Item 1. Business
Company History
American Wagering, Inc. ("AWI" or the "Company") was incorporated in the state of Nevada in August 1995. AWI earns its revenues through the consolidated operations of its wholly-owned subsidiaries, including Leroy's Horse & Sports Place, Inc. ("Leroy's"), Computerized Bookmaking Systems, Inc. ("CBS"), AWI Manufacturing, Inc. ("AWIM"), and AWI Gaming, Inc. ("AWIG").
Race and Sports Wagering Revenue 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. 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 the 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. 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. 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 seamlessly 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 19 local bar locations during fiscal 2010.
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.
Chapter 11 Filing
On July 25, 2003, AWI and Leroy's filed voluntary petitions for relief ("Chapter 11 Petitions") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the District of Nevada (the "Bankruptcy Court"). On February 28, 2005, the Bankruptcy Court confirmed the Restated Amended Joint Plan of Reorganization (the "Plan") of AWI and Leroy's. On March 11, 2005, AWI and Leroy's consummated the Plan and formally emerged from Chapter 11 proceedings after completing all required actions and all remaining conditions.
On September 26, 2005, the Bankruptcy Court issued an order closing the Chapter 11 cases of AWI and Leroy's. All required distributions have been made, except with respect to the Racusin matter ("Racusin Claim"). For the fiscal years ended January 31, 2010 and 2009, the Company has paid $363,891 and $540,986, respectively, to the Bankruptcy Court and certain other lienholders of Racusin. As of January 31, 2010, the remaining Racusin Claim liability is $338,851, with $332,710 due in 2011, and the balance in 2012, plus interest at the rate of 8% per annum.
For a discussion of the Racusin Claim, see Item 3. Legal Proceedings.
Sports Wagering
Wagering on sporting events is currently legal in the states of Nevada, 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 for operating expenses, profit and taxes and the remainder is distributed to the winners. The Nevada legislature recently passed a bill to legalize the acceptance of Dog Track pari-mutuel wagering.
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 bets placed over the telephone, which are currently accepted only from within Nevada and are limited to $2,200 per day per patron, by regulation (unless a higher limit for a specific patron is approved by the Nevada State Gaming Control Board). 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 do not offer horse race wagering at all of our Leroy's locations. We offer limited horse race wagering at most locations, and a full pari-mutuel race book at several 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. The increased popularity 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, 2010, six 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. The state of New Jersey is suing the federal government for the right to also accept sports wagering. These potential new sports wagering jurisdictions 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.
CBS and its CBS Race and Sports System face competition from the following sources: larger 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 and competes in the tourism market with casino facilities in the nearby cities of 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) 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 $672,899 in research and development in the fiscal year ended January 31, 2010, as compared to $591,121 in the fiscal year ended January 31, 2009 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. 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 nonrestricted 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 nonrestricted 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 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 180 full-time and 47 part-time employees at January 31, 2010, at all of our locations and subsidiaries, including our Sturgeon's property, of which 33 employees were full-time and 22 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
Cautionary Statements Regarding Future Results, Forward-Looking Statements and Other Important Factors
Throughout this report we make statements regarding our business, expectations and prospects, such as projections of future performance, statements of our plans and objectives, forecasts of market trends, and other matters that are "forward- looking statements" as defined in Section 27A of the Securities Act of 1933, as amended, (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements containing words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "might," "may," "could," "will," "should," or similar expressions, or the negative thereof, constitute forward-looking statements. Although we believe that our plans, objectives and expectations reflected in, or suggested by, such forward-looking statements are reasonable at the present time, we might not achieve them or we may modify them from time to time. You should read this report thoroughly and with the understanding that actual future results may be materially different from what we expect. We do not plan to update forward-looking statements even though our situation or plans may change in the future, unless applicable law requires us to do so.
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:
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, 2010, we had approximately $2.1 million in cash and equivalents, a majority of which cash is held to fund winning tickets and future bets. Based upon our anticipated operations, we believe that cash on hand and operating cash flows will be adequate to meet our anticipated working capital requirements, capital expenditures, and scheduled payments for indebtedness for fiscal 2011; however, we do anticipate a short term liquidity issue during the second quarter of fiscal year 2011, which we expect will recover during the third quarter of fiscal year 2011 with the commencement of football season. This expectation is based upon our inability to reduce our Regulation 22.040 reserve requirement as we normally do after football season. 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, or that the outcome of litigation will be positive, resulting in the need to raise additional funds sooner, or that we will be able to raise additional funds. We recently engaged a financial advisor on an exclusive basis to provide advisory services to us, including the identification of potential investors in an offering of debt, equity or equity-linked securities of us, or a strategic based transaction involving us. No assurance can be given, however, that we will be able to raise any additional capital, through the efforts of our financial advisor or otherwise, or that such capital will be available to us on acceptable terms. Given the current financial market disruption, credit crisis and state of the economy, it may be particularly difficult at this time to raise any capital on acceptable terms. In the event we cannot raise additional capital or operations continue to decline, we may be unable to satisfy our obligations as they become due.
Risk of Loss due to Racusin Litigation
The Company and Racusin entered into the Settlement Agreement on September 3, 2004. Racusin filed a claim for breach of the Settlement Agreement on January 14, 2009, and motion for summary judgment to accelerate amounts due, with penalty interest, on February 24, 2009. A hearing was held on May 8, 2009, regarding the motion for summary judgment. On April 2, 2010, a hearing was held where the Court verbally indicated an intent to vacate an August 18, 2009 order granting summary judgment in favor of Racusin because a material issue of fact remained regarding whether the Company breached the Settlement Agreement, and whether the acceleration clause of the Settlement Agreement was triggered. Additionally, at the April 2, 2010 hearing, the Court also held off rendering a decision on Racusin's Motion for Attorneys' Fees and Costs because at this time no prevailing party exists as no material breach of the Settlement Agreement has been proven. No trial date has been set
in this case as of yet. If the Court determines we owe additional amounts, we may not be able to pay such obligations when due without obtaining additional financing. No assurance can be given, however, that we will be able to raise any additional capital or that such capital will be available to us on acceptable terms.
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.
In March 2009, we were notified that Fidelity would cancel its surety bond effective May 8, 2009. We have been unable to secure a replacement bond with acceptable terms subsequent to the cancellation. In September 2009 we reached an agreement with the Nevada Gaming Control Board to increase our reserve by $500,000 with a deposit of $100,000 on September 30, 2009 and an $80,000 deposit required on October 31, 2009; November 30, 2009; December 31, 2009; January 31, 2010; and February 28, 2010. These deposits increased our reserve account to $1.62 million held at Nevada State Bank as of January 31, 2010. In addition, Victor and Terina Salerno pledged a certificate of deposit for $200,000 and Robert and Tracey Kocienski pledged two certificates of deposit totaling $500,000 for the benefit of Leroy's effectively creating a total reserve of $2.32 million as of January 31, 2010. The pledged certificates expire in October 2010 and unless the pledge is renewed we may be required to make additional reserve deposits during football season. If we are required to increase the Regulation 22.040 reserve and 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 telephone wagering accounts, resulting in an adverse change in our operating results.
We Have Had a History of Significant Losses and We May Incur Additional Losses in the Future
For the fiscal years ended January 31, 2010 and 2009, we have incurred net income of $1.0 million and a net loss of $1.0 million, respectively. From our inception of revenue producing operations through the current fiscal year, we have incurred an accumulated deficit of $12.2 million. For the fiscal years ended 2001 though 2010, the Company recorded net income for six of those years and net losses for four of those ten 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 20% 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. The state of New Jersey is suing the federal government for the right to also accept sports wagering. These potential new sports wagering jurisdictions 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 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 declined 3% for the year ended December 31, 2009, and gaming revenues fell in 2009 compared with 2008 according to the Las Vegas Convention and Visitors Authority.
Staffing Reductions and Internal Controls-Due to Our Staff Reductions and Reduced Hours Worked, Particularly in the Accounting Department, We May Experience Deficiencies in Disclosure Controls and Internal Controls Over Financial Reporting, Leading to a Material Weakness and Non-Compliance with the Sarbanes-Oxley Act of 2002
We have reduced staffing hours worked in the accounting and revenue auditing areas and may have additional layoffs in the future. In addition our Chief Financial Officer resigned in February 2010. The lack of sufficient 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 Are Largely Dependent on Current Management
Our success is largely dependent on the efforts of Victor Salerno, our Chief Executive Officer and Chief Operating Officer. 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 Have the Authority to Issue Additional Equity Securities, Which Would Lead to Dilution of Our Issued and Outstanding Common Stock
The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing stockholders' equity interests in us. Our Board of Directors has the authority to issue, without vote or action of stockholders, preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. We currently have Redeemable Series A Preferred Stock outstanding, of which 3,238 shares, representing $323,800, are subject to redemption at any time, without prior approval from the Board of Directors. Any redemption of the remainder of the preferred stock is subject to prior approval from the Board of Directors. Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common stockholders' interest. In addition, as of January 31, 2010, we are authorized to issue, without stockholder approval, up to 16,870,121 shares of common stock. Of that amount, 616,499 shares of our common stock are reserved for issuance upon the exercise of vested options. On March 12, 2010, the Company engaged a financial advisor on an exclusive basis to provide advisory services to us, including the identification of potential investors in an offering of debt, equity or equity-linked securities of the Company, or a strategic based transaction involving the Company. As part of the consideration we agreed to pay the financial advisor for its services an initial retainer of 250,000 restricted shares of the Company's common stock.
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.
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:
•Periodic variations in the actual or anticipated financial results of our business or that of our competitors;
•Downward revisions in estimates of our future operating results or of the future operating results of our competitors;
•Material announcements by us or our competitors;
•Uncertainty as to the continued quotation of our stock on the OTC Bulletin Board ("OTCBB"); and
•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. 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.
We May Not Receive an Unqualified Opinion From Our Auditors With Respect to the Assessment of Our Internal Controls Over Financial Reporting That Is Required by Section 404 of the Sarbanes-Oxley Act Of 2002, and We Will Incur Additional Costs in That Process
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 the Sarbanes-Oxley Act of 2002. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires our management's annual review and evaluation of our internal control systems. Commencing with our Annual Report on Form 10-K for the year ending January 31, 2011, attestations as to these systems by our registered independent accounting firms will be required.
We will continue to incur increased costs in implementing and responding to these requirements due to the complexities of Section 404 that require significant documentation, testing and, if necessary, remediation. Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a considerable strain on our management, diverting them from their daily business focus and strain on our information systems and other resources. We may be required to hire additional temporary or part-time personnel and to use outside legal, accounting and advisory services and software to assist us in compliance efforts. In addition, we will incur additional fees from our auditors as they perform the added review work necessary for them to provide their attestation. Even with those expenditures, we may not be able to successfully complete our assessment or we may not be able to obtain an unqualified attestation report on such assessment.
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.
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. 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
Not required.
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 $32,339 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 21, Reno, Nevada. CBS pays $1,709 per month plus utilities, for a twelve month period ending September 30, 2010, the lease expiration date.
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 $1.6 million loan with Nevada State Bank, having a 20-year amortization with a 5-year maturity at a fixed interest rate of 8.0% per annum.
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. (Removed and Reserved)
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, 2010, there were 58 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.
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
Overview
Our primary operating strategies for the foreseeable future are to focus on our core businesses relating to the race and sports industry, and the operation of Sturgeon's. Regarding CBS, we intend to continue developing, selling and maintaining computerized race and sports wagering systems for the gaming industry. As to AWIM, we intend to continue developing the self-service wagering kiosk, installing kiosks in Leroy's locations to assist in controlling escalating personnel costs, and marketing the kiosk to non-Leroy's locations to seek strategic alliances with third party gaming suppliers and/or gaming operators, if economically feasible, that desire to utilize our expertise in the race and sports industry. These strategies should enable us to gain a national, and foreseeably global, competitive advantage by offering the gaming operator and/or the betting patron a well-rounded gaming experience.
Regarding the Sturgeon's facility, we intend to continue to monitor and make additional changes in the slot mix at Sturgeon's where and when appropriate, and continue to increase efficiency by possible personnel and other administrative cost reductions, where appropriate.
Concerning Leroy's, we intend to continue operating existing sports books, adding new books where and when appropriate, based on our business model, and to continue to increase efficiency by possible personnel and other administrative cost reductions, where appropriate. We are closely reviewing and analyzing the existing Leroy's locations in order to close those locations that are not operating efficiently. 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. Additionally, we will be adding sports bars and taverns for the purpose of sports account wagering. There is no assurance that Leroy's will be able to add new locations and/or that any new locations added will be profitable.
We have implemented, and continually revise our cost reduction measures throughout the Company. During fiscal 2009, the Company began reducing its workforce by means of a lay-off for a total of 114 employees (or 31.2%) as of January 31, 2009. The lay-offs were in each of our subsidiaries and we began to focus on other non-employment related cost reduction measures, such as reductions in telecommunication costs, energy and utility costs, and office supply costs. The Company maintained its cost reduction measures throughout fiscal 2010. During fiscal 2010 and fiscal 2009, our local, regional and national economy has been negatively impacted due to a number of factors, including the nationwide downturn in the economy, the subprime mortgage crisis and transportation costs. Confidence in the credit market has also eroded, which resulted in a tightening of credit availability. The economy is also subject to events such as threatened or actual terrorist attacks; pandemic outbreaks or similar widespread health epidemics; natural disasters; and declines in the stock market. During fiscal 2010, Las Vegas continued to experience high foreclosure and unemployment rates and reduced passenger traffic at McCarran International airport attributed to additional costs and airline cutbacks. We face the risk that the effects of higher unemployment rates, 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 as a result of the current economic environment. We have also experienced a change in gambling patterns of our patrons, including a trend toward more conservative bets, which tend to be less profitable to the Company. In addition, because Sturgeon's Hotel and Casino is heavily dependent on the drive-through market, especially travelers on Interstate 80; the factors listed above have and will continue to have an adverse affect on our business.
Liquidity and Capital Resources
The United States is currently experiencing an economic downturn accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational activities and general discretionary consumer spending, and is also engaged in war, all of which are likely to continue to have far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these developments and related risks and uncertainties on our future operations and cash flows, including, the principal officer's ability to continue to provide financial support for the Company, as in the past, and other access to capital or credit financing, cannot be estimated at this time but may likely be significant.
Cash Flow
As of January 31, 2010, we had working capital of $751,489, compared to working capital deficit of $(456,055) at January 31, 2009. The increase in working capital is primarily due to earning a profit of $983,706 and the timing of and decreases in future bets and unpaid winning tickets. Significant expense control measures were instituted throughout the fiscal year resulting in expense reductions of $3.2 million (-19%) from the prior year. Expense reductions were partially offset by revenue reductions of $.9 million (-6%). The third and fourth quarters have historically been the best two quarters regarding cash flow and earnings for the Company; however, for fiscal 2010, the third quarter was weak due to a low hold percentage in professional football, and, during the fourth quarter, we experienced a high hold percentage which offset the third quarter.
The United States recently experienced a severe economic downturn that curtailed casino gaming development, activity and profitability. This was a local and nationwide problem, resulting in highly reduced availability of credit and capital financing. The recession continues to have an adverse effect on our cash flows and earnings for fiscal 2010 particularly on the revenues of our Hotel / Casino segment which experienced a reduction of $387,998 (-14.5%). The effects and the duration of these negative developments and related uncertainties on the Company's future operations and cash flows cannot be estimated at this time, but may likely be significant.
Additionally, due to the current negative economic environment, the Company has taken additional measures to increase cash flow. Effective January 1, 2009, the Company no longer matches the employees' 401(k) contributions. The salaries of the President of AWIG and the controller of Sturgeon's Hotel and Casino were reduced by 20%. The CEO and the in-house general counsel each agreed to reduce their annual base salaries to the amount sufficient to cover payroll deductions for benefits, effective November 24, 2008. Pursuant to the original terms of Mr. Salerno's employment agreement, Mr. Salerno is entitled to an annual base salary of $240,000. Additionally, several higher salaried employees each agreed to reduce their salaries by 20% effective January 3, 2009. Certain higher paid hourly employees agreed to a 32 hour work week, effective January 4, 2009, resulting in a 20% pay reduction. The salary reductions were intended to be temporary pending an improvement in the Company's cash flow and were reversed in September 2009 with the exception of the President of AWIG; the controller at Sturgeon's Hotel and Casino; the CEO; and the in-house general counsel.
Victor Salerno, the Company's President, Chief Executive Officer, Chief Operating Officer, and interim Principal Accounting Officer (as our Chief Financial Officer resigned in February 2010), loaned the Company an additional $500,000 on December 1, 2008 due to the cash flow needs of the Company. Due to the urgency, the funds were advanced on an expedited basis without formal board approval, as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. Mr. Salerno had previously loaned the Company $500,000 pursuant to a loan agreement dated April 21, 2008. The independent directors of the Company evaluated and approved the fairness of the loan agreement to cover the total $1,000,000, at the same terms of the April 21, 2008 loan agreement. Additionally, the Company's outside directors elected not to receive their directors' fees for the last three months of 2008 and renounced their stock option grants for fiscal 2009 effective January 31, 2009.
On December 11, 2008, U.S. Bank gave the Company verbal approval to extend the maturity date of the Company's $500,000 revolving line of credit to 90 days after the original maturity date of December 31, 2008 (March 31, 2009) and to further negotiate the terms of the line of credit. This credit facility was converted into a term loan, effective March 30, 2009. As of January 31, 2010, the Company paid the full balance of the term loan.
We believe our working capital position will improve in fiscal 2011 due to: (a) the continuation of the expense reduction measures implemented by management in fiscal 2009 and fiscal 2010; (b) an increased demand in fiscal 2011 for our CBS equipment due to certain customers' desire to obtain new equipment, who are themselves recovering from the economic downturn; (c) deployment of new
products and services anticipated in fiscal 2011; (d) reduced cash obligations in fiscal 2011 related to paydowns and reduced payments to Racusin; and (e) additional or expanded sports book locations in fiscal 2011. Based on the foregoing and subject to the severity of the economic downturn, we believe we will be able to satisfy our operating cash requirements for at least the remainder of fiscal 2011 from existing cash balances and anticipated cash flows; however, we do anticipate a short term liquidity issue in the second quarter of fiscal year 2011 due to reserve requirements of Regulation 22.040. Some of the above statements are forward-looking in nature. No assurance can be given that our working capital position will improve in fiscal 2011 or that we will be successful in achieving the items listed above, including, but not limited to, a reduction in costs, increased demand for our CBS equipment, successful deployment of new products and services, and additional or expanded sports book locations.
If our cash flow from operations and available credit is not sufficient to meet our capital requirements, we will be required to raise additional funds. If we cannot locate additional sources of capital, we may not be able to fund operations, take advantage of future opportunities, or respond to competitors or changing demands of customers. In the event we are required to raise additional funds to support our operations, we cannot assure you that the additional funds will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, it would likely have a material adverse effect on our financial condition and operating results and we may be unable to satisfy our obligations as they become due.
Subject to uncertainties resulting from the current economic conditions, we plan to improve our cash liquidity during the current fiscal year (ending January 31, 2011), as described above, to help us fund the following: payroll and benefits; sports book supplies and improvements; required cash reserves; business insurance; real estate and equipment leases; Racusin obligation; legal expenses; telecommunications; costs related to inventory and to assemble race/sports systems for our CBS customers; compliance costs associated with gaming regulations and Section 404 of the Sarbanes-Oxley Act of 2002; and debt service. However, there can be no assurance that we will be profitable in the future.
Our principal cash requirements consist of cash provided by operations for fiscal 2010 of $0.2 million as compared to cash used by operations of $0.2 million for fiscal 2009, primarily due to a net income of $1.0 million and a reduction in unpaid winning tickets and future wagers related to the last big game of the professional football season.
Net cash used in investing activities for fiscal 2010 was approximately $0.5 million as compared to approximately $0.4 million for fiscal 2009, primarily as a result of an increase in the Regulation 22.040 reserve requirement of approximately $0.4 million.
Net cash used in financing activities for fiscal year ended January 31, 2010 was approximately $0.9 million compared to approximately $0.6 million in cash provided by financing activities for fiscal 2009 primarily due to payments made on borrowings.
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.
In May 2009, our surety bond was cancelled and we have been unable to secure a replacement bond with acceptable terms subsequent to the cancellation. In September 2009 we reached an agreement with the Nevada Gaming Control Board to increase our reserve by $500,000 with a deposit of $100,000 on September 30, 2009 and $80,000 deposits on October 31, 2009; November 30, 2009;
December 31, 2009; January 31, 2010; and February 28, 2010. These deposits increased our required reserve to $1.62 million as of January 31, 2010. In addition, Victor and Terina Salerno pledged a certificate of deposit for $200,000 and Robert and Tracey Kocienski pledged two certificates of deposit totaling $500,000 for the benefit of Leroy's effectively creating a reserve of $2.32 million. The pledged certificates expire in October 2010 and unless the pledge is renewed we may be required to make additional reserve deposits during football season. We believe that such amount will provide an adequate reserve until football season, at which time; we may need to increase the reserve amount. If we are required to increase the Regulation 22.040 reserve and 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 elimination or reduction of telephone wagering accounts, resulting in an adverse change in our operating results.
Outlook
Our liquidity has been adversely impacted by a number of factors, including economic conditions and those summarized under "Overview" above.
At January 31, 2010, we had approximately $2.1 million in cash and equivalents, a majority of which cash is held to fund winning tickets and future bets. Based upon our anticipated operations, we believe that cash on hand and operating cash flows will be adequate to meet our anticipated working capital requirements, capital expenditures, and scheduled payments for indebtedness for the remainder of fiscal 2011; however, we do anticipate a short term liquidity issue during the second quarter of fiscal year 2011, which we expect will recover during the third quarter of fiscal year 2011 with the commencement of football season. 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 or unforeseen events will not occur, that the outcome of litigation will be positive, including any amounts that may be accelerated under the Racusin settlement agreement, resulting in the need to raise additional funds sooner, or that we will be able to raise additional funds. We anticipate that we may require additional funds to meet our cash requirements sometime in fiscal 2011. To raise capital, we may seek to sell additional securities, issue debt or convertible securities, obtain additional credit facilities through financial institutions or third parties, or sell assets of the Company. No assurance can be given, however, that we will be able to raise any additional capital, or that such capital will be available to us on acceptable terms. Given the current financial market disruption, credit crisis and state of the economy, including the current recession, it may be particularly difficult at this time to raise any capital on acceptable terms. In the event we cannot raise additional capital or operations continue to decline, we may be unable to satisfy our obligations as they become due. See "Liquidity and Capital Resources, Cash Flow".
Cash Obligations
Once again, 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:
Note: 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). 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 the Settlement Agreement on September 3, 2004. Racusin filed a claim for breach of the Settlement Agreement on January 14, 2009, and motion for summary judgment to accelerate amounts due, with penalty interest, on February 24, 2009. A hearing was held on May 8, 2009, regarding the motion for summary judgment. On April 2, 2010, a hearing was held where the Court verbally indicated an intent to vacate an August 18, 2009 order granting summary judgment in favor of Racusin that would have accelerated amounts due and imposed penalty interest at 12% per annum because a material issue of fact remained regarding whether the Company breached the Settlement Agreement, and whether the acceleration clause of the Settlement Agreement was triggered. Arguments as to the potential effects of the Stay Order on the Interpleader and the resulting calculation of amounts due may be considered later in the litigation, including but not limited to at trial. No trial date has been set in this case as of yet. Accordingly, we believe that the balance owed to Racusin as of January 31, 2010 is $338,851, with $332,710 due in 2011 and the balance in 2012, plus interest at 8% per annum. If arguments regarding the effects of the Stay Order on the Interpleader are heard and the Court were to rule that the Stay Order did not effect the Interpleader Order and did not result in an off-set in the calculation of the accrued interest, then we believe the amount due as of January 31, 2010 would be approximately $759,426 assuming an 8% interest rate.
Internet Sports International, Ltd.
This case is currently in the discovery phase and pending in the District Court of Clark County, Nevada, case no. A567638. Several of the Defendants have recently moved the Court for leave to file a First Amended Answer, Affirmative Defenses and Counterclaims through which those Defendants will assert four additional claims for relief against ISI for misappropriation of trade secrets, conversion, unjust enrichment, and common law unfair competition. In November 2009, ISI issued a press release and attended the G2E gaming show in Las Vegas, NV, claiming to have filed a provisional patent for a slot machine that accepts sports bets. Defendants have alleged that they previously developed the race and sports application for a product with the same or similar attributes and that ISI misappropriated this intellectual property and trade secrets. Through the assertion of these additional Counterclaims Defendants seek to obtain appropriate relief from the Court concerning these newly asserted claims for relief.
Salerno
On November 8, 2007, the Company borrowed $400,000 against the $500,000 line of credit for the benefit of the Company under the terms of a Guaranty Agreement, as amended from time to time, between Victor and Terina Salerno (the "Salernos") and AWI. As amended on April 21, 2008, the Guaranty Agreement provides for AWI 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. The April 21, 2008 Guaranty Agreement expires 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 and Guaranty Agreement with the Company.
On December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 to fund urgent cash flow needs of the Company. Due to the urgency, the funds were advanced on an expedited basis without formal board approval as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. The independent directors of the Company considered and approved the fairness of a proposed amendment to the April 21, 2008 Guaranty Agreement 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. The Company paid interest to Mr. Salerno totaling $100,000 in fiscal 2010 and $63,630 in fiscal 2009. The total $1,000,000 will be repaid with interest only payments during fiscal 2011 and 2012, and the loan will mature on February 1, 2012.
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
The Company received the benefit of pledges from Victor and Terina Salerno for $200,000 and Robert and Tracey Kocienski for $500,000 to the Nevada Gaming Control Board to meet its reserve requirements under Regulation 22.040. The pledges are treated as off-balance sheet financing although the Company agreed with the pledgors to repay the pledges or increase its cash reserve deposits in order to release the pledges. Interest accrues on the pledges at 1% per month and the interest is payable on the first day of every month. The pledges expire in October 2010.
We may, from time to time, seek additional capital to fund our operations, reduce our liabilities, or fund our expansion plans (including acquisitions). The Company engaged a financial advisor on an exclusive basis to provide advisory services to the Company, including the identification of potential investors in an offering of debt, equity, or equity linked securities of the Company, or a strategic based transaction involving the Company. The sale of additional equity or convertible securities would result in dilution to our shareholders.
Results of Operations
Overview. We report our results of operations through three operating segments: Wagering, Hotel/Casino and Systems. 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 decrease in revenues for the year ended January 31, 2010 is attributed to a decrease in the Hotel / Casino segment revenues of $387,998 (-14.5%); a decrease in the Systems segment revenues of $672,229 (-18.2%); partially offset by increased Wagering segment revenues of $120,282 (+1.3%).
The decrease in operating costs and expenses for the year ended January 31, 2010 is due to the decrease in direct costs of $2,674,729 (-22.8%) and a decrease in operating expenses of $508,517 (-10.5%).
The change in other income (expense) for the year ended January 31, 2010 is due primarily to the following factors: interest income decreased $37,359 (-81.5%); interest expense increased $22,993 (+8.4%); litigation income decreased by $239,896 (-80.0%); and other income decreased by $31,244 (-27.8%).See statements of operation
Please refer to the discussions below ("Wagering Segment," "Hotel/Casino Segment," "Systems Segment," and "Other Income and Expense") for additional information, discussion and analysis.
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 for the fiscal year ended January 31, 2010 increased $120,282 (+1.3%) from the fiscal year ended January 31, 2009. This increase is attributed to the following factors:
•Sports wagering handle was off 10.3% from the prior year which is indicative of the recessionary times, however, the hold percentage was 6.1% compared to the prior year at 5%. The decrease in handle was experienced in all sports with the exception of college basketball. We continue to experience a more conservative betting trend from our patrons.
•Race wagering continues to decrease as we experienced a 27.43% reduction in revenue which is consistent with the Nevada Pari-Mutuel Association's experience.
Wagering Segment total costs and expenses for the fiscal year ended January 31, 2010 decreased $2,229,719 (-21.9%) from the fiscal year ended January 31, 2009. This decrease is attributed to the following factors:
•Direct costs decreased $2,194,983 (-25.6%) for the fiscal year ended January 31, 2010 compared to the fiscal year ended January 31, 2009, primarily due to reductions in personnel costs of approximately $908,000; a reduction in advertising expense of approximately $211,000; a decrease in telephone expenses of approximately $192,000; decreased rent expense of approximately $245,000; and a reduction in taxes and licenses of approximately $105,000.
•Selling, general and administrative costs decreased $206,571 (-16.9%) for the fiscal year ended January 31, 2010 compared to the fiscal year ended January 31, 2009 primarily due to decreases in various corporate administrative costs.
•Depreciation and amortization expense decreased by $24,601 (-7.7%) over the prior fiscal year primarily due to a cumulative net increase in capitalized acquisitions.
Note that an 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.
Hotel/Casino Segment. The Hotel/Casino Segment consists of the operating results of Sturgeon's. Hotel/Casino Segment revenues for the fiscal year ended January 31, 2010 decreased by $387,998 (-14.5%) from the fiscal year ended January 31, 2009. This decrease is attributed to the following factors:
•Casino revenues decreased primarily due to the reduced tourism travel and reduced local customers due to the economic recession.
•Hotel revenues decreased due to a lower occupancy rate, primarily due to decreased travel which may have been influenced by the economic recession and the higher price of gasoline.
•Food and Beverage revenues decreased primarily due to the reduced tourism travel and reduced local customer traffic, attributed to the economic downturn.
Hotel/Casino Segment total costs and expenses for the twelve months ended January 31, 2010 decreased by $289,086 (-10.9%) from the twelve months ended January 31, 2009. This decrease is attributed to the following factors:
•Direct costs for the casino operations decreased over the prior fiscal year ended January 31, 2009 primarily due to an emphasis on cost controls implemented by management.
•Direct costs for the hotel operations decreased in fiscal 2010 compared to fiscal 2009, primarily due to lower occupancies as a result of economic conditions.
•Direct costs for the food and beverage operations decreased over the prior fiscal year ended January 31, 2009, primarily due to lower occupancies in the hotel.
•Selling, general and administrative costs for Sturgeon's have decreased in fiscal 2010 compared to fiscal 2009, primarily due to a 20% reduction in salary for the President and the Controller.
Systems Segment. The Systems Segment includes the operating results of our systems sales, installations and maintenance fees, less the related expenses. Systems Segment revenues for the fiscal year ended January 31, 2010 decreased by $672,229(-18.2%) from the fiscal year ended January 31, 2009. This decrease is attributed to the following factors:
•Systems revenues decreased by $660,000 over the prior fiscal year due to the timing and in the number of infrequent or non-recurring sales.
•Revenues from maintenance contracts were flat with the prior fiscal year.
Systems Segment total costs and expenses for fiscal year ended January 31, 2010 decreased $467,825 (-12.4%) from the fiscal year ended January 31, 2009. This decrease is attributed to the following factors:
•Direct costs for systems decreased over the prior fiscal year ended January 31, 2009, primarily due to decreased wages and benefits resulting from a reduction and realignment of personnel, improving our operational efficiencies, and decreased cost of sales due to reduced sales in the current fiscal year.
•Research and development costs increased from the prior fiscal year, primarily due to increased spending on new products.
•Selling, general and administrative costs decreased $265,770 (-16.3%) for the fiscal year ended January 31, 2010, compared to the prior period, primarily due to reduced bad debt expense, decreased wages, lower repairs and maintenance expense, and a decrease in corporate administrative expense.
•Depreciation and amortization decreased slightly from the prior fiscal year, due to a reduction in fixed assets.
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.
•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 $37,359 is
due primarily to decreased interest rates paid on our cash deposits and less overall cash held in deposits.
•Interest expense is primarily due to the interest paid on the pledged certificates of deposit and interest on loans payable to Victor Salerno.
•Litigation expense of $(59,951) was recorded in fiscal 2010 related to an adjustment in the estimated outstanding balance due Racusin, compared to Racusin litigation expense of $(299,847) due to an adjustment in the interest expense.
•Other income decreased by $31,244 (-27.8%) primarily due to a decrease in rental income.
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. The following summarizes our critical estimates and policies.
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 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 revenue are relatively insignificant.
Hotel/Casino Revenue
We report the wagering revenues of Sturgeon's, which is primarily comprised of slot revenue, hotel room revenue and food and beverage revenue, in compliance with Nevada law and the regulations of the Nevada gaming regulators. These revenues are generally in the form of cash, personal checks, credit cards, or gaming chips and tokens, which do not require estimates. We do estimate certain liabilities with payment periods that extend for longer than several months. We believe these estimates are reasonable based on our assumptions related to possible outcomes in the future. Future actual results might differ materially from these estimates. 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. For non-gaming revenues, such as food and beverage, hotel, etc., we record revenues in compliance with generally accepted accounting principles, recognizing revenue when it is earned.
System-Software
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.
System-Hardware
We recognize hardware revenue (including any related installation revenue) upon installation of the hardware.
System-Maintenance
We negotiate maintenance agreements with each of our 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. We recognize maintenance revenue on the first day of each month for which the maintenance agreement is in place; we maintain an allowance for doubtful accounts in the event that any such revenue recorded is not 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.
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, 2010 and 2009, 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, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 2010 and 2009, 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
May 7, 2010
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2010 AND 2009
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2010 AND 2009
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2010 AND 2009
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2010 AND 2009
See notes to consolidated financial statements.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2010 AND 2009
1. Nature of Operations 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") owns and operates 59 (as of April 11, 2010) race and sports wagering locations ("books") in leased space within nonrestricted casinos throughout the state of Nevada. 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").
Basis of Presentation
The consolidated financial statements include the accounts of AWI and all of its subsidiaries for applicable periods, (collectively referred to hereafter as the "Company"). All subsidiaries are directly or indirectly wholly-owned by AWI. 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 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 20% is derived from professional football events. If the professional football season were to be interrupted, this could have a significant adverse impact on future operations. Management also estimates that a significant amount of the Company's Nevada non-casino wagering relates to college sports and, therefore, the passage of amateur sports anti-wagering legislation could 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.
The United States is currently experiencing an economic downturn accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational activities and general discretionary consumer spending, and is also engaged in war, all of which are likely to continue to have far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these developments and related risks and uncertainties on our future operations and cash
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
flows, including the principal officer's ability to continue to provide financial support for the Company, as in the past, and, other access to capital or credit financing, cannot be estimated at this time but may likely be significant.
The Company often carries cash and cash equivalents, including statutorily restricted amounts, on deposit with financial institutions substantially in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as result of recent economic developments and uncertainties discussed in the foregoing paragraph. 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 systems' customers before extending credit; and by perfecting and using, when necessary, security interests in the hardware and software.
Accounts receivable are evaluated quarterly for collectability, and carried net of an appropriate allowance, at their estimated collectible 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 allowances for doubtful accounts represent allowances for accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross accounts receivable to their estimated net realizable value. The Company records these allowances 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. Accounts for which no payments have been received for 12 months or if management becomes aware that no payment will be made to the Company, are written off. 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 generally accepted accounting principles in the United States of America 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
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
balance sheet date, valuation of deferred tax assets, 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 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.
Goodwill
As of the most recent balance sheet date, goodwill 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 and 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, 2010 or 2009.
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 but rather are 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 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.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
Hotel/Casino. Revenues of Sturgeon's consist primarily of slot revenue, recorded in compliance with Nevada gaming law and regulations, 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 certain sales incentives in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products.) Accordingly, cash incentives to patrons for gambling, which are not material, 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 wagering 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 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.
Advertising
The Company expenses all advertising costs as incurred. Advertising expense was $99,252 and $310,130 for the fiscal years ended January 31, 2010 and 2009, respectively.
Stock-Based Compensation
Stock options 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 inputs pursuant to fair value measurements, 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
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
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.
The Company did not grant stock options to employees and non-employee directors in fiscal 2010 and 2009.
Legal Defense Costs
The Company records provisions for probable losses equal to the lower end of the estimated probable loss range for matters in litigation or other disputes such as those discussed in Note 6.b. and periodically revises these estimates as known 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, if any, as part of income tax expense in its consolidated statements of operations.
Net Income (Loss) Per Common Share
Basic income or (loss) per common share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted net income per common share is calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. Except for loss periods, net income per common share considers potentially dilutive securities, which consist solely of stock options of 400 and 900 at January 31, 2010 and 2009, respectively. There is no computation of dilution for loss periods, since the effect of including potentially dilutive common shares would be anti-dilutive because of the losses.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
1. Nature of Operations and Summary of Significant Accounting Policies (Continued)
Following is a reconciliation of the numerators and denominators of the net loss per common share computations for the periods presented.
*Diluted income (loss) per common share is not applicable for loss periods.
2. Property and Equipment
Prior to the year ended January 31, 2007, the Company completed a sale and leaseback of a building with an unrelated party and realized a gain of $1,638,000. Only a portion of the gain was recognized in each of the succeeding years, including $287,971 and $327,600 for the fiscal years ended January 31, 2010 and 2009, respectively. The deferred gain was reported as "Other Long-Term Liabilities."
Property and equipment consists of the following as of January 31, 2010 and 2009:
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
3. Debt
Short-term debt at January 31, 2009 consists of $499,295 due to U.S. Bank. On April 21, 2008, U.S. Bank approved a revolving credit note for $500,000 for the Company to provide overdraft protection on our checking accounts. This credit facility was converted into a term loan, effective March 30, 2009, with principal payments of $25,000 for six months (from March through August 2009) and $70,000 for five months (from September 2009 through January 2010), plus interest at prime plus 2%, collateralized by Victor Salerno's personal residence.
Long-term debt as of January 31, 2010 and 2009 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 $165,000 annually through January 2013, with the balance of approximately $1.43 million due February 2013.
Racusin Settlement Obligation. The total amount of the Racusin settlement obligation is estimated to be $338,851 outstanding at January 31, 2010, bearing interest at 8.0% per annum. (See Note 6b.)
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).
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
4. Series A Preferred Stock (Continued)
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, 2010 or 2009. 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. Common Stock and Stock Options
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, 2010, 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 and the Company's financial position.
2001 Stock Option 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 250,000 options per year and no more than 1,150,000 options in total may be granted under the 2001 Employee Stock Option Plan (the "2001 Plan"). The 2001 Plan does 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 2001 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. The 2001 Plan is scheduled to terminate on August 8, 2011, except as to the outstanding stock options on that date.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
5. Common Stock and Stock Options (Continued)
The following tables summarize the current status of the 2001 Plan:
Outstanding and Exercisable by Price Range as of January 31, 2010:
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 to terminate on April 30, 2011. In October 2007, the Board of Directors ratified this practice as an amendment to the Directors Plan and such prior grants and amendments to the Directors Plan were approved by the stockholders at the last Annual Stockholders' Meeting held in December 2007. 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, 2010 and January 31, 2009 as part of the Directors' Stock Option Plan for the best financial interests of the Company.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
5. Common Stock and Stock Options (Continued)
No more than 40,000 options may be granted pursuant to 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, 2010 and 2009, 20,800 options were outstanding with 20,800 and 20,000 exercisable, respectively, at a weighted average price of $1.28. Options outstanding and exercisable by price range as of January 31, 2010 follows:
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.
In May 2009, our surety bond was cancelled, and we were subsequently unable to secure a replacement bond with acceptable terms. In September 2009, we reached an agreement with the Nevada Gaming Control Board to increase our reserve by $500,000 with a deposit of $100,000 on September 30, 2009, and $80,000 deposits on October 31, 2009; November 30, 2009; December 31, 2009; January 31, 2010; and February 28, 2010. These deposits increased our reserve to $1.62 million as of January 31, 2010. In addition, Victor and Terina Salerno pledged a certificate of deposit for $200,000 and Robert and Tracey Kocienski pledged two certificates of deposit totaling $500,000 for the benefit of Leroy's effectively creating a reserve of $2.32 million. The pledged certificates expire in October 2010 and unless the pledge is renewed we may be required to make additional reserve deposits during football season. We believe that such amount will provide an adequate reserve until football season, at which time; we may need to increase the reserve amount. If we are required to increase the Regulation 22.040 reserve and are unable to do so, it would have an adverse impact on us including,
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
6. Commitments and Contingencies (Continued)
but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy's and/or elimination or reduction of telephone wagering accounts, resulting in an adverse change in our operating results.
b. Litigation Judgments and Settlements
Currently, the Company is not a party in any litigation and has no knowledge of any pending material legal proceedings in any court or agency of government or governmental authority, except as noted below. The Company has recorded provisions for probable losses equal to the lower end of the estimated probable loss range for the matters. As of January 31, 2010 and 2009, respectively, the aggregate recorded provision for the following matters, included in long term debt, was $338,851 and $757,642.
Racusin
The Company and Racusin entered into a Settlement Agreement on September 3, 2004. On or about March 11, 2005, the Company consummated its Plan of Reorganization and emerged from Bankruptcy. On May 13, 2005, the Company commenced an adversary proceeding in its bankruptcy case against Racusin and various other competing claimants to Racusin's claim which action sought to interplead any distribution on the Racusin Claim into the Bankruptcy Court (the "Interpleader Adversary"). On or about August 2, 2005, the Bankruptcy Court entered an order approving the interpleader (the "Interpleader Order"), whereby the Company placed 250,000 shares of common stock with the clerk of the court as payment of the Racusin Claim while Racusin pursued his appeal of the Bankruptcy Appellate Panel's decision in our favor subordinating Racusin's claim pursuant to Section 510(b) of the Bankruptcy Code to the 9th Circuit Court of Appeals. The Interpleader Order further stated that the Company's stock would be substituted with cash payment in the event that the 9th Circuit reverses the Bankruptcy Appellate Panel. On August 31, 2005, the Court entered an order staying the interpleader (the "Stay Order") pending a decision from the 9th Circuit Court of Appeals.
On June 28, 2007, the 9th Circuit Court of Appeals entered its final opinion, which reversed the Bankruptcy Appellate Panel's decision, thus holding that Racusin's claim was not to be subordinated pursuant to Section 510(b) of the Bankruptcy Code. The Company filed a Form 8-K on July 6, 2007, in response to the 9th Circuit's reversal of the Bankruptcy Appellate Panel.
On November 2, 2007, the Bankruptcy Court heard an argument to determine whether the Company could withdraw its 250,000 shares of common stock and whether it could begin depositing funds pursuant to the Settlement Agreement attached to the Company's motion (the "Revised Payment Schedule"). The Revised Payment Schedule estimated post-judgment interest at 8% per annum, compounded, from March 11, 2005, without taking into consideration the Interpleader Order of July 27, 2005 or the Stay Order of August 31, 2005.
The Company filed its Corrected Amortization Schedule on March 17, 2008 ("Corrected Amortization Schedule") under the assumption that interest should not accrue as long as the Company was in compliance with the Interpleader Order. As a result of confirming legal analysis that occurred during the fourth quarter of fiscal 2009, pursuant to legal actions initiated by Racusin during that quarter (and through February 2009) described below, estimated interest payable was reduced $394,021, decreasing legal expense in that quarter.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
6. Commitments and Contingencies (Continued)
On April 2, 2008, the Company received a letter from Racusin stating that he considered our filing of the Corrected Amortization Schedule and making payments pursuant thereto to be a breach of the Settlement Agreement. On October 10, 2008, Racusin moved the Court to file supplemental pleadings in the Interpleader Adversary, and that motion was granted on December 23, 2008. Racusin filed a counterclaim in the Interpleader Adversary for breach of the Settlement Agreement on January 14, 2009, and his Motion for Summary Judgment on breach of the Settlement Agreement on February 24, 2009.
A hearing was held on May 8, 2009, regarding Racusin's Motion for Summary Judgment. On August 18, 2009, the Court entered its order granting Racusin's motion and awarding damages of $3,935,932 of which $ 2,910,097 had already been paid (including $ 2,153,757 paid into the bankruptcy court registry). On April 2, 2010, a hearing was held regarding the Company's Motion for Rehearing of the order granting Racusin summary judgment. In such hearing the Court verbally held that it was going to vacate the August 18, 2009 order granting Racusin summary judgment because the starting balance owed per the Revised Payment Schedule and/or Corrected Amortization Schedule under the Settlement Agreement was inaccurate and, as a result, a material issue of fact exists regarding whether the Company materially breached the Settlement Agreement. Arguments as to the potential effects of the Stay Order on the Interpleader and the resulting calculation of amounts due may be considered later in the litigation, including but not limited to at trial. As yet, no trial date has been set. The effect of correcting the starting balance in accordance with the Court's decision is to reduce the amount due to $759,426 under the Revised Payment Schedule and to $338,851 as calculated in accordance the Corrected Amortization Schedule. Accordingly, during the fourth quarter of fiscal 2010, the Company recorded an adjustment to reduce the estimated interest payable (and legal expense) by $118,149 to reflect an estimated balance due of $338,851.
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. The complaint was filed in the District Court, Clark County, Nevada as Case No. A567638, asserting claims for breach of contract, breach of implied covenant of good faith and fair dealing, intentional and negligent interference with prospective economic advantage, and quantum meruit. The claims arise out of agreements with plaintiff to jointly develop an upright kiosk, including an equipment purchase agreement, software license agreement, and a marketing agreement. Plaintiff alleges that we failed to perform under, and effectively and prematurely terminated, the equipment purchase agreement as to 100 upright kiosks. Plaintiff further alleges that it had entered into negotiations with an established customer of ours to place kiosks and plaintiff's products on the customer's casino floor, and that we contacted the customer and terminated plaintiff's opportunity. Plaintiff seeks for (i) the recovery of actual, consequential and punitive damages, and (ii) the recovery of attorneys' fees, costs and expenses.
On December 8, 2008, the Court (i) granted summary judgment and dismissed CBS and AWIG from the breach of contract and breach of the implied covenant of good faith and fair dealing; (ii) granted summary judgment and dismissed the claim of unjust enrichment against AWIM; (iii) granted summary judgment and dismissed the claim of negligent interference with a prospective
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
6. Commitments and Contingencies (Continued)
business advantage against all defendants; (iv) denied summary judgment and refused to dismiss the claim of intentional interference with a prospective business advantage against CBS, AWIG, and General Counsel; (v) denied summary judgment and refused to dismiss the claim of quantum meruit against CBS and AWIG; and (vi) denied summary judgment and refused to dismiss the claim of unjust enrichment against CBS and AWIG.
On December 29, 2008, the Defendants filed their answer, affirmative defenses and counter-claims for abuse of process, breach of contract, breach of the implied covenant of good faith and fair dealing, accounting, rescission, and violation of relevant provisions of the Nevada Revised Statutes.
This case is currently in the discovery phase. We recently moved the Court for leave to file a First Amended Answer, Affirmative Defenses and Counterclaims through which we will assert four additional claims for relief against plaintiff for misappropriation of trade secrets, conversion, unjust enrichment, and common law unfair competition. Through the assertion of these additional counterclaims, we seek to obtain appropriate relief from the Court concerning these newly asserted claims for relief.
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 $1,451,489 and $1,771,428 during the fiscal years ended January 31, 2010 and 2009, respectively.
d. Long-Term Employment Commitments
The Company has employment agreements with the following executive officers:
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. 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. 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.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
6. Commitments and Contingencies (Continued)
Bruce Dewing. On December 29, 2009, the Company entered into an agreement with Bruce Dewing, a member of the Company's board of directors and president of the Company's wholly-owned subsidiary, AWI Gaming, Inc. Pursuant to the agreement, the employment agreement dated June 14, 2005, as amended between the Company and Mr. Dewing was terminated effective December 17, 2009. As part of the termination of the employment agreement, the Company agreed to pay Mr. Dewing at his then current compensation rate of $144,000 annually through December 31, 2009. The Company also agreed to pay Mr. Dewing his accrued, but unused, paid time off of approximately $15,500 in twelve monthly payments beginning January 15, 2010. In addition, Mr. Dewing's 50,000 remaining unvested stock options fully vested on December 31, 2009. The Company also agreed to pay Mr. Dewing's medical insurance coverage through December 31, 2010. The agreement also contains a general release of claims by the Company and Mr. Dewing regarding any and all claims that they may have against each other through the date of the agreement. Pursuant to the agreement Mr. Dewing will remain president of AWI Gaming, Inc. However, he will be employed on an at-will basis, and his annual salary will be reduced to $34,573 with a commensurate reduction in hours. Mr. Dewing will also be entitled to three calendar months of severance pay upon termination by the Company of his at-will employment and mileage reimbursement related to travel to and from work.
Melody (Sullivan) Sherrill. Ms. Sherrill's employment agreement became effective on August 6, 2007 and the initial term expired on August 6, 2009, which was not extended by the Company. The Company continued to honor the terms of the expired agreement until Ms. Sherrill resigned her position effective February 18, 2010. The agreement provided for an annual base salary of $180,000 with an annual performance bonus of 1% of Consolidated Income Before Income Taxes. However, Ms. Sherrill agreed to temporarily reduce her annual base salary by 20%, effective January 3, 2009. Ms. Sherrill also received non-qualified stock options of 30,000 shares upon hire with one-third vesting on each anniversary of her hiring date, at an exercise price equal to the closing market price of the Company's stock on her hire date. As a result of Ms. Sherrill's resignation, the Company entered into a Separation Agreement that contained a general release of claims, a six month non-competition and non-solicitation covenant, a confidentiality covenant and non-disparagement covenant. The Separation Agreement provided Ms. Sherrill with three months of salary and accrued but unused paid time off.
Our long-term employment commitments through the existing terms of the agreements total $240,000 of base salary through fiscal year 2011, without consideration of typical benefits and voluntary salary reductions.
7. Related Party Transactions
The Company has engaged in the following related-party transactions during the years ended January 31, 2010 and 2009:
On November 8, 2007, the Company borrowed $400,000 against the $500,000 line of credit for the benefit of the Company under the terms of a Guaranty Agreement, as amended from time to time, between Victor and Terina Salerno (the "Salernos") and AWI. As amended in April 21, 2008, the Guaranty Agreement provides for AWI to pay the Salernos interest at 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. The April 21, 2008 Guaranty Agreement expires on February 16, 2011. The personal line of credit then in place was
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
7. Related Party Transactions (Continued)
secured by the Salerno's residence and provides for an interest rate of 0.5% below the prime rate published by the Wall Street Journal, adjusted annually. The outstanding balance of this line of credit was $380,773 at January 31, 2008. The Company paid principal and interest payments totaling $63,630 in fiscal 2009 and $25,814 in fiscal 2008 and paid interest-only payments of $8,333 per month in fiscal 2010. In February 2008, an additional $80,000 was also borrowed by the Company against this line of credit. Smaller amounts were loaned to the Company by Mr. Salerno subsequent to February 2008, but prior to December 31, 2008, totaling $20,000. The payments described above take into consideration the additional borrowings.
On December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 to fund urgent cash flow. Due to the urgency, the funds were advanced on an expedited basis without formal board approval as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. The independent directors of the Company considered and approved the fairness of a proposed amendment to the April 21, 2008 Guaranty Agreement to cover the total $1,000,000 that has been loaned by Mr. Salerno at the same terms. The total $1,000,000 will be repaid with interest only payments during fiscal 2011 and 2012, with the balance due February 1, 2012.
Additionally, Mr. Salerno's personal residence secured the U.S. Bank term loan for $500,000 until repaid January 31, 2010.
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 2010 and 2009 was $120,000 and $63,630, respectively.
8. Income Taxes
The tax effect of significant temporary differences representing deferred tax assets and liabilities for the Company as of January 31, 2010 and 2009 follows:
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
8. Income Taxes (Continued)
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, 2010, the Company had federal tax net operating loss ("NOL") carryforwards available to potentially reduce future tax obligations in the aggregate amount of approximately $7.0 million; of which approximately $1.3 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 will be profitable for at least the short-term future and that it is therefore more likely than not that our net deferred tax asset of $369,000, which resulted primarily from NOLs, will be fully realized.
The Company's federal income tax returns for the years ended January 31, 2007 through 2010 are subject to possible examination by the Internal Revenue Service.
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).
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
9. Business Segments (Continued)
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.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
9. Business Segments (Continued)
Operating Income (Loss) to Net Loss. The following table reconciles the operating income (loss) from each segment to income 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; intangibles; and other assets. Goodwill, in the amount of $103,725, for the fiscal years ended January 31, 2010 and 2009, is a component of the Systems Segment.
AMERICAN WAGERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED JANUARY 31, 2010 AND 2009
10. Additional Supplementary Cash Flow Information
The reconciliation of net income (loss) to net cash provided by (used in) operating activities is as follows:
11. Financial Instruments
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(T).
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Interim Principal Accounting 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, 2010. We determined that our disclosure controls and procedures, specifically with respect to a late Form 8-K filed on April 29, 2009 (which should have been filed on or before April 2, 2009) and a late Form 8-K filed on October 15, 2009 (which should have been filed on or before October 7, 2009) and the effects of the departure of our Chief Financial Officer and certain accounting department personnel in February 2010 discussed below, were not effective.
Changes in Internal Control over Financial Reporting
Except for the effects of the departure of our Chief Financial Officer in February 2010 and certain accounting department personnel in February 2010, 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. The departure of these individuals adversely affected the preparation of our consolidated financial statements resulting in audit adjustments. We have hired employees and consultants to mitigate the effects of such departures and are presently considering other improvements.
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 Interim Principal Accounting 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 not effective as of
January 31, 2010, due to the effects of the departure of the our Chief Financial Officer and certain accounting department personnel in February 2010 as discussed above.
This annual report on Form 10-K does not include an attestation report by the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this year's annual report on Form 10-K.
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, COO, and Chairman of the Board since our inception and our interim Principal Accounting Officer and Treasurer since February 2010. 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).
Bruce Dewing became a Director in July 2003 and President of AWIG in July 2005. Mr. Dewing has over thirty years of progressive experience in hotel/casino senior level management positions. Mr. Dewing was formerly the President of the Holder Hospitality Group, Inc. where he oversaw the daily operations of five casinos, an AM radio station, a statewide (Nevada) slot route, several event companies and over 1,500 executives and employees. Mr. Dewing is a founding member of the Air
Service Task Force for Washoe County (Nevada) Airport Authority, a member of the Advisory Board to Washoe Airport Authority, a Board member of the Reno Air Race Association, and a Board member of the Nevada Hotel and Lodging Association. Mr. Dewing is a former chairman of the Pershing County Tourism Board. In July 2008, Mr. Dewing was appointed to the Nevada Commission on Tourism as a commissioner.
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. Bruce Dewing is licensed by the Commission to be an officer and director of AWIG and Sturgeon's. 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. Melody Sullivan 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. 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.
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, 2009.
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.
(2)Mr. Dewing's annual salary as President of AWIG was $180,000; however, he agreed to reduce his base salary by 20%, through December 2009.
(3)Ms. Sullivan's annual salary was $180,000; however, she agreed to reduce her annual base salary by 20% effective January 3, 2009 which was reinstated in September 2009.
(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 Statement 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)The amounts in column (g), if any, include the annual performance bonus that the executives earned under their respective employment agreements, which are based on a pre-established percentage of our pre-tax earnings (as defined in their agreements) for the reported fiscal year.
(6)These amounts in column (i) include the Company's matching contributions under our 401(k) plan. Ms. Sullivan was not eligible for our 401(k) plan until she completed one year of service (August 5, 2008 was the completion of one year of service but the next allowable enrollment date for the plan was October 1, 2008). Pursuant to Ms. Sullivan's employment agreement, she received a payment in the amount of $4,800 representing the remainder of the 4% of her salary that would have been matched by the Company, if she were a participant in the 401(k) plan upon her hire date. Mr. Salerno's and Mr. Dewing's vehicle expenses are also included in the amounts in this column (i). Ms. Sullivan has no vehicle expense reimbursement.
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. 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."
Bruce Dewing. On December 29, 2009 the Company entered into an agreement with Bruce Dewing, a member of the Company's board of directors and president of the Company's wholly-owned subsidiary, AWI Gaming, Inc. pursuant to which, the employment agreement dated June 14, 2005, as amended, between the Company and Mr. Dewing was terminated effective December 17, 2009. As part of the termination of the employment agreement, the Company agreed to pay Mr. Dewing at his then compensation rate of $144,000 annually through December 31, 2009. The Company also agreed to pay Mr. Dewing his accrued, but unused, paid time off of approximately $15,500 in twelve monthly payments beginning January 15, 2010. In addition, Mr. Dewing's 50,000 remaining unvested stock options vested on December 31, 2009. The Company also agreed to pay Mr. Dewing's medical insurance coverage through December 31, 2010. The agreement also contains a general release of claims by the Company and Mr. Dewing regarding any and all claims that they may have against each other through the date of the agreement. Pursuant to the agreement Mr. Dewing remains president of AWI Gaming, Inc. However, he is employed on an at-will basis, and his annual salary is reduced to $34,573 with a commensurate reduction in hours. Mr. Dewing will also be entitled to three calendar months of severance pay upon termination by the Company of his at-will employment and mileage reimbursement related to travel to and from work.
Our long-term employment commitments through the existing terms of the agreements total $240,000 of base salary through 2011, without consideration of typical benefits and voluntary salary reductions.
The following table provides information concerning executive officers' unexercised stock options as of January 31, 2010.
Outstanding Equity Awards at Fiscal Year-End
(1)For information on vesting dates, see the schedule of stock option grants following the Director Compensation table below.
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.
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. Mr. Swecker and Mr. Barengo agreed to forego director fees in the amount of $24,000 each during fiscal 2010 and $6,000 each during fiscal 2009, for the best interests of the financial health and well-being of the Company. The following table summarizes the compensation paid to the directors for the fiscal year ended January 31, 2010.
Director Compensation
(a)This table includes only non-employee directors whose compensation is not reported in the Summary Compensation Table.
(b)W. Larry Swecker is chairman of the compensation committee for fiscal 2009 and 2010. Robert R. Barengo became chairman of the audit committee in August 2006 and continues as Chairman for fiscal 2009 and 2010.
(c)Mr. Swecker had 10,800 in stock option awards outstanding at January 31, 2010. Mr. Barengo had 9,200 in stock option awards outstanding at January 31, 2010. Mr. Swecker and Mr. Barengo voluntarily renounced their rights to stock option awards that would have been granted on January 31, 2010 as part of the Directors' Stock Option Plan for the best financial interests of the Company.
We have granted the following stock options to our Directors (excluding terminated options):
(1)Stock options were issued pursuant to our 2001 Stock Option Plan.
(2)Stock options were issued pursuant to our Directors Stock Option Plan.
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, 2010, 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, 2010 (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, 2010 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, 2010, 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 10,800 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. Dewing and his wife share the voting and investment power with respect to 44,800 shares included above. Mr. Dewing has 250,800 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)Ms. Sullivan has 20,000 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.
(7)Our current directors and named executive officers as a group have options for 343,800 shares, which they can exercise within the next 60 days. Those shares are included in the table above.
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, 2010.
Equity Compensation Plans Approved by Security Holders:
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, COO, interim Principal Accounting Officer, Treasurer, 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, the Company borrowed $400,000 against the $500,000 line of credit for the benefit of the Company under the terms of a Guaranty Agreement, as amended from time to time, between Victor and Terina Salerno (the "Salernos") and AWI. As amended in April 21, 2008, the Guaranty Agreement provides for AWI 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. The April 21, 2008 Guaranty Agreement expires on February 16, 2011. The personal line of credit then in place was secured by the Salerno's residence and provides for an interest rate of 0.5% below the prime rate published by the Wall Street Journal, adjusted annually. The outstanding balance of this line of credit was $380,773 at January 31, 2008. The Company paid principal and interest payments totaling $63,630 in fiscal 2009 and $25,814 in fiscal 2008 and paid interest only payments of $3,839 per month in fiscal 2009. In February 2008, an additional $80,000 was also borrowed by the Company against this line of credit. Smaller amounts were loaned to the Company by Mr. Salerno subsequent to February 2008, but prior to December 31, 2008, totaling $20,000. The payments described above take into consideration the additional borrowings.
On December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 to fund urgent cash flow needs of the Company. Due to the urgency, the funds were advanced on an expedited basis without formal board approval as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. The independent directors of the Company considered and approved the fairness of a proposed amendment to the April 21, 2008 Guaranty Agreement to cover the total $1,000,000 that
has been loaned by Mr. Salerno at the same terms. The total $1,000,000 will be repaid with interest only payments during fiscal 2011 and 2012, with the balance due February 1, 2012.
Additionally, Mr. Salerno's personal residence secured the U.S. Bank term loan for $500,000, until repaid January 31, 2010.
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, 2010, her total compensation was $4,739. 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 Victor and Terina Salerno for fiscal 2010 was $193,165.
We employ on a full-time basis John Salerno, the son of Victor Salerno and Judith Zimbelmann, as a Vice President and gaming analyst of Leroy's. For our fiscal year ended January 31, 2010, his total annual compensation was $67,561. John Salerno agreed to temporarily reduce his annual base salary by 20%, effective January 3, 2009 which was reinstated in September, 2009.
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, is 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, 2010. PBTK previously performed similar audit and review services for the years ended January 31, 2001 through January 31, 2008. 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 of 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:
Consolidated Balance Sheets at January 31, 2010 and 2009
Consolidated Statements of Operations for the Years Ended January 31, 2010 and 2009
Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended January 31, 2010 and 2009
Notes to Consolidated Financial Statements
(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
*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.
(A)Management contract or compensatory plan or arrangement.
SIGNATURES
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.
May 7, 2010
AMERICAN WAGERING, INC.
By:
/s/ VICTOR SALERNO
Victor Salerno
President, Chief Executive Officer, and Interim Principal Accounting Officer
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.
EXHIBIT INDEX