Item 1. Business
Company History
AWI was incorporated in the state of Nevada in August 1995. We earn our revenue through the consolidated operations of our wholly-owned subsidiaries, including Leroy’s Horse & Sports Place, Inc. (“Leroy’s”), Computerized Bookmaking Systems, Inc. (“CBS”), AWI Manufacturing, Inc. (“AWIM”), AWI Gaming, Inc. (“AWIG”), ExactGeo Media, LLC (“ExactGeo Media”), and Mobile Sports Fantasy, LLC dba PlayBETM (“PlayBETM”). Leroy’s operates a network of 54 sportsbooks, 56 tavern remote account wagering locations, and expanded remote account wagering through the Leroy’s® App©, the first gaming approved downloadable app for betting on a wireless device. CBS designs, produces, sells and services computerized wagering systems for the race and sports wagering industry. AWIM designs, produces, and sells self-service race and sports wagering kiosks. AWIG is the sole member of Sturgeons, LLC dba Sturgeon’s Inn & Casino (“Sturgeons”), which AWIG owns and operates in Lovelock, Nevada. ExactGeo Media was recently formed to sell advertising in connection with our mobile betting capability, and PlayBETM is a contest, play-for-fun version of our mobile sports application.
Bridge Loan Agreement, Merger Agreement and Plan of Merger
On April 13, 2011, we, William Hill Holdings Limited, a private limited company formed under the laws of England and Wales (“Parent”), and AW Sub Co., a Nevada corporation and an indirect wholly-owned subsidiary of Parent (“Merger Subsidiary”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Subsidiary will be merged with and into AWI, with AWI surviving as a wholly-owned subsidiary of Parent (the “Merger”).
At the effective time of the Merger, each holder of outstanding shares of AWI common stock (other than (i) shares owned by Parent, Merger Subsidiary, or us or (ii) shares in respect of which dissenters’ rights have been properly exercised under Nevada law) will be entitled to receive $0.90 in cash for each such share (which shares shall be automatically cancelled).
Contemporaneous with the Closing (as defined in the Merger Agreement), Parent shall cause a wholly-owned subsidiary of Parent to pay to us an amount equal to the sum of (i) $1,416,200 and (ii) all of the additional accrued but unpaid interest on each share of preferred stock for the period from the execution of the Merger Agreement through the Closing Date (as defined in the Merger Agreement), which we will use at the Closing to redeem in cash from the holders of our preferred stock each issued and outstanding share of preferred stock. On or after the Closing, Parent shall cause the Surviving Corporation (as defined in the Merger Agreement) to honor the cashing of checks held by the holders of preferred shares representing accrued interest on the preferred shares for the period prior to the date of the execution of the Merger Agreement. At the Closing, each outstanding stock warrant and option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the Merger shall be cancelled and, in exchange therefor, the Surviving Corporation shall pay to each former holder as soon as practicable following the effective time of the Merger an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share of our common stock under such stock warrant or option, and (ii) the number of shares of our common stock subject to such stock warrant or option.
The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among other things, (i) the adoption of the Merger Agreement by our stockholders, which was effected on April 13, 2011 by the written consent of a majority of our stockholders, and no further approval of our stockholders is required to approve and adopt the Merger Agreement and the transactions contemplated thereby, (ii) the absence of any injunction or applicable law preventing consummation of the Merger, (iii) receipt of any required consents, approvals and licenses under the Nevada Gaming Control Act and the rules and regulations promulgated thereunder and applicable local gaming and liquor laws, ordinances and regulations, (iv) verification of the accuracy of the representations and warranties made by the Company, Parent and Merger Subsidiary, and (v) the performance, in all material respects, by each of the Company, Parent and Merger Subsidiary of all of its obligations, agreements and covenants under the Merger Agreement.
The Merger Agreement contains customary representations and warranties. In addition, we have agreed to various covenants in the Merger Agreement, including, among other things, covenants (i) to conduct our business in the ordinary course of business consistent with past practice during the period between the execution of the Merger Agreement and the Closing of the Merger and (ii) not to take certain actions prior to the Closing without the prior consent of Parent.
Additionally, on April 13, 2011 (the “Bridge Loan Signing Date”), we and Parent entered into a Bridge Loan Agreement (the “Bridge Loan Agreement”) pursuant to which Parent agreed to loan to us funds in an aggregate principal amount of $4.25 million and, at the Parent’s discretion, up to an additional $3.0 million (the “Bridge Facility”). The Bridge Facility matures upon the earlier of (i) consummation of the Merger, (ii) termination of the Merger Agreement (subject to a six month refinancing period) and (iii) December 31, 2013, subject to certain extension mechanisms.
Loans outstanding under the Bridge Facility accrue interest at an annual rate equal to 12.5%, which compound on a quarterly basis in arrears on March 31, June 30, September 30, and December 31 of each year, and shall be paid in kind and added to the balance of the loan. During the existence of an event of default under the Bridge Facility, an additional 2% per annum is imposed. A principal amount equal to $4,250,000 was made available to us on the Bridge Loan Signing Date. On September 2, 2011, we made a borrowing request under the Bridge Loan Agreement for $750,000 of Tranche II of the Bridge Facility for general corporate purposes. The remainder of the Bridge Facility, which is currently $2,250,000, may be funded from time to time in Parent’s sole discretion during the term of the Bridge Facility.
In connection with the Bridge Loan Agreement, the Company entered into a Pledge Agreement and Security Agreement to secure the Company’s obligations under the Bridge Loan Agreement. The pledged collateral under the Pledge Agreement includes (i) all right, title and interest of the Company (whether now or in the future) in Leroy’s, CBS, AWIM, AWIG, ExactGeo Media, and PlayBETM; (ii) all right, title and interest of the Company in and to all present and future payments, proceeds, dividends, distributions, instruments, compensation, property, assets, interests and rights in connection with or related to the collateral listed in clause (i); (iii) all indebtedness from time to time owed to the Company; (iv) any and all rights, powers, remedies and privileges of the Company with respect to the foregoing; and (v) all proceeds of the foregoing.
Pursuant to the Security Agreement, the Company, Leroy’s, CBS, AWIM, ExactGeo Media, and PlayBETM (the “Grantors”) granted Parent a first priority lien upon, among other things, the respective Grantor’s right, title, and interest in and to all present and future (i) accounts, accounts receivable, and deposit accounts; (ii) chattel paper (whether tangible or electronic); (iii) equipment; (iv) goods and inventory; (v) certain intellectual property, including patents, trademarks, trade names, and copyrights; (vi) cash and cash equivalents; (vii) books and records relating to or in connection with the foregoing; (v) supporting obligations relating to any of the foregoing; and (vii) proceeds of all of the foregoing.
The foregoing descriptions of the Merger Agreement and the Bridge Loan Agreement have been provided solely to inform investors and security holders with information regarding their terms. They are not intended to provide any other financial information about the parties thereto or their respective subsidiaries and affiliates. The representations, warranties and covenants contained in the Merger Agreement and the Bridge Loan Agreement were made only for purposes of those agreements and as of specific dates; were solely for the benefit of the parties thereto; may be subject to limitations agreed upon by such parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties thereto instead of establishing these matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of the parties or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date hereof, which subsequent information may or may not be fully reflected in public disclosures by the parties thereto. Our shareholders and other investors are not third-party beneficiaries under the Bridge Loan Agreement and/or the Merger Agreement and should not rely on the representations, warranties, and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of American Wagering, Inc., William Hill Holdings Limited, AW Sub Co., or any of their respective subsidiaries or affiliates.
We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provision are required to make the statements in this Form 10-K not misleading.
Race and Sports Wagering Segment
Leroy’s. Leroy’s was incorporated in the state of Nevada in November 1977. Leroy’s, through a central computer system located at the Company’s Las Vegas headquarters, operates a network of race and sport wagering facilities on the premises of non-restricted gaming locations throughout the state of Nevada. Leroy’s offers a “turn-key” race and sports wagering operation that allows casinos to satisfy their patron’s desire for race and sports wagering, without the casino bearing the risk and overhead associated with running the operation themselves. By combining volume from a large number of locations, the Company believes that Leroy’s more effectively hedges risks and more efficiently covers fixed overhead. Keeping pace with the mobility trends of its bettors, Leroy’s introduced the first sports betting application for a bettor’s mobile phone while in Nevada, the Leroy’s® App©, approved by the Nevada Gaming Authorities, and provides remote account wagering at 56 taverns in Nevada. Leroy’s generates revenue from patron wagers less payouts.
Race and Sports Wagering Systems Segment
CBS. Founded in 1983, CBS designs, produces and services computerized wagering systems for the race and sports wagering industry. CBS is a leading race and sports equipment and software supplier in the State of Nevada. Accordingly, CBS services the majority of race and sports books in Nevada. We believe that the CBS Race and Sports System is the industry standard for race and sports content wager processing, delivery, and accounting. CBS also is the distributor of self-service race and sports wager kiosks, designed by AWIM. Additionally, CBS designed the first mobile sports betting application to receive approval from the Nevada Gaming Authorities, which is currently utilized by Leroy’s. CBS generates revenue as it sells and maintains these sports wagering systems for the gaming industry.
AWI Manufacturing, Inc. AWIM designs self-service race and sports wagering kiosks. The kiosks interface with our customers’ CBS Race and Sports Systems and they expand our customers’ race and sports books’ size and hours of operation without increasing the labor cost. The installation of kiosks in Leroy’s locations assists in controlling personnel costs, lengthening hours of operation, increasing Leroy’s visibility, and enhancing the convenience of the patron. The AWIM upright kiosk was jointly designed with a third-party vendor. Smaller self-service kiosks were placed in over 20 of our 56 local tavern locations during fiscal 2012.
Hotel/Casino Segment
AWI Gaming, Inc. AWIG is the sole member of Sturgeons, LLC, which owns and operates the Sturgeon’s Inn & Casino. AWIG’s intended purpose was to acquire hotel/casino properties; although due to the economy and other financial reasons, no other acquisitions have occurred to date and none are anticipated in the near future.
Sturgeons, LLC. Sturgeons, LLC d/b/a Sturgeon’s Inn & Casino (“Sturgeon’s”) is a hotel, casino and restaurant operation located in Lovelock, Nevada that was acquired on March 1, 2006.
Other activities (in the Race and Sports Wagering Segment)
ExactGeo Media, LLC. Established in 2011, ExactGeo, Media was formed to sell advertising in connection with our mobile betting application.
Mobile Sports Fantasy, LLC dba PlayBETM. Established in 2011, PlayBETM was formed to offer the public a contest, play-for-fun version of our mobile sports application, and we anticipate generating revenue from the sale of advertising placements on the contest application.
Sports Wagering
Wagering on sporting events is legal in varying degrees in the states of Nevada, Oregon, Montana, and Delaware and in numerous foreign countries. Wagering on sporting events has increased significantly with cable and satellite television, and technological improvements. When sporting events are televised, there is increased exposure and interest, which, we believe, leads to increased sports betting.
A sports wagering facility, or “sports book,” is a gambling establishment that sets odds and point spreads and accepts bets on the outcome of sporting events such as football, basketball, baseball, and hockey games. Sports books set odds and point spreads aiming not to reflect the final result, but to maintain a “balanced book” by offering odds or point spreads that will attract equal amounts of bets on each side of a particular event. Generally, a patron’s odds (or point spread or the “line”) are fixed at the time he or she makes his or her bet, regardless of any subsequent movement in the line. Under this system, a sports book operator attracts bets by changing or “moving” the line up or down to encourage wagering on a specific side or team.
To the extent that a book on a particular event is not balanced, the bookmaking operation takes a risk on the outcome of the event. This is the fundamental difference from other forms of organized gambling, where profits result from patron play against a statistical advantage that the gambling operator (the “House”) possesses; or in the case of pari-mutuel wagering, used by major North American Horse Racing Tracks, Dog Race Tracks, and Jai-Alai establishments, where the House receives a guaranteed percentage of the wagers for operating expenses, profit and taxes and the remainder is distributed to the winners. Nevada also now uses pari-mutuel wagering for betting on Dog Race Tracks.
This fundamental difference is part of the appeal for many sports patrons, but it also creates risk for the sports book. A bookmaker operates in a system that is interrelated with oddsmakers and patrons. Bookmakers collect bets, adjust odds to account for the preferences of their patrons, pay the winners, and if the book is balanced for each type of sports bet, the House then has a “theoretical advantage.” For example, for a straight football bet involving the outcome of one game, it is common practice that the patron wagers $11 to win $10. If the patron wins the wager, he or she receives $21. If the patron loses, in this case, he has wagered $11. Accordingly, by maintaining a balanced book, the sports book would win $1 for each $22 wagered, or 4.55%.
Oddsmakers initially set betting lines with the goal of splitting the bets evenly between each of the betting sides. Patrons have opinions concerning the odds and bet accordingly, which requires initial lines to be adjusted. As a result, in practice, a sports book is rarely perfectly balanced. The sports books’ profit depends upon the reliability of the oddsmaker and its own acumen at adjusting the odds when required. Because patrons are betting on propositions of uncertain probability and are paid according to the line at which they make their bets rather than the closing odds (as in a pari-mutuel system), the sports book is not assured of either a constant profit over time or for a single event.
A sports book also attempts to limit the potential risk by setting game limits and line movement. For example, the opening line for a football game ideally would split the bets from the time it was posted until kick-off. However, the opening line generally is unbalanced. Because a sports book does not want to take the risk of accepting unlimited bets on one side of a game, it creates a game limit, the maximum amount of money that will be accepted at the posted line. When the game limit is reached, the line is changed, or “moved,” to attract wagers on the “other” side. We believe that using a conservative strategy of placing limits on games mitigates a great portion of our risk of losing large sums of money in short time periods.
The game limit is established by the sports book based upon the “earn” in a sport, which is a function of the amount the sports book would earn if the odds guaranteed it a constant commission regardless of the outcome (the “theoretical hold percentage”), the quality of the line, and the patron mix. For example, when the sports book anticipates that the majority of the bets will come from sophisticated patrons who know as much as, or more than, the oddsmaker, the limit will be relatively low. We believe that events with the highest fan popularity and media coverage, such as professional football, have a relatively small proportion of sophisticated patrons. Accordingly, the sports books’ expected earn on such an event would be higher and would justify a higher game limit. In order to effectively balance its books, a bookmaking operation must take a sufficient volume of wagers to offset large wagers on any given event. While many of the consolidated casino operators have sufficient patron traffic to underwrite the substantial risks inherent in a sports book, many single casino operators are typically more risk adverse. Through Leroy’s, we offer casino operators the amenity of having sports wagering books with no risk of financial loss or substantial operating, labor, or administrative costs. Under Nevada gaming law, Leroy’s is permitted to own and operate sports books located on the premises of other nonrestricted gaming licensees.
When Leroy’s began operations in 1978, it was one of only seven sports and race books in Las Vegas. Currently, virtually every major casino in Nevada offers its patrons a sports and race book. The typical sports book location leased by Leroy’s encompasses approximately 300 square feet, but can range from 100 to 10,000 square feet, contains a board displaying the odds, television monitors showing sporting events, betting stations, ticket sellers and cashiers. Most leases are at fixed rates, are cancelable by either party with proper notice, and some have revenue sharing or incentive (participation) clauses. As a bet is placed, the wagering data is entered into a computer terminal which is connected via a communications device to Leroy’s centralized computer system which confirms the line, determines that the bet is within the limits set for the particular event, records the information on a central database, and issues a ticket evidencing the bet. The ticket is then distributed to the patron with Leroy’s simultaneously recording the wager. Personnel at Leroy’s corporate office monitor all bets and adjust the odds as necessary to reflect the various bets throughout all of Leroy’s locations.
We believe that Leroy’s has lower maximum betting limits than many sports books operated by the larger casinos. We established these lower limits in an effort to limit bets from the more sophisticated patrons who often place larger bets. In addition, in order to limit the more sophisticated bettors from utilizing strategies that would provide an advantage, we set even lower limits for account wagering bets placed through the mobile application on a wireless device, which are currently accepted only from within Nevada. We believe that geographical dispersion across Nevada is more likely to attract bets from patrons more evenly on both sides of a line, thereby further limiting our risk.
Professional and college football games currently are the most popular sports wagered on, followed by professional and college basketball games, and finally professional baseball games; together comprising the majority of the total amount wagered at all of our Leroy’s locations. Historically, our Leroy’s business has been seasonal in nature, with more than half of its handle occurring between the months of September and February.
We offer limited horse race wagering at most of Leroy’s locations, and a full pari-mutuel race book at four of our locations. See Pari-Mutuel Race Wagering below.
Leroy’s race books utilize the same personnel and facilities as its sports books, but Leroy’s does not set its own odds for race wagering. Leroy’s accepts wagers for races by offering race patrons the same odds as the racetracks at which the races occur. At those locations with limited race wagering, Leroy’s pays full track odds up to the predetermined limit. At those locations with full pari-mutuel race wagering, there are no limits and Leroy’s operates a daily race book with wagers merged into the on-track pari-mutuel pools.
Online sports’ betting (through use of personal computers) has existed for approximately 20 years, is currently very popular, and continues to become more popular each year. However, in response to online sports wagering, Leroy’s created a mobile application for use on approved wireless devices that permits a bettor to legally place a bet any where in the state of Nevada. The increased popularity of online sports betting may result in the continued growth of the sports betting industry in general, or could have an adverse impact upon our live wagering facilities in Nevada. At this time, we cannot predict what impact, if any, the growth of online wagering may have on our overall handle (total amount wagered). See Item 1.A Risk Factors below.
Pari-Mutuel Race Wagering
In December 1997, Leroy’s joined the Nevada Pari-mutuel Association to allow pari-mutuel race wagering at one or more of its licensed locations. As of January 31, 2012, four licensed Leroy’s locations, in association with a disseminator, offer pari-mutuel wagering on numerous events at racetracks throughout the country.
Competition
There is intense competition among companies in the gaming industry, most of which have significantly greater financial, marketing, technical and other resources than we do.
Leroy’s faces competition from all other sports and race wagering operations throughout Nevada. Virtually all of the major casinos in Nevada have sports and race books, some of which are larger and offer more amenities than our locations and some casinos operate their own sports books.
The state of Delaware legalized limited sports wagering in September 2009. This new sports wagering jurisdiction and expanded internet sports wagering could potentially reduce the amount of wagers placed in Nevada. However, this expansion could also represent expansion opportunities for our Company, but there can be no assurance that this will create a positive impact on our financial position or results of operations.
CBS and its CBS Race and Sports System face competition from large casinos that may develop their own race and sports wagering systems; an over-the-counter system offered by another company with approximately 10% of the market, and international race and sports service providers.
AWIM competes with other manufacturers of self-service wagering kiosks.
AWIG faces competition from other hotel/casino operators. Sturgeon’s is the only hotel/casino operation in Lovelock, Nevada. While most of its revenues are generated from residents of that area, Sturgeon’s also competes, to varying degrees, in the tourism market with casino facilities in Reno, Sparks, Fallon and Winnemucca. However, other hotel operations (without casino facilities) compete for the tourism market while other (smaller) casino facilities (without hotel operations) in Lovelock, Nevada compete for gaming patrons in this area.
Intellectual Property
We regard our technology as proprietary and attempt to protect it by relying on patents, trademarks, service marks, copyrights and trade secret laws and restrictions on disclosure and transferring title and other methods. We generally enter into confidentiality and/or license agreements with our employees and consultants, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently.
Research and Development
We incurred costs of $848,013 in research and development in the fiscal year ended January 31, 2012, as compared to $725,689 in the fiscal year ended January 31, 2011, all of which was expensed as incurred. We intend to conduct continuing development and innovation of our products in accordance with changing consumer preferences, demographics, and the evolution of new technologies such as the Leroy’s® App©. Our development strategy is to leverage our proprietary technology and regulatory approvals to integrate third party developed solutions such as age verification, biometrics, identification, security, and wireless devices in order to provide fully-integrated applications that are competitive and innovative in the regulated gaming industry.
Proposed Government Regulation
In the past, the U.S. Congress has submitted bills that, if passed, would prohibit wagering on some, if not all, types of sporting events. Passage of any such legislation would have a significant negative impact on our operations.
Regulation and Licensing
The ownership and operation of gaming facilities in Nevada are subject to extensive state and local regulation. Our gaming operations are subject to the Nevada Gaming Control Act and its regulations (hereinafter collectively referred to as the “Nevada Act”) and various local regulations. Our gaming operations are also subject to the licensing and regulatory control of the Nevada Gaming Commission (the “Commission”), the State Gaming Control Board (the “Board”), various county commissions (gaming, liquor, health, etc.), and other local jurisdictions. These regulatory agencies are hereinafter collectively referred to as the “Nevada Gaming Authorities.”
The laws, regulations and supervisory procedures of the Nevada Gaming Authorities have their genesis in various declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) the creation of a source of state and local revenues though taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on our gaming operations.
We have been found suitable as the publicly traded parent of entities holding Nevada gaming licenses. Leroy’s is licensed by the Nevada Gaming Authorities as the owner/operator of non-restricted race and/or sports book operations; AWIM is licensed by the Nevada Gaming Authorities as a Manufacturer and a Distributor; AWIG is licensed by the Nevada Gaming Authorities as the sole member of Sturgeon’s; Sturgeon’s is licensed by the Nevada Gaming Authorities as the operator of non-restricted gaming operations at Sturgeon’s Inn & Casino; CBS is not required to maintain any gaming-related licenses. Gaming licenses require the periodic payment of fees and taxes and periodic reviews by the gaming authorities. Furthermore, gaming licenses are not transferable.
We are registered in Nevada as a publicly traded corporation and, as such, are required to submit, on a periodic basis, detailed financial and operating reports to the Commission. Additionally, we may be required to furnish any other information requested by the Commission. No person may become a stockholder of, or receive any percentage of profits from Leroy’s, AWIM, AWIG or Sturgeon’s (as non-public entities) without first obtaining licenses and approvals from the appropriate Nevada Gaming Authorities. We have received from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material relationship, or involvement with us in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Our officers, directors and key employees who are actively and directly involved in the gaming activities may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application of licensing for any cause deemed reasonable. A finding of suitability is comparable to licensing, and both require the submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or a finding of suitability must pay all of the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities. In addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities also have jurisdiction to disapprove a change in a corporate position. Our current officers and directors and those of our subsidiaries have been found suitable by the Nevada Gaming Authorities.
If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us, we would be required to sever all relationships with such a person. Additionally, the Commission may require us to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada.
If it were determined that we or our subsidiaries violated the Nevada Act, the gaming licenses or registration held by us could be limited, conditioned, suspended or revoked. At the discretion of the Commission, we and any person involved could be subject to substantial fines for each separate violation of the Nevada Act. Furthermore, a supervisor could be appointed by the Commission to operate our gaming properties and, under certain circumstances, earnings generated during the supervisor’s appointment (except for the reasonable rental value of our gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could, and certainly the revocation of any gaming license would, materially adversely affect the results of our operations.
A beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his or her suitability as a beneficial holder of our voting securities determined if the Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting such an investigation. If the applicant is an Executive Officer or Director of the Company, it is our policy to pay for these expenses. In addition, the Clark County Liquor Gaming Licensing Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.
The Nevada Act requires any person who acquires more than 5% of our voting securities to report the acquisition to the Commission. The Nevada Act requires that beneficial owners of more than 10% of our voting securities apply to the Commission for a finding of suitability within 30 days after the Chairman of the Board mails written notice requiring such a filing. Under certain circumstances, an “institutional investor,” as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of our voting securities may apply to the Commission for a waiver of such a finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold the voting securities for investment purposes only unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or any other action which the Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities which are not deemed inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Commission may determine to be consistent with such investment intent. If the Commission grants a waiver to an “institutional investor,” the waiver does not include a waiver or exemption from the requirement for prior approval to “acquire control” of a registered corporation. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information, including a list of its beneficial owners. The applicant is required to pay all costs of investigation. If the applicant is an Executive Officer or Director of the Company, our policy is to pay for those expenses.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Commission, or the Chairman of the Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owners. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a registered corporation beyond such period of time as may be prescribed by the Commission may be guilty of a criminal offense. We would be subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us or our subsidiaries, we (i) pay that person any dividend or interest on our voting securities; (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. Any person required by the Commission to be found suitable but who is found unsuitable shall be guilty of a criminal offense if he holds, directly or indirectly, the beneficial ownership of the voting or debt securities beyond the time prescribed by the Commission.
We are required to maintain a current stock ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such a disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Commission has the power to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Commission has not imposed such a requirement on us.
Changes in control of AWI through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he or she obtains control, may not occur without the prior approval of the Commission. Entities seeking to acquire control of a registered corporation must satisfy the Board and the Commission under a variety of stringent standards prior to assuming control of such registered corporation. The Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity that proposes to acquire control, to be investigated and licensed as part of the approval process related to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defensive tactics affecting Nevada gaming licenses and registered corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada’s gaming industry and to further Nevada’s policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Commission before we can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by our management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by a registered company’s board of directors in response to a tender offer made directly to the registered company’s stockholders for the purposes of acquiring control of the registered company.
License fees and taxes, computed in various ways depending upon the type of gaming activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensees’ respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly, semi-annually or annually and are based upon either: (i) a percentage of gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of games operated. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer’s or distributor’s license, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, or required to be registered, or is under common control with such person (hereinafter collectively referred to as “licensees”) and who proposes to become involved in a gaming venture outside the State of Nevada is required to deposit with the Board, and thereafter maintain, a revolving fund to pay the expenses of investigation by the Board of his or her participation in such foreign gaming. We have filed the appropriate foreign gaming reports and have established the required revolving fund, if required. The revolving fund is subject to increase or decrease at the discretion of the Commission. Thereafter, such licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operations, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the basis of personal unsuitability. Recent changes in the Nevada Gaming Control Act would allow us to seek a determination of suitability of any associate or activity associated with the foreign gaming opportunity prior to engaging in that activity.
Pursuant to the Professional and Amateur Sports Protection Act (the “Sports Protection Act”), which became effective January 1, 1993, the proliferation of legalized sports books and wagering was significantly curtailed. The Sports Protection Act effectively outlawed sports betting nationwide, excluding Nevada and sports lotteries in Oregon, Montana, and Delaware. Thus, sports books and wagering are permitted to continue to operate in Nevada, provided the wager originates in Nevada and is received by a licensed sports book in Nevada. Moreover, the Interstate Wire Act also prohibits those in the business of betting and wagering from utilizing a wire communication facility for the transmission in interstate or foreign commerce of any bets, wagers or information assisting in the placing of such bets and wagers on any sporting event or contest unless such betting or wagering activity is specifically authorized in each jurisdiction involved.
On October 13, 2006, the United States Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”) was enacted. UIGEA prohibits any person engaged in the business of betting or wagering from knowingly accepting payments related to unlawful bets or wagers transmitted over the Internet. UIGEA instructs the U.S. Treasury Department and Federal Reserve to impose new obligations upon financial institutions and other payment processors to establish procedures designed to block online gaming-related financial transactions. It also expressly requires Internet bets and wagers to comply with the law of the jurisdiction where the wagers are initiated and received.
Leroy’s may not accept pari-mutuel bets received by use of wire communications facilities, including telephones and computers, unless such bets originated in jurisdictions where such betting or wagering is legal. Nevada has amended the Nevada Gaming Control Act to allow licensed race and sports books in Nevada to accept interstate pari-mutuel wagers (but not other sports betting) from other jurisdictions in which pari-mutuel wagering is legal.
Employees
We had 163 full-time and 41 part-time employees at January 31, 2012, at all of our locations and subsidiaries, including our Sturgeon’s property, of which 24 employees were full-time and 17 were part-time. None of our employees are represented by a labor union. We do not know whether or to what extent, if any, our employees will, in the future, be governed by collective bargaining agreements. At this time, we believe our employee relations are good.
Item 1A.
Item 1A. Risk Factors
In addition to other matters identified or described by us from time to time in this report or in our other filings with the Securities and Exchange Commission (the “SEC”), there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned, or results that are reflected from time to time in any forward-looking statement that may be made by us or on our behalf. Some of these important factors, but not necessarily all important factors, include the following:
If the Merger Contemplated by the Merger Agreement Does Not Occur or Is Delayed, It Could Have a Material Adverse Effect on Our Business, Financial Condition, and Results of Operations
There is no assurance that the Merger will occur or that the closing conditions of the Merger will be satisfied, including approval of the Merger by Nevada gaming regulators. The transactions contemplated by the Merger Agreement may be delayed or even abandoned before completion if certain events occur. We are subject to several risks as a result of the Merger Agreement and the Bridge Loan Agreement, including, but not limited to, the following, any of which could materially adversely affect our business, results of operations and financial condition:
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If the Merger is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed;
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Certain costs related to the Merger and the Bridge Facility, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the Merger is not completed;
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Under circumstances as defined in the Merger Agreement, we may be required to reimburse expenses if the Merger Agreement is terminated;
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If the Merger Agreement is terminated, the principal balance of the Bridge Facility, and all accrued interest, would become due and payable, and if we are unable to make such payment, Parent may foreclose on the collateral securing the obligations under the Bridge Loan Agreement;
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Stockholder lawsuits may be filed against us in connection with the Merger Agreement;
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Our management and employees’ attention may be diverted from day-to-day operations; and
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We may not be able to draw additional funds under the Bridge Facility, as additional advances are in Parent’s sole discretion.
A failed Merger may result in negative publicity and/or a negative impression of us in the investment community or business community generally. In addition, the process of consummating the Merger could cause disruptions in our business, which could have an adverse effect on our financial results. Among other things, uncertainty as to whether the Merger will be completed may cause current and prospective employees and members of management to become uncertain about their future roles with the Company if the transaction is completed. This uncertainty could adversely affect our ability to retain employees, members of management, and our relationships with customers and vendors. The terms of the Merger Agreement and the Bridge Loan Agreement also limit our ability to engage in certain business activities without the prior consent of Parent. The most significant of these restrictions limit our ability to pay dividends, issue or repurchase shares of our common stock, incur new indebtedness, enter into or modify material contracts, grant liens on our assets, and effect any significant change in our corporate structure or the nature of our business. If the Merger is not consummated, we will continue to be a publicly traded company, and we may not be able to pay our debts as they come due, including the Bridge Facility.
Current Economic Conditions Will Likely Adversely Affect Our Results of Operations
Our business is vulnerable to downturns in national and local economic conditions, including, without limitation, downturns in the economy related to threatened or actual terrorist attacks; pandemic outbreaks or similar widespread health epidemics; natural disasters; tightening of available credit; increasing government regulation, spending and taxes; increasing energy costs; increasing interest rates; declining consumer confidence; and declines in the stock market. The demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes, and thus a decline in general economic conditions or an increase in transportation or other costs will likely lead to our customers having less discretionary income with which to travel to Nevada and wager. We face the risk that the effects of higher unemployment rates, higher transportation costs, foreclosures and continued pressure on housing prices, as well as business failures and stock market volatility will place added strain on consumers’ ability to make purchases, repay their loans and thus, leave less funds available for travel and leisure activities. Consumer demand for gambling, due to decreased disposable income, has declined and could continue to decline as a result of the current economic conditions. We have also experienced a change in gambling patterns of our patrons, including a trend towards more conservative bets, which tend to be less profitable to the Company. Additionally, our current casino customers who purchase equipment and wagering software have experienced a decline in growth and financial performance, which will likely lead to a decrease in maintenance revenues and installation revenues. In addition, because Sturgeon’s Hotel and Casino is heavily dependent on the drive-through market, especially travelers on Interstate 80, the foregoing factors have and could continue to have an adverse affect on our business.
Liquidity-If We Are Unable to Raise Additional Capital in the Near Term, We May be Unable to Satisfy Our Obligations as They Become Due
At January 31, 2012, we had approximately $2.6 million in cash and equivalents, most of which is held to fund winning tickets and future bets. Based upon our anticipated operations, we believe that cash on hand, operating cash flows, and potential financing to be provided in the Bridge Loan Agreement will be adequate to meet our anticipated working capital requirements, capital expenditures, and scheduled payments for indebtedness for fiscal 2013. No assurance can be given however that our cash flow will be sufficient, that our estimates for anticipated operational cash needs will be accurate, that new business development will or unforeseen events will not occur, that the outcome of litigation will be positive, that we will be able to borrow additional funds under the Bridge Facility, resulting in the need to raise additional funds sooner, or that we will be able to raise additional funds. We engaged a financial advisor on an exclusive basis to provide advisory services to us and we were successful in our efforts to find a strategic partner. See Item 1. Business-Bridge Loan Agreement, Merger Agreement and Plan of Merger above.
Risk of Loss due to Racusin Litigation
The Company and Racusin entered into a Settlement Agreement on September 3, 2004. Racusin filed a claim against the Company for breach of the Settlement Agreement on January 14, 2009, and motion for summary judgment on that claim to accelerate amounts due, with penalty interest, on February 24, 2009. On August 18, 2009, the Court entered an order granting summary judgment in favor of Racusin, which accelerated amounts due and imposed penalty interest at 12% per annum. The Company moved for rehearing and at a hearing on April 2, 2010, the Court orally ruled that it was vacating the prior August 18, 2009 order granting summary judgment in favor of Racusin, which oral ruling was later entered in a written order on December 23, 2010. Based upon the Court’s December 23, 2010 order, wherein the Court found that a genuine issue of material fact existed as to the potential effect on the Settlement Agreement as a result of events that occurred in the Interpleader Action during the period between the Bankruptcy Appellate Panel’s subordination decision and the Ninth Circuit Court of Appeal’s decision to reverse the Bankruptcy Appellate Panel, on April 20, 2011 the Company filed a motion for summary judgment seeking dismissal of Racusin’s still pending complaint for breach of the Settlement Agreement, further relief on and discharge of the Company pursuant to the Interpleader Action, as well as a refund of alleged overpayments the Company made. On July 27, 2011, the Court made oral findings and conclusions in favor of the Company on its motion for summary judgment, which was entered into a written order on October 7, 2011. Specifically, the Court ruled that Racusin’s complaint against the Company for breach of the Settlement Agreement was dismissed. The Court also ruled that as to the Company’s Interpleader Action, interest did not accrue during the time when the Company previously deposited with the Court the 250,000 shares of AWI common stock through at least the date of the final decision of the 9th Circuit Court of Appeals on June 28, 2007. The Court also ruled that the Company had satisfied its obligations in full to Racusin under the Settlement Agreement and thus did not have to make any further payments to Racusin. Racusin is appealing the Court’s decision to grant the Company summary judgment to the United States Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals (the "BAP"). If the BAP, under case number BAP. No. NV-11-1549, disagrees with the Bankruptcy Court and determines we owe additional amounts, we believe that we have sufficient amounts allocated from the Bridge Facility to pay such obligations when due in accordance with the current payment terms. However, there is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
Regulation Regarding Reserves
Nevada Gaming Commission Regulation 22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. We have historically funded this reserve requirement through surety bonds secured by restricted cash held at Nevada State Bank.
As of January 31, 2012, we had cash reserves and pledge agreements totaling $1.9 million to satisfy the Regulation 22.040 requirement in addition to a float amount of $600,000 allowed by the Nevada Gaming Control Board to cover short term fluctuations in the outstanding liability. The $1.9 million amount consisted of our reserve account of $700,000 held at Nevada State Bank, a pledged certificate of deposit totaling $200,000, and an Irrevocable Standby Letter of Credit of $1 million. The pledged certificate initially expired in October 2010, but Victor and Terina Salerno agreed to extend their pledge without designating a specific expiration date. However, there is no assurance that this pledge will continue. On January 13, 2012, the Nevada Gaming Control Board allowed us to reduce our reserve balance by $750,000 and withdraw the pledge from Robert and Tracey Kocienski of $250,000. We will likely have to increase our reserve in August 2012, and if we are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, and/or an elimination or reduction of remote wagering accounts, resulting in an adverse change in our operating results. We anticipate being able to increase our reserve balance as a portion of the financing proceeds from the Bridge Facility is allocated for this purpose. There is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
We Have Had a History of Significant Losses and We May Incur Additional Losses in the Future
For the fiscal years ended January 31, 2012 and 2011, we have incurred net losses of $4.6 million and $3.3 million, respectively. From our inception of revenue producing operations through the current fiscal year, we have incurred an accumulated deficit of $20.3 million. For the fiscal years ended 2001 though 2012, the Company recorded net income for six of those years and net losses for six of those twelve years. While we have implemented strategies to improve future operations including, but not limited to the following: increasing financial analysis and focusing on cost reductions; eliminating unprofitable sports book locations; investing in newer, more profitable sports book locations; investing in additional research and development aimed at new markets and technologies; and settling litigation matters; there is no assurance that such strategies will be successful. Higher than expected administrative, research and development, and/or distribution costs, could also negatively impact our financial results. The timing of the sales of equipment compared to the timing of expenses incurred may also negatively affect our financial results. Changes in our business systems, competition, or technologies affecting our products could also negatively impact our financial results. In order for us to again achieve profitability, we need to generate and sustain additional revenues while maintaining reasonable cost and expense levels.
We Are Subject to Potential Fluctuations in Results
Our quarterly results have fluctuated primarily due to outside factors such as professional and college sports seasons and timing of sales and installations for CBS equipment. All of the Company’s wagering revenue comes from its Nevada race and sports books and nearly 19% of that is derived from professional football events. If the professional football season were to be interrupted this could have significant adverse impact on future operations. Management also estimates that a significant amount of our Nevada non-casino wagering relates to college sports and, therefore, the passage of amateur sports anti-wagering legislation could have a material adverse impact upon future operations. In addition, we generate substantial revenue from system sales and maintenance to a relatively small population of potential customers, a decline in the size, demand or number of these contracts could also adversely affect future operations. Thus, the results of any quarter are not necessarily indicative of the results that may be expected for any other interim period. In addition, we take risks by accepting wagers on the outcome of various sporting events. Fluctuations in the levels of the amounts wagered during particular times of the year and the win percentage of the wagers contribute to variations in financial results. While we have instituted measures to lessen the risk, there is no assurance that we will be able to win more of the wagers than we lose. In addition, our inability to manage the timing of the release of new products and installations can cause fluctuations in results.
We Are Subject to Intense Competition
There is intense competition among companies in the gaming industry, along with dynamic customer demand and rapid technological advances; and most of our competitors have significantly greater financial, marketing, technical and other resources than we do. Significant competition that we encounter may have a materially adverse effect on us. There can be no assurance that we will be able to compete successfully against current and future competitors. The state of Delaware legalized sports wagering in the form of parlay cards on professional football in 2009. This new sports wagering jurisdiction and expanded internet sports wagering could potentially reduce the amount of wagers placed in Nevada. However, this expansion could also represent expansion opportunities for our Company, but there can be no assurance that this will create a positive impact on our financial position.
Demand for Our Products and Services is Subject to Continued Acceptance of Our Products and Services
We believe our ability to increase revenues, cash flow, and to maintain profitability will depend, in part, upon continued market acceptance of our products and services. There can be no assurance that the market acceptance of our products and services will continue. Changes in market conditions in the gaming industry, the general and gaming industry economic conditions, and the financial condition of host locations or patrons could limit or diminish market acceptance of these products and services.
We Cannot Guarantee the Success or Growth of The LEROY’S® APP©.
The market for downloadable applications permitting legal sports wagering from a mobile device is a new market in Nevada. No assurances can be given that there will be commercial acceptances of the LEROY’S® APP©, that other competing mobile applications will not be developed that adversely affect the commercial acceptance of our mobile application, or that our ability to capitalize on any available growth opportunities will not be adversely affected by other risk factors previously discussed. Depending on its market acceptance, the release of the LEROY’S® APP© may limit our aggressiveness in adding new Leroy’s locations.
We Are Subject to Strict Regulation by Gaming Authorities
The ownership and operation of gaming licenses in Nevada are subject to strict regulation under various state, county and municipal laws. In particular, the Leroy’s, AWIM, AWIG and Sturgeon’s subsidiaries are licensed by the Nevada Gaming Commission and are subject to extensive regulation. Together with key personnel, we undergo extensive investigation before each new gaming license is issued, and the products of CBS and AWIM are subjected to testing and evaluation prior to approval and use. Generally, gaming authorities have broad discretion when granting, renewing or revoking these approvals and licenses. If we fail or any of our key personnel fail to obtain or retain a required license or approval, it would decrease our share in the marketplace and put us at a disadvantage with our competitors. Consequently, the market price of our common stock may suffer.
Any expansion of our activities could be hindered by delays in obtaining requisite state licenses or the inability to obtain such licenses. No assurance can be given as to the term for which our licenses will be renewed in a particular jurisdiction or as to what license conditions, if any, may be imposed by such jurisdiction in connection with any future renewals. We cannot predict the effects that adoption of and changes in gaming laws, rules and regulations might have on our future operations.
The Gaming Industry May be Adversely Affected by Federal Legislation and Tax Laws
The U.S. Congress passed UIGEA in late 2006, which prohibits any person engaged in the business of betting or wagering from knowingly accepting payments related to unlawful bets or wagers transmitted over the Internet. UIGEA prohibits financial institutions and other payment processors from processing online gaming-related financial transactions. It also expressly requires Internet bets and wagers to comply with the law of the jurisdiction where the wagers are initiated and received. In addition, the U.S. Congress has proposed several bills that would prohibit any person from accepting wagers on amateur sporting events including high school, college and Olympic events.
Pursuant to the Sports Protection Act, which became effective January 1, 1993, the proliferation of legalized sports books and wagering was significantly curtailed. The Sports Protection Act effectively outlawed sports betting nationwide, excluding Nevada and sports lotteries in Oregon, Montana, and Delaware. Thus, sports books and wagering are permitted to continue to operate in Nevada, provided the wager originates in Nevada and is received by a licensed sports book in Nevada. Moreover, the Interstate Wire Act also prohibits those in the business of betting and wagering from utilizing a wire communication facility for the transmission in interstate or foreign commerce of any bets, wagers or information assisting in the placing of such bets and wagers on any sporting event or contest unless such betting or wagering activity is specifically authorized in each jurisdiction involved.
There is no guarantee that the U.S. Congress will not pass a bill which would adversely affect our operations. Additionally, federal and state tax legislation matters, including changes to current law, or new assessments by taxing authorities could also negatively impact our results of operations or financial position. An Adverse Change Affecting the Gaming Industry, Such as a Change in Gaming Regulations or a Decrease in the Rate of Growth and Popularity of Casino Gaming, Particularly Those Casinos with Race and Sports Wagering, Will Negatively Impact Our Profitability and Our Potential for Growth
Our ability to grow and operate profitably is substantially dependent upon the expansion of the Nevada gaming industry and other factors that are beyond our control. These factors include, among others, the pace of development and expansion, changes in gaming regulations, the continued popularity of casino gaming, particularly those casinos with race and sports wagering, as a leisure activity, etc. An adverse change in any of these economic, political, legal or other factors may negatively impact our results of operations. Additionally, consolidation of existing gaming operations could negatively impact our pricing structure and revenue. The number of visitors to Las Vegas increased 4.3% for the year ended December 31, 2011, and gaming revenues were increased slightly in 2011 compared with 2010 according to the Las Vegas Convention and Visitors Authority.
We May Experience Deficiencies in Disclosure Controls and Internal Controls Over Financial Reporting, Leading to a Material Weakness
Over the past few years, we have reduced staffing hours worked in the accounting and revenue auditing areas in response to macroeconomic conditions that affected Nevada’s gaming, travel, hospitality, leisure, and construction industry and resulted in a weakened local economy. The lack of adequate staffing may cause existing controls to erode, possibly leading to a deficiency in disclosure controls and internal controls over financial reporting. While every effort will be made to monitor and retain these controls, there can be no assurance that we will have effective internal controls over financial reporting.
We believe that effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports. We have and will continue to incur a substantial amount of management time and resources and significant expenses in order to comply with laws, regulations and standards relating to corporate governance and public disclosure, including our management’s annual review and evaluation of our internal control systems.
Further, we or our auditors may identify significant deficiencies or material weaknesses in our internal control over financial reporting. If we fail to maintain the adequacy of our internal controls, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting. Additionally, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Nonetheless, as of January 31, 2012, we determined that our disclosure controls and internal controls over financial reporting were effective. See Part II, Item 9A - Controls and Procedures.
We Are Largely Dependent on Current Management
Our success is largely dependent on the efforts of Victor Salerno, our Chief Executive Officer and Chairman of the Board. Although we maintain a “key person” life insurance policy and have an employment agreement with Mr. Salerno, the loss of Mr. Salerno’s services could have a materially adverse effect on our business. Changes in the remainder of key management, or other key personnel or their compensation also contribute to this risk factor.
Future Revenue Growth Depends on Our Ability to Improve the Effectiveness and Breadth of Our Sales Organization
In order to achieve our goals for growth, and increase market awareness and sales, particularly with the AWIG and AWIM subsidiaries, we need to improve the effectiveness and breadth of our sales operations. Our gaming products require sophisticated sales efforts targeted at selected people within the gaming industry. Also, our ability to develop and refine products and technologies in a timely manner that have market acceptance, through effective marketing techniques is essential for financial success. Competition for qualified sales personnel is intense, and we may not be able to hire the kind and number of sales personnel required. In addition, we will need to effectively train and educate the sales force in order to be successful in selling into the market. We rely upon certain strategic relationships with our customers and our vendors. If we are unable to maintain these relationships or create new relationships, our results of operations and financial condition will be adversely affected.
We May Not be Able to Protect Our Proprietary Rights and May Incur Significant Costs Attempting to Do So
Our success and ability to compete are dependent to a significant degree on our proprietary technology. We rely on a combination of patent, copyright, trade secret and trademark laws, as well as confidentiality and licensing agreements to protect these proprietary rights. However, it may be possible for a third party to copy or otherwise obtain and use our software or other proprietary information without authorization or to develop similar software independently. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation, whether successful or not, could result in substantial costs and diversions of resources, either of which could have a material adverse affect on our financial condition or operating results.
The Market for Our Common Stock Is Limited
Our common stock is thinly-traded and any recently reported sales price may not be a true market-based valuation of our common stock. There can be no assurance that an active market for our common stock will develop. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to operating performance. It is likely that the Merger consideration will act as a cap on the market price of our common stock until the Merger is consummated or the Merger Agreement terminated. Therefore, it is unlikely that anyone selling shares of our common stock before consummation of the Merger will receive more than $0.90 per share. Upon consummation of the Merger, we will no longer be a public company.
Our Common Stock is Considered a “Penny Stock” and, as such, the Market for Our Common Stock May be Further Limited by Certain SEC rules
As long as the price of our common stock remains below $5.00 per share, the stock is likely to be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and ask prices, disclosure of the compensation to the brokerage firm, and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common stock and limit the liquidity of our securities.
The Trading Price of Our Common Stock is Volatile and Could Decline Substantially
The trading price of our common stock is volatile and is likely to continue to be volatile. Our stock price could be subject to wide fluctuations in response to a variety of issues, including broad market factors that may have a material adverse impact on our stock price, regardless of our actual performance. The factors include, but are not limited to, the following:
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Periodic variations in the actual or anticipated financial results of our business or that of our competitors;
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Downward revisions in estimates of our future operating results or of the future operating results of our competitors;
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Material announcements by us or our competitors;
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Uncertainty as to the continued quotation of our stock on the OTC Bulletin Board (“OTCBB”); and
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Adverse changes in general market conditions or economic trends or in conditions or trends in the market in which we operate.
We Do Not Intend to Pay Cash Dividends. As a Result, Stockholders Will Benefit from an Investment in Our Common Stock Only if It Appreciates in Value
We have never paid a cash dividend on our common stock, and we do not plan to pay any cash dividends on our common stock in the foreseeable future. Our ability to declare dividends is restricted under the terms of the Merger Agreement and the Bridge Loan Agreement as well. We currently intend to retain any future earnings to finance our operations and further expand and grow our business, including growth through acquisitions. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. We cannot assure you that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
Litigation May Subject Us to Significant Expenses and Liability
From time to time in the course of our business, we may be subject to litigation claims or other legal disputes, which may not be covered under our insurance policies or as to which our insurance carriers may seek to deny coverage. We also may be subject to lawsuits filed in connection with the Merger Agreement. Consequently, due to actions from third parties, we might incur adverse judgments, costly settlements or significant legal fees, any or all of which might have a material adverse effect on us. See Item 3. Legal Proceedings.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our corporate office is located in a 25,861 square foot building at 675 Grier Drive, Las Vegas, Nevada. On January 7, 2005, we completed a sale and leaseback of the property. Prior to the sale, the building was owned by our CBS subsidiary. We realized a gain of $1,638,000 on the sale of the building, which was deferred and amortized against lease expense over the initial lease term (5 years). CBS leases the building from the new owner for rent in the amount of $33,073 per month (triple net). The lease had an initial term which expired February 1, 2010, with options for two additional five-year terms. We exercised the first option and extended the lease for five years until February 1, 2015. CBS, in turn, sublets a portion of the building to AWI (2,830 square feet; $5,236 per month) and to Leroy’s (6,769 square feet; $11,014 per month). In addition, CBS leases 1,847 square feet of office and warehouse space in Reno, Nevada to provide 24 hour maintenance service to our Northern Nevada customers. This space is located at 960 Matley Lane, Suite 20 and 21, Reno, Nevada. CBS pays a combined rent of $1,800 per month plus utilities, for the twelve month period ending September 30, 2012, on a month-to month basis.
Leroy’s operates race and/or sports books subject to lease agreements primarily with the host casino operators. The average book occupies approximately 300 square feet, with individual books ranging from 100 to 10,000 square feet.
Sturgeon’s is located at 1420 Cornell Avenue in Lovelock, Nevada. The facility contains over 65,000 square feet and is the security for a $1.5 million loan with Nevada State Bank, having a 20-year amortization with a 5-year maturity at a fixed interest rate of 6.9% per annum which the bank reduced from 8% in October 2010.
Subject to any unforeseen space-management developments resulting from the Merger, we believe that the existing facilities in Las Vegas, Reno and Lovelock satisfy our present and foreseeable needs and we do not anticipate any changes.
Item 3.
Item 3. Legal Proceedings
See Part II-Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements, Note 6, for information regarding legal proceedings and contingencies.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market information. Our common stock is traded on the OTC Bulletin Board (“OTCBB”) under the symbol “BETM.” The following table sets forth the range of high and low closing sale prices for our common stock for each of the periods indicated as reported by the OTCBB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
We consider our common stock to be thinly traded and, accordingly, reported sales prices or quotations may not be a true market-based valuation of our common stock.
(b) Holders. As of January 31, 2012, there were 56 record holders of our common stock. We believe there are more owners of our common stock whose shares are held by nominees or in street name.
(c) Dividends. Holders of our common stock are entitled to receive dividends, as and when declared by our Board of Directors, out of funds legally available therefore, subject to the dividend and liquidation rights of preferred stock issued and outstanding. We have never declared or paid any dividends on our common stock, nor do we anticipate paying any cash dividends on our common stock in the foreseeable future. Our ability to declare dividends is also restricted under the terms of the Merger Agreement and Bridge Loan Agreement.
Item 6.
Item 6. Selected Financial Data
Not required.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Merger Agreement. On April 13, 2011, we entered into the Merger Agreement, which provides for the Merger of the Company with and into Merger Subsidiary with the Company surviving as a wholly-owned subsidiary of Parent. If the Merger is completed, each share of our common stock issued and outstanding immediately prior to closing automatically will be cancelled and converted into the right to receive $0.90 in cash, and the Company will cease to be a publicly traded company. In connection with the Merger Agreement, we entered into the Bride Loan Agreement pursuant to which Parent agreed to loan to us funds in an aggregate principal amount of $4.25 million and, at the Parent’s discretion, up to an additional $3.0 million of which $750,000 has been drawn. The Bridge Facility matures upon the earlier of (i) consummation of the Merger, (ii) termination of the Merger Agreement (subject to a six month refinancing period) and (iii) December 31, 2013, subject to certain extension mechanisms. For a description of the Merger Agreement and the Bridge Loan Agreement, see Part I, Item 1 - Business.
Overview. AWI is a leader in the design, development, and marketing of sportsbook accounting systems (equipment and software) as well as a leading independent sportsbook operator in Nevada. Our business operations involve many aspects of the race and sports book industry operated by our subsidiaries, Leroy’s, CBS, and AWIM. Our customer base is segmented into two categories: the Contract Customers and the Bettors.
Leroy’s provides a turn-key race and sports book solution to our contract customers who do not desire to operate a book on their own. Leroy’s operates a network of 54 sportsbooks and 56 tavern locations, generating revenue from bettors’ wagers less pay outs. We grow our business and increase our efficiencies by, (i) adding new books where and when appropriate, (ii) introducing CBS’s advanced betting terminals such as the dual faced-touchscreen terminals, and (iii) providing self-service products such as AWIM’s kiosk and the LEROY’S® APP©, which meets the bettor’s request for mobility and convenience based products utilizing remote account wagering.
The LEROY’S® APP© is a mobile device application for smartphones that permits a Bettor, with a pre-established telephone wagering account, to bet from his approved mobile device anywhere within the state of Nevada, assuming his wireless carrier provides coverage. The LEROY’S® APP© received final approval by the Nevada Gaming Control Board at the conclusion of its successful field trial. It was developed for Leroy’s by CBS and we have a patent pending on the intellectual property. We have been approved by the Nevada Gaming Control Board to make the application available on Research In Motion®’s BlackBerry® devices, Google®’s Android® operating system v. 2.1 and newer for smartphones and the Samsung® Galaxy® Tablet, and Apple, Inc’s. iPhone® and iPad®. Likewise, Leroy’s provides remote account wagering at 56 taverns throughout the state. Based on our strategy, the number of race and sports books operated by Leroy’s may increase or decrease in the future, due to the closure of unprofitable locations or host properties, closures due to other factors beyond our control and/or the possible opening of new locations with greater potential for profitability. There is no assurance that Leroy’s will be able to add new locations and/or that any existing locations or new locations so added will be profitable, or that the release of the LEROY’S® APP© will not limit our aggressiveness in adding locations particularly in Las Vegas depending on its market acceptance.
CBS develops, sells and maintains computerized race and sports wagering systems for the gaming industry, namely our contract customers who want to operate their own race and sports book. CBS also markets, distributes, installs, and maintains AWIM’s kiosks, which assists the Company in controlling personnel costs by eliminating duplicate job positions. AWIM has the following three models of kiosk.
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Upright kiosk, which was jointly developed with a third party, is a free standing wagering kiosk and most frequently used by Leroy’s and our contract customers to expand the reach of the race and sports book throughout the casino floor.
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Carrel kiosk is designed for the race bettor who never wants to leave his race carrel. The carrel kiosk allows him to place race and sports bets from the comfort of his race carrel, watch the races (or sporting events), and check results.
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Account wagering kiosk which is designed for use in areas beyond the traditional sportsbook, in conjunction with telephone account wagering. That is, once the bettor establishes a wagering account, he can bet from his account while watching the sporting event at his favorite bar or tavern.
Sturgeon’s operates a hotel/casino in Northern Nevada and is heavily dependent on the drive-through market on I-80. Sturgeon’s continuously reviews and modifies existing procedures and personnel to increase efficiency, reduce expenses, and strengthen the financials as Nevada, both Northern and Southern, continues to experience high unemployment, high foreclosures for residential homes and business failures. Accordingly, these factors will likely continue to have an adverse affect on our business conditions and financial performance, despite recent improvement in profitability resulting from changes to the average theoretical hold of our slot machines and certain cost cutting measures.
ExactGeo Media is an advertising company established to purchase and sell advertising in connection with our mobile betting application. PlayBETM designs and hosts play-for-fun, contest versions of our mobile sports application, which we anticipate will generate revenue through advertising. ExactGeo Media and PlayBETM are not revenue generating entities as of yet. Nonetheless, if and when these two entities generate material amounts of revenue from advertising sales and services leveraged from our mobile application, we intend to report the entities’ operating results as a fourth segment, “Advertising.”
Liquidity and Capital Resources
On April 13, 2011, we entered into the Merger Agreement and the Bridge Loan Agreement. If the Merger Agreement is terminated, the principal amount and all accrued interest under the Bridge Facility will become due and payable, and, in certain circumstances, (a) we may be required to reimburse Parent and its affiliates for all of their reasonable out-of-pocket fees and expenses up to $250,000 and (b) Parent may be required to pay us a termination fee of $1.5 million, which amount shall be subject to offset of any amounts owed by us in connection with the Bridge Loan Agreement. If the Merger Agreement is not consummated, we will continue to be a publicly traded company, and we may not be able to pay our debts as they come due, including the Bridge Facility. Upon a default under the Bridge Facility, Parent may foreclose on the collateral securing our obligations, which includes all of the equity interests in our wholly-owned subsidiaries.
In recent years for reasons discussed in the following paragraph, our cash flows from operating activities have been insufficient to satisfy our obligations (including legal contingencies) when due and to fund cash reserves required by Nevada Gaming regulations. Such cash requirements have been funded largely with borrowings from and/or collateral arrangements with the Company’s principal officers. The Company entered into the Bridge Loan Agreement that should satisfy the Company’s need for liquidity at least through the next year. More specifically, in April 2011, we borrowed $4.25 million under the Bridge Loan Agreement and used approximately $2.3 million of the proceeds to pay vendors ($750,000), for rank and file employees ($260,000), other lenders ($850,000), and transaction fees ($450,000) leaving approximately $1.95 million available for future cash flow requirements. On September 2, 2011, the Company borrowed an additional $750,000 under the Bridge Loan Agreement to fund a cash shortfall. The Bridge Loan Agreement also reduces the Company’s dependence on its principal officer’s ability to continue to provide financial support. There is $2,250,000 remaining for draws under the Bridge Loan Agreement. However, there is no assurance that we will be able to borrow additional funds under the Bridge Loan Agreement, as any additional advances are in Parent’s sole discretion.
Though visitor rate and gaming revenue in Nevada increased slightly in the fiscal year ended January 31, 2012, Nevada’s unemployment rate still remains above 10%. We derive nearly all our revenue from Nevada residents who are directly affected by the sustained high unemployment rate, as well as the continuing suppressed Nevada real estate market. As a result, the Company has experienced over four years of reduced customer spending, whether from equipment and software sales or from customer wagering revenue.
Cash Flow
As of January 31, 2012, we had working capital deficit of $(179,748), compared to working capital deficit of $(901,583) at January 31, 2011. The decrease in working capital deficit is due to the loans provided under the Bridge Loan Agreement. For fiscal 2012, we incurred a net loss of $4.6 million which can be attributed significantly to the sports wagering handle being off by 6.5% from fiscal year 2011, a lower win percentage than normal, and transaction costs related to the Merger and Bridge Loan Agreements. Direct costs for the Company were $619,000 less than the prior year while research and development costs increased $122,000 and selling, general and administrative costs increased nearly $1.5 million primarily due to increased payroll and transactions costs related to the Merger and Bridge Loan Agreements.
In fiscal 2011, the Company borrowed $500,000 from Alpine Advisors, LLC, and Victor Salerno, CEO, provided the Company with a $250,000 credit line. The proceeds of both loans were fully used during the year to alleviate a difficult cash position, and from the proceeds of the Bridge Facility, the Company paid to Alpine Advisors, LLC $600,417 in full and final payment of its loan and paid to Mr. Salerno $250,000 in full and final payment of his line of credit.
In addition to borrowings under the Bridge Loan Agreement as previously discussed and reduced payment requirements to Racusin (as discussed below), we believe, but there is no assurance that, subject to the economy, our working capital position will also improve in fiscal 2013 due to: (a) normalization of the win percentage in sports book wagering; (b) a continued increase in users of our Leroy’s App and other forms of account wagering services; and (c) additional or expanded sports book locations in fiscal 2013. Based on the foregoing and subject to the economy, we believe we will be able to satisfy our cash requirements for at least the remainder of fiscal 2013 from existing cash balances, anticipated cash flows and potential borrowings under the Bridge Facility. Some of the above statements are forward-looking in nature. No assurance can be given as to the ultimate outcome of any forward-looking statement because such outcome is dependent upon unknown evolving events.
Regulation Regarding Reserves
Nevada Gaming Commission Regulation 22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and remote wagering account deposits. We have historically funded this reserve requirement through restricted cash held at Nevada State Bank.
As of January 31, 2012, we had cash reserves and pledge agreements totaling $1.9 million to satisfy the Regulation 22.040 requirement in addition to a float amount of $600,000 allowed by the Nevada Gaming Control Board to cover short term fluctuations in the outstanding liability. The $1.9 million amount consisted of our reserve account of $700,000 held at Nevada State Bank, a pledged certificate of deposit totaling $200,000, and an Irrevocable Standby Letter of Credit of $1 million. The pledged certificate initially expired in October 2010, but Victor and Terina Salerno agreed to extend their pledge without designating a specific expiration date. However, there is no assurance that this pledge will continue. On January 13, 2012, the Nevada Gaming Control Board allowed us to reduce our reserve balance by $750,000 and withdraw the pledge from Robert and Tracey Kocienski of $250,000. We will likely have to increase our reserve in August 2012, and if we are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, and/or an elimination or reduction of remote wagering accounts, resulting in an adverse change in our operating results. We anticipate being able to increase our reserve balance as a portion of the financing proceeds from the Bridge Facility is allocated for this purpose. There is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
Outlook
At January 31, 2012, we had approximately $2.6 million in cash and cash equivalents, most of which is held to fund winning tickets and future bets as required by Nevada gaming regulations. Based upon our anticipated operations, we believe that cash on hand, operating cash flows, and potential borrowing under the Bridge Facility will be adequate to meet our anticipated working capital requirements, capital expenditures, and scheduled payments for indebtedness for the remainder of fiscal 2013. Our operations are affected by seasonality. Typically, we anticipate the need for liquidity during the second quarter of each fiscal year which lessens during the third quarter with the commencement of football season. We believe, but there is no assurance that, subject to the economy, our cash liquidity position will be sufficient to meet our operating needs, including new business development activities or unforeseen events including the outcome of litigation through fiscal 2013.
Cash Obligations
Subject to uncertainties resulting from the current economic conditions, we believe we will continue to successfully meet our long-term obligations. The following table summarizes our cash payment obligations, including short-term debt and long-term debt and operating lease obligations for the next five fiscal years:
As of January 31, 2012, the amount of Series A Preferred Stock that may be put to us by Mr. Salerno for immediate redemption (without prior approval by our Board of Directors) is $323,800 (3,238 shares). In prior years, Mr. Salerno forwent his right to have his shares redeemed when we made partial, pro rata calls of Series A Preferred Stock for redemption.
Racusin
The Company and Racusin entered into a Settlement Agreement on September 3, 2004. Racusin filed a claim against the Company for breach of the Settlement Agreement on January 14, 2009, and motion for summary judgment on that claim to accelerate amounts due, with penalty interest, on February 24, 2009. On August 18, 2009, the Court entered an order granting summary judgment in favor of Racusin, which accelerated amounts due and imposed penalty interest at 12% per annum. The Company moved for rehearing and the Court vacated the order on December 23, 2010. Based upon the Court’s December 23, 2010 order, on April 20, 2011 the Company filed a motion for summary judgment seeking dismissal of Racusin’s still pending complaint for breach of the Settlement Agreement, further relief on and discharge of the Company pursuant to the Interpleader Action, as well as a refund of alleged overpayments the Company made. On July 27, 2011, the Court made oral findings and conclusions in favor of the Company on its motion for summary judgment, which was entered into a written order on October 7, 2011. Specifically, the Court ruled that Racusin’s complaint against the Company for breach of the Settlement Agreement was dismissed. The Court also ruled that as to the Company’s Interpleader Action, interest did not accrue during the time when the Company previously deposited with the Court the 250,000 shares of AWI common stock through at least the date of the final decision of the 9th Circuit Court of Appeals on June 28, 2007. The Court also ruled that the Company had satisfied its obligations in full to Racusin under the Settlement Agreement and thus did not have to make any further payments to Racusin. Racusin is appealing the Court’s decision to grant the Company summary judgment to the United States Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals (the "BAP"). If the BAP, under case number BAP. No. NV-11-1549, disagrees with the Bankruptcy Court and determines we owe additional amounts, we believe that we have sufficient amounts allocated from the Bridge Facility to pay such obligations when due in accordance with the current payment terms. There is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
Internet Sports International, Ltd. (ISI)
On February 3, 2011, we and ISI engaged in consensual mediation, which resulted in a global settlement. The parties subsequently entered into a Settlement Agreement whereby AWIM agreed to pay to ISI the total sum $170,000 in exchange for a mutual release of all claims. The unpaid balance of the settlement agreement obligation is $70,000 at January 31, 2012.
Salerno
No shareholder, director, or officer has a legal obligation to make a loan to the Company or provide a guaranty to secure the debts, liabilities, and/or obligations of the Company. Over his tenure as Chairman of the Board and CEO of the Company, Mr. Salerno has made several such loans, extended lines of credit, and made personal guaranties on behalf of the Company, although he is under no fiduciary, statutory, or contractual obligation to do so now or to continue to do so in the future.
During fiscal 2009 and 2008, we increased our total borrowing from Mr. Salerno $1,000,000: $500,000, which was used for general working capital purposes, and was in addition to the 2006 $500,000 line of credit Mr. Salerno made available to us-we used $400,000 in connection with the 2006 acquisition of Sturgeons with the balance used for general working capital purposes. We pay the Salernos interest at the rate of 10.0% per annum (payable monthly) on the outstanding portion of the loan, which was $1,000,000 at January 31, 2012. We paid interest to Mr. Salerno totaling $100,000 in fiscal 2012 and $100,000 in fiscal 2011. The total $1,000,000 will be repaid on the earlier of August 1, 2012 or the closing of the Merger Agreement as Mr. Salerno extended the maturity of the loan from the previous maturity date of February 1, 2012.
On May 17, 2010, Mr. Salerno loaned us an additional interest free revolving line of credit in the amount of $250,000, which was repaid in full on April 14, 2011 from proceeds of the Bridge Facility.
Operating Leases
Included in the operating leases are rents payable at the Leroy’s sports book operating locations, rent for our corporate headquarters, and office equipment and vehicles leases. Rent at the Leroy’s locations includes the base rent due per the contract terms. The rental leases also include locations in which the rent is calculated based on a formula relating to the activity of the location. The rent to be paid for those locations was estimated for the purpose of the foregoing cash obligations table.
Off-Balance Sheet Arrangements
As of January 31, 2012, we had cash reserves and pledge agreements totaling $1.9 million to satisfy the Regulation 22.040 requirement in addition to a float amount of $600,000 allowed by the Nevada Gaming Control Board to cover short term fluctuations in the outstanding liability. The $1.9 million amount consisted of our reserve account of $700,000 held at Nevada State Bank, a pledged certificate of deposit totaling $200,000, and an Irrevocable Standby Letter of Credit of $1 million. The pledged certificate initially expired in October 2010, but Victor and Terina Salerno agreed to extend their pledge without designating a specific expiration date. However, there is no assurance that this pledge will continue. On January 13, 2012, the Nevada Gaming Control Board allowed us to reduce our reserve balance by $750,000 and withdraw the pledge from Robert and Tracey Kocienski of $250,000. We will likely have to increase our reserve in August 2012, and if we are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, and/or an elimination or reduction of remote wagering accounts, resulting in an adverse change in our operating results. We anticipate being able to increase our reserve balance as a portion of the financing proceeds from the Bridge Facility is allocated for this purpose. There is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
Results of Operations
Overview
We report our results of operations through three operating segments: Wagering, Hotel/Casino and Systems. At this time, our operating segment for Advertising, which includes ExactGeo Media and PlayBETM, will not show revenue and is not income generating. Although numerous factors are taken into consideration, the operating income (loss) of the segment represents a significant profitability measure that is used by us in allocating the appropriate level of resources and assessing performance of each segment. The following table summarizes the consolidated results of our segments
The decrease in revenues is primarily attributed to the results of our Wagering segment and, to a lesser extent, the Systems segment. The Hotel/Casino segment had a 3.1% increase in revenues.
Costs and expenses increased primarily due to higher corporate payroll of approximately $925,000 (+67.3%), transaction cost related to the Merger and Bridge Facility with William Hill approximately $450,000, offset by lower direct costs of approximately $619,000 (-7.07%) associated with lower revenues and cost containment measures.
The change in other income (expense) is due primarily to higher interest expense of $370,261 (+85.5%) due to increased borrowings, an increase in the estimated fair value of the warrant liability of $36,890 (+30.5%), and reductions in litigation income of $184,816 (100.0%), and an increase in other income of $86,216 (1,144.2%).
Please refer to the discussions below (“Revenues and Direct Costs” and “Operating Expenses”) for additional information, discussion and analysis.
Revenues and Direct Costs
The following table summarizes changes in our revenues and direct costs of our operating segments:
Wagering Segment. The Wagering Segment includes the operating results of the sports gaming wagers net of payouts and expenses, and pari-mutuel horse and dog racing. Wagering Segment revenues decreased as a result of the following:
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Sports wagering handle was off 6.5% from the prior year which is indicative of the struggling economy and the effect and timing of additions to and reductions from the number of operating locations. The win percentage was 4.77% compared to the prior year at 4.70%. The decrease in handle was experienced in all major sports and we continue to experience a more conservative betting trend from our patrons.
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Race wagering continues to decrease as we experienced a 25.8% reduction in revenue due to a reduction in the number of race books and the continuous downward trend in horse racing.
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Direct costs decreased $462,655 (−7.7%) for the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011, primarily due to reductions in personnel costs of approximately $100,000; decreased rent expense of approximately $94,000; a reduction in race related expenses of approximately $103,000; a reduction in taxes and licenses of approximately $167,000 directly related to the revenue shortfall.
The increase or decrease in handle is not necessarily indicative of an increase or decrease in revenues or profits, due to the volatility in the win percentage. Elimination of unprofitable locations, closure of host properties, changes in state and/or federal regulations, and other factors beyond our control may result in declines in handle.
We intend to continue to open new locations that we expect to operate profitably and review our existing locations in order to close those locations that are not operating efficiently. There is no assurance that the number of race and sports books operated by us will not decrease in the future due to elimination of unprofitable locations, closure of host properties, and other factors beyond our control, that we will be able to add new locations, and/or that any new locations so added will be profitable. We will continue to grow the mobile wagering market as we expand the accessibility of the product as new devices come to market.
Hotel/Casino Segment. The Hotel/Casino Segment consists of the operating results of Sturgeon’s. Hotel/Casino Segment revenues increased because of the following:
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Casino revenues increased $136,960 (+15.3%) primarily due to the increase in hotel occupancy and an upgraded slot floor.
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Hotel revenues increased $165,704 (+36.3%) due to higher occupancy and average rates primarily due to room renovations and the introduction of weekly rates for temporary workers in the mining industry.
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Food and beverage revenues decreased $237,088 (-31.1%) primarily due to a change in the restaurant operation geared more toward self service and menu modifications due to significant increases in food costs.
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Direct costs for the casino operations were down $35,528 (-8.1%) related to reduced payroll costs and promotional expense.
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Direct costs for the hotel operations increased $39,537 (+19.9%) primarily due to an increase in payroll costs and supplies as a result of higher occupancy.
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Direct costs for the food and beverage operations decreased $202,204 (-23.9%) primarily due to reductions in payroll costs, supplies, and food costs directly related to reductions in revenues.
Systems Segment. The Systems Segment includes the operating results of our systems sales, installations and maintenance fees, less the related expenses. Systems Segment revenues decreased due to the following factors:
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Systems sales revenues increased by $70,647 (+37.5%) over the prior fiscal year due to an increase in sales.
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Revenues from maintenance contracts decreased $184,554 (−6.9%) from the prior fiscal year due to loss of a contract during the year.
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Direct costs for systems increased by $91,449 (+10.7%) due to an increase in the payroll costs, taxes and licenses related to regulatory approvals necessary for new products and repairs and maintenance expense.
Other Operating Expenses
The $122,324 increase in research and development expenses relates to the development of our mobile device applications on new platforms. Selling, general and administrative expenses increased $1,496,774 due to additional higher corporate payroll costs and transaction costs and legal expense resulting from the Merger Agreement and the Bridge Facility.
Other Income (Expense)
The other income (expense) categories are primarily administrative in nature and, as such, are generally not directly attributable to any operating segment. Accordingly, these items are generally not taken into consideration by us when we allocate resources to the segments or assess the performance of the segments.
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Interest income is attributable to interest earned on restricted cash deposits required for compliance with the Regulation 22.040 reserve. The decrease in interest income of $3,554 is due primarily to decreased interest rates paid on our cash deposits.
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Interest expense increased approximately $370,000 (+85.5%) due to the loans totaling $5 million from William Hill under the Bridge Facility.
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The estimated fair value of the Warrant Liability increased because the trading price of the Company’s common stock increased from the price at the grant date, resulting in a loss of $157,706 for the fiscal year.
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Litigation expense was virtually eliminated during the fiscal year ended January 31, 2012 as the final payment to the Bankruptcy Court on behalf of Racusin was made in February 2012 and the $170,000 for the settlement of the ISI litigation was recorded in fiscal 2011.
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Other income increased by $86,216 (+1,144.2%) due to a gain on assets sold and miscellaneous income associated with adjustments in other expenses.
Critical Accounting Estimates and Policies
Although our financial statements necessarily make use of certain accounting estimates by our management, we believe that, except as discussed below, we do not employ any critical accounting policies or estimates that are either selected from among available alternatives, or require the exercise of significant management judgment to apply, or that if changed are likely to affect future periods. See Note 1 to Consolidated Financial Statements for additional discussion of our significant accounting policies. The following summarizes our critical estimates and policies.
Revenue Recognition
Wagering. We record wagering revenues in compliance with Nevada law and its regulations. For sports and non-pari-mutuel race, we use an accrual method wherein the handle (total amount wagered) is recognized as revenue on the day the event occurs (rather than the day the wager is accepted) decreased by the total amount owed to patrons with winning wagers. This gross calculation (handle less payouts) is then adjusted upward to account for any winning wagers that were not redeemed (cashed) within the specified time period. For pari-mutuel race, commission and breakage revenues are recorded when the wagers are settled, typically the same day as the wager. Other sources of wagering revenue are relatively insignificant.
Hotel/Casino Revenue. Revenues of Sturgeon’s are primarily comprised of slot revenue, hotel room revenue and food and beverage revenue. Slot revenue is the drop (the total amount removed from the machine) less the fills and the payouts. Bingo revenue is calculated as the total handle (the amount wagered) less the payouts. Casino revenues are recognized net of cash incentives to patrons for gambling, which are not material, and have been recognized as a direct reduction of casino revenue. For non-gaming revenues, such as food and beverage, hotel, etc., revenue is recorded when earned. Revenue does not include the retail value of food and beverage, and other services gratuitously furnished to patrons, which is not material. The estimated cost of providing such gratuities is included in casino direct expenses.
Systems. Software license fees represent revenues related to licenses for race/sports software delivered to customers for in-house use. Revenues from software license agreements (including any related training revenue) are recognized upon installation of the software.
The Company recognizes revenue from the sale of hardware (and any related installation revenue) upon installation of the hardware.
The Company negotiates separate maintenance agreements with certain customers to provide for the long-term care of the software and hardware. Pursuant to the terms of the various maintenance agreements, a fixed sum is due at the beginning of each month regardless of whether the customer requires service during that month. The Company recognizes maintenance revenue on the first day of each month for which the maintenance agreement is in place.
In other words, revenue is not recognized until it is realized or realizable and earned. The Company recognizes revenue when related assets held are readily convertible to known amounts of cash or claims to cash, and revenues are considered to have been earned when we have substantially accomplished what we must do to be entitled to the benefits represented by the revenues.
The Company’s software licensing arrangements do not require significant production, modification, or customization of the software and, except for maintenance services consistently priced on a per terminal / license basis at a standard price per unit across our entire customers base, the Company’s software arrangements do not provide licenses for any other software deliverables. Practically speaking, there are no software upgrades available once the hardware and applicable software license are purchased. Once in use, changes to the software occur infrequently and typically consist only of minor debugging or patch fixes for a period contractually limited to 90 days following the purchase. Subsequent minor and infrequent modifications are considered part of the support service and included in the maintenance fee. In the unlikely event that a major upgrade (modification) to the software is developed, customers would be given the opportunity, but are not required, to purchase it separately and to enter into a new software license agreement. Occasionally, however, a customer will request a custom enhancement. Such custom enhancements are developed and billed separately and are accounted for as sales and recognized as revenue upon installation and acceptance by the customer.
The Company does not earn or collect the software license and equipment fees over the life of the agreement (the stated initial term is 60 months but automatically renews for consecutive one-year periods indefinitely, without additional cost to the customer, until cancelled by the customer with appropriate written notice, and thus is, in substance, perpetual), or recognize revenue prior to inception of the license; rather, these fees are earned and paid upon installation, which coincides with the commencement of the license.
The only fees that are recognized over time are for maintenance services. Certain amounts in a few, but not all maintenance agreements, could, under one very remote condition that has never occurred (an intellectual property infringement claim that requires the software to be taken out of service and which could not be replaced within a specified time period), be refundable. A customer may not unilaterally cancel its maintenance agreement at any time. Non-payment would result in a breach of the agreement, and the Company may seek to enforce its legal and equitable contract rights.
Income Taxes
In establishing a valuation allowance for deferred tax assets, we evaluate positive and negative factors affecting the probability that such assets, primarily net operating loss carry-forwards, will be realized. For example, historical profitability trends are given more weight than forecasted future results. Given the Company’s recent history of operating losses and current equity deficiency, among other negative factors, a 100% valuation allowance has been provided as of January 31, 2012, because management believes it is not more likely than not that such deferred tax assets will be realized.
Long-Lived Assets
Owned property and equipment are recorded at cost and depreciated to residual values over the estimated useful lives using the straight-line method. Leasehold improvements on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. The useful life, currently estimated, of our equipment generally ranges from 3 to 10 years. We test for impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired. An impairment loss is recognized if the carrying amount of the asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset.
Change in Estimated Fair Value of Warrant Liability
The Company uses the Black-Scholes valuation model and “Level 2 and 3” measurement inputs as defined in GAAP including a risk-free interest rate of 2.2%, expected warrant life of five years, and its internal stock price volatility factor (initially 206.3% and 183.0% at January 31, 2012) to estimate the fair value of its warrant liability at each balance sheet date.
Recent Accounting Pronouncements
No recently issued accounting pronouncements not yet adopted are expected to have a material impact on our future financial position, results of operations, or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 8.
Item 8. Financial Statements and Supplementary Data
Audited Financial Statements for Years Ended January 31, 2012 and 2011, including:
a. Report of Independent Registered Public Accounting Firm
b. Consolidated Balance Sheets
c. Consolidated Statements of Operations
d. Consolidated Statements of Stockholders’ Equity
e. Consolidated Statements of Cash Flows
f. Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
American Wagering, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of American Wagering, Inc. and Subsidiaries (collectively, the “Company”) as of January 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity (deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2012 and 2011, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
/s/ Piercy Bowler Taylor & Kern
Piercy Bowler Taylor & Kern
Certified Public Accountants
Las Vegas, Nevada
April 30, 2012
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2012 AND 2011
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2012 AND 2011
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE YEARS ENDED JANUARY 31, 2012 AND 2011
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2012 AND 2011
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2012 AND 2011
1. Organization, Risks and Uncertainties, and Summary of Significant Accounting Policies
Organization and Business
American Wagering, Inc. (“AWI”) is a publicly traded holding company that earns its revenues through the consolidated operations of its wholly-owned subsidiaries. Leroy’s Horse & Sports Place, Inc. (“Leroy’s”), one of AWI’s wholly-owned subsidiaries, owns and operates 54 (as of April 30, 2012) race and sports wagering locations (“books”) in leased space within non-restricted casinos throughout the state of Nevada and 56 tavern locations. The business activities of AWI’s other wholly-owned subsidiaries are discussed in the following paragraph.
Computerized Bookmaking Systems, Inc. (“CBS”), designs, sells, installs, and maintains computerized race and sports wagering systems. AWI Manufacturing, Inc. (“AWIM”) develops and leases self-service race and sports wagering kiosks to the gaming industry. AWI Gaming, Inc. (“AWIG”) was formed in June 2005 for the purpose of acquiring hotel/casino operations, which it did through Sturgeons, LLC, a wholly-owned subsidiary of AWIG that owns and operates Sturgeon’s Inn & Casino in Lovelock, Nevada (“Sturgeon’s”). ExactGeo Media, LLC (“ExactGeo Media”), is an advertising company established to purchase and sell advertising in connection with our mobile betting application. Mobile Sports Fantasy, LLC dba PlayBETM (“PlayBETM”) designs and hosts play-for-fun, contest versions of our mobile sports application generating revenue through advertising.
On April 13, 2011, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with a foreign privately held company (the “Purchaser”). At the effective time of the merger, each holder of outstanding shares of the Company’s common stock (other than participants in the merger and dissenters) will be entitled to receive $0.90 in cash for each such share (which shares shall be automatically cancelled). Contemporaneous with the closing (as defined in the Merger Agreement), the purchaser shall pay the Company $1,416,200 and all of the additional accrued but unpaid interest on each share of preferred stock which will be used at the closing to redeem the preferred stock issued and outstanding, and to pay the related accrued interest. At the closing, each outstanding stock warrant and option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger shall be cancelled and, in exchange therefore, and the former holder shall receive an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share under such stock warrant or option, and (ii) the number of shares subject to such stock warrant or option.
The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among other things, (i) the absence of any injunction or applicable law preventing consummation of the merger, (ii) receipt of any required consents, approvals and licenses under the Nevada Gaming Control Act and the rules and regulations promulgated there under and applicable local gaming and liquor laws, ordinances and regulations, (iii) verification of the accuracy of the representations and warranties made by the parties, and (iv) the performance, in all material respects, of all obligations, agreements and covenants under the Merger Agreement.
On April 13, 2011, the Company entered into the Bridge Loan Agreement, as described below, that should satisfy the Company’s need for liquidity at least through the next year. The Company and the Purchaser entered into a bridge loan agreement (the “Bridge Loan Agreement”) pursuant to which the Purchaser loaned the Company $4.25 million and, at the Purchaser’s sole discretion, may loan up to an additional $3.0 million (collectively, the “Bridge Facility”). In recent years for reasons discussed in the following paragraph, our cash flows from operating activities have been insufficient to satisfy our obligations (including legal contingencies) when due and to fund cash reserves required by Nevada Gaming regulations. Such cash requirements have been funded largely with borrowings from and/or collateral arrangements with the Company’s principal officers. In April 2011, we borrowed $4.25 million under the Bridge Loan Agreement and used approximately $2.3 million of the proceeds to pay vendors ($750,000), rank and file employees ($260,000), other lenders ($850,000), and transaction fees ($450,000) and leaving $1.95 million at that time for general corporate purposes. On September 2, 2011, the Company made a borrowing request under the Bridge Loan Agreement for $750,000 of Tranche II for general corporate purposes. There is currently $2,250,000 potentially available for borrowing under the Bridge Facility for future cash flow requirements. The Bridge Loan Agreement also reduces the Company’s dependence on its principal officer’s ability to continue to provide financial support. However, there is no assurance that we will be able to borrow additional funds under the Bridge Loan Agreement, as any additional advances are in the Purchaser’s sole discretion.
The Bridge Facility matures upon earlier of (i) consummation of the Merger, (ii) termination of the Merger Agreement or (iii) December 31, 2013, subject to certain extension mechanisms. Loans outstanding under the Bridge Facility accrue interest at an annual rate equal to 12.5%, which compounds on a quarterly basis in arrears on March 31, June 30, September 30, and December 31 of each year, and shall be paid in kind by adding the accrued interest to the balance of the loan. During the existence of an event of default under the Bridge Facility, an additional 2% per annum is imposed.
The terms of the Merger Agreement and the Bridge Loan Agreement limit the Company’s ability to engage in certain business activities without the prior consent of Purchaser. The most significant of these restrictions limit the Company’s ability to pay dividends, issue or repurchase shares of our common stock, incur new indebtedness, enter into or modify material contracts, grant liens on the Company’s assets, and effect any significant change in the Company’s corporate structure or the nature of its business.
The Merger Agreement contains certain termination rights and reimbursement obligations. If the Merger Agreement is terminated, the principal amount and all accrued interest under the Bridge Facility will become due and payable, and, in certain circumstances, (a) the Company may be required to reimburse Purchaser and its affiliates for all of their reasonable out-of-pocket fees and expenses up to $250,000 and (b) Purchaser may be required to pay the Company a termination fee of $1.5 million, which amount shall be subject to offset to any amounts owed by the Company in connection with the Bridge Loan Agreement. If the Merger Agreement is not consummated, the Company will continue to be a publicly traded company, and the Company may not be able to pay its debts as they come due, including the Bridge Facility.
Basis of Presentation
The consolidated financial statements include the accounts of AWI and its subsidiaries (collectively, the “Company”). All subsidiaries are wholly-owned. All significant inter-company accounts and transactions have been eliminated in consolidation.
Basis of Accounting
The Company measures all of its assets and liabilities on the historical cost basis of accounting, except as required under generally accepted accounting principles in the United States (“GAAP”) and disclosed herein.
Concentrations and Economic Conditions, and Related Risks and Uncertainties
Because the Company operates primarily in the larger metropolitan areas of Nevada in the highly regulated gaming industry, realization of its receivables and its future operations could be affected by adverse economic conditions in Nevada and its key feeder markets in the western United States, and by possible future anti-wagering legislation and regulatory limitations on the scope of wagering. All of the Company’s wagering revenue comes from its Nevada race and sports books, of which nearly 19% is derived from professional football events. Interruption of the professional football season could have a significant adverse impact on future operations. Management also estimates that a significant amount of the Company’s Nevada sports wagering relates to college events and, therefore, the passage of amateur sports anti-wagering legislation could also have a material adverse impact on future operations. In addition, because the Company generates substantial revenue from system sales and maintenance to a relatively small population of potential customers, a decline in the size, demand or number of these contracts could also adversely affect future operations. Though there are signs of economic improvement, lingering markers of the downturn still affects Nevada’s economy and the Company’s businesses, including restricted credit markets and reduced consumer spending, particularly in the domestic gaming and leisure industries, and which may continue for an indeterminate period.
The Company often carries cash and cash equivalents, including statutorily restricted amounts, on deposit with financial institutions substantially in excess of federally-insured limits. The extent of a future loss as a result of uninsured deposits in the event of a future failure of a bank or other financial institution, if any, is not subject to estimation at this time.
Accounts Receivable and Allowance for Doubtful Accounts
The Company manages its concentrations of credit risk by requesting deposits; evaluating the creditworthiness of customers before extending credit; and by perfecting security interests in the hardware and software sold to its customers.
Accounts receivable are evaluated quarterly for collectability, and carried net of an appropriate allowance for doubtful collection, at their estimated realizable value. Since customer credit is generally extended on a short-term basis, accounts receivable do not bear interest, although a finance charge may be applied to accounts that are more than 30 days past due. The Company records the provision for doubtful collection as a charge to general and administrative expenses.
In establishing an allowance for doubtful accounts, if any, the Company is required to make judgments based on historical data and future expectations regarding the collectability of the amount owed to the Company. The Company considers, among other things, the customer’s financial condition; the relative strength of the Company’s legal position, including the related cost of any proceedings and its relationship with the customer; the amounts on the aging schedule; historical payment information; and local and general economic conditions.
Generally, accounts for which no payments have been received for three consecutive months are considered delinquent, and the customary collection efforts are initiated. Generally, accounts for which no payments have been received for 12 months are written off, if not sooner based on the relevant particulars of each account. The maximum losses that the Company would incur if a customer failed to pay would be limited to the amount due after any allowances were provided.
Use of Estimates
Timely preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts, which estimates may require revision in future periods. Settings and adjustments of betting lines on sporting events that have not yet taken place as of the most recent balance sheet date, valuation of deferred tax assets, changed in estimated fair value of warrant liability, and estimated costs of litigation, claims and assessments are subject to change materially within one year.
Cash and Equivalents
Cash equivalents include highly liquid investments with initial maturities of three months or less. Excluded from cash and equivalents, but included in current assets, are restricted cash amounts primarily required to be maintained on deposit with a bank under Nevada Gaming Commission Regulation 22.040 (Note 6a), to fund future potential gaming losses.
Inventories
Inventories consisting primarily of systems components and replacement parts are stated at the lower of cost (based on the first-in, first-out method) or market value.
Property and Equipment
Property and equipment (Note 2) is stated at cost, net of accumulated depreciation and amortization, computed using the straight-line method over the estimated useful lives of the depreciable assets, generally 3 to 10 years for equipment, furniture and fixtures, and 40 years for building improvements, but limited to the lease term (Note 6c) for leasehold improvements. Test for possible impairment are performed when events and circumstances indicate that the assets might be impaired. An impairment loss is recognized if the carrying amount of the asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. There were no impairment provisions deemed necessary or taken for the fiscal years ended January 31, 2012 or 2011.
Goodwill
As of the most recent balance sheet date, goodwill included in other assets primarily consists of the excess of the purchase price over fair value of net assets acquired in connection with the acquisition of CBS. Goodwill is evaluated periodically (at least annually) for impairment as events or circumstances warrant. Such evaluations include, among other analysis, cash flow and profitability projections, including the impact on other operations of the Company. There were no impairment provisions deemed necessary or taken for the fiscal years ended January 31, 2012 or 2011.
Change in Estimated Fair Value of Warrant Liability
The Company uses the Black-Scholes valuation model and “Level 2 and 3” measurement inputs as defined in GAAP including a risk-free interest rate of 2.2%, expected warrant life of five years, and its internal stock price volatility factor (initially 206.3% and 183.0% at January 31, 2012) to estimate the fair value of its warrant liability at each balance sheet date.
Revenue Recognition
General. Service revenues are principally recognized as products or services are provided to customers; the Company does not bill in advance. Advance deposits, if any, are recorded as deferred revenue until services are provided to the customer. Sales and similar revenue-based taxes collected from customers are excluded from revenue and recorded as a liability, which is payable to the appropriate taxing authority and included in accrued expenses.
Wagering. The Company records wagering revenues in compliance with Nevada law and regulations. For sports and non-pari-mutuel race wagering, the Company uses an accrual method wherein the handle (total amount wagered) is recognized as revenue on the day the event occurs (rather than the day the wager is accepted) and is decreased by the total amount owed to patrons with winning wagers. This gross calculation (handle less payouts) is then adjusted upward to account for any winning wagers that were not redeemed (cashed) within the specified time period. For pari-mutuel race, commission and breakage revenues are recorded when the wagers are settled, typically the same day as the wager.
Hotel/Casino. Revenues of Sturgeon’s consist primarily of slot revenue, hotel room and food and beverage revenue. Casino revenue is the aggregate net difference between gaming wins and losses. Food and beverage and other operating revenues are recognized as the good and services are provided. Advance deposits, if any, are recorded as deferred revenue until the goods or services are provided to the customer. Sturgeon’s casino gaming, food and beverage and other operating revenues are included in hotel/casino revenue. Casino revenues are recognized net of cash incentives to patrons for gambling, which are not material, and have been recognized as a direct reduction of casino revenue. Revenue does not include the retail value of food and beverage, and other services gratuitously furnished to patrons, which is not material. The estimated cost of providing such gratuities is included in casino direct expenses.
Systems. Software license fees represent revenues related to licenses for race/sports software delivered to customers for in-house use. Revenues from software license agreements (including any related training revenue) are recognized upon installation of the software. The Company recognizes revenue from the sale of hardware (and any related installation revenue) upon installation of the hardware. The Company negotiates separate maintenance agreements with certain customers to provide for the long-term care of the software and hardware. Pursuant to the terms of the various maintenance agreements, a fixed sum is due at the beginning of each month regardless of whether the customer requires service during that month. The Company recognizes maintenance revenue on the first day of each month for which the maintenance agreement is in place.
In other words, revenue is not recognized until it is realized or realizable and earned. The Company recognizes revenue when related assets held are readily convertible to known amounts of cash or claims to cash, and revenues are considered to have been earned when we have substantially accomplished what we must do to be entitled to the benefits represented by the revenues.
The Company’s software licensing arrangements do not require significant production, modification, or customization of the software and, except for maintenance services consistently priced on a per terminal / license basis at a standard price per unit across our entire customers base, the Company’s software arrangements do not provide licenses for any other software deliverables. Practically speaking, there are no software upgrades available once the hardware and applicable software license are purchased. Once in use, changes to the software occur infrequently and typically consist only of minor debugging or patch fixes for a period contractually limited to 90 days following the purchase. Subsequent minor and infrequent modifications are considered part of the support service and included in the maintenance fee. In the unlikely event that a major upgrade (modification) to the software is developed, customers would be given the opportunity, but are not required, to purchase it separately and to enter into a new software license agreement. Occasionally, however, a customer will request a custom enhancement. Such custom enhancements are developed and billed separately and are accounted for as sales and recognized as revenue upon installation and acceptance by the customer. The Company does not earn or collect the software license and equipment fees over the life of the agreement (the stated initial term is 60 months but automatically renews for consecutive one-year periods indefinitely, without additional cost to the customer, until cancelled by the customer with appropriate written notice, and thus is, in substance, perpetual). The Company does not recognize revenue prior to inception of the license; rather, these fees are earned and paid upon installation, which coincides with the commencement of the license.
The only fees that are recognized over time are for maintenance services. Certain amounts in a few, but not all maintenance agreements, could, under one very remote condition that has never occurred (an intellectual property infringement claim that requires the software to be taken out of service and which could not be replaced within a specified time period), be refundable. A customer may not unilaterally cancel its maintenance agreement at any time. Non-payment would result in a breach of the agreement, and the Company could then seek to enforce its legal and equitable contract rights.
Advertising
The Company expenses all advertising costs as incurred. Advertising expense was $135,915 and $140,802 for the fiscal years ended January 31, 2012 and 2011, respectively.
Stock-Based Compensation
Stock options (Note 5) expected to be exercised currently and in future periods are measured at estimated fair value with the expense associated with these awards being recognized on a straight-line basis over the award’s vesting period. The fair value of options granted at the date of grant is estimated using the Black-Scholes Multiple Option pricing model based on Level 2 and 3 inputs as defined in GAAP, with the following weighted-average assumptions in the fiscal years ended January 31:
The expected life (estimated period of time outstanding) of options granted was estimated using the expected exercise behavior of employees. The risk-free rate used was based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on historical volatility for the Company over the past two years. The expected dividend yield is based on the historical information that the Company did not have dividends in prior years.
Legal Defense Costs
The Company records provision for minimum probable losses for matters in litigation or other disputes, such as those discussed in Note 6(b) and periodically revises these estimates as facts and circumstances change. The Company does not accrue for estimated future legal and related defense costs, if any, to be incurred in connection with outstanding or threatened litigation and other disputed matters but rather, records such as period costs when the related services are rendered.
Income Taxes
The Company recognizes interest and penalties related to income tax matters (Note 8), if any, as part of income tax expense in its consolidated statements of operations.
Net Income (Loss) Per Common Share
For all periods, basic net income (loss) applicable to common shareholders per share (EPS) is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted EPS in profitable years reflects the effects of potentially dilutive common shares by dividing net income by the sum of the weighted average number of common shares and common-share equivalents outstanding during the year.
Following is a reconciliation of the numerators and denominators of the net income (loss) per common share computations for the periods presented.
(*) Excluded for loss periods because the effect would be anti-dilutive. In addition, net loss per common share does not consider potentially dilutive securities, which consist of stock options and warrants of 2,896,180 and 2,695,780 at January 31, 2012 and 2011, respectively.
2. Property and Equipment
Property and equipment consists of the following as of January 31, 2012 and 2011:
3. Debt
There was no short-term debt as of January 31, 2012 and $452,111 payable to Alpine Advisors, LLC (Note 5) as of January 31, 2011. As of January 31, 2012 and 2011, long-term debt consists of the following:
Note payable, Sturgeon’s. This note payable is collateralized by substantially all of the assets of Sturgeon’s. It is payable in equal monthly installments of principal and interest of approximately $153,000 annually through January 2013, with the balance of approximately $1.43 million due February 2013. In October 2010, the Company negotiated a rate modification with Nevada State Bank which lowered the fixed interest rate from 8% to 6.9%.
Long-term debt maturities for the years ending January 31 follow:
4. Series A Preferred Stock
The Series A Preferred Stock is held by two persons. One shareholder is an officer and director of the Company (the “Officer/Director Shareholder”); owning a total of 8,900 shares (5,662 regular shares and 3,238 redeemable shares). The other shareholder is a director of the Company (the “Director Shareholder”); owning a total of 5,262 shares (all regular shares).
Holders of the Series A Preferred Stock are entitled to receive monthly payments, upon declaration by the Board of Directors, of cumulative cash dividends at the annual rate of 10% per share. Interest at the rate of 10%, compounded annually, accrues on Series A Preferred Stock dividends that have accumulated but have not been paid. The Series A Preferred Stock is not convertible but is callable, in whole or (on a pro rata basis) in part, at any time at the option of the Company. There were no shares called during the fiscal years ending January 31, 2012 or 2011. The holders of Series A Preferred Stock are not entitled to vote (on a cumulative basis or otherwise) as a class or with AWI’s common stock (the “Common Stock”) upon any matters submitted to shareholders for a vote, except as mandated under Nevada law. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any assets or surplus funds, an amount equal to $100 per share plus all accumulated and unpaid dividends thereon and any unpaid interest due.
Over the years, the Officer/Director Shareholder has forgone his right to have shares redeemed in accordance with the pro-rata provision applicable when shares were called, and accordingly, the affected 3,238 shares have been reclassified as “Redeemable Series A Preferred Stock” (in the liabilities section); these may be put to the Company for redemption at any time.
5. Stock Options and Other Equity and Related Party Transactions
Stock Repurchase
In 1999, the Board of Directors approved a program to repurchase up to 250,000 shares of the Company’s publicly held Common Stock from time to time in the open market. As of January 31, 2012, 61,100 shares had been repurchased and are held by the Company as treasury stock, and accordingly are non-voting. The timing and amount of future share repurchases, if any, will depend on various factors, including market conditions, available alternative investments, the Company’s financial position, and restrictive covenants of the Merger Agreement and Bridge Loan.
2001 and 2010 Stock Option Plans
The Company’s 2001 Employee Stock Option Plan (the “2001 Plan”) terminated on August 8, 2011, except as to the outstanding stock options on that date. In November 2010, the stockholders approved the 2010 Employee Stock Option Plan (the “2010 Plan”). In general, the Company may, upon approval from the Board of Directors, award options to any employee at any time except that no employee may receive in excess of 1,100,000 options and no more than 2,744,980 options in total may be granted under the “2010 Plan”. The 2001 and 2010 Plans do not require any specific vesting schedule and/or term; as such, the vesting and term is at the discretion of the Board of Directors. Pursuant to the terms of the respective 2001 or 2010 Plan, the exercise price of options must be equal to or greater than the market value of the Common Stock on the date of the grant. At the closing, each outstanding stock warrant and option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger shall be cancelled and, in exchange therefor, and the former holder shall receive an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share under such stock warrant or option, and (ii) the number of shares subject to such stock warrant or option.
The following tables summarize the current status of the 2001 and 2010 Plans:
Changes in Outstanding Options
Outstanding and Exercisable by Price Range as of January 31, 2012
Vesting Schedule
Directors Stock Option Plan
In 1996, the Company adopted the Directors Stock Option Plan (the “Directors Plan”). The Directors Plan was extended in August 2006 and terminated on April 30, 2011, except as to the outstanding stock options on that date. Beginning in fiscal year 2002, each non-employee director of the Company has been awarded options for 400 shares of stock on the last day of each fiscal year, in lieu of 100 shares of stock per committee on which such non-employee directors serve. Mr. Swecker and Mr. Barengo voluntarily renounced their rights to stock option awards that would have been granted on January 31, 2011, as part of the Directors’ Stock Option Plan for the best financial interests of the Company.
No more than 40,000 options were available for grant under the Directors Plan, which will be exercisable on the anniversary of the date of grant and will expire no later than 10 years from the grant date. Pursuant to the terms of the Directors Plan, the exercise price of options must be equal to the market value of the Company’s common stock on the date of the grant.
As of January 31, 2012 and 2011, 19,600 and 20,000 options were outstanding with 19,600 and 20,000 exercisable, at a weighted - average price of $1.33 and $1.32, respectively. At the closing, each outstanding stock warrant and option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger shall be cancelled and, in exchange therefor, and the former holder shall receive an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share under such stock warrant or option, and (ii) the number of shares subject to such stock warrant or option. (See Note 1).
Options outstanding and exercisable by price range as of January 31, 2012 follows:
Non-cash stock-based compensation expense recorded in the line item “Selling, General and Administrative Expenses” on the consolidated statements of operations for fiscal 2012 and 2011 was $301,854 and $236,422, respectively.
Other Equity and Related Party Transactions
Services contributed by Victor and Terina Salerno and credited to additional paid-in capital for fiscal 2012 and 2011 totaled $8,326 and $146,337, respectively. Mr. Salerno also provided the Company with a $250,000 interest free revolving line of credit on May 17, 2010, which was fully drawn as of January 31, 2011, and repaid from the proceeds of the Bridge Facility.
In addition, during the quarter ended April 30, 2010, 250,000 shares of common stock were issued to the principal of Alpine Advisors, LLC (“Alpine”) as a non-refundable fee for financial advisory services, plus 25,000 shares effectively issued during the quarter ended July 31, 2010 as a one-time payment of additional compensation for a late filing. The shares were valued at $0.15 per share ($41,250) based on the trading price of the Company’s common stock on the date of grant. Additional fees are due Alpine upon the successful completion of (1) a single or a series of transactions in which 50% or more of the voting power of the Company or all or a substantial portion of its business or assets are combined with or transferred to another company and (2) any offering of debt, equity or equity-linked securities either individually or in combination. The success fee is calculated generally at 3-3.5% of the “equity value” of the transaction, as defined, or the amount of the proceeds from the financing
In June 2010, the Company borrowed $195,000 from and entered into an agreement with Alpine that entitled but did not obligate Alpine to purchase 600,000 shares of the Company’s common stock at an exercise price of $0.22 per share through June 11, 2015. The principal amount of the loan plus interest at 15% was due June 17, 2010 (six days following the issuance) and then on demand with weekly interest payments calculated at 22% per annum. On June 22, 2010 the parties entered into a financing agreement that allowed the Company to borrow up to $500,000, at 15% per annum, due on June 10, 2011, and collateralized by the Company’s stock in CBS and the receivables of CBS. Proceeds from the June 22nd financing agreement were used, in part, to refinance the June 11th loan for $195,000. The Company has borrowed $500,000 to date, which was repaid from the proceeds of the Bridge Facility resulting in a loss on debt extinguishment of $126,960. The warrant agreement was also amended to provide Alpine with registration rights and, the appointment two persons to the Company’s board of directors, which would expand from five to seven members, should the Company default in its financing or collateralization obligations. Using the Black-Scholes valuation model and “Level 2 and 3” measurement inputs as defined in GAAP including a risk-free interest rate of 2.2%, expected warrant life of five years, and its internal stock price volatility factor of 206% initially (approximately 183% as of January 31, 2012), the warrants were valued at $129,478 with all treated as a warrant liability, revalued at each subsequent balance sheet with the change charged or credited to earnings with the debt discount amortized to interest expense over the repayment term of the loan using the effective interest method.
At the closing, each outstanding stock warrant and option to purchase shares of our common stock that is outstanding immediately prior to the effective time of the merger shall be cancelled and, in exchange therefor, and the former holder shall receive an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share under such stock warrant or option, and (ii) the number of shares subject to such stock warrant or option.
6. Commitments and Contingencies
a. Gaming Reserve Requirement
Nevada Gaming Commission Regulation 22.040 (“Regulation 22.040”) requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. The Company generally funded this reserve requirement through surety bonds secured by restricted cash held at Nevada State Bank.
As of January 31, 2012, we had cash reserves and pledge agreements totaling $1.9 million to satisfy the Regulation 22.040 requirement in addition to a float amount of $600,000 allowed by the Nevada Gaming Control Board to cover short term fluctuations in the outstanding liability. The $1.9 million amount consisted of our reserve account of $700,000 held at Nevada State Bank, a pledged certificate of deposit totaling $200,000, and an Irrevocable Standby Letter of Credit of $1 million. The pledged certificate initially expired in October 2010, but Victor and Terina Salerno agreed to extend their pledge without designating a specific expiration date. However, there is no assurance that this pledge will continue. On January 13, 2012, the Nevada Gaming Control Board allowed us to reduce our reserve balance by $750,000 and withdraw the pledge from Robert and Tracey Kocienski of $250,000. We will likely have to increase our reserve in August 2012, and if we are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, and/or an elimination or reduction of remote wagering accounts, resulting in an adverse change in our operating results. We anticipate being able to increase our reserve balance as a portion of the financing proceeds from the Bridge Facility is allocated for this purpose. There is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
b. Litigation Judgments and Settlements
Except for the Racusin matter discussed in the following paragraph, the Company is not a party in any litigation.
Racusin. The Company and Racusin entered into a Settlement Agreement on September 3, 2004 to resolve a claim that Racusin had against the Company in its Chapter 11 bankruptcy case (the “Racusin Claim”). Subsequently, various claims and counter claims have been heard in bankruptcy court and the 9th Circuit Court of Appeals.
More recently on January 14, 2009, Racusin filed a claim against the Company for breach of the Settlement Agreement and motion for summary judgment on that claim to accelerate amounts due along with penalty interest. On August 18, 2009, the Court entered an order granting summary judgment in favor of Racusin, which accelerated amounts due and imposed penalty interest at 12% per annum. The Company moved for rehearing in spring 2010 in which the Court vacated the order on December 23, 2010. On April 20, 2011, the Company filed a motion for summary judgment seeking dismissal of Racusin’s still pending complaint for breach of the Settlement Agreement, further relief related to earlier pleadings, as well as a refund of alleged overpayments the Company made.
On October 7, 2011, the Court entered findings and conclusions in favor of the Company on its motion for summary judgment. Specifically, the Court ruled that Racusin’s complaint against the Company for breach of the Settlement Agreement was dismissed. The Court also ruled that interest on amounts due Racusin did not accrue during the time when the Company had deposited with 250,000 shares of AWI common stock with the Court pursuant to Court instructions. The Court also ruled that the Company had satisfied its obligations in full to Racusin under the Settlement Agreement and thus did not have to make any further payments to Racusin.The Court also ruled, however, that it would not make a determination on the amount that the Company allegedly overpaid under the Settlement Agreement and thus did not release such alleged overpayment back to the Company without further proceedings to determine what rights, if any, the Company, Racusin and certain other parties in interest had to such funds, as well as allowing for appeals to be taken from the Court’s decisions.
On October 7, 2011, Racusin noticed his intent to appeal the Court’s decision granting the Company summary judgment to the United States Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals. Appeal briefs have been filed under case number BAP. No. NV-11-1549; oral arguments have not been scheduled. If the Company were to prevail through the appellate process in accordance with the Court’s findings and conclusions from September 26, 2011, it is estimated that the Company’s payments to the Court through October 31, 2011, in connection with these matters, have exceeded the amount due by $239,000, including the $160,000 reflected in prepaid expenses as of such date. There is no assurance that the appellate court will agree with our position.
Internet Sports International, Ltd. On July 17, 2008, Internet Sports International, Ltd. (“ISI”) filed a complaint against three of our subsidiaries, AWI Manufacturing, Inc. (“AWIM”), AWI Gaming, Inc. (“AWIG”) and Computerized Bookmaking Systems, Inc. (“CBS”), and our General Counsel (collectively, “the Defendants”). On February 3, 2010, the Defendants and ISI engaged in consensual mediation, which resulted in a global settlement. The parties subsequently entered into a Settlement Agreement whereby AWIM agreed to pay to ISI the total sum $170,000 in exchange for a mutual release of all claims. The outstanding balance of the Settlement Agreement as of January 31, 2012 was $70,000.
c. Operating Leases
The Company has operating lease commitments for the majority of its race and sports book locations and for leased office equipment. Future minimum lease payments under non-cancelable operating leases are as follows:
Rent expense for all operating leases was $1,155,085 and $1,211,362 during the fiscal years ended January 31, 2012 and 2011, respectively.
d. Long-Term Employment Commitments
The Company has employment agreements with the following executive officers. Our annual commitment under these agreements is $740,000 through 2013, without consideration of typical benefits and voluntary salary reductions or deferrals. Information related to these agreements follows:
Victor J. Salerno. Mr. Salerno’s employment agreement was effective July 1, 2002, with automatic renewals for successive five-year terms as of January 31, 2008. The agreement provides an annual base salary of $240,000. Mr. Salerno agreed to temporarily reduce his annual base salary in an amount sufficient to cover payroll deductions for benefits, effective November 24, 2008. Upon funding of the Bridge Facility, Mr. Salerno received payment of his deferred salary reductions, and his full salary was reinstated. He is entitled to an annual performance bonus equal to 5% of our pre-tax earnings (as defined in his agreement) for the fiscal year, employer contributions to a profit-sharing or retirement plan of not less than 4% of his base salary, health and life insurance coverage, and use of an automobile that we provide for him. Mr. Salerno’s agreement also entitles him to certain benefits if he is terminated without cause or if his employment terminates within 24 months after a change in control of AWI. However, on April 13, 2011, Mr. Salerno entered into a subsequent agreement with the Company that terminates his employment agreement with the Company, including the entitlement to any payments, benefits or other rights thereunder, simultaneously with the consummation of the merger.
Robert Kocienski and John English. On November 11, 2010, the Company entered into agreements with Robert Kocienski, Chief Operating Officer and Principal Financial Officer, and John English, Senior Vice President of Marketing and Public Relations, for three years. The two agreements provide for an annual base salary of $250,000 and additional compensation of $204,261 to be paid over the term of the agreement in equal bi-weekly installments. As all our employees have had their salaries reduced, including executive management with and without an employment agreement, both executives verbally agreed to reduce their annual base salary by half and defer the payment of all the additional compensation for an unspecified time period. Upon funding of the Bridge Facility, both received payment of their deferred salary reductions, and their full salaries were reinstated. In addition, both will be reimbursed for all reasonable expenses incurred in the performance of his duties, participate in all medical, dental or other benefit plans made available by the Company to its employees, and be eligible for an annual bonus pursuant to the Company’s bonus program as determined by the Company’s board of directors. The Company granted both a stock option to purchase 1,047,490 shares of the Company’s common stock at an exercise price equal to $.27 per share. The agreements provide for termination rights and change of control payments dependent on the particular circumstances. Mr. Kocienski did not enter into any agreement modifying the terms of his employment agreement. At consummation of the merger, Mr. Kocienski will be paid the change of control payments, the total sum of which is variable depending on the date of the consummation of the merger. Mr. English's employment agreement was amended on April 13, 2011, which entitled him to a lump sum cash payment from the Company in the amount of $85,713. In addition, subject to Mr. English's continued employment with the Company and through each payment date, Mr. English shall be entitled to two addtional lump sum cash payments in the amount of $87,946, one payable on December 31, 2012 and the other payable on November 11, 2013.
7. Related Party Transactions
The Company has engaged in the following related-party transactions during the years ended January 31, 2012 and 2011:
As a result of a series of prior transactions, as of February 1, 2009, the Company owed Victor and Terina Salerno (the “Salernos”) $1,000,000, payable interest-only monthly at the rate of 10.0% per annum with the maturity date of the loan having been extended from February 1, 2012 to the earlier of August 1, 2012 or the closing of the Merger Agreement. Our independent directors have considered and approved the fairness of the financing arrangements with the Salernos. We paid interest to the Salernos totaling $100,000 in each of fiscal 2012 and fiscal 2011.
In addition, on May 17, 2010, Mr. Salerno loaned the Company an additional interest -free revolving line of credit in the amount of $250,000, which was repaid from proceeds of the Bridge Facility.
In October 2009 Victor and Terina Salerno pledged a $200,000 certificate of deposit to the Nevada Gaming Control Board on behalf of Leroy’s to increase the Regulation 22.040 reserve.
Related party interest expense recorded for fiscal 2012 and 2011 was $124,000 and $124,000, respectively.
8. Income Taxes
The tax effect of significant temporary differences representing deferred tax assets and liabilities for the Company as of January 31, 2012 and 2011 follows:
The difference between the normal federal statutory tax rate of 34.00% applied to loss from continuing operations before income taxes and the Company’s effective tax rate is:
At January 31, 2012, the Company had federal tax net operating loss (“NOL”) carryforwards available to potentially reduce future tax obligations in the aggregate amount of approximately $13.9 million; of which approximately $1.1 million is expected to expire in 2019. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes that the Company’s historical performance of losses in 6 of the past 12 years makes it more unlikely that any net deferred tax asset, which may result primarily from NOLs, will be realized.
The Company’s federal income tax returns for the years ended January 31, 2009 through 2012 are subject to possible examination by the Internal Revenue Service. Management has reviewed the positions taken or to be taken on such returns and believes that there are no uncertain tax position as defined by GAAP that would either require recognition or disclosure in these consolidated financial statements.
9. Business Segments
The Company reports its results of operations through three operating segments: Wagering, Hotel/Casino, and Systems.
Wagering Segment. The following table indicates the primary components of revenue and operating costs resulting in this segment’s operating income (loss).
Hotel/Casino Segment. The following table indicates the primary components of revenue and operating costs resulting in this segment’s operating income (loss).
Systems Segment. The following table indicates the primary components of revenue and operating costs resulting in this segment’s operating loss.
Reconciliation of Operating Loss to Loss Before Income Taxes. The following table reconciles the operating income (loss) from each segment to income (loss) before income taxes.
Other Information. Other information regarding the Wagering Segment, Hotel/Casino Segment, and Systems Segment and certain other unallocated items are set forth below.
(1) Includes property and equipment, shown net of accumulated depreciation and amortization; goodwill; and other assets. Goodwill, in the amount of $103,725, for the fiscal years ended January 31, 2012 and 2011, is a component of the Systems Segment.
10. Additional Supplementary Cash Flow Information
The reconciliation of net loss to net cash used in operating activities is as follows:
11. Financial Instruments
Except for the funds provided under the Bridge Loan and Merger Agreement, the Company’s financial instruments consist of cash and equivalents, restricted cash, accounts receivable, accounts payable, unpaid winning tickets, advance deposits, and long-term debt. The Company’s cash equivalents are short-term and diversified among security types and issuers, and their costs approximate estimated fair values. Other financial instruments that are also short-term and have little or no interest rate risk have estimated fair values equal to their historical cost carrying amounts. Management believes the estimated fair value of long-term liabilities are also not materially different from their historical cost carrying amounts due to the instruments’ interest rates approximating market rates for similar borrowings.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 31, 2012. Based on this evaluation, we determined that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. In the course of this evaluation and in accordance with Section 302 of the Sarbanes Oxley Act of 2002, we sought to identify material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our internal control over financial reporting that would have a material effect on our consolidated financial statements, and to confirm that any necessary corrective action, including process improvements, were being undertaken.
Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 31, 2012.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Our directors and executive officers are as follows:
Victor J. Salerno has been our President, CEO, and Chairman of the Board since our inception. Mr. Salerno has been the President, CEO and a Director of Leroy’s since September 1979. Mr. Salerno served as an Executive Vice-President and Director of Autotote CBS Corporation (subsequently purchased by us and renamed Computerized Bookmaking Systems, Inc.). He is a past President of the Nevada Association of Race and Sports Operators.
Robert R. Barengo became a Director in July 2005, and previously served on our Board of Directors from 1992 to 2000. Mr. Barengo has owned and operated his own law practice for over 30 years during which he has handled, among other matters, general business, municipal finance, bonding, investment banking, government and administration law, and gaming law. Mr. Barengo has extensive elected office and legislative experience as a Nevada Assemblyman (1972-1982) where he served on various committees including Interim Finance, Ways and Means, Commerce and Judiciary; Chairman of the Judiciary Committee (1973-1979); Speaker Pro Tempore (1978-1981); Chairman of the Legislative Commission (1981-1983); Speaker of the Assembly (1981-1983); and Judge Pro-Tem for the City of Sparks Municipal Court and the City of Reno Municipal Court (1976-1995). Mr. Barengo also served on the Board of Directors of Riviera Holdings Corporation, a publicly reporting company, from 1992 to April 2005 and also served as that company’s Director of Government and Public Affairs from January 2001 to April 2005. Mr. Barengo also served as President of Columbia Trust Company from 2004 to 2008. Mr. Barengo serves as Chairman of the audit committee.
W. Larry Swecker became a Director in April 2000. Mr. Swecker, a Certified Public Accountant, has been President of Swecker & Company, Ltd., Certified Public Accountants, since January 1979. Prior to that, he was a partner in the firm of Keltner Milam & Company, Certified Public Accountants, from 1975 to 1979. Mr. Swecker was employed as a revenue agent with the Internal Revenue Service from 1972 to 1975. He has a Bachelor of Science in Business Administration from the University of Nevada Reno. Mr. Swecker is a member of the audit committee, serving as our Financial Expert; and is Chairman of the compensation committee the Board of Directors.
Judith L. Zimbelmann became a Director in January 2001 and serves on the audit committee and the compensation committee. Ms. Zimbelmann is the daughter of Leroy Merillat, the founder of Leroy’s Horse & Sports Place, and was formerly married to Victor Salerno. Ms. Zimbelmann is a private investor with numerous holdings and is a member and officer of UV Doctor, LLC (which provides ultra-violet lighting for sterilization).
Robert Kocienski has been our COO and Principal Financial Officer since November 2010. Mr. Kocienski has extensive experience in the gaming industry over the past thirty years. From July 2009 to November 2010, Mr. Kocienski provided consulting services to us. From April 2008 to June 2009, Mr. Kocienski served as Senior Vice President, CFO, and Treasurer of Tropicana Entertainment, LLC. From June 2006 to April 2008, Mr. Kocienski served as CFO of Cosmo Senior Borrower, LLC. From November 2004 to May 2006, Mr. Kocienski served as President and CFO of Torguson Gaming Group Mississippi.
John English has been our Senior Vice President of Business Development and Public Affairs since November 2010. From July 2009 to November 2010, Mr. English provided consulting services to us. From 2004 to 2009, Mr. English served as Senior Vice President of Business and Creative Development for Las Vegas Gaming, Inc. (LVGI). Before joining LVGI, Mr. English created Sports Bet Xpress 2000, the first ever Nevada Gaming Control Board approved remote sports wagering system for bars, taverns and restaurants. Mr. English has developed global business relationships and has spoken and lectured on the subject of gaming, sports betting, and lottery worldwide.
Licensing
Pursuant to Nevada gaming regulations/statutes and the status of Leroy’s, AWIM, AWIG and Sturgeon’s as gaming licensees, officers and directors of Leroy’s, AWIM, AWIG and Sturgeon’s must be investigated and licensed by the Commission, a process that may be both lengthy and expensive. AWI and CBS are not licensees and therefore, the officers and directors of AWI and CBS must also be investigated and found “suitable” according to the Nevada gaming regulations and statutes. Victor Salerno is licensed by the Commission to be an officer and director of Leroy’s, AWIM, AWIG and Sturgeon’s and has been found suitable as an officer and director of AWI and CBS. Robert Barengo has been found suitable as a director of AWI and CBS. Judith Zimbelmann has been found suitable by the Commission to be a director of AWI and CBS and is licensed by the Commission to be an officer of Leroy’s, AWIM, AWIG, and Sturgeons. John Salerno is licensed by the Commission to be an officer of Leroy’s, AWIM, AWIG and Sturgeon’s and has been found suitable to be an officer of AWI and CBS and licensed as a director of AWIG.
Audit Committee
The Company has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the audit committee are Robert Barengo, W. Larry Swecker and Judith L. Zimbelmann.
Audit Committee Financial Expert
Our Board of Directors has determined that a member of our audit committee, W. Larry Swecker, who meets the audit committee independence criteria prescribed by NASDAQ, qualifies as an audit committee financial expert under the applicable rules of the SEC. Mr. Swecker’s qualifications include, among other things, his practice as a certified public accountant for the past 30 years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our common stock to file with the SEC certain reports regarding their stock ownership (“Section 16(a) Reports”). Such persons are required to furnish us with copies of all Section 16(a) Reports they file. Based solely on our review of such reports (and amendments thereto) that were furnished to us and written representations made to us by reporting persons in connection with certain of these reporting requirements, we believe that all the reporting persons met their Section 16(a) reporting obligations on a timely basis during our last fiscal year, except for Victor Salerno’s Form 4 regarding purchases of our common stock that was filed late on September 21, 2011.
Code of Ethics
We have adopted, and have filed with the SEC, a Code of Ethics for Financial Executives, which include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Item 11.
Item 11. Executive Compensation
The following table summarizes the compensation for the periods indicated of our Chief Executive Officer and the two most highly compensated executive officers who served as executive officers as of January 31, 2012.
Summary Compensation Table
(1)
Mr. Salerno’s compensation does not include interest paid to him on his loan to the Company. Mr. Salerno agreed to reduce his annual base salary in an amount sufficient to cover payroll deductions for benefits, effective November 24, 2008 which was modified on September 22, 2010 to re-instate his salary at a 50% level. Upon funding of the Bridge Facility, Mr. Salerno received payment of his deferred salary reductions, and his full salary was reinstated.
(2)
Mr. Kocienski’s annual salary is $250,000 under the employment agreement effective November 11, 2010. Under the agreement, Mr. Kocienski will also receive additional annual compensation of $68,087. As all our employees have had their salaries reduced, including executive management with and without an employment agreement, Mr. Kocienski verbally agreed to reduce his annual base salary by half and defer the payment of all the additional compensation for an unspecified time period. Upon funding of the Bridge Facility, Mr. Kocienski received payment of his deferred salary reductions, and his full salary was reinstated.
(3)
Mr. English’s annual salary is $250,000 under the employment agreement effective November 11, 2010. Under the agreement, Mr. English will also receive additional annual compensation of $68,087. As all our employees have had their salaries reduced, including executive management with and without an employment agreement, Mr. English verbally agreed to reduce his annual base salary by half and defer the payment of all the additional compensation for an unspecified time period. Upon funding of the Bridge Facility, Mr. English received payment of his deferred salary reductions, and his full salary was reinstated.
(4)
The dollar amounts in column (f) are the aggregate grant date fair value of the option awards. Please refer to Part II-Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements- Notes 1 and 5 for further information about our calculation of those amounts, which we based on the reported closing market price of our common stock on the OTCBB on the date we granted the options.
(5)
These amounts in column (i) include the Company’s matching contributions under our 401(k) plan and any other compensation such as an auto allowance. Mr. Salerno received an auto allowance which is included in the amounts in this column (i).
Employment Agreements
We have the following employment agreements with the following executive officers:
Victor Salerno. Mr. Salerno’s employment agreement became effective on July 1, 2002 with the initial term expiring on January 31, 2008. The employment agreement automatically renewed for successive five-year terms as of January 31, 2008. The agreement provides that Mr. Salerno may resign without cause upon 30 days’ written notice to us. The agreement provides an annual base salary of $240,000, which is subject to annual review. However, Mr. Salerno agreed to temporarily reduce his annual base salary in an amount sufficient to cover payroll deductions for benefits, effective November 24, 2008 and began receiving 50% of his annual base salary, effective September 22, 2010. Upon funding of the Bridge Facility, Mr. Salerno received payment of his deferred salary reductions, and his full salary was reinstated. In addition, Mr. Salerno is entitled to an annual performance bonus equal to 5% of our pre-tax earnings (as defined in his agreement) for the prior fiscal year, employer contributions to a profit-sharing or retirement plan of not less than 4% of his base salary, health and life insurance coverage, and use of an automobile that we provide for him. Mr. Salerno is also entitled to participate in our benefit plans available to our officers and employees generally. If the Company terminates Mr. Salerno’s employment without cause, he is entitled to an amount equal to five times his base salary at the rate in effect at the time of his termination, any bonus awarded but not yet paid, reimbursement for expenses incurred but not paid prior to the termination, continuation of Company provided health benefits and participation in the Company’s long-term disability insurance for a period of 60 months following the termination (or the economic equivalent thereof), and such rights to other benefits as may be provided in applicable plans and programs of the Company, including, without limitation, applicable employee benefit plans and programs, according to the terms and conditions of such plans and programs. Mr. Salerno’s agreement also entitles him to certain benefits if his employment terminates within 24 months after a change in control of AWI, as described below under “Payments in the Event of a Change in Control.” However, on April 13, 2011, Mr. Salerno entered into a subsequent agreement with the Company that terminates his employment agreement with the Company, including the entitlement to any payments, benefits or other rights thereunder, simultaneously with the consummation of the merger.
Robert Kocienski. On November 11, 2010 the Company entered into an agreement with Robert Kocienski, Chief Operating Officer and Principal Financial Officer, for three years. The agreement provides an annual base salary of $250,000 and additional compensation of $204,261 to be paid over the term of the agreement in equal bi-weekly installments. As all our employees have had their salaries reduced, including executive management with and without an employment agreement, Mr. Kocienski verbally agreed to reduce of his annual base salary by half and defer the payment of all the additional compensation for an unspecified time period. Upon funding of the Bridge Facility, Mr. Kocienski received payment of his deferred salary reductions, and his full salary was reinstated. In addition, Mr. Kocienski will be reimbursed for all reasonable expenses incurred in the performance of his duties, participate in all medical, dental or other benefit plans made available by the Company to its employees, and be eligible for an annual bonus pursuant to the Company’s bonus program as determined by the Company’s board of directors. The Company granted Mr. Kocienski a stock option to purchase 1,047,490 shares of the Company’s common stock at an exercise price equal to $.27 per share. The agreement provides for termination rights and change of control payments dependent on the particular circumstances. Mr. Kocienski did not enter into any agreement modifying the terms of his employment agreement. At consummation of the merger, Mr. Kocienski will be paid the change of control payments, the total sum of which is variable depending on the date of the consummation of the merger.
John English. On November 11, 2010 the Company entered into an agreement with John English, Senior Vice President of Marketing and Public Relations, for three years. The agreement provides an annual base salary of $250,000 and additional compensation of $204,261 to be paid over the term of the agreement in equal bi-weekly installments. As all our employees have had their salaries reduced, including executive management with and without an employment agreement, Mr. English verbally agreed to reduce of his annual base salary by half and defer the payment of all the additional compensation for an unspecified time period. Upon funding of the Bridge Facility, Mr. English received payment of his deferred salary reductions, and his full salary was reinstated. The agreement provides for termination rights and change of control payments dependent on the particular circumstances. On April 13, 2011, Mr. English entered into an agreement that upon the execution of the Merger Agreement, amended and restated his employment agreement with the Company, including providing for base salary, retention payments and severance in certain circumstances. In addition, Mr. English will be reimbursed for all reasonable expenses incurred in the performance of his duties, participate in all medical, dental or other benefit plans made available by the Company to its employees, and be eligible for an annual bonus pursuant to the Company’s bonus program as determined by the Company’s board of directors. The Company granted Mr. English a stock option to purchase 1,047,490 shares of the Company’s common stock at an exercise price equal to $.27 per share.
Our long-term employment commitments through the existing terms of the agreements total $740,000 of base salary per annum through 2013, without consideration of typical benefits and voluntary salary reductions or deferrals.
The following table provides information concerning executive officers’ unexercised stock options as of January 31, 2012.
Outstanding Equity Awards at Fiscal Year-End
(1) Mr. Salerno’s options have fully vested. Mr. Kocienski’s options vest in installments of 440,000 on January 1, 2011, 432,908 on July 1, 2011 and 174,582 on July 1, 2012. Mr. English’s options vest in installments of 130,936 on January 1, 2011, 130,936 on May 1, 2011, 130,936 on August 1, 2011, 130,937 on November 1, 2011, 130,936 on February 1, 2013, 130,936 on May 1, 2013, 130,936 on August 1, 2013, and 130,937 on November 1, 2013.
Payments in the Event of a Change in Control
Mr. Salerno’s agreement provides that if his employment terminates for any reason (other than death, disability or his resignation without cause during the initial term of his agreement, which ended on January 31, 2008, but was automatically renewed for five more years) within 24 months after a change in control of AWI, then we will pay, as termination benefits to Mr. Salerno, an amount equal to five times his base salary then in effect and we will continue his coverage under our health and welfare benefit plans for five years. Also in the event of a change in control of AWI, all of his stock options and any other stock-based awards will become exercisable or non-forfeitable. However, on April 13, 2011, Mr. Salerno entered into a subsequent agreement with the Company that terminates his employment agreement with the Company, including the entitlement to any payments, benefits or other rights thereunder, simultaneously with the consummation of the merger.
Mr. Kocienski and Mr. English’s agreements provide for the payout of the remaining amount due under their respective agreements and all of their stock-based awards will become exercisable and non-forfeitable. Mr. Kocienski did not enter into any agreement modifying the terms of his employment agreement. At consummation of the Merger, Mr. Kocienski will be paid the change of control payments, the total sum of which is variable depending on the date of the consummation of the merger. Whereas, on April 13, 2011, Mr. English entered into an agreement that upon the execution of the Merger, amends and restates his employment agreement with the Company, including providing for base salary, retention payments and severance in certain circumstances.
Compensation of Directors
Directors who are not our employees or consultants receive a fee of $1,000 per month plus travel expenses. In addition, each Committee Chairman (audit committee, compensation committee, etc.) receives an additional $1,000 per month for each committee chaired. The following table summarizes the compensation paid to the directors for the fiscal year ended January 31, 2012.
Director Compensation
(a)
This table includes only directors whose compensation is not reported in the Summary Compensation Table.
(1)
W. Larry Swecker has served as chairman of the compensation committee since 2005.
(2)
Robert R. Barengo has served as chairman of the audit committee since 2006.
(3)
Mr. Swecker and Mr. Barengo agreed to forego director fees in the amount of $24,000 each during fiscal year 2011 for the best interests of the financial health and well-being of the Company. In April 2011, payment of director fees to Mr. Swecker and Mr. Barengo were reinstated.
(4)
Mr. Swecker had 10,400 in stock option awards outstanding at January 31, 2012. Mr. Barengo had 9,200 in stock option awards outstanding at January 31, 2012. Mr. Swecker and Mr. Barengo voluntarily renounced their rights to stock option awards that would have been granted on January 31, 2011 as part of the Directors’ Stock Option Plan for the best financial interests of the Company.
(5)
Ms. Zimbelmann has received this compensation for rendering administrative services to the Company. Ms. Zimbelmann also had 3,000 stock option awards outstanding at January 31, 2012.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of April 30, 2012, the number and percentage of outstanding shares of our common stock, which, according to information supplied to us, are beneficially owned by: (i) each person who is a beneficial owner of more than 5.00% of our outstanding common stock; (ii) each of our directors, and named executive officers individually; and (iii) all of our current directors and executive officers as a group. Under SEC rules, a person is deemed a beneficial owner of our common stock with respect to which he or she has or shares voting power (which includes the power to vote or to direct the voting of the security), or investment power (which includes the power to dispose of, or to direct the disposition of, the security).
A person is also deemed the beneficial owner of shares with respect to which he or she could obtain voting or investment power within 60 days of April 30, 2012 (such as upon the exercise of options or warrants). The percentage of outstanding common stock represented by each named person’s stock ownership assumes the exercise by that person of all stock options that are exercisable within 60 days of April 30, 2012 but does not assume the exercise of stock options by any other persons. The percentage of outstanding common stock represented by the stock ownership of all directors and executive officers as a group assumes the exercise by all members of that group of their respective stock options that are exercisable within 60 days of April 30, 2012, but does not assume the exercise of options by any persons outside of that group.
Except as otherwise indicated below, the persons named in the table have sole voting and investment power with respect to all shares of our common stock held by them. The address of each person named in the table is c/o American Wagering, Inc., 675 Grier Drive, Las Vegas, Nevada 89119.
(1)
Mr. Salerno has 50,000 in vested stock options that he has the right to exercise to acquire shares within the next 60 days which are included in the table above.
(2)
Ms. Zimbelmann has 3,000 in vested stock options that she has the right to exercise to acquire shares within the next 60 days which are included in the table above.
(3)
Mr. Barengo has 9,200 in vested stock options that he has the right to exercise to acquire shares within the next 60 days which are included in the table above.
(4)
Mr. Swecker has 10,400 in vested stock options that he has the right to exercise to acquire shares within the next 60 days which are included in the table above.
(5)
Mr. Kocienski has 872,908 in vested stock options that he has the right to exercise to acquire shares within the next 60 days which are included in the table above.
(6)
Mr. English has 523,745 in vested stock options that he has the right to exercise to acquire shares within the next 60 days which are included in the table above.
(7)
Our current directors and named executive officers as a group have options for 1,469,253 shares, which they can exercise within the next 60 days. Those shares are included in the table above.
(8)
We derived this information from a Schedule 13D filed by Alpine Advisors LLC and Don R. Kornstein on June 23, 2010. Don R. Kornstein is the managing member of Alpine Advisors LLC. Alpine Advisors LLC is deemed to be the beneficial owner of 600,000 shares pursuant to the Amended and Restated Warrant Agreement dated as of June 11, 2010 (the “Warrant Agreement”). Pursuant to the Warrant Agreement, Alpine Advisors LLC was granted a warrant to purchase 600,000 shares of our common stock. Don R. Kornstein is deemed to be the beneficial owner of 875,000 shares, which amount includes the 600,000 shares issuable upon exercise of the Warrant and an additional 275,000 shares issued pursuant to the Advisor Agreement between Alpine Advisors LLC and American Wagering, Inc. dated March 12, 2010. Alpine Advisors LLC and Don R. Kornstein are located at 825 Lakeshore Blvd., Incline Village, Nevada 89451.
(9)
We derived this information from a Schedule 13G filed by Loeb Arbitrage Management LP, Loeb Offshore Management LP, Loeb Arbitrage Offshore Partners, Ltd., and Loeb Management Holding LLC on February 14, 2012. Loeb Capital Management is the dba for all of the reporting persons. The address of each reporting person is 61 Broadway, 24th Floor, New York, New York 10006.
Securities authorized for issuance under equity compensation plans
The following table provides information regarding the securities underlying outstanding options and securities remaining available for issuance under our equity compensation plans as of January 31, 2012.
(1) For information regarding the plans see Part II, Item 8 - Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 5.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Other than as set forth below, there have been no transactions since the beginning of our last fiscal year, nor are there any proposed transactions, to which we were or are to be a party, in which any of the following persons had or is to have a direct or indirect material interest:
(a) any director or executive officer;
(b) any person who beneficially owns more than 5% of our outstanding common stock; or
(c) any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons.
Our policy regarding related transactions requires that any director or executive officer who has an interest in any transaction disclose the presence and the nature of the interest to our Board of Directors prior to any approval of the transaction by our Board of Directors. The transaction may then be approved by a majority of our disinterested directors, provided that an interested director may be counted in determining the presence of a quorum at the meeting of our Board of Directors to approve the transaction. Our policy regarding compensation for directors and executive officers is that our Board of Directors may, without regard to personal interest, establish the compensation of directors for services in any capacity.
Victor J. Salerno (our President, CEO, and Chairman of the Board of Directors) owns 8,900 shares of Series A Preferred Stock (5,662 regular shares and 3,238 redeemable shares). Judith Zimbelmann (one of our directors) owns 5,262 shares of Series A Preferred Stock (all regular shares).
Holders of the Series A Preferred Stock are entitled to receive monthly payments, upon declaration by our Board of Directors, cumulative cash dividends at the annual rate of 10% per share. Interest at the annual rate of 10%, compounded annually, accrues on Series A Preferred Stock dividends that have accumulated but have not been paid. The Series A Preferred Stock is not convertible but is callable, in whole or (on a pro rata basis) in part, at any time at our option. There were no shares called since the beginning of our last fiscal year. The holders of Series A Preferred Stock are not entitled to vote (on a cumulative basis or otherwise) as a class or with our common stock upon any matters submitted to shareholders for a vote, except as mandated under Nevada law.
In prior years, Mr. Salerno forwent his right to have his shares redeemed when we made partial, pro rata calls of Series A Preferred Stock for redemption. Those affected shares have been classified as “Redeemable Series A Preferred Stock” in the liabilities section of our Consolidated Balance Sheet, and may be put to us by Mr. Salerno for redemption at any time. As of January 31, 2010, the amount of Series A Preferred Stock that may be put to us by Mr. Salerno for immediate redemption (without prior approval by our Board of Directors) is $323,800 (3,238 shares). When we and Leroy’s filed Chapter 11 Petitions, this Redeemable Series A Preferred Stock became subject to compromise under the Bankruptcy Code. (Under the Bankruptcy Code, the ordinary Series A Preferred Stock, which is classified in the equity section of our Consolidated Balance Sheet, was not designated as subject to compromise.) Pursuant to the Plan that we and Leroy’s consummated on March 11, 2005 (the “Effective Date”), the Redeemable Series A Preferred Stock is no longer considered subject to compromise, and we will pay the redemption price in the ordinary course of business.
From the filing of the Chapter 11 Petitions on July 25, 2003 through the Effective Date (March 11, 2005), dividends were accrued but not paid on the Series A Preferred Stock. The following table indicates the accruals and payments to the preferred shareholders through the Effective Date:
(1) The payment on March 11, 2005 includes $1,977 of interest at the Federal Judgment Rate.
On November 8, 2007, we borrowed $400,000 against the $500,000 line of credit for the benefit of the AWIG in its acquisition of Sturgeons under the terms of a Guaranty Agreement, as amended from time to time, between Victor and Terina Salerno (the “Salernos”) and AWI. On April 21, 2008, the Guaranty Agreement was restated as a Line of Credit Confirmation Letter (“Line of Credit”); its terms broadened such that we could draw on the line of credit for the benefit of the Company, and consolidated subsidiaries, provided for us to pay the Salernos interest at the rate of 10.0% per annum (payable monthly) on the outstanding portion of the loan (up to a maximum of $500,000) and to reimburse them for finance charges, fees, payments and other expenses they may incur. Unless extended, the April 21, 2008 Line of Credit expired on February 16, 2011. The personal line of credit then in place was secured by the Salernos’ residence and provides for an interest rate of 0.5% below the prime rate published by the Wall Street Journal, adjusted annually. The Salernos’ terminated their bank financed personal line of credit in 2009, but they maintain the Line of Credit with the Company.
On December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 fund our immediate general operating expenses. Due to the urgency for which the funds were needed, the funds were advanced on an expedited basis without formal board approval as reported in our Form 10-Q for the quarter ended October 31, 2008. Our independent directors considered and approved the fairness of a proposed amendment to the April 21, 2008 Line of Credit to cover the total $1,000,000 that has been loaned by Mr. Salerno at the same terms. The outstanding balance of this line of credit was $1,000,000 at January 31, 2010. We paid interest to Mr. Salerno totaling $100,000 in fiscal 2011 and $100,000 in fiscal 2010. The total $1,000,000 will be repaid with interest only payments during fiscal 2012, and the loan will mature on February 1, 2012.
Mr. Salerno also provided the Company with a $250,000 interest free revolving line of credit on May 17, 2010, which was fully drawn as of January 31, 2011, and repaid from the proceeds of the Bridge Facility.
We employ on a full-time basis Terina Salerno, the wife of Victor Salerno, as our General Counsel. For our fiscal year ended January 31, 2012, her total compensation was $96,664. Ms. Salerno agreed to temporarily reduce her annual base salary in an amount sufficient to cover payroll deductions for benefits, effective November 24, 2008.
The contributed services expense for Terina Salerno for fiscal 2012 was $8,326.
We employ on a full-time basis John Salerno, the son of Victor Salerno and Judith Zimbelmann, as Secretary of the Company and a gaming analyst of Leroy’s. For our fiscal year ended January 31, 2012, his total annual compensation was $65,190. John Salerno agreed to temporarily reduce his annual base salary by 15%, effective July 2010.
As of January 31, 2012, we had cash reserves and pledge agreements totaling $1.9 million to satisfy the Regulation 22.040 requirement in addition to a float amount of $600,000 allowed by the Nevada Gaming Control Board to cover short term fluctuations in the outstanding liability. The $1.9 million amount consisted of our reserve account of $700,000 held at Nevada State Bank, a pledged certificate of deposit totaling $200,000, and an Irrevocable Standby Letter of Credit of $1 million. The pledged certificate initially expired in October 2010, but Victor and Terina Salerno agreed to extend their pledge without designating a specific expiration date. However, there is no assurance that this pledge will continue. On January 13, 2012, the Nevada Gaming Control Board allowed us to reduce our reserve balance by $750,000 and withdraw the pledge from Robert and Tracey Kocienski of $250,000. We will likely have to increase our reserve in August 2012, and if we are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy’s, and/or an elimination or reduction of remote wagering accounts, resulting in an adverse change in our operating results. We anticipate being able to increase our reserve balance as a portion of the financing proceeds from the Bridge Facility is allocated for this purpose. There is no assurance that we will be able to borrow additional funds under the Bridge Facility as any additional advances are in the Parent’s sole discretion.
In addition, during the quarter ended April 30, 2010, 250,000 shares of common stock were issued to the principal of Alpine Advisors, LLC (“Alpine”) as a non-refundable fee for financial advisory services, plus 25,000 shares effectively issued during the quarter ended July 31, 2010 as a one-time payment of additional compensation for a late filing. The shares were valued at $0.15 per share ($41,250) based on the trading price of the Company’s common stock on the date of grant. Additional fees are due Alpine upon the successful completion of (1) a single or a series of transactions in which 50% or more of the voting power of the Company or all or a substantial portion of its business or assets are combined with or transferred to another company and (2) any offering of debt, equity or equity-linked securities either individually or in combination. The success fee is calculated generally at 3-3.5% of the “equity value” of the transaction, as defined, or the amount of the proceeds from the financing
In June 2010, the Company borrowed $195,000 from and entered into an agreement with Alpine that entitled but did not obligate Alpine to purchase 600,000 shares of the Company’s common stock at an exercise price of $0.22 per share through June 11, 2015. The principal amount of the loan plus interest at 15% was due June 17, 2010 (six days following the issuance) and then on demand with weekly interest payments calculated at 22% per annum. On June 22, 2010 the parties entered into a financing agreement that allowed the Company to borrow up to $500,000, at 15% per annum, due on June 10, 2011, and collateralized by the Company’s stock in CBS and the receivables of CBS. Proceeds from the June 22nd financing agreement were used, in part, to refinance the June 11th loan for $195,000. The Company has borrowed $500,000 to date, which was repaid from the proceeds of the Bridge Facility. The warrant agreement was also amended to provide Alpine with registration rights and, the appointment two persons to the Company’s board of directors, which would expand from five to seven members, should the Company default in its financing or collateralization obligations. Using the Black-Scholes valuation model and “Level 2 and 3” measurement inputs as defined in GAAP including a risk-free interest rate of 2.2%, expected warrant life of five years, and its internal stock price volatility factor of 206% initially (approximately 183% as of January 31, 2012), the warrants were valued at $129,478 with all treated as a warrant liability, revalued at each subsequent balance sheet with the change charged or credited to earnings with the debt discount amortized to interest expense over the repayment term of the loan using the effective interest method.
At the Closing, each outstanding stock warrant to purchase shares of our common stock that is outstanding immediately prior to the effective time of the Merger shall be cancelled and, in exchange therefore, the Surviving Corporation shall pay to each former holder as soon as practicable following the effective time of the Merger an amount in cash equal to the product of (i) the excess of $0.90 over the exercise price per share of our common stock under such stock warrant, and (ii) the number of shares of our common stock subject to such stock warrant.
Director Independence
We follow the director independence standards prescribed by NASDAQ. We are not listed on NASDAQ, but we are required by SEC rules to select a standard for determining independence for disclosure purposes. As such, the members of our Board of Directors who are considered independent are Robert Barengo and W. Larry Swecker.
Under the audit committee independence standards prescribed by NASDAQ, two of our three audit committee members, namely Robert Barengo (Chairman) and W. Larry Swecker are independent and Judith Zimbelmann is not.
Under the director independence standards prescribed by NASDAQ, two of our three compensation committee members, namely Robert Barengo and W. Larry Swecker, are independent and Judith Zimbelmann is not.
Our entire Board of Directors serves as our nominating committee.
Item 14.
Item 14. Principal Accountants’ Fees and Services
Our audit committee selected and our Board of Directors approved the firm of Piercy Bowler Taylor & Kern Certified Public Accountants (“PBTK”) as our independent registered public accounting firm to audit our annual consolidated financial statements and perform quarterly financial statement review services for the fiscal year ended January 31, 2012. PBTK previously performed similar audit and review services for the years ended January 31, 2001 through January 31, 2011. PBTK’s primary offices are located at 6100 Elton Avenue, Suite 1000, Las Vegas, Nevada, 89107.
Audit Committee’s Pre-Approval of Engagement
Our policy is that before we engage our registered public accounting firm annually to render audit or approved non-audit services, the engagement is reviewed and approved by our audit committee. All our principal accountants’ services for which we paid tax-related fees or other non-audit fees for our last two fiscal years, as described below, were within the scope of the engagement that our audit committee approved before we entered into the engagement.
Total Fees. Total fees paid and accrued to PBTK are as follows:
Audit Service Fees
The aggregate fees for audit services were for the audits of our annual consolidated financial statements and review of our quarterly consolidated financial statements for interim periods within the audit year. There were no Audit Related Services.
Tax Fees
The aggregate fees for tax services were for professional services relating to tax compliance, tax advice, and tax planning.
Other Fees
The aggregate Other Fees were for audits of our 401(k) employee benefit plan and all regulatory compliance attestation services.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
Included in Part II of this report:
(a)(2) Financial Statement Schedules
All required schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(a)(3) and (c) Exhibits
Exhibit
Number
Description
2.1*
Agreement and Plan of Merger, dated as of April 13, 2011, among William Hill Holdings Limited, AW Sub Co. and American Wagering, Inc. (See Exhibit 2.1 to Form 8-K filed April 14, 2011, SEC File No. 000-20685)
3.1*
Amended and Restated By-Laws of American Wagering, Inc. (see Exhibit 3.1 to Form 8-K filed November 20, 2007, SEC File No. 000-20685)
3.2*
Amended and Restated Articles of Incorporation of American Wagering, Inc. (see Exhibit 3.1 to Registration Statement on Form SB-2 filed December 13, 1995, SEC File No. 33-80431)
3.3*
Certificate of Designations, Preferences and Rights of Series A Preferred Stock of American Wagering, Inc. (see Exhibit 3.1.1 to Form 8-K filed December 10, 1998, SEC File No. 000-20685)
10.1*(A)
American Wagering, Inc. 2001 Stock Option Plan (see Exhibit 99 to our Definitive Proxy Statement on Schedule 14A filed October 16, 2001, SEC File No. 000-20685)
10.2*(A)
American Wagering, Inc. Amended and Restated Directors Stock Option Plan (see Appendix A to our Definitive Proxy Statement on Schedule 14A filed November 30, 2007, SEC File No. 000-20685)
10.3*(A)
2010 Stock Incentive Plan (see Appendix A to our Definitive Proxy Statement on Schedule 14A filed November 23, 2010, SEC File No. 000-20685)
10.4*(A)
Executive Employment Agreement between American Wagering, Inc. and Victor J. Salerno dated June 28, 2002 (see Exhibit 10.1 to Form 10-QSB filed September 14, 2005, SEC File No. 000-20685)
10.5*(A)
Amendment to Executive Employment Agreement of Victor Salerno (described in registrant’s Form 8-K filed on December 15, 2008, SEC File No. 000-20685)
10.6*(A)
Termination of Employment Agreement and Waiver of Payment Agreement dated April 13, 2011 between Victor Salerno, American Wagering, Inc. and William Hill Holdings Limited (to be effective upon consummation of the merger with William Hill Holdings Limited) (see Exhibit 10.6 to Form 10-K filed May 11, 2011, SEC File No. 000-20685)
10.7*(A)
Employment Agreement between American Wagering, Inc. and Robert Kocienski, dated November 11, 2010 (see Exhibit 10.7 to Form 10-K filed May 11, 2011, SEC File No. 000-20685)
10.8*(A)
Amended and Restated Employment Agreement between American Wagering, Inc. and John English, dated April 13, 2011 (see Exhibit 10.8 to Form 10-K filed May 11, 2011, SEC File No. 000-20685)
10.9*(A)
Compensation terms for American Wagering, Inc. directors (see Exhibit 10.8 to Form 10-KSB filed May 1, 2006, SEC File No. 000-20685)
10.10*(A)
Option Agreement of Robert Kocienski dated November 11, 2010 (See Appendix B to our Definitive Proxy Statement on Schedule 14A filed November 23, 2010, SEC File No. 000-20685)
10.11*(A)
Option Agreement of John English dated November 11, 2010 (See Appendix C to our Definitive Proxy Statement on Schedule 14A filed November 23, 2010, SEC File No. 000-20685)
10.12*
Lease Schedule No. 1 (with Options), dated July 14, 2006 by and between AWI Manufacturing Inc., American Wagering, Inc. and PDS Gaming Corporation-Nevada, and Master Lease Agreement (see Exhibit 10.2 to Form 10-QSB filed December 26, 2006, SEC File No. 000-20685)
10.13*
Amended and Restated Guaranty Agreement dated June 8, 2006, between American Wagering, Inc. and Victor and Terina Salerno (see Exhibit 10.1 to Form 10-QSB filed June 14, 2006, SEC File No. 000-20685)
10.14*
Line of Credit Confirmation Letter, dated April 21, 2008, between Victor and Terina Salerno and AWI, under the terms of the Guaranty Agreement dated June 8, 2006, with Loan Amortization Schedule (see Exhibit 10.21 to Form 10-K filed May 13, 2008, SEC File No. 000-20685)
10.15*
Loan Agreement from Victor Salerno (described in registrant’s Form 8-K filed on December 15, 2008, SEC File No. 000-20685)
10.16*
Reimbursement Agreement for Pledged Certificate of Deposits between Leroy’s Horse and Sports Place and Victor and Terina Salerno dated December 10, 2009 (see Exhibit 10.1 to Form 10-Q filed December 15, 2009, SEC File No. 000-20685)
10.17*
Commercial Loan Agreement, dated February 21, 2006, between AWI Gaming, Inc. and Great Basin Bank of Nevada (see Exhibit 10.12 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)
10.18*
Promissory Note, dated February 21, 2006, executed by AWI Gaming, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.13 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)
10.19*
Commercial Guaranty, dated February 21, 2006, executed by American Wagering, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.14 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)
10.20*
Commercial Guaranty, dated February 21, 2006, executed by Sturgeons, LLC in favor of Great Basin Bank of Nevada (see Exhibit 10.15 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)
10.21*
Commercial Security Agreement, dated February 21, 2006, executed by AWI Gaming, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.16 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)
10.22*
Deed of Trust, dated February 21, 2006, among AWI Gaming, Inc., Great Basin Bank of Nevada and Western Title Company Inc. (see Exhibit 10.17 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)
10.23*
Changes in Terms Agreement, dated February 4, 2008, between AWI Gaming, Inc., and Great Basin Bank of Nevada; Commercial Guaranty, dated February 4, 2008, by American Wagering, Inc. in favor of Great Basin Bank of Nevada; Commercial Guaranty, dated February 4, 2008, by Sturgeon’s, LLC in favor of Great Basin Bank of Nevada (see Exhibit 10.19 to Form 10-K filed May 13, 2008, SEC File No. 000-20685)
10.24*
Change in Terms Agreement, dated May 5, 2008, between AWI Gaming, Inc., and Great Basin Bank of Nevada (see Exhibit 10.1 to Form 10-Q filed June 13, 2008, SEC File No. 000-20685)
10.25*
Commercial Guaranty, dated May 5, 2008, by Sturgeon’s, LLC in favor of Great Basin Bank of Nevada (see Exhibit 10.2 to Form 10-Q filed June 13, 2008, SEC File No. 000-20685)
10.26*
Commercial Guaranty, dated May 5, 2008, by American Wagering, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.3 to Form 10-Q filed June 13, 2008, SEC File No. 000-20685)
10.27
Business Loan Agreement, dated September 4, 2010 between AWI Gaming, Inc. and Nevada State Bank; Change in Terms Agreement, dated September 4, 2010, between AWI Gaming, Inc. and Nevada State Bank; Commercial Guaranty by American Wagering, Inc. in favor of Nevada State Bank; Commercial Guaranty by Sturgeon’s, LLC in favor of Nevada State Bank; Commercial Security Agreement, dated September 4, 2010, executed by AWI Gaming, Inc. in favor of Nevada State Bank
10.28*
Settlement Agreement by American Wagering, Inc., Leroy’s Horse & Sports Place, Inc. and Michael Racusin d/b/a M. Racusin & Co., dated September 3, 2004 (see Exhibit 99.1 to Form 8-K filed September 7, 2004, SEC File No. 000-20685)
10.29*
Corrected Amortization Schedule as filed with the U.S. Bankruptcy court on March 17, 2008 related to the Settlement Agreement by American Wagering, Inc., Leroy’s Horse & Sports Place, Inc. and Michael Racusin d/b/a M. Racusin & Co., dated September 3, 2004 (see Exhibit 10.18 to Form 10-K filed May 13, 2008, SEC File No. 000-20685)
10.30*
Advisor Agreement between Alpine Advisors LLC and American Wagering, Inc. dated March 12, 2010 (see Exhibit 10.26 to Form 10-K filed May 7, 2010, SEC File No. 000-20685)
10.31*
Line of Credit dated May 17, 2010 between the Company and Victor Salerno (see Exhibit 10.1 to Form 8-K filed May 21, 2010, SEC File No. 000-20685)
10.32*
Bridge Loan Agreement, dated as of April 13, 2011, by and among American Wagering, Inc., the Guarantors (as defined therein) and William Hill Holdings Limited (See Exhibit 10.1 to Form 8-K filed April 14, 2011, SEC File No. 000-20685)
10.33(A)
Second Extension Of Maturity Date to April 21, 2008 Guaranty Agreement And Line Of Credit, dated April 10, 2012
14.1*
Code of Business Conduct and Ethics (see Exhibit 14.1 to Form 10-QSB filed June 14, 2005, SEC File No. 000-20685)
21.1*
Subsidiaries of American Wagering, Inc. (see Exhibit 21.1 to Form 10-K filed on May 17, 2011, SEC File No. 000-20685)
23.1
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2
Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
101.INS**
XBRL Instance
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition
101.LAB**
XBRL Taxonomy Extension Labels
101.PRE**
XBRL Taxonomy Extension Presentation
*These documents are incorporated herein by reference as exhibits hereto. Following the description of each such exhibit is a reference to the document as it appeared in a specified report previously filed with the SEC, to which there have been no amendments or changes unless otherwise indicated.
**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections
(A) Management contract or compensatory plan or arrangement.
SIGNAUTRES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Victor Salerno
April 30, 2012
Victor Salerno
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert Kocienski
April 30, 2012
Robert Kocienski
Principal Financial Officer and Chief Operating Officer
(Principal Executive Officer)
/s/ W. Larry Swecker
April 30, 2012
W. Larry Swecker
Director
/s/ Judith Zimbelmann
April 30, 2012
Judith Zimbelmann
Director
/s/ Robert Barengo
April 30, 2012
Robert Barengo
Director