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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-22191
CCA COMPANIES INCORPORATED
--------------------------
(Exact Name of Registrant)
Delaware 65-0675901
- ------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3250 Mary Street
Suite 405
Coconut Grove, FL 33133
----------------------------------------
(Address of Principal Executive Offices)
(305) 444-3888
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if changed Since Last Report)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ ] No. [X]
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date.
Class Outstanding at May 10, 1998
----------------------------- ---------------------------
Common Stock, $.001 par value 11,988,167 shares
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<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Condensed Balance Sheets as of June 30, 1997
and March 31, 1998 (unaudited)...........................................................................i
Condensed Statements of Operations for the Three and Nine Months ended March 31,
1997 (unaudited), the Three and Nine Months ended March 31, 1998
(unaudited), and for the period from March 6, 1996 (inception) to
March 31, 1998 (unaudited)..............................................................................ii
Condensed Statements of Cash Flows for the Three and Nine Months ended March 31,
1997 (unaudited), the Three and Nine Months ended March 31, 1998
(unaudited), and for the period from March 6, 1996 (inception) to
March 31, 1998 (unaudited).............................................................................iii
Notes to Condensed Financial Statements...........................................................................1
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations......................................................7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........................................................16
Item 6. Exhibits and Reports on Form 8-K...................................................................17
SIGNATURES.......................................................................................................18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCA COMPANIES INCORPORATED
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, March 31,
1997 1998
----------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,715,460 $ 5,273,048
Accounts receivable 182,715
Advances to officers and employees 26,965 134,567
Other current assets 186,783 420,010
----------------- ------------------
Total current assets 7,929,208 6,010,340
Loans receivable 838,894
Deposits on assets to be acquired 2,449,864
Construction in progress 5,005,049
Excess cost over fair value of assets acquired 10,583,561
Property and equipment, net 21,986 190,107
Leasehold improvements, net 622,788
Management contract agreements 4,700,080
Tradename 491,667
Other assets 69,890
Due from minority interests 98,557
----------------- ------------------
TOTAL $ 7,951,194 $ 31,060,797
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 531,602 601,144
Notes payable - current (net of $60,328 discount) 689,672
----------------- ------------------
Total current liabilities 1,221,274 601,144
----------------- ------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, 5,000 shares authorized,
1 issued and outstanding 1
Common stock, par value $.001; 50,000,000 shares authorized; 6,385,404
and 11,988,167 shares issued and outstanding at June 30, 1997 and
March 31, 1998, respectively 6,386 11,988
Additional paid-in capital 16,672,672 45,037,810
(Deficit) accumulated during the development stage (9,949,138) (14,590,146)
----------------- ------------------
Total stockholders' equity 6,729,920 30,459,653
----------------- ------------------
TOTAL $ 7,951,194 $ 31,060,797
================= ==================
</TABLE>
See notes to condensed financial statements.
i
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the Period from
Three Months Three Months Nine Months Nine Months March 6, 1996
Ended Ended Ended Ended (Inception) to
March 31, 1997 March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1998
---------------- --------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES $ $ 178,466 $ $ 186,494 $ 186,494
OPERATING EXPENSES:
Marketing and sales 6,066 74,657 6,066 238,664 354,241
Research and development 12,869 22,230 53,290 105,536
General and administrative 462,040 1,562,120 1,350,470 3,722,706 5,868,489
Write-down of inventory 10,000 365,800
Provision for bad debt 1,000,000
Compensation charges
in connection with issuance
of options and warrants 223,000 197,000 680,201 976,000 6,878,307
---------------- --------------- ---------------- -------------- ----------------
Total operating expenses 703,975 1,833,777 2,058,967 5,000,660 14,572,373
---------------- --------------- ---------------- -------------- ----------------
(LOSS) FROM OPERATIONS (703,975) (1,655,311) (2,058,967) (4,814,166) (14,385,879)
OTHER INCOME (EXPENSE):
Interest income 14,211 70,868 40,602 247,836 307,757
Interest expense (49,053) (84,260) (14,350) (199,524)
Amortization of debt discount (78,125) (152,303) (60,328) (312,500)
---------------- --------------- ---------------- -------------- ----------------
Total other income
(expense) (112,967) 70,868 (195,961) 173,158 (204,267)
---------------- --------------- ---------------- -------------- ----------------
NET (LOSS) $(816,942) $(1,584,443) $(2,254,928) $(4,641,008) $(14,590,146)
================ =============== ================ ============== ================
NET (LOSS) PER SHARE OF
COMMON STOCK $ (0.16) $ (0.14) $ (0.47) $ (0.51)
================ =============== ================ ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS
OUTSTANDING 4,952,900 11,391,190 4,825,955 9,124,367
================ =============== ================ =============
</TABLE>
See notes to condensed financial statements.
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the Period from
Three Months Three Months Nine Months Nine Months March 6, 1996
Ended Ended Ended Ended (Inception) to
March 31, 1997 March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1998
------------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($816,942) ($1,584,443) ($2,254,928) ($4,641,008) ($14,590,146)
Adjustments:
Compensation expense in connection with
issuance of options and warrants 223,000 197,000 680,201 976,000 6,878,307
Impairment of inventory 10,000 365,800
Provision for bad debt 1,000,000
Depreciation and amortization 78,437 131,994 153,397 196,465 331,179
Compensation expense for officer's salary 30,000 30,000 95,000 90,000 260,000
Legal services provided by shareholder 24,775 14,013 42,800 165,600 215,750
Consulting services provided for common
stock 26,250 26,250
Changes in current assets and current
liabilities:
Accounts receivable (171,615) (182,715) (182,715)
Advances to officers and employees (44,585) (21,179) (64,449) (107,602) (134,567)
Prepaid expenses and other current
assets (211,888) 176,813 (353,814) (28,227) (215,010)
Accounts payable and accrued expenses 88,496 (120,146) 212,360 69,542 601,144
------------- ---------------- -------------- --------------- --------------
Total adjustments 188,235 236,880 765,495 1,215,313 9,146,138
------------- ---------------- ---------------- --------------- --------------
Net cash (used) by operating activities (628,707) (1,347,563) (1,489,433) (3,425,695) (5,444,008)
------------- ---------------- ---------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment and leasehold (6,532) (741,985) (13,491) (799,091) (823,242)
improvements
Deposits on assets to be acquired (2,449,864) (2,449,864) (2,449,864)
Funds used for acquisitions and development (2,306,633) (4,909,285) (4,909,285)
Funds used for loans and notes receivable (85,250) (326,704) (328,550) (838,894) (2,103,176)
------------- ---------------- ---------------- --------------- --------------
Net cash (used) by investing activities (91,782) (5,825,186) (342,041) (8,997,134) (10,285,567)
------------- ---------------- ---------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subscriptions receivable 1,374 1,374
Subscription funds returned (90,000) (90,000)
Repurchase of shares of common stock (1,800,000) (1,800,000)
Net proceeds from public offering 1,447,567 10,306,296
Proceeds from sale of common stock 5,208,912 2,621,243 8,917,850 12,219,953
Proceeds from notes payable 750,000 2,250,000
Repayments of notes payable (385,000) (1,885,000)
------------- ---------------- ---------------- --------------- --------------
Net cash provided (used) by financing
activities 5,208,912 1,482,617 9,980,417 21,002,623
------------- ---------------- ---------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (720,489) (1,963,837) (348,857) (2,442,412) 5,273,048
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,876,637 7,236,885 1,505,005 7,715,460
------------- ---------------- ---------------- --------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,156,148 $5,273,048 $1,156,148 $5,273,048 $5,273,048
============= ================ ================ =============== ==============
</TABLE>
See notes to condensed financial statements.
<PAGE>
CCA COMPANIES INCORPORATED
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Note A) Basis of Presentation and the Company:
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. Operating results
for the three-month and nine-month periods ended March 31, 1998 are not
necessarily indicative of the results that may be expected for any interim
period or the year ending June 30, 1998.
The Company was incorporated on March 6, 1996 and initially adopted a
fiscal year ending August 31. Subsequently, in June 1997 the Company elected to
change its fiscal year end to June 30. Accordingly, the condensed statements of
operations and cash flows have been prepared for the three and nine months ended
March 31, 1998 as compared to the three and nine months ended March 31, 1997.
The balance sheet at June 30, 1997 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the audited financial
statements and footnotes thereto included in the Form 10-K for the year ended
June 30, 1997 filed by the Company.
(Note B) The Company:
CCA Companies Incorporated, formerly known as Conserver Corporation of
America (the "Company") is a development stage company incorporated under the
laws of the State of Delaware on March 6, 1996. The Company was initially
engaged in food technology, and beginning in August 1997 it diversified into the
hotel and casino industry.
In the spring of 1997, the Company was granted the exclusive right to
promote, import, distribute, market, sell and otherwise commercially exploit
Conserver 21(TM), a non-toxic product which can be used to retard spoilage and
decay in food and flowers, in the United States and Canada. The Company was also
granted an option and a right of first refusal to exercise such rights
throughout the world. Conserver 21(TM) is currently packaged in two forms:
packets and filters.
The Company experienced problems with respect to the pricing and
packaging of the Conserver 21(TM) product and in conjunction with discussions to
resolve these issues with Agrotech 2000 S.L. ("Agrotech"), its distributor, the
Company commenced efforts to identify alternative sources of products similar to
Conserver 21(TM). After extensive research, the Company identified one other
product that, from independent tests, the
<PAGE>
Company believes is as efficacious as Conserver 21(TM). The Company has obtained
an option to acquire the rights to manufacture, market and distribute this
alternative product. Efforts to negotiate a viable business arrangement with
Agrotech were unsuccessful, and the Company gave notice to Agrotech of its
termination of the Distribution Agreement. (See Note E)
As a development stage company, the Company's activities since its
inception have been primarily focused on raising both debt and equity financing
(public and private), recruiting management personnel, testing, developing and
exploiting Conserver 21(TM) and negotiating distribution and other arrangements.
Since the first quarter of fiscal 1998, the management of the Company has also
been engaged in exploring new business opportunities for the Company.
From March 1996 through November 1996, the Company raised capital
necessary for its business development through debt and equity private
placements. In June and July 1997, the Company raised additional capital through
an initial public offering (the "IPO"). (See Note D.)
In August 1997, the Company announced that it was considering
diversifying beyond its sole line of business of marketing, distributing and
otherwise commercially exploiting Conserver 21(TM) (the "Principal Line of
Business") and was exploring a possible new line of business in the hotel and
casino industry (the "New Line of Business"). At a Special Meeting of
Stockholders, which the Company held December 2, 1997, the Company's
stockholders voted on and approved various proposals regarding the New Line of
Business and related matters. (See Notes E and F.) In order to meet the funding
requirements of the New Line of Business, the Company in November 1997 commenced
a private placement offering to sell shares of its common stock which it
completed in February 1998. (See Note D.)
(Note C) Summary of Significant Accounting Policies:
[1] Loss per share of common stock:
Net loss per share of common stock is based on the weighted average
number of shares outstanding during the period. Common shares issued and options
and warrants granted by the Company at prices less than the $5.00 IPO price
during the twelve months preceding the IPO date have been included in the
calculation of common and common equivalent shares outstanding as if they were
outstanding since inception using the treasury stock method.
[2] Stock based compensation:
The Company applies Accounting Principal Board Opinion No. 25 and
related interpretations in accounting for its employee stock option and purchase
plans. In October 1995, Statement of Financial Accounting Standards No. 123
("SFAS 123") was issued and requires the Company to elect either expense
recognition or disclosure-only alternative for stock based employee
compensation. The expense recognition provision encouraged by SFAS 123 would
require fair-value based financial accounting to recognize compensation expense
for the employee stock compensation plans. The Company has elected the
disclosure-only alternative.
2
<PAGE>
The Company has computed the pro forma disclosures required under SFAS 123 for
employee stock options granted as of August 31, 1996 and June 30, 1997 using the
Black Scholes option pricing model prescribed by SFAS 123.
[3] Amortization of excess cost over book value:
In December 1997, the Company acquired all of the common stock of
Sakhalin General Trading & Investments, Limited ("SGTI")' for an amount which
exceeded the book and fair market value of SGTI's net tangible assets. This
excess amount has been recorded as an intangible asset and will be amortized
over a 30 year life. (See Note F)
(Note D) Initial Public Offering ("IPO") and Private Placement Offering ("PPO"):
In June 1997, the Company completed its initial public offering in
which it received net proceeds of approximately $8,900,000 from the sale of
2,200,000 shares of its common stock, $0.001 par value (the "Common Stock") at a
per share price of $5.00. In July 1997, the Company's underwriter exercised its
over-allotment option to purchase an aggregate of 330,000 shares of Common Stock
at $5.00 per share, resulting in the Company receiving additional net proceeds
of approximately $1,448,000. Aggregate net proceeds to the Company from the IPO
amounted to approximately $10,307,000. Also in connection with the IPO, the
Company sold to the underwriters, for nominal consideration, Underwriters'
Warrants to purchase 220,000 shares of Common Stock exercisable for a period of
four years at $8.25 per share.
During the nine months ended March 31, 1998, approximately $4,650,000
of the proceeds from the IPO were used for general business purposes, including
payments for the retirement of convertible debentures in the amount of $385,000
and advances of $839,000 made to Conserver Purchasing Corporation. (See Note E)
At June 30, 1997, approximately $2,130,000 of the proceeds from the IPO was used
for general business purposes, including the $1,000,000 loan to Agrotech under
the Distribution Agreement and the repayment of a $1,000,000 convertible
debenture, together with the accrued interest thereon.
In November 1997, the Company commenced efforts to raise additional
capital to fund its Hotel and Casino Business (See Note F). The Company
completed its private offering to raise capital in February and received in the
aggregate net proceeds of $8,918,000 from the sale of 2,044,763 shares of its
Common Stock at a per share price of $5.14. Also in connection with the
offering, the Company sold to the placement agent, for nominal consideration,
warrants to purchase 715,668 shares of Common Stock exercisable for a period of
four years at $5.14 per share.
(Note E) Food Technology Business:
The Company's distribution and marketing rights for Conserver 21(TM)
were derived from a distribution agreement entered into in March 1997 (the
"Distribution Agreement") with Agrotech 2000 S.L. ("Agrotech"), a Spanish
company that manufactures and packages Conserver 21(TM) and whose principal
stockholder is the developer of Conserver 21(TM). Initial marketing efforts of
the Conserver 21(TM) product in the United States indicated a need for
improvement in the packaging and pricing of the Conserver 21(TM) product. These
problems affected the Company's ability to market Conserver 21(TM) and to
generate revenue. Although
3
<PAGE>
the Company and Agrotech entered into negotiations with respect to reducing the
pricing arrangements for the Conserver 21(TM) product and to modify the
manufacturing arrangements so that packaging could be done in the United States,
no agreement has been reached, and the Company gave notice of termination to
Agrotech with respect to the Distribution Agreement.
During the period, the Company was involved in efforts to resolve the
outstanding issues with Agrotech, the Company identified an alternative source
of product similar to Conserver 21(TM) which, from independent tests, the
Company believes is as efficacious as Conserver 21(TM).
Conserver Purchasing Corporation ("CPC") entered into two agreements,
each dated December 9, 1997, with Sitedev S.a.r.l. ("Sitedev"), the owner of the
French company Atmos Concept S.A. ("Atmos"), which manufactures this alternative
similar product. The Company believes, although there can be no assurance, that
the Atmos product does not infringe upon the patents of Conserver 21(TM) held by
Agrotech. While the Company is not a party to either of these agreements with
Sitedev, the Company has the option, in its sole discretion, to require CPC to
assign all of its rights under these two agreements to the Company and to
purchase from CPC the Atmos shares held by CPC at the same price and on the same
terms and conditions as CPC purchased such shares from Sitedev.
Under the first agreement, CPC acquired 51% of the shares of Atmos in
return for advancing $400,000 to Atmos upon execution of the first agreement on
December 9, 1996, and agreeing to advance an additional $250,000 to Atmos, which
it did on February 9, 1998. The agreement requires Atmos to use all such funds
to discharge certain of its debts and obligations. The Company advanced $400,000
to CPC under a loan agreement dated December 5, 1997, to fund CPC's initial
payment required under the first agreement, and in February 1998, advanced the
additional $250,000 to CPC for the remaining payments required under the first
agreement. Through March 31, 1998, the Company advanced to CPC an additional
$189,000 for inventory purchases and overhead requirements bringing the total
advances to CPC for funding Atmos to an aggregate amount of $839,000. Since CPC
will be unable to repay any of the loans made to it by the Company, the Company
must exercise the option to acquire Atmos in order to recoup the value of its
loans to CPC.
Under the second agreement, CPC was obligated to deliver to Sitedev
common stock of the Company having a market value of $1,000,000 in February
1998, subject to Atmos having received assignments satisfactory to CPC of
certain patent rights in respect of its food preservation product from a former
Atmos shareholder. In early May 1998, such assignments satisfactory to CPC were
received. CCA is therefore prepared to issue $1,000,000 of its Common Stock,
priced in accordance with the agreements between CPC and Sitedev. However,
because those agreements contain a warranty from Sitedev which limits the amount
of liabilities of Atmos to be assumed by CPC and provide that the CCA Common
Stock may be held by CPC as security for a breach of the warranties, CCA has not
issued the shares while an audit of Atmos, which is currently being conducted by
Atmos' accountants, is uncompleted.
The Atmos product, like Conserver 21(TM), has not been successfully
commercialized, and there can be no assurance that the Atmos product can be
successfully commercialized. Successful commercialization of the Atmos product
is subject generally to similar difficulties and uncertainties that
commercialization of Conserver 21(TM) faces.
4
<PAGE>
(Note F) Hotel and Casino Business:
Hotel Management Services. On October 2, 1997, the Company entered an
agreement (the "Hotel Management Agreement") with Dorsett Hotels and Resorts
International, Ltd. ("Dorsett"), a company controlled 100 percent by Mr. Dato
David Chiu, pursuant to which the Company, directly or through a subsidiary,
would act as exclusive operator and manager of certain hotels owned by Dorsett.
In consideration for Dorsett entering into the Hotel Management Agreement, the
Company would (i) issue to Dorsett up to an aggregate 2,000,000 shares and/or
options to purchase shares of the Company's Common Stock, upon specified
conditions being satisfied and (ii) pay Dorsett $3,000,000. The Hotel Management
Agreement provides for twenty year exclusive operating agreements with respect
to the management of the Dallas Grand Hotel, Dallas, Texas, Dorsett Regency
Bali, Indonesia, Dorsett Regency, Kuala Lumpur, Malaysia, and Rockman's Regency
Melbourne, Australia, as well as operating agreements on substantially similar
terms for four other hotels scheduled to open within the next two years (the
"Operating Agreements").
The parties amended the Hotel Management Agreement on January 28, 1998
whereby the consideration for Dorsett entering into the Hotel Management
Agreement was amended to (i) the issuance to Dorsett up to an aggregate of
800,000 shares and/or options to purchase shares of the Company's Common Stock,
upon specific conditions being satisfied and (ii) pay Dorsett $1,000,000. The
Amended Hotel Management Agreement appoints the Company as the exclusive
operator of the Dorsett Regency, Bali; Dorsett Resort, Serenban; Dorsett Court,
Angkor Wat; and Dorsett Hotel, Phuket. Pursuant to the Amended Hotel Management
Agreement, the Company has paid Dorsett $1,000,000 but has not granted the
shares of the Company's Common Stock since the conditions precedent to such
issuance have yet to be satisfied.
The Company entered into Operating Agreements for each of the hotels
effective January 1, 1998, other than the Rockman's Regency, Melbourne,
effective March 1, 1998. The Company, pursuant to the terms of the Operating
Agreement for each hotel managed, is entitled to a base fee equal to three
percent of gross revenues, calculated on an annual basis and payable monthly,
plus an incentive fee of ten percent of gross operating profits. In addition,
the Company is to receive annual service fees equal to four percent of gross
revenues for marketing, promotion and advertising expenses as well as an
additional one-half of one percent of gross revenues for training costs which
would be used in turn to fund such expenses. Each Operating Agreement further
provides that in the event Dorsett terminates the Operating Agreement for any
reason other than for a material breach by the Company, which is not remedied by
the Company, or upon breach of covenant or warranty, bankruptcy or non-payment,
the Company would be entitled to a termination fee. The termination fee shall be
calculated based on the formula which is the remaining number of years under
such Operating Agreement multiplied by a factor which is: (i) in the event of a
termination during the first five years of the Agreement, the factor shall be
the sum of the actual fees paid or payable to the Company based on revenues
generated to date plus fees payable to the Company based on projected revenues
for the rest of the year, (ii) in the event of a termination after the first
five years, the factor shall be the average of the fees paid or payable to the
Company for the preceding two years, or (iii) in the event of a termination
after the first ten years, the factor shall be the average of the fees paid or
payable to the Company for the preceding three years. The Company plans to add a
management team with experience with major international hotel chains in the
operation and management of hotels and leisure time activities worldwide.
Dorsett agreed that it shall not for a period of three years from the
date of issuance or transfer, as applicable, of the shares received under the
Hotel Management Agreement, voluntarily or involuntarily, directly or
indirectly, sell, contract to sell, grant a right to purchase, exchange,
mortgage, pledge, hypothecate, give, bequeath, transfer, assign, encumber,
alienate or in any other way whatsoever dispose of (hereinafter collectively
called "transfer") any of such shares, including any options and warrants with
respect to such shares, received by way of dividend or upon an increase,
reduction, substitution or reclassification or combination of stock of the
Company or upon any reorganization of the Company, as applicable.
Notwithstanding any of the foregoing, Dorsett may transfer the shares to any
subsidiary or affiliate of Dorsett, subject to the Company's consent, which
consent shall not be unreasonably withheld. Dorsett also agreed, until three
years from the issuance date of the shares, to give the Company an irrevocable
5
<PAGE>
proxy, with full power of substitution, to vote on all matters as the Company
deems appropriate, with respect to the shares at all meetings of the
stockholders of the Company and by means of any written consent of stockholders
with respect to all matters. The Company has designated Charles H. Stein, the
Chairman, President and Chief Executive Officer of the Company as the authorized
person to exercise the aforementioned voting rights on behalf of the Company,
until such time as Mr. Stein is incapacitated to act.
Furthermore, the Hotel Management Agreement provides that, in the event
that Dorsett wishes to sell all or any part of the shares after the three-year
period described above, the Company shall have the first option to purchase all
or any part of the shares from Dorsett. Dorsett agreed to give the Company
written notice thereof of its intent to sell any or all of the shares received
under the Hotel Management Agreement.
The Company has a right to purchase said shares at a price equal to the
(i) closing price per share as reported on the Nasdaq (as reported in The Wall
Street Journal) on the date written notice is given to the Company or (ii) the
price offered to Dorsett by an unaffiliated third party (not a competitor of the
Company) in an irrevocable and unconditional bona fide written offer (the "Bona
Fide Offer"), as applicable. The Company has the right to purchase all or a
portion of the shares by giving Dorsett written notice no later than 10 business
days after written notice is provided to the Company. In the event that the
Company fails to exercise its option, Dorsett has the right to sell the shares
to such third party at the price offered to the Company without any further
obligations to sell the shares to the Company. If, however, any or all of the
shares are not sold pursuant to the Bona Fide Offer within 30 days from the
receipt by the Company of Dorsett's notice of intent to sell, the unsold shares
shall remain subject to the terms of the Hotel Management Agreement.
Subsequent to the execution of the Hotel Management Agreement with
Dorsett, the Company was notified by Mr. Chiu that Far East Consortium
International, Ltd. ("FEC") is the owner of certain hotels included in the
agreement and as such, would require a separate agreement with the Company under
terms and conditions similar to the Dorsett Hotel Management Agreement. On
January 25, 1998, the Company entered into an Amendment to the Hotel Management
Agreement and a separate agreement (the "FEC Hotel Management Agreement"), with
FEC whereby CCA was appointed as exclusive operator and manager of the Dallas
Grand Hotel, Dallas; Rockman's Regency, Melbourne; Dorsett Regency, Kuala
Lumpur; and Radisson Plaza, Edmonton, in consideration for FEC receiving upon
execution of the FEC Hotel Management Agreement, $1,500,000 and the Company
granting FEC the right to receive 1,200,000 shares of Common Stock of the
Company. Of the 1,200,000 shares of Common Stock to be granted to FEC, shares
are to be granted in such proportions upon the delivery of a duly executed and
legally enforceable hotel management contract relating to the following hotels,
275,000 allocated to the Dallas Grand Hotel, 400,000 allocated to the Rockman's
Regency, 275,000 allocated to the Dorsett Regency and 250,000 allocated to the
Radisson Plaza. Hotel operating agreements must be delivered within two years of
January 28, 1998 in order for FEC to receive such shares. The FEC Hotel
Management Contract contains the same provisions as the Dorsett Hotel Management
Agreement with regards to transfer of shares, irrevocable proxy, and repurchase
of shares. Pursuant to the FEC Hotel Management Agreement, the Company has paid
FEC $1,500,000 and has issued FEC 950,000 shares of the Company's Common Stock.
The Company has not yet issued the 250,000 shares of Common Stock allocated to
the Radisson Plaza, Edmonton.
The Suriname Project. As of October 3, 1997, the company entered into
an agreement in principle with Parbhoe's Handelmij NV, a Surinamese limited
liability company, to create a joint venture company to develop a casino project
(the "Suriname Project") in Paramaribo, the capital city of Suriname (the former
Dutch Guyana). Pursuant to the agreement, the joint venture company will
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also enter into a Casino Management Agreement with the Company to manage the
casino. Through March 31, 1998, the Company has advanced $1,835,000 for this
project. Total additional funds which will be required to be advanced by the
Company or financing from outside sources to be arranged by the Company is
expected to aggregate approximately $3,000,000.
(Note G) Subsequent Events:
Budapest Project. On April 3, 1998, the Company's wholly owned
subsidiary, Dorsett Hotels & Resorts Inc. ("CCA Dorsett") entered into an
agreement with Casino Bahia De Cadiz S.A. ("Cadiz") and Mrs. Teresa Juste Picon,
("Juste") (both of Spain) to purchase (i) their 95% interest in the equity
capital of Roulette Kft. ("Roulette"), a Hungarian limited liability company
that operates the Orfeum Casino in Budapest, and (ii) receivables of in excess
of $1.5 million due to Cadiz and Juste under loan agreements and lease
agreements with Roulette. (the "Budapest Project"). Under the agreement, the
Company has paid $100,000 to Cadiz and Juste and has loaned $270,000 to
Roulette. Further, the Company has made two additional loans, repayable on
demand, totalling $250,000 to Roulette for working capital. The agreement
provides for CCA Dorsett to manage the Orfeum Casino during the period from
April 3, 1998, up to the closing of the acquisition. The purchase is subject to
the approval of the Hungarian Gaming Supervisory Board, warranties about the
business and operations of Roulette and other normal legal conditions. At the
closing CCA Dorsett is required to deliver to Cadiz and Juste $460,000 of CCA
Common Stock calculated at $7.50 per share, which equates to 61,333 shares of
CCA Common Stock. The Company has given Cadiz and Juste a put option to sell
their shares of CCA Common Stock back to the Company at $7.875 per share during
the three month period starting six months after the closing. There can be no
assurance that the Hungarian Gaming Supervisory Board will approve CCA Dorsett
as the new controlling shareholder. Under the agreement, if the purchase is not
completed, Cadiz and Juste are obligated to repay the $100,000 payment and the
$270,000 loan made to Roulette. The Company has a claim against Roulette for the
repayment of its other $250,000 of loans.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results of Operation
The following discussion and analysis of significant factors affecting
the Company's operating results and liquidity and capital resources should be
read in conjunction with the accompanying financial statement and related notes.
Overview
The Company, which was organized in March 1996, is in the development
stage and its activities since the date of incorporation have been primarily
focused on raising both debt and equity financing (public and private),
recruiting management personnel, testing, developing and exploiting its food
technology product and negotiating distribution and other arrangements. Since
August 1997, management of the Company has also been engaged in exploring new
business opportunities for the Company and has entered into several agreements.
The Company's operations are subject to all of the risks inherent in
the establishment of a new business enterprise, including the need to obtain
financing, lack of revenues, reliability of sources of supply and the
uncertainty of market acceptance of its business. The company has
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incurred losses since inception. From March 6, 1996 to June 30, 1997, the
Company did not derive any revenues from operations. During the nine months
ended March 31, 1998, the Company had revenues of $186,494 derived primarily
from the commencement of its hotel management operations. The Company's
accumulated deficit at March 31, 1998 was $14,590,146, which included $6,878,307
of non-cash compensation charges related to the value attributed to stock
options and warrants issued by the Company.
From March 1996 to November 1996, the Company raised the capital
necessary for its initial business development through debt and equity private
placements. In June 1997, the Company completed an initial underwritten public
offering (the "IPO") in which it received net proceeds of approximately
$8,900,000 from the sale of 2,200,000 shares of its Common Stock at a per share
price of $5.00. In July 1997, the Company's underwriter exercised it's
over-allotment option to purchase an aggregate of 330,000 shares of Common Stock
at $5.00 per share resulting in the Company receiving additional net proceeds of
$1,448,000. Aggregate net proceeds to the Company from the IPO amounted to
$10,306,000. Also, in connection with the IPO, the Company sold to the
underwriters, for nominal consideration, Underwriters' Warrants to purchase
220,000 shares of Common Stock exercisable for a period of four years at $8.25
per share. During the nine months ended March 31, 1998, approximately $4,650,000
of the proceeds from the IPO were used for general business purposes, including
payments for the retirement of convertible debentures in the amount of $385,000
and advances of $839,000 made to Conserver Purchasing Corporation. At June 30,
1997, approximately $2,130,000 of the proceeds from the IPO were used for
general business purposes, including the $1,000,000 loan to Agrotech under the
Distribution Agreement and the repayment of a $1,000,000 convertible debenture,
together with the accrued interest thereon.
In November 1997, the Company commenced efforts to raise additional
capital to fund its Hotel and Casino Business (See Note F). The Company
completed its private offering to raise capital in February and received in the
aggregate net proceeds of $8,918,000 from the sale of 2,044,763 shares of its
Common Stock at a per share price of $5.14. Also in connection with the
offering, the Company sold to the placement agent, for nominal consideration,
warrants to purchase 715,668 shares of Common Stock exercisable for a period of
four years at $5.14 per share.
The Company's distribution and marketing rights for Conserver 21(TM)
were derived from a distribution agreement entered into in March 1997 (the
"Distribution Agreement") with Agrotech 2000 S.L. ("Agrotech"), a Spanish
company that manufactures and packages Conserver 21(TM) and whose principal
stockholder is the developer of Conserver 21(TM). Initial marketing efforts of
the Conserver 21(TM) product in the United States indicated a need for
improvement in the packaging and pricing of the Conserver 21(TM) product. These
problems affected the Company's ability to market Conserver 21(TM) and to
generate revenue. Although the Company and Agrotech entered into negotiations
with respect to reducing the pricing arrangements for the Conserver 21(TM)
product and to modify the manufacturing arrangements so that packaging could be
done in the United States, no agreement has been reached. As a result, the
Company gave notice of termination to Agrotech with respect to the Distribution
Agreement.
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Changes in Fiscal Year
The Company initially adopted a fiscal year ending August 31, when it
incorporated on March 6, 1996. During the 1997 calendar year, the Company
elected to change its fiscal year end to June 30. Accordingly, the following
discussion of the Company's results for the three and nine months ended March
31, 1998 is compared to the three and nine months ended March 31, 1997.
Results of Operations
The Company has a limited operating history upon which an evaluation of
its performance and prospects can be made. During the period from March 6, 1996
to March 31, 1998, the Company's activities were primarily limited to
organization efforts and raising public and private capital to defray its
organizational expenses and the development and initial implementation of its
business plan for its Principal Line of Business. Commencing in August 1997, the
Company's activities also included organizational and fund raising efforts
relating to its New Line of Business and New Business Opportunities. From March
6, 1996 to June 30, 1997 the Company had no revenues. During the nine months
ended March 31, 1998 the Company had revenues of $178,466 primarily attributable
to the commencement of its hotel management operations.
Comparison of Three Months Ended March 31, 1998
to Three Months Ended March 31, 1997
Net Loss. The Company incurred a net loss of $1,584,443, or $0.14 per
share, for the three months ended March 31, 1998, as compared to a net loss of
$816,942, or $0.16 per share, for the three months ended March 31, 1997. This
increase was primarily due to increases in general and administrative expenses.
Revenues. For the three months ended March 31, 1998, the Company had
revenues of $178,466 from initial fees earned on its hotel management contracts.
During the three months ended March 31, 1997, the Company had no revenues.
Compensation Charges. During the three months ended March 31, 1998,
non-cash compensation charges were $197,000 while the Company incurred $223,000
of such charges for the three months ended March 31, 1997. This represents a
decrease of $26,000 during the current period in the Company's utilization of
the issuance of stock options and warrants in lieu of cash compensation
payments.
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $1,562,120 for the three months ended March 31, 1998
compared to $462,040 for the three months ended March 31, 1997. This 238%
increase was primarily the result of costs associated with increases in the
Company's business activities for its Principal Line of Business, additional
expenses incurred as a result of the Company's status as a publicly traded
entity and expenses incurred in exploring and entering into the New Line of
Business and New Business Opportunities.
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Marketing and Sales. During the three months ended March 31, 1998, the
Company incurred $74,657 in marketing and sales expenses in connection with its
preliminary marketing and sales efforts for its food technology product. The
Company incurred minimal marketing and sales expenses for the three months ended
March 31, 1997.
Research and Development. During the three months ended March 31, 1998,
the Company incurred no research and development expenses. The Company incurred
$12,869 in research and development expenses for the three months ended March
31, 1997.
Interest Income. For the three months ended March 31, 1998 interest
income was $70,868, compared to $14,211 for the three months ended March 31,
1997. This increase was due to additional cash being available for investment
from the proceeds of the IPO and Private Offering.
Interest Expense. For the three months ended March 31, 1998, interest
expense including amortization of debt discount was $0 compared to $127,178 for
the three months ended March 31, 1997. For the three months ended March 31,
1997, interest expense included non-cash charges related to amortization of
$78,125 on debt discount recorded for the value of Common Stock shares issued to
convertible debentureholders. The decrease in actual accrued interest expense
from $49,053 during the 1997 period to $0 in the 1998 period was the result of
the repayment of certain outstanding obligations by the Company from the
proceeds of the IPO.
Comparison of Nine Months Ended March 31, 1998
to Nine Months Ended March 31, 1997
Net Loss. The Company incurred a net loss of $4,641,008, or $0.51 per
share, for the nine months ended March 31, 1998, as compared to a net loss of
$2,254,928, or $0.47 per share, for the nine months ended March 31, 1997. This
increase was primarily due to increases in general and administrative expenses,
sales and marketing expenses and compensation charges in connection with the
issuance of options and warrants.
Revenues. For the nine months ended March 31, 1998, the Company had
revenues of $186,494 from fees earned on its initial hotel management services.
During the nine months ended March 31, 1997, the Company had no revenues.
Compensation Charges. During the nine months ended March 31, 1998,
non-cash compensation charges were $976,000 compared to $680,201 for the nine
months ended March 31, 1997. This represents a 44% increase during the current
period in the Company's utilization of the issuance of stock options and
warrants in lieu of cash compensation payments.
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $3,722,706 for the nine months ended March 31, 1998
compared to $1,350,470 for the nine months ended March 31, 1997. This 175%
increase resulted from costs associated with increases in the Company's business
activities for its Principal Line of Business, additional expenses incurred as a
result of the Company's status as a publicly traded entity and expenses incurred
in exploring and entering into the New Line of Business and New Business
Opportunities.
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Marketing and Sales. During the nine months ended March 31, 1998, the
Company incurred $238,664 in marketing and sales expenses in connection with its
preliminary marketing and sales efforts for Conserver 21(TM). The Company
incurred nominal marketing and sales expenses of $6,066 for the nine months
ended March 31, 1997.
Research and Development. During the nine months ended March 31, 1998,
the Company incurred $53,290 in research and development expenses which
represented an increase in product testing for its food technology product. The
Company incurred $22,230 in research and development expenses for the nine
months ended March 31, 1997.
Interest Income. For the nine months ended March 31, 1998 interest
income was $247,836, compared to $40,602 for the nine months ended March 31,
1997. This increase was due to additional cash being available for investment
from the proceeds of the IPO and Private Offering.
Interest Expense. For the nine months ended March 31, 1998, interest
expense including amortization of debt discount was $74,678 compared to $236,563
for the nine months ended March 31, 1997. These amounts include non-cash charges
related to amortization of $60,328 and $152,303, respectively, on debt discount
recorded for the value of Common Stock shares issued to convertible
debentureholders. This decrease in the current period in actual accrued interest
expense was the result of the repayment of certain outstanding obligations by
the Company from the proceeds of the IPO.
Liquidity and Capital Resources
From its date of incorporation through June 1997, the Company relied
primarily upon privately raised debt and equity financing to fund its operations
which included raising $3,172,000 through the private placement of its Common
Stock at $5.00 per share.
In June 1997, the Company completed its initial public offering in
which it received net proceeds of approximately $8,900,000 from the sale of
2,200,000 shares of its common stock, $0.001 par value (the "Common Stock") at a
per share price of $5.00. In July 1997, the Company's underwriter exercised its
over-allotment option to purchase an aggregate of 330,000 shares of Common Stock
at $5.00 per share, resulting in the Company receiving additional net proceeds
of approximately $1,448,000. Aggregate net proceeds to the Company from the IPO
amounted to approximately $10,306,000. Also in connection with the IPO, the
Company sold to the underwriters, for nominal consideration, Underwriters'
Warrants to purchase 220,000 shares of Common Stock exercisable for a period of
four years at $8.25 per share.
In November 1997, the Company commenced efforts to raise additional
capital to fund its Hotel and Casino Business (See Note F). The Company
completed its private offering to raise capital in February and received in the
aggregate net proceeds of $8,918,000 from the sale of 2,044,763 shares of its
Common Stock at a per share price of $5.14. Also in connection with the
offering, the Company sold to the placement agent, for nominal consideration,
warrants to purchase 715,668 shares of Common Stock exercisable for a period of
four years at $5.14 per share.
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During the nine months ended March 31, 1998, approximately $4,650,000
of the proceeds from the IPO were used for general business purposes, including
payments for the retirement of convertible debentures in the amount of $385,000
and advances of $839,000 made to Conserver Purchasing Corporation. At June 30,
1997, approximately $2,130,000 of the proceeds from the IPO were used for
general business purposes, including the $1,000,000 loan to Agrotech under the
Distribution Agreement and the repayment of a $1,000,000 convertible debenture,
together with the accrued interest thereon.
At June 30, 1997 and at March 31, 1998, the Company had available cash
and cash equivalents of $7,715,460 and $5,273,048, respectively.
During the six months ended September 30, 1997, in connection with the
convertible debentures issued by the Company in September and November 1996 in
the aggregate principal amounts of $600,000 and $150,000, respectively, the
$150,000 debenture issued in November 1996 was repaid in full from the proceeds
of the IPO, and of the $600,000 debenture issued in September 1996, $365,000 of
such debenture was converted into Common Stock at $5.00 per share and $235,000
was repaid from the proceeds of the IPO.
The Company's 1996 Stock Option Plan (the "Plan") was adopted in
November 1996, and amended in December 1996, April 1997 and December 1997. Under
the Plan, which authorizes the granting of incentive stock options or
nonincentive stock options, the maximum number of shares of common stock for
which options may be granted is 5,000,000 shares. During the nine months ended
March 31, 1998, the Company issued to employees stock options under the Plan to
purchase an aggregate of 125,000 shares of Common Stock and to consultants stock
options to purchase 952,500 shares of Common Stock. As at March 31, 1998,
options to purchase 2,132,500 shares of Common Stock had been granted under the
Plan. During the nine months ended March 31, 1998, the Company also issued to a
consultant 5,000 shares of Common Stock and issued to another consultant
currently exercisable warrants to purchase 100,000 shares of Common Stock at
$6.50 per share which expire in August 2001. Historically, the Company has used
Common Stock issuances and stock option grants and warrants to pay a significant
portion of its compensation expenses.
In connection with the Company's Principal Line of Business, the
Distribution Agreement with Agrotech required the Company to make loans to
Agrotech of up to $1,500,000 for the enhancement of Agrotech's manufacturing
capacity. Under the terms of the Distribution Agreement, the first $1,000,000 of
such loan is repayable over a three-year period as an offset against Conserver
21(TM) purchases by the Company in excess of $2,000,000 annually and the balance
of any such loan is payable out of royalties which may be due to Agrotech from
such sales over a three- to four-year period. In June 1997, the Company advanced
$1,000,000 and has established a reserve equal to the amount advanced to
Agrotech. The Company had not advanced any further sums to Agrotech at the time
of its termination of the Distribution Agreement.
Pursuant to the first agreement between CPC and Sitedev, CPC acquired
51% of the shares of Atmos in return for advancing $400,000 to Atmos upon
execution of the first agreement on December 9, 1997 and agreed to advance an
additional $250,000 to Atmos which it did on February 9, 1998. The agreement
requires Atmos to use all such funds to discharge
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certain of its debts and obligations. The Company advanced $400,000 to CPC under
a loan agreement dated December 5, 1997, to fund CPC's initial payment required
under the first agreement, and in February 1998, advanced the additional
$250,000 to CPC for the remaining payments required under the first agreement.
Through March 31, 1998, the Company advanced to CPC an additional $189,000 for
inventory purchases and overhead requirements bringing the total advances to CPC
for funding Atmos to an aggregate amount of $839,000. Since CPC will be unable
to repay any of the loans made to it by the Company, the Company must exercise
the option to acquire Atmos in order to recoup the value of its loans to CPC.
Under the second agreement between CPC and Sitedev, CPC is obligated to
deliver to Sitedev Common Stock of the Company having a market value of
$1,000,000 in February 1998, subject to Atmos having received assignments
satisfactory to CPC of certain patent rights in respect of its food preservation
product from a former Atmos shareholder. In early May 1998, such assignments
satisfactory to CPC were received. CCA is therefore prepared to issue $1,000,000
of its Common Stock, priced in accordance with the agreements between CPC and
Sitedev. However, because those agreements contain a warranty from Sitedev which
limits the amount of liabilities of Atmos to be assumed by CPC and provide that
the CCA Common Stock may be held by CPC as security for a breach of the
warranties, CCA has not issued the shares while an audit of Atmos, which is
currently being conducted by Atmos' accountants, is uncompleted.
During the nine months ended March 31, 1998, the Company incurred
$238,664 and $53,290 in marketing and sales expenses and research and
development costs for its food technology product, respectively. Although the
Company has completed some of the initial testing of its food technology
product, the Company has not completed all of its own comprehensive independent
tests. Thus, it is possible that the Company's product may require further
research, development, design and testing, as well as regulatory clearances,
prior to larger-scale commercialization. During the fiscal year ending June 30,
1998, the Company anticipates a significant increase in marketing and sales
costs and research and development costs for its food technology product.
The Company is in the development stage and its operations are subject
to all of the risks inherent in the establishment of a new business enterprise,
including the need to obtain financing, lack of revenues and the uncertainty of
market acceptance of its business. The Company has derived only nominal revenues
from operations and has incurred losses since inception. No significant
operating revenues are anticipated until such time, if ever, as the Company can
demonstrate the commercial viability of its food technology product. The Company
currently has nominal orders for its food technology product and there can be no
assurance that potential customers will be willing to incur the costs of such
product. There can be no assurance regarding whether or when the Company will
successfully implement its food technology business plan or operate profitably.
The Company anticipates that during the fiscal year ended June 30, 1998
it will enter the operating stage for its food technology Principal Line of
Business and as a result will incur additional costs in connection with
inventory purchases, warehousing and shipping and hiring additional employees
and consultants. The Company currently estimates that its available cash
reserves will be sufficient to meet the Company's liquidity and working capital
requirements for
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its Principal Line of Business, including additional expenditures for inventory
purchase, hiring additional employees, consultants and warehouse space through
June 1999. The continued expansion and operation of the Company's Principal Line
of Business beyond such period may be dependent on its ability to obtain
additional financing.
The Company currently has 11 employees. The Company anticipates a
significant increase in the number of employees and consultants during the next
12 to 18 months. This increase in the number of employees and consultants and
the attendant costs cannot be estimated at this time. Management does not
anticipate, however, such workforce increases until such time the Company's
Principal Line of Business and/or New Line of Business have the potential to
generate sufficient revenues to offset such costs.
In addition to the direct issuance of shares of the Company's Common
Stock, the Company anticipates funding the cash portion of the initial capital
required for the New Line of Business and New Business Opportunities with the
proceeds from the private sale of additional Common Stock and/or other
securities of the Company. Issuances of securities would be dilutive to
stockholders and any other types of financing would likely constrain the
Company's financial and operating flexibility. With respect to the New Line of
Business and the New Business Opportunities, the Company during the nine months
ended March 31, 1998 funded $3,000,000 under the Sakhalin Agreement and
approximately $3.13 million under the Hotel Management Agreement, the
Development Services Agreement and the Casino Consulting Agreement. Further, the
Suriname Project will require cash to be advanced by the Company or financing
from outside sources to be arranged by the Company of approximately $4,800,000.
As of March 31, 1998, $1,835,000 has been advanced by the Company.
In addition, the Company issued in December 1997 pursuant to the
Sakhalin Agreement, 2,000,000 shares of its Common Stock and is further required
to issue, under certain circumstances and subject to the completion of certain
terms and obligations thereunder, up to 3,500,000 shares of Common Stock under
the Hotel Management Agreement and Development Services Agreement. Further, the
Company issued options to purchase 600,000 shares of Common Stock in December
1997 relating to obligations created by the aforementioned transactions. The
Company's stockholders will experience significant dilution in their percentage
ownership interest in the Company upon the issuance of the shares of Common
Stock as contemplated under the agreements related to the New Line of Business
and the New Business Opportunities.
In the event the Company's plans change, its assumptions prove to be
inaccurate or its available cash reserves together with the privately raised
funds prove to be insufficient to fund its operations (as a result of future
changes in the industry, general economic conditions, unanticipated increases in
expenses or other factors), the Company may be required to seek additional
financing. Any additional equity financing may be dilutive to stockholders and
debt financing, if available, will likely include restrictive covenants,
including financial maintenance covenants restricting the Company's ability to
incur additional indebtedness and to pay dividends. Except as disclosed herein
with respect to the New Line of Business and the New Business Opportunities, the
Company has no current arrangement with respect to, or sources of, additional
financing and there can be no assurance that any needed financing would be
available to the Company on acceptable terms, or at all. The Company's ability
to obtain additional
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financing will depend upon, among other things, the willingness of financial
organizations to participate in the funding and the Company's financial
condition and results of operations.
The Company's future performance will be subject to a number of
business and other factors, including many factors beyond the Company's control,
such as economic downturns and changes in the marketplace, as well as the level
of competition and the ability of the Company to successfully implement its
business strategy and effectively monitor and control its costs. There can be no
assurance that the Company will be able to generate significant revenues or
achieve profitable operations.
Subsequent Events
Budapest Project. On April 3, 1998, the Company's wholly owned
subsidiary, Dorsett Hotels & Resorts Inc. ("CCA Dorsett") entered into an
agreement with Casino Bahia De Cadiz S.A. ("Cadiz") and Mrs. Teresa Juste Picon,
("Juste") (both of Spain) to purchase (i) their 95% interest in the equity
capital of Roulette Kft. ("Roulette"), a Hungarian limited liability company
that operates the Orfeum Casino in Budapest, and (ii) receivables of in excess
of $1.5 million due to Cadiz and Juste under loan agreements and lease
agreements with Roulette. (the "Budapest Project"). Under the agreement, the
Company has paid $100,000 to Cadiz and Juste and has loaned $270,000 to
Roulette. Further, the Company has made two additional loans, repayable on
demand, totalling $250,000 to Roulette for working capital. The agreement
provides for CCA Dorsett to manage the Orfeum Casino during the period from
April 3, 1998, up to the closing of the acquisition. The purchase is subject to
the approval of the Hungarian Gaming Supervisory Board, warranties about the
business and operations of Roulette and other normal legal conditions. At the
closing CCA Dorsett is required to deliver to Cadiz and Juste $460,000 of CCA
Common Stock calculated at $7.50 per share, which equates to 61,333 shares of
CCA Common Stock. The Company has given Cadiz and Juste a put option to sell
their shares of CCA Common Stock back to the Company at $7.875 per share during
the three month period starting six months after the closing. There can be no
assurance that the Hungarian Gaming Supervisory Board will approve CCA Dorsett
as the new controlling shareholder. Under the agreement, if the purchase is not
completed, Cadiz and Juste are obligated to repay the $100,000 payment and the
$270,000 loan made to Roulette. The Company has a claim against Roulette for the
repayment of its other $250,000 of loans.
Other
Certain statements in this Quarterly Report on Form 10-Q are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 and involve known and unknown risks, uncertainties and other
factors that may cause the Company's actual results, performance or achievements
to be materially different form the results, performance or achievements
expressed or implied by the forward looking statement. Factors that impact such
forward looking statements include, among others, risk factors included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information is furnished pursuant to Item 701(f) of
Regulation S-K in connection with the Company's IPO:
The effective day of the Securities Act registration: June 5, 1997
The commission file number assigned to the subject registration
statement: 333-15639
The date on which the offering commenced: June 6, 1997
The date on which the offering terminated: June 13, 1997; the offering
terminated after all of the securities were sold.
The names of the sole underwriter(s): Janssen/Meyers Associates, L.P.
The title of securities registered: Common Stock, $0.001 par value
For each of securities registered, the amount registered: 2,530,000
shares (including underwriter's overallotment)
Aggregate price of the offering amount registered: $12,650,000
For each of securities, the amount sold: 2,530,000 shares (including
underwriter's overallotment)
Aggregate offering price of the amount of each securities sold:
$12,650,000
From the effective date of the Securities Act registration statement to
the ending date of the reporting period, the amount of expenses
incurred for the Company's account in connection with the issuance and
distribution of the Securities registered: $2,302,000.
Underwriters discounts and commissions $1,075,250
Expenses paid to or for underwriter $ 561,750
Auditors Fees $ 85,000
Legal Fees $ 280,000
Printing Expenses $ 233,000
Miscellaneous Filing Fees and Other Expenses $ 67,000
Such payments referred to above were not direct or indirect payments to
officers, directors, general partners of the issuer or their
associates, affiliates of the issuer or any person owning 10% or more
of any class of equity securities of the issuer, nor were such payments
referred to above were direct or indirect payments to others, except as
indicated
Net offering proceeds were: $10,306,000
16
<PAGE>
From the effective date of the Securities Act registration to the end
of the reporting period the amount of net offering proceeds used for
any purpose for which at least 5% of the issuer's total offering
proceeds, whichever is less, has been used were:
Retirement of Convertible Debentures, together
with accrued interest thereon $1,583,000
Loan pursuant to Distribution Agreement $1,000,000
Advances to C.P.C. $ 839,000
Working Capital and General Business Purposes $3,271,000
Such payments referred to above were not direct or indirect payments to
officers, directors, general partners of the issuer or their
associates, affiliates of the issuer or any person owning 10% or more
of any class of equity securities of the issuer, nor were such payments
referred to above were direct or indirect payments to others, except as
indicated
If the use of proceeds disclosed represents a material change in the
use of proceeds described in the prospectus, describe the material
change:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Documents
----------- ---------
27 Financial Data Schedule
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSERVER CORPORATION OF AMERICA
Dated: May 20, 1998 By: /s/ Charles H. Stein
---------------------------------
Charles H. Stein
Chairman, Chief Executive Officer
and President
By: /s/ Miles R. Greenberg
---------------------------------
Miles R. Greenberg
Chief Financial Officer
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