------
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
As of June 30, 2000:
Security Price Shares
---------------------------- --------------------- ----------
Stock options $ .10 - $ 12.00 4,130,498
Warrants $ 1.00 - $ 14.40 720,479
Preferred stock $ 7.875 1,173,867
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.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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, 1998, 1999 and 2000, were $69, $723 and $116, respectively.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives are accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS No. 133 will have no material effect on its
financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation,
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, which provides guidance on applying generally
accepted accounting principles to selected revenue recognition issues.
Management believes that the Company's revenue recognition policies are in
accordance with SAB 101.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the June 30, 1999 financial
statements in order to conform to the June 30, 2000 presentation.
Note 2 - Continued Existence
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained a
$27,701 loss in 2000 resulting in a deficit in stockholders' equity of $3,978
and a working capital deficiency of approximately $16,200 at June 30, 2000. In
March of 1999 a court decision discontinued legalized gaming in South Carolina
effective after June 30, 2000. This resulted in the elimination of the largest
market for the Company's games. From November to March the Company's principle
effort was developing games to be introduced into California that allowed gaming
on Indian Reservations starting in March 2000. The Company believed that entry
into the California market would produce a significant market for the Company's
machines. The market in California did not develop as quickly as the Company had
anticipated and in April the Company chose to terminate its hotel segment and
gaming vessel segment of the business. (See Note 6.) The Company has continued
to lose money from operations and has been unable to pay vendors and debt
holders' amounts as they become due. This has resulted in several pieces of
litigation being filed against the Company. Included in the litigation are
several pending summary judgments in the amounts of approximately $2,700 and
$1,000. (See Note 13.) In September 2000, the State of Arizona as well as the
Viejas Indian Tribe in California denied gaming licenses to the Company citing
the financial condition of the Company. As a result of this denial the Company
is no longer confident that it can market certain lines of inventory and has
reserved $8,000 of inventory at June 30, 2000. In addition, Company is
experiencing difficultly in obtaining new gaming licenses due to its financial
condition and the denials mentioned above.
The Company has cut its costs significantly in 2000 and is continuing to reduce
its costs so that it can achieve profitable operations. Additionally, the
Company is pursuing opportunities to expand its licensing outside of the United
States and is seeking interested buyers for the rights to sell the Pot of Gold
machines in the United States. However, there can be no assurances that the
planned restructuring will increase revenue or that the Company will be able to
return to a profitable position.
These factors, among others, raise substantial doubt that the Company may be
able to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
<PAGE>
Note 3 - Significant Fourth Quarter Adjustments
In August and September of 2000, the Company was denied a gaming license in
Arizona, on the Viejas Indian Reservation in California, on the Pueblo Sandia
Rservation and the Pueblo Isleta reservation in Arizona. This event caused
management to reassess the realization of inventory and software development
costs. In the first quarter of fiscal 2000 the Company accumulated large
quantities of inventory in anticipation of sales in South Carolina in December
of 1999. The Company now believes it cannot realize the value of this inventory
in the near future and has established a reserve of $8,000 in the fourth quarter
of 2000. Additionally the Company impaired $2,486 in software costs related to
specific communication devises for gaming machines in South Carolina. The
Company had felt this software might have had application elsewhere but in the
fourth quarter 2000 decided that it could not be realized in the near future.
Note 4 - Inventories
Inventories consist of the following:
June 30,
--------------------------------------
1999 2000
-------------- --------------
Raw materials and parts
made by others $ 4,028 $ 8,325
Finished goods 6,765 765
-------------- --------------
Total 10,793 9,090
Inventory reserve (150) (5,727)
-------------- --------------
$ 10,643 $ 3,363
============== ==============
<PAGE>
Note 5 - Property and Equipment and Other Assets
Property and equipment consist of the following:
June 30,
------------------------------------
1999 2000
--------------- ---------------
Property and equipment
Vehicles $ 363 $ 85
Furniture and fixtures 247 252
Machinery and equipment 997 731
Leasehold improvements 277 341
--------------- ---------------
1,884 1,409
Less accumulated depreciation (525) (534)
--------------- ---------------
$ 1,359 $ 875
=============== ===============
Other assets consist of the following:
Capitalized software development
costs, net of impairment of
$2,486 (2000) $ 499 $ -
Capitalized loan fees, net of
accumulated amortization of
$11 (1999)
150 -
License fees 146 70
Other 289 8
--------------- ---------------
$ 1,084 $ 78
=============== ===============
Note 6 - Discontinued Operations
In April 2000, the Company decided to discontinue its offshore gaming cruise,
financial and hospitality business segments. All offshore gaming cruise
operations have ceased and related locations have been closed. The renovations
on the hotel have ceased.
The Company intends to sell the net assets of the subsidiaries related to the
offshore gaming cruise segment and is actively seeking to do so. The stock of
the financing segment was sold on May 7, 2000 to a current stockholder and the
former owner. The Company has sold the hotel business segment to the President
of the Company for $1,300,000 payable as follows: Assumption of the first
mortgage of approximately $360,000. The balance of $940,000 will be paid by a
combination of forgiveness of debt the Company owes the president and a note
receivable from the president.
<PAGE>
Note 6 - Discontinued Operations (continued)
No proceeds have been received related to the discontinued assets as of June 30,
2000.
All personnel associated with the aforementioned divisions have been, or will be
terminated or transferred to another division.
The results of operations of the segments are included in the statements of
operations and include the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1999 2000
----------------- -----------------
<S> <C> <C>
Revenues $ 5,668 $ 2,833
Total costs and expenses (9,117) (4,593)
----------------- -----------------
Loss from operations of discontinued operations $ (3,449) $ (1,760)
================= =================
</TABLE>
The loss of the disposition of the segments
listed above has been accounted for
as discontinued operations and includes:
Loss on Discontinued
Operations
-------------------
Estimated loss on disposal and carrying value of net
assets in excess of anticipated proceeds $ (4,785)
Estimated loss from operations of the discontinued
divisions for the period April 20, 2000 through
April 2001 (2,281)
-----------------
Total disposal costs (7,066)
-----------------
Loss on disposal of discontinued business $ (7,066)
=================
The components of the loss on disposal of the offshore gaming cruise, financing
and hospitality segments were based on reasonable estimates and assumptions that
management believes are adequate; however, actual amounts may differ from these
estimates.
The Company has guaranteed the dollars of outstanding debt from a financial
institution related to vessels that operated in the offshore gaming cruise
segment. The Company continues to seek an interested buyer to acquire the assets
an interested buyer to acquire the assets and assume the debt related to the
offshore gaming cruise segment. As such, the Company has not removed the
indebtedness from the accompanying financial statements and has recorded an
asset of equal value, which is management's estimate of the value the boats will
be sold at. If the boat sells at a value lower or if it is subject to a
foreclosure sale then the Company could experience a loss in excess of the
current estimated amount to the debt titled financial interest in collateral
because the lender will not remove Casinos as a maker on the note.
<PAGE>
Note 6 - Discontinued Operations (continued)
The carrying value of net assets of discontinued operation at June 30, 1999 and
2000 is based on estimated future cash flows associated with the assets.
<TABLE>
<CAPTION>
June 30,
---------------------------------
1999 2000
-------------- -------------
<S> <C> <C>
Assets
Cash $ 1,509 $ 17
Receivables 3,988 6
Machinery and equipment, net (financial interest in collateral)
7,083 7,807
Other assets 1,682 160
Note receivable - related party - 890
-------------- -------------
Total assets $ 14,262 $ 8,880
============== =============
Liabilities
Notes payable $ (3,607) $ (8,633)
Accrued liabilities and other expenses (1,406) (1,487)
Provision for losses on disposal of discontinued operations - (1,903)
-------------- -------------
Total liabilities $ (5,013) $ (12,023)
============== =============
Net assets (liabilities) of discontinued operations $ 9,249 $ (3,143)
============== =============
</TABLE>
Note 7 - Accrued Expenses
<TABLE>
<CAPTION>
June 30,
---------------------------------
1999 2000
-------------- -------------
<S> <C> <C>
Litigation (Note 13) $ - $ 92
Advanced deposits 588 381
Accrued interest 244 852
Accrued wages, benefits and payroll taxes 499 233
Miscellaneous taxes 23 -
Dividend Payable - 157
Other accruals 561 114
-------------- -------------
$ 1,915 $ 1,829
============== =============
</TABLE>
Note 8 - Related Party
<TABLE>
<CAPTION>
June 30,
---------------------------------
Notes Receivable 1999 2000
---------------- -------------- -------------
<S> <C> <C>
Notes receivable
$ - $ 81
Less current portion - (12)
-------------- ------------
Long-term portion $ - $ 69
============== ============
</TABLE>
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. Rent
expense for the years ended June 30, 1999 and 2000 was $30 and $30,
respectively.
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, 1999 and 2000, were $18 and $18, respectively.
Accrued rent related to this lease was $18 and $9 at June 30, 1999 and 2000,
respectively.
The Company leases 12 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 December 2002. 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 year ended June
30, 1998, but for the years ended June 30, 1999 and June 30, 2000, $61 and $63,
respectively, was paid.
In October 1998, Cruises borrowed $3,000 from Foothill Capital Corporation. The
loan is collateralized 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. This loan is currently in
default.
The Company's president has also guaranteed $1,000 of $8,400 of notes payable.
The notes payable are secured by substantially all the assets of Cruises and
Florida Casino Cruises and are guaranteed by Technology and Cruises. The
Company's president, Technology and Cruises received no compensation for
guaranteeing the notes payable. The loans are currently in default.
<PAGE>
Note 8 - Related Party (continued)
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. The line-of-credit is currently in default.
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. Unaffiliated third
parties own the remaining 49%. The Company has reserved $33 associated with
sales to Leisure Time Europe.
The Company uses the services of an architect who is also the assistant
secretary and a director of the Company. These services were being performed in
connection with the Company's renovation of the hotel property. For the year
ended June 30, 2000, approximately $27 was paid in connection with these
services.
Prior to the acquisition of Financial, the Company had paid approximately $50
and $13 to Financial and an officer of Financial, respectively, in connection
with their arrangement of equipment and working capital financing for the
Company.
The brother of the president of the Company is the owner of a consulting
business that was paid $140 during the year ended June 30, 2000. The same person
was also an employee of the Company and was paid $60 during the year ended June
30, 2000.
The brother of the president of the Company has entered into a lease agreement
with the Company for certain equipment. The lease receivable has a balance of
$69 at June 30, 2000.
Note 9 - Long-Term Debt and Line-of-Credit
All of the following notes are currently in default.
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 2000
---------------- ----------
<S> <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.
$ 18 $ -
6.64% promissory notes payable to individuals in connection with the purchase of
U.S. Games. The Company's obligation was satisfied in full during the year
ended June 30, 2000.
796 -
</TABLE>
<PAGE>
Note 9 - Long-Term Debt and Line-of-Credit (continued)
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 2000
---------------- ----------
<S> <C> <C>
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 June 30, 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 (10.5% combined rate at June
30, 2000). 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. The
Company is currently in default on this note, as such the entire balance is
due and callable at the election of the holder of the note. 2,600 2,438
Notes payable to a finance company, payable in 48 and 60 monthly installments of
$5 and $6 including interest at fixed rates of 9.80% and 10.25%, commencing
August 1998 and July 1999 and due June and July 2003. Collateralized by
security interests in certain equipment. The Company is currently in default
on this note, as such the entire balance is due and callable at the election
of the holder of the note. 458 297
</TABLE>
<PAGE>
Note 9 - Long-Term Debt and Line-of-Credit (continued)
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 2000
---------------- ----------
<S> <C> <C>
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 (Note 10).
The Company is currently in default on this note, as such the entire balance
is due and callable at the election of the holder of the note. The note
remained with Leisure Time Hospitality in the sale of that corporation. 545 -
Notes payable to various financial institutions, interest at 7.8% to 11%,
various monthly installments. Substantially all assets of Financial,
consisting of capital leases and installment notes receivable are pledged as
collateral for the financing arrangements. The notes remained with Financial
in the sale of that corporation. 3,061 -
Notes payable to a finance company for insurance. Fixed interest at 6.92% to
11.12% payable in nine installments of $1 to 16, commencing January 1999 to
July 1999 and due September 1999 to March 2000. The note is currently in
default. 215 26
Notes payable to a finance company with variable interest at a rate equal to
2.25% points above the reference rate (10.00% combined rate at June 30, 1999).
Payable in sixty installments of $35 and $54 plus interest, commencing June
1999 and due May 2004. Collateralized by a vessel. The Company is currently in
default on this note, as such the entire balance is due and callable at the
election of the holder of the note. 4,823 4,534
</TABLE>
<PAGE>
Note 9 - Long-Term Debt and Line-of-Credit (continued)
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 2000
---------------- ----------
<S> <C> <C>
Note payable to an insurance company. Interest at 7.6%, payable in twelve
installments of $308, commencing July 1999 and due June 2000. The Company is
currently in default on this note, as such the entire balance is due and
callable at the election of the holder of the note. 3,550 2,688
Note payable to a finance company, with a variable interest rate equal to 2.2%
points above the reference rate (11.25% combined rate at June 30, 2000).
Payable in fifty-five installments of $7 plus interest and commencing October
1, 1999 and continuing until May 1, 2004, when all remaining principal and
interest are due. The Company is currently in default on this note and as
such, the entire note balance is callable at the election of the finance
company. - 392
Note payable to stockholder, non-interest bearing. - 341
Notes payable to vendors, interest rates at 0% - 10%, with various monthly
installments, in default. - 1,024
Note payable to a finance company for insurance. Fixed rate at 10.9%, payable in
eight installments of $2, commencing December 1999 and due July 2000,
currently in default. - 9
Note payable to a finance company, due in six installments of $5, commencing July
1, 2000 and due December 1, 2000. Fixed interest rate at 12.5%. The note is
currently in default. - 28
Capital leases, canceled during the year ended June 30, 2000. 156 -
---------------- ----------
Total debt 17,722 11,777
Less current portion (6,660) (11,738)
Less debt attributable to discontinued operations - current (2,024) (39)
Less debt attributable to discontinued operations - long-term (1,739) -
---------------- ----------
Total long-term debt $ 7,299 $ -
================ ==========
</TABLE>
<PAGE>
Note 9 - Long-Term Debt and Line-of-Credit (continued)
Line-of-Credit
<TABLE>
<CAPTION>
June 30,
------------------------
1999 2000
---------------- ----------
<S> <C> <C>
$1,000 line-of-credit with a finance company that expired on March 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 (6.5% at June 30, 2000)
collateralized by a first lien on certain accounts receivable and inventory
(Note 4). This note is currently in default. $ 960 $ 1,034
================ ==========
</TABLE>
The aggregate average interest rate on short-term debt is 9.3% at June 30, 2000.
Note 10 - 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 June 30, 2000, approximately $2,149 of deferred
compensation payments have been made. Of these payments, $1,354 has been
recorded as a reduction to the liability. The remaining $795 has been recorded
as interest expense. The Company satisfied, in full, all deferred compensation
contracts during the year ended June 30, 2000.
Non-Compete Agreement
In connection with the acquisition of Technology, the Company entered into a
non-compete 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. The Company did not make its September 2000
payment, and as such, is in default.
<PAGE>
Note 10 - Long-Term Liabilities (continued)
A summary of long-term liabilities at June 30, 1999 and June 30, 2000 is as
follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------
1999 2000
-------------------------------------------- -------------------------------------------
Current Long-term Current Long-term
Total Portion Portion Total Portion Portion
------------ ------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Deferred compensation contracts $ 202 $ 30 $ 172 $ - $ - $ -
Non-compete agreement 4,420 436 3,984 3,984 466 3,518
------------ ------------ ------------ ------------ ------------ ------------
$ 4,622 $ 466 $ 4,156 $ 3,984 $ 466 $ 3,518
============ ============ ============ ============ ============ ============
</TABLE>
The annual aggregate maturities of long-term debt and long-term liabilities at
June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Long-Term Long-Term
Year Ending June 30, Debt Liabilities Total
-------------------- -------------- -------------- --------------
<S> <C> <C> <C>
2001 $ 11,738 $ 466 $ 12,204
2002 - 496 496
2003 - 529 529
2004 - 564 564
2005 - 602 602
Thereafter - 1,327 1,327
-------------- -------------- --------------
$ 11,738 $ 3,984 $ 15,722
============== ============== ==============
</TABLE>
<PAGE>
Note 11 - Income Taxes
The Company files a consolidated tax return that includes the operations of its
subsidiaries.
Income tax expense (benefit) consists of:
Year Ended June 30,
----------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
Current
U.S. Federal $ 780 $ 1,672 $ (1,997)
State and local 80 127 (127)
-------------- -------------- --------------
860 1,799 (2,124)
-------------- -------------- --------------
Deferred
U.S. Federal (1,008) 792 777
State and local (49) 38 37
-------------- -------------- --------------
(1,057) 830 814
-------------- -------------- --------------
$ (197) $ 2,629 $ (1,310)
============== ============== ==============
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,
------------------------------------------
1998 1999 2000
------------ ----------- ---------
<S> <C> <C> <C>
Federal statutory rate (34.0)% 34.0% (34.0)%
State income taxes, net of federal income tax benefit 4.7 1.2 -
Nondeductible expenses including nondeductible goodwill
12.9 2.3 1.1
Deferred expenses including litigation and stock based compensation
(1.1) (.3) 9.9
Net operating loss - reserve - - 18.2
------------ ----------- ---------
(17.5)% 37.2% (4.8)%
============ =========== =========
</TABLE>
<PAGE>
Note 11 - Income Taxes (continued)
Rate Reconciliation (continued)
The net current deferred tax asset and the net long-term deferred tax
(liability) asset in the accompanying consolidated balance sheets consist of the
following:
June 30,
-------------------------
1999 2000
---------- ----------
Current deferred taxes
Current deferred tax asset $ 180 $ -
Long-term deferred taxes
Long-term deferred tax asset 616 3,922
Long-term deferred tax liability (1,002) -
---------- ----------
Net long-term deferred tax asset (liability) (386) 3,922
---------- ----------
Valuation allowance - (3,922)
$ (206) $ -
========== ==========
The principal temporary differences that result in the above deferred tax assets
and liabilities are net operating loss carryforwards. Discontinued operation
amounts are not shown net of taxes because the deferred tax asset will be fully
impaired.
Note 12 - Leases
The Company has a non-cancelable operating lease for its office space in
Norcross, Georgia that expires in January 2005 and requires monthly payments of
$21. Rental expenses for these operating leases were approximately $279 and $287
during the years ended June 30, 1999 and 2000, 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 through March 31, 1999. Additionally,
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, $100 and $750 during the years ended June
30, 1997, 1998 and 1999, respectively. The Company purchased the corporation
that owned the boat in May 1999.
<PAGE>
Note 12 - Leases (continued)
In addition, the Company has operating leases that expire through January 2005
for various office equipment, vehicles, office facilities, dock and parking.
These leases require monthly payments totaling $63. Lease expense for these
operating leases was approximately $395 and $600 for the years ended June 30,
1999 and June 30, 2000, respectively.
Future minimum lease payments pursuant to these leases are approximately as
follows:
Related
Non-Related Party
Year Ending June 30, Party (Note 8) Total
-------------------- --------------- ---------------- -----------
2001 $ 252 $ 95 $ 347
2002 258 53 311
2003 264 15 279
2004 268 - 268
2005 275 - 275
Thereafter - - -
-------------- -------------- --------
$ 1,317 $ 163 $ 1,480
============== ============== =========
Note 13 - Commitments and Contingencies
Open Litigation
Creditors:
On July 24, 2000, a complaint was filed against Leisure Time Hospitality, in the
Cleveland Municipal Court Cuyahoga County, Ohio, (Civil Action No. 00CVF 15927),
alleging defendant rented equipment on three different months and failed to pay.
Plaintiff seeks judgment in the amount of $7 plus interest at a rate of 10% plus
costs. On August 28, 2000, defendant entered into stipulated order granting
leave of Court to move or plead on or before September 25, 2000. Defendant filed
an answer on September 25, 2000. The case is in the discovery/ pre-trial
process. The Company has accrued for this case.
On August 2, 2000, a complaint was filed against Technology, in the Magistrate
Court of Gwinnett County, State of Georgia (Civil Action No. 00-A07048 1),
alleging non-payment on account. Plaintiff seeks judgment for $47 principal,
plus pre-judgment interest accruing on the principal indebtedness at the per
diem rate of $.02 from July 31, 2000 until the date of judgment. Defendant's
answer and defenses were filed on August 31, 2000. The case is in the discovery/
pre-trial process. The Company has accrued for this case.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
Open Litigation (continued)
On August 4, 2000, a complaint was filed against Technology, in the United
States District Court for the Northern District of Georgia, Atlanta Division,
(Civil Action No. 1 00-CV-2011), alleging non-payment on account. Plaintiff
seeks judgment for $937 plus inventory carrying charges, costs, attorneys' fees,
costs of action, and such other and further relief. Defendant's answer and
defenses were filed on August 31, 2000. The case is in the discovery/ pre-trial
process. The Company has accrued for this case.
On August 7, 2000, a complaint was filed by a vendor against Cruises in the
Commonwealth of Massachusetts, District Courts of Massachusetts, Peabody
District Court, (Civil Action No. 0086 CV 0348), alleging damages in the amount
of $14 plus interest and attorney's fees of $2 for a total of $16. An entry of
default against Cruises was filed on September 14, 2000. The Company has accrued
for this case.
On August 17, 2000, a complaint was filed against Florida Casino Cruises, Inc.,
Leisure Express Cruise, LLC, Cruises and Casinos in the United States District
Court For the Northern District of Georgia, Atlanta Division, (Civil Action No.
1 00-CV-2128) alleging breach of maritime contract. Plaintiff requests a
constructive trust for repair funds in the amount of $300 plus additional
interest, costs and attorneys' fees. Plaintiff filed for attachment and
garnishment to any and all freights, accounts, monies, hires, disbursements,
fees, advances, cash, or otherwise, etc. being held by First Union National Bank
and/or its agents and affiliates. Defendant's response to the complaint is due
on October 25, 2000. The Company has accrued for this case.
On August 23, 2000, a complaint was filed by a vendor against Casinos and Alan
N. Johnson, in the United States District Court, for the Northern District of
Georgia, Atlanta Division, alleging violation of 10(b)&10(b)5. (Civil Action No.
00-CV-2186). Plaintiff request damages in the amount of $2,691, the exact amount
to be determined by jury as compensatory damages; costs of litigation and
attorneys' fees, and other relief the Court deems just and proper. Defendants'
answer was filed on October 12, 2000. The Company has accrued for this case.
On August 28, 2000, a complaint was filed against Technology, in the State Court
of Gwinnett County, State of Georgia, (Civil Action No. 00-C-5273-1) alleging
non-payment on account. Plaintiff requests damages plus pre-judgment interest in
the amount of $6, plus continuing pre-judgment interest, and post-judgment
interest at the rate of 18% per annum on the principal amount, plus court costs.
Defendant filed an answer on September 28, 2000. The case is in the discovery/
pre-trial process. The Company has accrued for this case.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
Open Litigation (continued)
On September 28, 2000, a complaint was filed by a vendor against Cruises, in the
Commonwealth of Massachusetts, District Court Department, Taunton Division,
(Civil Action No. 0031CV0669) requesting damages in the amount of $40 plus
interest, costs and attorneys' fees. Defendant's answer is due October 23, 2000.
The Company has accrued for this case.
Note Holders:
On December 27, 1999 a complaint was filed against Casinos in the United States
District Court for the Southern District of New York, (Civil Action No. 99
CV12369) alleging that Casinos defaulted on the payment of a note and breach of
contract by failing to pay in accordance with the premium finance agreement.
Plaintiff requests that it be granted damages in the amount of $2,688 plus
interest at a rate of 7.6% per annum on the note and, in the alternative, $2,773
plus interest, together with the costs and disbursements of the action,
including attorneys' fees, for breach of the finance agreement. The trial
scheduled for September 12, 2000 was continued. On February 15, 2000, Casinos
filed an Answer. On August 24, 2000 the plaintiff filed for summary judgment. On
September 25, 2000, Casinos filed a response to the plaintiff's motion for
summary judgment. Parties are awaiting the Court's ruling. The Company has
accrued for this case.
On August 25, 2000, a complaint was filed against Technology and Casinos in the
State Court of Gwinnett County, State of Georgia, (Civil Action No. 00-C-5242-4)
alleging non-payment on account. Plaintiff requests damages in the amount of
$959, prejudgment interest at the rate of 18% per annum, plus $8 in interest
which accrued at 10% per annum prior to July 15, 2000, plus attorneys' fees;
post-judgment interest at the rate of 18% per annum; all court costs and such
other and further relief as the Court considers just, fair and appropriate.
Defendants filed an answer on September 28, 2000. The case is in the discovery/
pre-trial process. The Company has accrued for this case.
On September 11, 2000, a complaint was filed against Casinos, Technology,
Cruises, Leisure Time International, Ltd., Leisure Time Gaming, Inc., Solutia
Gaming Systems, Inc., Leisure Belle Cruise, LLC, Leisure Time Hospitality, Inc.,
Leisure Express Cruise, LLC, Financial, Florida Casino Cruises, Inc. d/b/a FCC
Advertising, and Alan N. Johnson, an individual, Michael R. Pace, an individual,
in the Superior Court of Gwinnett County, State of Georgia, (Civil Action No.
00-A-8358 7), alleging breach of contract and default under the agreement and
guaranties for a line of credit. Plaintiff request damages in the amount of
$1,027 plus interest, including reasonable attorneys' fees and expenses, and
other costs of collection in the amount provided for in such statute, as
determined at trial. Defendant's answer was filed on October 11, 2000. The
Company has accrued for this case.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
Open Litigation (continued)
Other:
On October 19, 1998, a former employee filed a complaint against Casinos and
Technology in the U.S. District Court, Northern District of Georgia, Atlanta
Division, (Civil Action No. 1:98-CV-3033), alleging breach of oral Employment
Agreement. The Plaintiff is requesting damages for failure of defendants to
issue plaintiff an option for 200,000 shares exercisable at $1.00 per share. On
July 10, 2000 the Court granted summary judgment in favor of Casinos and
Technology. Plaintiff filed a notice of appeal on July 24, 2000. As there is no
reasonable estimate of the outcome of this case, no accrual has been made by the
Company.
On December 14, 1998, Technology filed a complaint against a distributor in the
Superior Court of Gwinnett County, State of Georgia (Civil Action No.
98-A-9761-4), alleging breach of a distribution agreement and misappropriation
of trade secrets. Technology seeks specific performance and damages. The case is
in the discovery/ pre-trial process. As there is no reasonable estimate of the
outcome of this case, no accrual has been made by the Company.
On March 25, 1999, a company filed a complaint against Technology and an
individual in the Court of Common Pleas, Fifth Judicial Circuit, State of South
Carolina, City of Richland, (Civil Action No. 99CP401068), alleging breach of
distribution agreement, illegal raising of prices, breach of contract by
fraudulent act, fraudulent non-disclosure of material fact, and tortuous
interference of contract. The plaintiff requests an award of $2 for every game
resold by the individual. The exact number has not yet been determined. The case
is in the discovery/ pre-trial process. The Court has stated that if the case is
not settled by October 25, 2000, it will be removed to the Federal District
Court. As there is no reasonable estimate of the outcome of this case, no
accrual has been made by the Company.
On September 12, 2000, a complaint was filed against Casinos, Technology, and
Leisure Time Gaming, Inc., in the Court of Common Pleas, State of South
Carolina, County of Spartanburg, (Civil Action No. 2000-CP-42-2524) by a former
employee, alleging that he was denied the opportunity to exercise his options,
that he is owed expenses and that the company is unjustly enriched. Plaintiff
seeks judgment of $1,901 regarding the options and $5 for expenses. Defendants'
answers are due on October 25, 2000. As there is no reasonable estimate of the
outcome of this case, no accrual has been made by the Company.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
Pending Litigation (continued)
Creditors:
On June 27, 2000, a complaint was filed against Casinos in the District Court
Dallas County, Texas, I-162nd Judicial District, (Civil Action No. 00-04789)
alleging non-payment on account. Plaintiff seeks judgment for $260 principal,
attorney fees, plus pre-judgment and post-judgment interest at the highest rates
allowed by law, costs of suit and other and further relief, both special and
general, legal and equitable. On August 25, 2000, defendant filed a notice of
special appearance objecting to jurisdiction. A hearing was held on September
19, 2000. The Court requested briefs after the hearing. The Court ruled that
Casinos should be given the opportunity to correct an affidavit. A hearing is
set for October 24, 2000. Depositions were taken on October 12, 2000. The
Company has accrued for this case.
Other:
On June 18, 1998, a complaint was filed against Technology in the United States
District Court, the District of South Carolina, Anderson Division, (Civil Action
No. 3:98-1887 13), alleging breach of contract and violation of the South
Carolina Unfair Trade Practices Act. Plaintiff requested damages in the amount
of $1,300. The trial was held on June 20 through June 22, 2000, resulting in an
award for plaintiff in the amount of $190, interest at 6.375%, plus costs.
Plaintiff filed a motion for new trial and additur on July 3, 2000. Defendant
filed a motion in opposition on July 14, 2000. On August 28, 2000, the
plaintiff's motion was denied. On September 26, 2000 plantiff filed a notice of
appeal. As there is no reasonable estimate of the outcome of this case, no
accrual has been made by the Company.
Settled Litigation
Creditors:
On January 26, 2000, a complaint was filed against Technology in the State Court
of Gwinnett County, State of Georgia, (Civil Action No. 00-C-06277-4), alleging
that Technology had failed to pay on an account. Plaintiff requested that it be
granted damages in the amount of $136 plus interest, attorneys' fees and costs
of the action. Technology's answer to the complaint was filed on May 9, 2000.
The plaintiff was awarded a judgment in the principal amount of $136 on May 9,
2000. On July 7, 2000 the parties negotiated a payoff of the judgment. The
judgment was totally satisfied on September 10, 2000.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
Settled Litigation (continued)
On February 9, 2000, a complaint was filed by a vendor against Casinos,
Technology, and DOES 1 through 10, inclusive, in the Second Judicial District
Court, State of Nevada, Washoe County, (Civil Action No. CV00-00628), requesting
damages in the amount of $29 plus interest at a rate of 1 1/2% per month since
March 31, 1999. The case was settled by payments of $3 per month. $4 remains as
an outstanding balance.
On March 8, 2000, a complaint was filed by a vendor against Technology in the
State Court of Gwinnett County, State of Georgia, (Case No: 00-C-1602-2).
Plaintiff requests that it be granted damages in the amount of $117 and judgment
for $155 principal, $5 pre-judgment interest to date, plus continuing
pre-judgment interest and post-judgment interest at a rate of 18% per annum. On
August 9, 2000, the Court granted summary judgment in favor of plaintiff in the
amount of $155, $5 pre-judgment interest and post-judgment interest at the
lawful rate and court costs. The parties negotiated a payment plan to satisfy
the judgment whereby Technology has agreed to pay $20 on August 31, 2000 and $10
monthly thereafter until paid in full.
Note Holders:
On April 28, 2000, a complaint was filed against the Biloxi Belle, her engines,
tackle, etc., in rem, and Leisure Belle Cruise, L.L.C. in personam in the U.S.
District Court, Eastern District of Louisiana (Civil Action No. 00-1287)
alleging that defendant breached their obligation under a loan with a principal
balance of $1,383. The plaintiff requested that the Biloxi Belle's, rigging,
tackle, apparel, furniture, engines and all other necessaries thereunto
appertaining and belonging be condemned and sold to pay the demands and claims.
On August 14, 2000, the Court ordered the sale of the Biloxi Belle to be held on
August 30, 2000. On August 30, 2000, the Biloxi Belle was sold to the only
bidder for $100.
Other:
On October 15, 1999, the former holders of approximately $1,400 of 11%
convertible promissory notes filed a complaint in the United States District
Court for the Northern District of Ohio (Civil Action No. 1:99CV 2495) against
Casinos. In January 1999, Casinos paid in full the remaining balance of the 11%
convertible promissory notes after the 11% convertible promissory notes were
accelerated as a result of a default in payment by Casinos. The 11% convertible
promissory notes were convertible into units consisting of 920,000 shares of
Casinos' common stock and warrants to purchase 920,000 shares of Casinos' common
stock at a price of $1.75 and 920,000 shares of Casinos' common stock at a price
equal to 120% of the offering price of an initial public offering by Casinos.
The complaint alleged that Casinos breached the terms of the 11% convertible
promissory notes by failing to provide the holders with Casinos' financial
statements denying them the benefit of their bargain and unjustly enriching
Casinos' rights under the 11% convertible promissory notes.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
Settled Litigation (continued)
The complaint requested judgment against Casinos in an unspecified amount
including all costs and attorneys' fees. Casinos believed that the conversion
features of the 11% convertible promissory notes had expired and filed an answer
denying the claims. Casinos settled the lawsuit in March 2000 by agreeing to
issue 5,000 shares of Casino's unregistered common stock for each $50 loaned by
each former note-holder for a total of 115,000 shares. The 115,000 shares were
issued in April 2000.
On February 25, 2000, a complaint was filed against Solutia Gaming Systems,
Inc., an Oklahoma corporation, Casinos, and Elden Rance, an individual, in the
District Court of Tulsa County, State of Oklahoma, (Case No. CJ-000-0848),
alleging indebtedness and wrongful possession of real property. Plaintiff
requested that it be granted damages in the amount of $11 plus late charges
accruing at $.01 per day from January 10, 2000. On April 13, 2000, the plaintiff
dismissed Elden Rance with prejudice. On August 4, 2000, the case was settled
for the amount of $14. $5 was paid on September 14, 2000, $4 is due on October
15, 2000 and $4 is due on November 15, 2000.
On June 13, 2000, a complaint was filed against Technology in the State of South
Carolina, County of Greenville, (Civil Action No. 2000-CP-23-3385), requesting
damages for a deposit in the amount of $20. The case was settled whereby the
plaintiff took boards and software for the value of deposit.
On July 31, 2000, a complaint was filed against Technology in the Magistrate
Court of Gwinnett County, State of Georgia (Civil Action No. 00M11868), alleging
non-payment of rent. Plaintiff seeks judgment for $119 principal, $2 interest,
plus $12 attorney's fees. On August 29, 2000, parties entered into an agreement
by a consent order with schedule of re-payment plan, reinstatement of the lease,
and a limited personal guarantee. Technology paid $45 on August 29, 2000 and
agreed to pay $34 on October 1, November 1, and December 1, in order to satisfy
the consent order.
The following lawsuits and legal claims have had no material change in their
status since December 31, 1999:
- Civil Action No.: 98-A-9761-4 between Technology and a distributor.
<PAGE>
Note 13 - Commitments and Contingencies (continued)
On June 10, 1999 a former employee filed a complaint against Casinos in the
Commonwealth of Massachusetts, Commission Against Discrimination, (Case No:
M.C.A.D. C.A.#: 99-BEM-1619). The complaint alleges sex/gender harassment,
sex/gender discrimination, age discrimination, hostile work environment,
retaliation and constructive termination. The case is in the discovery stage.
On April 26, 2000, a former employee filed a workers compensation complaint
against Casinos (WC Case No. 9926617). This case is in the discovery stage.
It is the Company's policy to vigorously defend litigation, however, The Company
has entered into settlements of claims in the past, and may do so in the future,
whenever management deems the circumstances appropriate. Any unfavorable outcome
related to any outstanding litigation could have a material adverse effect on
the financial condition of the Company.
Debt Guaranties
During March 2000, a customer defaulted on $400 of debt guaranteed by the
Company. The lender has notified the Company of its intent to collect from the
Company.
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 non-renewal.
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.
<PAGE>
Note 14 - Business and Credit Concentrations
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 year ended June 30, 1999, two customers accounted for approximately 29%
and 11% of the Company's total sales. As of June 30, 1999, the Company had
approximately 17% and 13% of total trade receivables due from two customers.
For the year ended June 30, 2000, four customers accounted for approximately 52%
of the Company's total sales. As of June 30, 2000, the Company had approximately
$191, or 42%, of total trade accounts receivable due from these four customers.
The majority of Leisure Time's sales of video gaming machines over the years
ending June 30, 1998, 1999 and 2000 have been in South Carolina. For the years
ending June 30, 1998, 1999 and 2000, 67%, 75%, and 35%, respectively, of the
Company's sales were derived from South Carolina, however gaming has become
illegal in South Carolina effective July 1, 2000.
Note 15 - Stock Options and Warrants
Stock Option Plan
The Company has a 1997 Incentive and Non-statutory 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
non-statutory 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.
<PAGE>
Note 15 - Stock Options and Warrants (continued)
Stock Option Activity (continued)
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, the Company issued 500,000 employee stock options exercisable
at $6.00 per share, which approximated fair value. These options expire through
December 2007.
From December 1998 through May 1999, the Company issued 375,000 employee stock
options exercisable at $6.00 per share that expire from December 2003 through
May 2008. $1,500 of compensation expense was recorded in connection with these
options using a value of $10.00 per share.
In March and April 1999, the Company issued 549,100 employee stock options
exercisable at $10.00 per share, which approximated fair value. These options
expire from March 2007 through April 2007.
In May and June 1999, the Company issued 85,000 stock options exercisable at
$12.00 per share, which approximated fair value. These options expire in June
2009.
In April 1999, 100,000 options to acquire stock at $6.00 per share were issued
in connection with the acquisition of a business. The Company imputed a value of
$10.00 per share related to these options (Note 17).
In August 1999, the Company issued 112,850 stock options exercisable at $12 per
share, which approximated fair value at the date of the grant. These options
expire from July 2004 through August 2007.
In December 1999, the Company issued 30,000 stock options exercisable at $8.625
per share, which approximated fair value at the date of the grant. These options
expire from December 2005 through December 2007.
In May 2000, the Company issued 45,000 stock options exercisable at $4.875 per
share, which approximated fair value at the date of the grant. These options
expire from April 2005 through April 2008.
<PAGE>
Note 15 - Stock Options and Warrants (continued)
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 non-employees 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 year ended June 30, 1999, the Company issued 38,489 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 May 2001.
During the year ended June 30, 1999, 4,000 units containing 4,000 warrants and
4,000 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).
<PAGE>
Note 15 - Stock Options and Warrants (continued)
Stock Warrant Activity (continued)
During the year ended June 30, 1999, 200,000 units containing two sets of
200,000 warrants and 200,000 shares of common stock, were sold for cash at $1.25
per unit in conjunction with the conversion of certain notes payable. These
warrants have exercise prices of $1.75 per share and 120% of the offering price
of an initial public offering by the Company and expire June 2002 and June 2004,
respectively, (Note 13).
The following is a summary of options and warrants granted, exercised and
expired:
<TABLE>
<CAPTION>
Weighted Weighted Average
Average Fair Exercise
Exercise Average Price
Price Value of of Options
of Options and
Options and Currently Exercisable Warrants -
and Warrants ----------------------- Currently
Options Warrants Warrants Granted Options Warrants Exercisable
--------- -------- -------- ------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Expired - (128,115) (.10)
--------- -------- --------
Outstanding June 30, 1998 3,370,648 429,022 1.91 3,110,648 429,022 1.74
--------- -------- -----------
Granted 1,234,100 442,489 1.67 2.12
Granted at less than fair
market value 475,000 80,000 .26 6.13
Exercised (40,100) (70,086) (.04)
Expired (370,000) (64,650) (.14)
--------- -------- --------
Outstanding June 30, 1999 4,669,648 816,775 4.36 3,740,823 816,775 2.10
--------- -------- -----------
Granted 187,850 - 0.38 0.38
Exercised - (31,472) (0.02)
Expired (727,000) (64,824) (1.17)
--------- -------- --------
Outstanding June 30, 2000 4,130,498 720,479 4.05 3,730,523 720,479 $ 3.36
========= ======== ======== ========= ======== ===========
</TABLE>
<PAGE>
LEISURE TIME CASINOS & RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Note 15 - Stock Options and Warrants (continued)
Stock Warrant Activity (continued)
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------------
Options and
Options and Warrants Outstanding Warrants Exercisable
------------------------------------------------------- --------------------
Weighted
Weighted Average Weighted
Range of Options and Warrants Average Remaining Average
Number Exercise Contractual Number Exercise
Exercisable Price Outstanding Price Life Exercisable Price
-------------------------------- -------------- ------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
$.10 - $2.80 3,079,527 1.52 4.6 years 2,568,048 1.56
$6.00 - $14.40 1,771,450 4.50 7.3 years 1,162,475 7.35
-------------- ------------- -------------- --------------
4,850,977 4.05 4.0 years 3,730,523 3.36
============== ============= ============== ==============
</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 Company believed that
the conversion features that would have entitled the noteholders the right to
acquire up to 2,980,000 shares of the Company's common stock expired. Holders of
these securities sued the Company and in March 2000, the Company issued 115,000
shares of stock to debt holders holding $1,150 of promissory notes, in
satisfaction of the claims associated with these securities.
In June 1999, the Company issued 200,000 shares at a $1.25 per share and 400,000
warrants to the remaining individual who exercised his conversion rights.
In May 1999, 80,000 warrants to acquire common stock were issued in connection
with the acquisition of a business. The Company imputed a value of $10.00 per
share related to these warrants.
<PAGE>
Note 15 - Stock Options and Warrants (continued)
Stock Warrant Activity (continued)
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 year ended
June 30, 1999 and June 30, 2000, $1,500 and $0, respectively, of compensation
expense was recognized.
Had compensation cost for the Company's issuances of all stock options during
the year ended June 30, 1998, 1999 and 2000 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,
----------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) available to common shareholders - as reported
$ (929) $ 4,432 $ (27,701)
Net income (loss) - pro forma $ (1,431) $ 1,704 $ (28,745)
Earnings (loss) per share - diluted - as reported $ (.21) $ .56 $ (4.81)
Earnings (loss) per share - diluted - pro forma $ (.32) $ .22 $ (5.00)
</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 year ended June 30, 2000: dividend yield
of 0.0%; expected average annual volatility of 57.0%; average annual risk-free
interest rate of 5.44%; and expected terms of 3 to 5 years.
Note 16 - Stockholders' Equity
Preferred Stock
On December 10, 1999, the Company issued 523,759 shares of convertible Series A
preferred stock in satisfaction of indebtedness totaling $5,237,586. If declared
by the Board of Directors, The shares accrue dividends at 6% per annum payable
on a semi-annual basis beginning June 10, 2000. The dividends are cumulative.
Unpaid dividends accumulate at a rate of 12% per annum until paid in full.
Subject to prior redemption, the shares are convertible into common stock at a
conversion price of $7.875 per share for a maximum of 1,173,867 shares of common
stock. In the event of liquidation or dissolution, the holders of these shares
are entitled to distributions prior and in preference to holders of common
stock.
<PAGE>
Note 16 - Stockholders' Equity (continued)
Common Stock Activity
Initial Public Offering
Effective September 15, 1999, Casinos completed an initial public offering of
700,000 shares of common stock at a price of $12.00 per share. The net proceeds
of the offering to Casinos, after deducting the underwriters' discount and other
offering expenses of approximately $1,926, were $6,554. $434 of these expenses
had been paid prior to June 30, 1999, and were reflected as deferred initial
public offering costs.
In connection with the offering, Casinos entered into an underwriting agreement
with the underwriters under which the underwriters received an 8% discount, a 3%
non-accountable expense allowance and warrants of Casinos. The warrants are to
purchase 70,000 shares of common stock of Casinos at $14.40 per share. The
warrants expire five years from their issue date.
On May 1, 2000, the Company reacquired 100,000 shares related to the sale of a
business (Note 20).
During the years ended June 30, 1999 and 2000, the Company issued 70,186 and
31,472 shares of common stock upon the exercise of options and warrants at rates
varying from $2.50 to $2.80 per share.
During the years ended June 30, 1998 and 1999, the Company sold 33,900 and 4,000
shares of common stock, respectively, for cash at prices ranging from $.50 to
$10.00 per share.
Through May 1, 1999, the Company issued 180,000 shares of common stock in
connection with various acquisitions valued at $10.00 per share.
During the year ended June 30, 1999, the Company issued 200,000 shares of common
stock at $1.25 per share in connection with certain debt conversion features.
During the year ended June 30, 1999, the Company issued 40,000 shares of stock
for a note related to the exercise of options totaling $240,000.
<PAGE>
Note 16 - Stockholders' Equity (continued)
Common Stock Activity (continued)
Initial Public Offering (continued)
During the years ended June 30, 1998 and 1999, the Company issued 99,874 and
38,489 shares of common stock, respectively, 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 extensions on notes
payable and 54,192 shares, of which 32,500 related to the exercise of warrants
issued with debt, were issued at rates ranging from $2.50 to $2.80 per share in
satisfaction of $145 of notes payable and accrued interest.
Note 17 - Earnings (Loss) Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
Numerator 1998 1999 2000
--------------- ------------- -------------
Numerator for earnings per share - continuing operations
<S> <C> <C> <C>
$ (929) $ 7,881 $ (18,718)
Numerator for earnings per share - discontinued operations
- (3,449) (8,826)
Numerator for basic earnings per share - net income (loss)
(929) 4,432 (27,701)
Effect of interest saved on assumed conversion of convertible debt
(A) - (A)
-------------- ------------- ------------
Numerator for diluted earnings per share - adjusted net income
(loss) $ (929) $ 4,432 $ (27,701)
=============== ============= =============
</TABLE>
<PAGE>
Note 17 - Earnings (Loss) Per Share (continued)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Denominator
Denominator for basic earnings per share - weighted average shares
4,516,528 4,755,771 5,753,815
Effect of weighted average dilutive securities
Options and warrants (A) 3,142,449 (A)
Convertible debt (A) - (A)
------------- -------------- -------------
Denominator for diluted earnings per share - adjusted weighted
average shares 4,516,528 7,898,220 5,753,815
============== ============== ==============
Earnings (loss) per share - continuing operations $ (.21) $ 1.66 $ (3.25)
============== ============== ==============
Earnings (loss) per share - discontinued operations $ - $ (.73) $ (1.53)
============== ==============- ==============
Basic earnings (loss) per share $ (.21) $ .93 $ (4.81)
============== ============== ==============
Diluted earnings (loss) per share $ (.21) $ .56 $ (4.81)
============== ============== ==============
</TABLE>
(A) Where the inclusion of potential common shares and other adjustments is
antidilutive, such shares are excluded from the computation.
Note 18 - 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:
Years of Service Vested
1 25%
2 25%
3 25%
4 25%
Contributions for the years ending June 30, 1998, 1999 and were $85, $72 and $0,
respectively.
<PAGE>
Note 19 - Business Acquisition
In April 1999, Casinos acquired all of the outstanding stock of Financial 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.
The purchase price was allocated as follows:
Cash advanced to provide funding $ 154
Value of stock issued in connection with acquisition 1,000
Value of options issued in connection with acquisition 400
------------
Total consideration given in exchange for outstanding stock $ 1,554
============
The purchase price was allocated as follows:
Current assets $ 206
Net lease receivables 2,502
Other assets 92
Liabilities assumed (2,517)
------------
Net assets acquired 283
------------
Goodwill $ 1,271
============
This transaction was rescinded effective May 17, 2000 (Note 20).
<PAGE>
Note 20 - Sale of Business
On May 7, 2000, the Company sold all of the outstanding stock of Financial to
the previous owner. Consideration for the purchase of the shares was the
delivery by the previous owner of 100,000 shares of Casinos stock and the
unvested portion (60,000 shares) of an option to purchase additional stock of
Casinos. The previous owner in return accepted the financial condition of
Financial as it existed on the date of sale, subject to the following: a)
transfer of a lease receivable to Casinos in the approximate amount of $114,391,
including interest, together with all right to the equipment or residuals. b)
Financial will assume/retain tax obligations, including penalty and interest, to
the state of Minnesota for the period April - June 1999. The Company is
responsible for any taxes due for the period July 1999 through April 2000.
On April 26, 2000, the Company sold all of the outstanding stock of Leisure Time
Hospitality, Inc. to the president of the Company. The president purchased
Leisure Time Hospitality, Inc. for $1,300, payable by the assumption of the 1st
mortgage in the approximate amount of $360,000 and the balance of $940,000 to be
paid by a combination of the forgiveness of debt the Company owes the president
and a note receivable from the president.
