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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
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Commission File No.: 0-25244
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TRANS WORLD GAMING CORP.
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(Name of Small Business Issuer in Its Charter)
NEVADA 13-3738518
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE PENN PLAZA, SUITE 1503 10119-0002
NEW YORK, NY ----------
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(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (212)563-3355
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK
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Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Act during the past 12 months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES / / NO /X/
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained,
to the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
The Issuer's revenues for the year ended December 31, 1998 were
$15,079,000.
As of July 30, 1999, 3,364,286 shares of Common Stock of the
Issuer were deemed outstanding, and warrants to purchase 16,042,438 shares of
the Issuer's Common Stock were issued. The aggregate market value of the
Common Stock of the Issuer as of that date based upon the closing price of
the Common Stock at that date as reported by the OTC Bulletin Board,
excluding outstanding shares beneficially owned by directors and executive
officers, was approximately $934,000.
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TRANS WORLD GAMING CORP.
FORM 10-KSB
TABLE OF CONTENTS
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PART I ...........................................................................................................1
Item 1. Description of Business ........................................................................1
General Development of Business ................................................................1
Louisiana Operations ...........................................................................1
The Boxer Casino ...............................................................................2
The Bishkek Casino .............................................................................3
Multiple Application Tracking Systems, Inc. ....................................................3
Czech Republic .................................................................................3
Spain ..........................................................................................3
Delisting from the Nasdaq ......................................................................4
Accounting and Financial Issues ................................................................4
Corporate Information ..........................................................................5
(a) Financial Information About Industry Segments .........................................5
(b) Narrative Description of Business .....................................................5
Summary ........................................................................................5
Industry Overview ..............................................................................5
The Company's Facilities .......................................................................5
Louisiana Gaming ......................................................................5
Woodlands Truckstop ...................................................................6
Czech Republic ........................................................................6
Spain .................................................................................6
Bishkek ...............................................................................6
Future Operations ..............................................................................6
Czech Republic ........................................................................6
Spain .................................................................................6
Bishkek ...............................................................................6
Long Range Objective ...........................................................................7
Marketing ......................................................................................7
Czech Republic ........................................................................7
Spain .................................................................................7
Acquisition and Disposition Agreements .........................................................7
Tottenham & Co.. ......................................................................7
Multiple Application Tracking Systems, Inc. ...........................................7
Gold Coin Acquisition .................................................................8
Chrysolith Operating Agreement ........................................................8
Monarch Acquisition ...................................................................8
Woodlands Acquisition .................................................................8
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Bishkek Agreement .....................................................................8
Resorts Acquisition ...................................................................9
CDZ Acquisition .......................................................................9
Regulation and Licensing .......................................................................9
Louisiana .............................................................................9
VLT License ..................................................................9
Establishment License .......................................................10
Louisiana Gaming Reform .....................................................10
Spain.................................................................................10
Czech Republic .......................................................................11
Application of Future or Additional Regulatory Requirements ...................................11
Gaming Taxes .........................................................................11
Federal Regulation ...................................................................11
Competition ..........................................................................11
Environmental ........................................................................11
Employees ............................................................................12
Item 2. Description of Property .......................................................................12
Corporate Offices ....................................................................12
Louisiana ............................................................................12
Czech Republic .......................................................................12
Spain ................................................................................12
Bishkek ..............................................................................12
Item 3. Legal Proceedings .............................................................................13
Item 4. Submission of Matters to a Vote of Security Holders ...........................................13
PART II .........................................................................................................13
Item 5. Market for Common Equity and Related Stockholder Matters ......................................13
Item 6. Management's Discussion and Analysis or Plan of Operation .....................................15
Forward-Looking Statements ....................................................................15
Results of Operations .........................................................................15
Revenues ......................................................................................16
Cost of Revenues ..............................................................................16
Expenses ......................................................................................17
Earnings/(Loss) ...............................................................................17
Liquidity and Capital Resources ...............................................................17
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Plan of Operations ............................................................................18
Year 2000 Conversion ..........................................................................19
Important Factors to Consider .................................................................19
Accumulated Deficit; Operating Losses; Going Concern .................................19
Termination of Louisiana Operations in 1999; Need to Diversify........................19
Taxation of Gaming Operations ........................................................19
Dependence Upon Key Personnel ........................................................20
Need for Additional Financing ........................................................20
International Activities .............................................................20
Licensing and Regulation .............................................................20
Liability Insurance ..................................................................21
No Dividends .........................................................................21
Possible Adverse Effect of Preferred Stock ...........................................21
Dilutive Effect of Warrants ..........................................................21
Item 7. Financial Statements ..........................................................................21
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .............................................................22
PART III ........................................................................................................22
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act ....................................22
Information About the Board and Its Committees ................................................23
Section 16(a) Beneficial Ownership Reporting Compliance........................................24
Item 10. Executive Compensation ........................................................................24
Summary of Cash and Certain Other Compensation ................................................24
Option Grants and Exercises ...................................................................25
Directors' Compensation .......................................................................26
Employment/Severance Agreements ...............................................................26
Item 11. Security Ownership of Certain Beneficial Owners and Management ................................27
Item 12. Certain Relationships and Related Transactions ................................................30
Item 13. Exhibits and Reports on Form 8-K ..............................................................31
(a) Exhibits .............................................................................31
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(b) Reports on Form 8-K ..................................................................31
SIGNATURES ......................................................................................................32
EXHIBIT INDEX ...................................................................................................33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .....................................................................F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
Trans World Gaming Corp. (the "Company" or "TWG") was organized as a Nevada
corporation in October 1993 to acquire, develop and manage, to the extent
permitted by applicable local laws, gaming establishments featuring live and
mechanized gaming, including video gaming devices such as video poker machines.
LOUISIANA OPERATIONS
Although the Company's Louisiana video poker operations terminated as of July 1,
1999, references to Company's Louisiana activities are presented here with
respect to activities which occurred through December 31, 1998 (and through the
filing date of this Form 10-KSB as otherwise noted herein) and in the event that
the appeal being undertaken by an industry group on behalf of all similarly
situated companies to the U.S. Supreme Court (discussed below) results in the
reversal of the lower court's decision.
In 1994, Trans World Gaming of Louisiana, Inc. ("TWGLa"), a wholly owned
subsidiary of TWG, obtained certain ownership interests in two gaming
establishments at truck stops in Louisiana, which included (i) an establishment
located at the 76 Plaza in Lafayette, Louisiana known as the "Gold Coin"
(formerly known as the Gold Nugget), which had fifty (50) video lottery
terminals ("VLTs" or "Devices"), and (ii) the Toledo Palace (the "Toledo
Palace"), which the Company established and licensed at a truck stop located in
DeRidder, Louisiana, known as the Woodlands Travel Plaza (the "Woodlands") and
at which TWGLa operated thirty-three (33) VLTs. Both the Gold Coin and the
Toledo Palace establishments were licensed to operate only VLTs.
In December 1994, the Company purchased a non-voting 49% interest in Chrysolith,
LLC, a Louisiana limited liability company ("Chrysolith") for $1.00 and entered
into an agreement with Chrysolith pursuant to which Chrysolith owned, maintained
and operated the VLTs at the Gold Coin. The remaining 51% interest in Chrysolith
is owned by Mr. Lee Young, a former director of the Company. Pursuant to a
management agreement entered into between Chrysolith and the Company dated
December 31, 1996, Chrysolith was to provide on-site management for all of the
operations of both the Gold Coin and the Toledo Palace and acquire, install,
operate and maintain the VLTs at both facilities.
On December 22, 1994, the Company acquired from Chrysolith and Prime
Properties, Inc., a Louisiana corporation ("Prime"), which leased the 76
Plaza, a truckstop in which the Gold Coin was located, certain rights therein
including an 18 year sub-leasehold interest (the "Sub-Lease"), subject to the
terms of an Over-Lease on the 76 Plaza between Prime, as lessee and National
Auto Truckstops, Inc. ("National") as lessor. At the same time, the Company
acquired from Prime the right to a 50% interest in the profits of the Gold
Coin under the terms of an agreement (the "Prime Agreement") under which the
Company agreed to pay Prime a total of $6.0 million for such profit interests
in the form of a promissory note (the "Prime Note"). On November 10, 1997,
the Company was advised that on October 16, 1997, National had placed Prime
on notice that its rights to occupy the 76 Plaza would terminate on January
23, 1998, due to an alleged breach of the Over-Lease by Prime. Subsequently,
on December 23, 1997, the Company filed a Petition for Concursus in the 15th
Judicial District Court, Lafayette Parish, Louisiana, Case No. 976174-D, and
paid the final $292,000 then owing under the Prime Note into the registry of
the court, protesting that such sum was not actually due and owing based on
the alleged breach of the Over-Lease by Prime. On or about December 30, 1997,
the Company received notice from Prime that Prime (which was not aware of the
Company's Petition for Concursus) considered the Company in default of the
Sub-Lease demanded that the Company pay to Prime an amount equal to
approximately $299,513 on or before January 7, 1998 to cure its alleged
default. Upon receipt of this correspondence, the Company contacted counsel
for Prime and notified him of the Company's prior Petition for Concursus
filing. On or about January 19, 1998, Prime filed in United States District
Court, Western District of Louisiana, Case No. CV98-0076L-0, a Complaint for
Damages and Violation of the Petroleum Marketing Practices Act against
National, alleging breaches by National in the franchise agreement between
Prime and National and seeking to enjoin National from terminating the
Over-Lease. On or about January 21, 1998, Prime filed a Voluntary Petition in
Bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Western District of Louisiana, Case No. 98BK-50087,
listing National as the holder of an unsecured claim for $925,000 (the
"National Claim"). (See Form 10KSB/A for the year ended December 31, 1997,
Item 6, "Management's Discussion and Analysis and Results of Operations -
Important
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Factors to Consider".) On March 20, 1998, National filed various motions, as
permitted under section 362(d) of the Bankruptcy Code, to lift the automatic
stay and to permit certain actions by Prime. On April 13, 1998, the United
States Bankruptcy Court granted National's motions and dismissed Prime's
bankruptcy case. Following that decision, on April 17, 1998, National filed a
"Motion for Expedited Hearing on Motion to Return Possession of Premises to
National Auto" in the United States District Court, Western District of
Louisiana, Case No. 98-0076.
On May 22, 1998, the owners of Prime sold their interests in the 76 Plaza
truckstop property to Mr. Lee Young, who is the 51% member of Chrysolith. At the
same time, National and Prime (under its new ownership by Mr. Lee Young)
executed an Amended and Restated Lease Agreement which is scheduled to expire
on December 31, 1999 (the "Lease"). Under the terms of the Lease, National has
the right to terminate the Lease under certain circumstances, including default
or non-renewal of the fuel franchise by Prime.
On May 22, 1998, the Company negotiated settlements by and among TWGLa,
Chrysolith, Prime and National (the "Settlement"). The terms of the
Settlement were as follows: (i) TWGLa and the former owners of Prime agreed
that TWGLa would make a final settlement payment to said former owners of
$450,000, subject to certain deductions, noted below, (the "Settlement
Payment"), (ii) the claim of National against Prime would be satisfied by:
(a) liquidating the assets of Prime, (b) paying to National the funds
previously placed in the registry of the court (Petition for Concursus file
number 976174-D), and (c) paying to National available cash in Prime relating
to the sale of Prime's truckstop inventory to National (the "Prime Assets")
and (d) delivering a promissory note from Prime (guaranteed by TWGLa and TWG)
in the principal amount of $239,597 bearing interest at the rate of 10% per
annum payable in four equal monthly installments beginning on June 22, 1998
(the "National Promissory Note"); (iii) to the extent that the Prime Assets
proved insufficient to satisfy the National Claim, TWGLa would reduce the
Settlement Payment by the amount of such deficiency and remit such amount to
National; (iv) the remaining funds of the Settlement Payment first were used
to pay trade creditors and to reimburse TWGLa for payments made under the
National Promissory Note and any funds remaining after such payments and
reimbursements were paid to the former owners of Prime; (v) all of the
litigation among the parties was dismissed (See Item 3 "Legal Proceedings");
and (vi) all parties agreed to mutually acceptable releases of all claims and
liabilities against the others. As of the date of this report, approximately
$415,000 of the $450,000 has been paid by the Company to the former owners of
Prime. Payment terms for the remaining liabilities are currently being
negotiated between the creditors and the prior owners of Prime. It is
expected that final payments will occur before December 31, 1999.
In November 1996, residents in 35 parishes in Louisiana, including the two
parishes in which the Gold Coin and the Toledo Palace are located, voted to
discontinue video poker effective June 30, 1999 (the "Voter Mandate"). On
that date, the Louisiana gaming authorities terminated the operations at both
the Gold Coin and the Toledo Palace. The Company has appealed the Louisiana
State Court's recent decision to uphold the Voter Mandate to the U.S. Supreme
Court. The U.S. Supreme Court is scheduled to consider, during the quarter
ending December 31, 1999, whether it will review the case (See Item 3 "Legal
Proceedings").
In accordance with the Voter Mandate and the outcome of subsequent judicial
decisions, the Company ceased all operations in Louisiana on July 1, 1999. The
Company has been notified that its lease at the Gold Coin location in Lafayette
will terminate on July 31, 1999. Additionally, the Company currently is in the
process of selling its ownership interests in the Woodlands. If the Company
cannot find a buyer for the Woodlands property, it would consider closing its
remaining non-gaming operations, but such closure would not have a materially
adverse effect on the Company.
Through June 30, 1999, the Company received the net revenue at both the Gold
Coin and the Toledo Palace, which is the revenue generated by VLTs at both
facilities after payment of franchise taxes by Chrysolith to the State of
Louisiana and after payment of all prizes to the players (the "Net Win After
Tax"). In accordance with a management arrangement between the Company and
Chrysolith, the Company reimbursed Chrysolith for all direct operating costs
incurred in the operation of the VLTs. At the Woodlands, the Company continues
to derive revenue from the sale of fuel, supplies and food normally associated
with a truckstop operation, pending the sale of such property, as discussed
above.
THE BOXER CASINO
On March 31, 1997, Art Marketing, Ltd., d/b/a Tottenham & Co., a wholly owned
subsidiary of the Company ("Tottenham & Co."), executed a Joint Activity
Agreement with Mr. Mahmud Avdiyev, an individual engaged in various businesses
in Azerbaijan (the "Avdiyev Agreement"). The Avdiyev Agreement which is for a
term of twenty years, sets
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forth the parties' relative obligations with respect to operation of the Boxer
Casino (the "Boxer Casino") located in Gyandja, Azerbaijan Republic. In January
1998, the President of Azerbaijan ordered the closing of all of the casinos in
Azerbaijan including the Boxer Casino. The shutdown resulted in the 1998
write-off of the unamortized balance of the Company's investment of $295,000.
Management cannot predict when, or if, the Boxer Casino will reopen for
business.
THE BISHKEK CASINO
In June 1998, the Company opened the Bishkek Casino located in the Kyrgyz
Republic, a former member of the Soviet Union. TWG has a twenty-year management
contract with Jockey Clubs Casinos, LLC ("JCC") under which TWG is to receive
40% of the pre-tax profits of the casino. During 1998, the Kyrgyz parliament
passed a law which bans all casinos except those protected by the country's
foreign investment laws. The Bishkek Casino is one of two casinos allowed to
remain open.
MULTIPLE APPLICATION TRACKING SYSTEMS, INC.
On April 15, 1997, the Company acquired Multiple Application Tracking
Systems, Inc. of Colorado ("MATS"), a supplier of casino software products.
The purchase price was $250,000, consisting of $15,000 in cash and a $235,000
promissory note (the "MATS Note") which was set to mature in November, 2000.
In addition, the Company entered into a five-year employment agreement with
Mr. James Hardman, Jr. ("Hardman"), the previous owner of MATS, at an annual
compensation of $100,000. Mr. Hardman also was to receive ten percent (10%)
of all MATS sales as a license royalty. On February 15, 1999, however, the
Company sold MATS back to Hardman in return for his cancellation of the MATS
Note, termination of the employment agreement and $38,000 of severance
payments to benefit Hardman and one other employee.
CZECH REPUBLIC
On March 31, 1998, the Company consummated a Stock Purchase Agreement ("Stock
Purchase Agreement") with 21st Century Resorts a.s., an owner-operator of two
casinos, and the owner of property to build a third casino, in the Czech
Republic ("Resorts"), Gameway Leasing Limited ("Gameway") and Monarch Leasing
Limited ("Monarch"), two off-shore affiliates of Resorts which leased
equipment to Resorts and the stockholders of Resorts (the "Selling
Stockholders") pursuant to which the Company acquired 100% of the equity
interests of Resorts and its two operating subsidiaries and all of the assets
of Gameway and Monarch. On March 31, 1998, the Company, with the assistance
of Libra Investments, Inc., Los Angeles, California ("Libra") acting as
placement agent, borrowed $17.0 million from fourteen sophisticated,
accredited investors (the "Investors") in a private placement (the "Private
Placement"). The loan is represented by 12% Senior Secured Notes (the "Senior
Notes") issued pursuant to indentures (the "Indentures") by and among TWG,
TWG International U.S. Corporation ("TWGI"), TWG Finance Corp. ("TFC") (both
of which are wholly-owned subsidiaries of TWG) and U.S. Trust Company of
Texas, N.A., Dallas, Texas ("USTCT") acting as indenture trustee. The Senior
Notes require mandatory prepayments based upon excess cash flow generated by
TWGI from the operation of Resorts and bear interest at the rate of 12% per
annum. (See - Periodic Reports Form 8-K and the Amended Periodic Report on
Form 8-K/A filed with the Securities and Exchange Commission ("SEC") on April
14, 1998 and June 15, 1998, respectively.) The proceeds of the Senior Notes
were used to pay the net acquisition costs of, and improvements to, Resorts
totaling approximately $12.6 million, to repay the First Amended Loan
Agreement in the amount of $1.3 million, to cover costs and expenses of $1.4
million relating to the Private Placement and to provide working capital of
$1.7 million.
As a result of a change in Czech gaming law which effectively banned foreign
ownership of casinos, the Company restructured the ownership of Resorts
through the use of a new Czech limited liability company and amended the
Indentures (the "Amended Indentures"), both of which Amended Indentures
relate to, but do not alter, the Senior Notes.
SPAIN
On April 17, 1998, the Company acquired 90% of the Casino de Zaragoza, SA, a
company incorporated in Zaragoza, Spain that holds the exclusive casino license
in the region of Aragon ("CDZ"). Following approval of its recapitalization plan
by the Council of Ministers in Spain, the Company will own 100% of CDZ (See:
Item 6. "Management's Discussion and Analysis or Plan of Operation - Liquidity
and Capital Resources"). TWG acquired 90% of the
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outstanding stock of CDZ for approximately $780,000 (excluding related
acquisition costs of approximately $680,000) and assumed outstanding debt
obligations of approximately $4.9 million. TWG currently requires a total of
approximately $4.0 million (including approximately $1.7 million for the
recapitalization of CDZ due in November 1999) to provide working capital to
cover the projected operating losses and for the cost to move the casino. (See -
"Liquidity and Capital Resources".) The Company anticipates that permission will
be granted by the appropriate Spanish government authorities that will enable
TWG to move CDZ from its current location approximately 25 miles from the
Zaragoza city center to a more favorable location in downtown Zaragoza. (See -
"Industry Overview" below).
DELISTING FROM THE NASDAQ
The Company issued a press release dated June 26, 1997 announcing the delisting
of the Company's common stock, $.001 par value per share (the "Common Stock) and
warrants (the "Warrants") from the Nasdaq SmallCap Market effective June 25,
1997. The Common Stock and Warrants currently are trading on the OTC Bulletin
Board. The delisting resulted from the fact that the bid price of TWG's Common
Stock was trading below $3.00 per share and TWG had failed to maintain a minimum
capital and surplus of $1 million.
ACCOUNTING AND FINANCIAL ISSUES
In the event that financing is not available for the casino in Znojmo, or the
recapitalization of CDZ, such failure would have a material adverse effect on
the future profitability of TWG.
In December 1998, the Company reviewed the carrying amount of long-lived
assets, identifiable intangibles and goodwill related to its Czech Republic,
Spanish and Bishkek casino operations under FASB No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Based on a comparison of those assets against the expected future cash flows
generated by those operations, the Company recorded an asset impairment
charge of $2.5 million for the Czech operation, $1.5 million for the Spanish
operation and amortized its entire investment in Bishkek ($264,000) during
the year ended December 31, 1998. The Company based the write-off in the
Czech Republic on increased competition in Ceska Kubice, lower than
anticipated revenue in Rozvadov and the likelihood that the proposed casino
in Znojmo will be a smaller operation with fewer gaming tables and machines
than originally forecasted. In Spain, delays in receiving permission to move
the casino to a more favorable location together with a smaller operation
than originally planned is the basis for the impairment charge.
The Company was in technical default of, and has not timely paid a $1.0
million loan from Value Partners, Ltd., a Texas limited partnership ("Value
Partners"), which was due on September 15, 1998 (the "Value Partners Loan")
and is currently negotiating an extension of the Value Partners Loan. On July
30, 1999, the Company received from Value Partners a waiver of such default
and a waiver of the cross defaults on the Amended Indentures, until January
1, 2000 (except for payment defaults on the Amended Indentures) by the
majority in interest of the holders of the Senior Notes. Value Partners also
granted an extension of the Value Partners Loan until January 1, 2000, with
the understanding that the Company and Value Partners will work in good faith
to renegotiate the loan terms prior to August 31, 1999. A default by the
Company on this loan (or any other loan) would result in a default on all of
the Company's debt instruments and would have a material adverse effect on
the Company's financial condition.
The Company has, from time to time, been in technical default of the Amended
Indentures and has relied upon the forbearance and waivers from a majority
interest of the holders of the Senior Notes. Value Partners represents a
majority in interest of the holders of the Senior Notes. The Company has
borrowed other amounts from Value Partners from time to time (some of which
have been in technical default for which forbearance or waivers have been
granted) and may seek to borrow additional funds or obtain equity investment,
from Value Partners in the future. At December 31, 1998, Value Partners owned
51% of the Company's long term debt and owned warrants which, upon exercise,
would result in Value Partner's beneficial ownership of Common Stock equaling
66.5% of the Company's issued and outstanding shares of Common Stock.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
suffered significant losses from operations and has a working capital deficit
of $3.3 million and a stockholders' deficit of $9.4 million as of December
31, 1998. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. Managements plans to induce the growth of its existing business
through marketing campaigns; certain personnel changes and the raising of up
to an additional $6 million or more to fund the Company's Znojmo casino
construction and CDZ's move to the center of Zaragoza.
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CORPORATE INFORMATION
The Company's corporate offices are located at One Penn Plaza, Suite 1503, New
York, New York 10119-0002 and its telephone number is (212) 563-3355.
(a) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates in two industry segments: the ownership and management
of gaming establishments overseas and the operation of a truckstop featuring
VLTs. (See Note 13 to Consolidated Financial Statements).
(b) NARRATIVE DESCRIPTION OF BUSINESS.
SUMMARY
The Company is engaged in the acquisition, development and management of
niche casino operations worldwide which feature table games and mechanized
gaming devices, such as video poker machines. At December 31, 1998 the
Company owned certain interests in two gaming establishments at truck stops
in Louisiana, which include; (i) the Gold Coin, in Lafayette, Louisiana, and
(ii) the Toledo Palace in DeRidder, Louisiana, located approximately 120
miles from the Gold Coin. As a result of the Louisiana Voter Mandate, both
gaming operations were terminated on July 1, 1999. The Company is appealing
the termination to the U.S. Supreme Court. The Supreme Court is tentatively
scheduled to consider this appeal during the quarter ending December 31,
1999. (See - "The Company's Facilities" and Item 6. "Management's Discussion
and Analysis of Financial Condition or Plan of Operation-Important Factors to
Consider"). On March 31, 1998, the Company acquired two casinos in the Czech
Republic and realty upon which it may build a third casino. The Czech casinos
are located close to major border crossings with Germany in Ceska Kubice and
Rozvadov. The casino under development is in Znojmo near the border crossing
with Vienna, Austria. The Zaragoza casino, acquired on April 17, 1998, is
approximately 25 miles outside of Zaragoza, Spain and is the exclusive casino
licensee in the region of Aragon. (See "- General Development of Business,"
above, and "Future Operations," below).
INDUSTRY OVERVIEW
Prior to the amendments to the Czech gaming regulations in December 1998,
local municipalities were empowered to grant casino licenses in their
regions. The amendments to the gaming legislation removed that right from the
local governments and effectively eliminated exclusivity. The Company
believes that another entity has recently opened a competing casino in
Folmava, Czech Republic, near the Company's Ceska Kubice location which may
negatively impact the Company's revenue.
In Spain, the regional government, Disputacion General de Aragon (the "DGA"),
which is also the largest creditor of CDZ, signed a protocol with TWG stating
its intent to pass a law allowing the casino to move to a more favorable
location. A certain Aragonian parliamentary party opposes the new law unless
it includes an amendment that would allow casino-style slot machines in bingo
parlors. Rather than agree to this amendment, the DGA decided to issue a
governmental decree which will circumvent the parliament and allow CDZ to
move from its current location. It is anticipated, although there can be no
assurance, that the decree will be issued in the quarter ending September 30,
1999 and the new casino could therefore open in early 2000.
Many of the Company's competitors and potential competitors have greater
financial and marketing resources, significantly more experience in operating
gaming facilities, better sites, and operate a greater number and variety of
gaming facilities than the Company does. The Company believes that competition
in the gaming industry is based on the quality and location of gaming
facilities, the effectiveness of marketing resources, and customer service and
satisfaction.
THE COMPANY'S FACILITIES
LOUISIANA GAMING
The Gold Coin and Toledo Palace gaming facilities were closed July 1, 1999
and the Company has been notified that the sub-lease at the Gold Coin will be
terminated by the landlord effective July 31, 1999. Unless the VLT machines
are sold by
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July 31, 1999, the machines must be warehoused in a suitable warehouse facility
approved by the Louisiana State Police. A potential buyer for the machines has
been identified. However, in the event the sale of the machines is not
completed, a suitable warehouse facility has been located and approval is
pending.
WOODLANDS TRUCKSTOP
The Woodlands, where the Toledo Palace was located, includes a 24-hour
restaurant, a convenience store and a gas station that currently sells an
average of approximately 130,000 gallons of fuel per month. The Woodlands is
located on State Route 3236 in DeRidder, Louisiana, approximately 20 miles from
the Texas border is being actively marketed for sale.
CZECH REPUBLIC
The Ceska Kubice casino currently has fifteen gaming tables, one hundred slot
machines and parking for approximately forty cars. In Rozvadov there are seven
tables, eighty-seven slot machines and parking for forty cars.
SPAIN
The casino currently has nine gaming tables and twenty-four slot machines.
BISHKEK
The casino currently has six gaming tables.
FUTURE OPERATIONS
CZECH REPUBLIC
TWG currently owns ten acres of commercial land between the Czech and
Austrian border posts near Znojmo. Planning permission has been received
which allows the Company to build a casino at the site, which, when completed
will include approximately 11 gaming tables and up to 40 slot machines and
parking for approximately 120 cars. The Company is finalizing an agreement
with a local building contractor who will finance the construction of the
facility. Under the terms of the agreement, TWG will lease the facility from
the contractor under a ten-year rental agreement and will have an option to
purchase the building at any time during the ten-year period at a price
between $1.4 million and $1.8 million. TWG anticipates that the casino will
be opened before December 31, 1999 with the slot machines being activated in
early January 2000. The Company has estimated that the cost to equip and open
the Znojmo casino will be approximately $1.3 million. (See Item 6.
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources".)
SPAIN
In anticipation of receiving permission to move CDZ to center city Zaragoza, TWG
is in the process of completing negotiations to lease available space in a
cinema adjacent to a downtown hotel location. The cinema was chosen due to its
highly desirable location, together with the advantages of providing common
services with the hotel (food, maintenance, parking and accommodations). CDZ,
which is expected to open within six months after it receives permission to
move, pending local planning board approvals, will have approximately 17 gaming
tables and 60 slot machines. The investment required by TWG upon receipt of the
approvals is anticipated to total approximately $4.0 million (See Item 6.
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources".).
BISHKEK
In June 1998, the Company opened the Bishkek Casino located in the Kyrgyz
Republic, a former member of the Soviet Union. TWG has a twenty-year
management contract with Jockey Clubs Casinos, LLC under which TWG is to
receive 40% of the pre-tax profits of the casino. During 1998, the Kyrgyz
parliament passed a law which bans all casinos except those protected by the
country's foreign investment laws. The Bishkek Casino is one of two casinos
allowed to remain open.
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Except as described above, the Company has no other specific arrangements or
understandings with respect to the management or acquisition of any gaming
facility. There can be no assurance that the Company will manage or acquire any
other gaming facilities in the future, although it hopes to do so.
LONG RANGE OBJECTIVE
The Company's long-range objective is to become a premier management company of
gaming establishments at local neighborhood sites both in the United States and
internationally. To achieve this goal, the Company's strategy consists of: (i)
identifying gaming establishments which may include a local, machine-based
market and wherever possible, mechanized gaming devices that are centrally
audited by a local or state governmental office; (ii) leasing or owning
mechanized gaming machines that are user-friendly for occasional video gaming
customers; and (iii) retaining local management following an acquisition to
ensure a smooth transition to the Company. Through this strategy, the Company
believes it can address a specific niche in the gaming industry which attracts
local, neighborhood markets as opposed to the destination, high-roller
clientele. While the Company believes that there are significant opportunities
in developing the Company's proposed niche market, the Company is committed to
maximizing performance at its existing establishments while expanding to other
markets. See, however, "Regulations and Licensing".
MARKETING
CZECH REPUBLIC
Company management has implemented a marketing strategy designed to increase the
number of visitors at its Czech casinos. The target area is the sixty mile
radius surrounding each of the casinos. These areas will be addressed through
the use of direct mailings, flyers, radio, newspaper, billboard advertising and
improved directional signage in English, German and Czech, as appropriate. TWG
is also considering the introduction of an "American" theme to its casinos based
on research of a prominent marketing institute in Germany commissioned by TWG.
Customer loyalty programs, special events and promotions and a busing program
also are being developed. Plans are also being developed for a grand opening of
the Znojmo casino. There can be no assurances that these marketing strategies
will have a positive impact on the financial performance of the Czech
properties.
SPAIN
TWG is currently developing plans to market the new CDZ casino through direct
mailings, radio, newspapers and billboard advertising in English and Spanish,
as appropriate. Promotional tie-ins with the hotel in center-city Zaragoza
that the Company hopes to align itself with might include accommodations,
complementaries (meals, drinks and other services) and special event
promotions. A gala opening night promotion with invitations to leading
citizens in Zaragoza also is planned. There can be no assurances that the
implementation of these marketing strategies will have a positive impact on
the financial performance of CDZ.
ACQUISITION AND DISPOSITION AGREEMENTS
TOTTENHAM & CO. On January 1, 1997, the Company completed the acquisition of
Tottenham & Co., which was founded in 1988 by Andrew Tottenham, the Company's
President and Chief Operating Officer, is engaged in providing consulting
services to gaming companies worldwide. The consideration paid for Tottenham &
Co. by the Company included 500,000 shares of the Company's Common Stock, and
warrants to purchase 250,000 shares at an exercise price of $.5938, the bid
price of the Company's Common Stock on the date of the acquisition as reported
by the Nasdaq SmallCap Market System. In addition, the Company issued two
promissory notes in the aggregate principal amount of $200,000 bearing interest
at the rate of 10% per annum and payable on January 1, 2002 (the "Tottenham
Notes"). On December 31, 1998, the Company and Andrew Tottenham converted the
Tottenham Notes and accrued interest totaling $240,000 into 320,000 shares of
the Company's Common Stock. All of the Common Stock, as well as the Common Stock
underlying the warrants, carries certain "piggyback" registration rights.
MULTIPLE APPLICATION TRACKING SYSTEMS, INC. On April 15, 1997, the Company
acquired MATS, a supplier of casino software products. The purchase price was
$250,000, consisting of $15,000 in cash and a $235,000 promissory note which was
set to mature in November, 2000. In addition, the Company entered into a
five-year employment agreement with Mr. James Hardman, Jr., the previous owner
of MATS, at an annual compensation of $100,000. Mr. Hardman also
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received ten percent (10%) of all MATS sales as a license royalty. MATS was sold
back to Mr. Hardman on February 15, 1999. (See Item 1 - "Discussion of Business
- - General Development of Business").
GOLD COIN ACQUISITION. The Company acquired the interests of Prime and
Chrysolith in the Gold Coin gaming facility on December 22, 1994. The Company
acquired the rights of Prime to a 50% interest in the profits of the Gold Coin,
under the terms of an agreement dated September 21, 1994 between Prime and the
Company. Under the Prime Agreement, the Company paid a total of $6 million, for
which the final payment was made on December 23, 1997. The Company also issued
to Prime 120,000 shares of the Company's Common Stock and options to purchase up
to an additional 120,000 shares of Common Stock exercisable at $7.00, which
options expired unexercised on December 23, 1997.
On December 22, 1994, the Company acquired Chrysolith's right to participate in
the profits of the Gold Coin and its sub-leasehold interest therein, for an
aggregate purchase price of $4.5 million, which was paid in full on July 2,
1996. Pursuant to an Agreement for Exchange of Shares dated July 13, 1994
between the Company and the shareholders of Lee Young Enterprises ("LYE"), under
the Chrysolith Agreement, on December 22, 1994, the Company acquired all of the
issued and outstanding capital stock of LYE in exchange for 100,000 shares of
the Company's Common Stock and options to acquire up to an additional 200,000
shares of Common Stock at an exercise price of $7.00, which options expired
unexercised on December 23, 1997.
As of December 23, 1997, all of the outstanding notes issued in connection with
the Gold Coin Acquisition, including a $75,000 obligation of Monarch (as defined
below) which was guaranteed by the Company, were paid in full.
CHRYSOLITH OPERATING AGREEMENT. The Company is a member under, and party to,
the Amended and Restated Regulations and Operating Agreement of Chrysolith,
dated as of December 22, 1994 and amended in December, 1996 (the "Chrysolith
Operating Agreement"). The Chrysolith Operating Agreement sets forth the
rights and obligations of the original members, all of whom are individuals,
and the Company. Under this agreement, Chrysolith operated, serviced and
maintained the VLTs at the Gold Coin and Toledo Palace and the Company
provided management, financial and consulting services. The Chrysolith
Operating Agreement will continue pending the decision of the U.S. Supreme
Court regarding the Company's appeal of the termination of the operations at
the Gold Coin and Toledo Palace.
MONARCH ACQUISITION. In April 1994, the Company acquired for $49,000 a 49%
ownership interest in Monarch Casinos ("Monarch"), a Louisiana-licensed video
gaming device operator which was founded in December 1993. In June and August
1994, the Company loaned Monarch an aggregate of $55,000 for working capital to
manage the operations of the Woodlands under an agreement between Monarch and
the previous owner of the Woodlands. All of such loans were payable on demand,
bore interest at the rate of 10% and were evidenced by promissory notes executed
by Monarch. In October 1994, the Company credited Monarch $25,000 against prior
advances, among other things, in consideration for the assignment by Monarch to
the Company of an option to purchase the Woodlands. Although it was originally
intended that Monarch would own, operate and maintain the VLTs at both the
Toledo Palace and the Gold Coin, the Company believed that Chrysolith was better
suited to operate the video poker parlors and thus entered into the Chrysolith
Agreement (See "Narrative Description of Business - The Company's Facilities -
Louisiana - Chrysolith Operating Agreement"). In March 1996, the Company learned
that as of June 30, 1995, Monarch had not renewed its operator's license as
required by the State of Louisiana, and as such, was no longer a licensed video
poker operator in the State. Pursuant to the management agreements between
Monarch and the Company, such a failure to renew or other termination of the
operator's license created a default under the agreements and the agreements
were terminated by the Company on March 14, 1996. On or about November 6, 1997
Monarch and Michael Edwards, President of Monarch, filed suit against the
Company alleging, among other things, breach of contract. The lawsuit was
settled in May 1999 for a cash payment by the Company of $100,000 and both
parties released the other of any and all further obligations. See Item 3.
"Legal Proceedings".
WOODLANDS ACQUISITION. In October 1994, TWGLa acquired the Woodlands for
approximately $1,000,000 pursuant to the exercise of an option originally
granted to Monarch and assigned by Monarch to the Company. The balance of the
purchase price for the Woodlands was paid in full in July 1996.
BISHKEK AGREEMENT. On January 30, 1998 the Company entered into a twenty-year
management agreement with JCC for the management and operation of the Bishkek
Casino. In return for an initial investment by TWG of approximately
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$250,000, TWG will receive a management fee equal to 60% of the operating
profits from the Bishkek Casino until the $250,000 investment is recovered; such
fee is then reduced to 40%. The casino opened in June 1998. (See "Narrative
Description of Business - Future Operations - Bishkek").
RESORTS ACQUISITION. On March 31, 1998, the Company acquired the outstanding
stock of Resorts for a total cost of approximately $12.4 million (including
acquisition costs of approximately $1.6 million). (See Item 1. "Discussion
of Business - General Development of Business"). In October 1998, the
ownership structure of Resorts was altered to comply with a change in Czech
gaming law.
CDZ ACQUISITION. On April 17, 1998, the Company acquired 90% of CDZ for a
total cost of approximately $1.5 million (including $.7 million of
acquisition costs). (See Item 1. "Discussion of Business - General
Development of Business").
REGULATIONS AND LICENSING
LOUISIANA
VLT LICENSE. The manufacture, distribution, servicing and operation of VLTs in
Louisiana are subject to the Louisiana Video Draw Poker Devices Control Law and
the Rules and Regulations promulgated thereunder (the "Louisiana Act"), and to
licensing and regulatory control by the Video Gaming Division of the Gaming
Enforcement Section of the Office of State Police within the Department of
Public Safety and Corrections (the "Louisiana Authorities"). The laws and
regulations of the State of Louisiana are based upon declarations of policy
which are concerned with protecting the video gaming industry from organized
crime, illegal gambling activities and other harmful elements, and protection of
the public from illegal and unscrupulous gaming.
The Company owns a 49% interest in Chrysolith, a licensed machine operator in
Louisiana. Pursuant to the Chrysolith Operating Agreement, Chrysolith
maintained, serviced and operated the VLTs at the Gold Coin and the Toledo
Palace. The license held by Chrysolith is not transferable and must be renewed
annually through payment of fees and continued compliance with the suitability
requirements of the Louisiana Act. The Louisiana Authorities may, in accordance
with certain regulatory procedures, limit, condition, suspend or revoke the
license of Chrysolith for any violation of any rules or regulations of the
Louisiana Authorities or any violations of the Louisiana Act, or for any other
cause deemed reasonable by the Louisiana Authorities. Fines for violations of
gaming laws, rules, or regulations may be levied against licensees and other
involved persons. Suspension or revocation of Chrysolith's license could have a
material adverse effect upon the business of the Company.
The Louisiana Authorities can conduct overt and covert investigations of any
person, entity, applicant or participant involved directly or indirectly in the
video gaming industry in Louisiana. Such investigations may extend beyond the
information provided in the formal license application, including an
investigation of information with regard to the licensee's immediate family and
relatives and their affiliations with certain groups, organizations,
corporations, firms or other business entities. The investigation also may
extend to every person who has or controls more than five percent of the
ownership, income or profit interest in an entity which has or applies for a
license in, or exercises a significant influence over, the activities of a
licensee. The Louisiana Authorities require detailed personal and financial
information to be submitted and thoroughly investigated. The applicant for
licensing must pay a filing fee which covers the cost of investigation. If a
stockholder is found unsuitable, the Louisiana Authorities may require his
removal from the venture or refuse to license the applicant. Further, the
Louisiana Authorities, in their discretion, may require a determination to the
suitability of the holders of the Company's debt securities. Determinations of
suitability or questions pertaining to licensing are subject to review under the
provisions of Louisiana's Administrative Procedures Act and the Louisiana Act.
In order for a company such as Chrysolith to be licensed by the Louisiana
Authorities, it must demonstrate that a majority of its equity securities is
owned by persons who have been domiciled in Louisiana for a period of at least
two years prior to the date of the application.
VLTs must meet strict specifications established by the Louisiana Act.
Furthermore, the number of VLTs that may be operated at a particular location
depends on the underlying nature of the location. For example, the number of
VLTs that may be operated at a truckstop depends based upon average monthly fuel
sales: (i) no more than 50 VLTs if sales equal
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at least 100,000 gallons per month and 40,000 of such gallons are diesel; (ii)
no more than 40 VLTs if sales equal at least 75,000 gallons per month and 30,000
of such gallons are diesel; (iii) no more than 35 VLTs if sales equal at least
50,000 gallons per month, and 10,000 of such gallons are diesel; (iv) no more
than 3 machines if sales are less than 50,000 gallons per month, and (v) license
can be revoked if sales are less than 25,000 gallons in any single month. See
"Establishment License" below.
ESTABLISHMENT LICENSE. The Louisiana Act provides that a truck stop facility
("Establishment") must obtain a license as an Establishment to allow the
placement and operation of VLTs therein. In general, in order to qualify as
an Establishment, the location must have paved parking for at least 50
eighteen-wheelers, a 24 hour on-site restaurant facility, an on-site repair
facility with at least one mechanic available, five developed contiguous
acres, and certain other specified amenities (the "Qualified Truck Stop"). An
Establishment license typically is granted to the owner of the truck stop
facility, but also may be granted to a lessee of the facility. Prime holds an
Establishment license for the Gold Coin and TWGLa holds an Establishment
license for the Toledo Palace.
In accordance with video gaming law in Louisiana prior to June 30, 1999, a
licensee who had its license revoked by the Video Gaming Division of the State
Police could not reapply for another such license for a period of five years
from the date of such revocation.
Except under emergency circumstances as determined by the Louisiana Authorities,
if a licensed Establishment which otherwise was a Qualified Truck Stop, failed
to sell a minimum of 25,000 gallons of fuel in any single month, the
Establishment's video gaming license would be subject to immediate revocation
without a hearing.
Establishment and VLT owner licenses are subject to annual renewal in June of
each year and the payment of an annual fee. The Louisiana Authorities have the
same authority to deny, suspend, condition or revoke an Establishment license
and to conduct investigations, including investigations of 5% or more owners, as
it does for VLT owner licenses. The loss by Prime or TWGLa of the Establishment
licenses for the Gold Coin or the Toledo Palace, respectively, would have a
materially adverse effect upon the business of the Company. See Item 6.
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation - Important Factors to Consider - Possible Loss of Establishment
License."
The Louisiana Act also provides protection to lessees of truck stop facilities.
It provides that if the lease of a licensed Establishment expires or is
terminated without legal cause by the owner of the Establishment, neither the
owner nor any new lessee shall have the right to apply for a VLT license at the
Establishment for six years unless the owner of the Establishment also was the
holder of the VLT license for the VLTs being operated at the Establishment, and
the former lessee/licensee is given the right to continue operations at the
Establishment by agreement with the owner or any new lessee.
LOUISIANA GAMING REFORM. At the close of a special legislative session on
April 19, 1996, a local option bill was passed which required the residents
of each parish in the state to vote on the future of gambling in their
parish. On November 5, 1996, the residents in Lafayette and Beauregard
parishes in Louisiana, where the Company had video poker operations, were
among 35 Louisiana parishes that voted to eliminate video poker. As a result,
the Company ceased its video poker operations on July 1, 1999 in both of
those parishes. These were the only two facilities at which the Company had
operations in the U.S. The Company, through its Chrysolith affiliate, has
joined with two video poker operators in Louisiana in challenging the vote in
the courts. On January 30, 1998, the Louisiana Supreme Court unanimously
denied without comment a writ application filed by Chrysolith, among others,
alleging Election Code violations, effectively ending the Election Code
challenge to the Voter Mandate. In May 1999, the 1st District Court in Baton
Rouge decided that the 1996 election was illegal and the Voter Mandate should
be overturned. In June 1999, the Louisiana Court of Appeals reversed the 1st
District Court's decision. The State Supreme Court refused to hear the case
and upheld the decision of the Appellate Court. It is anticipated that the
U.S. Supreme Court will consider the issue during the quarter ended December
31, 1999. As a result, the Company's video poker operations closed on July 1,
1999. The Company cannot as of the date hereof predict the outcome of this
litigation or when a decision relating hereto will be rendered.
SPAIN. The new law that would allow CDZ to move to the center of Zaragoza has
been passed from a parliamentary committee to the floor of the regional
parliament. However, a certain amendment to the law is of concern to TWG. The
proposed amendment would allow bingo operators in Aragon to install
casino-style slot machines. The DGA, which is controlled by the largest party
in parliament, opposes the amendment and has decided to issue a governmental
decree that would circumvent the parliament and would allow the casino to
move to the center city. The decree is currently in a
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judicial committee pending passage into law. The validity of the decree could
be challenged in courts with the litigant being required to post a bond equal
to potential damages incurred by CDZ if the litigation failed. Recently, the
Spanish National Court upheld the right of the Catalan (Barcelona) Government
to issue a similar decree. There can be no assurances however, that the
courts will uphold the DGA's right to issue a decree if it is challenged. In
the event the decree is not issued, the Company may offer the casino license
for sale or close CDZ. This would have a material adverse effect on the
future profitability of the Company.
CZECH REPUBLIC. During the quarter ended June 30, 1998, the Czech Republic House
of Deputies passed an amendment to the gaming law which restricted foreign
ownership of casino licenses. In response, the Company restructured its
subsidiaries and Czech legal entities to comply with the amendment and was
subsequently granted a ten-year license. It is currently anticipated that the
foreign ownership restriction will be lifted in 2000, however, there may be
increased competition at that time in the areas where the Company operates
because local municipalities no longer have control over the issuance of casino
licenses, thereby effectively eliminating exclusivity. There can be no
assurances that the authorities in the Czech Republic will not amend the gaming
law as it pertains to foreign ownership of casino licenses. In the event the
gaming laws are amended in the future, it may have a material adverse effect on
the Company's future profitability and operations.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS. In the future, the
Company intends to seek the necessary licenses, approvals and findings of
suitability for the Company and its personnel in other jurisdictions. However,
there can be no assurance that such licenses, approvals or findings of
suitability will be obtained or will not be revoked, suspended or conditioned or
that the Company will be able to obtain the necessary approvals for its future
activities. If a license, approval or finding of suitability is required by a
regulatory authority and the Company fails to seek or does not receive the
necessary license or finding of suitability, the Company may be prohibited from
owning or operating gaming establishments in that jurisdiction.
GAMING TAXES. Gaming taxes in the various locations where the Company operates
range from 10% to 55% of net gaming revenues. There can be no assurance that tax
rates, fees or other payments applicable to the Company's gaming operations will
not be increased in the future.
FEDERAL REGULATION
The Federal Gambling Devices Act of 1962 (the "Federal Act") generally makes
it unlawful for a person to manufacture, deliver, or receive gaming machines,
gaming machine type devices, and related components across state lines or to
operate gaming machines unless that person has first registered with the
Attorney General of the United States. In order to manufacture, sell,
deliver, or operate certain of its current and proposed products, the Company
must register and renew its registration annually. In addition, various
record keeping and equipment identification requirements are imposed by the
Federal Act. Violation of the Federal Act may result in seizure and
forfeiture of equipment, as well as other penalties. The Company is currently
registered and maintains the reports required under the Federal Act.
COMPETITION
The Gold Coin and the Toledo Palace competed with other forms of legal and
illegal gambling, including bingo and pull-tab games, card clubs, pari-mutuel
betting on horse racing and dog racing and state-sponsored lotteries, as well as
other forms of wagering entertainment. The Company's Czech casinos compete with
approximately twelve other casinos in the area with two new casinos under
construction across the German border. Due to the exclusivity of the Spanish
casino license, the bingo operations in Zaragoza are CDZ's only competition and
only one other casino is operating in Bishkek. (See Item 1. "Description of
Business - Industry Overview").
ENVIRONMENTAL
The Company owns and operates a truck stop in DeRidder, LA with the fuel tanks
situated above ground which minimizes environmental issues. The Company believes
that it is in compliance with all federal, state and local environmental laws in
all areas where the Company operates.
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EMPLOYEES
As of July 1, 1999, the Company had 286 full-time employees (including three
executive officers): 191 in the Czech Republic, 79 in Spain, 4 in London, 3 in
New York and 9 in the Woodlands, respectively. The Company also had twelve
part-time employees as of July 1, 1999. The Company believes that its employee
relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY.
CORPORATE OFFICES
The Company's corporate offices are located at One Penn Plaza, Suite 1503, New
York, New York, occupying approximately 1,000 square feet of office space under
a lease at the rental rate of $2,500 per month expiring in October 1999.
The Company leases approximately 1,500 square feet of office space in London,
England for Tottenham & Co. on a five-year lease expiring in April 2003 at
approximately $4,000 per month.
LOUISIANA
The Company's lease for the Gold Coin will be terminated effective July 31,
1999. TWGLa owns the 20-acre site on which the Woodlands is located in DeRidder,
Louisiana which is currently subject to a mortgage under the terms of the 1996
Senior Bonds. (See - Form 10KSB/A for the fiscal year ended December 31, 1997,
Item 6. "Management's Discussion and Analysis or Plan of Operations - Liquidity
and Capital Resources"). TWGLa is actively seeking a buyer for the Woodlands
property.
CZECH REPUBLIC
The Company leases a 5,000 square foot casino facility in Ceska Kubice under the
terms of an agreement that expires in 2001. The Company also leases a hotel from
a local bank in nearby Krasnahorska for staff accommodations at the rate of
approximately $14,000 per month. The lease expires in September 1999. The
Company does not intend to renew the hotel lease and is currently seeking an
alternative facility. If an alternative facility cannot be located at terms
favorable to the Company, the Company may decide not to offer accommodations to
the staff at the expiration of the current lease.
In Rozvadov, the Company owns the casino building and an adjacent facility for
staff accommodations. TWG has no immediate plans to relocate the casino and/or
sell the property.
As part of the acquisition of Resorts (See Item 1. "Description of Business -
General Development of Business"), TWG acquired approximately 10 acres of land
in Znojmo on which the Company intends to operate a casino. TWG has negotiated
an agreement with a local building contractor who will finance and build a 5,000
square foot casino facility and lease it to the Company under the terms of a
ten-year lease for approximately $27,000 per month. (See Item 1. "Description
of Business - Future Operations").
SPAIN
The Company leases the current CDZ casino facility from the DGA on a
month-to-month basis.
BISHKEK
The Bishkek Casino is leased from a hotel location by JCC (See - "Acquisition
and Disposition Agreements - Bishkek Agreement") and the Company has a
management contract to operate the casino.
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ITEM 3. LEGAL PROCEEDINGS.
On or about November 6, 1997, the Company was sued for breach of contract by
Monarch Casinos, Inc. of Louisiana and Michael A. Edwards in the 15th Judicial
District Court, Lafayette Parish, Louisiana, Case No. 97-5037B. Mr. Edwards
claimed compensation charges of approximately $2.2 million and punitive charges
of $11.1 million and alleged that the Company breached a management contract
dated September 21, 1994. The lawsuit was settled for a cash payment of $100,000
on May 15, 1999. The final order of dismissal with full prejudice which
terminated the litigation and disposed of all claims in the lawsuit was issued
by the United States District Court of Louisiana on May 24, 1999.
On January 25, 1997 (prior to the Company's acquisition of 90% of CDZ), the
directors of CDZ filed an application in the Court of First Instance Number
11 of Zaragoza to declare CDZ in temporary receivership. Temporary
receivership was granted on June 23, 1997.
On April 17, 1998 (the date of the Company's acquisition of 90% of CDZ), CDZ
signed a composition with creditors, most notably the DGA, the Spanish Social
Security Authorities and the City Council of Alfajarin ("Spanish Taxing
Authorities"), which set the terms of payment to the Spanish Taxing
Authorities and other creditors for debts existing as of January 25, 1997.
The composition with the Spanish Taxing Authorities and other creditors
resulted in a debt reduction of approximately $1.7 million. This reduction
was accounted for as a reduction of goodwill.
In addition, in 1998, DGA granted the Company a deferral of approximately
$1.0 million in taxes on all of 1997 and some of 1998 gaming winnings.
Furthermore, in April 1998, the Company reached an understanding with the
Spanish Social Security Authorities to defer approximately $1.4 million
related to all debts generated in 1997 and the first quarter of 1998, until
November __, 1999.
On May 22, 1998, the Company entered into the settlement relating to the
Prime Agreement. (See Item 1. "Description of Business - General Development
of Business").
The Company is currently involved as a plaintiff, through its Chrysolith
affiliate, in litigation challenging the Voter Mandate. (See Item 1.
"Description of Business - Regulations and Licensing - Louisiana Gaming
Reform").
The Company is not currently involved in any other material legal proceeding nor
was it involved in any other material litigation during the year ended December
31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Effective December 15, 1994, the Company's Common Stock and warrants (the "$8.50
Warrants") commenced trading on the Nasdaq National Market System under the
symbols IBET and IBETW, respectively. Prior to December 15, 1994, there was no
established public trading market for the Company's Common Stock or the $8.50
Warrants. On December 17, 1996, trading of the Company's Common Stock was
transferred to the Nasdaq SmallCap Market System for failure to maintain the
minimum bid price requirements of the National Market System. Further on June
25, 1997, the Company's Common Stock and the $8.50 Warrants were delisted from
the Nasdaq Small Cap Market and trading on the Company's Common Stock was
transferred to the OTC Bulletin Board for failure to maintain a bid price of
$1.00 and minimum capital and surplus requirements.
13
<PAGE>
The following table sets forth the high and low prices of the Company's Common
Stock and the $8.50 Warrants for fiscal years 1997 and 1998:
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter.................................. $ 1.87 $ 1.00
Second Quarter................................. 1.37 .50
Third Quarter.................................. *.68 *.31
Fourth Quarter................................. *.44 *.22
1998
First Quarter.................................. *.78 *.30
Second Quarter................................. *.75 *.46
Third Quarter.................................. *.46 *.31
Fourth Quarter................................. *.31 *.24
$8.50 WARRANTS
1997
First Quarter.................................. .31 .08
Second Quarter................................. .25 .19
Third Quarter.................................. *.08 *.08
Fourth Quarter................................. *.04 *.02
1998
First Quarter.................................. *.03 *.00
Second Quarter................................. *.03 *.02
Third Quarter.................................. *.02 *.01
Fourth Quarter................................. *.02 *.00
</TABLE>
-----------------
* Quoted on OTC Bulletin Board.
As of the date of this Report, there were (a) 3,364,286 shares of Common
Stock outstanding held of record by approximately 1,300 persons, (b)
outstanding options to purchase an aggregate of 12,500 shares of Common Stock
not part of the Company's 1993 Incentive Stock Option Plan (the "1993 Plan"),
(c) outstanding $8.50 Warrants to purchase an aggregate of 1,511,429 shares
of Common Stock, (d) outstanding $0.01 Series D Warrants to purchase an
aggregate of 2,051,912 shares of Common Stock issued in connection with the
March 1996 financing, (e) outstanding $11.55 Warrants to purchase an
aggregate of 151,143 shares of Common Stock, (f) outstanding $13.50 Warrants
to purchase an aggregate of 151,143 shares of Common Stock, (g) outstanding
$1.50 Series B Warrants to purchase an aggregate of 3,200,000 shares of
Common Stock issued in connection with the restructuring of certain long-term
debt, (h) outstanding $1.00 Series A Warrants to purchase an aggregate of
960,000 shares of Common Stock issued in connection with the sale of certain
debt instruments, (i) outstanding $.5938 Warrants to purchase an aggregate of
250,000 shares of Common Stock issued in connection with the acquisition of
Tottenham & Co. (see Item 1. "Description of Business - Narrative Description
of Business - Acquisition Agreements"), (j) outstanding $.50 warrants to
purchase an aggregate of 220,760 shares of Common Stock issued in connection
with the 1997 Promissory Note (See Item 6 -"Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources"), (k)
outstanding $.01 warrants to purchase an aggregate of 104,225 shares of
Common Stock issued in connection with the debt financing to fund the Bishkek
Casino transaction and (l) outstanding $0.01 Series C and Series E Warrants
to purchase an aggregate of 7,441,826 shares of Common Stock issued in
connection with the March 1998 Private Placement. (See Item 6. "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital
Resources").
14
<PAGE>
The Company has not declared or paid any cash dividends on its Common Stock
since its inception and does not intend to pay any dividends for the foreseeable
future.
Except for the 320,000 shares of Common Stock issued in exchange for the
cancellation of the Tottenham Notes (See Item 1 "Description of Business -
Narrative Description of Business - Acquisition Agreements"), there were no
securities sold by the Company during the period covered by this Report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will", "expect," "believe," "anticipates,"
"estimates," or "intends" or comparable terminology are intended to identify
certain forward-looking statements in this and other sections of the Form 10-KSB
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors,
including those set forth in the section below entitled "Important Factors to
Consider."
The following discussion and analysis relates to the financial condition and
results of operation of the Company for the two years ended December 31, 1998.
This information should be read in conjunction with the Company's Consolidated
Financial Statements and notes appearing elsewhere herein. All amounts in the
following discussions have been rounded to the nearest thousand except where
indicated.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997
---- ----
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
Revenue $ 15,079 $ 6,901
Pre-Tax Income/(Loss) (10,538) 80
Net Income/(Loss) (10,729) 80
Earnings/(Loss) per common share - Basic $ (3.52) $ 0.03
Earnings/(Loss) per common share, - Diluted $ (3.52) $ 0.02
Weighted Average Common Shares Outstanding
-- Basic 3,044,286 3,044,286
-- Diluted 3,044,286 3,830,986
</TABLE>
15
<PAGE>
REVENUES
The Company's net revenues are derived from the net win (defined as those
amounts remaining with the Company after payment of winnings and state gaming
taxes) from the operations in the Czech Republic, Spain, the Gold Coin, Bishkek
and the Toledo Palace. At the Woodlands, the Company derives additional revenues
primarily from the sale of fuel, convenience store items and supplies. The
following table lists the revenue by operation:
TWG REVENUES FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
-------------------
1998 1997 $ %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gold Coin $ 3.7 $3.8 $(.1) (3%)
Toledo Palace .5 .3 .2 67%
Czech Republic (1) 5.5 5.5 N/M
Spain (2) 3.5 3.5 N/M
Woodlands 1.9 2.8 .9 (32%)
----- ---- ---- ---
$15.1 $6.9 $8.2 119%
----- ---- ---- ---
----- ---- ---- ---
</TABLE>
- ----------------------
(1) The Czech Republic casinos were acquired on March 31, 1998.
(2) The Spanish casino, CDZ, was acquired on April 17, 1998.
COST OF REVENUES
Cost of revenues, consist of the direct costs of operating the Czech Republic,
Spain, the Gold Coin, Bishkek and the Toledo Palace, primarily in the areas of
labor, security, and general office expenses, and the cost of revenue, at the
Woodlands is shown in the following table:
TWG COST OF REVENUES FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
1998 1997 $ %
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gold Coin $ .9 $ .9
Toledo Palace .4 .2 .2 100%
Czech Republic 4.6 4.6 N/M
Spain 2.8 2.8 N/M
Woodlands 1.6 2.4 (.8) (33%)
----- ---- ---- ----
$10.3 $3.5 $6.8 194%
</TABLE>
Virtually all of the increase in cost of revenues is a result of the operations
in the Czech Republic and Spain, costs the Company did not incur in the
comparable period in 1997.
16
<PAGE>
EXPENSES
Selling, general and administrative expenses were $4.4 million in 1998
representing a 96% increase over 1997. This increase is primarily attributable
to such costs incurred with the operation of the Czech Republic and Spanish
casinos, a cost the Company did not incur in 1997.
Depreciation and amortization increased from $.3 million in 1997 to $2.8 million
in 1998 due primarily to the amortization of acquired assets during 1998. (See
Item 1. "Description of Business"). Interest expense for the year ended
December 31, 1998 was $3.1 million compared to $.8 million for the year ended
December 31, 1997. The increase is due primarily to interest charges of
approximately $2.1 million in connection with the $17 million March 1998 Private
Placement.
In addition, the Company after reviewing the carrying amounts of long-lived
assets recorded an asset impairment charge of $4.2 million during the quarter
ended as of December 31, 1998. (See Item 1. "Description of Business - General
Development of Business").
EARNINGS/(LOSS)
The Company incurred a net loss of approximately $10.7 million for the year
ended December 31, 1998 as compared to net earnings of $.1 million in the
year ended December 31, 1997. The loss was primarily attributed to increases
in interest expense of $2.3 million, asset impairment charge of $4.2
million and the write-off of the Company's investments in the Boxer Casino
($.3 million) and the Bishkek Casino ($.3 million) and Chrysolith receivables
of $.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital, defined as current assets minus current
liabilities, decreased $2.4 million to a deficit of $3.3 million for the year
ended December 31, 1998 from a working capital deficit at December 31, 1997 of
$.9 million. As described below, the Company used the proceeds of certain
short-term and long-term financings to acquire and capitalize Resorts (See -
Item 1. "Description of Business") and to repay interest-bearing debt. The net
proceeds of the financings, offset by the investments and debt repayments,
resulted in an increase of $1.8 million in cash and equivalents to a balance of
$2.0 million at December 31, 1998.
On October 29, 1997, the Company and Value Partners, executed a loan which was
amended on December 19, 1997, under which TWG had the ability to borrow up to
$2,538,000 (the "First Amended Loan Agreement"). As of December 31, 1998, the
Company had borrowed $1,538,000 under this loan, including the Bishkek Note
described below, of which $1,288,000 was repaid on March 31, 1998 from the
proceeds of the Private Placement (as described below).
On March 19, 1998, the Company and Value Partners executed a Lender's Waiver and
Option Agreement (the "Waiver") under which the Company borrowed $250,000 (the
"Bishkek Note") to fund the Bishkek Casino transaction. In February 1999, the
Company repaid the principal and accrued interest on the Bishkek Note in full,
and it was cancelled.
On March 31, 1998, the Company, with the assistance of Libra, acting as
placement agent, borrowed $17.0 million from fourteen investors in a Private
Placement. The loan is represented by the Senior Notes issued pursuant to the
Indentures by and among TWG, TWGI, TFC and USTCT, as the case may be. The
Indentures were amended on October 29, 1998 in connection with the
restructuring of the Company's ownership of Resorts as a result of the change
in Czech gaming law which restricted foreign ownership of Czech casinos. The
Amended Indentures, however, did not alter the underlying basis of the Senior
Notes. The Senior Notes require mandatory prepayments based upon excess cash
flow generated by TWGI from the operation of the Czech casinos acquired in
the Resorts acquisition and bear interest at the rate of 12% per annum. The
proceeds of the Senior Notes were used to pay the net acquisition costs of,
and improvements to, Resorts totaling $12.6 million, to repay the First
Amended Loan Agreement in the amount of $1.3 million, to cover costs and
expenses of $1.4 million relating to the Private Placement and to provide
working capital of $1.7 million. Interest payments under the terms of the
Senior Notes were paid when due on September 17, 1998 and March 17, 1999. The
Company was and is current on its payments under the Senior Notes.
17
<PAGE>
On May 19, 1998, the Company and Value Partners executed a Loan Agreement
(the Value Partners Loan) under which the Company borrowed $1,000,000 at 12%
interest per annum to fund the purchase of the stock of the Casino de
Zaragoza (see -"Plan of Operations"), which was payable in full on September
15, 1998 monthly. The interest rate automatically increased to 17% on
September 15, 1998 which has been accrued monthly by the Company since that
date.
The Company was in technical default of, and has not timely paid the Value
Partners Loan which was due on September 15, 1998 and is currently
negotiating an extension of such loan. On July 30, 1999, the Company received
from Value Partners a waiver of such default and a waiver of the cross
defaults on the Amended Indentures by the majority in interest of the holders
of the Senior Notes. Value Partners also granted an extension of this loan
until January 1, 2000, with the understanding that the Company and Value
Partners will work in good faith to renegotiate the loan terms prior to
August 31, 1999. There can be no assurance that the terms of the Loan
Agreement can be renegotiated at terms favorable to the Company. If Value
Partners chose to do so, a declaration of default would result in a default
on all of the Company's other debt instruments and have a material adverse
effect on the Company's financial condition and results of operation.
The Company has, from time to time, been in technical default of the Amended
Indentures and has relied upon the forbearance and waivers from a majority
interest of the holders of the Senior Notes. Value Partners represents a
majority in interest of the holders of the Senior Notes. The Company has
borrowed other amounts from Value Partners from time to time (some of which
have been in technical default for which forbearance or waivers have been
granted) and may seek to borrow additional funds or obtain equity investments
from Value Partners in the future. At December 31, 1998, Value Partners owned
51% of the Company's long term debt and owned warrants to acquire 66.5% of
the Company's issued and outstanding shares of Common Stock.
In accordance with Spanish law, in order for a casino company to remain
solvent it must have a minimum capitalization of approximately $1.8 million
and such recapitalization requires the approval of both the CDZ's Board of
Directors (received on July 21, 1998) and the Council of Ministers in Spain
(which is pending). The owner of the remaining 10% of CDZ declined to
participate in the recapitalization and under Spanish law that 10% interest
will be diluted to zero once the recapitalization is approved by the Council
of Ministers, bringing the total TWG ownership to 100%. The recapitalization
may be used to finance operating losses, for refurbishments and/or equipment
purchases. The Company estimates that approximately $4.0 million (including
$1.8 million for the recapitalization) will be required by the fourth quarter
of 1999 to meet the minimum capital requirements and to move the casino and
equipment, assuming permission is received from the DGA for such move by
September 1, 1999.
In addition, the amendment to the gaming law in the Czech Republic demands
that each casino license holder must increase its license bond by
approximately $320,000 to approximately $640,000, before December 31, 1999.
The Company currently is attempting to raise approximately $6.0 million for
CDZ and the Czech Republic (the "Capital Raise") from Value Partners and/or
other private investors.
PLAN OF OPERATIONS
TWG management will continue to develop marketing and operational strategies
designed to increase attendance and revenues at its existing locations in the
Czech Republic and Spain. The Company has acquired land close to the German
border near Ceska Kubice, at Folmava, Czech Republic and is planning to build
a casino to replace the existing facility. Management believes that the new
location would be more accessible to its main target market in Germany and
will result in improved attendance and play. TWG also plans to transfer
excess slot machines from Ceska Kubice and Rozvadov to its new location in
Znojmo, thereby decreasing its necessary investment. Pre-opening
advertisements are planned for both Znojmo and CDZ and gala grand openings
are scheduled for each location.
The Company will aggressively pursue its case against the Voter Mandate to the
U.S. Supreme Court. (See Item 3. "Legal Proceedings").
18
<PAGE>
YEAR 2000 CONVERSION
The Company does not believe that the Year 2000 conversion as it relates to
computer applications that perform data intensive calculations beyond December
31, 1999 will have a material adverse effect on the Company's operations.
To date the Company has not incurred significant expense to obtain Y2K
compliance since it is primarily reliant on third party vendors for its computer
output and processing including accounting software, payroll processing, banking
and slot machine accounting and controls. The Company has received assurances
from these third party vendors that these vendors have demonstrated Year 2000
("Y2K") compliance and that they have taken the necessary steps for their
systems to function properly.
There can be no assurance that potential systems interruptions or unanticipated
additional expense incurred to obtain Y2K compliance would not have a material
adverse effect on the Company's business or financial condition.
IMPORTANT FACTORS TO CONSIDER
ACCUMULATED DEFICIT; OPERATING LOSSES; GOING CONCERN
On December 31, 1998, the Company had an accumulated deficit of approximately
$23.9 million and a working capital deficit of approximately $3.3 million. For
the year ended December 31, 1998, the Company incurred a net loss of
approximately $10.7 million. The ability of the Company to achieve profitability
depends upon the successful operation of gaming establishments in the Czech
Republic, Spain, and Bishkek and the diversification of its operations to
other locations. There can be no assurance that the Company
will achieve profitability as a result of these operations or otherwise. The
Company's independent public accountants' have issued their report dated May 6,
1999 with an explanatory paragraph relating to the Company's ability to continue
as a going concern.
TERMINATION OF LOUISIANA OPERATIONS IN 1999; NEED TO DIVERSIFY
In November 1996, residents in 35 parishes in Louisiana, including the two
parishes in which the Gold Coin and the Toledo Palace are located, voted to
discontinue video poker effective June 30, 1999. The Company is currently
involved in litigation to overturn the voter referendum. See Item 3 - "Legal
Proceedings." No assurances can be given that such litigation will be
successful. At this time, the Company has operations in the Czech Republic,
Spain, and Bishkek, but no U.S. gaming operations. The Company is currently
seeking to develop or acquire interests in gaming operations at other locations;
however, there can be no assurance that the Company will be able to develop or
acquire such new operations in the future.
TAXATION OF GAMING OPERATIONS
Gaming operators are typically subject to significant taxes and fees in
addition to federal and state corporate income taxes, and such taxes and fees
are subject to increase to any time. Any material increase in these taxes or
fees would adversely affect the results of operations of the Company. The
Czech Republic currently has a number of laws related to various taxes
imposed by governmental authorities. Applicable taxes, include value added
tax, corporate tax, and payroll (social) taxes, together with others. In
addition, laws related to these taxes have not been in force for significant
periods, in contrast to more developed market economies; therefore,
implementing regulations are often unclear or nonexistent. Accordingly, few
precedents with regard to issues have been established. Often, differing
opinions regarding legal interpretations exist both among and within
government ministries and organizations, creating uncertainties and areas of
conflict. Tax declarations, together with other legal compliance areas (for
example, customs and currency control matters) are subject to review and
investigation by a number of authorities, who are enabled by law to impose
extremely severe fines, penalties and interest charges. These facts create
tax risks in the Czech Republic substantially more significant than typically
found in countries with more developed tax systems. Management believes that
it has adequately provided for tax liabilities; however, the risk remains
that relevant authority in the Czech Republic, and to a lesser extent as of
the date of this report in Spain and Bishkek, could take differing positions
with regard to interpretive issues and the effect could be significant.
19
<PAGE>
DEPENDENCE UPON KEY PERSONNEL
The Company's ability to successfully implement its strategy, manage the
Czech, Bishkek and Spanish casinos and maintain a competitive position will
depend in a large part on the ability of Rami S. Ramadan, the Company's newly
hired Chief Executive and Chief Financial Officer and Andrew Tottenham, the
Company's President. Mr. Ramadan has served as Executive Vice President of
Finance for the Ian Schrager Hotels and also held financial positions with
the Hyatt Hotels, Euro Disney and Meridien Hotels. Mr. Tottenham is a
well-known international gaming consultant and provides the Company with an
extensive network of worldwide contacts in the gaming industry, as well as
experience and expertise in international casino development, marketing and
management. The Company may also be highly dependent upon other key
employees, casino managers and consultants whom the Company may retain from
time to time. Although Mr. Ramadan and Mr. Tottenham have employment
agreements with the Company that continue for an additional three years,
there can be no assurances that the Company will be able to continue to
retain Mr. Ramadan or Mr. Tottenham or any of such other personnel.
NEED FOR ADDITIONAL FINANCING
The Company believes, although there can be no assurance, that existing cash,
together with anticipated cash flows from operations, will be sufficient to
satisfy its current obligations for the next twelve months. However, the
Company will require additional capital for the refurbishment of the casino in
Znojmo and the cost of the new CDZ casino and for growth opportunities. If
such additional financing is not available, this would have a materially
adverse effect on the financial condition and operations of the Company. The
Company may require additional debt and/or equity financing for the
acquisition of other gaming businesses when and if an opportunity to acquire
such businesses arises. The Company's ability to obtain additional financing
may be limited for a number of reasons, including the fact that because the
Company is highly leveraged, a substantial portion of the Company's assets
are subject to liens. There can be no assurance that such financing will be
available on terms favorable to the Company or at all.
The Company is highly leveraged with debt, which makes the Company more
vulnerable to extended economic downturns and reduces the Company's ability
to respond to changing economic and industry conditions. This high leverage
may adversely impact the holders of the Company's equity securities by
impairing the Company's ability to obtain additional financing needed for
working capital, capital expenditures, acquisitions or general corporate
purposes.
INTERNATIONAL ACTIVITIES
Since July 1, 1999, the Company's operations were totally outside of the United
States. Operating internationally involves additional risks relating to such
things as currency exchange rates, different legal or regulatory environments,
political and economic risks relating to the stability or predictability of
foreign governments, differences in the manner in which different cultures do
business, difficulties in staffing and managing foreign operations, differences
in financial reporting, operating difficulties, different types of criminal
threats and other factors. The occurrence of any of these risks, if severe
enough, could have a material adverse effect on the financial condition or
results of operations of the Company.
LICENSING AND REGULATION
The Company's operations are subject to regulation by each local jurisdiction
in which it operates or plans to operate business, as well as federal laws
and the laws of any foreign country. Each of the Company's officers, and
directors, and in certain instances, persons who have more than a 5% income
or profit interest in, or who exercise significant influence over the
activities of, the Company may be subject to strict scrutiny and approval
from the gaming commission or other regulatory body of each jurisdiction in
which the Company may conduct gaming operations.
The failure to obtain any license for properties upon which the Company plans to
operate or manage a gaming establishment in the future would have a materially
adverse effect on the Company's business. Obtaining required licenses can be
time consuming and costly with no assurance of success. In addition, the Company
is subject to changes in the laws of the jurisdictions in which it operates,
which could materially limit the Company's ability to conduct business
profitably. In the event that a required license is not granted for any
particular location, the Company's options would include effecting a transfer of
substantially all of its related gaming assets to a different location or
selling its
20
<PAGE>
interest in the gaming operations at that location to a third party. There can
be no assurance that the Company would be able to relocate gaming assets or sell
its interests on acceptable terms or at all, and the inability to do so would
have a materially adverse effect upon the business and prospects of the Company.
LIABILITY INSURANCE
The Company currently maintains and intends to maintain general liability
insurance in each of that locations in which it operates. There can be no
assurance that liability claims will not exceed the coverage limits of such
policies or that such insurance will continue to be available on commercially
reasonable terms or at all. There can be no assurance that such insurance will
be adequate to cover unanticipated liabilities.
NO DIVIDENDS
The Company has not paid any dividends to date on its Common Stock, and does not
expect to declare or pay any dividends in the foreseeable future. The Company
intends to retain future earnings, if any are generated, for investment in its
business.
POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 2,000,000
shares of "blank check" Preferred Stock, with designations, rights and
preferences determined from time to time by its Board of Directors. Accordingly,
the Company's Board of Directors is empowered, without further stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
Preferred Stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. The
Company has no current plans to issue any shares of Preferred Stock. However,
there can be no assurance that Preferred Stock will not be issued at some time
in the future.
DILUTIVE EFFECT OF WARRANTS
In March 1998 in connection with the completion of the Private Placement, the
Company issued warrants to purchase approximately 9.5 million shares of the
Company's Common Stock. In addition, in connection with the restructuring of
the Senior Bonds, in March 1998 the Company issued approximately 3.2 million
warrants to purchase the Company's Common Stock. The issuance of such
securities will have a dilutive effect on the Company's earnings, if any are
generated, on a diluted basis. Together these warrants represented at
December 31, 1998, 385% of the Company's issued and outstanding shares of
Common Stock.
ITEM 7. FINANCIAL STATEMENTS.
The following items are included in this Report:
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
- --------------------------------- ----
<S> <C>
Index to Consolidated Financial Statements......................... F-1
Independent Auditors' Report....................................... F-2
Independent Auditors' Report....................................... F-3
Consolidated Balance Sheet......................................... F-4
Consolidated Statements of Operations.............................. F-5
Consolidated Statements of Change in Stockholders' Deficit......... F-7
Consolidated Statements of Cash Flows.............................. F-8
Notes to Consolidated Financial Statements......................... F-9
Financial Statements of Other Auditors
</TABLE>
21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Pannell Kerr Forster PC ("PKF") completed the Company's audit for the year ended
December 31, 1997. In August, 1998, PKF informally indicated that it did not
wish to act as the Company's independent auditor for the year ended December 31,
1998 and that it would decline to stand for reelection to audit the Company's
financial statements for the year ended December 31, 1998. On February 25, 1999,
PKF tendered its formal resignation to the Company without having performed an
audit for the Company's year ended December 31, 1998.
During the previous two audited fiscal years, except as described below, no
audit report of PKF on the financial statements of the Company contained any
adverse opinion or disclaimer of opinion; nor was such a report qualified or
modified as to uncertainty, audit scope, or accounting principles. However,
PKF's reports for the years ended December 31, 1996 and 1997 state that the
consolidated financial statements were prepared assuming that the Company would
continue as a going concern. Furthermore, PKF expressed substantial doubt as to
the Company's ability to continue as a going concern due to the fact that the
Company, at and as of such dates, had neither established a trend of profitable
operations nor sufficient cash flow and had working capital and net capital
deficiencies. During the years ended December 31, 1996 and 1997 and the
subsequent interim period preceding February 25, 1999, there were no
disagreements between the Company and PKF.
Upon receipt of notice from PKF that it would resign and not stand for
reelection as the Company's independent accountant, the Company began its search
for a new independent accountant in September 1998. On February 19, 1999, the
Company and Rothstein Kass & Company, P.C. ("RKC") signed a letter of engagement
whereby RKC agreed to perform an audit of the Company for the year ended
December 31, 1998.
Prior to the date of engagement of RKC, the Company had not consulted with RKC
regarding the application of accounting principles to a specified transaction or
the type of audit opinion that might be rendered on the Company's financial
statements.
The decision to accept the engagement of RKC as the Company's independent
accountant was recommended by the Audit Committee and approved by the Board of
Directors of the Company.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table provides information as of July 26, 1999 with respect to
each of the Company's directors and each Executive Officer:
<TABLE>
<CAPTION>
NAME(1) AGE POSITION IN THE COMPANY DIRECTOR OR EXECUTIVE OFFICER SINCE:
- ------- --- ----------------------- ------------------------------------
<S> <C> <C>
Stanley Kohlenberg (2) 66 Chairman and Director 1994
Rami S. Ramadan 49 Chief Executive Officer, CFO 1999
Andrew Tottenham (2) 42 President, Chief Operating Officer
and Director 1996
Julio E. Heurtematte, Jr. (3) 53 Director 1998
Malcolm M.B. Sterrett (3) 56 Director 1998
</TABLE>
Dominick J. Valenzano, former Chief Financial Officer of the Company, resigned
on July 12, 1999 to pursue other business interests.
- ------------------
(1) Mr. Geoffrey Baker, who was appointed to a fill a vacancy on the Board of
Directors on December 22, 1998, resigned from his position on May 13, 1999.
(2) Member of the Executive Committee.
(3) Member of Audit Committee and Compensation Committee.
22
<PAGE>
STANLEY KOHLENBERG was the Chief Executive Officer and President of the
Company from March 6, 1996 until his retirement on December 31, 1996. He was
retained as a consultant to the Company through September 15, 1998. He was
reinstated as Chief Executive Officer on September 16, 1998 and continued to
serve in such capacity until July 1, 1999. He has been a director of the Company
since September 1994, where he has served as Chairman since March 6, 1996. He
has been a Managing Director of Tottenham & Co. since January 1991. Mr.
Kohlenberg was the acting Chief Financial Officer for the start-up and opening
of the Teller House Casino in Central City, Colorado in 1991. Prior to January
1991, Mr. Kohlenberg held senior executive positions in the cosmetics industry
as Chief Executive Officer of Alfin Inc. (1989-1991), President of Sanofi
Beauty, Inc. (1984-1989), President of CFT Marketing (1980-1984), which was
acquired by Sanofi Beauty in 1984, President of Calvin Klein Cosmetics
(1977-1980), and Executive Vice President of Revlon, Inc. (1974-1977).
RAMI S. RAMADAN has served as CEO/CFO since July 12, 1999. His most
recent position had been Executive Vice President of Finance for the Ian
Schrager Hotels from November 1997 to July 1999. Prior to that, Mr. Ramadan
held senior financial positions with Hyatt Hotels from January 1994 to
November 1997, Euro Disney from October 1990 to December 1993 and Meridien
Hotels from September 1975 to September 1990.
ANDREW TOTTENHAM was appointed as President and CEO of the Company on
January 1, 1997 and served in such capacities until September 1998 when he was
appointed to the offices of President and Chief Operating Officer. Mr. Tottenham
was a consultant to the Company from July 1996 to December 31, 1996 and has been
a director of the Company since May 1996. He has been the President of Tottenham
& Co., since 1988. Mr. Tottenham commenced his career in the gaming industry in
1975 and has worked for the Silhouette Club, Bally's Park Place, Connoisseur
Club, and Victoria Casino. Mr. Tottenham is the son-in-law of Mr. Kohlenberg.
JULIO E. HEURTEMATTE, Jr. Mr. Heurtematte currently is a private
consultant, specializing in international projects, trade and investments and
has acted in such capacity since 1989. From 1963 to 1989, Mr. Heurtematte served
with the Inter-American Development Bank in several capacities, most recently as
its Deputy Manager for Project Analysis.
MALCOLM M. B. STERRETT. Mr. Sterrett is a private investor. From 1989
to 1993, he was a partner at the law firm of Pepper Hamilton & Scheetz,
Washington, D.C. From 1988 to 1989, he served as General Counsel to the U.S.
Department of Health and Human Services and from 1982 to 1988 he was a
Commissioner on the U.S. Interstate Commercial Commission. Prior thereto, he was
Vice President and General Counsel to the United States Railway Association and
served as Staff Director and Counsel to the U.S. Senate Committee on Commerce,
Science and Transportation.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The business and affairs of the Company are managed by the Company's
Board of Directors. Meetings of the Board are held quarterly and on an as-needed
basis. The Board has established a number of committees, described below, which
meet on an as-required basis during the year. The Board held six meetings during
the Company's fiscal year ended December 31, 1998. All of the directors of the
Company attended 75% or more of the aggregate number of meetings of the Board
and the aggregate number of meetings of committees of the Board during the year
ended December 31, 1998.
The Board of Directors has established the following committees:
AUDIT COMMITTEE. The Audit Committee reviews and approves internal
accounting controls, internal audit operations and activities, the Company's
annual report and audited financial statements, the selection of the Company's
independent auditors, the activities and recommendations of the Company's
independent auditors, material changes in the Company's accounting procedures,
the Company's policies regarding conflicts of interest and such other matters as
may be delegated by the Board. The Audit Committee, composed of Messrs.
Heurtematte and Sterrett, both non-employee directors, met once in 1998.
EXECUTIVE COMMITTEE. The Executive Committee recommends a list of
potential director nominees to the Board of the Company, develops guidelines for
corporate structuring and Board-related issues and acts as an oversight
committee. Although the Executive Committee will consider nominees recommended
by the Company's shareholders, it has neither actively solicited nominations nor
established any procedures for this purpose. The Executive Committee, composed
of Messrs. Kohlenberg and Tottenham, met three times during 1998.
23
<PAGE>
COMPENSATION COMMITTEE. The Compensation Committee sets the
compensation for executive officers of the Company and sets the terms of
grants of awards under the Company's 1993 Incentive Stock Option Plan (the
"1993 Plan"), the Company's 1998 Stock Option Plan (the "1998 Plan"), and any
other equity-based compensation plans adopted by the Company. The
Compensation Committee, composed of Messrs. Heurtematte and Sterrett, met
four times during 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers, directors
and persons who own more than 10% of the Company's Common Stock to file
reports of ownership and changes in ownership with SEC and the National
Association of Securities Dealers, Inc. by certain dates. The Company
believes that in the fiscal year ended December 31, 1998, these filing
requirements were not satisfied by its directors and executive officers. For
the year ended December 31, 1998, Geoffrey Baker, Julio Heurtematte, Malcolm
Sterrett, Maureen Weppler, Stanley Kohlenberg, Dominick Valenzano and Andrew
Tottenham each were late once in reporting one transaction each of which were
subsequently filed. In making the foregoing statements, the Company has
relied on representations of its directors and executive officers and copies
of the reports that they have filed with the SEC. The Company knows of no
person who owns 10% or more of the Company's Common Stock.
ITEM 10. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table sets forth the cash and non-cash compensation paid
or earned during the fiscal years ending December 31, 1998, 1997 and 1996 by the
Chief Executive Officer(s) and Chief Financial Officer of the Company (the
"Named Officers") during those periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
OTHER ANNUAL STOCK ALL OTHER
YEAR SALARY BONUS COMPENSATION OPTIONS(4) COMPENSATION (5)
<S> <C> <C> <C> <C> <C> <C>
Andrew Tottenham
President and Chief Executive 1998 $180,000 25,000 $9,000
Officer (1) 1997 150,000 $60,000 100,000 8,600
Stanley Kohlenberg 1998 43,750 25,000 42,500
Former President and Chief 1997 60,000
Executive Officer (2) 1996 125,000 37,500 100,000
Dominick J. Valenzano 1998 120,000 25,000 6,500
Former Chief Financial 1997 90,000 30,000 50,000 6,360
Officer (6) 1996 90,000 18,000 50,000 6,360
</TABLE>
- ---------------------
(1) Mr. Tottenham was elected President and Chief Executive Officer of the
Company as of January 1, 1997 and became President and Chief
Operating Officer on September 16, 1998.
(2) Mr. Kohlenberg served as President and Chief Executive Officer of the
Company from March 6, 1996 to December 31, 1996 and again from September
16, 1998 to June 30, 1999, the date of his resignation. Under the terms
of a severance agreement dated May 23, 1999, Mr. Kohlenberg will receive
six months salary and will participate in the Company's health plan for
that period.
(3) Bonus amounts shown were earned with respect to each year indicated.
24
<PAGE>
(4) Amounts shown represent the number of qualified stock options granted
each year. All such options listed are exercisable; all of the options,
at December 31, 1998, were issued at the fair market value of one share
of the Company's Common Stock on the date of grant.
(5) The amounts shown represent the cost of a leased automobile provided to
Mr. Tottenham and Mr. Valenzano by the Company for each year
indicated and represents a consulting fee paid to Mr. Kohlenberg under
the terms of a Consulting Agreement which terminated on September 15,
1998.
(6) Mr. Valenzano resigned from the Company on July 12, 1999. Under the
terms of a severance agreement, executed on July 12, 1999, Mr. Valenzano
will receive six months salary and will continue to participate in the
Company's health plan for six months following termination.
OPTION GRANTS AND EXERCISES
The following table summarizes certain information concerning
individual grants of options during fiscal 1998 to the executive officers named
in the Summary Compensation Table above and the potential realizable value of
the options held by such persons at December 31, 1998.
OPTIONS GRANTED IN FISCAL 1998
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
SHARES OF COMMON GRANTED TO
STOCK UNDERLYING EMPLOYEES EXERCISE OF BASE
OPTIONS GRANTED IN FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
<S> <C> <C> <C> <C>
Stanley Kohlenberg 25,000 (1) 23.8% $0.30 12/30/08
Andrew Tottenham 25,000 (1) 23.8% 0.30 12/30/08
Dominick J. Valenzano 25,000 (1) 23.8% 0.30 12/30/08
</TABLE>
- ----------------
(1) All of these options fully vested on the date of grant and expire ten
years after the date of grant.
No options were exercised by the executive officers named in the Summary
Compensation Table during fiscal 1998.
The following table summarizes the option values held by the executive
officers named in the Summary Compensation Table as of December 31, 1998.
AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND
FISCAL 1998 YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS AT
OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Stanley Kohlenberg 159,000 $
Andrew Tottenham 127,000
Dominick J. Valenzano 145,000
</TABLE>
25
<PAGE>
DIRECTORS' COMPENSATION
Directors receive a cash fee of $2,000 for each meeting attended and all members
of the Board are reimbursed for out-of-pocket expenses in connection with
attending Board meetings. In 1998, the Board of Directors amended the 1993 Plan
to provide each non-employee director with an automatic grant of a non-qualified
option to purchase 2,000 shares of Common Stock on the date following each
fiscal quarter in which the director serves. Each such option (i) has a ten-year
term, (ii) has an exercise price per share equal to 100% of the fair market
value of one share of Common Stock on the date of grant, and (iii) becomes fully
exercisable on the date of grant.
EMPLOYMENT/SEVERANCE AGREEMENTS
RAMI S. RAMADAN. Effective July 12, 1999, the Company entered into a three
year employment agreement with Mr. Ramadan pursuant to which he will serve as
the Company's Chief Executive Officer and Chief Financial Officer at an
annual salary of $300,000. Mr. Ramadan is eligible to participate in the 1998
Plan, Executive Compensation Plan and any present or future employee benefit
plans. He also will be reimbursed for reasonable travel and out-of-pocket
expenses necessarily incurred in the performance of his duties. Mr. Ramadan
will also receive three separate equal annual installments of options to
acquire the Company's Common Stock, each of which shall have a five year term
commencing upon the date on which each installment is granted. Upon
commencement of the employment agreement, Mr. Ramadan received 100,000
options exercisable at $0.50 per share; upon commencement of the second year
of the employment agreement an additional 100,000 options exercisable at
$0.55 per share will be granted; and upon commencement of the third year of
the employment agreement the final installment of 100,000 options exercisable
at $0.61 per share will be granted. Upon commencement of the second and third
year of the employment agreement, the exercise price for all unexercised
options granted in the preceding year will be increased to the current year's
exercise price up to $0.61. In the event the employment agreement is
terminated other than for cause, as defined in the agreement, within six
months of the commencement date, the Company shall pay to Mr. Ramadan one
year's salary in a lump sum within 30 days of the notice of termination. If
the agreement is terminated other than for cause at anytime after six (6)
months following commencement of the employment agreement, Mr. Ramadan will
receive two years' salary.
ANDREW TOTTENHAM. Effective as of January 1, 1997, the Company entered into a
five-year employment agreement with Mr. Tottenham pursuant to which he serves
as the Company's President and Chief Operating Officer at an annual salary of
$150,000. On April 1, 1998, Mr. Tottenham's salary was increased to
$180,000.00. Mr. Tottenham will be eligible for participation in the
Company's 1993 Plan, 1998 Plan, the Executive Compensation Plan, and any
present or future employee benefit plans. He also will be reimbursed for
reasonable travel and out-of-pocket expenses necessarily incurred in the
performance of his duties. Mr. Tottenham works from the Company's offices in
London, England. The Company is entitled to terminate Mr. Tottenham's
employment, and its salary obligation to him, upon 30 days written notice in
the event of (i) disability (assuming there is disability insurance
sufficient to pay Mr. Tottenham his full salary for the remaining term of the
employment agreement), (ii) conviction of a felony, or (iii) a breach of the
employment agreement. If Mr. Tottenham dies during the term of the employment
agreement, his estate is entitled to three months' salary at his base salary
rate on the date of death. If Mr. Tottenham is terminated for any other
reason, he is entitled to three months' severance pay at his base salary rate
in effect on the date of such termination.
26
<PAGE>
STANLEY KOHLENBERG. Effective July 12, 1999, the Company and Mr. Kohlenberg
entered into a severance agreement, pursuant to which Mr. Kohlenberg resigned
as Chief Executive Officer of the Company on June 30, 1999. Mr. Kohlenberg
will receive severance payments equal to six (6) months salary and will
continue to participate in the Company's benefit plans for six (6) months.
Mr. Kohlenberg will continue to serve as Chairman of the Company's Board of
Directors.
DOMINICK J. VALENZANO. The Company and Mr. Valenzano executed a severance
agreement on July 12, 1999 pursuant to which Mr. Valenzano resigned as Chief
Financial Officer of the Company. Mr. Valenzano will receive severance
payments equal to six (6) months salary and will continue to participate in
the Company's benefit plans for six (6) months.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership
of the Common Stock as of July 1, 1998, unless otherwise noted, (a) by each
shareholder who is known by the Company to own beneficially more than 5.0% of
the outstanding Common Stock, (b) by each director, (c) by each executive
officer named in the Summary Compensation Table below, and by all executive
officers and directors as a group. Unless otherwise noted, each of the
shareholders listed in the table or included within a group listed in the
table possesses sole voting and investment power with respect to the shares
indicated subject to community property laws where applicable. The business
address for each director and officer of the Company is One Penn Plaza, Suite
1503, New York, New York 10119.
<TABLE>
<CAPTION>
NAME OF NUMBER OF SHARES OF COMMON PERCENTAGE
BENEFICIAL OWNER STOCK BENEFICIALLY OWNED (1) OWNERSHIP (1)
<S> <C> <C>
Value Partners, Ltd. 6,677,166(2) 66.50%
Anasazi Partners Limited
Partnership 866,667(3) 20.48%
New Generation Limited
Partnership 433,333(4) 11.41%
Credit Suisse First Boston
Management Corporation 2,084,545(5) 38.26%
Fort Pitt Fund III, L.P. 312,682(6) 8.50%
Fundamental Investors, L.P. 173,333(7) 4.90%
C.P. Baker & Co., Ltd. 2,051,912(8) 37.88%
Libra Investments, Inc. 354,374(9) 9.53%
Stanley Kohlenberg 264,000(10) 7.28%
Andrew Tottenham 1,205,500(11) 26.38%
Dominick J. Valenzano 195,000(12) 5.48%
Julio Heurtematte 7,000(13) *
Malcolm M.B. Sterrett 7,000(14) *
All directors and executive officers
as a group (6 persons) 1,267,000(15) 33.18%
- ---------------------------
</TABLE>
*Less than 1%.
(1) The percentage of outstanding shares is based on 3,364,286 shares
outstanding as of July 1, 1999 (the "Calculation Date"). A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days from the Calculation Date upon the exercise
of options or warrants. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such
person (but not those held by any other person)
27
<PAGE>
are exercisable within 60 days from the date of the Voting Record Date
have been exercised. Included are shares of Common Stock issuable upon
the exercise of options or warrants to purchase the Company's Common
Stock.
(2) Value Partners, Ltd. is a Texas limited partnership, whose business
address is 4514 Cole Avenue, Suite 808, Dallas, Texas 75205. Includes
warrants to purchase: 600,000 shares of Common Stock at an exercise price
of $1.00, expiring December 31, 2005; 2,000,000 shares of Common Stock at
an exercise price of $1.50 per share, expiring December 31, 2005;
3,752,181 shares of Common Stock (which includes 416,909 warrants to
acquire shares purchased from Banco Santander Trust Corporation (Bahamas)
Ltd. during 1998) at an exercise price of $.01 per share, expiring March
31, 2008; 220,760 shares of Common Stock at an exercise price of $.50 per
share, expiring December 31, 1999; and 104,225 shares of Common Stock at
an exercise price of $.01 per share expiring March 31, 2008.
(3) Anasazi Partners, Ltd. is a Massachusetts limited partnership whose
business address is 120 Boylston Street, Suite 800, Boston, Massachusetts
02116. Includes warrants to purchase: 200,000 shares of Common Stock at
an exercise price of $1.00 per share, expiring December 31, 2005; and
666,667 shares of Common Stock at an exercise price of $1.50 per share,
expiring December 31, 2005.
(4) New Generation, Ltd. is a Massachusetts limited partnership whose
business address is 225 Friend Street, Suite 801, Boston, Massachusetts
02114. Includes warrants to purchase: 100,000 shares of Common Stock at
an exercise price of $1.00 per share, expiring December 31, 2005; and
333,333 shares of Common Stock at an exercise price of $1.50 per share,
expiring December 31, 2005.
(5) The business address for Credit Suisse First Boston Corporation is 11
Madison Avenue, 4th Floor, New York, New York 10010. Includes warrants to
purchase 2,501,454 shares of Common Stock (which includes 416,909
warrants to acquire shares purchased from Morgan Stanley & Co. during
1998) at an exercise price of $.01 per share expiring March 31, 2008.
(6) The business address for Fort Pitt Fund III, L.P. is P.O. Box 974,
Uniontown, Pennsylvania 15401. Includes warrants to purchase 312,682
shares of Common Stock at an exercise price of $.01 per share expiring
March 31, 2008.
(7) The business address for Fundamental Investors, L.P. is P.O. Box 5355,
Santa Barbara, CA 93150. Includes warrants to purchase 40,000 shares of
Common Stock at and exercise price of $1.00 per share expiring December
31, 2005 and 133,333 shares of Common Stock at an exercise price of $1.50
per share, expiring December 31, 2005.
(8) Represents warrants to purchase 2,051,912 shares of Common Stock at an
exercise price of $.01 per share, expiring June 30, 2002 and held by C.P.
Baker & Co., Ltd. and certain of its affiliates. The business address for
C.P. Baker & Co., Ltd. is 120 Boylston Street, Suite 800, Boston,
Massachusetts 02116.
(9) Represents warrants to purchase 354,374 shares of Common Stock at an
exercise price of $.01 per share, expiring March 31, 2008 and held by
Libra Investments, Inc. ("Libra"), the placement agent for the Company's
$17.0 million Senior Secured Notes due March 31, 2008, and certain
affiliates of Libra. The business address for Libra is 11766 Wilshire
Boulevard, Suite 870, Los Angeles, California 90025.
(10) Does not include 929,500 shares (187,500 of which are immediately
exercisable warrants and 107,000 of which are immediately
exercisable options) held by Andrew Tottenham, a son-in-law of Mr.
Kohlenberg, as to which beneficial ownership is disclaimed. Includes
1,000 shares, and 25,000 shares and 1,000 shares at the end of each
calendar quarter during the quarter ended March 31, 1997 through the
quarter ended September 30, 1998, respectively, subject to
non-qualified options granted to Mr. Kohlenberg under the 1993 Plan on
May 22, 1995, on March 7, 1996 and 75,000 shares and 25,000 shares of
Common Stock subject to incentive options granted to Mr. Kohlenberg on
December 31, 1996 and December 31, 1998 respectively, all of which
fully vested on the dates of grant.
(11) Includes 623,500 shares of Common Stock (240,000 shares were issued to
Mr. Tottenham upon conversion of the Tottenham Notes on December 31,
1998) and 1,000 shares and 1,000 shares subject to non-qualified options
granted to Andrew Tottenham under the 1993 Plan on October 2, 1996 and on
December 31, 1996, respectively,
28
<PAGE>
and 100,000 shares and 25,000 shares subject to incentive options granted
to Mr. Tottenham on December 31, 1997 and December 31, 1998 respectively,
all of which fully vested on the dates of grant. Also includes 187,500
shares subject to immediately exercisable warrants which were granted to
Mr. Tottenham on January 1, 1997. Also includes 205,000 shares of Common
Stock owned by Robin Tottenham, (80,000 shares were issued to Mrs.
Tottenham upon conversion of the Tottenham Notes on December 31, 1998),
the wife of Andrew Tottenham and the daughter of Mr. Kohlenberg, and
62,500 shares subject to immediately exercisable warrants that were
granted to Mrs. Tottenham on January 1, 1997. Does not include shares
owned by Mr. Kohlenberg, as set forth above, as to which beneficial
ownership is disclaimed.
(12) Includes 20,000 shares, 50,000 shares, 50,000 shares and 25,000 shares of
Common Stock subject to incentive options granted to Mr. Valenzano under
the 1993 Plan on May 22, 1995, on December 31, 1996, on December 31,
1997 and on December 31, 1998, all of which fully vested on the dates of
grant.
(13) Includes 1,000 shares of Common Stock subject to non-qualified options
granted to Mr. Heurtematte under the 1998 Plan at the end of each
calendar quarter ended March 31, 1998 through December 31, 1998 and 2,000
shares granted at the end of each calendar quarter ended March 31, 1999
and June 30, 1999, respectively, all of which fully vested on the dates
of grant.
(14) Includes 1,000 shares of Common Stock subject to non-qualified options
granted to Mr. Sterrett under the 1998 Plan at the end of each calendar
quarter ended March 31, 1998 through December 31, 1998 and 2,000 shares
granted at the end of each calendar quarter ended March 31, 1999 and June
30, 1999, respectively, all of which fully vested on the dates of grant.
(15) See Notes (10), (11), (12), (13) and (14), above.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TOTTENHAM & CO. On January 1, 1997, the Company completed the acquisition of
Tottenham & Co. which was founded in 1988 by Andrew Tottenham, the Company's
President and Chief Operating Officer and is engaged in providing consulting
services to gaming companies worldwide. The consideration paid for Tottenham &
Co. by the Company included 500,000 shares of the Company's Common Stock, and
warrants to purchase 250,000 shares at an exercise price of $.5938, the bid
price of the Company's Common Stock on the date of the acquisition as reported
by the Nasdaq SmallCap Market System. In addition, the Company issued two
promissory notes in the aggregate principal amount of $200,000 bearing interest
at the rate of 10% per annum and payable on January 1, 2002 (the "Tottenham
Notes"). On December 31, 1998, the Company and Andrew Tottenham converted the
Tottenham Notes and accrued interest totaling $240,000 into 320,000 shares of
the Company's Common Stock. All of the Common Stock, as well as the Common Stock
underlying the warrants, carries certain "piggyback" registration rights.
CHRYSOLITH OPERATING AGREEMENT. The Company is a member under, and party to, the
Amended and Restated Regulations and Operating Agreement of Chrysolith, dated as
of December 22, 1994 (the "Chrysolith Operating Agreement") and amended in
December, 1996. The Chrysolith Operating Agreement sets forth the rights and
obligations of the original members, all of whom are individuals (the "Original
Members"), and the Company. Under this agreement, Chrysolith operated, serviced
and maintained the VLTs at the Gold Coin and Toledo Palace and the Company
provided management, financial and consulting services. The Chrysolith Operating
Agreement will continue pending the decision of the U.S. Supreme Court regarding
the Company's appeal of the termination of the operations at the Gold Coin and
Toledo Palace.
MONARCH ACQUISITION. In April 1994, the Company acquired for $49,000 a 49%
ownership interest in Monarch Casinos ("Monarch"), a Louisiana-licensed video
gaming device operator which was founded in December 1993. In June and August
1994, the Company loaned Monarch an aggregate of $55,000 for working capital
to manage the operations of the Woodlands under an agreement between Monarch
and the previous owner of the Woodlands. All of such loans were payable on
demand, bore interest at the rate of 10% and were evidenced by promissory
notes executed by Monarch. In October 1994, the Company credited Monarch
$25,000 against prior advances, among other things, in consideration for the
assignment by Monarch to the Company of an option to purchase the Woodlands.
Although it was originally intended that Monarch would own, operate and
maintain the VLTs at both the Toledo Palace and the Gold Coin, the Company
believed that Chrysolith was better suited to operate the video poker parlors
and thus entered into the Chrysolith Agreement (See Item 1, "Narrative
Description of Business - The Company's Facilities -Louisiana - Chrysolith
Operating Agreement"). In March 1996, the Company learned that as of June 30,
1995, Monarch had not renewed its operator's license as required by the State
of Louisiana, and as such, was no longer a licensed video poker operator in
the State. Pursuant to the management agreements between Monarch and the
Company, such a failure to renew or other termination of the operator's
license created a default under the agreements and the agreements were
terminated by the Company on March 14, 1996. On or about November 6, 1997
Monarch and Michael Edwards, President of Monarch, filed suit against the
Company alleging, among other things, breach of contract. The lawsuit was
settled in May 1999 for a cash payment by the Company of $100,000 and both
parties released the other of any and all further obligations. See Item 3
- -"Legal Proceedings".
On October 29, 1997, the Company and Value Partners, executed a loan which was
amended on December 19, 1997, under which TWG had the ability to borrow up to
$2,538,000 (the "First Amended Loan Agreement"). As of December 31, 1998, the
Company had borrowed $1,538,000 under this loan, including the Bishkek Note
described below, of which $1,288,000 was repaid on March 31, 1998 from the
proceeds of the Private Placement.
On March 19, 1998, the Company and Value Partners executed a Lender's Waiver and
Option Agreement (the "Waiver") under which the Company borrowed $250,000 (the
"Bishkek Note") to fund the Bishkek Casino transaction. In February 1999, the
Company repaid the principal and accrued interest on the Bishkek Note in full,
and it was cancelled.
On March 31, 1998, the Company, with the assistance of Libra, acting as
placement agent, borrowed $17.0 million from fourteen investors in a Private
Placement. The loan is represented by the Senior Notes issued pursuant to
indentures by and among TWG, TWGI, TFC and USTCT, as the case may be. The
indentures were amended on October 29, 1998 in connection with the restructuring
of the Company's ownership of Resorts as a result of the change in Czech gaming
law
30
<PAGE>
which restricted foreign ownership of Czech casinos. The Amended Indentures,
however, did not alter the underlying basis of the Senior Notes. The Senior
Notes require mandatory prepayments based upon excess cash flow generated by
TWGI from the operation of the Czech casinos acquired in the Resorts acquisition
and bear interest at the rate of 12% per annum. The proceeds of the Senior Notes
were used to pay the net acquisition costs of, and improvements to, Resorts
totaling $12.6 million, to repay the First Amended Loan Agreement in the amount
of $1.3 million, to cover costs and expenses of $1.4 million relating to the
Private Placement and to provide working capital of $1.7 million. Interest
payments under the terms of the Senior Notes were paid when due on September 17,
1998 and March 17, 1999. The Company was and is current on its payments under
the Senior Notes.
On May 19, 1998, the Company and Value Partners executed a Loan Agreement (the
"Loan Agreement") under which the Company borrowed $1,000,000 at 12% interest
per annum to fund the purchase of the stock of the Casino de Zaragoza (see
- - "Plan of Operations"), which was payable in full on September 15,1998. The
interest rate automatically increased to 17% on September 15, 1998 which has
been accrued monthly by the Company since that date.
The Company was in technical default of, and has not timely paid the Value
Partners Loan which was due on September 15, 1998 and is currently
negotiating an extension of such loan. On July 30, 1999, the Company received
from Value Partners a waiver of such default and a waiver of the cross
defaults on the Amended Indentures by the majority in interest of the holders
of the Senior Notes. Value Partners also granted an extension of this loan
until January 1, 2000, with the understanding that the Company and Value
Partners will work in good faith to renegotiate the loan terms prior to
August 31, 1999. There can be no assurance that the terms of the Value
Partners Loan Agreement can be renegotiated at terms favorable to the
Company. If Value Partners chose to do so, a declaration of default would
result in a default on all of the Company's other debt instruments and have a
material adverse effect on the Company's financial condition and results of
operation.
The Company has, from time to time, been in technical default of the Amended
Indentures and has relied upon the forbearance and waivers from a majority
interest of the holders of the Senior Notes. Value Partners represents a
majority in interest of the holders of the Senior Notes. The Company has
borrowed other amounts from Value Partners from time to time (some of which
have been in technical default for which forbearance or waivers have been
granted) and may seek to borrow additional funds or obtain equity investments
from Value Partners in the future. At December 31, 1998, Value Partners owned
51% of the Company's long term debt and owned warrants which, upon exercise,
would result in Value Partner's beneficial ownership of Common Stock equaling
66.5% of the Company's issued and outstanding shares of Common Stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Reference is made to the Exhibit Index hereinafter contained. A copy of
any exhibits listed or referred to herein will be furnished at a
reasonable cost to any person who was a shareholder of the Company as of
August 2, 1999, upon written request from any such person. Requests
should be sent to: Rami S. Ramadan, Chief Executive Officer, Trans World
Gaming Corp., One Penn Plaza, Suite 1503, New York, New York 10119-0002.
(b) REPORTS ON FORM 8-K
During the last quarter of the year ended December 31, 1998, the Company
filed a Periodic Report on Form 8-K with the SEC on December 22, 1998.
This Periodic Report related to the resignation of Dominick J. Valenzano
from the Company's Board of Directors and the appointment of Geoffrey B.
Baker as Mr. Valenzano's replacement. The Report also discussed the
election of Stanley Kohlenberg to the position of Chief Executive
Officer and the election of Andrew Tottenham to the position of Chief
Operating Officer. Subsequently Mr. Baker resigned from the Board.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange Act
of 1934, the Issuer has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TRANS WORLD GAMING CORP.
(registrant)
Dated: July 30, 1999 By: /s/ Rami S. Ramadan
----------------------------------------------
Chief Executive Officer/Chief Financial Officer
(Principal Executive and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below the following persons on behalf of the Issuer on July 30,
1999 in the capacities indicated.
Signature and Title
-------------------
/s/ Andrew Tottenham
--------------------
Andrew Tottenham
President and Director
/s/ Stanley Kohlenberg
----------------------
Stanley Kohlenberg
Chairman and Director
/s/ Malcolm M.B. Sterrett
-------------------------
Director
/s/ Julio E. Heurtematte, Jr.
-----------------------------
Director
32
<PAGE>
TRANS WORLD GAMING CORP.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Item No. Item Method of Filing
- -------- ---- ----------------
<S> <C> <C>
2 Deed of Sale of Shares Authenticated by Mr. Jose Incorporated by reference to Exhibit 2 contained in
Maria Badia Gasco, Notary of Zaragoza, dated April the Form 8-K/A filed on July 2, 1998 (File No.
17, 1998 0-25244)
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
3.2 By-laws Incorporated by reference to Exhibit 3.2 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
4.1 Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
4.2 Specimen Redeemable Common Stock Purchase Warrant Incorporated by reference to Exhibit 4.2 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
4.3 Form of Warrant Agreement Incorporated by reference to Exhibit 4.3 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
4.4 Confidential Private Placement Memorandum dated Incorporated by reference to Exhibit 4.4 contained
June 17, 1996 in Form 10-KSB for the fiscal year ended December
31, 1996. (File No. 0-25244)
4.5 Supplement No. 1 dated January 14, 1997 to Incorporated by reference to Exhibit 4.5 contained
Confidential Private Placement Memorandum dated in Form 10-KSB for the fiscal year ended December
June 17, 1996 31, 1996. (File No. 0-25244)
4.6 Indenture dated as of November 1, 1996 between the Incorporated by reference to Exhibit 4.6 contained
Company and Trans World Gaming of Louisiana, Inc., in Form 10-KSB for the fiscal year ended December
as Issuer, and U.S. Trust Company of Texas, N.A., 31, 1996. (File No. 0-25244)
as Trustee
4.7 Form of 12% Secured Convertible Senior Bond due Incorporated by reference to Exhibit 4.7 contained
June 30, 1999 in Form 10-KSB for the fiscal year ended December
31, 1996. (File No. 0-25244)
4.8 Form of Warrant to Purchase Common Stock Dated July Incorporated by reference to Exhibit 4.8 contained
1, 1996 in Form 10-KSB for the fiscal year ended December
31, 1996. (File No. 0-25244)
4.9 Form of Warrant for Purchase of Shares of Common Incorporated by reference to Exhibit 4.9 contained
Stock dated January 1, 1997 in Form 10-KSB for the fiscal year ended December
31, 1996. (File No. 0-25244)
4.10 Form of Non-Negotiable Promissory Note dated Incorporated by reference to Exhibit 4.10 contained
January 1, 1997 in Form 10-KSB for the fiscal year ended December
31, 1996. (File No. 0-25244)
4.11 First Amended Senior Secured Promissory Note dated Incorporated by reference to Exhibit 4.11 contained
December 19, 1997 in Form 10-KSB for the fiscal year ended December
31, 1997 filed on March 30, 1998. (File No. 0-25244)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
4.12 Form of Warrant for Purchase of Shares of Common Incorporated by reference to Exhibit 4.12 contained
Stock dated January 15, 1998 in Form 10-KSB for the fiscal year ended December
31, 1997 filed on March 30, 1998. (File No. 0-25244)
4.13 Lenders Waiver and Option Agreement dated March 9, Incorporated by reference to Exhibit 4.13 contained
1998 in Form 10-KSB for the fiscal year ended December
31, 1997 filed on March 30, 1998. (File No. 0-25244)
4.14 Indenture dated March 31, 1998 among the Company, Incorporated by reference to Exhibit 4(I) contained
TWG International U.S. Corporation, TWG Finance in the Form 8-K filed on April 14, 1998 (File No.
Corp. and U.S. Trust Company of Texas, N.A. 0-25244)
4.15 Series C Warrant to Purchase Common Stock dated Incorporated by reference to Exhibit 4(II) contained
March 31, 1998 in the Form 8-K filed on April 14, 1998 (File No.
0-25244)
4.16 Indenture dated March 31, 1998 between TWG Incorporated by reference to Exhibit 4(III)
International U.S. Corporation and U.S. Trust contained in the Form 8-K filed on April 14, 1998
Company of Texas, N.A. (File No. 0-25244)
4.17 Consent to Amend Indenture, Bonds and Warrants Incorporated by reference to Exhibit 4(IV) contained
dated March 25, 1998 by and between the Company, in the Form 8-K filed on April 14, 1998 (File No.
Trans World Gaming of Louisiana Inc., U.S. Trust 0-25244)
Company of Texas, N.A., and certain individuals
4.18 First Amended Indenture dated March 31, 1998 among Incorporated by reference to Exhibit 4(V) contained
the Company, TWGLa and U.S. Trust Company of Texas, in the Form 8-K filed on April 14, 1998 (File No.
N.A. 0-25244)
4.19 Series A Warrant to Purchase Common Stock dated Incorporated by reference to Exhibit 4(VI) contained
March 31, 1998 in the Form 8-K filed on April 14, 1998 (File No.
0-25244)
4.20 Series B Warrant to Purchase Common Stock dated Incorporated by reference to Exhibit 4(VII)
March 31, 1998 contained in the Form 8-K filed on April 14, 1998
(File No. 0-25244)
4.21 Agreement to Amend Warrants dated March 31, 1998 Incorporated by reference to Exhibit 4(VIII)
among the Company and the named Holders contained in the Form 8-K filed on April 14, 1998
(File No. 0-25244)
4.22 Series D Warrant to Purchase Common Stock dated Incorporated by reference to Exhibit 4(IX) contained
March 31, 1998 in the Form 8-K filed on April 14, 1998 (File No.
0-25244)
10.1 Agreement for Exchange of Shares dated July 12, 1994, Incorporated by reference to Exhibit 10.1 contained in the
between the Company and the shareholders of Lee Young registration statement on Form SB-2 (File No. 33-85446-A).
Enterprises, Inc.
10.2 Asset Purchase Agreement dated as of September 21, Incorporated by reference to Exhibit 10.2 contained in the
1994, between the Company and Prime Properties, Inc. registration statement on Form SB-2 (File No. 33-85446-A).
10.3 Agreement of Sale dated as of September 21, 1994, Incorporated by reference to Exhibit 10.3 contained in the
between the Company and Prime Properties, Inc. registration statement on Form SB-2 (File No. 33-85446-A).
10.4 Form of Lease between Prime Properties, Inc. and Incorporated by reference to Exhibit 10.4 contained in the
the Company. registration statement on Form SB-2 (File No. 33-85446-A).
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C>
10.5 Agreement dated September 21, 1994, among Chrysolith, Incorporated by reference to Exhibit 10.5 contained in the
LLC, Prime Properties, Inc., Monarch Casinos, Inc. of registration statement on Form SB-2 (File No. 33-85446-A).
Louisiana, ("Monarch") and the Company.
10.6 Asset Purchase Agreement dated September 21, 1994, Incorporated by reference to Exhibit 10.6 contained in the
between Chrysolith L.L.C. and Monarch registration statement on Form SB-2 (File No. 33-85446-A).
10.7 Lease (with option) dated May 10, 1994 among Lula Incorporated by reference to Exhibit 10.7 contained in the
Miller, Inc., Charles A. Jones III and Kelly McCoy registration statement on Form SB-2 (File No. 33-85446-A).
Jones, as Lessor, and Monarch, as Lessee.
10.8 Offer to Purchase dated October 4, 1994, among Trans Incorporated by reference to Exhibit 10.8 contained in the
World Gaming of Louisiana, Inc., Monarch, Lula registration statement on Form SB-2 (File No. 33-85446-A).
Miller, Inc., Charles A. Jones III and Kelly McCoy
Jones.
10.9 Memorandum of Agreement dated March 18, 1994, between Incorporated by reference to Exhibit 10.9 contained in the
the Company and Yves Gouhier and Camille Costard to registration statement on Form SB-2 (File No. 33-85446-A).
acquire shares of Casino Cherbourg S.A., as amended
(English translation, except amendment is in French.
10.10 Shareholder Agreement dated April 7, 1994, between Incorporated by reference to Exhibit 10.10 contained in the
the Company and Michael A. Edwards, as the registration statement on Form SB-2 (File No. 33-85446-A).
shareholders of Monarch
10.11 Employment Agreement dated March 6, 1996 between Incorporated by reference to Exhibit 10.11 contained in the
the Company and Stanley Kohlenberg Form 10-KSB for the fiscal year ended December 31, 1995
(File No. 0-25244).
10.12 Employment Agreement between the Company and Incorporated by reference to Exhibit 10.12 contained
Dominick J. Valenzano in the registration statement on Form SB-2 (File No.
33-85446-A).
10.13 1993 Incentive Stock Option Plan Incorporated by reference to Exhibit 10.13 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
10.14 Form of 41/2% Bridge Note Incorporated by reference to Exhibit 10.14 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
10.15 Form of 10% Secured Bridge Incorporated by reference to Exhibit 10.15 contained
in the registration statement on Form SB-2 (File No.
33-85446-A).
10.16 Collateral Mortgage relating to the Woodlands Incorporated by reference to Exhibit 10.16 contained
Travel Plaza. in the registration statement on Form SB-2 (File No.
33-85446-A).
10.17 Operating Agreement dated as of December 22, 1994 Incorporated by reference to Exhibit 10.17 contained
between the Company and Chrysolith relating to the in the Form 10-KSB for the fiscal year ended
Gold Coin. December 31, 1994 (File No. 0-25244).
10.18 Note in principal amount $75,000 payable by Monarch Incorporated by reference to Exhibit 10.18 contained
(and assumed by the Company). in the Form 10-KSB for the fiscal year ended
December 31, 1994 (File No. 0-25244).
10.19 Lease Agreement dated May 1, 1993 between National Incorporated by reference to Exhibit 10.19 contained
Auto/Truck Stops, Inc. and Prime Properties with in the Form 10-KSB for the fiscal year ended
respect to the 76 Plaza December 31, 1995 (File No. 0-25244).
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C>
10.20 Agreement and General Release dated as of March 6, Incorporated by reference to Exhibit 10.20 contained
1996 between the Company and R. K. Merkey. in the Form 10-KSB for the fiscal year ended
December 31, 1995 (File No. 0-25244).
10.21 Forbearance Agreement dated January 19, 1996 Incorporated by reference to Exhibit 10.21 contained
between the Company and Chrysolith in the Form 10-KSB for the fiscal year ended
December 31, 1995 (File No. 0-25244).
10.22 Letter Agreement dated January 30, 1996 between the Incorporated by reference to Exhibit 10.22 contained
Company and Chrysolith regarding forbearance in the Form 10-KSB for the fiscal year ended
payments December 31, 1995 (File No. 0-25244).
10.23 Consulting Agreement dated January 1, 1997 between Incorporated by reference to Exhibit 10.23 contains
the Company and Stanley Kohlenberg in Form 10-KSB for the fiscal year ended December
31, 1996 (File No. 0-25244).
10.24 Employment Agreement dated December 26, 1996 Incorporated by reference to Exhibit 10.24 contains
between the Company and Andrew Tottenham in Form 10-KSB for the fiscal year ended December
31, 1996 (File No. 0-25244).
10.25 Employment Agreement date February 1, 1997 between Incorporated by reference to Exhibit 10.25 contains
the Company and Christopher Moore in Form 10-KSB for the fiscal year ended December
31, 1996 (File No. 0-25244).
10.26 Cancellation Agreement dated as of October 3, 1996 Incorporated by reference to Exhibit 10.26 contained
between the Company and Mid-City Associates in the Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-25244).
10.27 Agreement of Lease dated as of October 2, 1996 Incorporated by reference to Exhibit 10.27 contained
between the Company and Mid-City Associates in the Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 0-25244).
10.28 Stock Purchase Agreement dated as of January 1, Incorporated by reference to Exhibit 10.28 contained
1997 among the Company, Andrew Tottenham and Robin in the Form 10-KSB for the fiscal year ended
Tottenham December 31, 1996 (File No. 0-25244).
10.29 Employment Agreement dated April 15, 1997 between Incorporated by reference to Exhibit 10.29 contained
Company and James Hardman in Form 10-KSB for the fiscal year ended December
31, 1997 filed on March 30, 1998. (File No. 0-25244)
10.30 Stock Purchase Agreement dated as of January 20, Incorporated by reference to Exhibit 10.30 contained
1998 between the Company and 21st Century Resorts in Form 10-KSB for the fiscal year ended December
31, 1997 filed on March 31, 1998. (File No. 0-25244)
10.31 Form of the Subscription Agreement for the Private Incorporated by reference to Exhibit 10.31 contained
Placement in Form 10-KSB for the fiscal year ended December
31, 1997 filed on March 31, 1998. (File No. 0-5244)
10.32 Escrow Agreement dated March 17, 1998 among the Incorporated by reference to Exhibit 10.32 contained
Company, TWG Finance Corp., TWG International U.S. in Form 10-KSB for the fiscal year ended December
Corporation as Issuer and U.S. Trust Company of 31, 1997 filed on March 30, 1998. (File No. 0-25244)
Texas, N.A., as Trustee
10.33 Consulting Agreement between Chrysolith, L.L.C. Incorporated by reference to Exhibit 10 contained in
and Lee Young dated January 1, 1997 the Form 10-QSB for the quarter ended June 30, 1996
filed on August 14, 1996 (File No. 0-25244)
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
10.34 Purchase Agreement dated as of April 15, 1997 among Incorporated by reference to Exhibit 10.34 contained
the Company, James R. Hardman, Jr. and Multiple in the Form 10-Q for the quarter ended March 31,
Application Tracking System 1997, filed on May 9, 1997 (File No. 0-25244)
10.35 License Agreement dated as of April 15, 1997 Incorporated by reference to Exhibit 10.35 contained
between the Company and James R. Hardman, Jr. in the Form 10-Q for the quarter ended March 31,
1997, filed on May 9, 1997 (File No. 0-25244)
10.36 Loan Agreement dated June 11, 1997 between the Incorporated by reference to Exhibit 10.36 contained
Company and Value Partners in the Form 8-K filed on June 17, 1997 (File No.
0-25244)
10.37 $350,000 Senior Promissory Note dated June 11, 1997 Incorporated by reference to Exhibit 10.37 contained
in the Form 8-K filed on June 17, 1997 (File No.
0-25244)
10.38 Joint Activity Agreement dated March 31, 1997 Incorporated by reference to Exhibit 10.38 contained
between Mr. Mahmud Avdiyev and Tottenham & Co., in the Form 8-K filed on June 17, 1997 (File No.
d/b/a ART marketing Ltd. 0-25244)
10.39 Loan Agreement dated October 27, 1997, between Incorporated by reference to Exhibit 10.39 contained
Value Partners, and the Company in the Form 10-QSB for the quarter ended September
30, 1997, filed on November 12, 1997 (File No.
0-25244)
10.40 $262,500 Senior Promissory Note dated October 27, Incorporated by reference to Exhibit 10.40 contained
1997 in the Form 10-QSB for the quarter ended September
30, 1997, filed on November 12, 1997 (File No.
0-25244)
10.41 Warrant to Purchase Common Stock dated November 27, Incorporated by reference to Exhibit 10.41 contained
1997 in the Form 10-QSB for the quarter ended September
30, 1997, filed on November 12, 1997 (File No.
0-25244)
10.42 Employment Agreement between the Company and Rami Incorporated by reference to Exhibit 10.42 contained
S. Ramadan dated July 12, 1999 in the Form 8-K filed on July 13, 1999 (File No.
0-25244)
10.43 Severance Agreement between the Company and Stanley Incorporated by reference to Exhibit 10.43 contained
Kohlenberg dated May 23, 1999 in the Form 8-K filed on July 13, 1999 (File No.
0-25244)
10.44 Severance Agreement among the Company, Trans World Incorporated by reference to Exhibit 10.44 contained
Gaming of Louisiana, TWG International U.S. in the Form 8-K filed on July 13, 1999 (File No.
Corporation and TWG Finance Corp. and Dominick J. 0-25244)
Valenzano dated July 12, 1999
10.46 Form of Lease Agreement between London Investments Filed herewith (File No. 0-25244).
s.r.o. and the Company
16.1 Letter from Bederson & Co. (the Company's former Incorporated by reference to Exhibit 16.1 contained
independent public accountants) relating to a in the Form 10-KSB for the fiscal year ended
change of accountants December 31, 1995 (File No. 0-25244).
16.2 Letter from Pannell, Kerr, Forster, PC (the Incorporated by reference to Exhibit 16.2 contained
Company's former independent public accountants) in the Form 8K filed February 25, 1999.
relating to a change of accountants
21.0 Subsidiaries Filed herewith (File No. 0-25244).
27.1 Financial Data Schedule Filed herewith (File No. 0-25244).
</TABLE>
37
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Independent Auditors' Report F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) F-5
Consolidated Statements of Stockholders' Deficit F-6
Consolidated Statements of Cash Flows F-7-8
Notes to Consolidated Financial Statements F-9-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Trans World Gaming Corp.
We have audited the accompanying consolidated balance sheet of Trans World
Gaming Corp. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' deficit and cash flows for the year then ended. 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 audit. We did not audit the financial statements of a
wholly-owned subsidiary, which statements reflect total assets of approximately
$949,000 as of December 31, 1998, and total revenues of approximately $3,481,000
for the year then ended. Those financial statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for the wholly-owned subsidiary, is based solely
on the report of the other auditors. The consolidated financial statements of
Trans World Gaming Corp. and Subsidiaries for the year ended December 31, 1997
were audited by other auditors whose report dated February 25, 1998, expressed
an unqualified opinion on those statements with explanatory paragraphs relating
to the Company's ability to continue as a going concern and the Company's
discontinuation of its video poker operations.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our report and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Trans World Gaming
Corp. and Subsidiaries as of December 31, 1998, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered significant losses
from operations and has a working capital deficit and a stockholders' deficit at
December 31, 1998. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
May 6, 1999, except for Note 1 which is as of June 30, 1999 and Notes 5, 6 and
15 which are as of July 30, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Trans World Gaming Corp.
We have audited the accompanying consolidated statements of operations and
comprehensive income (loss), stockholders' deficit and cash flows of Trans World
Gaming Corp. and Subsidiaries for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Trans World Gaming Corp. and Subsidiaries for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
The voters in the parishes in Louisiana where the Company's video poker
operations are located voted to eliminate video poker. As a result, the Company
must cease its video poker operations on June 30, 1999. In addition, due to
legal proceedings, the continuous usage of the gaming license for one of the
established video poker operations is uncertain. In an effort to diversify their
revenue stream from video poker operations, the Company has acquired certain
businesses and entered into consulting agreements.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the preceding
paragraph, there is no assurance that the current operations will continue and
be sufficient to generate cash flows or working capital to fund operations and
to meet debt service payments. This raises substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Pannell Kerr Forster PC
New York, New York
February 25, 1998
F-3
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands, except for per share data)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash $ 1,955
Accounts receivable, less allowance for doubtful accounts of $1,304 263
Prepaid expenses and other current assets 830
------------------
TOTAL CURRENT ASSETS 3,048
------------------
PROPERTY AND EQUIPMENT, net 4,002
------------------
OTHER ASSETS:
Goodwill and other intangible assets, less accumulated
amortization of $2,030 12,591
Investment in affiliate 75
Deposits and other assets 846
------------------
13,512
------------------
$ 20,562
------------------
------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
<S> <C>
Short-term debt $ 1,056
Accounts payable 1,868
Accrued expenses and other current liabilities 3,403
------------------
TOTAL CURRENT LIABILITIES 6,327
------------------
LONG-TERM LIABILITIES:
Long-term debt 17,838
Other long-term liabilities 5,800
------------------
23,638
------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 2,000 shares authorized,
none issued
Common stock $.001 par value, 50,000 shares authorized,
3,364 shares issued and outstanding 3
Additional paid-in capital 9,136
Stock warrants outstanding 5,237
Accumulated other comprehensive income 112
Accumulated deficit (23,891)
------------------
TOTAL STOCKHOLDERS' DEFICIT (9,403)
------------------
$ 20,562
------------------
------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 1998 and 1997
(in thousands, except for per share data)
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
REVENUES $ 15,079 $ 6,901
------------------ ------------------
COSTS AND EXPENSES:
Cost of revenues 10,337 3,484
Depreciation and amortization 2,770 344
Selling, general and administrative 4,389 2,237
Provision for impairment 4,192
Write-offs 763
------------------ ------------------
22,451 6,065
------------------ ------------------
INCOME (LOSS) FROM OPERATIONS (7,372) 836
------------------ ------------------
OTHER INCOME (EXPENSE):
Interest income 85
Interest expense (3,103) (756)
Foreign exchange gain 148
Other (296)
------------------ ------------------
(3,166) (756)
------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES (10,538) 80
INCOME TAXES, foreign 191
------------------ ------------------
NET INCOME (LOSS) $ (10,729) $ 80
------------------ ------------------
------------------ ------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 3,044 3,044
------------------ ------------------
------------------ ------------------
Diluted 3,044 3,831
------------------ ------------------
------------------ ------------------
EARNINGS (LOSS) PER COMMON SHARE
Basic $ (3.52) $ 0.03
------------------ ------------------
------------------ ------------------
Diluted $ (3.52) $ 0.02
------------------ ------------------
------------------ ------------------
COMPREHENSIVE INCOME (LOSS)
NET INCOME (LOSS) $ (10,729) $ 80
OTHER COMPREHENSIVE INCOME, foreign currency
translation adjustment 112
------------------ ------------------
COMPREHENSIVE INCOME (LOSS) $ (10,617) $ 80
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1998 and 1997
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------------- -------------------------------- Paid-in
Shares Amount Shares Amount Capital
--------------- -------------- ---------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997 $ 2,544 $ 2 $ 8,600
ISSUANCE OF COMMON STOCK IN 500 1 296
CONNECTION WITH ACQUISITION
NET INCOME
--------------- -------------- ---------------- -------------- -------------------
BALANCES, December 31, 1997 3,044 3 8,896
ISSUANCE OF STOCK WARRANTS
ISSUANCE OF COMMON STOCK
IN SETTLEMENT OF NOTES PAYABLE AND
ACCRUED INTEREST 320 240
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
NET LOSS
--------------- -------------- ---------------- -------------- -------------------
BALANCES, December 31, 1998 $ 3,364 $ 3 $ 9,136
--------------- -------------- ---------------- -------------- -------------------
--------------- -------------- ---------------- -------------- -------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Stock Other Total
Warrants Comprehensive Accumulated Stockholders'
Outstanding Income Deficit Deficit
----------------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1997 $ 537 $ $ (13,242) $ (4,103)
ISSUANCE OF COMMON STOCK IN 297
CONNECTION WITH ACQUISITION
NET INCOME 80 80
----------------------- ----------------- ------------------ -------------------
BALANCES, December 31, 1997 537 (13,162) (3,726)
ISSUANCE OF STOCK WARRANTS 4,700 4,700
ISSUANCE OF COMMON STOCK
IN SETTLEMENT OF NOTES PAYABLE AND 240
ACCRUED INTEREST
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 112 112
NET LOSS (10,729) ( 10,729)
----------------------- ----------------- ------------------ -------------------
BALANCES, December 31, 1998 $ 5,237 $ 112 $ (23,891) $ (9,403)
----------------------- ----------------- ------------------ -------------------
----------------------- ----------------- ------------------ -------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
(in thousands, except for per share data)
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (10,729) $ 80
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Provision for allowance for doubtful accounts 295 32
Depreciation and amortization 2,770 344
Noncash interest 610 51
Provision for impairment 4,192
Write-offs 763
Other 8 20
Increase (decrease) in cash attributable to changes
in assets and liabilities
Accounts and other receivables 84 (57)
Prepaid expenses and other current assets (399) 27
Other assets (612) (315)
Accounts payable, accrued expenses and other current
liabilities 1,682 324
------------------ ------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
(1,336) 506
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Resorts and CDZ, net of cash acquired
of $697 in 1998 (12,754) (363)
Purchases of property and equipment (1,476) (8)
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (14,230) (371)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs (35)
Proceeds from short-term debt 1,250 350
Payments of short-term debt (194) (350)
Proceeds from long-term debt 17,525 763
Payments of long-term debt (1,312) (1,154)
------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 17,269 (426)
------------------ ------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 54
------------------ ------------------
NET INCREASE (DECREASE) IN CASH 1,757 (291)
CASH
Beginning of year 198 489
------------------ ------------------
End of year $ 1,955 $ 198
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED) Years Ended December 31,
1998 and 1997
(in thousands, except for per share data)
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,706 $ 678
------------------ ------------------
------------------ ------------------
Income taxes, foreign $ 346 $ -
------------------ ------------------
------------------ ------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in settlement of notes payable
and accrued interest $ 240 $ -
------------------ ------------------
------------------ ------------------
Issuance of stock warrants with debt $ 4,700 $ -
------------------ ------------------
------------------ ------------------
Goodwill aquired through issuance of notes payable $ - $ 378
------------------ ------------------
------------------ ------------------
Goodwill aquired through issuance of common stock $ - $ 297
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN CONSIDERATION
OVERVIEW
Trans World Gaming Corp. and Subsidiaries (the "Company"), a
Nevada corporation, is primarily engaged in the gaming business in
the United States, the Czech Republic and Spain. Its U.S. gaming
operations ceased as of June 30, 1999.
GAMING OPERATIONS - UNITED STATES
Until March 1998, the Company's only gaming operations were two
video poker parlors ("Gold Coin" and "Toledo Palace") situated at
truck stops in Louisiana. Gold Coin was acquired during 1994 and
Toledo Palace commenced operations in October 1995. The Company's
video poker operations in Louisiana are managed by Chrysolith, LLC
("Chrysolith"), a Louisiana-licensed video gaming operator in
which the Company owns 49% of its Class B membership units.
As a result of parish (county) votes to eliminate video poker in
the parishes in Louisiana where the Company's video poker
operations are located, the Company ceased its video poker
operations on July 1, 1999. The Company, together with other
companies operating video poker parlors in the affected parishes,
continues to challenge the votes through the courts. The viability
of such challenge is uncertain.
GAMING OPERATIONS - CZECH REPUBLIC
In March 1998, the Company acquired a company operating two
casinos in the western Czech Republic close to the border of the
German State of Bavaria (SEE NOTE 3). The largest casino, located
in Ceska Kubice, had twelve table games and twenty-two slot
machines. It was expanded shortly after acquisition to its current
capacity of fifteen table games and one hundred slot machines. The
smaller casino, located in Rozvadov, had seven table games.
Eighty-seven slot machines were added shortly after acquisition.
A third casino is under construction in the southern Czech
Republic close to the border of Austria. The third casino, located
in Znojmo, is anticipated to be completed in late 1999.
GAMING OPERATIONS - SPAIN
In April 1998, the Company acquired a company that owns the
license to operate the only casino in the Spanish province of
Aragon (SEE NOTE 3). The casino, with nine table games and
twenty-four slot machines, is currently situated 25 miles outside
of Zaragoza. The Company has reached an understanding with an
agency of the provincial government, the Diputacion General de
Aragon ("DGA"), to allow the casino to move to the center of
Zaragoza, subject to the issuance of a decree. An administrative
order effectuating this understanding is anticipated in the
latter half of 1999.
F-9
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN CONSIDERATION (CONTINUED)
OTHER
Tottenham & Co. ("Tottenham"), an international gaming consultory
and wholly-owned subsidiary of the Company, provides clients in
the United States and abroad with assistance in corporate strategy
development, mergers and acquisitions, feasibility studies,
operational reviews and casino development.
In March 1997, Tottenham signed a twenty-year consulting agreement
with the owner and operator of Boxer Casino located in Gyandja,
Azerbaijan Republic (a former member of the Soviet Union). In
January 1998, Tottenham entered into a twenty-year management
agreement with Jockey Club Casinos LLC for the management and
operation of a casino in Bishkek, Kyrgyz Republic (a former member
of the Soviet Union) (SEE NOTE 10).
GOING CONCERN CONSIDERATION
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
The Company has suffered significant losses from operations and
has a working capital deficit of $3,279 and a stockholders'
deficit of $9,403 as of December 31, 1998. Furthermore, the
Company is highly leveraged with debt (SEE NOTES 5 AND 6), which
makes the Company more vulnerable to extended economic downturns
and reduces the Company's ability to respond to changing economic
and industry conditions. This high leverage may adversely impact
the holders of the Company's debt and equity securities by
impairing the Company's ability to obtain additional financing
needed for working capital, capital expenditures, or general
corporate purposes. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Management's plans include the growth of its existing business
through marketing campaigns; certain personnel changes; and the
raising of an additional $6,000 to fund the Company's Znojmo
casino construction and the Company's Spanish casino's move to the
center of Zaragoza.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH - Cash consists of cash in banks and on hand. The Company
maintains its bank accounts at several financial institutions
which, at times, may exceed Federal Deposit Insurance
Corporation ("FDIC") insured limits. In addition, the Company's
foreign deposits, aggregating $1,310 at December 31, 1998, are not
insured by the FDIC. The Company has not incurred any losses in
such accounts and believes it is not exposed to any significant
credit risk on cash.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost
less accumulated depreciation and amortization. The Company
provides for depreciation and amortization using the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
ASSETS LIFE
---------
<S> <C>
Building and improvements 45 years
Gaming equipment 4-12 years
Furniture, fixtures and other equipment 3-8 years
</TABLE>
F-10
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES - Inventories, which primarily consist of food and
beverages at the casinos and truck stop fuel and retail store
items, are stated at the lower of cost or market, with cost being
determined on the first-in, first-out (FIFO) method.
PRE-OPENING AND DEVELOPMENT COSTS - Pre-opening and development
costs incurred in connection with the pursuit and development of
new gaming projects in various jurisdictions are expensed as
incurred.
GOODWILL - Goodwill, which represents the excess of cost of
acquired companies over the fair value of their net assets at
dates of acquisition, is being amortized on a straight-line basis
over 7 years.
The carrying value of goodwill is periodically reviewed by the
Company based upon the expected future undiscounted operating cash
flows of the related business (SEE NOTE 10).
FOREIGN CURRENCY TRANSLATION - For foreign subsidiaries whose
functional currency is the local foreign currency, balance sheet
accounts are translated at exchange rates in effect at the end of
the year and statement of operations accounts and cash flows are
translated at average exchange rates for the year. Resulting
translation adjustments are included in accumulated other
comprehensive income.
EARNINGS (LOSS) PER COMMON SHARE - Earnings (loss) per common
share is based on the weighted average number of common shares
outstanding.
The Company complies with Statement of Financial Accounting
Standards ("SFAS") 128, "Earnings Per Share", which requires dual
presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average
common shares outstanding for the year. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
INCOME TAXES - The Company complies with SFAS 109, "Accounting for
Income Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
CASINO REVENUE - Casino revenue is the net win from gaming
activities, which is the difference between gaming wagers less the
amount paid out to patrons.
PROMOTIONAL ALLOWANCES - Promotional allowances primarily consist
of food and beverages furnished gratuitously to customers. For the
year ended December 31, 1998, revenues do not include the retail
amount of food and beverage of $246 provided gratuitously to
customers. The cost of these items of $123 is included in cost of
revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair values of the
Company's assets and liabilities which qualify as financial
instruments under SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," approximate their carrying amounts
presented in the consolidated balance sheet at December 31, 1998.
F-11
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews
the carrying value of its long-lived assets in relation to
historical results, as well as management's best estimate of
future trends, events and overall business climate. If such
reviews indicate that the carrying value of such assets may not be
recoverable, the Company would then estimate the future cash flows
(undiscounted and without interest charges). If such future cash
flows are insufficient to recover the carrying amount of the
assets, then impairment is triggered and the carrying value of any
impaired assets would then be reduced to fair value.
PRESENTATION - Prior year amounts have been rounded (IN THOUSANDS,
EXCEPT FOR PER SHARE DATA) and certain prior year amounts have
been reclassified to conform to the 1998 presentation.
INVESTMENT CARRIED AT EQUITY - The Company's investment in
Chrysolith is being accounted for under the equity method of
accounting. Accordingly, the investment is recorded at cost and
adjusted for the Company's proportionate share of undistributed
earnings or losses (SEE NOTE 14).
DEBT ISSUANCE COSTS - Cost incurred in connection with the
Company's debt financing have been deferred and are being
amortized on a straight-line basis over the term of the related
debt. Amortization of debt issuance costs amounted to $279 and
$275 for the years ended December 31, 1998 and 1997, respectively.
NOTE 3 - BUSINESS COMBINATIONS
YEAR ENDED DECEMBER 31, 1998
On March 31, 1998, the Company acquired substantially all of the
voting and non-voting interests of 21st Century Resorts a.s.
("Resorts"), a Czech Republic joint stock company, Resorts'
subsidiaries and certain assets of companies affiliated with
Resorts in a business combination accounted for as a purchase.
Resorts, through its subsidiaries, operates two casinos in the
Czech Republic and owns land where a third casino is under
development. The results of operations of Resorts are included in
the accompanying consolidated financial statements since the date
of acquisition. The total cost of the acquisition of $12,356
(including acquisition costs of $1,584) was allocated to the
assets acquired and liabilities assumed based on their estimated
fair values. The excess of the total cost over the fair value of
the net assets acquired (goodwill), $10,537 is being amortized on
the straight-line basis over seven years.
On April 17, 1998, the Company acquired 90% of the shares of
Casino de Zaragoza, S.A. ("CDZ") in a business combination
accounted for as a purchase. The results of operations of CDZ are
included in the accompanying consolidated financial statements
since the date of acquisition. The total cost of the acquisition
of $1,458 (including acquisition costs of $678) was allocated to
the assets acquired and liabilities assumed based on their
estimated fair values. Goodwill of $7,367 is being amortized on
the straight-line basis over seven years.
F-12
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 3 - BUSINESS COMBINATIONS (CONTINUED)
During the fourth quarter of 1998, the Company adjusted the
carrying amount of goodwill as it relates to the Resorts and CDZ
acquisitions by $2,500 and $1,500, respectively (SEE NOTE 10).
The following summarized unaudited pro forma information assumes
the 1998 acquisitions had occurred on January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Revenues $ 17,598 $ 15,889
---------- ----------
---------- ----------
Net loss $ (11,743) $ (3,840)
---------- ----------
---------- ----------
Loss per common share, basic and diluted $ (3.86) $ (1.26)
---------- ----------
---------- ----------
</TABLE>
The summarized unaudited consolidated pro forma results are not
necessarily indicative of results which actually would have
occurred if the acquisitions had been in effect for the years
presented. Further, the summarized unaudited consolidated pro
forma results are not intended to be a projection of future
results and do not reflect any integration costs, cost savings
resulting from synergistic opportunities or the results of
operations of other businesses acquired or disposed of in 1998 and
1997.
The above amounts reflect adjustments primarily for interest on
notes payable and amortization of goodwill.
YEAR ENDED DECEMBER 31, 1997
In January 1997, the Company acquired Tottenham, a United Kingdom
corporation, in a business combination accounted for as a
purchase. The results of operations of Tottenham are included in
the accompanying consolidated financial statements since the date
of acquisition. The total cost of $497, paid for by the issuance
of 500 shares of the Company's common stock and the delivery of
10% unsecured promissory notes in the aggregate principal amount
of $200, was allocated entirely to goodwill. In December 1998, the
10% unsecured promissory notes were converted to shares of the
Company's common stock (SEE NOTE 9).
In April 1997, the Company acquired Multiple Application Tracking
Systems, Inc. of Colorado ("MATS") in a business combination
accounted for as a purchase. The results of operations of MATS are
included in the accompanying consolidated financial statements
since the date of acquisition. The total cost of $250 was paid for
by the delivery of a non-interest bearing unsecured note in the
aggregate principal amount of $235 and cash of $15. The Company
allocated the entire purchase price, net of a $57 note discount,
to goodwill. In February 1999, MATS was sold to its former owner
(SEE NOTE 15).
Had the 1997 acquisitions occurred on January 1, 1997, the
revenues, net income and earnings per common share for the year
ended December 31, 1997 would not have been materially affected.
F-13
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 1998, property and equipment consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 801
Building and improvements 716
Gaming equipment 1,333
Furniture, fixtures and other equipment 1,166
Construction in progress 421
---------
4,437
Less accumulated depreciation and amortization 435
---------
$ 4,002
---------
---------
</TABLE>
NOTE 5 - SHORT-TERM DEBT
At December 31, 1998, short-term debt consists of the following:
<TABLE>
<CAPTION>
<S> <C>
17% note payable to Value Partners, Ltd.
("Value Partners"), originally due September 1998
("17% Note") $ 1,000
12% note payable to Value Partners due
and paid in full in February 1999
56
---------
$ 1,056
---------
---------
</TABLE>
The Company is in default of the 17% Note for nonpayment and the
breach of certain covenants triggering cross-defaults with
substantially all of the Company's other debt instruments. On July
30, 1999, the Company was granted an extension on the 17% Note to
January 1, 2000 and received waivers on all defaults and
cross-defaults under the 17% Note and the Company's other affected
debt instruments (SEE NOTES 6 AND 15).
NOTE 6 - LONG-TERM DEBT
At December 31, 1998, long-term debt consists of the following:
<TABLE>
<S> <C>
12% Senior Secured Promissory Notes (a) (d) $ 12,832
12% Secured Convertible Senior Bonds secured by
the assets of the Louisiana properties. Interest
only is payable semi-annually (b) (d) 4,800
Non-interest bearing unsecured note payable (c) 206
----------
17,838
Less current portion 0
---------
$ 17,838
---------
---------
</TABLE>
F-14
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 6 - LONG-TERM DEBT (CONTINUED)
(a) In March 1998, the Company borrowed $17,000 ($9,000 from Value
Partners) in a private placement ("Private Placement"). The
loan is represented by 12% Senior Secured Notes ("Senior
Notes") issued pursuant to indentures by and among the Company
and an independent indenture trustee. The Senior Notes, which
are due March 2005, require mandatory prepayments based upon
excess cash flows generated from Resorts. The Senior Notes are
collateralized by primarily all of Resort's gaming equipment
and a majority interest in the capital stock of all of the
Company's subsidiaries (except CDZ). In addition to the Senior
Notes, each investor received a proportionate share of
warrants to purchase 7,087 shares of the Company's common
stock (SEE NOTE 12).
The indentures were amended in October 1998 in connection with
the restructuring of the Company's ownership of Resorts as a
result of a 1998 change in Czech gaming law which restricted
foreign ownership of Czech casinos. The amended indentures did
not alter the underlying basis of the Senior Notes.
Of the $17,000 principal amount of notes and warrants issued
in the March 1998 Private Placement, the Company has allocated
approximately $4,700 as the estimated value of the warrants
issued with the notes. This amount is being amortized as
additional interest expense and an increase to notes payable
over the lives of the respective notes using the effective
interest method until such notes are repaid or converted to
equity. At December 31, 1998 approximately $532 has been
amortized and the remaining balance of approximately $4,168 at
December 31, 1998 is reflected as a reduction of notes
payable.
(b) As a condition to the Private Placement, the Company was
required to renegotiate the terms and conditions of the 12%
Secured Convertible Senior Bonds ("Senior Bonds") originally
due June 30, 1999. In March 1998, the Company and the holders
of the Senior Bonds agreed to amend such indebtedness as
follows: (i) the principal and interest obligations will be
payable only from excess cash flow generated primarily from
the Louisiana operations and secondarily, from the Bishkek
operations; (ii) the maturity date was extended to December
31, 2005; (iii) the ability to convert the Senior Bonds into
the Company's common stock was terminated; (iv) the holders of
the Senior Bonds received Series A warrants and Series B
warrants (SEE NOTE 12). Value Partners hold $3,000 of the
Senior Bonds. The Senior Bonds are collateralized by all of
the Company's Louisiana assets.
(c) This $235 note was discounted using an effective rate of 10%.
Unamortized debt discount at December 31, 1998 is $29. For the
years ended December 31, 1998 and 1997, the amount of debt
discount amortized to interest expense totaled $17 and $11,
respectively. The note was cancelled in February 1999 (SEE
NOTE 15).
(d) The Company's nonpayment of its 17% Note (SEE NOTE 5)
triggered cross-defaults under the Senior Notes and Senior
Bonds. Furthermore, the Company was not in compliance with
certain other (primarily financial reporting) covenants under
the Senior Notes and Senior Bonds. On July 30, 1999, the
Company received waivers on all defaults and cross-defaults
under the 17% Note, Senior Notes and Senior Bonds from the
holder of the majority in interest of those debt instruments
(Value Partners) (SEE NOTE 15). The waivers cover actions or
omissions by the Company which may constitute a default or an
event of default under the debt instruments through and
including January 1, 2000 (except for payment defaults under
the Senior Notes and Senior Bonds).
F-15
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 7- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 1998, accrued expenses and other current
liabilities consists of the following:
<TABLE>
<S> <C>
Taxes payable to Spanish
Taxing Authorities (SEE NOTE 8) $ 1,314
Accrued interest 855
Other 1,234
---------
$ 3,403
---------
---------
</TABLE>
NOTE 8- COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS - The Company is obligated under operating
leases relative to its various facilities expiring through 2003.
Future aggregate minimum annual rental payments under all of these
leases are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 373
2000 36
2001 36
2002 36
2003 9
--------
$ 490
--------
--------
</TABLE>
Rent expense under these leases amounted to $335 and $67 for the
years ended December 31, 1998 and 1997, respectively.
EMPLOYMENT AGREEMENTS - The Company has entered into employment
agreements with its various executives which provide for annual
compensation plus, in most cases, participation in future benefit
programs and stock options plans. Future annual compensation under
these employment agreements, including an agreement the Company
entered into in June 1999 (SEE NOTE 15), is as follows:
<TABLE>
<S> <C>
1999 $ 711
2000 783
2001 690
2002 173
---------
$ 2,357
---------
---------
</TABLE>
F-16
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUANDS, EXCEPT FOR PER SHARE DATA)
NOTE 8- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
CONTINGENCIES - The Company is involved in certain legal actions
that arose during the normal course of business. In the opinion of
the Company's management, the resolution of these matters will not
have a material adverse effect on the financial position, results
of operations or cash flows of the Company.
LICENSE BOND - A new amendment to the Czech Republic law will
require casino companies to increase the license bond from
approximately $320, currently in deposits and other assets at
December 31, 1998, to approximately $640 by December 1999.
FOREIGN ACTIVITIES - During 1998 and continuing in 1999, a
substantial amount of the Company's operations are outside of the
United States (SEE NOTE 13). Operating internationally involves
additional risks relating to such things as currency exchange
rates, different legal and regulatory environments, political and
economic risks relating to the stability or predictability of
foreign governments, differences in the manner in which different
cultures do business, difficulties in staffing and managing
foreign operations, differences in financial reporting, operating
difficulties, different types of criminal threats and other
factors. The occurrence of any of these risks, if severe enough,
could have a material adverse effect on the financial condition,
results of operations and cash flows of the Company.
TEMPORARY RECEIVERSHIP - On January 25, 1997 (prior to the
Company's acquisition of 90% of CDZ), the directors of CDZ filed
an application in Court of First Instance number 11 of Zaragoza to
declare CDZ in temporary receivership. Temporary receivership was
granted on June 23, 1997.
On April 17, 1998 (the date of the Company's acquisition of 90% of
CDZ), CDZ signed a composition with creditors, most notably the
DGA, the Spanish Social Security Authorities and the City Council
of Alfajarin ("Spanish Taxing Authorities"-SEE NOTES 7 AND 10),
which set the terms of payment to the Spanish Taxing Authorities
and other creditors for debts existing as of January 25, 1997. The
composition with the Spanish Taxing Authorities and other
creditors resulted in a debt reduction of approximately $1,743.
This reduction was accounted for as a reduction of goodwill.
In addition, in 1998, DGA granted the Company a deferral of
approximately $1,000 in taxes on all of 1997 and some of 1998
gaming winnings. Furthermore, in April 1999, the Company reached
an understanding with the Spanish Social Security Authorities to
defer approximately $1,440 related to all debts generated in 1997
and the first quarter of 1998.
At December 31, 1998, taxes payable to Spanish Taxing Authorities
consist of the following:
<TABLE>
<S> <C>
Gaming tax $ 4,064
Property tax 613
Social security 1,502
Other 621
---------
6,800
Less current portion 1,314
---------
Long-term portion $ 5,486
---------
---------
</TABLE>
F-17
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 8- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
(CONTINUED)
Future aggregate payments to the Spanish Taxing Authorities are
due as follows (excluding interest):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999 $ 1,314
2000 320
2001 410
2002 492
2003 492
thereafter (through 2009) 3,772
---------
$ 6,800
---------
---------
</TABLE>
TAXING JURISDICTION - The Czech Republic currently has a number of
laws related to various taxes imposed by governmental authorities.
Applicable taxes include value added tax, corporate tax, and
payroll (social) taxes, together with others. In addition, laws
related to these taxes have not been in force for significant
periods, in contrast to more developed market economies;
therefore, regulations are often unclear or nonexistent.
Accordingly, few precedents with regard to issues have been
established. Often, differing opinions regarding legal
interpretations exist both among and within government ministries
and organizations, thus, creating uncertainties and areas of
conflict. Tax declarations, together with other legal compliance
areas (as examples, customs and currency control matters) are
subject to review and investigation by a number of authorities,
who are enabled by law to impose extremely severe fines, penalties
and interest charges. These facts create tax risks in the Czech
Republic substantially more significant than typically found in
countries with more developed tax systems. Management believes
that it has adequately provided for tax liabilities; however, the
risk remains that relevant authorities could take differing
positions with regard to interpretive issues and the effect could
be significant and adverse.
NOTE 9- STOCKHOLDERS' DEFICIT
In January 1997, in connection with its acquisition of Tottenham,
the Company issued 500 shares of its common stock. In December
1998, the Company issued 320 shares of its common stock in
settlement of unsecured notes payable, issued in connection with
its acquisition of Tottenham, and accrued interest to its
president and chief executive officer and his spouse aggregating
$240.
In March 1998, in connection with the issuance of 12% Senior Notes
(SEE NOTE 6), the Company has allocated $4,700 as the estimated
value of the warrants issued with the Senior Notes. Upon surrender
of a warrant , the holder is entitled to purchase one share of the
Company's common stock for $.01. The warrants expire on various
dates through December 31, 2005.
F-18
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 10- OTHER MATTERS
RESTRICTED CASH - The Louisiana State Police regulations regarding
video poker require the Company to maintain a minimum cash balance
at all times in its gaming account equivalent to 15% of the
previous month's net device revenues or to secure the account by a
line of credit or bond. The Company meets this requirement by
maintaining the required minimum balance in its gaming account.
Similarly, regulations in the Czech Republic and Spain require the
Company to maintain minimum cash balances. At December 31, 1998,
aggregate restricted cash relative to these requirements is $576.
PREPAID EXPENSES AND OTHER CURRENT ASSETS - Included in prepaid
expenses and other current assets at December 31, 1998 is land
held for sale of $225, prepaid rent of $188, prepaid licenses of
$186 and other items aggregating $231.
OTHER LONG-TERM LIABILITIES - Included in other long-term
liabilities at December 31, 1998 are taxes payable to Spanish
Taxing Authorities of $5,486 (see Note 8) and other items
aggregating $314.
SETTLEMENTS - In connection with various legal proceedings related
to the Company's sublease agreement with Prime Properties, Inc.
(the lessor of the Gold Coin facility) which includes the right to
operate its gaming license, the Company negotiated settlements by
and amongst the involved parties. Under the terms of the
settlement, the Company would make a settlement payment of $450.
In connection with an action brought by the former operator of its
Louisiana gaming facilities, alleging the Company's breach of a
management contract, the Company executed a Mutual Release and
Settlement Agreement whereby the Company paid the former operator
$100 in exchange for release of all claims against it.
Settlement charges in connection with the preceding legal
proceedings have been reflected in selling, general and
administrative expenses in the accompanying 1998 statement of
operations.
PROVISION FOR IMPAIRMENT- Since the Company's acquisition of
Resorts, the Company has experienced increased competition in its
Ceska Kubice Casino and budget shortfalls in its Rozvadov casino.
Furthermore, its uncompleted Znojmo casino will be significantly
smaller than originally anticipated and forecasted. Similarly,
since the Company's acquisition of CDZ, the Company has
experienced revenue shortfalls, unexpected costs and timing
delays. Furthermore, its casino, upon its move to the center of
Zaragoza, is expected to be smaller than originally anticipated
and forecasted. In light of these developments, in accordance with
its policy on impairment of long-lived assets, the Company has
adjusted the carrying amounts of its goodwill as it relates to the
Resorts and CDZ acquisitions by $2,500 and $1,500, respectively,
during the fourth quarter of 1998.
In 1998, the Company has further written-down the value of its
DeRidder, Louisiana land by $192 to its December 31, 1998 carrying
amount of $225.
WRITE-OFFS - During 1998, the President of the Azerbaijan Republic
ordered the closure of all casinos in the Republic resulting in
the write-off of the Company's unamortized investment in the Boxer
Casino of approximately $295. Additionally, during 1998, in light
of mounting losses and unrealistic future prospects, the Company
wrote-off its investment in the Bishkek Casino of approximately
$264. Other 1998 write-offs include $204 of receivables from
Chrysolith.
F-19
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 10- OTHER MATTERS (CONTINUED)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - In 1998, diluted loss
per common share is the same as basic loss per common share since
the inclusion of stock options and warrants would be antidilutive.
Accordingly, the 1998 weighted average common shares outstanding
applicable to diluted loss per common share is the same as the
1998 weighted average common shares outstanding applicable to
basic loss per common share. In 1997, weighted average common
shares outstanding applicable to diluted earnings per common share
is computed as follows:
<TABLE>
<S> <C>
Weighted average common shares outstanding, basic 3,044
Shares applicable to dilutive securities 787
-----
Weighted average common shares outstanding, diluted 3,831
-----
-----
</TABLE>
Not included in the preceding computation of weighted average
common shares outstanding applicable to diluted earnings per
common share are 305 stock options and 2,774 warrants as their
exercise prices were greater than the average market price of the
common shares.
RECAPITALIZATION - Pursuant to Spanish law, in order to maintain
solvency, a Spanish entity must maintain a defined minimum
capitalization. In July 1998, the Company, pending approval from
the Spanish government, proposed to reduce CDZ's capital to zero
and increase it to 250,000 pesetas (approximately $1,760). The
Company requested, and was granted, a postponement of the
recapitalization until November 1999. Upon approval of the
recapitalization, the Company will own 100% of CDZ, as a result of
CDZ's prior owner not subscribing to the new shares in the
recapitalization process.
NOTE 11- INCOME TAXES
At December 31, 1998, the Company's deferred income tax asset is
comprised of the tax benefit (cost) associated with the following
based on the statutory tax rates currently in effect.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deferred tax assets
Loss carryforwards $ 2,204 $ 3,511 $ 5,715
Impairment 3,457 3,457
Other 56 13 69
--------- --------- ---------
5,717 3,524 9,241
Deferred tax liabilities (120) (120)
--------- --------- ---------
Deferred tax asset, gross 5,717 3,404 9,121
Valuation allowances (5,717) (3,404) (9,121)
--------- --------- ---------
Deferred tax asset, net
$ - $ - $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 11- INCOME TAXES (CONTINUED)
The following table presents the U. S. and foreign components of
income (loss) before income taxes for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
U.S. $ (8,691) $ 80
Foreign (1,847)
---------- --------
$ (10,538) $ 80
---------- --------
---------- --------
</TABLE>
The 1998 provision for income taxes of $191 relates to earnings
from certain of Resorts' wholly-owned subsidiaries, recognized
under Czech tax laws, as a separate reporting entites.
The following table presents the principal reasons for the
differences between the effective tax rate and the U.S. federal
statutory income tax rate for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
U.S federal statutory income tax rate (34)% 34%
State income tax, net of federal effect 5
Effect of nondeductibility of goodwill
amortization and impariment 19
Effect of net operating loss carryforwards
and valuation allowances, net 15 (39)
Other 2
------- -------
2% --%
------- -------
------- -------
</TABLE>
At December 31, 1998, the Company has net operating loss
carryforwards available for income tax reporting purposes of
approximately:
<TABLE>
<S> <C>
U.S. $ 5,650
Foreign 10,026
----------
$ 15,676
----------
----------
</TABLE>
The U.S. net operating loss carryforwards expire between 2009 and
2018. The foreign net operating loss carryforwards expire between
2002 and 2008.
F-21
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 12 - WARRANTS AND STOCK OPTIONS
WARRANTS
In connection with the March 1998 Private Placement including the
restructuring of certain long-term debt obligations (SEE NOTE 6),
the Company issued the following series of warrants to purchase
the Company's common stock:
Series A Warrants - consists of warrants to purchase 960
shares of the Company's common stock with an exercise price of
$1.00 per share expiring on December 31, 2005. These warrants
were issued to replace warrants in connection with the
issuance of convertible senior bonds dated July 1, 1996.
Series B Warrants - consists of warrants to purchase 3,200
shares of the Company's common stock with an exercise price of
$1.50 per share expiring on December 31, 2005. These warrants
were issued to replace conversion rights in connection with
the convertible senior bonds dated July 1, 1996.
Series C Warrants - consists of warrants to purchase 7,087
shares of the Company's common stock with an exercise price of
$.01 per share expiring on March 31, 2008. These warrants were
issued pursuant to the March 1998 Private Placement.
Series D Warrants - consists of warrants to purchase 2,052
shares of the Company's common stock with an exercise price of
$.01 per share expiring on March 31, 2008. These warrants were
issued to replace 500 warrants containing anti-dilution
provisions issued in connection with a September 1996
financing.
Series E Warrants - consists of warrants to purchase 354
shares of the Company's common stock with an exercise price of
$.01 per share expiring on March 31, 2008. These warrants were
issued to the placement agent and its affiliates pursuant to
the March 1998 Private Placement.
In connection with a March 1998 debt financing to fund the Bishkek
Casino transaction (SEE NOTE 1), the Company issued warrants to
purchase 104 shares of the Company's common stock with an exercise
price of $.01 per share expiring on March 31, 2008.
All of the warrants issued in 1998 contain certain demand
registration rights provided that the holders of such warrants
hold in excess of 100 shares. The Series C and E Warrants also
contain anti-dilution provisions.
In 1997, the Company issued warrants to purchase 250 and 131
shares of the Company's common stock with an exercise price of
$.59 per share and $.50 per share, respectively, in connection
with the acquisition of Tottenham and certain debt financing,
respectively. The warrants, which expire on December 31, 2001 and
December 31, 1999, respectively, include demand registration
rights and anti-dilution provisions. Relative to the same debt
financing, during January 1998, the Company issued warrants to
purchase an additional 90 shares of the Company's common stock.
F-22
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 12 - WARRANTS AND STOCK OPTIONS (CONTINUED)
For the years ended December 31, 1998 and 1997, warrant activity
is as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE, BALANCE,
PRICE JANUARY 1, GRANTED DECEMBER 31, GRANTED - TERMINATED - DECEMBER 31,
PER SHARE 1997 1997 1997 1998 1998 1998
- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 13.50 151 151 151
11.55 151 151 151
8.50 1,511 1,511 1,511
1.50 3,200 3,200
1.00 960 960 960 (960) 960
250
0.59 250 250
0.50 131 131 90 221
0.01 500 500 9,598 (500) 9,598
----- --- ----- ------ ------ ------
3,273 381 3,654 13,848 (1,460) 16,042
----- --- ----- ------ ------ ------
----- --- ----- ------ ------ ------
</TABLE>
All warrants outstanding at December 31, 1998 are exercisable.
During the years ended December 31, 1998 and 1997, no warrants
were exercised.
STOCK OPTION PLANS
The Company has incentive and nonstatutory stock option plans
under which certain key employees may purchase up to a total of
2,000 common shares of the Company. Under the incentive stock
option plan, the exercise price can not be less than the fair
market value of a share on the date of grant or at 110% of
the fair market value on the date of grant, if, any employee owns
more than 10% of the total combined voting power of all
classes of outstanding stock of the Company. In addition the
incentive stock option plan provides for an automatic grant of an
option to purchase 2 shares of common stock to non-employee
directors on a quarterly basis. In the case of a nonstatutory
stock option, the exercise price may be any amount determined by
the Board on the date of grant, but not less than the par value of
the stock subject to the option.
F-23
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 12 - WARRANTS AND STOCK OPTIONS (CONTINUED)
The activity in the stock option plans is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE PER SHARE
-------------------------------------------------------------
NUMBER OF WEIGHTED
OPTIONS RANGE AVERAGE
----------------- ------------------- ------------------
<S> <C> <C> <C>
Balance outstanding,
January 1, 1997 573 $ .91-9.00 $ 4.64
Granted 267 .30-2.00 0.56
Expired (320) 7.00 7.00
----- ------------ ---------
Balance outstanding,
December 31, 1997 520 .30-9.00 1.09
Granted 125 .24- .63 0.25
Expired (6) .30-1.59 0.80
----- ------------ ---------
Balance outstanding,
December 31, 1998 639 $ .24-9.00 $ 0.93
----- ------------ ---------
----- ------------ ---------
Exercisable,
December 31, 1998 639 $ .24-9.00 $ 0.93
----- ------------ ---------
----- ------------ ---------
</TABLE>
There were no options exercised during 1998 or 1997. The option
price per share was equal to or above the market value of the
underlying stock on the date of grant. Options generally expire
between five and ten years after the date of grant or earlier upon
termination as defined in the plans.
The Company complies with the disclosure-only provisions of SFAS
123, "Accounting for Stock-Based Compensation".
F-24
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 12 - STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations
in accounting for its stock option plans and, accordingly, no
compensation cost has been recognized because stock options
granted under the plans were at exercise prices which were equal
to or above the market value of the underlying stock at date of
grant. Had compensation expenses been determined as provided by
SFAS 123 using the Black-Scholes option-pricing model, the pro
forma effect on the Company's net income (loss) and per share
amounts would have been:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income (loss)
As reported $ (10,729) $ 80
Pro forma (10,759) (55)
Income (loss) per common share
Basic
As reported $ (3.52) $ 0.03
Pro forma (3.53) (0.02)
Diluted
As reported $ (3.52) $ 0.02
Pro forma (3.53) (0.02)
</TABLE>
The fair value of each option grant is calculated using the
following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Expected life (years) 10 5
Interest rate 5.00% 6.67%
Volatility 275.00% 136.00%
Dividend yield 0.00% 0.00%
</TABLE>
NOTE 13- INFORMATION CONCERNING BUSINESS SEGMENTS
The Company adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information", effective January 1, 1998.
SFAS 131 requires disclosures of segment information on the basis
that is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
F-25
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 13- INFORMATION CONCERNING BUSINESS SEGMENTS (CONTINUED)
Segment information listed below reflects the two principal
business units of the Company during the year ended December 31,
1998. Each segment is managed according to the products or
services that are provided to the respective customers and
information is reported on the basis of reporting to the Company's
Chief Operating Decision Maker (CODM).
<TABLE>
<CAPTION>
GAMING TRUCKSTOP OTHER ELIMINATIONS CONSOLIDATED
------ --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 7,998 $ 6,063 $ 1,377 $ (359) $ 15,079
Interest income 36 165 (116) 85
Interest expense 247 638 2,330 (112) 3,103
Depreciation and amortization 2,335 278 157 2,770
Impairments (see Note 10) 4,000 192 4,192
Write-offs (see Note 10) 204 559 763
</TABLE>
During the year ended December 31, 1998, the Company operated
principally in three geographic areas: the United States, the
Czech Republic and Spain. The following table presents information
about the Company by geographic area. There were no material
amounts of sales or transfers among geographic areas.
<TABLE>
<CAPTION>
UNITED CZECH
STATES REPUBLIC SPAIN OTHER ELIMINATIONS CONSOLIDATED
-------------- --------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 6,114 $ 5,466 $ 2,778 $ 1,080 $ (359) $ 15,079
Long-lived assets 184 10,524 5,444 441 16,593
</TABLE>
During the year ended December 31, 1997, the Company's principal
operating segment was the truckstop, which operated in the United
States. Accordingly, operating segment and geographic segment
information is not presented for 1997.
F-26
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 14- SUMMARIZED FINANCIAL INFORMATION
The Company has a nonvoting 49% interest in Chrysolith and entered
into an agreement with Chrysolith pursuant to which Chrysolith
owns, maintains and operated (through June 30, 1999) the video
lottery terminals at the Gold Coin and Toledo Palace properties.
During 1995, the Company contributed $75 of equipment to
Chrysolith.
Prior to July 1, 1999, the Company received 100% of the net
operating revenues (the "Net Win") derived from the Gold Coin and
the Toledo Palace, after payment of all the gaming taxes payable
to the State of Louisiana and payout of winnings from the gaming
establishment. Further, the Company paid a management fee to
Chrysolith in an amount equal to the direct operating expenses of
the gaming establishment. A summary of the December 31, 1998 and
1997 financial information of Chrysolith is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets
Liabilities $ 442 $ 420
367 345
Stockholders' equity 75 75
Net income - -
</TABLE>
NOTE 15- SUBSEQUENT EVENTS
In February 1999, the Company sold MATS to MATS's former owner in
exchange for severance compensation and certain other
consideration and for the cancellation of (i) an unsecured note
payable to the former owner and (ii) an employment agreement with
the former owner.
In April 1999, the Company acquired 15 square meters of land in
Folmova adjacent to the border with the German State of Bavaria.
The purchase price was $250.
In June 1999, the Company entered into a contract with an
unaffiliated entity whereby the unaffiliated entity would
construct, at its own expense, a casino complex on the Company's
Znojmo land. Subsequent to the construction and local approval
for use, the unaffiliated entity will lease the casino complex
to the Company for a period of ten years for a monthly rental
of 25 Euro (approximately $27), adjusted annually for inflation,
plus value-added taxes. The Company shall have the option to
purchase the casino complex for a specified price approximating
anticipated market value, adjusted for inflation.
In June 1999, the Company entered into a three-year employment
agreement ("Employment Agreement") with a new executive. Under the
terms of the Employment Agreement, the executive will receive a
base salary of $300 per annum and options to purchase 300 shares
of the Company's common stock granted in three separate, equal,
annual installments, each of which shall have a five-year term
commencing upon the date on which each installment is granted. All
options shall be immediately exercisable at $.50, $.55 and $.61
per share, respectively. In addition, upon commencement of the
second and third years of the Employment Agreement, the effective
exercise price of any unexercised options issued in preceding
years shall be increased to the current exercise price.
In 1999, the Company settled certain legal proceedings
(SEE NOTE 10).
F-27
<PAGE>
TRANS WORLD GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
NOTE 15- SUBSEQUENT EVENTS (CONTINUED)
On May 23, 1999 and July 12, 1999, the Company accepted the
resignation of certain executives effective July 1999 and a date
to be determined, respectively. In connection therewith, the
Company is obligated to pay severance compensation to such
executives aggregating $150.
On July 30, 1999, the Company received waivers on all defaults and
cross-defaults under the 17% Note, Senior Notes and Senior Bonds
through January 1, 2000 from the holder of the majority in
interest of those debt instruments (SEE NOTES 5 AND 6). The
waivers cover actions or omissions by the Company which may
constitute a default or an event of default under the debt
instruments (Value Partners) through and including January 1,
2000 (except for payment defaults under the Senior Notes and
Senior Bonds). Furthermore, on July 30, 1999, the Company was
granted an extension on the 17% Note to January 1, 2000.
F-28
<PAGE>
CASINO DE ZARAGOZA, S.A.
FINANCIAL STATEMENTS FOR THE PERIOD
APRIL 17, 1998 TO DECEMBER 31, 1998
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Casino de Zaragoza, S.A.:
1. We have audited the accompanying balance sheet of Casino de Zaragoza, S.A.
as of December 31, 1998, and the related statements of income,
shareholder's equity and cash flows for the period April 17, 1998 to
December 31, 1998. These financial statements are the responsibility of
Casino de Zaragoza, S.A.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
2. We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
3. The Company has yet to sign the collective agreement with the workers for
the years 1994 through 1998, inclusive, and this matter must be arranged
with the Works' Committee. In addition, the last collective agreement
signed by the Company provided for the payment of retirement bonuses to
employees who retire before age 65.
The balance sheet as of December 31, 1998 does not include any provision
for the liabilities that could result from pay raises, the aforementioned
retirement bonus or any other item that could come to light once the
collective agreements have been settled.
4. As a result of the different interpretations to which ruling tax
legislation lends itself and the Company's tax treatment of certain
transactions, tax contingencies that cannot be objectively quantified could
arise in respect of the years still open to inspection.
5. Net worth as per the accompanying balance sheet as of December 31, 1998 is
negative by Ptas. 1,003 million (U.S. Dollars 7.1 million). This situation
constitutes a cause for compulsory dissolution unless capital is increased
or decreased accordingly, pursuant to the Revised Spanish Corporations Law,
and it raises substantial doubt about its ability to continue as a going
concern.
<PAGE>
-2-
In addition, as indicated in Note 11, in the first few months of 1998 the
Company signed a composition with creditors in connection with the
application for temporary receivership that Casino de Zaragoza, S.A. filed
in January 1997. Note 11 indicates the sums and terms agreed for the
partial acquittance and deferral with the Company's creditors. In addition,
as indicated in Note 9, most of the Company's capital stock was purchased
in April 1998 by a new shareholder, who plans to recapitalize the Company.
The accompanying financial statements as of December 31, 1998 were prepared
on a going-concern basis, although, considering the above circumstances,
the Company's ability to continue as a going concern is dependent on the
success of its future operations and on the continued support of its
shareholders so as to enable it to realize its assets and settle its
liabilities for the amounts and according to the classification in the
financial statements referred to above, which have been prepared assuming
that the Company will continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
6. In our opinion, except for the effects of such adjustments, if any, as
might have been required had the outcome of the uncertainties described in
paragraphs 3 to 5 above been known, the financial statements referred to
above present fairly, in all material respects, the financial position of
Casino de Zaragoza, S.A. as of December 31, 1998, and the results of its
operations and its cash flows for the period April 17, 1998 to December 31,
1998, in accordance with generally accepted accounting principles in the
United States of America.
ARTHUR ANDERSEN
Jesus Tejel
April 30, 1999
<PAGE>
- 1 -
CASINO DE ZARAGOZA, S.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) DESCRIPTION OF BUSINESS
Casino de Zaragoza, S.A. (hereinafter referred to as the Casino) was
founded in 1978, and since then, is located in Alfajarin (Zaragoza).
The second article of the Casino's bylaws defines its corporate
purpose, basically, as the operation of a gambling casino and
appurtenant services, namely bar, restaurant, sitting rooms, show
halls, night clubs, athletic facilities and shopping establishments
located in the casino's building complex.
Details of the Casino's holdings are as follows:
<TABLE>
<CAPTION>
- ------------------------------------ -------------------------- ---------------------------
Name Catering y Gestion, S.L. Los Albares, S.A.
Location Ctra. Nacional II Ctra. Nacional II
Km. 343,250 Km. 343,250
Alfajarin (Zaragoza) Alfajarin (Zaragoza)
Line of business Lodging Inoperative
- ------------------------------------ ------------------------------------------------------
U.S. Dollars
------------------------------------------------------
<S> <C> <C>
Proportion of stock held as of
December 31, 1998 100% 50,31%
Capital stock as of December 31,
1998 535,327 522,999
Net equity as of December 31, 1998
(974,854) 174,185
- ------------------------------------ ------------------------------------------------------
Thousands of Pesetas
------------------------------------------------------
Proportion of stock held as of
December 31, 1998 100% 50,31%
Capital stock as of December 31,
1998 76,000 74,250
Net equity as of December 31, 1998
(138,400) 24,729
- ------------------------------------ -------------------------- ---------------------------
</TABLE>
The main assets and liabilities of both investees have been included in
the corresponding captions of the balance sheet of the Casino as of
December 31, 1998, for the portion assigned to the Casino according to
the percentage of its holding. The transactions performed in the period
April, 17, 1998 to December 31, 1998 by both investees according to
their nature have not been included in the different captions in the
statement of income of the Casino since their effect is not
significant.
<PAGE>
-2-
Up until October 1997, the properties and other assets needed to manage
Catering y Gestion, S.L. were owned by and included in the book fixed
assets of Casino de Zaragoza, S.A., which did not charge Catering y
Gestion, S.L. for the use of those assets. In October 1997, Diputacion
General de Aragon (the Aragon Provincial Council) acquired all of the
properties that belonged to Casino de Zaragoza, S.A. through an auction
(see Note 6).
The Casino is subject to the regulations set forth in the Ministerial
Order of January 9, 1979, which approved the Gambling Casino
Regulations.
The Casino holds a ten-year business license that is valid until
December 23, 2000.
(2) BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS
The accompanying financial statements as of December 31, 1998 were
obtained from the accounting records and are presented in accordance
with accounting principles generally accepted in the United States,
which required certain adjustments and reclassifications to adapt the
financial statements to US GAAP.
All amounts are reported in Local Currency (Thousands of Pesetas) and
in U.S. dollars. Assets and liabilities are translated using published
exchange rates in effect at December 31, 1998. Revenues and expenses
are translated using a monthly average exchange rate for the period.
Resulting translation adjustments are recorded as a separate component
of shareholders' equity.
The following exchange rates were used to translate the financial
statements as of December 31, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Ptas./U.S. Dollar
---------------------
<S> <C>
Balance Sheet Exchange Rate 141.97
Profit and Loss Exchange Rate 147.77
- ---------------------------------------------------------------
</TABLE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) USE OF ESTIMATES
The preparation of the 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 disclosures of
contingent assets and liabilities at the date of the financial
statements and the
<PAGE>
-3-
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
B) CURRENT ASSETS AND LIABILITIES
Current assets are those assets which expect to be received
within one year. Current liabilities are those liabilities
which are expected to be paid within one year.
C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in hand and cash in
bank current accounts, with original maturities of three
months or less.
D) TANGIBLE FIXED ASSETS
Tangible fixed assets are shown at cost.
Expenditure on expansion, modernization or improvement is
capitalized as an increased cost of the related assets
provided that it increases productivity, capacity or
efficiency, or extends the useful lives of these assets.
Upkeep and maintenance costs are expensed currently.
The Company depreciates its tangible fixed assets on a
straight-line basis over the years of estimated useful life of
each asset as follows:
<TABLE>
<CAPTION>
---------------------------------------- --------------------
Years of estimated
useful life
---------------------------------------- --------------------
<S> <C>
Gaming equipment 10 to 12
Tools 6 to 8
Furniture and fixtures 8 to 25
Data processing equipment 4
---------------------------------------- --------------------
</TABLE>
E) INCOME TAXES
Period corporate income tax is computed on the basis of book
income before tax adjusted by the corresponding permanent
differences with regard to the income for tax purposes, i.e.
the corporate income tax base, less any abatements and tax
credits, excluding withholdings and payments on account.
The Casino accounts for income taxes in accordance with
Statement of Financial Accounting Standards (`SFAS') No. 109
`Accounting for Income Taxes'. SFAS 109 requires an asset and
liability approach for financial accounting and reporting for
income tax purposes. Under the asset and liability method,
deferred income taxes are recognized on account of the
consequences of timing differences and net operating
<PAGE>
-4-
carryforwards by applying the statutory tax rates applicable
to future years. Valuation allowances are recorded when it is
determined that realization of such amounts are deemed more
likely than not to be realized.
F) DEFERRED INDEMNITIES
The Casino is obligated to compensate employees whom it
dismisses, in certain circumstances, pursuant to ruling labor
legislation. In 1997 and 1998 the Casino dismissed some
employees, as a result of which it is involved in various
legal actions.
The balance sheet as of December 31, 1998 does include
provisions for Ptas. 10.4 million (US Dollars 73,332) for the
liability which may result from the aforesaid dismissals (Note
8).
G) CASINO REVENUE
Casino revenue is the net win from gaming activities, which is
the difference between gaming wagers less the amount paid out
to patrons, and the portion of customers' tips due to the
Casino.
(4) ACCOUNTS RECEIVABLE
Accounts receivable (debtors) as of December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
----------------------------------------------
U.S. Thousands
Dollars of Pesetas
----------------------------------------------
<C> <C>
Accounts 1,485,518 210,899
Receivable
Less:
Allowance for (1,303,740) (185,092)
Doubtful Accounts
----------------------------
181,778 25,807
----------------------------------------------
</TABLE>
<PAGE>
-5-
The rollforward of the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
U.S. Thousands
Dollars of Pesetas
-------------------------------------------------------------------
<S> <C> <C>
Allowance for doubtful accounts
as of April 17, 1998 799,155 113,456
Bad debt expense for the period
April 17, 1998 to December 31, 1998 574,649 84,916
Recoveries/other for the period
April 17, 1998 to December 31, 1998 (93,541) (13,280)
Translation adjustment 23,477 -
ALLOWANCE FOR DOUBTFUL ACCOUNTS AS OF
DECEMBER 31, 1998 1,303,740 185,092
-------------------------------------------------------------------
</TABLE>
(5) INTANGIBLE ASSETS
Movement in the cost of the assets and the related accumulated depreciation was
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
April 17, Translation December 31,
U.S. Dollars 1998 Additions adjustments 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Software 144,291 - - 144,291
Accumulated depreciation (89,639) (26,325) (1,075) (117,039)
--------------------------------------------------------
54,652 (26,325) (1,075) 27,252
--------------------------------------------------------
Other 725 - - 725
Accumulated depreciation (725) - - (725)
--------------------------------------------------------
- - - -
--------------------------------------------------------
TOTAL:
Cost 145,016 - - 145,016
Accumulated depreciation (90,364) (26,325) (1,075) (117,764)
- --------------------------------------------------------------------------------------------------
TOTAL INTANGIBLE ASSETS - NET 54,652 (26,325) (1,075) 27,252
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
April 17, December 31,
Thousands of Pesetas 1998 Additions 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Software 20,485 - 20,485
Accumulated depreciation (12,726) (3,890) (16,616)
------------------------------------------
7,759 (3,890) 3,869
------------------------------------------
Other 103 - 103
Accumulated depreciation (103) - (103)
------------------------------------------
- - -
------------------------------------------
TOTAL:
Cost 20,588 - 20,588
Accumulated depreciation (12,829) (3,890) (16,719)
- -----------------------------------------------------------------------------------------------
TOTAL INTANGIBLE ASSETS - NET 7,759 (3,890) 3,869
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-6-
(6) PROPERTY AND EQUIPMENT
Movement in the cost of the assets and the related accumulated
depreciation was as follows:
<TABLE>
<CAPTION>
- ------------------------------------ ------------- ------------- ------------- ------------ -------------
April 17, Regulari- Translation December
U.S. Dollars 1998 Additions zation adjustment 31, 1998
- ------------------------------------ ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Land 89,948 - - - 89,948
------------- ------------- ------------- ------------ -------------
Gaming equipment 335,063 - - - 335,063
Accumulated depreciation (215,060) (13,840) - (564) (229,464)
------------- ------------- ------------- ------------ -------------
120,003 (13,840) - (564) 105,599
------------- ------------- ------------- ------------ -------------
Tools 158,540 - 13 1 158,554
Accumulated depreciation (146,433) (4,480) 1,908 (105) (149,110)
------------- ------------- ------------- ------------ -------------
12,107 (4,480) 1,921 (104) 9,444
------------- ------------- ------------- ------------ -------------
Furniture 1,257,089 7,318 136,881 5,593 1,406,881
Accumulated depreciation (1,187,970) (14,855) (113,833) (5,250) (1,321,908)
------------- ------------- ------------- ------------ -------------
69,119 (7,537) 23,048 343 84,973
------------- ------------- ------------- ------------ -------------
Data Processing Equipment 136,049 1,324 - - 137,373
Accumulated depreciation (128,098) (3,743) - (152) (131,993)
------------- ------------- ------------- ------------ -------------
7,951 (2,419) - (152) 5,380
------------- ------------- ------------- ------------ -------------
Other 500 - - - 500
Accumulated depreciation (500) - - - (500)
------------- ------------- ------------- ------------ -------------
- - - - -
------------- ------------- ------------- ------------ -------------
TOTAL:
Cost 1,977,189 8,642 136,894 5,594 2,128,319
Accumulated depreciation (1,678,061) (36,918) (111,925) (6,071) (1,832,975)
- ------------------------------------ ------------- ------------- ------------- ------------ -------------
TOTAL TANGIBLE ASSETS - NET 299,128 (28,276) 24,969 (477) 295,344
- ------------------------------------ ------------- ------------- ------------- ------------ -------------
</TABLE>
<PAGE>
-7-
<TABLE>
- ------------------------------------ ------------- ------------- ------------- ------------
April 17, Regulari- December
Thousands of Pesetas 1998 Additions zation 31, 1998
- ------------------------------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Land 12,770 - - 12,770
------------- ------------- ------------- ------------
Gaming equipment 47,569 - - 47,569
Accumulated depreciation (30,532) (2,045) - (32,577)
------------- ------------- ------------- ------------
17,037 (2,045) - 14,992
------------- ------------- ------------- ------------
Tools 22,508 - 2 22,510
Accumulated depreciation (20,789) (662) 282 (21,169)
------------- ------------- ------------- ------------
1,719 (662) 284 1,341
------------- ------------- ------------- ------------
Furniture 178,469 1,039 20,227 199,735
Accumulated depreciation (168,656) (2,195) (16,821) (187,672)
------------- ------------- ------------- ------------
9,813 (1,156) 3,406 12,063
------------- ------------- ------------- ------------
Data Processing Equipment 19,315 188 - 19,503
Accumulated depreciation (18,186) (553) - (18,739)
------------- ------------- ------------- ------------
1,129 (365) - 764
------------- ------------- ------------- ------------
Other 71 - - 71
Accumulated depreciation (71) - - (71)
------------- ------------- ------------- ------------
- - - -
------------- ------------- ------------- ------------
TOTAL:
Cost 280,702 1,227 20,229 302,158
Accumulated depreciation (238,234) (5,455) (16,539) (260,228)
- ------------------------------------ ------------- ------------- ------------- ------------
TOTAL TANGIBLE ASSETS - NET 42,468 (4,228) 3,690 41,930
- ------------------------------------ ------------- ------------- ------------- ------------
</TABLE>
<PAGE>
- 8 -
In October 1997 Diputacion General de Aragon (the Aragon Provincial
Council) auctioned off all the properties of the Casino, that had been
mortgaged or which secured its debt in respect of gambling tax. The
properties were auctioned off to settle debt for Ptas. 865 million
(U.S. Dollars 6.1 million), while their net book value for the Casino
was Ptas. 396 million (U.S. Dollars 2.8 million). Ptas. 469 million
(U.S. Dollars 3.9 million) in extraordinary revenues obtained on the
auction were recorded in 1997 financial statements.
(7) TAX MATTERS
Set out below are the balances payable to the Spanish tax authorities:
<TABLE>
<CAPTION>
U.S. Dollars Thousands of Pesetas
------------------------------------------------ ------------------------------------------------
Long term Long term
------------------------------------ ------------------------------------
Temporary Short Temporary Short
receivership Other Total term receivership Other Total term
- -------------------------- ------------- ---------- ----------- ----------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Diputacion General de
Aragon:
- - Gambling tax 2,748,074 1,007,741 3,755,815 309,116 390,144 143,069 533,213 43,885
City Council of Alfajarin:
- - Tax on business
activities, property tax 228,949 - 228,949 384,060 32,504 - 32,504 54,525
Central tax authorities:
- - Personal income tax - - - 596,097 - - - 84,628
- - Value added tax - - - 20,997 - - - 2,981
Social Security authorities 839,571 662,183 1,501,754 - 119,194 94,010 213,204 -
Other - - - 4,106 - - - 583
------------- ---------- ----------- ----------- ------------- ---------- ----------- -----------
3,816,594 1,669,924 5,486,518 1,314,376 541,842 237,079 778,921 186,602
- -------------------------- ------------- ---------- ----------- ----------- ------------- ---------- ----------- -----------
</TABLE>
On April 17, 1998, the Company signed a composition with creditors
(Diputacion General de Aragon, the Social Security authorities and the
City Council of Alfajarin) which set the terms of payment for the
Casino's debts as of January 25, 1997, which is the date of the
Company's application for temporary receivership (see Note 11).
In addition, in 1998 Diputacion General de Aragon granted the Company a
deferral of Ptas. 143.1 million (U.S. Dollars 1 million) in taxes on
game winnings accruing during 1997 and the first half of 1998. These
taxes will begin to fall due between 2001 and 2006.
Likewise, in April 1999 the Casino reached an agreement with the Social
Security authorities to defer payment of debts affected by the
temporary receivership and the
<PAGE>
-9-
debts generated in 1997 and in the first quarter of 1998, with a
combined total of Ptas. 205.1 million (US$ 1.44 million), maturing
between 2002 and 2009.
Corporate income tax is calculated on the basis of book income, which
is determined in accordance with generally accepted accounting
principles. Such income need not be equal to the income for tax
purposes, i.e. the corporate income tax base.
The tax loss carryforwards and maximum terms (under Spanish tax
legislation) allowed for offset are as follows:
<TABLE>
<CAPTION>
-------------- ------------- ------------- ------------
U.S. Dollars Thousands Last year
Year of Pesetas for offset
-------------- ------------- ------------- ------------
<S> <C> <C> <C>
1992 194,266 27,580 2002
1994 1,279,967 181,717 2004
1995 1,417,193 201,199 2005
1996 1,164,527 165,328 2006
1997 3,179,714 451,424 2007
1998 2,482,242 352,404 2008
-------------- ------------- ------------- ------------
-------------- ------------- ------------- ------------
9,717,909 1,379,652
------------- -------------
</TABLE>
Under current legislation, losses incurred in a given year can be
offset against taxable income in the following ten years. However, the
ultimate amount to carry forward may depend on the outcome of a tax
inspection of the years in which losses were incurred. The accompanying
balance sheet does not reflect the possible impact of offsetting such
tax losses.
The last four years are open for review of all applicable taxes by the
tax authorities.
(8) COMMITMENTS & CONTINGENCIES
The main legal disputes in which the Casino is involved are set out
below:
- Complaint filed on March 9, 1998 by the Casino against HERALDO
DE ARAGON (a newspaper) in Court of First Instance no. 11 of
Zaragoza, for infringement and violation of the right to
honor, claiming Ptas. 1,456 million (U.S. Dollars 10.3
million) in damages. The case is currently at the discovery
stage. In 1998 the Casino booked a provision of Ptas. 25
million (U.S. Dollars 0.2 million) for the legal costs arising
from this complaint.
- An appeal for reversal filed by the Casino against the
Superior Court of Justice of Aragon in November 1998 against a
judgement handed down by Labor Court no. 1 of Zaragoza in
October 1998 sentencing the Casino to compensate an
ex-employee. The appeal has yet to be adjudged. In 1998 the
Casino booked Ptas. 10.4 million (U.S. Dollars 0.07 million)
for the compensation in question in case it is finally
sentenced to pay the ex-employee.
<PAGE>
-10-
(9) CAPITAL STOCK
As of December 31, 1998 the Company's capital stock consisted of 2,500
fully subscribed and paid registered shares of Ptas. 100,000 (U.S.
Dollars 704) par value each.
On April 17, 1998, Trans World Gaming Corp. purchased the 90% of the
shares of Casino de Zaragoza, S.A.
The list of all shareholders by ownership percentage as of December 31,
1998 was as follows:
<TABLE>
-------------------------------------------------------
<S> <C>
Trans World Gaming Corp. 90%
Pedro Trapote Avecilla 10%
-------------------------------------------------------
</TABLE>
On July 21, 1998, the Shareholders' Meeting resolved to reduce capital
to 0 pesetas (U.S. Dollars 0) and to increase it by Ptas. 250 million
(U.S. Dollars 1.8 million) by issuing 2,500 new registered shares of
Ptas. 100,000 (U.S. Dollars 704) each. The resolution to reduce and
increase capital has yet to be implemented and is pending obtainment by
Trans World Gaming Corp. of the compulsory government authorization for
a foreign investment in the gaming industry, which the capital increase
will entail. The authorization is in the processing stage.
(10) REVENUES AND EXPENSES
Net sales and operating results were obtained entirely from the
Casino's gambling business.
The "Other, net" caption is broken down below:
<TABLE>
<CAPTION>
- ------------------------------------------------- ------------ -------------
U.S. Thousands
Dollars of Pesetas
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
Allowance for doubtful accounts receivable (574,650) (84,916)
Other 17,663 2,610
------------ -------------
(556,987) (82,306)
- ------------------------------------------------- ------------ -------------
</TABLE>
(11) TEMPORARY RECEIVERSHIP
On January 25, 1997, the directors of the Company filed an application
in Court of First Instance number 11 of Zaragoza to declare Casino de
Zaragoza, S.A. in temporary receivership, which was granted on June 23,
1997.
On April 17, 1998, the secondary creditors listed as such in the list
of creditors approved by the court and the preferred creditors who
attended the Meeting of
<PAGE>
-11-
Creditors voted for the proposed composition, in which Casino de
Zaragoza, S.A. agreed to make the following payments:
<TABLE>
<CAPTION>
- ------------------------------------------------- ------------ -------------
Thousands
of Pesetas US Dollars
- ------------------------------------------------- ------------ -------------
<S> <C> <C>
Social Security authorities (Nota 7) 119,194 839,571
Partial acquittance of 35.75% of the credits of
the rest of the creditors of the composition 206,529 1,454,736
Repayment schedule for the remaining 64.25%
of the credits of the rest of the
creditors of the composition:
Year 1 - -
Year 2 - -
Year 3 37,117 261,443
Year 4 37,117 261,443
Year 5 37,118 261,450
Year 6 37,118 261,450
Year 7 111,352 784,335
Year 8 111,353 784,342
- ------------------------------------------------- ------------ -------------
TOTAL CREDIT OF THE CREDITORS WHO SIGNED THE
COMPOSITION 696,898 4,908,770
- ------------------------------------------------- ------------ -------------
</TABLE>
In addition, there are Ptas. 102.7 million (U.S. Dollars 0.7 million)
due to other privileged creditors that are subject to the same payment
and acquittance conditions as described for the rest of the creditors
in the composition.
If the Casino does not make its payments according to the schedule, the
debt would go back to pre-composition levels.
<PAGE>
CASINO DE ZARAGOZA, S.A.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD APRIL 17, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------ -------------------------------------------------------------
US Dollars
-------------------------------------------------------------
Subscribed Accumulated
Capital Accumulated Income for Translation
Stock Losses the year adjustment
- ------------------------------------------ ------------ ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
OPENING BALANCE AS OF APRIL 17, 1998 1,760,935 (9,192,611) (220,504) -
- ------------------------------------------ ------------ ----------------- ------------- ----------------
Transfer to retained earnings - (220,504) 220,504 -
Translation adjustment - - - 23,075
Income (loss) for the year - - 564,831 -
- ------------------------------------------ ------------ ----------------- ------------- ----------------
CLOSING BALANCE AS OF DECEMBER 31,
1998 1,760,935 (9,413,115) 564,831 23,075
- ------------------------------------------ ------------ ----------------- ------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------ --------------------------------------------
Thousands of Pesetas
--------------------------------------------
Subscribed Income
Capital Accumulated For the
Stock Losses year
- ------------------------------------------ ------------ ----------------- -------------
<S> <C> <C> <C>
OPENING BALANCE AS OF APRIL 17, 1998 250,000 (1,305,076) (31,304)
- ------------------------------------------ ------------ ----------------- -------------
Transfer to retained earnings - (31,304) 31,304
Income (loss) for the year - - 83,465
- ------------------------------------------ ------------ ----------------- -------------
- ------------------------------------------ ------------ ----------------- -------------
CLOSING BALANCE AS OF DECEMBER 31,
1998 250,000 (1,336,380) 83,465
- ------------------------------------------ ------------ ----------------- -------------
</TABLE>
<PAGE>
CASINO DE ZARAGOZA, S.A.
BALANCE SHEET AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. THOUSANDS LIABILITIES & STOCKHOLDERS' U.S. THOUSANDS
ASSETS DOLLARS OF PESETAS EQUITY DOLLARS OF PESETAS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS 409,544 58,143 CURRENT LIABILITIES 2,140,044 303,822
Cash and cash equivalents 163,471 23,208 Accounts payable, trade 128,499 18,243
Short-Term financial investments 56,399 8,007 Accounts payable, group 374,051 53,104
Accounts receivable (Note 4) 181,778 25,807 Taxes (Note 7) 1,314,376 186,602
Prepaid expenses and other receivables 7,896 1,121 Other current liabilities 323,118 45,873
LONG-TERM DEBT 5,623,645 798,389
Taxes (Notes 7 and 11) 5,486,518 778,921
Other long term debt 137,127 19,468
TOTAL NON-CURRENT ASSETS 539,297 76,564
Intangible assets (Note 5) 27,252 3,869 COMMITMENTS & CONTINGENCIES
Tangible fixed assets (Note 6) 295,344 41,930 (NOTE 8) 249,426 35,411
Other-Deposits 216,701 30,765
SHAREHOLDERS' EQUITY (7,064,274) (1,002,915)
Common Stock (Note 9) 1,760,935 250,000
Accumulated losses (9,413,115) (1,336,380)
Translation adjustment 23,075 -
Profit/Loss (April 17, 1998
to December 31, 1998) 564,831 83,465
----------------------- -----------------------
TOTAL LIABILITIES & STOCK
TOTAL ASSETS 948,841 134,707 HOLDERS' EQUITY 948,841 134,707
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
CASINO DE ZARAGOZA, S.A.
STATEMENT OF INCOME FOR THE PERIOD
APRIL 17, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
U.S Thousands
Dollars of Pesetas
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUES (Note 10) 2,778,081 410,517
COSTS AND EXPENSES (3,280,822) (484,807)
Operating departments (Note 10) (2,909,488) (429,935)
Selling, general and administrative (371,334) (54,872)
INCOME (LOSS) FROM OPERATIONS (502,741) (74,290)
OTHER INCOME (EXPENSE) (675,563) (99,828)
Interests (118,576) (17,522)
Other, net (Note 10) (556,987) (82,306)
INCOME TAXES -- --
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (1,178,304) (174,118)
EXTRAORDINARY ITEM, NET OF RELATED
TAX EFFECT (Note 11) 1,743,135 257,583
NET INCOME 564,831 83,465
EARNIGS/(LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM (471.32) (69.65)
EXTRAORDINARY GAIN PER SHARE (697.25) (103.03)
EARNINGS/ (LOSS) PER SHARE 225.93 33.39
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
CASINO DE ZARAGOZA, S.A.
STATEMENT OF CASH FLOWS
FOR THE PERIOD APRIL 17, 1998 TO DECEMBER 31 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
U.S Thousands
Dollars of Pesetas
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Cash received from customers and other accounts receivable 2,788,779 395,923
Cash paid to suppliers and others accounts payable (2,893,442) (410,782)
Cash received from (paid to) subsidiaries 94,421 13,405
---------- --------
Cash provided by (used in) operating activities (10,242) (1,454)
---------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment (8,643) (1,227)
---------- --------
Cash provided by (used in) investing activities (8,643) (1,227)
---------- --------
FINANCING ACTIVITIES
(Increase) decrease in financial investments (134,888) (19,150)
---------- --------
Cash provided by (used in) financing activities (134,888) (19,150)
---------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (153,772) (21,831)
Cash and cash equivalents, beginning of year 317,243 45,039
---------- --------
Cash and cash equivalents, end of year 163,471 23,208
---------- --------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Net income 564,831 83,465
Adjustments:
Translation adjustment 23,075 --
Depreciation and amortization 65,817 9,344
Taxes and Social Security not paid 682,306 96,867
Provision for bad debts 596,999 84,756
Restructuring of payables (1,814,349) (257,583)
Other provisions 110,728 15,720
Other (42,946) (6,097)
(Increase) decrease in accounts receivable (382,426) (54,293)
Increase (decrease) in trade accounts payable and other current liabilities 185,722 26,367
---------- --------
Total adjustments to net income (10,242) (1,454)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LONDON INVESTMENTS s.r.o.
I O: 25116151
registered office: Belohorska 161, Praha 6,
represented by Mr. Martin Beck
(henceforth the Investor)
and
LMJ Casino Rozvadov a.s.,
I O: 64358267,
registered office: Folmava 66, Ceska Kubice,
represented by the Chairman of the Board of Directors, Mr. Andrew Tottenham
(henceforth the Operator)
and with the participation of
Atlantic Properties s.r.o.
I O: 64578038
registered office: Folmava 66, Ceska Kubice
represented by the Managing Director, Mr. Andrew Tottenham,
(henceforth the Contract Participant)
hereby conclude on the day, month, and year as specified below this
Contract on the Tenth day of June 1999
--------------------------------------
(henceforth the Contract)
1.
WHEREAS
a) the Contract Participant is the owner of lots no. 339/42 of 20 166 sq m, no.
339/73 of I 534 sq m and no. 5407 of 31 000 sq m (digitised: lots no. 339/47
of 9 000 sq m, no. 339/48 of 34 700 sq m, no. 339/49 of 9 000 sq m, no.
339/50 of 9 320 sq m), all registered in Ownership Certificate no. 500
for the cadastral district of Chvalovice, Chvalovice municipality, Znojmo
region, at the Land Register Office in Znojmo, on which the construction of
the "Casino Hat" complex was approved by the valid Decision of the
Construction Department of the Municipal Office in Znojmo, no. 723/97 from
22 December, ref. no. Vyst 7d 17291/97 Pv, and
b) the Operator owns a license granted by the Ministry of Finance of the CR
on 5 November 1998, ref. no. 601/80168/98, permitting the operation of
casino gaming in the Casino Ceska Kubice and Casino Rozvadov gaming
centres, and WHEREAS he is hereby obliged to obtain a permission from the
Ministry of Finance for the operation of gaming in the "Casino Hat" complex
within 60 days from the issue of the Approval for Use of the complex, the
contractual parties have agreed on the following:
1
<PAGE>
II.
(1) The Investor is obliged to build at his own expense the Casino Hat
complex (henceforth the Complex) on the land owned by the Contract
Participant in accordance with the construction license within 12 months
from the signature of this Contract, if the building is not completed within
12 months the operator has the right to invalidate this contract. With his
signature, the secondary participant to this contract expressly agrees that
the building to be build by the investor on his property shall become the
exclusive property of the investor, and hereby authorizes the investor,
following the building inspection, to register a deed title for the building
at the Znojmo land registry. After the Approval for Use becomes legally
valid according to valid legal regulations, the Investor is further obliged
to lease the Complex to the Operator under the terms and conditions
specified in this Contract.
(2) The contractual parties are aware that the approximate value of the
Complex including all related expenses will amount to 1.4 mil. Euro.
(3) The detailed construction project specification of the Complex shall be
governed by the relevant construction project documentation which is a
Supplement to this Contract. The Investor is obliged to respect the
requirement and wishes of the Operator in preparing the construction project
and to consult the Operator regularly concerning the progress of the
construction.
(4) The contractual parties shall co-operate with maximum effort, especially
in the following:
-- the Contract Participant shall guarantee access to the land,
-- the owner shall submit all written documents as required by the
Investor in connection with changes in the construction license,
-- the Operator shall provide his own team for consultations on the
Investor's proceeding for the purpose of the construction of a
casino on the land,
-- the Investor shall consult the Operator about his proceedings and
submit all necessary written documents, and respect the ownership
rights to the land.
The contractual parties are aware that the construction of the casino as
specified in the construction project documentation depends on the approval by
the relevant Construction Office.
(5) The Investor is obliged to equip the Complex with the following above all:
-- complete paint coating of the internal walls,
-- floor coverings,
-- lighting - non gaming only
-- gaming tables (6 tables for American roulette-tables with wheels-,
5 for blackjack) with seats - all other gaming equipment to be
provided by the operator
-- bar construction - seating and equipment to be provided by the
operator
-- construction of the room for the cash desk - security systems and
furnishings to be provided by the operator
-- closed circuit security cameras (according to valid legal
regulations). Upgrades and modifications at the cost of the operator.
All this equipment, its type, colour and placement in the Complex, requires
the approval by the Operator.
III.
The Operator is obliged to equip the Complex with the following additional
equipment above all:
2
<PAGE>
-- kitchen equipment,
-- slot machines, machine bases and signage,
-- money-counting machines (for bank notes and coins),
-- office equipment and furnishings,
-- equipment for the cash office rooms and safes,
-- construction of an entrance road with vertical and horizontal signs
including advertisement notice boards,
-- plus systems described in art. II of this Contract.
IV.
The contractual parties have agreed on a lease period of 10 (ten) years from
date that the casino building is complete with all required building approvals.
V.
(1) The contractual parties have agreed on a monthly rent amount of 25000 Euro
(twenty five thousand Euro) plus VAT. The rent is payable always by 7th of
the month, to the account of the Investor no. 3282338002/3800 at HypoVereins
Bank Cz A.S. Italaska 24, Praha 2.
(2) Beginning on the second year of validity of this Contract, the monthly
rent for each following calendar year shall be adjusted by the actual
inflation rate announced annually by the Central European Bank in
Frankfurt am Main.
VI.
(1) At any time after the approval for use of the Complex as stated in IV, the
Operator shall have the right to purchase the Complex with all its parts
and accessories from the Investor, on the basis of a written offer
delivered to the Investor, for the price specified below, but depending
on the age of the Complex as increased by the inflation rate announced by
the Central European Bank in Frankfurt am Main to be calculated from the
year following the year when this Contract was signed:
-- during the first year of the Contract..................1.8 mil. Euro
-- during the second year after concluding the Contract...1.7 mil. Euro
-- 3rd-10th year after the conclusion of this Contract.....1.6 mil. Euro
(2) The Investor is obligated to sign the relevant purchase contract drawn up
by the Operator within 30 days from the delivery of the written offer as
specified in Article VI. par. 1 of this Contract in favour of the
investor and the investor is also obliged to sign the proposal for
ownership rights and registration in favour of the operator.
VII.
(1) The Contract Participant and the Investor have agreed to the establishment
of the right of lien to the lands owned by the Contract Participant as
specified in Article I. a) of this Contract in favour of the Investor.
(2) The Investor hereby accepts this right of lien.
(3) This right of lien expires (i) upon the sale of the pledged land and the
Complex built on the land to a third party, or (ii) upon the agreement
of the contractual parties or (iii) by transfer of the Complex to the
Operator according to Article VI. of this Contract.
3
<PAGE>
VIII.
(1) If the Operator delays the payment of the rent to the Investor for more
than 30 days, the Investor or the Pledgee has the right to sell the pledged
land in the name of the Contract Participant at a public sale for the upset
price of the pledged land, within 30 days.
(2) The Contract Participant, as the owner of the land, hereby expresses his
explicit approval with this procedure and by his signature of this Contract
authorizes the Investor to proceed accordingly.
(3) The Contract Participant further authorises the Investor to sign in the
Contract Participant's name the proposal for ownership rights registration
in favour of the new owner of the land.
(4) The Investor is entitled to deduct from the actual sale price of the
developed land and building a total of 1.8 million Euro (regardless of which
year under the Contract the sale took place), as well as all outstanding
debts (including fines and sales costs) owed by the operator, and shall
deposit the remaining sum from the purchase or sale price within three days
of the sale of the property to the account of the secondary participant,
acct. no. 123230359/5100 IPB Domazlice. In the event of late payment, the
parties have agreed to a contract penalty of 0.05% per day.
(5) In the event, the option right of the Operator according to Article VI. of
this contract expires.
IX.
(1) The Operator is obliged to take good and proper care of the entrusted
property, to maintain it in the state in which it was transferred to him
(with the exception of the usual wear and tear) and to ensure that no damage
is done to the property.
(2) If the property is damaged through the negligence of the Operator or persons
employed by the Operator, the Operator shall be obliged to remove the damage
at his own expenses as soon as possible.
X.
(1) The Operator is obliged to insure the tangible assets against damage,
loss, destruction as well as against any damage from third persons different
from the Operator.
(2) The Operator hereby declares that he shall respect all hygienic, work and
fire safety regulations, and carry out regular inspections and revisions of
the entrusted assets according to valid legal norms. The Operator is obliged
to pay all related expenses.
XI.
The contractual parties have agreed that during the validity of this Contract
the Operator shall pay all taxes and fees related to the Complex and to the
land specified in Article I letter a) of this Contract.
XII.
During the validity of this Contract, the Operator shall pay all expenses
related to the operation of the Complex (as for example energy supplies,
water supplies and sewage fees, telephone bills) directly to the suppliers of
these services. Whenever this is not possible, the Investor or the Contract
Participant shall re-invoice these expenses at their identical amount to
the Operator, who is obliged to pay them by the deadline cited on the
invoice.
XIII.
(1) The contractual parties are obliged to proceed with due care and
thoughtfulness in their negotiations with each other, with third persons
and with state authorities, so that the purpose of this Contract, i.e. the
operation of gaming in the Complex, is not threatened.
4
<PAGE>
(2) All mutual announcements, messages and other written documents provided
by the contractual parties to each other are considered as confidential and
may be disclosed to third parties only with the consent of the other
contractual parties.
XIV.
(1) This Contract has been concluded for a definite period of 10 (ten) years,
from the date of the completion of the casino building and the granting of
the required building approvals.
(2) After expiration of the ten-year Contract period either:
a) the contracting parties will extend the validity of this Contract for
another 10 years with no change in the Contract conditions, or
b) the operator will purchase the building from the investor for an agreed
to contractual price of 1.6 mil. Euro with the relevant adjustment for
inflation according to art. V para. (2) of this Contract,
If neither (a) or (b) are agreed within 60 days of the conclusion of the
contract then the land owned by the secondary participant and the building
will be sold to a third party. In such case, the investor shall receive an
identical sum from the sales price as given in point b) of this article of
the Contract, while the remainder shall go to the secondary participant.
XV.
(1) This Contract becomes valid and takes effect upon the date of signature
of the authorized representatives of all contractual parties.
(2) The Contract becomes invalid and legally ineffective upon the day
following the time period defined in article XIV par (1) of this contract
with exception of advancement specifying in article XIV par (2) of this
contract.
(3) If any provision of this Contract becomes invalid or unenforceable or is
construed as illegal in any respect, the validity and enforceability of all
other provisions of this Contract shall not be thereby affected.
(4) This Contract has been drawn up according to Czech law. In the event of
any disputes between the contractual parties of this Contract, the
contractual parties shall make every effort to settle such disputes by
conciliation reached in mutual negotiations. If the negotiations are not
successful, the disputes shall be settled by the relevant court.
(5) Any amendments and supplements to this Contract must be in the form of a
written supplement to this Contract, signed by the authorised
representatives of the contractual parties.
(6) This Contract has been drawn up in 4 copies, each valid as an original.
Each contractual party shall receive 2 copies of this Contract.
LONDON INVESTMENTS has the right to transfer this contract to another company
with the consent of the operators which will not be unreasonably withheld.
In London on 11th June 1999
------- ----------
/s/ Mark Beck /s/ Andrew Tottenham /s/ Andrew Tottenham
- ------------------- -------------------- --------------------
Investor Operator Contract Participant
5
<PAGE>
EXHIBIT 21
WHOLLY OWNED SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME PLACE OF INCORPORATION
- ---- ----------------------
<S> <C>
Trans World Gaming of Louisiana, Inc. Louisiana, USA
TWG International U.S. Corporation Nevada, USA
TWG Finance Corp. Delaware, USA
Art Marketing, Ltd. d/b/a Tottenham & Co. London, UK
SC98A, s.r.o. Czech Republic
21st Century Resorts, a.s. Czech Republic
LMJ Casino Rozvadov, a.s. Czech Republic
LMJ Slots, s.r.o. Czech Republic
Atlantic Properties, s.r.o. Czech Republic
Casino de Zaragoza, SA Zaragoza, Spain
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES F-3 AND F-4 OF THE COMPANY'S 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,955
<SECURITIES> 0
<RECEIVABLES> 1,567
<ALLOWANCES> (1,304)
<INVENTORY> 0
<CURRENT-ASSETS> 3,048
<PP&E> 5,576
<DEPRECIATION> (1,574)
<TOTAL-ASSETS> 20,562
<CURRENT-LIABILITIES> 6,327
<BONDS> 23,638
0
0
<COMMON> 3
<OTHER-SE> (9,406)
<TOTAL-LIABILITY-AND-EQUITY> 20,562
<SALES> 1,775
<TOTAL-REVENUES> 13,304
<CGS> 1,598
<TOTAL-COSTS> 8,739
<OTHER-EXPENSES> 4,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,018
<INCOME-PRETAX> (10,538)
<INCOME-TAX> 191
<INCOME-CONTINUING> (10,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,729
<EPS-BASIC> (3.52)
<EPS-DILUTED> (3.52)
</TABLE>
