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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended
DECEMBER 31, 1995
COMMISSION FILE NO. 33-22521
WINNERS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE IRS NO. 84-1103135
State of Incorporation IRS Employer Identification
1461 GLENNEYRE STREET, SUITE F, LAGUNA BEACH, CALIFORNIA 92651
Address of principal executive offices
(714) 376-3010
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class: Common Stock $.00001 par value
Name of each exchange on which registered: NASDAQ Stock Exchange
Indicate by check mark whether the registrant (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K of (Section 299.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ( )
As of April 4, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $11,962,400.*
As of April 4, 1996, the number of shares outstanding of the
Registrant's Common Stock was approximately 17,323,399.
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without conceding
that all such persons are "affiliates" of the Registrant for purposes of the
federal securities laws.
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TABLE OF CONTENTS
PART 1
ITEM 1 BUSINESS
General ........................................................ 1
Acquisitions ................................................... 1
Mountaineer Race Track and Resort .............................. 2
Current Operations ............................................. 4
Improvement Plan and Expanded Operations ....................... 7
Business Strategy .............................................. 8
Marketing ...................................................... 10
Competition .................................................... 10
Employees ...................................................... 11
Regulation and Licensing ....................................... 11
Discontinued Operations ........................................ 14
ITEM 2 PROPERTIES ....................................................... 16
Gaming, Racing and Other Entertainment ......................... 16
Oil and Gas .................................................... 16
Equipment Leases ............................................... 16
Office Lease ................................................... 16
ITEM 3 LEGAL PROCEEDINGS ................................................ 16
Settled Litigation Involving Loss Contingencies ................ 16
Pending Litigation ............................................. 18
Threatened Litigation .......................................... 19
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 20
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS ................................ 20
ITEM 6 SELECTED FINANCIAL DATA .......................................... 21
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............... 22
Results of Continuing Operations ............................... 22
Results of Discontinued Operations ............................. 28
Liquidity ...................................................... 28
Liquidity and Sources of Capital ............................... 28
Cash Flows ..................................................... 29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 30
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ......................... 30
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............... 31
Board of Directors ............................................. 31
Compliance with Section 16(a) of the Exchange Act .............. 32
Employment Agreements .......................................... 34
Other Agreements ............................................... 35
Compensation of Directors ...................................... 35
Compensation Committee Interlocks and Insider Participation .... 35
ITEM 11 EXECUTIVE COMPENSATION ........................................... 32
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ............................... 36
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 37
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
AND REPORTS ON FORM 8-K ........................................ 37
SIGNATURES ..................................................... 40
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ITEM 1. BUSINESS
GENERAL
Winners Entertainment, Inc. (the "Registrant") is a Delaware
corporation incorporated in 1988. The Registrant, through wholly owned
subsidiaries, owns and operates Mountaineer Race Track and Gaming Resort, a
resort facility in West Virginia, and a working interest in proved oil and gas
reserves in Michigan.
The Registrant was incorporated in March 1988 under the name "Secamur
Corporation," a wholly owned subsidiary of Buffalo Equities, Inc., and later
"spun-off" through the sale of its stock to Buffalo Equities' stockholders in
January 1989. In June 1989, the Registrant acquired through merger Pacific
International Industries, Inc., which had been engaged in the contract security
guard services business in Southern California since its inception in February
1987. Upon completion of the merger, the Registrant was renamed "Excalibur
Security Services, Inc.," to reflect its new line of business. After operating
unprofitably, the Registrant filed a voluntary petition for reorganization
with the U.S. Bankruptcy Court for the Central District of California in
December 1990, and became a Chapter 11 debtor-in-possession. The Bankruptcy
Court approved the Registrant's sale of its security guard services business in
May 1991, and confirmed the Registrant's plan of reorganization in December
1991. The plan authorized the Registrant to acquire, primarily, specified
gaming and oil and gas businesses. Upon confirmation of the plan, the
Registrant changed its name to "Excalibur Holding Corporation." In connection
with Management's decision to operate as a gaming company, the Registrant was
renamed "Winners Entertainment, Inc." in August 1993.
ACQUISITIONS
Mountaineer Race Track & Gaming Resort - Chester, West Virginia
Pursuant to a stock purchase agreement dated May 1992, the Registrant
acquired all of the capital stock of Mountaineer Park, Inc. ("MPI"), a West
Virginia corporation, in December 1992. MPI owns Mountaineer Race Track &
Gaming Resort ("Mountaineer"), an entertainment complex and destination resort
featuring thoroughbred racing, simulcast off-track racing, video lottery
gaming, hotel, dining and lounge facilities, and outdoor activities including
golf, swimming and tennis. Mountaineer is situated on a 606-acre site on the
Ohio River at the northern tip of West Virginia's northwestern panhandle in
Hancock County, approximately 40 miles south of Youngstown, Ohio and 35 miles
west of Pittsburgh, Pennsylvania.
Hotel-Casino Site - Cripple Creek, Colorado
In January 1992, the Registrant acquired through merger all of the
outstanding capital stock of SDR Corporation ("SDR"), a Nevada corporation
owned in part by affiliates of the Registrant. A ten percent interest in SDR
was subsequently issued to an individual who assisted SDR in acquiring its
principal asset -- an option to purchase commercial lots in Cripple Creek,
Colorado, some of which were zoned for hotels and gaming. After exercising the
option in September 1992, the lots were eventually deeded back to the original
owner in May 1993 when, due to the rapid saturation of the gaming market in
Cripple Creek, Management determined that the lots were less attractive than
originally assessed. Thereafter, SDR became inactive until it was formally
dissolved in March 1996.
Golden Palace Casinos - Oklahoma Indian Gaming Contract
In October 1992, the Registrant acquired all of the outstanding capital
stock of Golden Palace Casinos, Inc. ("GPC" and "Golden Palace"), a Minnesota
corporation
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organized to manage casinos on Indian reservations. Although Golden Palace had
no significant operations at the time of the acquisition, it held, through a
wholly owned subsidiary, a contract, to manage a casino planned for an Indian
reservation in Oklahoma, subject to the satisfaction of certain conditions.
Shortly after the acquisition of Golden Palace, the West Virginia Lottery
Commission advised Management that, as a condition to licensing of the
Registrant's then-proposed video lottery operations at Mountaineer, the
Registrant could not engage in Indian gaming activities. Consequently, in
December 1992, the Registrant sold the subsidiary holding the management
contract and agreed to not otherwise engage in Indian gaming activities as long
as it conducted video lottery operations in West Virginia. Notwithstanding the
sale of the management contract, the acquisition of Golden Palace, which had
substantial cash on hand, provided the Registrant with sufficient funds to
complete the acquisition of all of the outstanding capital stock of Mountaineer
Park, Inc., as described below.
Riverboat Casino Site - Tunica, Mississippi
In March 1993, the Registrant acquired an 80% interest owned by M&R
Investment Company in a joint venture which held a long-term ground lease
for a riverboat gaming development site in Tunica, Mississippi. The Registrant
subsequently acquired the remaining 20% interest in the joint venture from
Regal Casinos, Inc. In July 1993, the Registrant agreed to form a joint
venture with Las Vegas Entertainment Network ("LVEN") and BP, Ltd. to develop
the Tunica project. The joint venture agreement called for contributions of
the ground lease by the Registrant, working capital for initial development by
LVEN, and construction and opening financing and investment banking services by
BP, Ltd. Later in 1993, the Registrant and LVEN agreed to merge in a
stock-for-stock transaction. Neither the joint venture nor the merger with
LVEN was consummated as a result of disagreements over how to develop the
Tunica site, and pursuant to a settlement agreement reached in February 1994,
the Registrant sold its interest in the Tunica site to LVEN.
Oil and Gas Interests - Michigan and Ohio
In January 1992, the Registrant also acquired certain oil and gas
interests which have since been, or are in the process of being divested
pursuant to the Registrant's plan of orderly liquidation adopted in March
1993. Except for the limited resources required to prepare its remaining oil
and gas interests for orderly liquidation, the Registrant has focused
substantially all of its resources on Mountaineer. (For discussion of the
Registrant's oil and gas acquisitions and plan of orderly liquidation, see Item
1 -- "Discontinued Operations," Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Discontinued
Operations" and Notes 1 and 10 of "Notes to Consolidated Financial Statements").
MOUNTAINEER RACE TRACK & GAMING RESORT
Racetrack Facilities
Mountaineer offers horse racing before expansive clubhouse and
grandstand viewing areas with enclosed seating for year-round racing. The
track also conducts simulcast thoroughbred and greyhound racing from other
prominent racetracks. Mountaineer's main racetrack consists of an oval dirt
track approximately one mile in length. Inside the main track is a natural turf
(grass) track measuring seven furlongs or 7/8 of a mile. The racetrack is
equipped with two chutes for races of lengths from 4 1/2 furlongs to over one
mile. The racetrack buildings consist of the clubhouse and grandstand
which provide glass-enclosed stadium and box seating for approximately 770 and
2,850 patrons, respectively. The buildings are each three-stories and are
connected by an enclosed
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walkway. Live and simulcast racing can be viewed by approximately 1,200 dining
patrons in two restaurants located in the clubhouse and grandstand. In
addition to seating areas, the grandstand covers approximately 57,000 square
feet of interior space on the main and mezzanine levels containing 42
parimutuel windows and four food and beverage concession stands. The clubhouse
covers approximately 25,000 square feet of interior space containing 22
parimutuel windows. The grandstand has an indoor stage with a seating capacity
of approximately 2,240, and has been the site of several nationally televised
boxing matches. The racetrack apron, which is accessible from both buildings
provides racing fans with up-close viewing of horses entering the racetrack
and crossing the finish line. The stable area accommodates approximately 1,250
horses and is located adjacent to the main track. Mountaineer's racetrack
parking lots have a combined capacity for over 2,900 vehicles. The racetrack
parking admission fee is $1.50.
Lodge Facilities
The Mountaineer Lodge is a two-story facility which overlooks the golf
course at Mountaineer's main entrance on West Virginia State Route 2. The
Lodge offers 101 rooms, including 50 standard rooms (one double bed), 46
superior rooms (two double beds), 5 king rooms and suites. The Mountaineer
Lodge Dining Room seats 125 patrons for casual dining overlooking the golf
course. In 1995, in response to increased patronage of the off-track betting,
video lottery gaming, dining and bar facilities located at the Lodge, the
Registrant expanded its 5,000 square foot Speakeasy Gaming Saloon with an
8,000 square foot addition. Capacity of the Speakeasy Gaming Saloon now stands
at 750. Extensive off-track wagering facilities continue to be maintained at
the Speakeasy Gaming Saloon. Lodge parking lots have a combined capacity for
approximately 370 vehicles.
Video Lottery Facilities
In addition to live and simulcast parimutuel wagering, Mountaineer
offers video lottery gaming through 800 video lottery terminals ("VLTs") located
in the racetrack clubhouse and grandstand and Lodge. Mountaineer introduced 400
new state-of-the-art VLTs in September 1994, replacing 165 older machines
operated since December 1992, and subsequently placed an additional 400 VLTs
into operation in June 1995. The racetrack houses 400 of the VLTs in its
Riverside Gaming Terrace on the second floors of the clubhouse and grandstand,
and the Lodge offers the remaining 400 VLTs in the Speakeasy Gaming Saloon,
Derby Room and Iron Horse Lounge. Unlike the replaced machines, each of the new
VLTs allows a player to select from several game themes, including up to five
versions of draw poker and one version each of blackjack and keno, and also
which cards to hold while playing draw poker. The Registrant is currently
authorized to install up to 200 more VLTs.
Recreational Facilities
Mountaineer offers a par three nine-hole "executive" golf course, three
tennis courts, a volleyball court, a basketball court, two swimming pools and
two children's swimming pools. These facilities are made available for use by
Lodge guests and the general public at specified daily or seasonal fee rates.
Trailer Park
Located across West Virginia State Route 2 from the Lodge and the
entrance to Mountaineer, the Registrant maintains a trailer park consisting of
61 individual lots on approximately 11.5 acres. The lots are rented for fixed
monthly fees, mostly to individuals who are employed by Mountaineer in racing
operations. The Registrant is
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responsible for maintenance of the road and grounds, refuse removal and
providing water and sewage hook-ups. The tenants pay all utility expenses.
Development Land
Mountaineer owns, as part of its 606 acre site, a 375 acre tract that is
currently undeveloped. The acreage is located directly across West Virginia
State Route 2 from the Lodge and racetrack main entrance.
CURRENT OPERATIONS
The Registrant's operating revenues at Mountaineer are derived
principally from its racing and video lottery operations, and, to a lesser
extent, its lodge and food and beverage operations. Additional revenues are
generated from greens fees and other recreational facilities fees.
Racing Operations
The Registrant is subject to annual licensing requirements established
by the West Virginia Racing Commission (the "Racing Commission"), the
Registrant's license was renewed in December 1995, through December 1996.
The Registrant's revenue from racing operations is derived mainly from
commissions earned on parimutuel wagering on live races held at Mountaineer and
on races conducted at other "host" racetracks and broadcast live (i.e., import
simulcast) at Mountaineer. In parimutuel wagering, patrons bet against each
other rather than against the operator of the facility or with pre-set odds.
The dollars wagered form a pool of funds from which winnings are paid based on
odds determined solely by the wagering activity. The racetrack acts as a
stakeholder for the wagering patrons and deducts from the amounts wagered a
"take-out" or gross commission, from which the racetrack pays state and county
taxes and racing purses. The Registrant's parimutuel commission rates are fixed
as a percentage of the total handle or amounts wagered. With respect to
Mountaineer's live racing operations, such percentage is fixed by West Virginia
law at three levels, 17.25%, 19% and 25%, depending on the complexity of the
wager. The lower rate applies to wagering pools involving only wins, place and
show wagers while the higher rates apply to pools involving wagers on specified
multiple events, such as trifecta, quinella and perfecta wagers. With respect
to simulcast racing operations, Mountaineer generally has opted to apply the
commission rates imposed by the jurisdictions of the host racetracks, as it may
do with the consent of the Racing Commission. Such rates vary with each
jurisdiction and may be more or less favorable than the live racing commission
rates. Out of its gross commissions, Mountaineer is required to distribute
fixed percentages to its fund for the payment of regular purses (the "regular
purse fund"), the State, Hancock County and, with respect to commissions
derived from simulcast operations, Mountaineer's employee pension plan fund.
After deducting state and county taxes and, with respect to simulcast
commission, simulcast fees and expenses and employee pension plan
contributions, approximately one-half the remainder of the commission is
payable to the regular purse fund.
Mountaineer also receives the "breakage," which is the odd cents by
which the amounts payable on each dollar wagered in a parimutuel pool exceeds a
multiple of ten cents. Breakage from simulcast wagers is generally allocated
proportionately between the host racetrack and Mountaineer on the basis of the
amounts wagered at their respective facilities.
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Video Lottery Operations
The Registrant is subject to annual licensing requirements as set forth
by the West Virginia Lottery Commission (the "Lottery Commission"). The
Registrant's license was renewed in June 1995 through June 1996.
The Registrant derives revenue from the operation of video lottery
games in the form of net win on the gross terminal income, or the total cash
deposited into a video lottery machine less the value of credits cleared for
winning redemption tickets. Pursuant to the Video Lottery Act, the
Registrant's commission is fixed at 47% of the net win after deducting an
administration fee of up to 4% of gross terminal revenues first paid to the
State of West Virginia.
The VLTs are leased under a master lease agreement which requires the
Registrant to insure the machines for their full replacement value, pay any
taxes, insurance and maintenance expenses and, upon the expiration of the lease,
allows the Registrant to purchase the VLTs at fair market value. Monthly
payments for the first 400 terminals were $72,378 from September 1994 through
December 1995, and monthly payments for the second 400 terminals were $0 for
the first six months after installation in late June 1995. The Registrant
accrued monthly lease expense of $70,743 during this deferral period of July
through December 1995. On March 26, 1996, the master lease agreement was
amended to reflect a new monthly consolidated payment schedule as follows: (i)
$0 in December 1995, January 1996 and February 1996, (ii) $119,471 in March and
April 1996, (iii) $183,176 from May through October 1996, and (iv) 119,471 from
November 1996 through January 1999. In addition, the Registrant is obligated
to make interest payments from March through October 1996 at the rate of 15% of
the past due periodic rental payments under the master lease agreement, a total
interest obligation of $26,278.
In 1995, the Lottery Commission approved the linking of VLTs to enhance
the amount that could be won on any single play of any single terminal within
the linked group. The Lottery Commission also approved nominal payout
percentages for this gaming option, commonly referred to as "progressives," of
up to 95%. The Registrant expects to link approximately half of its video
lottery terminals into several progressive playing groups located in the
Riverside Gaming Terrace at the racetrack and the Speakeasy Gaming Saloon at the
Lodge. Mountaineer's VLT supplier is actively working on the development of
progressive gaming software for the Registrant's existing VLTs. Management's
target date for implementation of progressive gaming play is the third quarter
of 1996, although there can be no assurance that progressive games will be
successfully implemented by that date or at all.
In March 1996, the West Virginia legislature approved the usage of
video game themes depicting symbols on reels, commonly referred to as "line
games" or "slot games." The Registrant's video lottery terminal supplier is
actively working on the development of slot game software to be installed in 400
of Mountaineer's existing VLTs. Management's target date for the
implementation of slot games is July 1996, although there can be no assurance
that slot game software will be successfully installed by that date, if at all.
Management of Video Lottery Operations
American Gaming & Entertainment, Ltd. ("AGEL," formerly named Gamma
International, Ltd.) was engaged by the Registrant pursuant to a June
1994 management agreement (the "Management Agreement") to provide management
services for video lottery and other gaming activities at Mountaineer permitted
under West Virginia law, other than its parimutuel horse racing operations (the
"Permitted Activities"). Under the
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Management Agreement, AGEL was entitled to receive a management fee of 3% of
the gross revenues of the Permitted Activities. In addition, AGEL was entitled
to receive 8% of the earnings before interest, taxes, depreciation and
amortization of all businesses conducted at or, in the case of off-track
betting, generated as a result of the operations at Mountaineer, including the
Permitted Activities and all parimutuel horse racing operations.
The Registrant's Management Agreement with AGEL was suspended pursuant
to a Stay Agreement effective June 30, 1995 until such time as the Registrant's
construction loan lender, Bennett Management and Development Corporation
("Bennett") complied with certain requirements of the Lottery Commission. In
July 1995, AGEL assigned its right to conduct business with Mountaineer to
American Newco, Inc., a company owned by two officers and shareholders of AGEL.
Simultaneously, American Newco, Inc. entered into a Consulting Agreement with
MPI to provide consulting services in connection with Mountaineer's video
lottery operations at the rate of $10,000 per month, subject to increases of up
to $10,000 per month for possible additional services to be provided through
March 17, 1997. Fees under this Consulting Agreement are substantially less
than those which would have been paid under the original Management Agreement.
The agreements provide that if the Stay Agreement or the Consulting Agreement
are terminated in accordance with certain specified contingencies, the
Management Agreement will also terminate. However, the agreements also provided
that if Bennett should fulfill certain requirements of the Lottery Commission
and declare not earlier than January 1, 1996 that it will continue as lender to
MPI on a permanent basis, then the Management Agreement will be reinstated
prospectively.
The personal involvement of the two shareholders of American Newco,
Inc. in the consulting activities is a material element of the Consulting
Agreement. Similarly, the personal involvement of Mr. Al Luciani with AGEL is a
material element of the Management Agreement. Since August 1995, neither
shareholder has provided such services for American Newco and Mr. Luciani has
left the employ of AGEL. Management believes that there has been a material
failure of performance under each agreement and, as a result, the Registrant has
paid no consulting fees to American Newco, Inc. since that time. Although there
can be no assurance, Management believes that the Management Agreement will not
be reinstated. On March 28, 1996 the SEC filed suit against The Bennett Funding
Corporation, the parent of Bennett and an affiliate of a major shareholder of
AGEL, seeking a financial judgment and civil penalties for actions that are
unrelated to Bennett's lending activities to Mountaineer in West Virginia. Also
named in the suit was Patrick Bennett, Chief Executive Officer of Bennett, the
Registrant's construction lender. Management does not believe that these recent
developments will have a material negative impact on the Registrant's licenses
or financing efforts.
Racetrack Food and Beverage Operations
The clubhouse restaurant is open 220 days annually on live race days,
and offers seating for 650 customers with full lunch and dinner menus and a
buffet. Clubhouse customers include racing fans, local residents and private
social groups. Beverages and cocktails are also available in the clubhouse at
the Riverside Gaming Terrace bar, which services video lottery players as well
as racing fans. The grandstand's Man o' War restaurant offers a buffet
primarily for bus and riverboat excursion tour and charter groups and is open
approximately 140 days annually. Renovation and expansion were completed in
March 1995 increasing dining capacity of the Man o' War from 230 to 550.
Closed circuit television monitors displaying Mountaineer's live and
simulcasted races are provided at every table in both the Clubhouse and Man o'
War Restaurants for the convenience of racing fans. The racetrack food and
beverage facilities are intended to complement the entertainment experience for
racing fans and video lottery players and, therefore, are designed to offer
familiar menus with moderate pricing in a comfortable atmosphere.
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Lodge Operations
Mountaineer Lodge customers principally include local residents and
business travelers visiting nearby steel plants and other businesses on week
days, with a larger number of recreational customers from non-local markets on
weekends. Occupancy rates and room rates for the 12 months ended December
1995 and 1994 averaged 45% and 46%, and $47 and $34, respectively. Lodge
facilities also include the Mountaineer Lodge Dining Room, which seats 125
patrons for casual dining overlooking the golf course. Food and beverages are
also available at the lodge in the Speakeasy Gaming Saloon and the Iron Horse
Lounge. Table and barstool seating is available in the Speakeasy Gaming Saloon
and the Iron Horse Lounge for the video lottery gaming and off-track wagering
patrons accommodated there. The Lodge and its food and beverage operations are
operated in combination with its entertainment facilities and is utilized
principally to increase racing attendance and video lottery play. Accordingly,
the Registrant maintains inexpensive room rates.
IMPROVEMENT PLAN AND EXPANDED OPERATIONS
Since its acquisition in December 1992, the Registrant has been engaged
in an ongoing effort to renovate and, more recently, enhance and expand
Mountaineer, which was first opened in 1951. Prior to West Virginia's adoption
of the Video Lottery Act in March 1994, the Registrant completed certain
renovations necessary to maintain the clubhouse and lower grandstand areas,
including upgrades to the plumbing and electrical systems, the installation of
new furniture and finishes and the redesign of the grandstand parimutuel
(wagering) windows. These improvements were made during 1993.
In 1994, the Registrant commenced its capital improvement program,
designed to upgrade and expand Mountaineer's existing facilities to a level
which would allow its marketing as an upper scale gaming and racing destination
resort.
In 1994 and 1995, Mountaineer invested $8.9 million in building
improvements, furnishings, fixtures and equipment suitable for large scale
gaming activities in its race track grandstand and clubhouse, and an additional
$591,000 to convert a portion of existing lodge space to gaming areas. In
response to increased patronage at its lodge gaming areas, Mountaineer embarked
upon an 8,000 square foot expansion to the Lodge video lottery facilities in
1995. At December 31, 1995, Mountaineer operated the Riverside Gaming Terrace
in the racetrack clubhouse and grandstand facilities, with 400 video lottery
terminals arranged on either side of a central lounge and hallway. The
Speakeasy Gaming Saloon is the primary gaming venue in the Lodge building, with
380 video lottery terminals in operation, including 39 in a non-smoking
location. A separate lounge area adjacent to the Lodge restaurant contains 20
additional terminals. Areas in the Riverside Gaming Terrace and Speakeasy
Gaming Saloon suitable for the addition of 200 VLTs were constructed in 1995,
and the ancillary facilities necessary to efficiently operate these additional
VLTs are already in place.
Mountaineer has expanded its off-track betting facilities in both the
racetrack and lodge locations. In 1994 and 1995, the Registrant invested $1.9
million in two track-side restaurants offering seating for 1,200 racing
patrons, with new 13-inch television monitors located at each table, and a
total of 32 overhead monitors with 40-inch screens. A simulcast control center
is located in the clubhouse restaurant, which also offers video and graphic
overlay capabilities. This system enables the Registrant to promote upcoming
events and Mountaineer's other entertainment facilities, as well as the day's
live and off-track racing schedule. In 1995, Mountaineer completed the
renovation of its Lodge off-track betting facility, offering seating for 198
patrons in the Speakeasy Gaming Saloon. The Lodge simulcasting facility is
served by twenty-four 40-inch television monitors, as well as a 15-foot
projection screen. The Registrant currently has available 64 mutuels
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windows in the racetrack facility and 6 windows in the Lodge Speakeasy Gaming
Saloon, to be supplemented by self-activated portable betting terminals in 1996
and beyond.
The Registrant also created a boxing arena and entertainment stage,
which it has integrated into the grandstand seating. The stage is an integral
component of the Registrant's efforts to expand Mountaineer's customer base by
offering new, complementary forms of entertainment. Mountaineer has hosted
five boxing events since December 1994, including nationally televised bouts on
ESPN and USA Cable. Mountaineer paid fixed fees and provided certain lodging
at no charge to the event promoters. Mountaineer retained all proceeds from
ticket sales, food and beverage sales and program sales. Management intends to
engage in similar events to increase public awareness and to thereby help to
increase future attendance at Mountaineer.
The Lodge lobby and reception area were renovated in 1994, followed by
restoration of 41 guest rooms damaged by fire and a general renovation and
upgrade of the 60 remaining guest rooms and common areas in 1995.
Remaining components of the improvement plan scheduled for completion
in 1996 consist of enhancements to the Speakeasy Gaming Saloon, parking lot
expansion and general paving. The cost of these improvements is not expected
to exceed $1.5 million.
BUSINESS STRATEGY
The Registrant's business strategy is to increase revenues in all areas
of operations through the promotion and expansion of its video lottery business
and the enhancement of its racing and entertainment facilities.
Develop and Market Mountaineer as Diversified Entertainment Facility
The Registrant believes that the Mountaineer racetrack facility has not
performed to its potential in the past because it was utilized primarily to
conduct parimutuel racing, thereby limiting the facility's customer base and
under-utilizing its sizable infrastructure during non-racing times. The
expansion of video lottery operations and the introduction of bingo for
local senior groups and boxing events at Mountaineer has begun to remedy these
effects. Management believes that the addition of such improvements and
programs to those already completed, will provide the right product mix to
attract an increasing number of visitors and more efficiently use Mountaineer's
facilities during non-racing times. It is anticipated that the resulting
benefits will be shared by parimutuel, as well as video lottery and other
entertainment operations, since patrons who traditionally do not visit horse
racetracks may be, once at Mountaineer, more inclined to wager on racing. In
addition, because a significant percentage of revenues from video lottery
operations must be contributed to the racing purse fund, as video lottery
revenues increase, so will the size of purses. Management believes that this
will have the effect of attracting better quality racehorses, further enhancing
Mountaineer's appeal to traditional horse racing fans who are largely
responsible for Mountaineer's parimutuel revenues.
Expand Video Lottery Operations
The Registrant intends to expand its video lottery operations by adding
up to 200 VLTs which were authorized by the Lottery Commission in 1995. The
Registrant believes that its video lottery revenues will continue to increase
with the installation of new machines, the implementation of progressives and
video slot games, and the implementation of its expanded marketing plan. With
its current involvement in video lottery gaming and parimutuel racing, its
substantial infrastructure and grounds, and the
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attractive location of its facility, Mountaineer is positioned to take
advantage of any future forms of gaming which may be legalized in West Virginia.
Relocate Off-Track Wagering
The Registrant recently relocated its primary simulcasting operations
to the Speakeasy Gaming Saloon at the Lodge. Management believes that by
exposing video lottery patrons to simulcast and live racing, new racing fans
can be developed, thereby increasing parimutuel operations. The expanded
clubhouse simulcast facilities are also expected to create additional
excitement and increase the level of activity at the racetrack on live race
days.
Improve Live Racing Product and Commence Export Simulcasting Outside
Hub Area
The Registrant's ability to attract attendance at Mountaineer and
wagering on its live races is dependent, in part, upon the quality of the horses
racing at Mountaineer. Horse races at racetracks competing with Mountaineer,
and at the racetracks from which Mountaineer receives import simulcasts, have
often been of higher quality than Mountaineer's horse races, thereby attracting
a larger volume of wagering and higher average wagers at Mountaineer. Beginning
in October 1994, Mountaineer has been able to attract better quality horses by
paying incrementally higher purses. The increased purses reflect an increase in
the minimum daily purses guaranteed pursuant to the Registrant's agreement with
the horsemen. Management's ability to increase further the size of purses will
depend on increased video lottery operations and, to a lesser extent, expanded
simulcast racing operations. The Registrant anticipates that it will be able to
continue increasing purse sizes to levels attractive to owners of mid-level
quality or better racehorses.
Management also expects to sponsor several stakes races in 1996, with
purses of up to $100,000 per race. In September 1995, Mountaineer sponsored
the West Virginia Breeders' Classics stakes races, with purses totaling
$330,000 funded by state-wide video lottery tax revenue. Mountaineer broadcast
the stakes races to a number of other racetracks around the country, and
intends to simulcast its regular card of live races within the next year.
Wagering handles from participating racetracks are commingled with
Mountaineer's on-site wagering handle when it exports its simulcast signal.
Commence Export Simulcasting Outside Hub Area
Export simulcasting is a highly desirable source of revenue because the
direct costs associated with such operations are relatively low. The
Registrant believes that the higher average purses anticipated from video
lottery contributions will improve the quality of races to other racetracks,
off-track betting facilities, casinos and other gaming establishments once it
has completed its improvement plan. In order to make its races more attractive
to simulcast outlets, the Registrant anticipates that it will experiment with
different post times, possibly adopting more evening racing days which are
preferable because they do not compete with live racing conducted by host
tracks.
Increasing Import Simulcasting
The Registrant intends to increase the number and quality of races it
makes available for wagering by simulcasting additional out-of-state races.
Although Management does not anticipate that it will increase the number of
import signals it can receive simultaneously, it will increase the number of
races displayed with each available signal. In May 1995, Mountaineer introduced
off-track greyhound racing, and has since offered thoroughbred and/or greyhound
import simulcasting 7 days per week.
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Because operating expenses associated with simulcast racing are generally lower
than those associated with live racing, Management believes that increases in
the levels of simulcast wagering would result in greater operating profits than
similar increases in live racing levels.
MARKETING
Mountaineer's primary market includes 4 million persons of gaming age
who reside within a one-hour drive, or approximately 50 miles, of the facility
including the population centers of Pittsburgh, Pennsylvania, Youngstown/Warren
and Akron/Canton, Ohio, and Wheeling, West Virginia. A secondary market of 3.4
million persons of gaming age reside within a two-hour drive, including
Cleveland, Ohio and Morgantown, West Virginia. Both markets have an average
household income of approximately $26,000.
The Registrant has adopted and is in the process of implementing a
comprehensive marketing program to capitalize on Mountaineer's recently
expanded gaming facilities to create a larger and more loyal customer base.
The program includes (i) the Players Club, a player rating and tracking system
designed to reward qualified play through the issuance of reward certificates
which are redeemable for food and beverages, merchandise and other services,
(ii) entertainment programming featuring boxing and other special events, (iii)
attractive food and beverage pricing, (iv) comprehensive advertising, and (v) a
bus program. Some features of the program are subject to approval by the
Lottery Commission. Prior to the formulation of the new marketing program, the
Registrant's marketing efforts consisted of limited television, radio and print
advertising and promotional events tied to major holidays or horse racing
events.
COMPETITION
Mountaineer's principal direct competitors are Wheeling Downs, located
approximately 40 miles to the south in Wheeling, West Virginia and Thistledown,
located approximately 85 miles to the northwest in Cleveland, Ohio. Wheeling
Downs conducts parimutuel greyhound dog racing and video lottery gaming.
Thistledown conducts parimutuel thoroughbred horse racing but not video
lottery. Other than Wheeling Downs and Thistledown, there are currently no
facilities offering competitive parimutuel live thoroughbred or video lottery
gaming within a 100-mile radius of Mountaineer. As a result, although there
are facilities located more than 100 miles away, Management does not believe
that such other facilities compete with Mountaineer for a significant segment
of its target customer base (although they do compete to some extent for
quality racehorses). In addition, none of those facilities, all of which are
located in Pennsylvania and Ohio, are currently licensed to offer video lottery
gaming. Moreover, the one facility in West Virginia, other than Mountaineer
and Wheeling Downs, offering video lottery is located in the central part of
the state and, as a result, does not compete with Mountaineer for customers.
However, the Registrant does compete with statewide lotteries in West Virginia,
Pennsylvania and Ohio, off-track wagering in Pennsylvania and other
entertainment options available to consumers, including live and televised
professional and collegiate major sports events. The Registrant will also
compete with off-track wagering in Ohio, if implemented as proposed.
The Registrant is attempting to attract patrons by promoting
Mountaineer as a complete entertainment complex and destination resort offering
a unique combination of quality racing, video lottery wagering, dining, special
events and other entertainment options, all in a physically attractive setting
which is easily accessed with ample on-site parking. To the extent that
Pennsylvania or Ohio legalize any forms of casino gaming, the
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Registrant's video lottery operations will compete with new gaming facilities
located within driving distances from Mountaineer's geographic market. Such
facilities may offer more gaming machines than Mountaineer as well as forms of
gaming not available in West Virginia. There is no assurance that such any of
such forms of competition will develop, however, Management believes that the
development of Mountaineer into a complete entertainment complex is necessary in
order to compete with casino gaming, if any, introduced in neighboring
jurisdictions.
EMPLOYEES
As of April 1, 1996, approximately 400 full-time persons and 150
part-time persons were employed at Mountaineer, of whom approximately 70 were
represented by a labor union under a collective bargaining agreement. As of
April 1, 1996, the Registrant also employed one part-time person in its oil and
gas operations in Ada, Michigan and, in addition to Management, one person, at
its corporate offices in Laguna Beach, California. The Registrant believes
that its employee relations are good.
REGULATION AND LICENSING
Racing
The Registrant's horse racing operations are subject to extensive
regulation by the Racing Commission, which is responsible for, among other
things, granting annual licenses to conduct race meets, approving simulcasting
activities and establishing and regulating wagering procedures, minimum purses,
post times, and other matters. When granting licenses the Racing Commission
has the authority to determine the dates on which Mountaineer may conduct
races. In order to conduct simulcast racing, Mountaineer is required under
West Virginia law to hold a minimum of 220 live race days each year.
Mountaineer was granted a license to conduct 220 live race days for its 1996
meet.
West Virginia law requires that at least 80% of Mountaineer's employees
must be citizens and residents of West Virginia and must have been such for at
least one year. In addition, certain activities, such as simulcasting races,
require the consent of the representatives of the majority of the horse owners
and trainers at Mountaineer.
Mountaineer's revenues from live racing operations are derived
substantially from its parimutuel commissions, which are fixed by the State of
West Virginia as percentages of Mountaineer's wagering handles. The West
Virginia legislature could change these percentages at any time, although the
Registrant is not aware of any current proposal to do so.
The Registrant's simulcast activities that occur outside of West
Virginia could be subject to regulation of other state racing commissions, as
well as the provisions of the Federal Interstate Horse Racing Act of 1978,
which prohibits Mountaineer from accepting off-track wagering on simulcast
racing without the approval of the Racing Commission and, subject to certain
exceptions, of any other currently operating track within 60 miles, or if none,
of the closest track in any adjoining state.
Video Lottery
The operation of video lottery games in West Virginia is subject to the
Video Lottery Act. Licensing and regulatory control is provided by the Lottery
Commission.
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Prior to the adoption of the Video Lottery Act in March 1994, the
Registrant conducted video lottery gaming under the West Virginia State Lottery
Act pursuant to an agreement with the Lottery Commission which authorized the
Registrant to operate video lottery machines at the racetrack and Lodge as part
of a video lottery pilot project. Under the terms of the agreement, the
Registrant retained ownership or control of the video lottery machines and
other equipment it provided for use in video lottery gaming. In March 1993,
the Attorney General of West Virginia issued an opinion that, under the West
Virginia Constitution, video lottery machines could not be privately owned. As
a result of the Attorney General's opinion, the Registrant was unable to renew
its agreement with the Lottery Commission, which was scheduled to expire in
June 1993. In October 1993, the Supreme Court of Appeals of West Virginia
found that the legislature had not adequately defined and authorized video
lottery gaming and, as a result, the Lottery Commission's authorization of
video lottery gaming at Mountaineer was invalid. The court's order was to
become effective in late November 1993, at which time video lottery gaming at
Mountaineer would have had to terminate. However, the court stayed its order
pending consideration and passage of satisfactory video lottery legislation.
The subsequent adoption of the Video Lottery Act has not been contested in or
otherwise addressed by the court or any other West Virginia court.
Under the Video Lottery Act, only parimutuel horse or dog racing
facilities that were licensed by the Racing Commission prior to January 1, 1994
and that conduct at least 220 live racing dates for each dog or horse race
meeting, or such other number as may be approved by the Racing Commission, are
eligible for licensure to operate video lottery games. There are four racing
facilities in West Virginia (two horse racing and two dog racing) including
Mountaineer, three of which satisfy the eligibility requirements of 1995. The
conduct of video lottery gaming by a racing facility is subject to the approval
of voters of the county in which such facility is located. If such approval is
obtained, the facility may continue to conduct racing activities unless the
matter is resubmitted to the voters pursuant to a petition by at least 5% of the
registered voters, who must wait at least five years to bring such a petition.
If approval is denied, another election on the issue may not be held for a
period of two years. Video lottery gaming was approved in Hancock County, the
location of Mountaineer, on May 10, 1994.
In order to qualify as a "video lottery game," as the term is defined
under the Video Lottery Act, a game must, among other things, be a game of
chance which utilizes an interactive electronic terminal device allowing input
by an individual player and is not based on any of the following game themes;
roulette, dice, baccarat card games or games having a video display depicting
symbols which appear to roll on drums to simulate classic casino slot machines.
Moreover, video lottery machines must meet strict hardware and software
specifications, including minimum and maximum pay-out requirements, and must be
connected to the Lottery Commission's central control computer by an on-line or
dial-up communications systems. Only machines registered with and approved by
the lottery Commission may offer video lottery games.
Under the Video Lottery Act, racetracks that conduct video lottery
gaming, as well as persons who service and repair video lottery machines and
validation managers (persons who perform video lottery ticket redemption
services) are required to be licensed by the Lottery Commission. The licensing
application procedures are extensive and include inquiries into and an
evaluation of the character, background (including criminal record, reputation
and associations) and business ability and experience of an applicant and the
adequacy and source of the applicant's financing arrangements. In addition, a
racetrack applicant must hold a valid racing license, have an agreement
regarding video lottery revenues with the representatives of the majority of the
horsemen, the parimutuel clerks and the breeders for the racetrack and post a
bond or irrevocable letter of credit in such
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amount as the Lottery Commission shall determine. Finally, no license will be
granted until the Lottery Commission determines that each person who has
"control" of an applicant meets all of the applicable licensing qualifications.
Persons deemed to have control of a corporate applicant include: (i) any
holding or parent company or subsidiary of the applicant who has the ability to
elect a majority of the applicant's board of directors or to otherwise control
the activities of the applicant; and (ii) key personnel of an applicant,
including any executive officer, employee or agent, who has the power to
exercise significant influence over decisions concerning any part of the
applicant's business operations. The Registrant's license application was
approved by the Lottery Commission in June 1995. From March 1994 until such
approval, the Registrant conducted video lottery gaming under a provision of
the Video Lottery Act that permitted any racetrack authorized by the Lottery
Commission to conduct video lottery gaming prior to November 1, 1993 to
continue to do so for a limited time without additional licensure.
Licenses granted by the Lottery Commission must be renewed on July 1 of
each year. A license to operate video lottery games is a privilege personal to
the license holder and, accordingly, is non-transferable. In order for a
license to remain in effect, Lottery Commission approval is required prior to
any change of ownership or control of a license holder. Unless prior approval
of the Lottery Commission is obtained, the sale of five percent or more of the
voting stock of the license holder or any corporation that controls the license
holder or the sale of a license holder's assets (other than in the ordinary
course of business), or any interest therein, to any person not previously
determined by the Lottery Commission to have satisfied the licensing
qualifications voids the license.
Once licensed, a racetrack has the right to install and operate up to
400 video lottery machines and may operate more than 400 machines only upon
Lottery Commission approval. The Registrant has received approval to operate a
total of 1,000 machines.
Video Lottery machines may only be operated in the areas of the
racetrack where parimutuel wagering is permitted; provided, however, that if a
racetrack was authorized by the Lottery Commission prior to November 1, 1993 to
operate video lottery machines in another area of the racetrack's facilities,
such racetrack may continue to do so as long as there is one video lottery
machine in the parimutuel wagering area for each machine located in another
area of the racetrack. Accordingly, the Registrant may continue to operate
video lottery machines at the Lodge, providing there are at least as many
machines located at Mountaineer's racetrack.
The Video Lottery Act imposes extensive operational controls relating
to, among other matters, security and supervision, access to the machines,
hours of operation, general liability insurance coverage and machine location.
In addition, the Video Lottery Act prohibits the extension of credit for video
lottery play and requires Lottery Commission approval before any video lottery
advertising and promotional activities are conducted. The Video Lottery Act
provides for criminal and civil liability in the event of specified violations.
All revenues derived from the operation of video lottery games must be
deposited with the Lottery Commission to be shared in accordance with the
provisions of the Video Lottery Act. Under such provisions, each racetrack
must electronically remit to the Lottery Commission its "gross terminal income"
(total cash deposited into video lottery machines less the value of credits
cleared for winning redemption tickets). To ensure the availability of such
funds to the Lottery Commission, each racetrack must maintain in its account an
amount equal to or greater than the gross terminal income to be remitted. If a
racetrack fails to maintain this balance, the Lottery Commission may disable all
of the
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racetrack's video lottery machines until full payment of all amounts due is
made. From the gross terminal income remitted by a licensee, the Lottery
Commission will deduct up to 4% to cover its costs of administering video
lottery at the licensee's racetrack and divide the remaining amounts as follows:
47% is returned to the racetrack, 30% is paid to the State's general revenue
fund, 15.5% is deposited in the racetrack's fund for the payment of purses, and
the remaining 9% is divided among tourism promotion, Hancock County, Breeders'
Classics, Veterans Memorial Program and the Racetrack Employees Pension Fund.
DISCONTINUED OPERATIONS
Bartlett Field Leases - Ohio
In January 1992, the Registrant, through its wholly owned subsidiary,
ExCal Energy Corporation ("ExCal") acquired approximately 16,000 net developed
acres and 16,800 net undeveloped acres (held by production) of oil and gas
leases in the Bartlett Field in Southeastern Ohio from Biscayne Petroleum
Corporation, an affiliate of Edson R. Arneault, a director of the Registrant.
The Registrant agreed to provide funds to drill 40 gas wells on such
properties, and in 1992, the Registrant attempted to raise the required capital
through a public offering. Due to the expiration of "Section 29" credits (a
credit against Federal income taxes derived from gas produced from Devonian
Shale and "tight sands" formations from wells commenced before January 1993), in
December 1992, the Registrant abandoned the offering. As a result, the
Registrant recorded certain provisions for writedown of these interests.
During 1993, the Registrant allowed the leases for the net undeveloped acreage
to expire, and sold to third parties approximately 2,300 net developed acres.
In December 1994, all of the remaining leases were sold pursuant to the plan of
orderly liquidation described below.
Bartlett Field Wells - Ohio
In January 1992, ExCal acquired 77 gas wells in the Bartlett Field from
18 limited partnerships controlled by Mr. Arneault and operated by his
affiliate, Century Energy Management Company, Inc. The wells were in need of
repair and the Registrant planned to incur rework costs to increase production
and maximize the value of the assets. Aggregate annual gas production was
100,000 to 150,000 MCF, and Management believed that with limited rework,
production could be increased by at least 100%. In December 1994, all of the
wells were sold pursuant to the plan of orderly liquidation described below.
Marathon-Otter Lake Field - Michigan
In January 1992, ExCal acquired all the issued and outstanding shares of
Crystal Oil Company, Inc. ("Crystal"). Crystal's assets consisted of an average
64% net revenue interest in approximately 3.4 million barrels of oil (proved
reserves) plus 34 oil and gas wells and related equipment in the Marathon-Otter
Lake Field in the State of Michigan. In 1991, the wells were shut-in by Crystal
who had undertaken no material drilling since then. In December 1992, ExCal
entered into a joint venture agreement with Fleur-David Corporation
("Fleur-David"), a minority shareholder of the Registrant, to perform rework and
remediation activities to re-establish production and provide activities
necessary for compliance with state environmental standards. ExCal contributed
its net revenue interest in the proved reserves and agreed to pay 25% of
on-going costs in exchange for a 25% interest in the joint venture. For a 75%
interest in the joint venture, Fleur-David agreed to
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provide technical expertise and 75% of on-going costs. Fleur-David also
obtained a covenant not to sue for clean-up and abandonment costs from the state
of Michigan by funding $188,000 in an environmental escrow fund required by the
state. Costs were estimated at $2,200,000 and have included rework of wells,
repairs to oil storage tank batteries, acid treatments of producing formations,
plugging, clean-up, equipment removal, waste disposal and soil removal costs
required by the Michigan Department of Natural Resources. The Registrant is
responsible to provide 25%, or approximately $550,000 of such costs, of which
$286,000 has been paid primarily from proceeds from the exercise of certain
stock options granted to Fleur-David by the Registrant, as well as cash from
continuing operations.
Plan of Orderly Liquidation
On March 31, 1993, the Registrant's board of directors approved a
formal plan to divest its oil and gas operations over a period of two years.
This decision was based upon several factors including (i) the anticipated
potential of the Registrant's gaming operations and the anticipated time to be
devoted to it by Management, (ii) the expiration of "Section 29" credits, a
credit against Federal income taxes derived from gas produced from Devonian
Shale and "tight sands" formations from wells commenced before January 1993,
and (iii) the impact of delays in connection with a political controversy over
video lottery in West Virginia during 1993 which caused Management to focus the
Registrant's efforts and financial resources on Mountaineer. To enhance the
value of the properties for sale, the plan of orderly liquidation provided for
remediation costs to address certain environmental matters and rework and
development costs to increase future production.
During 1993, the Registrant began disposition of the Bartlett Field oil
and gas leases by selling to third parties or, based on certain contingencies
in the acquisition agreement, returning to their previous owners approximately
2,300 net developed acres. The Registrant received approximately $85,000 in
connection with the sale of the leases. The Registrant also allowed leases
comprising 16,800 net undeveloped acres to expire. At December 31, 1993, net
developed acreage was approximately 13,700 acres and the Registrant held proved
reserves in the Bartlett Field of 902,200 MCF.
The plan of orderly liquidation also called for rework costs of
approximately $150,000 in connection with the Registrant's 77 Bartlett Field
gas wells. Because the wells were in various states of disrepair, the plan
called for maintenance of wells, acid treatments of producing formations and,
in some cases, plugging and abandonment, all for the purpose of increasing
production and the value of such assets for ultimate sale. In mid-1993, the
Registrant reduced its appropriation for such rework costs to $100,000, which
was estimated to increase net cash flows from production to a minimum of
$25,000 per month. However, after completion of only $50,000 of such rework
costs, the Bartlett Field wells and remaining Bartlett Field leases were sold
in December 1994 to Development & Acquisition Ventures in Energy, Inc., whose
principal shareholder is the brother of Mr. Arneault, for notes valued at
approximately $426,000, of which $150,000 (discounted to $126,000) is
non-recourse, secured solely by the assets sold (see Item 13 - "Certain
Relationships and Related Transactions").
At the time of the sale, the Registrant remained obligated on a
$590,000, 9% note to the previous owners of the Bartlett Field wells. On March
31, 1995, the note was amended to provide the Registrant with a credit for the
then current value of 98,333 shares of the Registrant's common stock issued to
the previous owners in March 1993 in the amount of $123,000. The amendment
further provided for the $467,000 balance of
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the note to be paid in monthly payments of interest only at 10% from May
through October 1995, with principal amortized over 36 months thereafter with a
balloon payment after 12 months on October 1, 1996. The note was payable at
the option of the Registrant through the issuance of common stock on or before
November 1, 1996 at the then market value, provided that such shares were
registered by the Registrant at the time of issuance. The Registrant paid
monthly interest payments in May and June 1995, and in October 1995, the note
was canceled in exchange for interest payments for the months of July, August
and September 1995, and 373,600 shares of the Registrant's common stock,
subject to registration rights and valued for purposes of the transaction at
the then market value of $1.25 per share.
The Registrant intends to sell its sole remaining oil and gas interest,
its interest in the Marathon-Otter Lake Field, during 1996. For further
discussion of Management's plan of orderly liquidation, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Discontinued Operations" and Note 10 of the accompanying "Notes to
Consolidated Financial Statements".
ITEM 2. PROPERTIES
GAMING, RACING AND OTHER ENTERTAINMENT
Mountaineer comprises a thoroughbred race track and Lodge with video
lottery gaming, off-track wagering, dining and lounge facilities as well as
facilities for golf, swimming, tennis and other outdoor activities covering
approximately 606 acres (including 375 undeveloped acres) in Chester, West
Virginia. The Mountaineer facility encompasses approximately 4,100 feet of
frontage on the Ohio River and approximately 2,500 feet of highway frontage
straddling West Virginia and State Route 2. At December 31, 1995, Mountaineer
was encumbered by a first deed of trust in favor of Bennett Management &
Development Corporation, collateralizing indebtedness aggregating $10.2 million
in principal amount.
OIL AND GAS
The Registrant's oil and gas interest constitutes a 25% joint venture
in a 64% net revenue interest in proved reserves with 34 net producible wells
in the Marathon-Otter Lake field in Lapeer and Genesee Counties, Michigan.
Proved reserves are estimated at 3,314,800 BBL. For financial and other
information about the Registrant's oil and gas interests, see Item 1. "Business
- - Discontinued Operations," Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Discontinued
Operations," and Note 10 of the accompanying "Notes to Consolidated Financial
Statements."
EQUIPMENT LEASES
At Mountaineer, the Registrant leases 800 video lottery machines,
totalisator system, video tape and closed circuit televisions systems and other
equipment required for operations. For discussion of such equipment leases,
see Note 7 of the accompanying "Notes to Consolidated Financial Statements -
Commitments and Contingencies."
OFFICE LEASE
The Registrant leases office space for its corporate offices under
operating leases. To reduce overhead costs, the Registrant has moved to
progressively smaller offices on two occasions since January 1, 1994. The
Registrant's lease for a 6,034 square foot facility in Irvine, California
expired at that time, and the Registrant moved and entered into a new
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lease for a period of 36 months at a smaller 4,300 square foot office in San
Juan Capistrano, California. On November 1, 1995, the Registrant downsized
again and moved to a smaller 880 square foot office in Laguna Beach, California
pursuant to a 12 month lease with an option to extend the term for an additional
six months. On February 15, 1996, the San Juan Capistrano office was subleased
through December 15, 1996, the termination date for the underlying lease. Net
annual minimum lease payments at December 31, 1995 are approximately $41,000 and
$17,000 per year in 1996 and 1997. Rent expense for the Company's corporate
offices included in the consolidated statements of operations amounted to
$78,000, $84,000, and $125,000 for 1995, 1994 and 1993, respectively.
ITEM 3. LEGAL PROCEEDINGS
SETTLED LITIGATION INVOLVING LOSS CONTINGENCIES
Jackpot Enterprises, Inc. v. Winners Entertainment, Inc., Circuit Court
of Kanawha County, West Virginia Case No. 94-C-819. On May 13, 1994, the
Registrant was served with a complaint in which Jackpot sought an award of
250,000 shares of the Registrant's common stock as liquidated damages for an
alleged breach of a January 27, 1993 agreement and for alleged intentional
torts in refusing to issue the stock. Jackpot also sought a cash award equal
to the difference in the market price of the stock from May 28, 1993 to the
date of issuance. Jackpot also alleged that the refusal to issue the 250,000
shares constituted a separate intentional tort, for which Jackpot sought
punitive damages of $5 million.
The parties settled these claims on March 3, 1995. The terms of the
agreement require the Registrant to issue to Jackpot, and include in a
registration statement, such number of shares which, when combined with the
30,000 shares of the Registrant's stock previously issued to Jackpot, on the
date the registration statement becomes effective, will result in net proceeds
of $550,000 to Jackpot. If the registration statement was not effective by
April 29, 1995, which it was not, the Registrant was required to issue an
additional 12,500 shares every sixty days until the effective date. In no
event, however, will the Registrant be required to issue more than 250,000
shares. The Registrant had the right under the Settlement Agreement to
repurchase at par value any shares (other than the 30,000 shares Jackpot has
held since January of 1993) necessary to limit Jackpot's net proceeds to
$550,000. The repurchase was not effective within one year of the date of the
Settlement Agreement. Through December 31, 1995, Management has issued 175,000
shares (excluding the 30,000 shares referred to above) of its common stock in
accordance with terms of the Agreement.
Glenn Hall v. Winners Entertainment, Inc. and Michael Mapes v. Winners
Entertainment, Inc., United States District Court for the District of
Minnesota, Case Nos. 3-94-CV-1383 and 3-94-CV-1384. On October 26, 1994,
Winners was served with complaints by Glenn Hall and Michael Mapes, former
directors of Golden Palace Casinos, Inc., alleging breach of a provision of the
October 13, 19932 stock exchange (through which Golden Palace became a wholly
owned subsidiary of the Registrant) requiring the Registrant under certain
circumstances to repurchase 52,250 shares of the Registrant's stock from each
of them. Mr. Hall alleged that the Registrant must purchase 52,250 shares of
the Registrant's stock from Hall for $6 per share, compensate him for his
unspecified lost investment opportunity, and reimburse him for legal fees
incurred in the suit.
Mr. Mapes, who sold 209,000 shares of the Registrant's stock in a
private transaction, seeks, as to 52,250 shares, payment of the difference
between $6 per share and the price for which he sold such shares, unspecified
damages for lost investment opportunity, and
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replacement of 156,750 shares that Mr. Mapes claims he would not have sold but
for the alleged breach. He also sought attorneys' fees.
Effective June 1, 1995, the Registrant settled the claims of Messrs.
Hall and Mapes as follows:
Mr. Hall received 156,750 shares of the Registrant's common stock,
valued at $1.50 per share (the "Make-Up Shares") to make up the difference
between $313,500 (the proceeds he would have received if the Registrant had
repurchased 52,250 shares for $6 per share) and $78,375 (the market value of
52,250 shares on June 30, 1995). Mr. Hall received an additional 45,000 shares
to cover his costs and attorneys' fees (the "Expense Shares"). The Registrant
has agreed to register the Make-Up Shares, the Expense Shares, and 30,000
shares underlying options previously granted (and exercised in 1995) to Mr.
Hall as part of the October 13, 1992 stock exchange through which Golden Palace
became a wholly owned subsidiary of the Registrant.
Pursuant to the agreement, in the event the average market price of the
Registrant's common stock is less than $1.50 per share for the 90 trading days
following the effective date of the registration statement, the Registrant
will issue Mr. Hall that number of additional shares required to satisfy the
difference between $1.50 per share and such average market price. Mr. Hall's
right to receive, and the Registrant's obligation to issue additional shares,
however, applies only to the Make-Up Shares. In the event a registration
statement with respect to the shares is not effective by June 1, 1996, then the
Registrant will execute a promissory note in favor of Mr. Hall in the amount of
$235,125, payable in 24 equal monthly installments of principal and interest at
12% per annum, such interest accruing from July 1, 1995. So long as the
Registrant is not in default with respect to its repayment obligations under
the promissory note, if such note is required to be delivered, then upon either
(i) the registration of the Make-Up Shares or (ii) the eligibility of the
Make-Up Shares for public sale pursuant to SEC Rule 144, then the Registrant
shall receive as a credit against any amounts then due under the note an amount
equal to the average closing market price of the common stock for the 90
trading days following the effective date of the registration statement or the
date the shares become eligible for public sale under Rule 144. Upon execution
and delivery of the promissory note, the Registrant will have the right to
repurchase the Make-Up shares for $1.50 per share and would, upon such
repurchase, receive a like credit against the amount due under the note. Mr.
Hall may extinguish the Registrant's right of repurchase upon notice, resulting
in a credit against the note equal to $1.50 per share multiplied by the number
of shares as to which the right of repurchase had been extinguished.
The Registrant settled with Mr. Mapes on identical terms, except that
(i) Mr. Mapes received 120,000 Make-Up Shares, 45,000 Expense Shares, and the
Registrant agreed to register 20,000 shares underlying Mr. Mapes" previously
granted options; and (ii) the promissory note in favor of Mapes, if required,
will be in the principal amount of $180,000. Both cases have been dismissed
without prejudice until the earlier of registration of the shares or the
delivery of the promissory notes, at which time Messrs. Hall and Mapes have
agreed to enter dismissals with prejudice.
PENDING LITIGATION
Darelynn Lehto v. Winners Entertainment, Inc., Case No. 4-96-49, U.S.
District Court for the District of Minnesota (filed January 11, 1996). Ms.
Lehto's complaint alleges breach of provisions of the October 1, 1992 stock
exchange (through which Golden Palace became a wholly owned subsidiary of the
Registrant) requiring the Registrant under certain circumstances to repurchase
52,500 shares of the Registrant's stock from
- 18 -
21
her at a price of $6 per share and to use its best efforts to register such
shares for sale to the public. The complaint claims damages in the amount of
$315,000 (the proceeds if the Registrant had repurchased 52,500 shares for $6
per share) and $64,564.94 (the net proceeds Ms. Lehto received for such shares
in the market), plus prejudgment interest; unspecified damages for the
Registrant's failure to register Ms. Lehto's shares at a time when the
prevailing market price of Registrant's common stock was higher; and costs and
attorney's fees. Based on discussions with Ms. Lehto's counsel, Management
believes that the case will be settled on terms satisfactory to the Registrant,
however, there is no assurance that such a settlement will be reached.
George Jones v. Mountaineer Park, Inc. and Winners Entertainment, Inc.,
Case No. 95-C-103-G, Circuit Court of Hancock County, West Virginia. On June
19, 1995, the Registrant and its wholly owned subsidiary, Mountaineer Park,
Inc. ("Mountaineer") were served with a complaint by George Jones, claiming
breach and wrongful termination of Mr. Jones' employment agreement with
Mountaineer, retaliatory discharge, fraud, outrage, and defamation. The
complaint alleges, among other things, that Mountaineer terminated Jones'
employment in September of 1993 in retaliation for his efforts to investigate
alleged improper activities occurring at Mountaineer. Mr. Jones seeks an award
for compensatory damages in the amount of $1 million and a like amount in
punitive damages.
The Registrant and Mountaineer have answered the complaint, denying any
liability to Mr. Jones. Management has determined to defend the case
vigorously on the grounds that the defamation claim is barred by the statue of
limitations, and the remaining claims should be dismissed because Mr. Jones'
employment was properly and justifiably terminated. Mountaineer has been
advised by its insurance carrier that the claims against it are covered by
insurance. Mr. Jones' counsel has indicated that Jones is considering a
voluntary dismissal of the claims against the Registrant. Management does not
believe that either the Registrant or Mountaineer will incur any material loss
on account of such claims.
Joyce Richard Brantley v. Mountaineer Park, Inc., Case No. 94-C-124,
Circuit Court of Hancock County, West Virginia. In 1994, the Registrant was
served with a complaint by a former part-time employee for wrongful termination,
claiming that Mountaineer fired her as a result of a worker's compensation
claim. The complaint was not answered timely by the Registrant's counsel and,
as a result, a default judgment was entered by the Court in the amount of
approximately $308,000. The Registrant has filed a motion to set aside the
default judgment, however, there is no assurance that the motion will be
granted.
Daniel Barrett v. Mountaineer Park, Inc., Case No. 94-C-147G, Circuit
Court of Hancock County, West Virginia. The Registrant was served with a
complaint in 1994 by a jockey who sustained head injuries from a fall during a
race at Mountaineer. The plaintiff is seeking both compensatory and punitive
damages. Although the matter is covered by insurance, Management has been
advised by its carrier, after discovery, that a jury could award damages in
excess of Mountaineer's $1 million policy limits. In the event that such an
award were made,the Registrant would be liable for any such excess amount.
Although Management believes that the matter will ultimately be resolved within
the policy limits, there can be no assurance that it will.
THREATENED LITIGATION
Dorothy van Haaften. Dorothy van Haaften, a former director of Golden
Palace Casinos, Inc. has threatened to bring suit against the Registrant
alleging breach of a
- 19 -
22
provision of the October 13, 1992 stock exchange (through which Golden Palace
became a wholly owned subsidiary of the Registrant) requiring the Registrant
under certain circumstances to repurchase 52,250 shares of the Registrant's
stock from her. Ms. van Haaften's threat comes notwithstanding a Loan
Agreement dated March 4, 1993 pursuant to which (i) Ms. van Haaften agreed to
forbear from requesting that the Registrant repurchase her shares until after
the effective date of the Registration Statement; and (ii) the Registrant agreed
to lend and did lend van Haaften the sum of $10,000.00 without interest and
without recourse except for a pledge of 1,666 shares of Ms. van Haaften's
Winners stock.
Although definitive agreements have not yet been signed, the parties
have agreed to settle Ms. van Haaften's claims as follows: (i) the Registrant
will issue Ms. van Haaften 150,083 Make-Up Shares (as defined above in
connection with the claims of Messrs. Hall and Mapes); (ii) if the Make-Up
Shares have not been registered within one year after the execution of the
definitive Settlement Agreement, the Registrant will execute a promissory note
in favor of Ms. van Haaften in the amount of $225,125 on the same terms and
conditions as the Hall and Mapes notes; (iii) the Registrant will forgive the
$10,000 loan made in March of 1993 and release the collateral therefor.
Crystal Asset Management Group, Ltd. In July of 1994, the Registrant
and Crystal Asset Management Group, Ltd. ("CAM") settled CAM's claims for
amounts due under a Financial Advisory Agreement of April 1, 1993. Under the
settlement agreement, the Registrant was to pay CAM $165,684 ($65,684 of which
constitutes reimbursement for fees for professional services incurred by CAM in
connection with its work for the Registrant), payable $15,000 upon execution,
up to $30,000 in the event the Registrant sold equity securities, and the
balance payable in monthly payments of $7,500 beginning December 1, 1994, and
warrants to purchase 145,000 shares of WINS common stock at $6.25 per share.
The Registrant made the initial $15,000 payment and delivered the warrants but
has not made the subsequent payments. In February of 1996, CAM threatened to
bring suit to enforce the settlement and, although Management believes the
matter will be settled on satisfactory terms there can be no assurance that
it will.
Michael R. Dunn. During the second quarter of 1995, the Registrant and
Michael R. Dunn, the former president and chairman of the Registrant, entered
into an agreement pursuant to which Mr. Dunn resigned from the Registrant and
its subsidiaries effective April 26, 1995. Pursuant to this agreement, the
Registrant agreed to pay Mr. Dunn bi-monthly payments equal to his former salary
for a period of two years, certain medical and health benefits, and
indemnification for actions taken while he was an employee of the Registrant.
Terry D. Elliott. On October 20, 1995, a horse, which was stabled by
one of the horse owners at Mountaineer, became loose and ran onto a highway
resulting in an automobile collision and the death of a motorist. Although no
action has been filed to date, the Registrant has been advised that the brother
of the decedent intends to file a civil action. Management believes that if
Mountaineer is found to be responsible, the matter will be resolved within the
limits of its insurance policy, however, there can be no assurance that it
will.
Subsequent to the agreement, the Registrant discovered circumstances
which has caused Management to believe that the agreement should be rescinded.
Bi-monthly payments were made to Mr. Dunn through September 30, 1995, and no
payments thereafter. Mr. Dunn has made demand for payment of unpaid
installments under the agreement, attorneys' fees incurred in pursuing his
claim and unspecified investment opportunity. No action has been filed,
however, Mr. Dunn has made a formal demand for arbitration. The Registrant
intends to defend or settle the matter after a complete review by counsel.
There is no assurance that the matter will be resolved on terms acceptable
to Management.
The Registrant (including its subsidiaries) is also a defendant in
various law suits relating to routine matters incidental to its business.
Management does not believe that the outcome of such litigation, in the
aggregate, will have any material adverse effect on the Registrant.
-20-
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock is traded in the over-the-counter market
and has been quoted on the Nasdaq stock exchange since December 7, 1992. The
Registrant currently trades under the symbol "WINS." The following table sets
for the high and low stock prices of the Registrant's common stock during each
of the quarterly periods indicated, as reported by the National Quotation
Bureau.
1996 1995* 1994
Sales Price Sales Price Sales Price
------------- ---------------- ----------------
Quarter Ended High Low High Low High Low
- ------------- ------------- ---------------- ----------------
March 31 1 11/32 1-31/32 1-3/32 7-3/16 3-7/8
June 30 1-11/16 1-1/8 5-1/2 3
September 30 1-5/8 1-1/16 4-1/4 1-15/16
December 31 1-1/4 1-7/32 2-7/32 31/32
The high and low bid quotations set forth above reflect inter-dealer
prices, without retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions. On April 4, 1996, the last reported
sale price was $0.875. The Registrant has never paid a dividend and does not
intend to for the foreseeable future. As of April 4, 1996, there were
approximately 532 holders of record of the Registrant's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Registrant included elsewhere
in this Report, and should be read in conjunction with those consolidated
financial statements (including the notes thereto) and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere herein.
Year Ended December 31
(In thousands of dollars, except per-share data)
-------------------------------------------------------------------------------------
1995 1994 1993(b) 1992(b) 1991(a)
----------- ----------- ----------- ----------- ---------
Statement of Operations Data:
Net revenues $24,979,000 $14,682,000 $13,014,000 $ 690,000 $ 0
Net loss from continuing operations (5,313,000) (6,902,000) (5,913,000) (2,749,000) (447,000)
Loss per share from
continuing operations (.33) (.48) (.46) (.42) (.07)
Balance Sheet Data:
Total Assets $25,747,000 $23,958,000 $19,137,000 $16,812,000 $ 0
-21-
24
Redeemable Common Stock 1,406,000 2,208,000 2,208,000 1,618,000 0
Total liabilities 19,763,000 14,200,000 6,040,000 5,641,000 0
Stockholders' Equity 5,984,000 9,758,000 13,097,000 11,171,000 0
- -----------------------
(a) The Registrant discontinued and disposed of its security guard business in
1991 and devoted substantially all of its efforts in 1991 to bankruptcy
proceedings and the acquisition of new businesses. In 1992, the Registrant
emerged from bankruptcy and acquired Mountaineer Park, Inc. and the oil and
gas properties described herein. Since the periods included in the
foregoing selected financial information reflect businesses of a
substantially different nature, balance sheet data for 1991 has been
excluded.
(b) Due to the Registrant's approval of a plan of orderly liquidation of its
oil and gas operations in March 1993, the results of these operations in
1992 and 1993 have been excluded from such data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In December 1992, the Registrant acquired all of the outstanding stock
of Mountaineer Park, Inc. ("Mountaineer") with the intent of enhancing its
existing facilities for promotion as a high quality gaming and racing
destination resort. Shortly thereafter the Registrant determined to focus its
business primarily on the gaming industry, and de-emphasized its activity in
other businesses in order to more fully devote corporate resources to
Mountaineer, as described elsewhere in this report.
RESULTS OF CONTINUING OPERATIONS
The Registrant incurred significant losses from continuing operations
during the years ended December 31, 1995, 1994 and 1993 largely due to certain
regulatory delays in the State of West Virginia encountered by the Registrant as
discussed elsewhere as well as, the costly frame in which management
transitioned its operations under such regulations. The Registrant incurred
losses from continuing operations of $5.3 million in 1995, $6.9 million in 1994,
and $5.9 million in 1993, largely as a result of legal settlement provisions,
operating losses incurred in the horse racing operations of Mountaineer
Racetrack and Gaming Resort ("Mountaineer") and corporate overhead charges.
Years Ended December 31
---------------------------------------------
Revenues 1995 1994 1993
- -------- ---- ---- ----
Video Lottery Operations $16,479,000 $ 7,481,000 $ 5,293,000
Parimutuel Commission 4,263,000 3,768,000 4,323,000
Lodging, Food and Beverage 3,046,000 2,276,000 2,344,000
Other 1,191,000 1,157,000 1,054,000
----------- ----------- -----------
$24,979,000 $14,682,000 $13,014,000
=========== =========== ===========
Revenues -- Year ended December 31, 1995 compared to Year Ended
December 31, 1994.
Total revenues increased by $10.3 million from 1994 to 1995, an
increase of 70%. Approximately $9.0 million of the increase was produced by
video lottery operations, while the parimutuel commissions and lodging, food,
beverage and other operations at Mountaineer contributed $1.3 million of
additional revenues.
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Video Lottery Operations
Revenues from video lottery operations increased 120%, from $7.5
million in 1994 to $16.5 million in 1995. In response to increased patronage,
Mountaineer doubled the number of video lottery terminals, to 800, in June
1995. Video lottery revenues in the second half of 1995 surpassed $9.6
million, a level 28% higher than revenues earned in all of 1994. A comparison
of fourth quarter revenues shows that 1995 outperformed 1994 by $1.6 million,
an increase of 56% over the $2.8 million of revenue earned in the final quarter
of 1994. In December 1995, the Registrant completed an expansion of its lodge
gaming facilities, allowing the placement of half of its video lottery
terminals at the Lodge with the other half remaining in the racetrack
grandstand/clubhouse, in response to a perceived demand for more terminal
availability on days when live racing is not conducted.
Parimutuel Commissions
Parimutuel commission revenue is a function of wagering handle, with a
higher commission earned on more exotic wagers, such as a trifecta, than on
single horse wagers, such as a win, place or show bet. Mountaineer earned an
average commission rate of 20.6% in 1995, up slightly from the 20.3% average
commission rate earned in 1994.
Both live and off-track wagering handles increased in 1995 from 1994,
yielding a 13% increase in parimutuel commissions to $4.3 million. Live
wagering handle increased 4%, from $21.2 million in 1994 to $22.0 million in
1995, an increase which slightly surpassed the 3% increase in live race days,
from 220 in 1994 to 227 in 1995.
In September 1995, Mountaineer hosted the West Virginia Breeders'
Classics, a night of stakes races with $330,000 in purses funded by taxes on
statewide video lottery revenues. Mountaineer broadcasted a simulcast signal
of the stakes races, earning commissions on $351,000 of handle wagered
off-site.
Early in 1995 the Registrant expanded its off-track betting facilities
in both the racetrack clubhouse/grandstand and the Lodge, leading to a 24%
increase in simulcast wagering handle from $14.3 million to $17.8 million, an
increase of $3.5 million. In April 1995, Mountaineer began offering greyhound
off-track betting, which contributed $2.7 million to the increased simulcast
handle. The remaining $.8 million increase is attributable to the enhancement
of Mountaineer's off-track betting facilities and more extensive offerings of
simulcast racing; for most of 1995 Mountaineer offered simulcast racing seven
days per week, compared to six days per week in 1994.
Lodging, Food and Beverage
Revenues earned from lodging, food and beverage activities increased
34%, from $2.3 million earned in 1994 to $3.0 million in 1995. The increase is
a reflection of significantly greater attendance at the Registrant's video
gaming and off-track betting facilities, as well as a slight increase in live
racing attendance. Restaurant, bar and concession facilities produced $582,000
of the revenue increase, while lodge revenues increased $194,000. Food and
beverage operations accounted for approximately three quarters of the revenues
earned by this profit center in both 1995 and 1994. The increase in lodge
revenues was achieved despite an outage of 41 of the hotel's 101 rooms for the
first four months of 1995 due to a fire experienced in October 1994.
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Other Revenues
In total, other revenues were virtually unchanged from 1994 to 1995,
registering approximately $1.2 million each year. Last year's operations saw a
moderate increase in revenues relating to admission fees and program sales.
Revenues -- Year Ended December 31, 1994 Compared to Year Ended December
31, 1993
Total revenues increased by $1.7 million or 13% to $14.7 million for
the year ended December 31, 1994, from $13.0 million for the year ended December
31, 1993. Video lottery terminal ("VLT") revenues increased by $2.2 million or
41% to $7.5 million for the year ended December 31, 1994 as compared to $5.3
million in VLT revenues for the same period a year earlier. The increase was
primarily attributable to the installation of 400 new VLTs which replaced 165
existing VLTs on September 1, 1994. A significant increase in VLT revenues was
evidenced in fourth quarter 1994 results of operations of 38% to $2.8 million
from $1.3 million for the same quarter ended December 31, 1993. Other sources
of revenues, which consist primarily of admissions, programs, golf, tennis and
swimming, as well as incidental revenues, increased to $1.2 million from $1.1
million or 10% which is an increase of $110,000 for the year ended December 31,
1994 as compared to 1993.
The higher revenues helped absorb the 13% decrease in parimutuel
commissions to $3.8 million for the year ended December 31, 1994 from $4.3
million for the prior year ended December 31, 1993. Total parimutuel wagering
handle decreased from $41.0 million to $35.5 million or 13.4% for the twelve
months ended December 31, 1994 from the same period ended December 31, 1993.
Live racing handle constituted an 18% decrease from $25.7 million to
$21.1 million, while simulcast handle reflected only a 7% decrease from $15.3
million to $14.3 million for the years ended December 31, 1993, to December 31,
1994, respectively. Although the Registrant experienced an increase in live
racing attendance of approximately 6,000 patrons, from 234,000 to 240,000, the
Registrant had fewer racing days in 1994 of 220 versus 226 in 1993. Management
has increased minimum daily purses of $18,000 in 1993 to $22,500 in 1994 for
live racing in order to attract higher quality performing horses and higher
spectator betting to increase parimutuel commission revenues. Fifteen and
one-half percent (15.5%) of VLT revenues are mandatorily appropriated for purse
funding to achieve this Management objective.
Food, beverage and lodging revenues decreased 3% from slightly more
than $2.3 million for the year ended December 31, 1993 to slightly under $2.3
million for the year ended December 31, 1994. Guest room revenues decreased
$50,000 or 8% from $621,000 to $571,000 for the year ended December 31, 1994 as
compared to December 31, 1993, which resulted from the reduction in available
rooms due to planned remodeling and construction. Additional negative impact
was attributable to 41 guest rooms which were smoke damaged by fire and out of
service in the fourth quarter 1994. Average occupancy remained stable at 46%,
while the average room rate decreased from $36 to $34. Food and beverage
revenues increased $38,000 to $1,706,000 in 1994 from $1,668,000 in 1993. The
increase is primarily due to higher attendance and dining room menu
improvements implemented in early 1994.
Operating Costs -- Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Total profit center operating costs increased by 62%, from $13.4
million in 1994 to $21.8 million in 1995. Approximately $6.5 million of the
increase was attributable to the substantial growth in VLT revenues which more
than doubled from 1994 to 1995. Parimutuel commissions expense accounted for
$.5 million of the increase, largely a reflection of its 13% increase in
commission revenues, and lodging, food and beverage
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27
operating costs increased $1.0 million, exceeding the $776,000 revenue increase
earned by that profit center.
Costs and Expenses
Years Ended December 31
-----------------------------------------------------
1995 1994 1993
---- ---- ----
Operating costs
Video Lottery Operations $12,256,000 $ 5,709,000 $ 3,720,000
Parimutuel Commissions 5,064,000 4,563,000 5,136,000
Lodging, Food and Beverage 3,285,000 2,337,000 2,364,000
Other 1,195,000 798,000 787,000
----------- ----------- -----------
$21,800,000 $13,407,000 $12,007,000
=========== =========== ===========
Years Ended December 31
-----------------------------------------------------
1995 1994 1993
---- ---- ----
Profit (Loss)
Video Lottery Operations $ 4,223,000 $ 1,772,000 $ 1,573,000
Parimutuel Commissions (801,000) (795,000) (813,000)
Lodging, Food and Beverage (239,000) (61,000) (20,000)
Other (4,000) 359,000 267,000
----------- ----------- -----------
$ 3,179,000 $ 1,275,000 $ 1,007,000
=========== =========== ===========
Video Lottery Terminals Operating Costs
Taxes on statutory assessments applicable to video lottery increased
from 35% of video lottery revenues ("net win") prior to March 1994 to 53% of
net win thereafter. This increase in assessment rate, coupled with the 120%
increase in video lottery revenues, resulted in a $5.0 million increase in
taxes and statutory assessments from 1994 to 1995, to $9.0 million.
Approximately $2.5 million of 1995 statutory costs were contributed to
Mountaineer's horseowners' association in the form of live racing purse
payments, compared to $1.1 million in 1994, while $80,000 was contributed to
Mountaineer's employee pension fund in 1995, up from $31,000 returned in 1994.
Video lottery terminal lease expenses increased from $790,000 in 1994
to $1.3 million in 1995, a reflection largely of the increased number of
terminals leased, from 165 prior to September 1994, to 400 from September, 1994
through June, 1995, and 800 thereafter. Salaries, payroll taxes and employee
benefits increased from $503,000 in 1994 to $964,000 in 1995, and utilities
increased from $115,000 to $313,000, both increases resulting from the expanded
number of gaming terminals and related increases in patronage.
Parimutuel Commissions Operating Costs
Salaries, payroll taxes and employee benefits increased from $2.2
million in 1994 to $2.5 million in 1995, partly as an accommodation to
certain inefficiencies caused by Mountaineer's extensive construction activities
in 1995. A general upgrade in
- 25 -
28
maintenance activities contributed to this increase, as well as a $65,000
increase in repair and maintenance supplies. The Registrant's totalisator
rents and payments of host track fees increased $177,000 in 1995 from the prior
year as a result of the 24% increase in revenues achieved by its off-track
betting operation. Liability insurance expense in 1995 was $87,000 higher than
the prior period, a reflection of the increased volume of business and an
industry-wide increase in jockey insurance.
Lodging, Food and Beverage Operating Costs
$695,000 of the $947,000 increase in this segment's operating costs
were attributable to food and beverage operations. Although cost of sales
rates increased only slightly from 42% in 1994 to 44% in 1995, this cost
category increased by $303,000 in proportion to the $582,000 increase in
sales. Food and beverage labor costs rose approximately $320,000 also
commensurate with the increase in revenues. Hotel labor costs increased
approximately $191,000 in response to the upgraded service levels which
produced a $194,123 increase in revenues despite no appreciable change in
occupancy rates from 1994 to 1995.
Other Operating Costs
Selling General and Administrative Expenses and Interest Expense
Selling general and administrative expense decreased $104,000 from $6.7
million in 1994 to $6.6 million in 1995. Legal and other professional fees
decreased from $1.4 in 1994 to $1.1 million in 1995. In addition, several
one-time charges affected selling, general and administrative fees as follows: a
provision for settlement of $525,000 and development cost writeoffs of $200,000
in 1994, and provisions for settlements of $408,000 and doubtful notes
receivable from related parties of $290,000, and relocation and severance
charges of $596,000 in 1995.
Other selling, general and administrative expenses at Mountaineer rose
4%, from $2.6 million in 1994 to $2.7 million in 1995. Advertising expenses at
Mountaineer increased from $715,000 in 1994 to $938,000 in 1995 as its revenue
volume grew from $14.7 million to $25.0 million. Salaries decreased from $1.3
million in 1994 to $961,382 in 1995; 1994 compensation includes $600,000
charged to a former shareholder of Mountaineer in the form of Winners
Entertainment, Inc. stock options issued below market in connection with an
employment agreement. During the years ended December 31, 1995 and 1994, the
Registrant incurred noncash expenses of $2.1 million and $2.9 million,
respectively. From time to time, the Company issues common stock for services,
settlements and interest. In addition, in 1995, the Company provided an
allowance for doubtful notes receivable from related parties.
Interest expense decreased 24% from $729,000 in 1994 to $557,000 in
1995 despite the increased construction loan balances carried in 1995; $1.1
million of the interest incurred in 1995 was capitalized to the cost of
construction compared to only $709,000 capitalized in 1994.
Operating Costs -- Year Ended December 31, 1994 Compared to Year Ended
December 31, 1993
Video Lottery Terminals Operating Costs
Cost of VLTs increased by $2.0 million or 53% from $3.7 million to $5.7
million for the year ended December 31, 1994 compared to the same year ended
December 31, 1993. Contributing to this increase were statutory expenses which
increased from $1.7 million in 1993 to $3.9 million for 1994 excluding costs
associated with VLT leases of $790,000 million and $1.2 million in 1994 and
1993, respectively. On March 17, 1994, the State of West Virginia approved the
continued operation of VLTs, however, statutory rates paid to certain entities
were mandated at substantially higher amounts in effect as follows:
March 18, 1994 March 17, 1994
and Beyond and Prior
---------- ---------
State of West Virginia 30.0% 25.0% (1)
Hancock County 2.0% 0.0%
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Horsemen 15.5% 10.0%
Other 5.5% 0.0%
---- ----
Total Statutory Payments 53.0% (2) 35.0%
---- ----
- ---------------
(1) Increased from 20% to 25% in June 1993.
(2) Excludes up to 4% administrative fee charged by the State of West Virginia
based on revenues. In addition, rates are applied to revenues net of this
4% administrative fee.
In addition to the above rates, the Registrant paid a 3% management fee
(after 4% administrative fee), based on VLT revenues to American Gaming and
Entertainment, Ltd. ("AGEL") which began on October 26, 1994, as approved by
the West Virginia Lottery Commission. The Registrant was also required to pay
additional management fees of 8% of income before depreciation, amortization,
taxes and interest. Total management fees charged to the cost of VLTs in 1994
was $133,000. From January 1, 1993 to March 1993 and from April 1993 to August
1993, the Company paid the lessor of its 165 video lottery terminals 23% and
10% of net revenues, respectively.
VLT cashier and technician salaries expense increased $52,000 for the
twelve months ended December 31, 1994 to $215,000 from the same period ended
December 31, 1993, which reflected the additional employees hired to support
the operation of 400 new video lottery terminals, 278 of which have been placed
in operation at the Registrant's newly developed Riverside Gaming Terrace in
the racetrack clubhouse. Increased costs for utilities, insurance and rentals,
due to enlarged facilities and increased personnel costs, accounted for an
additional increase of 17% for the twelve months ended December 31, 1994 as
compared to the twelve months ended December 31, 1993.
PARIMUTUEL COMMISSIONS OPERATING COSTS
Cost of parimutuel commissions were lower by $573,000 or 2% from $5.1
million to $4.6 million for the year ended December 31, 1994 compared to the
year ended December 31, 1993. This decrease is consistent with the decrease in
parimutuel commission revenues for the respective years largely due to the
contractual nature of the Registrant's expenses, as well as certain cost
reduction measures implemented by Management.
FOOD, BEVERAGE AND LODGING OPERATING COSTS
Cost of food, beverage and lodging decreased by $27,000 or 1%
registering at approximately $2.3 million for the years ended December 31, 1994
and December 31, 1993. Costs of food and beverage were essentially unchanged,
reflecting a lower labor cost per dollar of sales. This profit improvement was
made possible by expansion of the clubhouse dining and bar facilities, allowing
for more efficient service. Costs of lodging decreased in 1994 by $26,000 from
$725,000 to $699,000. The decrease is attributable to certain salaries and
other variable expenses which were curtailed in late 1994 due to the fire at
Mountaineer Lodge. This decrease in lodge operating costs is commensurate
with the decline in revenues experienced by the lodge.
OTHER OPERATING COSTS
Costs of other revenues were higher by $11,000 or 1% from $787,000 to
$798,000 for the twelve months ended December 31, 1994 as compared to the same
period ended December 31, 1993. Selling, general and administrative and selling
expenses increased by 4% from $6.4 million to $6.7 million in 1994 versus 1993.
Costs included in this increase pertaining to Mountaineer were the $525,000
Jackpot settlement and legal and professional fees, which, in the aggregate,
cause an increase of $1,039,000 from $319,000 to $1,359,000. In addition,
payroll expenses increased from $812,000 to $1,109,000 or $297,000 and
advertising expenses increased by $170,000 from $915,000 to $1,085,000.
Mountaineer experienced significantly higher legal and professional fees because
of actions by the State of West Virginia in determining legality of VLT
operations and the ultimate approval of such operations. Mountaineer also
incurred fees associated with a new collective bargaining agreement, lawsuits
in the normal course of business and contractual agreements consummated in 1994
(horsemen, VLT lease, AGEL Management Agreement, etc.).
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Interest expense increased by $659,000 from $70,000 to $729,000 for the
twelve months ended December 31, 1994, as compared to the twelve months ended
December 31, 1993. The increase was attributable to the interest cost at 12.5%
per annum on principal amounts drawn down for the construction and redevelopment
activities at Mountaineer, as well as approximately $631,000 of non-cash
interest expenses associated with common stock issued to Bennett. Interest costs
capitalized to construction activities totalled approximately $709,000 and
financing costs deferred in the consolidated balance sheet at December 31, 1995
are $1,628,000 and will be amortized over the expected term of the loan to
construction activities (based on qualified assets) and interest expense.
During the years ended December 31, 1994 and 1993, the Registrant incurred
noncash expenses of $2.9 million and $2.4 million, including depreciation and
amortization of $1.1 million and $1.0 million, respectively. From time to time,
the Registrant has issued common stock for services, settlements and interest
expenses (see Notes 5, 9 and 15 in the "Notes to Consolidated Financial
Statements").
RESULTS OF DISCONTINUED OPERATIONS
On March 31, 1993, the Registrant's board of directors approved a formal
plan to divest its oil and gas operations through a plan of orderly liquidation.
This decision was based upon several factors including (i) the anticipated
potential of the Registrant's gaming operations and the anticipated time to be
devoted to it by Management, (ii) the expiration of "Section 29" credits, a
credit against Federal income taxes derived from gas produced from Devonian
Shale and "tight sands" formations from wells commenced before January 1993, and
(iii) the impact of delays in connection with a political controversy over video
lottery in West Virginia during 1993 which caused Management to focus the
Registrant's efforts and financial resources on Mountaineer. The plan of orderly
liquidation provided for certain rework, remediation and development costs to
address environmental matters, increase production and enhance the value of such
properties for sale.
Descriptions of the oil and gas properties and financial information
relating to operating results and balance sheet items as of December 31, 1994
and 1995 have been disclosed as "Discontinued Operations" for purposes of this
report.
LIQUIDITY AND SOURCES OF CAPITAL
The consolidated financial statements have been presented on a going
concern basis. The Registrant has incurred substantial losses in 1995, 1994 and
1993, and as of December 31, 1995, the Registrant has current liabilities in
excess of current assets of $7,286,000. The Registrant expects that its
continuing operations will be derived primarily by its operations at
Mountaineer. Therefore, the following factors pertain primarily to the
operations at Mountaineer. Management believes that it will be successful in
its attempt to continue to operate as a going concern for the foreseeable
future based, in part, on the plans and factors described below:
- - Mountaineer replaced 165 existing terminals in September 1994 with 400
new terminals, and upon the authorization by the West Virginia Lottery
Commission, Mountaineer installed an additional 400 terminals in June
1995. In March 1996, the West Virginia State Legislature approved
"line" (symbol) games, which is expected to be in operation on at least
400 video lottery terminals by June 1996. In addition, in December
1995, the Lottery Commission voted to allow progressive video lottery
poker and keno games to exceed a 92% payout threshold. As a result,
progressive blackjack, poker and keno games can now be implemented at
payout rates competitive with other gaming jurisdictions. As the most
heavily patronized gaming venue in West Virginia, Mountaineer is
uniquely positioned to benefit from the interest generated by
progressive jackpots. Management believes that such line games will
have a significantly positive impact on the Company's operations. Total
Mountaineer revenue increased from $14,583,000 in 1994 to $24,961,000
in 1995. In addition, Mountaineer's first quarter operating revenues
have increased from $4.7 million (unaudited) in 1995 to $7.2 million
(unaudited) in 1996. Management believes that the substantial and
steady revenue increases over the past three years at Mountaineer will
continue and ultimately result in positive cash flows from operations.
However, there is no guarantee that the Registrant will achieve the
increases in revenues and cash flows it expects to occur.
- - As discussed in Note 3, management intends to refinance its $10.2
million construction loan in 1996. At December 31, 1995, approximately
$2.3 million of this balance is recorded as a current liability in the
accompanying consolidated balance sheet. Mountaineer is currently in
negotiations with a lender to refinance this debt and provide
additional working capital. A $12,500 due diligence fee has been paid
by Mountaineer in connection with the negotiations. However, there is
no guarantee that Mountaineer will be successful in these negotiations.
- - In March 1996, Mountaineer received bridge financing from a different
lender in the amount of $570,000, net, which Mountaineer expects to
repay with the proceeds from the aforementioned refinancing.
- - Mountaineer has expended approximately $11.4 million for capital
improvements, which includes expenditures for the lodge which was
damaged by fire in 1994. Management believes that the Registrant's
capital improvements have had a favorable impact on the Registrant's
operations and management believes this should continue in 1996 and
beyond. However, there is no guarantee that such favorable impact will
continue.
- - Mountaineer amended its video lottery terminals' lease agreement in
March 1996 resulting in a reduction of future monthly payments over an
extended term. Scheduled annual lease payments under the original
agreement were approximately $1,859,000. The amendment reduced the
required cash outflows by approximately $256,000 for 1996.
There are no assurances that management's plans as stated above will be
successfully implemented to a degree sufficient to support operations, generate
positive cash flow and service its obligations.
Operations
The Registrant has incurred losses from continuing operations of $5.3
million in 1995, following losses of $6.9 million in 1994 and $5.9 million in
1993. The operating loss prior to 1995 is substantially the result of delays in
the operation and expansion of its
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video lottery activities, as previously discussed herein. During the years
ended December 31, 1994 and 1993, the Registrant funded losses from proceeds of
approximately $2,193,000 and $3,280,000, respectively, from private placements
and overseas sales under Regulation "S" of the Securities Act of 1933. In
addition in 1994, the Registrant financed certain losses through $1,500,000 of
advances under the Bennett loan.
Operating losses incurred in the Registrant's parimutuel/racing
operation have contributed approximately $800,000 to the overall losses
experienced in each of the three years ended December 31, 1995.
Achievements in early 1995 in off-track betting and live racing purse
increases (which are supported by a 15.5% contribution from VLTs) may resurrect
horse racing at Mountaineer from substantial losses to more moderate shortfalls
in 1996. The Registrant expects to expend significant funds for advertising,
promotion and busing programs to substantially increase attendance and revenues
in 1996 and future years.
In addition, two significant changes have occurred recently in West
Virginia Gaming legislation: (i) In December, 1995 the Lottery Commission voted
to allow progressive video lottery poker and keno games to exceed a 92% payout
threshold. As a result, progressive blackjack, poker and keno games can now be
implemented at payout rates competitive with other gaming jurisdictions. As the
most heavily patronized gaming venue in West Virginia, Mountaineer is uniquely
positioned to benefit from the interest generated by progressive jackpots, and
(ii) In March, 1996 Section 29-22A-3 of the West Virginia code was amended to
permit game themes depicting symbols on reels (commonly referred to as "slot
games" or "line games"). Furthermore, there were no changes to the
grandfathering provisions of the West Virginia code which inhibited the access
of new entities to participate in gaming activities in the state.
The addition of line games has heralded a marked leap in gaming revenue
in other jurisdictions to which it has recently been introduced. Mountaineer
has already engaged in renovation activities which have to position itself for
an almost immediate, low cost expansion in video lottery terminals when the
need arises.
In 1995 the Lottery Commission granted permission for Mountaineer to
increase the number of video lottery terminals in use to 1,000 from the present
800 in operation. Areas in the Speakeasy Gaming Saloon and the Riverside
Gaming Terrace suitable for the addition of 200 video lottery terminals were
constructed in 1995. These areas are already
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fitted with security cameras, cashiering stations, count rooms and most of the
attendant ancillary facilities necessary to efficiently operate as a gaming
facility.
CASH FLOWS
The Registrant's continuing operations have consumed cash from
operations in the following amounts: 1994--$3.9 million, 1993--$2.9 million,
while operations produced $553,000 of cash in 1995. Such cash provided by
continuing operations in 1995 was a result of $3.0 of increases in accounts
payable and accrued liabilities.
Mountaineer has significantly completed its capital expansion and
improvement campaign, investing $5.5 million in property additions in
1995, following investments of $3.4 million in 1994 financed primarily through
its $10.2 construction loan, and $2.5 million in 1993 financed through the
issuance of Registrant's common stock. Approximately $5.9 million of 1994 and
1995 capital improvements were invested in video lottery facilities, with
approximately $518,000 of construction in progress remaining at December 31,
1995. Racetrack related construction totaled $2.4 million in 1994 and 1995,
including renovation of two restaurants seating 1,200, each of which contains
facilities for wagering on live and simulcast racing, and a boxing arena with a
seating capacity of approximately 2,240. Approximately $1.2 million was
invested in hotel renovations in 1994 and 1995, including extensive repairs to
41 rooms damaged in an October, 1994 fire and general furnishing and fixture
upgrades to all other lodging rooms and common areas. Total 1996 capital
expenditures are not expected to exceed $1.5 million.
Mountaineer borrowed $10.2 million under a construction loan with
Bennett in 1994. Mountaineer received $5.7 million of the loan's proceeds in
1994 and the remaining $4.5 million in 1995. The construction loan will convert
to a 36 month term loan, with equal principal payments commencing May 31, 1996
if not prepaid prior to that date. In addition, if the loan is not repaid by
January 2, 1997, the Registrant will be obligated to issue common stock valued
at $2.5 million to Bennett. Management intends to refinance the loan prior to
that date, although there are no assurances that a refinancing will be
successfully completed at favorable terms by that date.
In December, 1995 Mountaineer entered into an agreement with its
totalisator system supplier to convert $461,167 of outstanding trade payables
into a 21 month term loan with monthly principal payments ranging from $13,188
to $34,894.
The Registrant capitalized interest costs relating to construction
totaling $1.1 million in 1995 and $709,000 in 1994. In 1994 the Registrant
recorded a provision in the amount of $525,000 relating to the value of stock
to be used in 1995 in settlement of a legal dispute. Significant items
affecting cash flows in 1993, which are non-cash related are (1) the January 1,
1993 adoption of SFAS 109, "Accounting for Income Taxes," whereby
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the Registrant recorded deferred income taxes of $1,952,000 with a
corresponding increase to property and (2) in July 1993, the Registrant
reconveyed land acquired in Cripple Creek, Colorado, valued at $1,315,000 in
exchange for cancelled long-term debt of $1,315,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and accompanying notes are set
forth on pages F-1 through F-38 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies the Registrant's directors and principal
executive officers and sets forth their business experience during the past
five years. Each director serves for a period of one year and thereafter until
his or her successor is elected and qualified. ExCal Energy Corporation,
Golden Palace Casinos, Inc. and Mountaineer Park, Inc. are subsidiaries of
Winners Entertainment, Inc., as was SDR Corporation until its dissolution in
March 1996.
Director
Name Age Since Registrant Positions
---- --- -------- ---------- ---------
Edson R. Arneault 49 1995 Winners Entertainment, Inc. Chairman of the Board, President,
and Chief Executive Officer
1994 Mountaineer Park, Inc. President
1992 Winners Entertainment, Inc. Director
SDR Corporation Director
Mountaineer Park, Inc. Director and Treasurer
Golden Palace Casinos, Inc. Director, Secretary and Treasurer
ExCal Energy Corporation Chairman, President and CEO
Robert A. Blatt 55 1995 Winners Entertainment, Inc. Director
Robert L. Ruben 34 1995 Winners Entertainment, Inc. Director
Thomas K. Russell 43 1995 Mountaineer Park, Inc. Director and Secretary
1992 Mountaineer Park, Inc. Director and Assistant Secretary
ExCal Energy Corporation Director, Secretary and Treasurer
1991 SDR Corporation Director, Secretary and Treasurer
1989 Winners Entertainment, Inc. Director, Secretary, Treasurer,
Chief Financial Officer and
General Counsel
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BOARD OF DIRECTORS
Members of the Registrant's Board of Directors are elected for a one
year term at each annual meeting of stockholders to succeed those directors
whose terms are expiring.
Mr. Arneault is responsible for government relations in connection
with the Registrant's oil and gas, racing and video lottery operations, with
responsibility for licensing, legislative and regulatory matters and political
relations involving the Registrant. Mr. Arneault manages the daily operations
of the Registrant, including supervision of video lottery gaming, racing and
parimutuel activities, financing and development. Mr. Arneault has an MBA and
is a certified public accountant.
Mr. Blatt is Chief Executive Officer of Island Gold Resorts, L.L.C.,
Championship Golf Enterprises, L.L.C., and Gold Development Services, Limited
of St. John's Antigua, a consultant to the board of directors of AFP Imaging
Corporation. Mr. Blatt is a member of the New York Stock Exchange, Inc. and
has served as director, officer or principal of numerous public and private
enterprises. Mr. Blatt is an attorney and a Registered Principal, NASD and New
York Stock Exchange, Inc.
Mr. Ruben is a principal in Freer & McGarry, P.C., a Washington, D.C.
law firm, where he has practiced since 1991. Freer & McGarry, P.C. has served
as counsel to the Registrant since November 1991, and Mr. Ruben has represented
Mr. Arneault and various of his affiliates since 1987. Mr. Ruben is an attorney
and practices principally in the areas of commercial litigation and
corporate/securities law.
Mr. Russell is responsible for the management of the Registrant's
compliance, litigation, and general legal matters, including coordination of all
activities involving outside professionals, financing and matters concerning
markets for the Registrant's securities. Mr. Russell is an attorney licensed
to practice in the State of California.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
At the date hereof, the Registrant has received reports on Form 5 which
are being submitted by 5 affiliates for filing with the Securities and Exchange
Commission to complete all reports required uner Section 16(a) of the
Securities Act of 1934 during the Registrant's last two fiscal years, including
7 reports by Mr. Arneault involving 8 transactions or holdings, 2 reports by
Mr. Blatt involving 2 transactions or holdings, 2 reports by Mr. Ruben
involving 2 transactions or holdings, 5 reports by Mr. Russell involving 6
transactions or holdings, and 4 reports by the Don Saunders and Bonnie Saunders
1987 Trust involving 5 transactions or holdings. Many of the transactions and
holdings reportable in the previously required reports have been reported in
this report and the Registrant's prior proxy statements and reports on Forms
10-K and 10-Q.
The Registrant has not received at least 2 such reports from a former
affiliate, Michael R. Dunn, involving 8 transactons or holdings known to the
Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The following information is furnished with respect to all the
remuneration for services rendered in all capacities to the Registrant during
1995, paid to (i) each of the Registrant's highest paid executive officers and
directors for whom such remuneration exceeded $100,000 in the last three
completed fiscal years and (ii) all executive officers and directors of the
Registrant as a group.
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SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation ----------------------------------------------
------------------------------------- Awards Payouts
---------------------- -------
Other Restricted
Annual Stock Options LTIP All
Comp. Awards SARs Payouts Other
Name Year Salary ($) Bonus ($) ($) ($) (#) ($) Comp.
---- ---- ---------- --------- ---- --------- ------ ------- ------
(1) (2) (3) (4) (5) (6)
Edson R. Arneault
President and CEO of 1995 213,652 23,000 -- -- 618,415 -- --
Mountaineer Park, Inc. 1994 188,729 -- 4,021 46,000 -- -- --
ExCal Energy Corporation 1993 151,865 -- -- -- -- -- --
Thomas K. Russell
Secretary, Treasurer, CFO 1995 147,288 -- -- -- 357,316 -- --
General Counsel of 1994 134,075 -- 2,789 -- -- -- --
Winners Entertainment, Inc. 1993 109,597 16,250 -- -- -- -- --
Michael R. Dunn (6) 1995 38,659 -- -- -- -- -- 176,973
President and CEO of 1994 204,437 -- 12,500 -- 240,000 -- --
Winners Entertainment, Inc. 1993 161,436 36,250 -- -- -- -- --
Compensation paid to all 1995 399,599 23,000 -- -- 975,731 -- --
officers and directors
as a group during 1995
- ---------------
(1) Salaries for Mr. Arneault and Mr. Russell include accrued compensation for
the year ended December 31, 1995 of $144,667 and $41,554, respectively.
Subsequent to December 31, 1995, said amounts, together with interest at
the rate of 10% per annum, will be converted to shares of the Registrant's
common stock at the market value of the shares on February 9, 1996, the
effective date of the conversion.
(2) Represents accrued 1994 vacation compensation for executive officers
distributed in 1994.
(3) Represents the dollar value of stock award of 20,000 shares of restricted
common stock.
(4) No options were granted in 1994 or 1993. All options granted by the board
of directors in 1995 were approved by vote of the stockholders at the
Registrant's annual meeting of shareholders held September 11, 1995.
(5) See "Employment Agreements" below.
(6) Mr. Dunn resigned from all offices with the Registrant and its subsidiaries
on April 26, 1995. See "Other Agreements" below and Item 1--Legal
Proceedings."
The following table contains information concerning the grant of stock
options during fiscal 1995 to the Registrant's executive officers named in the
Summary Compensation Table.
OPTIONS GRANTS IN 1995
Potential Realized Value
at Assumed Annual Rates
% of Total of Stock Price Appreciation
Options for Option Term
Options Granted In Exercise Expiration ---------------------------
Name Granted Fiscal Year Price Date 5% 10%
- ---- ------- ----------- -------- ---------- ------- --------
Edson R. Arneault 378,415 45.98% $1.219 Sep 1998 $72,711 $152,686
240,000 20.00% $2.000(1) Oct 1997 $ 0 $ 0
Thomas K. Russell 222,316 27.01% $1.219 Sep 1998 $42,176 $ 89,702
135,000 11.25% $2.000(1) Oct 1997 $ 0 $ 0
Michael R. Dunn 240,000 20.00% $2.000(a) Oct 1997 $ 0 $ 0
- -----------------
(1) In October 1992, the board of directors granted incentive stock options to
certain executive officers, key personnel and employees to purchase, in
the aggregate, 1,200,000 shares of the Registrant's common stock for a
price of $4.875 per share. In December, 1994, the board of directors of
the Registrant voted and shareholders approved at the annual shareholders'
meeting, to reduce the exercise price of such incentive stock options from
$4.875 to $2.00 per share.
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The following table sets forth information regarding the number and
value of options held by each of the Registrant's executive officers named in
the Summary Compensation Table during fiscal 1995. None of the named executive
officers exercised any stock options during fiscal 1995.
FISCAL YEAR END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options at in-the-Money Options
Fiscal Year End(2) at Fiscal Year End($)(1)
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Edson R. Arneault 759,749 -- 0 --
Thomas K. Russell 436,816 -- 0 --
Michael R. Dunn 419,133 -- 0 --
- ----------------
(1) Based on the market price of the Registrant's common stock at $0.75 on
December 31, 1995, as reported by Nasdaq.
(2) On January 23, 1996, the Registrant, pursuant to a qualified incentive stock
option plan, granted to Mr. Arneault and Mr. Russell, options to purchase
300,000 shares and 100,000 shares of the Registrant's common stock,
respectively, at the estimated fair market value price on the date of grant
of $0.5625, the options are subject to approval at the next annual meeting
of shareholders. Such options grants were made in 1996, and are not
reflected in the table above.
The following table sets forth the number of options held by officers
of the Registrant subject to repricing during the fiscal year ended December
31, 1995. See table entitled "Option Grants in 1995 - footnote (a)," above.
TEN-YEAR OPTION/SAR REPRICINGS
Length of
Original
Number Market Price Exercise Price Option Term
of Options/ of Stock at at Time of Remaining
SARs Repricing or Repricing or New at Date of
Amended Amendment Amendment Exercise Repricing or
Name Date # ($) ($) Price($) Amendment
---- ---- ----------- ------------ -------------- -------- ------------
Edson R. Arneault Sep 95 240,000 1.563 4.875 2.00 2 years
Thomas K. Russell Sep 95 240,000 1.563 4.875 2.00 2 years
Michael R. Dunn Sep 95 135,000 1.563 4.875 2.00 2 years
EMPLOYMENT AGREEMENTS
In May 1994, employment agreements were entered into by the Registrant
and three of its officers, Edson R. Arneault, Thomas K. Russell and Michael R.
Dunn. The employment agreements contain substantially similar compensation
terms, differing only as to the amounts of compensation for each officer. Each
agreement provides for a three year period of employment, with an automatic
renewal of the three-year term on each anniversary date unless either party
provides written notice of cancellation of the renewal. On January 23, 1996,
the Registrant canceled the renewal provision for each of the agreements
effective May 11, 1996. Mr. Dunn's employment agreement terminated effective
April 26, 1995, the date of his resignation as an officer and director of the
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Registrant and its subsidiaries. Mr. Dunn's employment agreement was replaced
with the agreement discussed in "Other Agreements" below. Each employment
agreement provides for a base salary with annual cost of living adjustments,
increases contingent on certain events and bonuses at the discretion of the
board of directors. Base salaries of the executive officers of the registrant
at December 31, 1995 are $228,900 for Mr. Arneault and $157,500 for Mr. Russell.
Under the employment agreements, if the employee's period of employment
is terminated for a reason other than death or physical or mental incapacity or
for cause, the Registrant will continue to pay the employee, or the employee's
estate, the compensation that otherwise would have been due to him for the
remaining period of employment. The agreements may be terminated with no
further obligation by the Registrant to pay the employee, but only if such
termination is for cause defined as (i) conviction of a felony, (ii)
embezzlement or misappropriation of funds or property of the Registrant, or
(iii) refusal to substantially perform or willful misconduct in the performance
of duties under the agreement. The agreements provide that in the event an
officer's employment is terminated by the Registrant without cause or by the
officer following a change of control, as defined, the officer is to receive
within 30 days of the termination a sum that is three times his annual base
salary, but not to exceed the amount deductible by the Registrant under the
Internal Revenue Code of 1986. The agreements also prohibit employment in a
competitive gaming venture located within a 90 mile radius of any gaming
facility owned or to be owned by the Registrant during the term of the
agreement.
OTHER AGREEMENTS
During the second quarter of 1995, Mr. Dunn and the Registrant
entered into an agreement pursuant to which Mr. Dunn resigned from the
Registrant and its subsidiaries effective April 26, 1995. Pursuant to this
agreement, the Registrant agreed to pay Mr. Dunn bi-monthly payments equal to
his former salary for a period of two years, certain medical and health
benefits, and indemnification for actions taken while he was an employee of
the Registrant.
Subsequent to the agreement, the Registrant discovered circumstances
which has caused Management to believe that the agreement should be rescinded.
Bi-monthly payments were made to Mr. Dunn through September 30, 1995, and no
payments thereafter. Mr. Dunn has made demand for payment of unpaid
installments under the agreement, attorneys' fees incurred in pursuing his
claim and unspecified investment opportunity. No action has been filed,
however, Mr. Dunn has made a formal demand for arbitration. The Registrant
intends to defend or settle the matter after a complete review by counsel.
COMPENSATION OF DIRECTORS
On September 11, 1995, the shareholders elected Mr. Ruben and Mr. Blatt
as directors of the Registrant. Although Mr. Ruben and Mr. Blatt are not
employees of the Registrant, they are entitled to a fee of $2,500 for each
quarterly board meeting attended, and reimbursement for out-of-pocket expenses
incurred in connection with their attendance at board meetings. Directors who
are employees of the Registrant do not receive additional compensation for
services as directors, except that they are reimbursed for out-of-pocket
expenses. On January 23, 1996, Mr. Blatt and Mr. Ruben, were granted
non-qualified options to purchase 50,000 shares and 75,000 shares of the
Registrant's common stock, respectively, at the fair market value on the date
of grant of $0.5625 per share. The options are immediately exercisable for
a term of three years.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On September 11, 1995, the board of directors appointed Mr. Ruben and
Mr. Blatt to serve as the board's Compensation Committee. The Committee is
authorized to review all compensation matters involving directors and executive
officers, and Compensation Committee approval is required for any compensation
to be paid to executive officers or directors who are employees of the
Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1995 the ownership of
the presently issued and outstanding shares of the Registrant's common stock by
persons owning more than 5% of such stock, and the ownership of such stock by
the Registrant's officers, directors and key employees, individually and as a
group. As of April 4, 1996, there were 17,323,399 shares of common stock
outstanding. All such shares were owned both beneficially and of record,
except as otherwise noted.
Amount
and Nature
of Beneficial Percentage
Name and Address Ownership of Class
------------------- ------------- ----------
Edson R. Arneault(1) 2,412,133 11.77%
7199 Thornapple River Drive
Ada, MI 49306
Donald Saunders and Bonnie Saunders 1987 Trust(2) 2,017,685 9.85%
Donald G. Saunders, Trustee
900 East Desert Inn Road, Suite 521
Las Vegas, NV 89109
Bennett Management(3) 1,530,000 7.47%
and Development Corp
2 Clinton Square
Syracuse, NY 13202
Thomas K. Russell(4) 540,626 2.64%
1461 Glenneyre Street, Suite F
Laguna Beach, CA 92651
Robert A. Blatt(5) 377,684 1.84%
The CRC Group
Larchmont Plaza
1890 Palmer Avenue, Suite 303
Larchmont, NY 10538
Robert L. Ruben(6) 90,000 0.44%
Freer and McGarry
1000 Thomas Jefferson St., NW, Suite 600
Washington, DC 20007
All officers and directors as a
Group (4 persons)(7) 3,420,443 16.70%
- ---------------
(1) Includes 20,000 shares and options and other rights to acquire beneficial
ownership of 1,122,615 shares within 60 days held by Mr. Arneault, and
1,269,518 shares held by corporations and limited partnerships for which Mr.
Arneault is a control person.
-36-
39
(2) Includes 1,016,816 shares and options, warrants and other rights to acquire
beneficial ownership of 1,000,869 shares within 60 days held by trust.
(3) Includes 780,000 shares for which voting rights have been assigned to the
board of directors of the Registrant to satisfy licensing requirements of
the West Virginia Lottery Commission.
(4) Includes options and other rights to acquire beneficial ownership of 540,626
shares within 60 days held by Mr. Russell.
(5) Includes 327,684 shares and options to acquire beneficial ownership of
50,000 shares within 60 days held by Mr. Blatt.
(6) Includes 15,000 shares and options to acquire beneficial ownership of 75,000
shares within 60 days held by Mr. Ruben.
(7) Includes Messrs. Arneault, Russell, Blatt and Ruben.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the Registrant's officers and directors may be subject to
various potential conflicts of interest arising out of their relationship with
the Registrant and ExCal Energy Corporation, including their status as
creditors of the Registrant, owners of working interests in properties owned by
the Registrant, contractors for operating wells for the Registrant, their
control of pipelines through which the Registrant transports gas, and
the ownership of leases on land adjacent to leases owned by the Registrant.
Sales of Leases and Wells. In December 1994, the Registrant sold its
Ohio oil and gas operations pursuant to its March 1993 plan of orderly
liquidation to Development & Acquisition Ventures in Energy, Inc. ("DAVE"), the
brother of Mr. Arneault, for notes secured, in part, solely by the assets
sold. The Registrant had received four independent bids for the purchase of
such properties, with the highest having been submitted by DAVE. Management
determined, based on market conditions and the Registrant's plans to liquidate
its oil and gas operations, that the sale terms were in the best interest of
the Registrant. Though DAVE is current with payments under the notes to date,
ExCal will be confronted with a continuing conflict of interest with respect to
the enforcement of the notes.
Advances by Director to Subsidiary. During 1994 and 1995, various
corporate affiliates of Mr. Arneault advanced an aggregate sum of approximately
$100,000 to ExCal primarily to cover overhead expenses in connection with the
maintenance of leases and other costs associated with the Registrant's existing
oil and gas interests in Michigan and former interests in Ohio. In February
1996, such accrued amount, along with accrued interest thereon at the rate of
10% per annum, was converted into a demand promissory note in the principal
amount of $100,218 payable to Mr. Arneault at the rate of 10% per annum. No
material overhead expenses are expected to be incurred in 1996.
Purchase of Stock by Affiliate from Joint Venture Partner. To assist
Fleur-David Corporation, the Registrant's joint venture partner in rework
activities related to the Registrant's plan of orderly liquidation of its oil
and gas interests in Michigan, Mr. Arneault purchased 25,000 shares of the
Registrant's common stock held by Fleur-David, in July 1995, in a private
transaction.
Participation by Director and Affiliate in Proved Reserves. During
1995, Thomas K. Russell, a director of the Registrant, and Mark C. Russell, his
brother, each purchased a working interest in the Marathon-Otter Lake oil and
gas reserves in Michigan, owned in
-37-
40
part by a joint venture between Fleur-David Corporation and the Registrant for
an aggregate amount of approximately $50,000. The subject working interests,
and others, were offered by Fleur-David to raise capital to finance further
rework and remediation activities at the property.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Included in Part II of this Report:
Independent Auditors' Report (F-2)
Consolidated Balance Sheets as of December 31, 1995 and 1994 (F-3)
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1995 (F-5)
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended December 31, 1995 (F-6)
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1995 (F-9)
Notes to Consolidated Financial Statements (F-11)
(a) 2. FINANCIAL STATEMENT SCHEDULES.
Included in Part IV of this Report.
For the years ended December 31, 1995, 1994 and 1993
Schedule II - Valuation Allowance and Qualifying Accounts
(a) 3. EXHIBITS.
3(1) Articles of Incorporation, as amended.(1)
3(2) By-Laws of Winners Entertainment, Inc.(1)
10(1) Amendment re outstanding promissory note to Bartlett Field
Partnership by ExCal Energy Corporation pursuant to the March 30,
1995 Amendment of Supplemental Agreement with Respect to Acquisition
of 77 Gas Wells, dated October 2, 1995.
10(2) Amendment to June 27, 1994 Construction Loan Agreement by and among
Bennett Management & Development Corporation, Mountaineer Park, Inc.,
and Winners Entertainment, Inc., dated October 31, 1995.
- ---------------
(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, Exhibit 3(i) and (ii).
-38-
41
10(3) Amendment to June 27, 1994 Construction Loan Agreement by and among
Bennett Management & Development Corporation, Mountaineer Park, Inc.,
and Winners Entertainment, Inc., dated November 28, 1995.
10(4) Amendment to June 27, 1994 Construction Loan Agreement by and among
Bennett Management & Development Corporation, Mountaineer Park, Inc.,
and Winners Entertainment, Inc., and Mutual Release, dated January
12, 1995.
10(5) Agreement by and between Autotote Systems, Inc. and Mountaineer Park,
Inc., dated November 29, 1995, for totalisator services provided
pursuant to an agreement dated September 21, 1984, as amended. Letter
agreement dated April 12, 1995 attached as Exhibit "A".
10(6) Totalisator Services Agreement between Autotote Systems, Inc. and
Mountaineer Park, Inc., dated November 29, 1995.
10(7) Master Lease Agreement #154920 and Schedule 2 between IGT North
America and Mountaineer Park, Inc. re video lottery machine equipment
lease, dated June 19, 1995.
10(8) Amendment to Master Lease Agreement by and among IGT, Mountaineer
Park, Inc. and Winners Entertainment, Inc., dated March 26, 1996.
10(9) Mutual Release by and between Dublin Energy Corporation and Edward R.
Knezevich and Winners Entertainment, Inc., Mountaineer Park, Inc. and
Mountaineer Magic, Inc., dated October 18, 1995.
10(10) Letter Agreement dated November 17, 1995, with Donald G. Saunders for
the issuance of 200,000 shares of Winners Entertainment, Inc. common
stock.
10(11) Promissory Note No. 1 by Mountaineer Park, Inc. to AstraFund, Ltd.,
dated March 20, 1996 and due April 22, 1996, and Schedule of
Substantially Identical Promissory Notes.
10(12) Irrevocable and Unconditional Guaranty of Payment by Winners
Entertainment, Inc., dated March 20, 1996, of Promissory Note No. 1,
dated March 20, 1996, by Mountaineer Park, Inc. to AstraFund, Ltd.,
and Schedule of Substantially Identical Irrevocable and Unconditional
Guarantys of Payment.
17 Letter of Resignation from Michael R. Dunn as director and officer of
Winners Entertainment, Inc., dated April 26, 1995.
-39-
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WINNERS ENTERTAINMENT, INC.
By: /s/ Edson R. Arneault
--------------------------
Name: Edson R. Arneault
Title: President and Chief Executive Officer
Date: March 15, 1996
------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Signature Capacity
- --------- --------
/s/ Edson R. Arneault Chairman and Director
- ----------------------------
Edson R. Arneault
/s/ Thomas K. Russell Chief Financial Officer and Director
- ----------------------------
Thomas K. Russell
43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and 1994................................................................. F-3
Consolidated Statements of Operations for each of
the years in the three-year period ended December 31, 1995............... F-5
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 31, 1995.................................................. F-6
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 1995........................................................ F-10
Notes to Consolidated Financial Statements................................ F-12
44
INDEPENDENT AUDITORS' REPORT
Board of Directors
Winners Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Winners
Entertainment, Inc. and its subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Winners
Entertainment, Inc. and its subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred substantial losses
in the past three years and has a significant working capital deficit at
December 31, 1995. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management is implementing plans which
it believes will allow the Company to improve operations and cash flows, and
meet its obligations as they come due (see Note 1). The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Corbin & Wertz
Irvine, California
April 5, 1996
F-2
45
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
ASSETS 1995 1994
---- ----
Current assets:
Cash $ 807,000 $ 1,057,000
Restricted cash (Notes 7 and 13) 426,000 646,000
Accounts receivable, net of allowance
for doubtful accounts of $70,000 and
$93,870 in 1995 and 1994, respectively 174,000 79,000
Notes receivable from related parties,
net of allowance for doubtful accounts
of $290,000 in 1995 (Note 8) 62,000 352,000
Prepaid management fees (Note 14) --- 220,000
Prepaid purses (Note 13) --- 352,000
Deferred financing costs (Note 5) 388,000 630,000
Other current assets 115,000 219,000
----------- -----------
Total current assets 1,972,000 3,555,000
----------- -----------
Property and equipment, net
(Notes 2, 4 and 5) 18,100,000 13,462,000
----------- -----------
Net assets of discontinued oil and
gas activities (Note 10) 2,616,000 2,616,000
----------- -----------
Other assets:
Deferred financing costs (Note 5) --- 998,000
Excess of cost of investments over
net assets acquired, net of accumulated
amortization of $770,000 and $517,000
in 1995 and 1994 (Note 2) 3,004,000 3,255,000
Deposits and other 55,000 72,000
----------- -----------
3,059,000 4,325,000
----------- -----------
$25,747,000 $23,958,000
=========== ===========
Continued
F-3
46
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 1995 and 1994
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
---- ----
Current liabilities:
Accounts payable $ 3,474,000 $ 2,259,000
Accrued liabilities (Notes 7, 8,
13 and 14) 2,257,000 805,000
Current portion of long-term
debt (Note 5) 2,536,000 648,000
Current portion of redeemable common
stock (Notes 2, 9 and 10) 991,000 1,651,000
------------ ------------
Total current liabilities 9,258,000 5,363,000
------------ ------------
Accrued financing costs (Note 5) --- 998,000
Accrued liabilities (Notes 7 and 8) 490,000 525,000
Long-term debt, less current portion
(Note 5) 8,071,000 5,095,000
Deferred income taxes (Note 11) 1,529,000 1,662,000
Redeemable common stock, 441,854
and 367,937 issued and outstanding at
December 31, 1995 and 1994, net of
current portion (Notes 2, 9 and 10) 415,000 557,000
Commitments and contingencies (Notes
5, 7, 9, 13 and 14)
Shareholders' equity (Notes 2, 3, 5,
and 9):
Common stock, par value $.00001,
25,000,000 shares authorized;
17,022,645 and 14,620,877 issued
and outstanding in 1995 and
1994, respectively 2,000 1,000
Paid-in capital 32,115,000 30,508,000
Receivable from exercise of
stock options (69,000) ---
Accumulated deficit (26,064,000) (20,751,000)
------------ ------------
Total shareholders' equity 5,984,000 9,758,000
------------ ------------
$ 25,747,000 $ 23,958,000
============ ============
See accompanying notes to consolidated financial statements
F-4
47
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
1995 1994 1993
----------- ----------- -----------
Revenues:
Video lottery terminals
(Note 14) $16,479,000 $ 7,481,000 $ 5,293,000
Parimutuel commissions
(Note 13) 4,263,000 3,768,000 4,323,000
Lodging, food and beverage 3,046,000 2,276,000 2,344,000
Other 1,191,000 1,157,000 1,054,000
----------- ----------- -----------
24,979,000 14,682,000 13,014,000
----------- ----------- -----------
Costs and expenses:
Cost of video lottery terminals
(Note 14) 12,256,000 5,709,000 3,720,000
Cost of parimutuel commissions
(Note 13) 5,064,000 4,563,000 5,136,000
Cost of lodging, food and
beverage 3,285,000 2,337,000 2,364,000
Cost of other 1,195,000 798,000 787,000
Selling, general and admini-
strative expenses (Note 7) 6,564,000 6,668,000 6,370,000
Depreciation and amortization 1,504,000 910,000 625,000
Interest expense (Notes 5 and 8) 557,000 729,000 70,000
----------- ----------- -----------
30,425,000 21,714,000 19,072,000
----------- ----------- -----------
Loss before income taxes (5,446,000) (7,032,000) (6,058,000)
Benefit for income taxes (Note 11) 133,000 130,000 145,000
----------- ----------- -----------
Loss from continuing operations (5,313,000) (6,902,000) (5,913,000)
----------- ----------- -----------
Discontinued operations (Note 10):
Loss on disposal of oil and gas
operations --- (640,000) (1,653,000)
----------- ----------- -----------
Loss from discontinued operations --- (640,000) (1,653,000)
----------- ----------- -----------
Net loss $(5,313,000) $(7,542,000) $(7,566,000)
=========== =========== ===========
Loss per share from continuing
operations $ (.33) $ (.48) $ (.46)
Loss per share from discontinued
operations .00 (.04) (.13)
----------- ----------- -----------
Net loss per share $ (.33) $ (.52) $ (.59)
=========== =========== ===========
Weighted average number of
shares outstanding 16,226,743 14,523,377 12,883,031
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
48
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- -----------
Balances, January 1, 1993 11,226,231 $1,000 $17,013,000 $--- $(5,643,000) $11,371,000
Shares issued from exercise
of Series C warrants
(Note 9) 373,241 --- 2,239,000 --- --- 2,239,000
Shares canceled on notes
payable and interest to
affiliates (Note 10) (20,000) --- (120,000) --- --- (120,000)
Shares issued for notes
payable and interest to
affiliates, net of 98,333
shares of redeemable common
stock (Note 10) 226,286 --- 792,000 --- --- 792,000
Shares issued for conversion
of debentures (Note 6) 416,197 --- 832,000 --- --- 832,000
Shares issued for services
rendered and letter of credit
fees (Notes 7 and 9) 197,787 --- 619,000 --- --- 619,000
Shares issued for cash, net
of commissions (Note 9) 746,755 --- 3,280,000 --- --- 3,280,000
Shares issued for investment
in riverboat gaming
(Note 2) 50,000 --- 300,000 --- --- 300,000
Shares issued in connection
with LVEN (Note 2) 250,000 --- 750,000 --- --- 750,000
Continued
F-6
49
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- ----------
Shares issued for capital
raising activities (Note 9) 125,000 --- --- --- --- ---
Compensation for stock
options issued below fair
value (Notes 2 and 9) --- --- 600,000 --- --- 600,000
Net loss --- --- --- --- (7,566,000) (7,566,000)
---------- ----- ---------- -------- ----------- ----------
Balances, December 31, 1993 13,591,497 1,000 26,305,000 --- (13,209,000) 13,097,000
Shares received in connection
with settlement with
LVEN (Notes 2 and 3) (250,000) --- (750,000) --- --- (750,000)
Shares issued to for cash,
net of commissions (Note 9) 786,199 --- 2,193,000 --- --- 2,193,000
Shares issued from exercise
of stock options
(Note 9) 50,000 --- 200,000 --- --- 200,000
Shares issued for services
rendered and interest (Note 9) 147,500 --- 210,000 --- --- 210,000
Shares issued in connection with
financing arrangement (Note 5) 285,000 --- 1,710,000 --- --- 1,710,000
Shares issued for accounts
payable (Note 9) 10,681 --- 40,000 --- --- 40,000
Compensation for stock
options issued below fair
value (Notes 2 and 9) --- --- 600,000 --- --- 600,000
Continued
F-7
50
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- ----------
Net loss --- --- --- --- (7,542,000) (7,542,000)
---------- ----- ---------- -------- ----------- ----------
Balances, December 31, 1994 14,620,877 1,000 30,508,000 --- (20,751,000) 9,758,000
Shares issued from exercise
of stock options
(Notes 2 and 9) 286,667 --- 109,000 (69,000) --- 40,000
Shares issued for services
rendered and interest (Note 9) 77,332 --- 42,000 --- --- 42,000
Shares issued in connection with
financing arrangement (Note 5) 225,000 1,000 1,349,000 --- --- 1,350,000
Cancellation of price guarantee
in connection with financing
arrangement (Note 5) --- --- (3,060,000) --- --- (3,060,000)
Shares issued to replace price
guarantee in connection with
financing arrangement (Note 5) 1,020,000 --- 1,530,000 --- --- 1,530,000
Shares forfeited by Company
(510,000), retained by creditor,
in connection with financing
arrangement (Note 5) --- --- 478,000 --- --- 478,000
Shares issued, and 104,500
redeemable shares without
rights canceled in connection
with the Golden Palace
acquisition debt (Notes 2
and 9) 194,500 --- 212,000 --- --- 212,000
Shares issued, and 98,333
redeemable shares with
put rights canceled, in
connection with oil and gas
acquisition debt (Note 10) 471,933 --- 590,000 --- --- 590,000
Shares issued in connection
with legal settlement
(Note 7) 175,000 --- 414,000 --- --- 414,000
Continued
F-8
51
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
-------------------- PAID-IN EXERCISE OF ACCUMULATED
SHARES AMOUNT CAPITAL STOCK OPTIONS DEFICIT TOTALS
---------- ------ ----------- ------------- ----------- -----------
Shares issued for notes
payable (Note 5) 60,850 --- 43,000 --- --- 43,000
Cancellation of shares issued
in 1994 for services rendered
(Note 7) (97,500) --- (100,000) --- --- (100,000)
Adjustment to shares
outstanding (12,014) --- --- --- --- ---
Net loss --- --- --- --- (5,313,000) (5,313,000)
---------- ------ ----------- -------- ------------ -----------
Balances, December 31, 1995 17,022,645 $2,000 $32,115,000 $(69,000) $(26,064,000) $ 5,984,000
========== ====== =========== ======== ============ ===========
See accompanying notes to consolidated financial statements
F-9
52
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
1995 1994 1993
----------- ----------- -----------
Cash flows from operating activities:
Loss from continuing
operations $(5,313,000) $(6,902,000) $(5,913,000)
Adjustments to reconcile loss to
net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 1,504,000 910,000 625,000
Provision for settlements (Note 7) 408,000 525,000 ---
Other non-cash provisions, net (133,000) 125,000 510,000
Provision for notes receivable
from related parties 290,000 --- ---
Common stock and options issued for
services rendered and interest
(Notes 2 and 9) 77,000 1,340,000 1,219,000
Change in operating assets and
liabilities, net of effects of
acquired companies:
Prepaid management fees 220,000 (220,000) ---
Prepaid purses 352,000 (352,000) ---
Other current assets 54,000 63,000 73,000
Accounts payable 1,676,000 1,221,000 1,049,000
Other accrued liabilities 1,418,000 (244,000) (341,000)
----------- ----------- -----------
Cash provided by (used in)
continuing operations 553,000 (3,534,000) (2,778,000)
----------- ----------- -----------
Loss from discontinued operations:
Oil and gas operations --- (640,000) (1,653,000)
Adjustments to reconcile loss to
net cash used in discontinued
operating activities:
Depletion --- --- 25,000
Provision for estimated loss on
sale of discontinued oil and gas
operations (Note 10) --- 567,000 1,546,000
----------- ----------- -----------
Cash used in discontinued operations --- (73,000) (82,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 553,000 (3,607,000) (2,860,000)
----------- ----------- -----------
Cash flows from investing activities:
Restricted cash 220,000 (401,000) (170,000)
Proceeds from insurance reimbursement --- 241,000 ---
Repayments (advances) on notes receivable
from related parties --- 38,000 (160,000)
Deposits and other assets 17,000 (2,000) 5,000
Capital expenditures (5,482,000) (3,444,000) (2,544,000)
Expenditures for investment in riverboat --- --- (428,000)
Net assets of discontinued oil and gas
operations (45,000) (198,000) (210,000)
----------- ----------- -----------
Net cash used in investing activities (5,290,000) (3,766,000) (3,507,000)
----------- ----------- -----------
Continued
F-10
53
WINNERS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
1995 1994 1993
----------- ----------- -----------
Cash flows from financing activities:
Payments on notes payable (53,000) (150,000) (300,000)
Proceeds from the issuance of long-term debt 4,500,000 5,700,000 240,000
Proceeds from the issuance of notes
payable to shareholders --- --- 100,000
Payments on notes payable to shareholders --- (70,000) (432,000)
Deferred finance costs --- (61,000) ---
Proceeds from issuance of common stock
Series C warrants exercised --- --- 2,239,000
Proceeds from issuance of common stock
for cash, net 2,193,000 3,280,000
Proceeds from issuance of common stock
in connection with LVEN --- --- 750,000
Proceeds from issuance of common stock
through exercise of stock options 40,000 200,000 ---
----------- ----------- -----------
Net cash provided by financing
activities 4,487,000 7,812,000 5,877,000
----------- ----------- -----------
Net increase (decrease) in cash
(250,000) 439,000 (490,000)
Cash, beginning of year 1,057,000 618,000 1,108,000
----------- ----------- -----------
Cash, end of year $ 807,000 $ 1,057,000 $ 618,000
=========== =========== ===========
Supplemental disclosures of cash flow information -
Cash paid during the year for:
Interest $ 896,000 $ 204,000 $ 68,000
=========== =========== ===========
Income taxes $ 4,000 $ 5,000 $ 15,000
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-11
54
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Secamur Corporation was incorporated on March 7, 1988. Effective June 19, 1989,
Secamur Corporation and Pacific International Industries, Inc., dba Excalibur
Securities Services, completed a merger accounted for under the pooling-of-
interests method. Prior to the merger, Secamur Corporation had no operations.
Secamur Corporation subsequently changed its name to Excalibur Security
Services, Inc. During 1991, Excalibur Security Services, Inc. formally changed
its name to Excalibur Holding Corporation.
Due to the inability of Excalibur Security Services, Inc. to attain profitable
operations, its Board of Directors, on December 28, 1990, filed a voluntary
petition for reorganization with the U.S. Bankruptcy Court in the Central
District of California for protection under Chapter 11 of the U.S. Bankruptcy
Code (see Note 10) and in May 1991, Excalibur Holding Corporation sold the
assets of its discontinued security guard business. Effective January 15, 1992,
a formal plan was approved by the Bankruptcy Court to operate oil and gas
activities and to devote Excalibur Holding Corporation's efforts to the
acquisition of new businesses.
In January 1992, Excalibur Holding Corporation formed ExCal Energy Corporation
(ExCal) as a wholly-owned subsidiary to acquire certain assets of various
companies which were controlled by the newly appointed president of ExCal for
the purpose of establishing oil and gas operations.
During 1992, Excalibur Holding Corporation acquired all of the outstanding
common stock of Golden Palace Casinos, Inc., an entity with no significant
operations and cash of approximately $3,200,000. Excalibur Holding Corporation
utilized substantially all of the cash obtained from Golden Palace Casinos to
finance the acquisition of all of the outstanding common stock of Mountaineer
Park, Inc., which operates a thoroughbred horse track, a 101 room inn and dining
facility, and video lottery terminal activities in West Virginia. Excalibur
Holding Corporation undertook a major renovation of this facility in 1993 with
cash expenditures, including capitalized finance costs incurred through December
31, 1995 of approximately $11,400,000.
Because of the significant acquisitions by Excalibur Holding Corporation in the
gaming industry and their long-term potential, it is management's current
strategy to focus all of its efforts in such industry. Accordingly, on March
31, 1993, management decided to adopt a formal plan of orderly liquidation of
its oil and gas properties and is effecting an orderly sale of such assets
having sold approximately 30% of such assets in 1994 (see Note 10). During
1993, the Excalibur Holding Corporation formally changed its name to Winners
Entertainment, Inc. (the "Company").
Basis of Presentation
The consolidated financial statements have been presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Certain considerations raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has incurred substantial losses in 1995, 1994 and 1993, and as of
December 31, 1995, the Company has current liabilities in excess of current
assets of $7,286,000. The Company expects that its continuing operations will
be derived primarily by its operations at Mountaineer Race Track and Gaming
Resort ("Mountaineer") (see Note 2). The Company's business strategy is to
increase revenues in all areas of operations through the promotion and expansion
of its video lottery business and the enhancement of its racing and
entertainment facilities. Therefore, the following factors pertain primarily to
the operations at Mountaineer. Management believes that it will be successful in
its attempt to continue to operate as a going concern for the foreseeable future
based, in part, on the plans and factors described below:
Continued
F-12
55
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
- - Mountaineer replaced 165 existing terminals in September 1994 with 400
new terminals, and upon the authorization by the West Virginia Lottery
Commission, Mountaineer installed an additional 400 terminals in June
1995. In March 1996, the West Virginia State Legislature approved
"line" (symbol) games, which is expected to be in operation on at least
400 video lottery terminals by June 1996. In addition, in December
1995, the Lottery Commission voted to allow progressive video lottery
poker and keno games to exceed a 92% payout threshold. As a result,
progressive blackjack, poker and keno games can now be implemented at
payout rates competitive with other gaming jurisdictions. As the most
heavily patronized gaming venue in West Virginia, Mountaineer is
uniquely positioned to benefit from the interest generated by
progressive jackpots. Management believes that such line games and
progressives will have a significantly positive impact on the Company's
operations. Total Mountaineer revenue increased from $14,583,000 in
1994 to $24,961,000 in 1995. In addition, Mountaineer's first quarter
operating revenues have increased from $4.7 million (unaudited) in 1995
to $7.2 million (unaudited) in 1996. Management believes that the
substantial and steady revenue increases over the past three years at
Mountaineer will continue and ultimately result in positive cash flows
from operations. However, there is no guarantee that the Company will
achieve the increases in revenues and cash flows it expects to occur.
- - As discussed in Note 3, management intends to refinance its $10.2
million construction loan in 1996. At December 31, 1995, approximately
$2.3 million of this balance is recorded as a current liability in the
accompanying consolidated balance sheet. Mountaineer is currently in
negotiations with a lender to refinance this debt and provide
additional working capital. A $12,500 due diligence fee has been paid
by Mountaineer in connection with the negotiations. However, there is
no guarantee that Mountaineer will be successful in these negotiations.
- - In March 1996, Mountaineer received bridge financing from a different
lender in the amount of $570,000, net (see Note 16), which Mountaineer
expects to repay with the proceeds from the aforementioned refinancing.
- - Mountaineer has expended approximately $11.4 million for capital
improvements, which includes expenditures for the lodge which was
damaged by fire in 1994. Management believes that the Company's
capital improvements have had a favorable impact on the Company's
operations and management believes this should continue in 1996 and
beyond. However, there is no guarantee that such favorable impact will
continue.
- - As discussed in Note 7, Mountaineer amended its video lottery
terminals' lease agreement in March 1996 resulting in a reduction of
future monthly payments over an extended term. Scheduled annual lease
payments under the original agreement were approximately $1,859,000.
The amendment reduced the required cash outflows by approximately
$256,000 for 1996.
The consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation. The accounts of the Company's acquired
companies include the operations from the consummation dates.
Continued
F-13
56
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Discontinued Operations
The Company adopted a formal plan in March 1993 to discontinue operations of its
oil and gas operations (see Note 10). The net assets and operating results of
the oil and gas segment are shown separately in the accompanying consolidated
financial statements as discontinued operations. Although management still
retains certain assets to maximize their ultimate value upon disposition,
management believes that the classification as discontinued operations remains
appropriate.
Cash and Restricted Cash
For purposes of the statements of cash flows, the Company considers investments
purchased with a remaining maturity of three months or less from the purchase
date to be cash equivalents.
Restricted cash includes collateralized, short-term certificates of deposit (see
Note 7), cash in banks designated for redevelopment activities, and unredeemed
winning tickets from its racing operations (see Note 13).
At December 31, 1995, the Company has approximately $73,000 of deposits which
are in excess of limits insured by the Federal Deposit Insurance Corporation.
Property and Equipment
Property and equipment is stated at cost. The Company capitalizes direct
materials and labor, and allocates interest during the construction periods.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
Buildings 20 to 40 years
Furniture and fixtures 5 to 7 years
Equipment and automobiles 3 to 15 years
Interest is capitalized to construction in progress during periods of
redevelopment based on qualifying assets, using a method which approximates the
effective interest rate method. Interest incurred in 1995 and 1994 was
$1,711,000 and $2,337,000, respectively. Interest capitalized in 1995 and 1994,
was $1,127,000 and $790,000, respectively. Interest costs in 1993 were not
significant.
Fair Value of Financial Instruments
The Company has financial instruments whereby the fair market value of these
financial instruments could be different than that recorded on a historical
basis on the December 31, 1995 and 1994 consolidated balance sheets. The
Company's significant financial instruments consist of its long-term debt and
its redeemable common stock. An estimate of the fair value of these financial
instruments is not practicable because there is not an active market for such
financial instruments.
Deferred Financing Costs
The Company capitalizes certain loan costs in connection with its financing
activities (see Note 5) and these costs are amortized over the expected term of
the related loans using a method that approximates the effective interest
method.
Continued
F-14
57
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Excess of Cost of Investments Over Net Assets Acquired, Net
The excess of cost of investments over net assets acquired (goodwill) is
amortized on a straight-line basis over the expected periods to be benefitted.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted cash flows and
is charged to operations in the period in which goodwill impairment is
determined by management. Goodwill is being amortized on the straight-line
method over an expected fifteen year life. The methodology that management used
to project results of operations forward twelve years, which represents the
remaining life of the goodwill as of December 31, 1995, was based on a five-year
trend line of expected cash flows. At December 31, 1995, 1994 and 1993, no
impairment of goodwill was determined by management.
Amortization expense included in the consolidated statement of operations for
the years ended December 31, 1995, 1994 and 1993 is $252,000, $252,000 and
$266,000, respectively.
Revenue Recognition
The Company recognizes revenues from parimutuel commissions earned from
thoroughbred racing at the time wagers are made. Such commissions are a
designated portion of the wagering handle as determined by the West Virginia
Racing Commission (the "Racing Commission"). Such revenues are shown net of the
taxes assessed by state and local agencies, as well as purses and contract
amounts paid to the Horsemen's Association (see Note 13).
Revenues from video lottery terminals is the net win, which is the difference
between wins (wagers) and losses (payouts), and is recorded at the time wagers
are made (see Note 14).
Revenues from food and beverage are recognized at the time of sale and revenues
from lodging are recognized at the time services are rendered.
Seasonality
The operations of Mountaineer are typically seasonal in nature. Winter
conditions may adversely affect transportation routes to Mountaineer, as well as
cause cancellations of live horse racing. As a result, adverse seasonal
conditions could materially effect the operations of the Company.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Such
estimates may be materially different from actual financial results.
Continued
F-15
58
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 1 - GENERAL, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, continued
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred taxes are based on the difference between the tax
bases of assets and liabilities and their amounts for financial statement
purposes; deferred taxes are then provided based on the estimated tax rates in
effect when the temporary differences are expected to reverse. The Company
records a valuation allowance for deferred tax assets when it is more likely
than not that such deferred tax assets will not be realized through future
operations (see Note 11).
Per Share Information
Per share information is computed by dividing net loss for the year by the
weighted average number of shares of common stock outstanding during the year.
The effect of common stock equivalents would be antidilutive for all periods
presented and is not included in the net loss per share calculations.
Reclassifications
Certain reclassifications have been made to the 1993 and 1994 consolidated
financial statements to conform with the 1995 presentation.
NOTE 2 - MERGERS AND ACQUISITIONS
Mountaineer Park, Inc.
On December 4, 1992, the Company acquired all of the issued and outstanding
common shares of Mountaineer Park, Inc. (Mountaineer), in a tax-free exchange,
for 183,181 shares of the Company's common stock, guaranteed at a per share
sales value of $6.00, an additional 400,000 shares of the Company's common stock
and approximately $91,000 in cash. Should the 183,181 shares, upon
registration, have a sales value in the aggregate less than $6.00 per share, the
Company will register additional shares such that the total market value of the
shares is equal to approximately $1,099,000, (183,181 shares times $6.00 per
share) (Note 9).
The acquisition was accounted for as a purchase and, accordingly, the results of
operations of the acquired business have been consolidated with those of the
Company commencing on December 4, 1992. The purchase price of $2,895,000 was
allocated to the acquired assets and assumed liabilities based on their
respective fair values. The purchase price exceeded the estimated fair value of
the net assets acquired by $2,774,000, which has been recorded as excess of cost
of investment over net assets acquired (see Note 1).
The Company paid certain outstanding indebtedness of Mountaineer of
approximately $3,652,000 in cash and issued approximately 446,496 shares of
common stock valued at $2,428,000 to certain creditors of Mountaineer in
satisfaction of additional obligations, of which 346,496 shares have
registration rights, guaranteed at a per share sales value of $6.00. Upon
registration, the Company will issue additional shares such that the market
value of the shares is equal to approximately $2,079,000. The Company granted
put rights to the holder (a bank) of 60,604 of the aforementioned shares (see
Note 9 "Redeemable common stock") at $6.00 per share, all of which became
exercisable on or before December 31, 1995. No demand has been made to the
Company. The Company has reflected certain amounts as current liabilities in
the accompanying consolidated balance sheets.
Continued
F-16
59
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 2 - MERGERS AND ACQUISITIONS, continued
Mountaineer Park, Inc. operates a thoroughbred horse racing track and 800 video
lottery terminals on a 606 acre facility in Chester, West Virginia. Mountaineer
also operates a 101 room inn adjacent to the track, dining facilities, as well
as a nine-hole executive golf course and other recreational facilities. Certain
operations are regulated by agencies within the state of West Virginia, which
includes annual licensing (see Notes 13 and 14). At December 31, 1995, all
significant licenses were in effect.
Golden Palace Casinos, Inc.
In October 1992, the Company acquired all of the outstanding capital stock of
Golden Palace Casinos, Inc. ("GPC" and "Golden Palace"), a Minnesota
corporation organized to manage casinos on Indian reservations. Although Golden
Palace had no significant operations at the time of the acquisition, it held,
through a wholly owned subsidiary, a contract, to manage a casino planned for
an Indian reservation in Oklahoma, subject to the satisfaction of certain
conditions. Shortly after the acquisition of Golden Palace, the West Virginia
Lottery Commission advised Management that, as a condition to licensing of the
Company's then-proposed video lottery operations at Mountaineer, the Company
could not engage in Indian gaming activities. Consequently, in December 1992,
the Company sold the subsidiary holding the management contract and agreed to
not otherwise engage in Indian gaming activities as long as it conducted video
lottery operations in West Virginia. Notwithstanding the sale of the management
contract, the acquisition of Golden Palace, which had substantial cash on hand,
provided the Company with sufficient funds to complete the acquisition of all
of the outstanding capital stock of Mountaineer. In connection therewith, the
Company granted put rights to the holders of 209,000 of the aforementioned
shares (see Note 9 "Redeemable common stock") at $6.00 per share should such
shares not have been registered by February 1, 1993; such registration has not
been effected to date.
On June 30, 1995, holders (2) of 104,500 shares of $6.00 redeemable common
stock received an aggregate of 366,750 shares of the Company's common stock, of
which 276,750 shares are subject to conversions into notes at a value of $1.50
per share or approximately $415,000, payable in 24 equal monthly installments
beginning June 30, 1996, interest at 12% per annum, in the event a registration
statement is not effective. Beginning June 30, 1995, the Company has the right
to purchase the 276,750 shares, in whole or in part, at $1.50 per share, less
any credit for payments made through the date of repurchase. Should a
registration statement become effective before the notes are paid in full, the
Company will receive credit for all payments made, as well as a credit for an
amount equal to the average closing market value for 90 days following the
effective date of the registration. All shares issued are subject to
registration, to the extent such shares have not been sold by the parties.
Considering the terms of the settlement discussed above, the Company has
recorded the value of the shares of $415,000 as noncurrent "redeemable common
stock" in the accompanying consolidated balance sheet.
In addition, on the acquisition date, the Company issued options to holders of
Golden Palace options to purchase (a) 190,000 shares of the Company's common
stock at $2.00 per share, (b) 200,000 shares of the Company's common stock at
$.01 per share, and (c) warrants to purchase 283,250 shares of the Company's
common stock at $2.40 per share through 1997. Options to purchase 70,000 shares
at $0.01 were exercised in 1995 (Note 9).
LVEN
On August 12, 1993, the Company entered into a letter of intent with Las Vegas
Entertainment Network, Inc. (LVEN) to acquire, through merger, the issued and
outstanding shares of LVEN. Pursuant to the letter of intent, the Company also
issued 250,000 shares of its common stock for $750,000 in cash. The letter of
intent provided for other terms to be negotiated; however, the parties were
unable to consummate a definitive agreement and the merger was not effected.
The Company and LVEN later reached a settlement arrangement in 1994 (see Note
3).
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN
Riverboat Gaming
On March 2, 1993, the Company, as assignee, entered into an agreement with M&R
Investment Company (M&R) for an assignment of an 80% interest in a ground lease
zoned for riverboat gaming in Tunica, Mississippi. The ground lease covered a
riverboat gaming site approved by the US Army Corps of Engineers. The Company
paid $106,937 on September 6, 1993 and $40,000 in rental payments in accordance
with the terms of the agreement. On March 9, 1993, the Company entered into a
joint venture arrangement with Regal Casinos, the remaining leaseholder, to
construct and operate a riverboat. On April 21, 1993, the Company agreed to
purchase Regal's 20% interest in the venture for $50,000 in cash and 50,000
shares of its common stock valued at $300,000.
Continued
F-17
60
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 3 - SALE OF RIVERBOAT INTEREST AND SETTLEMENT WITH LVEN, continued
On July 30, 1993, the Company entered into a joint venture arrangement with LVEN
and BP Group, Ltd., which agreed to assist in the funding, construction and
operation of the riverboat. On February 2, 1994, the Company sold its interest
in the venture. At December 31, 1993, the Company's investment in the riverboat
venture was $728,000 as reflected in the accompanying consolidated balance sheet
at December 31, 1993.
On February 25, 1994, the Company entered into a settlement agreement with LVEN
(see Note 2), whereby the Company sold its interest in the ground lease valued
at $728,000 at December 31, 1993, and was repaid its note receivable of
$200,000, totaling $928,000. Consideration received was 250,000 shares of the
Company's common stock owned by LVEN valued at $750,000, and the balance in
cash. No significant gain or loss resulted from this sale of the Company's
interest and note receivable.
The parties mutually agreed to be released from all claims which may have
existed as a result of the abandonment of the proposed merger between the
Company and LVEN.
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 1995 and 1994, property and equipment consists of the following:
1995 1994
----------- -----------
Land $ 371,000 $ 371,000
Buildings 15,716,000 11,899,000
Equipment 2,021,000 1,294,000
Furniture and fixtures 2,258,000 1,058,000
Construction in progress 519,000 372,000
----------- -----------
20,885,000 14,994,000
Less accumulated depreciation (2,785,000) (1,532,000)
----------- -----------
$18,100,000 $13,462,000
=========== ===========
Depreciation expense charged to operations during the years ended December 31,
1995, 1994 and 1993 is $1,252,000, $658,000 and $359,000, respectively.
NOTE 5 - LONG-TERM DEBT
Construction Note Payable
On June 27, 1994, the Company entered into a financing arrangement with Bennett
Management and Development Corporation (Bennett) for construction and
redevelopment activities at Mountaineer. Pursuant to the agreement, Bennett
agreed to finance the Company $10,200,000 for construction with interest payable
monthly at 12.5% per annum, subject to a default rate of 14.5% per annum. The
Company received advances of $5,700,000 from Bennett in 1994 and the remaining
$4,500,000 in 1995. The loan is secured by a deed of trust on all real property
at the resorts. The outstanding principal balance of the loan is $10,200,000 at
December 31, 1995.
Continued
F-18
61
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 5 - LONG-TERM DEBT, continued
The Company was obligated to issue 5 shares of common stock for every $100 in
advances, subject to a $6.00 per share price guarantee by the Company at the
time of registration of such shares. During 1995 and 1994, the Company issued
225,000 shares and 285,000 shares of its common stock valued at $1,350,000 and
$1,710,000, respectively, for a total value of $3,060,000. Such amounts
were recorded by the Company as deferred financing costs. If the Company did
not register these shares by October 1, 1995, the interest rate would have
increased to 22.5% per annum (see below). In addition to the financing costs
above, the Company incurred a $200,000 loan fee to an investment banker to be
amortized over the life of the loan.
In a series of amendments to the loan agreements and forbearance agreements
which were executed between July 7, 1995 and January 12, 1996, certain terms of
the Bennett loan agreement were amended by the parties as described below:
1) The Company's prepayment option dates of July 1, 1995 and November 1, 1995
were deleted. Upon amendment, the construction loan is payable interest only
through May 31, 1996, with principal and interest payable monthly over 36 months
through April 30, 1999.
2) An interest rate escalation, as defined in the original agreement, of 22.5%
was deleted.
3) Under the July 7, 1995 amendment, the $6.00 per share price guarantee on
510,000 shares discussed above was canceled in exchange for an additional
1,020,000 shares of common stock at an estimated fair value of $1,530,000. The
Company capitalized $1,530,000 as deferred financing costs. This amount is
amortized to interest expense and construction in progress through October 1,
1995 (see subsequent paragraphs).
The original 510,000 shares with $6.00 price guarantees were held by Bennett on
behalf of the Company, and in the event the Company prepaid the outstanding
indebtedness by October 1, 1995, such shares would have been returned to the
Company. No prepayment was made on October 1, 1995, and accordingly, the
510,000 shares were forfeited to Bennett and were valued on October 1, 1995 at
their estimated fair value of $478,000. This amount has been recorded as
additions to deferred financing costs and will be amortized from October 1, 1995
to January 2, 1997 (see Note 1).
The Company shall register all shares referred to above with the SEC on a best-
efforts basis.
Bennett has transferred the voting rights with respect to 780,000 shares to the
Board of Directors of the Company, and Bennett has agreed not to acquire
additional common stock so that Bennett will not be permitted to vote more than
5% of the Company's common stock.
4) At December 31, 1994, deferred financing costs of $998,000 were recorded as
a reflection of future obligations to Bennett. The requirement for these future
obligations was deleted from the amended agreement in July 1995, resulting in a
$998,000 reduction in "deferred financing costs" with a corresponding reduction
in "accrued financing costs".
Continued
F-19
62
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 5 - LONG-TERM DEBT, continued
5) The amended agreement allows the Company, at its option, to prepay the
outstanding advances by January 1, 1997. If such prepayment is not made by the
Company, it will be obligated to issue an additional number of shares of its
common stock equal to $2,500,000, divided by the average closing stock price per
share for 20 consecutive trading days prior to January 2, 1997.
Management intends to refinance this note through the issuance of long-term debt
on satisfactory terms by January 2, 1997; however, there are no assurances that
such obligation will be refinanced on terms satisfactory to the Company.
Interest expense charged to operations and interest capitalized to construction
in progress incurred under this agreement for the year ended December 31, 1995
were $547,000, of which $131,000 results from common stock issued by the
Company, and $1,127,000, of which $409,000 results from common stock issued by
the Company, respectively, and for the year ended December 31, 1994 were
$700,000, of which $614,000 results from common stock issued by the Company and
$709,000, of which $693,000 results from common stock issued by the Company,
respectively. At December 31, 1995 and 1994, the Company had approximately
$388,000 deferred as finance costs in connection with this arrangement in the
accompanying consolidated balance sheets.
Other Notes Payable
On December 4, 1992, the Company issued a 10% note in $93,750 principal amount
payable to an unrelated party in connection with the acquisition of Mountaineer.
At December 31, 1994, the outstanding principal balance of the note was $43,000.
In 1995, the Company converted the note into 60,850 shares of its common stock.
On March 11, 1993, the Company issued 20% notes in $300,000 aggregate principal
amount. Such notes were fully paid by October 10, 1993.
In September 1995, the Company entered into an agreement with its Totalisator
system supplier to convert $461,000 of outstanding trade payables into a term
note. Under the terms of the agreement, the Company is required to make 21
monthly interest and principal payments of $17,800 and eight (8) additional
payments of approximately $17,800 on various dates through May 31, 1997. The
loan, which is unsecured, bears interest at the rate of 12% per annum. The loan
is subject to an acceleration clause and other financial disincentives in the
event of default. At December 31, 1995, the outstanding principal balance is
$408,000. The Company paid $53,642 and $17,651 of principal and interest,
respectively, in 1995 related to this term note.
Annual Commitments
Future annual principal payments under all indebtedness as of December 31, 1995,
assuming the Bennett notes are prepaid on or before January 2, 1997, are as
follows:
Years Ended December 31,
------------------------
1996 $ 2,536,000
1997 8,071,000
-----------
$10,607,000
===========
Continued
F-20
63
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 6 - CONVERTIBLE DEBENTURES
In connection with the acquisition of Golden Palace (see Note 2), the Company
assumed unsecured convertible debentures bearing interest at 8% per annum and
due on March 31, 1993. In 1993, the holders agreed to convert such debentures,
plus accrued interest of approximately $82,000, into 416,197 shares of the
Company's common stock.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Mountaineer Bond Requirements
Mountaineer is required to maintain a $250,000 bond with the Racing Commission
for its operations through December 31, 1996. The Company obtained the bond
through a letter of credit with a bank which is collateralized by a $100,000
certificate of deposit (see Note 1) and a $150,000 bank deposit.
The Company is also required to maintain a bond of $70,000 for the benefit of
the Lottery Commission through June 30, 1996. The bonding requirement has been
satisfied via the issuance of a $20,000 surety bond and two letters of credit
aggregating $50,000, each of which is collateralized by certain bank deposits
(see Note 1).
Jackpot Settlement Agreement
In January 1993, the Company entered into a financing arrangement with Jackpot
Enterprises, Inc. (Jackpot), the proceeds of which were to be used for
redevelopment activities. Pursuant to such arrangement, Jackpot initially
provided the Company with a $600,000 letter of credit collateralized by
Mountaineer Park's land and improvements to insure the performance of the
Company's obligations with respect to racing and video lottery activities under
its agreements with the State of West Virginia. For its letter of credit, the
Company's issued Jackpot 30,000 shares of its common stock which were valued at
$90,000.
The Company and Jackpot were unable to consummate the overall financing
arrangement. The agreement provided that if financing could not be reached due
to certain contingencies, the Company would be required to issue 250,000 shares
of its common stock as liquidated damages. On March 2, 1995, management settled
such claim effective June 25, 1994, agreeing to issue shares of its common stock
with registration rights. The number of shares of common stock to be issued was
based on $512,500 divided by the closing market price per share on the effective
date of registration. In the event the Company did not register the shares by
May 2, 1995, the Company was, and continued to be, required to issue 12,500
shares on such date and 12,500 shares each 60 days that such registration is not
effective. In no event will the Company be obligated to issue more than 250,000
shares of its common stock. The Company recorded a provision for loss of
$525,000 in connection with the settlement which is included in the consolidated
statement of operations for the year ended December 31, 1994.
During 1995, the Company issued 175,000 shares of its common stock as part of
its settlement and, accordingly, $414,000 was reduced from accrued liabilities.
At December 31, 1995, $111,000 remains included in accrued liabilities in the
accompanying 1995 consolidated balance sheet. Management expects to issue an
additional 75,000 shares of its common stock as management does not expect to
file an effective registration statement by the deadline provided in this
agreement.
Continued
F-21
64
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
Other Settlement
In July 1994, the Company entered into an agreement settling all claims by a
consulting firm arising from an April 1993 financial advisory agreement. The
Company agreed to pay fees and expenses of $165,000. An initial payment of
$15,000 was made upon execution of the settlement agreement and two additional
payments of $15,000 were required from the proceeds of certain unrelated
financings by the Company by December 1, 1994. Such payments were not made and
the entire balance is due upon demand. At December 31, 1995, the Company has
$150,000 outstanding under the agreement, which is included in "accrued
liabilities" in the accompanying consolidated balance sheet.
Under the settlement agreement, the Company canceled previously issued warrants
to purchase 145,000 shares of common stock with registration rights at $7.00 per
share, and instead, issued warrants to purchase 145,000 shares of common stock
with registration rights, exercisable at $6.25 per share through December 1996.
Operating Leases
Totalisator System Operating Lease
The Company leased its Totalisator system under an operating lease which was
amended November 28, 1995 (see below). Under the terms of the lease prior to
amendment, the Company was obligated to pay the lessor approximately $1,500 per
live race performance, plus .5% of the wagered handle in excess of $300,000.
The Company was also paying $300 per live race day ($550 if no live race
performance), plus .5% of simulcast handle in excess of $60,000, per simulcast
race day.
Under the amended terms, the Company must pay the greater of $1,000 per live
race performance or 0.55% of the live racing handle. In addition, the Company
must pay the greater of $300 per live race day ($550 if no live race
performance) per simulcast race day or 0.55% of the simulcast racing handle. For
the years ended December 31, 1995, 1994 and 1993, the rent expense under the
lease was approximately $529,000, $495,000 and $509,000, respectively, which is
included in "cost of parimutuel commissions" in the accompanying consolidated
statements of operations.
The Company also leases its videotape and closed circuit television systems at a
cost of $500 per race day and $125 per simulcast race day under an operating
lease expiring in October 2002. The lease was entered into with a company whose
ownership included the majority shareholder (an existing shareholder of the
Company) at the time of its inception. The Company has the option to purchase
the equipment by October 1, 1996 at the estimated fair value of $350,000.
Rental payments made pursuant to this lease for the years ended December 31,
1995, 1994 and 1993 was approximately $142,000, $223,000 and $172,000,
respectively.
Video Lottery Terminals Operating Lease
The Company leased 165 video lottery terminals under an operating lease through
September 1994. Under the terms of the lease, the Company was obligated to pay
the lessor a fixed percentage of video lottery terminal revenues. These video
lottery terminals were replaced in September 1994 as discussed below.
Continued
F-22
65
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
In September 1994, the Company entered into a master lease agreement for 400 new
video lottery terminals which was scheduled to expire September 1997 (see
below). The monthly lease payments on these 400 video lottery terminals were
$72,378, plus taxes, insurance and maintenance costs (see discussion of
amendment to the master lease below).
On April 7, 1995, the Company updated the master lease to provide for 400
additional video lottery terminals which were installed in June 1995. In
connection with this lease addition, the Company was obligated to pay 36 monthly
installments of $83,000 beginning in January 1996 through December 1998 for
these 400 additional video lottery terminals. The Company has normalized rent
expense over the 42 month lease term (see discussion of amendment to the master
lease below).
As of December 31, 1995, the Company had past due payments under the master
lease agreement amounting to $190,093 which constituted an event of default. On
March 26, 1996, periodic rental payments under the master lease agreement were
amended to reflect a new consolidated payment schedule as a result of an event
of default by the Company. Under the new agreement, the Company must make
monthly payments of approximately $119,000 in March and April 1996, $183,000
from May through October 1996 and $119,000 from November 1996 through January
1999. In addition to the amounts reflected above, the Company is obligated to
make interest payments from March through October 1996 at a rate of 15% on
certain past due rental payments under the previous agreement for a total
interest obligation of $26,000.
OTHER LEASES
The Company leases office space for its corporate offices under operating
leases. To reduce overhead costs, the Company has moved to progressively
smaller offices on two occasions since January 1, 1994. The Company's lease
for a 6,034 square foot facility in Irvine, California expired at that time, and
the Company moved and entered into a new lease for a period of 36 months at a
smaller 4,300 square foot office in San Juan Capistrano, California. On
November 1, 1995, the Company downsized again and moved to a smaller 880
square foot office in Laguna Beach, California pursuant to a 12 month lease with
an option to extend the term for an additional six months. On February 15,
1996, the San Juan Capistrano office was subleased through December 15, 1996,
the termination date for the underlying lease. Net annual minimum lease
payments at December 31, 1995 are approximately $41,000 and $17,000 per year in
1996 and 1997. Rent expense for the Company's corporate offices included in the
consolidated statements of operations amounted to $78,000, $84,000, and $125,000
for 1995, 1994 and 1993, respectively.
For the years ended December 31, 1995, 1994 and 1993, rent expense under its
video lottery leases was $1,294,000, $1,203,000 and $790,000, respectively,
which is included in "costs of video lottery terminals" in the consolidated
statements of operations. At December 31, 1995, the Company has recorded
deferred rent obligations of $408,000 in the accompanying consolidated balance
sheet, which is included in accrued liabilities.
Future annual minimum payments under all material operating leases as of
December 31, 1995 are as follows, after providing for the amended video lottery
lease agreement described above:
Years Ended December 31,
------------------------
1996 $2,075,000
1997 1,912,000
1998 1,915,000
1999 522,000
2000 113,000
Thereafter 212,000
----------
Total $6,749,000
==========
Litigation
In 1995, the Company was served with a complaint by a former employee. The
complaint was not answered timely by the Company's counsel and as a result, a
default judgment was entered by the court in the amount of approximately
$308,000. Management has filed a motion to vacate the judgment. There are no
assurances that the motion will be granted or the Company will be successful in
defending the matter. Although management believes that the ultimate outcome
will not necessarily result in a payment of the judgment amount, the Company has
recorded a provision for loss of $308,000 in the accompanying consolidated
statement of operations during the year ended December 31, 1995.
Continued
F-23
66
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued
The Company was served with a complaint in 1994 by a jockey who sustained head
injuries from a fall during a race at Mountaineer. The plaintiff is seeking
both compensatory and punitive damages. Although the matter is covered by
insurance, management has been advised by its carrier, after discovery that a
jury could award damages in excess of Mountaineer's $1 million policy limits.
In the event that such an award is made, the Company would be liable for any
such excess amount. Although management believes that the matter will
ultimately be resolved within the policy limits, there can be no assurance that
it will.
The Company is party to various other lawsuits which have arisen in the normal
course of its business. Certain matters are covered by insurance, after the
Company meets certain deductible requirements, generally $2,500 per occurrence.
It is the opinion of management, that the liability, if any, arising from such
lawsuits would not have a material adverse effect on the Company's consolidated
financial statements.
Environmental Considerations
The Company has developed and is implementing a corrective action plan in
connection with leakage from underground storage tanks. Management has
estimated the cost of corrective action to be approximately $143,000 for the
cost of equipment to be installed in 1995 and 1996 and for remediation in 1996
and 1997. The Company has recorded a provision for anticipated expenditures of
$143,000 in 1995 under "selling, general and administrative" expenses, and has
entered into a service contract for the installation of equipment and future
remediation costs.
Common Stock Registration Rights
As of April 4, 1996, the Company is obligated to register approximately
4,077,991 shares of its common stock and 4,813,143 shares of its common stock
underlying certain options and warrants (see Note 9), which if not registered,
could have an adverse impact on the Company's future financial operations or
cause substantial dilution to existing shareholders. As discussed elsewhere,
the Company has certain price guarantees to sellers of its common stock, which
as of April 4, 1996, and based on a closing market price per share of 7/8, the
Company would have to issue approximately 5.7 million shares of its common
stock. Estimated costs of the registration are not considered significant to
the consolidated financial statements taken as a whole. There are no assurances
that such registration will be effected.
Pension Plan
Mountaineer has a qualified defined contribution plan covering substantially all
of its employees (the "Plan"). The Plan was ratified retroactively on March 18,
1994 by the legislature of the State of West Virginia. The Plan contributions
are based on .25% of the race track and simulcast wagering handles, and
approximately 0.5% of the net revenues of video lottery activities beginning
March 18, 1994. Contributions to the Plan for the years 1995, 1994 and 1993
were $179,000, $106,000 and $102,000, respectively.
Insurance Proceeds From Involuntary Conversion of Assets
In 1994, the Company experienced two fires at Mountaineer, believed to be caused
by arson, in which the Company received approximately $241,000 of insurance
proceeds. The Company realized a nominal gain based on the net carrying value
of the assets destroyed in the fire.
NOTE 8 - RELATED PARTY TRANSACTIONS
Employment Contracts
Effective December 4, 1992 (acquisition date), Mountaineer entered into
management agreements with certain former shareholders. In connection
therewith, the Company granted options to purchase 400,000 shares of its common
stock at $.50 per share. At the time the fair value of the Company's common
stock, subject to transferability restrictions, was approximately $3.50 per
share. As a result, Mountaineer recorded compensation expense of $600,000 for
the year ended December 31, 1994; no amounts were charged in 1995. The
agreements have been terminated by mutual consent without further obligation of
the parties.
Continued
F-24
67
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 8 - RELATED PARTY TRANSACTIONS, continued
In addition, the Company has entered into various employment agreements with
certain officers, key management and a consultant for periods of up to three
years expiring in 1997. The agreements provide for certain salaries, and stock
and stock option incentives (see Note 9) in the ordinary course of business.
Minimum annual salaries are approximately $523,000.
Severance Agreement
On April 26, 1995, the Company entered into a severance agreement with its
former Chief Executive Officer. In connection therewith, the Company is
obligated to pay approximately $440,000 over a period of two years. In
addition, the Company repriced certain incentive options and is obligated to
provide certain benefits during the term of the agreement. Management
discontinued payments under the agreement due to their discovery of certain
matters which they believe nullify the agreement. At December 31, 1995,
management has an accrued liability of $400,000 which is included in "accrued
liabilities" in the accompanying 1995 consolidated balance sheet.
Notes Payable and Advances Receivable From Related Parties
The Company has a note receivable for $240,000 from a shareholder of the Company
at December 31, 1995 and 1994, as well as additional noninterest bearing
advances of $62,000 made in 1994. The $240,000 note receivable bears interest
at 8% per annum, is due on demand, and is collateralized by certain shares of
the Company's common stock. No demand has been made by the Company's management
through December 31, 1995 as management believes recovery is doubtful. During
1995, the Company has recorded a provision for loss in the amount of $240,000
which is included in "selling, general and administrative" expenses in the
accompanying consolidated statement of operations.
In March 1994, the Company lent $50,000 to a company for a term of seven days in
exchange for a promissory note bearing interest at 8% per annum. The loan was
made upon the recommendation of a significant shareholder of both the Company
and the recipient. During 1995, the Company has recorded a provision for loss
in the amount of $50,000 which is included in "selling, general and
administrative" expenses in the accompanying consolidated statement of
operations. In April 1996, the Company and the recipient renegotiated,
cancelled the original note, and executed a substitute and replacement confessed
judgment promissory note in the principal amount of $58,333 at 8% per annum, all
due and payable August 4, 1996.
Notes Payable to Related Parties
During the year ended December 31, 1993, the Company fully paid certain 8% notes
payable totaling $401,000 to the former majority shareholder of Mountaineer (see
Note 2) and an existing shareholder of the Company.
At December 31, 1993, the Company had a $70,000 demand note due to an
officer/shareholder that bore interest at 6.25% per annum. The note was paid in
full in January 1994.
During 1995, the Company incurred salaries to key management, which remain
unpaid; at December 31, 1995, such amounts accrued were approximately $204,000.
In February 1996, management agreed to accept an aggregate of 466,676 shares of
the Company's common stock in satisfaction of the amounts due them. Such shares
have an approximate value of $204,000; therefore, no additional compensation
expense will be recorded as a result of the issuance of common stock.
Continued
F-25
68
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY
Stock and Warrants Issued in Connection With Plan of Reorganization
As part of the Company's Plan of Reorganization, which was confirmed January 15,
1992, the Company issued certain warrants to purchase its common stock. During
the year ended December 31, 1993, the Company received $2,239,000 for the
purchase of 373,241 shares of its common stock as a result of the exercise of
Series C warrants. The warrants expired in March 1993.
Redeemable Common Stock
In connection with certain arrangements entered into by the Company as of
December 31, 1994 (see Notes 2 and 10), 367,937 common shares could have been
put to the Company at $6.00 per share upon demand. In 1995, 98,333 redeemable
shares issued in connection with its oil and gas activities (Note 10) were
satisfied through the issuance of 373,600 additional shares of its common stock
as reflected in the aggregate in the accompanying 1995 consolidated statement
of shareholders' equity. In 1995, 194,500 common shares valued at $212,000 were
issued for the cancelation of 104,500 redeemable shares with put rights of
certain holders of Golden Palace acquisition debt. In connection therewith, the
Company issued 276,750 redeemable shares which are subject to registration with
the SEC and have a guaranteed selling price of $1.50 per share at the time of
registration. At December 31, 1995, 441,854 shares of redeemable common stock
are outstanding.
In connection therewith, the Company has classified the put value of such shares
of $1,405,000 and $2,208,000, respectively, as "redeemable common stock" in the
consolidated balance sheets at December 31, 1995 and 1994. Management has
reflected the value certain of these shares as a current liability in the
accompanying consolidated balance sheet at December 31, 1995 and 1994 to the
extent management believes these shares should have been registered. Amounts
reflected as noncurrent are based on scheduled payments in the event such shares
are not registered.
Common Stock and Options Issued for Services
From time to time in the ordinary course of business, the Company has issued
restricted common stock in exchange for services, interest and obligations. The
Board of Directors has determined the fair value of such shares based on 50% of
the value of freely tradable shares as determined through NASDAQ market
quotations. Such values are charged to operations or have extinguished
obligations depending upon the nature of the agreements.
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations; also see following
paragraph for additional shares issued in 1995.
During the year ended December 31, 1994, the Company issued 50,000 shares valued
at approximately $110,000 for services rendered, and the value of such shares
was charged to the 1994 consolidated statement of operations. Also in 1994, the
Company issued 97,500 shares of its common stock valued at $100,000 to a
financial consultant to seek capital for the Company; in 1995, such shares were
cancelled by mutual consent of the parties. The value of such shares, included
in noncurrent "Accrued Liabilities" at such value, will be settled through the
issuance of common stock in 1996. In addition, the Company issued 10,681
shares of its common stock for certain accounts payable valued at $40,000.
During the year ended December 31, 1993, the Company issued 197,787 shares
valued at approximately $619,000 for services rendered and letter of credit
fees for Jackpot, and the value of such shares was charged to the 1993
consolidated statement of operations.
In connection with certain employment agreements (see Note 8), the Company has
granted to two former shareholders of Mountaineer an option to purchase 400,000
shares of the Company's common stock at $.50 per share. The options are
exercisable beginning January 1993 and expire January 1996. The excess of the
estimated value of these shares of $3.50 each over their option price is
included as compensation expense over the two-year term of the employment
agreements, as amended. Compensation expense included in the consolidated
statements of operations for each of the years ended December 31, 1994 and 1993
is $600,000.
Continued
F-26
69
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY, continued
During 1995, 216,667 shares were exercised for $108,000 of which $69,000 remains
unpaid. At December 31, 1995, this receivable from the exercise of these stock
options is shown as a reduction in stockholders' equity.
Shares Issued for Cash
From January 1994 through May 1994, the Company issued 727,866 shares of its
common stock for $2,193,000, net of commissions of $146,000 and 58,333
restricted shares of its common stock. The 58,333 shares were issued for a
capital raising activity and thus are effectively charged to consolidated
shareholders' equity. In 1994, the Company received $200,000 for the exercise of
options to purchase 50,000 shares of its common stock.
From July through December 1993, the Company issued 746,755 shares of the
Company's common stock for $3,280,000, net of commissions of $592,000 and
125,000 restricted shares valued at $250,000. The 125,000 shares were issued
for a capital raising activity and thus are effectively charged to consolidated
shareholders' equity. The 746,755 shares are exempt from registration under
Regulation S of the Securities Act of 1933, whereby nonresident, aliens of the
United States (i.e., foreign purchasers) may purchase shares with a 40 day
restricted period.
See above and Note 2 for a total of 286,667 shares purchased from the exercise
of stock options at $0.01 and $0.50, per share.
Stock Option Plans
In May 1992, the Board of Directors approved the grant of nonqualified options
to purchase 600,000 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of $1.06 per share and is fully vested as of the date of grant.
The exercise price approximates the fair value of the shares at the date of
grant; such options expire in May 1997.
In October 1992, the Board of Directors adopted an incentive stock option plan
meeting the requirements of Section 422 of the Internal Revenue Code. The plan
reserves 1,200,000 shares for issuance which were granted effective October
1992. The options are exercisable at the then fair market value of $4.875 per
share (unless such options are granted to a 10% shareholder, in which case the
exercise price would be no less than 110% of the then fair market value), and
are exercisable over a period of five (5) years, subject to certain
restrictions. Options to acquire approximately 1,200,000 shares are exercisable
at December 31, 1995 and no options have been exercised to date. In December
1994, the Board of Directors adopted an amendment to reprice the options at
$2.00 per share; shareholder approval was obtained on September 11, 1995.
In May 1995, the Board of Directors approved the grant of nonqualified options
to purchase 823,047 shares to certain officers and directors of the Company.
Each option entitles the holder to purchase one share of common stock at an
exercise price of approximately $1.22 per share and is fully vested as of the
date of grant. The exercise price approximates the fair value of the shares at
the date of grant; such options expire in September 1998. Shareholder approval
was obtained on September 11, 1995.
In November 1995, the Board of Directors adopted, subject to shareholder
approval, an incentive stock option plan meeting the requirements of Section 422
of the Internal Revenue Code (see above for certain requirements under Section
422). The plan reserves 500,000 shares for issuance which were granted
effective January 23, 1996. The options will be exercisable at the then fair
market value of $.5625 per share, and are exercisable over a period of five (5)
years, subject to certain restrictions.
Continued
F-27
70
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 9 - SHAREHOLDERS' EQUITY, continued
From time to time, the Company issued options and warrants (exclusive of the
options and warrants described in the preceding paragraphs) to unrelated
entities in connection with service arrangements to purchase shares of its
common stock at their estimated fair value ranging from $0.01 to $8.00 per
share, expiring at various dates through April 1998.
During each of the years in the three year period ended December 31, 1995, stock
options and warrants activity is as follows:
Shares Price Range
Available per Share
--------- -----------
Balance, January 1, 1993 3,388,176 $0.01-$6.00
Granted 315,000 $3.00-$8.00
Canceled (70,185) $3.00-$6.00
Exercised (373,241) $4.00-$6.00
---------
Balance, December 31, 1993 3,259,750 $0.01-$8.00
Granted 1,155,000 $3.00-$6.25
Canceled (605,000) $7.00
Exercised (50,000) $4.00
---------
Balance, December 31, 1994 3,759,750 $0.01-$8.00
Granted 868,047 $1.21-$2.00
Canceled (10,000) $8.00
Exercised (286,667) $0.01-$0.50
---------
Balance, December 31, 1995 4,331,130(1) $0.01-$8.00
=========
Exercisable at December 31, 1995 4,331,130
=========
(1) Includes options to purchase 130,000 shares of common stock at $0.01 per
share.
See Notes 2, 3, 5, 7 and 10 for additional transactions in which the Company
issued its common stock and Note 7 for discussion on commitment to register
certain common stock and the underlying common stock of options and warrants
and dilution impact.
NOTE 10 - DISCONTINUED OPERATIONS
The Company acquired certain oil and gas interests as part of its plan of
reorganization in 1992. On March 31, 1993, the Company's Board of Directors
approved a formal plan of orderly liquidation to divest its oil and gas
operations. This decision was precipitated by several factors, including the
long-term potential of the Company's gaming operations and the anticipated time
to be devoted to it by management. In February 1993, the Company decided not to
continue to pursue funds in the public market to undertake the drilling of oil
and gas properties primarily due to the expiration of "Section 29" credits, a
credit against federal income taxes for gas produced from Devonian shale or
tight formations from wells commenced before January 1993. As discussed
further, the Company sold certain interests in these oil and gas assets in
December 1994. Certain interests are currently under rework, to be later sold
after management has enhanced the ultimate value of such interests.
Continued
F-28
71
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
The following is a summary of the significant accounting policies and a
description of other issues pertaining to the oil and gas operations.
Significant Accounting Policies
The Company follows the successful efforts method of accounting for its oil and
gas activities. Costs of property acquisitions, successful exploratory wells,
all development costs, and support equipment are capitalized. Costs of
unsuccessful exploratory wells are expensed when determined to be nonproductive.
Production costs, overhead and all exploratory drilling costs are expensed as
incurred. The carrying value of proved and unproved reserves are subjected to a
"ceiling test" based on the sum of (a) discounted future net cash flows from
proven reserve estimates, (b) the cost of properties not being amortized and (c)
the lower of cost or fair value of estimated unproved reserves; impairment of
the carrying value of such reserves is charged to operations. Costs of
abandonment and remedial work are expensed over the life of the net future
production cash flows.
Depletion of the cost of producing oil and gas properties has been computed on
the unit-of-production method. Due to the Company's decision to discontinue
these operations, no depletion has been recorded adjusted to their net
realizable value.
The consolidated financial statements reflect the operating results and balance
sheet items of its oil and gas operations separately from continuing operations
pursuant to the plan of divestiture. The assets of the discontinued operations
are shown net of the allocated liabilities.
In 1993, management believed that the operations would have been sold within a
period of one to two years, but due to certain delays and cash flow
considerations, management was not able to complete its rework on the properties
in the state of Michigan within the time originally estimated. Management does
not intend to retain the interest for the purpose of operating the wells.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves
Standardized measures of discounted future net cash flows and changes therein
relating to proved oil and gas reserves are not presented since the Company does
not intend to produce any oil and gas on a continuing basis.
Remaining Oil and Gas Interests
The Company's remaining assets are located in Michigan, consisting of a 25%
working interest in a 64% net revenue interest in proved reserves; 34 wells
exist on the property which have been inoperative since the Company's ownership.
Fleur-David Corporation is currently in the process reworking the wells, which
upon commencement of production, is expected to enable the wells to generate
production of approximately 3,300,000 barrels (BBLs) of oil, over a period of
ten years, with approximately 65% of such reserves recoverable over a period of
four years. Leases, for which the 34 wells are located, are held by force majure
(by production).
Continued
F-29
72
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
In December 1993, the Company entered into an agreement with Fleur-David
Corporation, whereby the Company contributed its 64% (original interest) working
interests in proved reserves. Fleur-David assumed a note payable of $375,000,
plus accrued interest from the Company, and paid approximately $250,000 in well
lease maintenance costs. In addition, Fleur-David was granted options to
purchase 121,500 shares of the Company's common stock at their then fair market
value of $4.00 each. Fleur-David was also to provide substantially all the
expertise and fund 75% of the costs to perform rework and water-flood of
approximately $2,200,000. The Company's is responsible for 25% of such costs or
approximately $550,000 and will be paid through the proceeds received from the
exercise of the options described above, as well as cash available from
continuing operations.
Fleur-David also obtained a covenant not to sue for clean-up and abandonment
costs from the State of Michigan, as required by the joint venture, by
depositing $188,000 into an environmental escrow account required by the state.
The Company retains a 25% net revenue interest in the joint venture through the
joint venture. An adjustment to the carrying value of these oil and gas proved
reserves was not affected since the additional costs incurred, and to be
incurred by Fleur-David, enhance the value of the interest retained by the
Company by a corresponding amount.
The Michigan well sites require certain remedial activities, which include
abandonment costs. Management has estimated the cost of such remedial
activities to range from $1,200,000 to $2,000,000 should its current plan of
operation with Fleur-David not continue. Management expects to continue with
its initial rework and eventual waterflood project with Fleur-David to minimize
the Company's costs associated with remediation and abandonment of the wells.
The Company's estimated cost of rework and waterflood, as a 25% joint venture
interest holder, is $550,000, $297,000 of which has been paid through December
31, 1995, and the remaining $252,000 included as a liability in the net assets
of discontinued operations in the accompanying 1995 consolidated balance sheet.
Oil and Gas Leases
Certain leases were acquired in 1992 as part of the Company's plan of
reorganization from Biscayne Petroleum Corporation. On March 25, 1993, the
seller agreed to amend certain terms of the acquisition agreement, which, as so
amended, provided for the payment of $50,000 in 1993 and the issuance of 226,286
shares of the Company's common stock in satisfaction of the purchase price. The
March 1993 amendment also rescinded the issuance of 20,000 shares in December
1992 for $100,000 of debt and $20,000 of interest as reflected in the
consolidated statements of shareholders' equity. The purchase price remained
unchanged, after the amendment discussed above, at $2,000,000. The leases, held
by production, were assigned for consideration, along with the 77 wells
discussed below, in December 1994.
Continued
F-30
73
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
Oil and Gas Wells
Certain oil and gas interests, consisting of 77 production wells, were acquired
in 1992 as part of the Company's plan of reorganization from Biscayne Petroleum
Corporation. On March 25, 1993, the sellers agreed to convert the outstanding
principal balance of an unpaid acquisition note of $590,000, into 98,333 shares
of the Company's common stock subject to registration rights and a put right at
a price of $6.00 per share (see Note 9 "Redeemable common stock"), and payment
of $100,000 in March 1993.
In September 1994, the Company negotiated certain additional terms extending the
date by which the registration of the 98,333 shares was required to be effected
to March 31, 1995, as amended. However, because the registration was not
effected as of March 31, 1995, subject to the terms of the agreement, the
Company was obligated to pay $590,000, less the average market value of the
98,333 shares of common stock for a value of $123,000, or $467,000, in 12 equal
monthly installments, together with interest at 9% per annum beginning April 1,
1995.
On March 31, 1995, the agreement was amended to extend the payment term and
amounts such that the note will be interest only at 10% per annum from April 1,
1995 until October 1, 1995, at which time the outstanding principal balance was
to be amortized over 36 months with a balloon payment due on October 1, 1996,
together with unpaid interest thereon. On October 1, 1995, the parties agreed
to covert the entire principal balance of $467,000 into 373,600 shares of the
Company's common stock based on a value of $1.25 per share. In 1995, the 98,333
shares discussed above, plus the 373,600 shares (471,933) valued at an
aggregate amount of $590,000 are reflected in the accompanying consolidated
statement of shareholders' equity during the year ended December 31, 1995.
In September 1993, the Company recorded a provision of $1,471,000 for an
estimated loss on the disposal of its leases and 77 wells located in
Southeastern Ohio. The Company's estimate was based on the current conditions
in the gas market, estimated costs to prepare such sites for sale, lease
expirations (see reserve quantity information below) and sales commissions.
Related Party Transactions
Sale of Oil and Gas Leases and Wells
In December 1994, the Company entered into an arrangement to sell certain proved
and unproven gas reserves located in Southeast Ohio for notes valued at
approximately $426,000 to a party related to an officer and shareholder of the
Company. In connection therewith, the Company obtained two notes, a $300,000
note, bearing interest at 8% per annum, payable $10,000 per month beginning May
1995, and a $150,000 noninterest bearing note, payable based on 50% of excess
revenues over $10,000 per month from production, secured by the assets sold.
The Company recorded a loss on the sale of these assets of $567,000 which is
included in loss on disposal of oil and gas operations. At December 31, 1995,
the principal balance on the note receivable is approximately $386,000.
Notes Payable
During 1994 and 1995, various corporate affiliates of Mr. Arneault advanced an
aggregate sum of approximately $100,000 to ExCal primarily to cover overhead
expenses in connection with the maintenance of leases and other costs associated
with the Registrant's existing oil and gas interests in Michigan and former
interests in Ohio. In February 1996, such accrued amount, along with accrued
interest thereon at the rate of 10% per annum, was converted into a demand
promissory note in the principal amount of $100,218 payable to Mr. Arneault at
the rate of 10% per annum. No material overhead expenses are expected to be
incurred in 1996.
Continued
F-31
74
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 10 - DISCONTINUED OPERATIONS, continued
The following summarizes the net assets of the discontinued operations as of
December 31, 1995 and 1994 and the results of its operations for each of the
years in the three-year period ended December 31, 1995.
Balance sheet items
December 31, 1995 and 1994
1995 1994
---------- ----------
Assets:
Cash $ --- $ ---
Receivable from sale of assets 386,000 426,000
Oil and gas activities -
Working interest in proved oil
and gas properties 2,582,000 2,582,000
---------- ----------
2,968,000 3,008,000
---------- ----------
Less liabilities:
Accrued liabilities (252,000) (350,000)
Payables to related parties (100,000) (42,000)
---------- ----------
Net assets $2,616,000 $2,616,000
========== ==========
Results of its operations for the
years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- -------- ---------
Revenues $ --- $184,000 $ 268,000
---------- -------- ---------
Costs and expenses:
General and administrative --- 148,000 224,000
Operating costs, including
depletion of $100,000 in
1993 --- 109,000 226,000
---------- -------- ---------
Total costs --- 257,000 450,000
---------- -------- ---------
Loss from operations $ --- $(73,000) $(182,000)
========== ======== =========
Reserve Quantity Information
Oil Gas
(in BBLs) (in MCF)
---------- ---------
Proved developed:
Balances, January 1, 1993 2,134,800 1,095,530
Revisions of previous estimates --- (58,378)
Production --- (134,952)
---------- ----------
Balances, December 31, 1993 2,134,800 902,200
Revisions of previous estimates 1,180,000(1) ---
Production --- (99,000)
Sale of assets --- (803,200)
---------- ----------
Balances, December 31, 1994 3,314,800 ---
Activity --- ---
Balances, December 31, 1995 3,314,800 ---
========== ==========
(1) In 1994, management determined that certain reserves existed in an
additional formation (Berea) which has been included in the Company's reserve
analysis.
Continued
F-32
75
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 11 - INCOME TAXES
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $23,000,000 for federal income tax reporting purposes and
approximately $5,111,000 for state reporting purposes, expiring through 2010.
The Tax Reform Act of 1986 includes provisions which limit the Federal net
operating loss carryforwards available for use in any given year if certain
events, including a significant change in stock ownership, occur. Because of
such limitations, the Company may only utilize net operating loss carryforwards
of approximately $1,500,000 per year for such losses of approximately $3,200,000
incurred prior to December 1992; additional limitations are believed to exist
between 1992 to 1995. Temporary differences are not considered
significant, exclusive of the differences (see below) in financial and tax
reporting bases of assets acquired from Mountaineer in a statutory tax-free
exchange.
At December 31, 1995 and 1994, the deferred taxes of $1,529,000 and $1,662,000,
respectively, represent the nondeductible tax bases of assets acquired from
Mountaineer totaling approximately $4,900,000 net of depreciation. The benefit
for income taxes in the consolidated statement of operations for the years
ended December 31, 1995, 1994 and 1993 represents the tax effect of
nondeductible depreciation less certain minimum state taxes paid.
The Company's only significant deferred tax asset as of December 31, 1995 and
1994 is approximately $8,700,000 and $6,800,000, respectively related to the
net operating loss carryforwards for federal and state tax reporting purposes.
The Company's valuation allowance at December 31, 1995 and 1994 was
approximately $8,700,000 and 6,800,000, respectively. The valuation allowance
at January 1, 1994 and 1993 was approximately $3,467,000 and $1,079,000,
respectivly. The difference between the federal income tax benefit using a 34%
and the benefit recorded in the accompanying statements of operations for each
of the years in the three-year period ended December 31, 1995 related primarily
to increases in the valuation allowances in each year.
NOTE 12 - SEGMENT REPORTING
The Company operates in two segments, oil and gas and gaming. The Company has
not presented segment information in accordance with Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise" because its oil and gas operations have been discontinued, are
separately disclosed in the accompanying consolidated financial statements and
will not be significant in the future.
NOTE 13 - RACING OPERATIONS
The Company conducts thoroughbred horse racing at Mountaineer Park Race Track
and Gaming Resort. Under West Virginia Horse Racing Law, the Company's
commission revenue is a designated portion of the parimutuel wagering handle
(amounts wagered).
The Racing Commission authorized a minimum of 220 days of racing; the Company
was in compliance with this provision in years reported. The Company is subject
to annual licensing requirements established by the Racing Commission which has
been renewed through December 31, 1996.
In August 1994, the Company renewed its contract with the West Virginia
Horsemens' Benevolent Protection Association (HBPA) for a period of three years.
In connection therewith, the Company is required to provide average daily horse
racing purses of at least $22,500, as well as operate a certain number of races
per day based on criteria provided in the contract.
Continued
F-33
76
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 13 - RACING OPERATIONS, continued
The Company pays purses for each race day to the horsemen and HBPA. The Company
receives a credit towards future purses for the difference of purses paid and
amounts earned by the horsemen and HBPA. The horsemen and HBPA earn a
percentage of the live and simulcast (satellite off-track wagering) race handle
less winning tickets and certain costs incurred by the Company, including
certain video lottery contractual expenses (approximately 15.5% of net video
lottery revenues) paid to the horsemen and HBPA.
The amounts paid in excess of the amounts earned are reflected in the
accompanying balance sheet as "prepaid purses" and totaled $352,000 at December
31, 1994. At December 31, 1995, purses earned in excess of amounts funded of
$85,000 are reflected in the accompanying 1995 consolidated balance sheet as
"accrued liabilities".
A summary of the parimutuel handle and deductions, including off-track wagering,
for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993
------------ ------------ ------------
Total parimutuel wagering
handles $ 39,819,000 $ 35,475,000 $ 40,961,000
Less patrons' winning
tickets (31,637,000) (28,246,000) (32,646,000)
------------ ------------ ------------
8,182,000 7,229,000 8,315,000
Less:
Parimutuel tax paid to:
State of West Virginia
and county (472,000) (442,000) (448,000)
Purses and Horsemen's
Association (3,447,000) (3,019,000) (3,544,000)
------------ ------------ ------------
Parimutuel commissions $ 4,263,000 $ 3,768,000 $ 4,323,000
============ ============ ============
Continued
F-34
77
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 14 - GAMING OPERATIONS
On March 17, 1994, the West Virginia State Legislature expressly authorized the
operation of up to 400 video lottery terminals through December 31, 1994,
subject to voter approval in a Hancock County referendum, which was approved on
May 10, 1994. The statute authorizing the operation of video lottery terminals
expires, unless extended, on June 13, 1997. In 1995, the Company received
approval from the West Virginia Lottery Commission (the "Lottery Commission") to
operate up to 1,000 video lottery terminals, and subsequently increased the
number of terminals in operation from 400 to 800.
One half of all video lottery terminals must be located in the racetrack
grandstand and clubhouse, while the balance may be located at the Company's on-
site lodge, as long as parimutuel wagering is operated therein. The Company is
subject to annual licensing requirements established by the Lottery Commission
which was renewed through June 1996.
In connection with its video lottery operations, the Company had the following
gross wins and losses for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
------------ ------------ ------------
Total gross winnings $ 55,988,000 $ 23,214,000 $ 16,736,000
Less losses (patron
payouts) (39,509,000) (15,733,000) (11,443,000)
------------ ------------ ------------
Revenues - Video lottery
terminals $ 16,479,000 $ 7,481,000 $ 5,293,000
============ ============ ============
With respect to the operations of video lottery terminals subsequent to March
17, 1994, the Company pays an administrative fee to the Lottery Commission not
to exceed 4% of video lottery terminal net revenues. After assessment of the
administrative fee, the Company is obligated to contribute legislatively
designated amounts to various funds. These amounts are included in "cost of
video lottery terminals" in the consolidated statements of operations.
Amounts contributed to these funds for the years ended December 31, 1995 and
1994 were as follows:
1995 1994
---------- ----------
HBPA purses (Note 13) $2,470,000 $1,070,000
Company pension plan (Note 7) 80,000 31,000
West Virginia tourism promotion fund 478,000 187,000
West Virginia Breeders' Classic fund 159,000 62,000
West Virginia general fund 4,780,000 2,371,000
Hancock County general fund 319,000 125,000
Veterans Memorial fund 159,000 63,000
---------- ----------
$8,445,000 $3,909,000
========== ==========
On June 2, 1994, the Company entered into a development agreement with American
Gaming Entertainment, Ltd. (formerly Gamma International, Ltd.) ("AGEL"), an
affiliate of Bennett, to provide services for development activities,
implementation of accounting and information systems and certain personnel
activities until AGEL was approved by the Lottery Commission. Upon approval in
October 1994, a long-term management agreement was executed.
Continued
F-35
78
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 14 - GAMING OPERATIONS, continued
Pursuant to the management agreement, the Company was obligated to pay 3% of
gross revenues, of video lottery and other non-parimutuel gaming and gaming
support operations, as defined, plus 8% of earnings before interest, taxes,
depreciation and amortization, as defined, from all operating activities of
Mountaineer. In the event of default by the Company, it would be required to
pay certain monies based on the remaining number of months through 1997, or in
the case of extension of video lottery activities by the State of West Virginia,
through the term of the agreement. The monthly base default fee begins at
$83,333. Management and consulting fees charged to "cost of video lottery
terminals" in the accompanying consolidated statements of operations during the
years ended December 31, 1995 and 1994 were $321,000 and $133,000, until such
time as a stay agreement was executed (see below). In addition, during 1994,
the Company advanced AGEL $300,000 which was used to reduce future management
fees and expenses. At December 31, 1994, prepaid management fees in the
accompanying consolidated balance sheet were $220,000.
The Company's management agreement with AGEL has been stayed pursuant to a stay
agreement effective June 30, 1995, and has been replaced by a consulting
agreement, dated July 1, 1995, until such time that Bennett complies with
certain requirements of the Lottery Commission. The consulting agreement calls
for American Newco, Inc. (owned by certain officers and shareholders of AGEL) to
continue to provide consulting services in connection with the Company's video
lottery operations at the rate of $10,000 per month, subject to increases of up
to $10,000 per month for additional services which may be provided, through
March 17, 1997. Fees under this consulting agreement are substantially less
than those which would have been paid under the original management agreement.
Should the stay agreement or the consulting agreement be terminated in
accordance with certain contingencies contained therein, the management
agreement shall also terminate. However, should the Lottery Commission
determine that Bennett has fully complied with its information requirements,
then the management agreement will be reinstated with the original terms as
defined above. At December 31, 1995, accrued consulting fees in the
accompanying consolidated balance sheet totaled $60,000.
The personal involvement of the two shareholders of American Newco, Inc. as
consultants to the Company is a material element of the contract. Since
September 1995, neither shareholder has provided such services and, as a
result, the Company has paid no consulting fees since that time. Management
believes that such failure to perform constitutes a material breach of the
Consulting Agreement and a resulting material breach of the Management
Agreement. Although there can be no assurances, Management believes that the
Management Agreement will not be reinstated.
NOTE 15 - STATEMENTS OF CASH FLOWS
The statements of cash flows exclude the effects of noncash investing and
financing activities for all periods presented. Supplemental disclosures of
significant noncash activities are as follows:
1995
In 1995, 202,833 redeemable common shares valued at $1,217,000 were satisfied
through 463,600 additional shares of its common stock (see Notes 2, 9 and 10).
Also see following paragraph for additional shares issued in 1995.
The Company issued 225,000 shares to Bennett for loan fees; these amounts, plus
285,000 shares valued at $1,710,000 (aggregate $3,060,000 of costs) were
reversed in 1995 due to the cancellation of the $6.00 price guarantee. In
satisfaction of such, the Company ultimately issued 1,020,000 additional shares
valued at $1,530,000 and relinquished its rights to the original 510,000 at a
value of $478,000. Such costs were accounted for as deferred finance costs,
interest and capitalized interest to its construction in progress (Notes 1 and
5).
Continued
F-36
79
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 15 - STATEMENTS OF CASH FLOWS, continued
During the year ended December 31, 1995, the Company issued 77,332 shares valued
at approximately $42,000 for services rendered, and the value of such shares was
charged to the 1995 consolidated statement of operations. Certain services were
rendered in 1995 which were to be satisfied through the issuance of common
stock; however, the parties cancelled 97,500 shares issued in 1994 which were
valued at $100,000. Such amounts are reflected as a reduction from
stockholders' equity with a corresponding increase in accrued liabilities.
In connection with the Jackpot settlement (Note 7), the Company issued 175,000
shares of its common stock in satisfaction of noncurrent accrued liabilities
totalling $414,000 ($525,000 accrued at December 31, 1994); approximately
$77,000 at December 31, 1995 are expected to be reduced through the issuance of
75,000 shares in 1996.
Certain finance fees totalling $997,500 (Note 5) which were accrued as deferred
finance costs in at December 31, 1995, were canceled due to the amendment by the
Company and Bennett. In addition in 1995, the Company issued 60,850 shares in
satisfaction of a note payable of approximately $43,000.
1994
During 1994, the Company issued 50,000 common shares for various services
rendered valued at $110,000. The Company also issued 10,681 and 97,500 shares
of its common stock valued at $40,000 and $100,000, respectively for certain
accounts payable and other current assets. The Company recorded compensation
expense of $600,000 as a result of options to purchase the Company's common
stock at below market values granted to two former shareholders of Mountaineer
(see Note 9).
From July 1994 to December 1994, the Company issued 285,000 common shares valued
at $1,710,000, accrued $200,000 in loan commissions to be paid in 1995, and
accrued $998,000 of construction financing costs which will be satisfied through
the issuance of common stock. Components of such costs of $1,568,000, $709,000
and $631,000 are excluded from cash expended for deferred financing costs,
buildings and improvements and interest expense, respectively.
In December 1994, the Company accrued a liability for the Jackpot settlement
costs of $525,000 which will be satisfied through the issuance of its common
stock in 1995.
See Note 3 for discussion of sale of investment and settlement agreement for
noncash transactions.
During 1994, the Company had certain noncash provisions, net of benefits,
reflected in operations aggregating a net benefit of $29,000.
1993
On January 1, 1993, the Company adopted SFAS 109, "Accounting for Income Taxes"
and, as a result, recorded deferred income taxes of $1,952,000 with a
corresponding increase to property.
In April 1993, the Company issued 50,000 shares of its common stock valued at
$300,000 to acquire a 20% interest in a ground lease (see Note 2).
Continued
F-37
80
WINNERS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each Of The Years In The Three-Year Period Ended December 31, 1995
NOTE 15 - STATEMENTS OF CASH FLOWS, continued
On March 31, 1993, the holders of $750,000, 8% convertible debentures elected to
convert their debentures and accrued interest of $82,000 into 416,197 shares of
common stock.
On March 25, 1993, $1,382,000 in debt related to oil and gas activities was
converted into 226,286 shares of common stock (valued at $792,000) and 98,333
shares of Redeemable common stock (valued at $590,000). In addition, 20,000
shares of common stock issued in 1992 for $100,000 of debt and $20,000 of
interest were rescinded.
In July 1993, the Company reconveyed land acquired in Cripple Creek, Colorado,
valued at $1,315,000, to the seller in exchange for long-term debt of $1,315,000
(see Note 2).
The Company issued 197,787 shares for various services rendered in 1993 valued
at $619,000. The Company recorded compensation expense of $600,000 as a result
of options to purchase the Company's common stock at below market values granted
to two former shareholders of Mountaineer (see Note 9).
During 1993, the Company had certain noncash provisions, net of benefits,
reflected in operations aggregating $145,000. Such amounts were expected to
provide future benefits or were based on estimates at December 31, 1992.
NOTE 16 - SUBSEQUENT EVENTS
Expanded Gaming Legislation
In March 1996, the West Virginia code was amended to permit game themes
depicting symbols on reels, commonly referred to as "line games" or "video slot
games". The legislation will go into effect in June 1996, unless vetoed by the
Governor of West Virginia.
Lease Amendment
In March 1996, the Company amended its master lease for its video lottery
terminals (see Note 7).
Bridge Financing
In March 1996, the Company entered into five short-term note agreements
aggregating $750,000 due in five monthly equal principal installments of
$150,000 each, commencing 30 days from the date of the loan. The Company
received an aggregate $570,000 of proceeds. In addition, the Company issued
75,000 shares of its common stock valued at approximately $50,000 as
consideration for the loan. Total interest costs on this indebtedness are
expected to be approximately $230,000 and will be charged to operations in 1996.
F-38
81
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Winners Entertainment, Inc.
We have audited the consolidated financial statements of Winners Entertainment,
Inc. and subsidiaries as of December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, and have issued our report
thereon dated April 5, 1996; such consolidated report is included elsewhere in
this Form 10-K. Our audits also included the consolidated financial statement
schedule of Winners Entertainment, Inc. and subsidiaries, listed in Item 14.
This consolidated financial statement schedule is the responsibility of
Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Corbin & Wertz
Irvine, California
April 5, 1996
F-39
82
WINNERS ENTERTAINMENT, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------- ---------- --------
BALANCE AT BALANCE
BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
---------- --------- ---------- ---------
Year ended, December 31, 1995(1):
Provision for doubtful notes
receivable $ -- $ 290,000 $ -- (1) $ 290,000
Allowance for deferred
tax assets 6,868,000 1,592,000 -- 8,460,000
---------- ---------- ---------- ----------
$6,868,000 $1,882,000 $ -- $8,750,000
========== ========== ========== ==========
Year ended, December 31, 1994(1):
Allowance for deferred tax
assets $3,467,000 $3,401,000 $ -- $6,868,000
========== ========== ========== ==========
Year ended December 31, 1993(1):
Allowance for deferred tax
assets $1,079,000 $2,388,000 $ -- $3,467,000
========== ========== ========== ==========
- ---------------
(1) During each of the years reported, allowances for trade receivables were not
significant.
F-40