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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-22191
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)
N/A
---------------
(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 [ X ] No. [ ]
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 November 30, 1998
------------ --------------------------------
Common Stock, $.001 par value 11,793,925 shares
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CCA COMPANIES INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and September 30, 1998 (unaudited)....................................1
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 1997 (unaudited),
the Three Months ended September 30, 1998 (unaudited).................2
CondensedConsolidated Statements of Cash Flows for the Three Months ended
September 30, 1997 (unaudited) and for the Three Months ended
September 30, 1998 (unaudited)........................................3
Notes to Condensed Consolidated Financial Statements...........................4
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations.....................8
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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, September 30,
1998 1998
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,699,028 $ 495,932
Accounts receivable 342,987 701,163
Prepaid and other current assets 520,181 368,006
------------ ------------
Total current assets 2,562,196 1,565,101
Loans receivable 667,085
Deposits on assets to be acquired 422,015
Construction in progress 5,107,333 4,466,221
Excess cost over fair value of assets acquired, net 10,366,442 10,278,574
Property, equipment and leasehold improvements, net 2,583,546 5,603,457
Management contract agreements, net 2,228,245 2,162,860
Other assets 20,300 181,690
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TOTAL $ 23,957,162 $ 24,257,903
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 1,630,805 2,202,207
Notes payable - current 1,345,000
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Total current liabilities 1,630,805 3,547,207
Notes payable - long term 600,000
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1,630,805 4,147,207
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Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, 5,000,000 shares
authorized, 1 share issued and outstanding
Common stock, par value $.001; 50,000,000 shares 11,997 12,361
authorized; 11,996,048 and 12,361,048 shares issued and
outstanding at June 30, 1998 and September 30, 1998, respectively
Additional paid-in capital 44,806,570 46,231,455
Currency translation adjustments (1,284,048)
Accumulated deficit (22,492,210) (24,849,072)
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Total stockholders' equity 22,326,357 20,110,696
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TOTAL $ 23,957,162 $ 24,257,903
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three For the Three
Months Months
Ended Ended
September 30, September 30,
1998 1997
------------ ------------
REVENUES $ 785,969 $ 5,470
OPERATING EXPENSES:
Marketing and sales 86,132 102,312
General and administrative 2,233,081 1,112,657
Compensation charges in connection with
issuance of options and warrants 750,000 228,000
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Total operating expenses 3,069,213 1,442,969
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(LOSS) FROM OPERATIONS (2,283,244) (1,437,499)
OTHER INCOME (EXPENSE):
Interest income 6,595 103,552
Interest expense (80,213) (73,278)
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Total other income (expense) (73,618) 30,274
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NET (LOSS) $ (2,356,862) $ (1,407,225)
============ ============
NET (LOSS) PER SHARE OF
COMMON STOCK $ (0.19) $ (0.21)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING 12,117,715 6,744,737
============ ============
See notes to condensed consolidated financial statements.
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CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Months
Ended Ended
September 30, September 30,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($2,356,862) ($1,407,225)
Adjustments:
Compensation expense in connection with issuance of 750,000 228,000
stock options and warrants
Depreciation and amortization 222,080 70,154
Compensation expense relating to officer's salary 30,000
Legal services provided by shareholder without charge 32,987 41,500
Consulting services provided for common stock 26,250
Changes in current assets and current liabilities:
Accounts receivable (358,176) (9,331)
Prepaid expenses and other current assets 185,162 (16,686)
Accounts payable and accrued expenses 1,916,991 236,475
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Total adjustments 2,749,044 606,362
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Net cash provided (used) by operating activities 392,182 (800,863)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment and leasehold improvements (3,088,737) (33,643)
Deposits on assets applied to purchase 422,015
Funds used for acquisitions and development (543,624)
Cash funds acquired from acquisition 264,818
Funds used for loans and notes receivable (541,041)
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Net cash (used) by investing activities (2,945,528) (574,684)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds form public offering 1,447,569
Proceeds from sale of common stock 500,000
Construction services provided for common stock 200,250
Proceeds from notes payable 650,000
Repayments of notes payable (385,000)
----------- -----------
Net cash provided by financing activities 1,350,250 1,062,569
----------- -----------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,203,096) (312,978)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,699,028 7,715,460
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 495,932 $ 7,402,482
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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CCA COMPANIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Note A) Basis of Presentation and the Company:
CCA Companies Incorporated 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.
The accompanying unaudited condensed consolidated financial statements
include the accounts of CCA, its subsidiaries and joint venture
(collectively, the "Company"). Intercompany transactions and balances have
been eliminated in consolidation. The consolidated 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 period ended September
30, 1998 are not necessarily indicative of the results that may be expected
for any interim period or the year ending June 30, 1999.
The balance sheet at June 30, 1998 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, 1998 filed by the Company.
CCA's subsidiaries, Sakhalin City Centre, Ltd., Dorsett Hotels &
Resorts (M) Sdn. Bhd. and Suriname Leisure Company A.V.V. are based and
operating in the Russian Federation, Malaysia and Suriname, respectively.
The functional and reporting currency for statutory purposes is the Russian
Rouble, Malaysian Ringgit and Suriname Guilder, respectively.
These financial statements have been translated to United States
Dollars (U.S. $) using a methodology consistent with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. Assets and
liabilities are translated to U.S. $ at the rate prevailing on the balance
sheet dates and the statements of operations have been translated from the
functional currency to U.S. $ using an average exchange rate for the
applicable period. Results of this translation process are accumulated as a
separate component of stockholders' equity. As of September 30, 1998, the
cumulative foreign currency translation adjustments resulted in a reduction
of stockholders' equity in the amount of $1,284,048. Exchange gains (losses)
for the period ended June 30, 1998, are included in general and
administrative expenses in the accompanying consolidated statements of
operations. There were no exchange gains and losses for the three month
periods ended September 30, 1998 and September 30, 1997.
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(Note B) The Company:
CCA Companies Incorporated was incorporated under the laws of the State
of Delaware on March 6, 1996 as Conserver Corporation of America and changed
its name on December 2, 1997. The active business of CCA Companies
Incorporated (with its subsidiaries) now is (i) operation and ownership of a
gaming casino in Budapest and of a temporary gaming casino in Suriname,
where a permanent casino is nearly completed, and (ii) development of a
casino and hotel project in Sakhalin in the Russian Federation.
The Company is currently seeking capital or debt financing in order to
enable it (i) to continue its basic operation; (ii) to complete the Suriname
Casino so as to realize that casino's cash flow potential; and (iii) to pay
any material expenses of continuing negotiations for the Sakhalin project
and for maintaining its position in that project.
(Note C) Summary of Significant Accounting Policies:
[1] Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[2] Impairment of Long-Lived Assets
The Company adopted the Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Under the provisions of this
statement, the Company has evaluated its long-lived assets for financial
impairment, and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be
fully recoverable.
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values.
[3] Property, Equipment and Leasehold Improvements
Property and equipment is recorded at cost. Depreciation and
amortization is computed by the straight line method based on the estimated
useful lives (3-5 years) of the related assets. Leasehold improvements are
amortized over the shorter of the life of the asset or the lease.
[4] Excess Cost over Fair Value of Assets Acquired
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The excess of cost over net fair value of assets acquired of Sakhalin
General Trading & Investments, Limited ("SGTI") are amortized on a
straight-line basis, over the estimated future periods to be benefited (30
years). On an annual basis, the Company reviews the recoverability of the
excess cost over the fair value of assets acquired.
[5] Income Taxes
For the purpose of these financial statements the Company has adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," for all periods presented. Under the
asset and liability method of SFAS 109, deferred taxes are recognized for
differences between financial statement and income tax bases of assets and
liabilities.
[6] Earnings Per Share
Effective December 31, 1997, the Company adopted Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which simplifies the
computation of earnings per share requiring the restatement of all prior
periods.
Net loss per share of common stock is based on the weighted average
number of common shares outstanding during each period. Diluted loss per
share of common stock is computed on the basis of the weighted average
number of common shares and diluted securities outstanding. Dilutive
securities having an anti-dilutive effect are excluded from the calculation.
The weighted average number of common shares outstanding for all
periods presented retroactively reflects the effects of the Company's stock
split.
[7] Stock Based Compensation
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure.
The Company did not adopt the fair value based method for employees but
instead discloses the pro forma effects of the calculation required by the
statement.
[8] Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
[9] Business Segment Reporting
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Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information,
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS 131 does not require interim reporting of segment information
during the first year of its application to the reporting entity. The
Company has therefore not included such information in this report.
[10] Future Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on July 1, 1999 to
affect its financial statements.
(Note D) Budapest Casino:
On April 3, 1998, the Company's wholly owned subsidiary, Dorsett Hotels
& Resorts Inc. entered into an agreement as amended with Casino Bahia De
Cadiz S.A. ("Cadiz") and Mrs. Teresa Juste Picon, ("Juste") to purchase (i)
their 95% interest in the equity of Roulette Kft. ("Roulette"), a Hungarian
limited liability company that owns and operates the Orfeum Casino in
Budapest, and (ii) receivables of $1.5 million due to Cadiz and Juste under
loan agreements and lease agreements with Roulette (the "Budapest Project").
Pursuant to the agreement, as of June 30, 1998, the Company had paid
$100,000, included in prepaid and other current assets and had loaned
$667,000 to Roulette, included in loans receivable-long term. 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 was
subject to (i) the approval of the Hungarian Gaming Supervisory Board (ii)
warranties about the business and operations of Roulette and (iii) other
normal legal conditions. At the closing CCA Dorsett was required to deliver
to Cadiz and Juste $125,000 of CCA Common Stock calculated at $7.00 per
share, which equates to 17,857 shares of CCA Common Stock. The sellers are
not permitted to sell the Company's common
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stock for a period of six months following the effective date. On September
16, 1998, the Company completed the acquisition of Roulette.
According to the terms of the acquisition agreement, in the case that
the average closing market price of the Company's common stock on the last
ten (10) trading days preceding March 1, 1999 is less than $7.00 (adjusted
market price) per share, the Company shall deliver to the sellers a certain
number of additional Company's common stock such that the total market value
of (i) the Company's shares delivered to the sellers at the acquisition date
plus (ii) those additional Company's shares, calculated using the adjusted
market price, shall be equal to $125,000. In addition, the Company paid
$45,000 and issued 7,143 of its common stock to a consultant for services
performed in connection with the above acquisition.
The acquisition was accounted for using the purchase method of
accounting. The purchase price approximated the book value of the net assets
of the acquired company.
(Note E) Sakhalin Project:
On September 23, 1998, the Company entered into a letter of intent with JSC
Rosneftegazstroy ("RNGS"), which is a large Russian construction company.
The letter of intent may lead to RNGS guaranteeing the financing of the full
cost of a turn-key construction contract on the Company's Sakhalin Project,
for which RNGS would be the major subcontractor. The letter of intent also
contemplated joint development of a hotel management business in the Russian
Federation and the Commonwealth of Independent States through a RNGS
management subsidiary to be acquired by the Company. The consummation of any
of those transactions is still conditional on substantial further
negotiations and agreements with RNGS and others as well as the approval of
the Company's Board of Directors and stockholders. If fully consummated as
described in the letter of intent, the Company would arrange for RNGS to
obtain a 51% interest in the Sakhalin Project in consideration of the
guarantee, and the Company would issue 3,000,000 shares of its common stock
for the acquisition of the hotel management company. The 51% interest in the
Sakhalin Project could be exchanged at the option of the Company or RNGS for
the Company's issuance of additional shares of its common stock which,
together with the three million shares would give RNGS 51% of the common
stock of the Company to be thereupon outstanding.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
CCA Companies Incorporated was incorporated under the laws of the State
of Delaware on March 6, 1996 as Conserver Corporation of America and changed
its name on December 2, 1997. The active business of CCA Companies
Incorporated (with its subsidiaries, the "Company") now is
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(i) operation and ownership of a gaming casino in Budapest and of a
temporary gaming casino in Suriname, where a permanent casino is nearly
completed, and (ii) development of a casino and hotel project in Sakhalin in
the Russian Federation.
The Company needs cash (i) to continue its basic operation; (ii) to
complete the Suriname Casino so as to realize that casino's cash flow
potential; and (iii) to pay any material expenses of continuing negotiations
for the Sakhalin project and for maintaining its position in that project.
The Company recently has been unable to raise adequate cash for all those
needs by a sale of its securities or by other financing on terms acceptable
to it. Largely as a result of the Company's need for cash, the report of
independent certified public accountants covering the Company's consolidated
financial statements for the year ended June 30, 1998 as reported in the
Form 10-K contains a going concern emphasis paragraph. However, the Company
believes it can meet its cash needs under certain conditions. For further
discussion of the Company's cash needs and how it proposes to meet them, see
"Liquidity and Capital Resources Summary" below.
The Company's original principal business was food preservation
technology. Exploitation of that business and development and market entry
of the Company's principal product in that business is now being
re-evaluated, possibly for a sale or joint venture of that business.
After mid-1997 the Company entered into various agreements (i) to
acquire and operate gaming casinos in Hungary and Suriname; (ii) to obtain
(over about two years) eight hotel management operating contracts, mostly
for hotels in Asia; and (ii) to build during the next two years and then to
own and operate, a hotel and casino in Sakhalin, a Russian Federation island
just North of Japan (the "Sakhalin Project").
The Budapest casino was acquired in September of 1998 when the
Company's subsidiary Dorsett Hotels and Resorts, Inc. acquired the 95%
interest in the equity of Roulette Kft. ("Roulette"), the local company that
owns rights to the casino, and various obligations of Roulette to others. On
the September 1998 closing of the acquisition the Company issued to the
Roulette stockholders 17,857 shares of the Company's Common Stock (at a
nominal value of $7 per share), subject to additional shares being issued to
make up any then short-fall in value from $125,000 if the market price for
shares in February 1999 is less than $7.00. Further shares with a market
value of $225,000 will be issued when the gaming license is renewed when it
expires in October 1999. The Company also issued 7,143 shares and paid
$45,000 to a consultant. At June 30, 1998, the Company had paid $100,000 to
the former stockholders as a deposit towards the purchase, and had loaned
$667,000 to Roulette. These amounts were reclassified as part of the
consideration paid for Roulette at closing. The Company has also entered
into agreements to manage the casino.
The Company's Budapest Casino occupies about 5,000 leased square feet
in the downtown Beke Radisson Hotel. The casino is in full operation and has
about 11 gaming tables and 20 slot machines. The lease and the casino gaming
license expire November 1999 and are not assured of renewal. This casino has
been marginally losing money since the Company assumed management in April
1998 until August 1998. The Company anticipates it will be profitable for
the fiscal year ending June 1999.
The Suriname casino is being constructed by the Company pursuant to an
agreement with a local company that owned the casino license, and the casino
license is now held by a local joint venture company owned 50% by the
Company. The joint venture company entered into a Suriname Casino
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Management Agreement in April 1998 for the Company to operate the Casino for
fifteen years at a base fee equal to 3% of gross revenues calculated on an
annual basis and payable monthly, plus an incentive fee of ten (10%) percent of
gross operating profits. The joint venture company leased the casino
premises from the hotel owner, its joint venture partner for fifteen years
beginning February 1998 for $200,000 per year, subject to locally based
escalation.
A Suriname joint venture is now operating as a small casino in temporary
quarters in the hotel where the Company is completing a larger permanent casino
for operation. The Company, with its joint venture partner, has provided the
joint venture entity with funds to build the permanent casino. The Company's
permanent Suriname casino will occupy two leased floors, totaling about 20,000
square feet, in the Plaza Hotel, which is a downtown hotel in the capital city.
The casino will have about 20 gaming tables, 161 slot machines and a 50-seat
restaurant. The temporary casino there is currently fully operating, and the
permanent one is projected to be completed and operational by January 1999.
To make its initial entry into the hotel management and operating
business, from mid-1997 and into early 1998 the Company entered into two
agreements (as amended, the "Hotel Management Agreements"). One was with
Dorsett Hotels and Resorts International Ltd. ("Dorsett International"), a
company represented to be owned and controlled by David Chiu, and one with
Far East Consortium International Ltd. ("FEC"). Under the agreements the
Company was granted the right (directly or through a subsidiary) to be
exclusive manager and operator of three particular hotels then open, and
five others then to be opened, and to do so pursuant to long-term contracts
("Hotel Operating Contracts") to be entered into with the owners of the
various hotels.
In July 1998 FEC paid the Company $500,000, which the Company treated
as a loan to be repaid in six months together with interest at a rate of
prime plus 1%. In the alternative the principal and interest could have been
repaid by way of offset against management fees. In July 1998, David Chiu
paid the Company a further $500,000 which the Company booked as a loan.
Until November 4, 1998 the Company held Hotel Operating Contracts for
three open hotels with a total of about 1200 rooms, one of which was being
actively managed by the Company. The Company had entered into Hotel
Management Agreements providing for the Company to enter into future Hotel
Operating Contracts to operate five other hotels. The Company had received
operating fees for one of the open hotels since January 1998 and for two of
the open hotels since March 1998.
As a result of the failure of the other parties to the Hotel Management
Agreements to deliver to the Company physical control and practical
management power over two open hotels, and their notice to the Company that
renovation or construction of five other hotels was deferred and being
reviewed, the Company began negotiations with those parties over the status
of the Hotel Management Agreements. In November 1998 the Company reached a
settlement, described below, terminating the Hotel Management Agreements and
all then existing Hotel Operating Contracts, and exchanging mutual releases
of related obligations. The Company received $450,000 cash, was returned
700,000 shares of its Common Stock, retained $1,625,000 in payments of
management fees and loans, and the other parties assumed other obligations
of the Company's hotel management operation estimated at about $350,000.
Consequently, as of November 4, 1998 the Company had no active hotel
management or operation business. The Company intends to resume its hotel
operating activity in the future.
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Until March 1998 the Company was for accounting purposes deemed a
development stage company. Receipt of revenues, primarily from hotel
management operation, technically ended that status. However, the Company's
operations are still subject to all of the risks inherent in the
establishment of new business enterprises, including the need to obtain
financing, lack of significant revenues, unreliability of sources of supply
and the uncertainty of market acceptance of its products and services. The
Company has incurred losses since inception. From March, 1996 to June, 1997
the Company did not have any revenues. During the year ended June 30, 1998
and the three months ended September 30, 1998, the Company had revenues of
$649,620 and $785,969, respectively, primarily attributable to the
commencement of its hotel management operations in January 1998 and its
casino operations in August 1998. The Company's accumulated deficit at
September 30, 1998 was $24,849,072 (which included $7,573,876 of non-cash
compensation charges related to the value attributed to stock options and
warrants issued by the Company). Furthermore as a consequence of the
settlement of the Hotel Management Agreements, the Company recorded a
write-down of assets of $4,200,000 during the fiscal year ended June 30,
1998, including a $2,400,000 loss relating to (i) the difference between the
stock price on the date the stock was issued and the stock price on the date
of the settlement and (ii) the value of the stock retained by FEC as part of
the settlement.
The casino and hotel project in Sakhalin requires the Company to get
substantial financing to progress further. In September 1998 the Company
entered into a letter of intent with JSC Rosneftegazstroy ("RNGS"), which is
a large Russian construction company. That letter of intent may lead to RNGS
guaranteeing the financing of the full cost of a turnkey construction
contract on the Company's Sakhalin Project, for which RNGS would be the
major subcontractor. The letter of intent also contemplated joint
development of a start-up hotel management business in the Russian
Federation and the Commonwealth of Independent States through a RNGS
management subsidiary to be acquired by the Company. The consummation of any
of those transactions is still conditional on substantial further
negotiations and agreements with RNGS and others. If fully consummated as
described in the letter of intent, the Company would arrange for RNGS to
obtain a 51% interest in the Sakhalin Project in consideration of the
guarantee, and the Company would issue 3,000,000 shares of the Common Stock
for the acquisition of the start-up hotel management Company. For three
years the 51% interest in the Sakhalin Project could be exchanged at the
option of the Company or RNGS for the Company's issuance of additional
shares of Common Sock which, together with the three million shares
previously issued would give RNGS 51% of the Common Stock of the Company to
be thereupon outstanding.
The Asian countries where the Company formerly managed a hotel and
formerly sought to manage more hotels, the Russian Federation where the
Company has the Sakhalin Project, and Japan (which is a significant
potential source of gaming visitors to Sakhalin), are all currently having
significant economic problems. Some are having significant political, social
and governmental problems. These problems are generally regarded as an
over-all "Asian Crisis", although circumstances vary from country to
country. The "Asian Crisis" substantially reduced tourist use and business
use of all the hotels the Company had managed or sought to manage in Asia.
The Company's related fees and fee structure, which was largely based on
percentages of gross revenue and profit, was adversely affected by this
fact. The situation in the Russian Federation has delayed and might further
delay, or even prevent, financing, construction and operation of the
Sakhalin Project.
11
<PAGE>
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.
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
organizational efforts and raising public and private capital to defray its
organizational expenses and the development and initial implementation of
its business plan for its food technology business. Commencing in August
1997, the Company's activities also included organizational and fund raising
efforts relating to its entrance into the business of managing and owning
hotels and casinos. From March 6, 1998 to June 30, 1997 the Company had no
revenues. During the year ended June 30, 1998 and the three months ended
September 30, 1998, the Company had revenues of $649,620 and $785,969,
respectively, primarily attributable to the commencement of its hotel
management operations in January 1998 and its casino operations in August
1998.
Comparison of Three Months Ended September 30, 1998
to Three Months Ended September 30, 1997
Net Loss. The Company incurred a net loss of $2,356,862, or $0.19 per
share, for the three months September 30, 1998, as compared to a net loss of
$1,407,225, or $0.21 per share, for the three months ended September 30,
1997. This increase was primarily due to increases in general and
administrative expenses and compensation charges in connection with the
issuance of options and warrants. These expense increases were partially
offset by increases in revenues attributable to the commencement of the
Company's operations during the current period.
Revenues. During the three months ended September 30, 1998, the Company
had revenues of $785, 969 attributable to the commencement of its hotel
management business, the operation of the recently purchased Budapest casino
and the opening of its temporary casino in Suriname. For the three months
ended September 30, 1997, the Company had nominal revenues of $5,470 from
the preliminary sales of its food technology products.
Marketing and Sales. The Company incurred marketing and sales expenses
of $86,132 for the three months ended September 30, 1998, approximately half
of which related to its food technology product with the remainder
attributable to its hotel and casino operations. During the three months
ended September 30, 1997, the Company incurred $102,312 in marketing and
sales expenses in connection with its preliminary marketing and sales
efforts for its food technology product.
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $1,112,657 for the three months ended September 30,
1997 compared to $2,233,081 for the three months ended September 30, 1998.
This 101% increase over the prior period was primarily the result of costs
12
<PAGE>
associated with the Company's business activities in its hotel and casino
operations which did not exist during the prior period. These costs during
the current period totaled approximately $1,110,000.
Compensation Charges. During the three months ended September 30, 1998,
non-cash compensation charges were $750,000 compared to $228,000 for the
three months ended September 30, 1997. This 230% increase over the prior
period was primarily the result of the Company revaluing options previously
issued to its officers, directors and corporate counsel.
Interest Income. For the three months ended September 30, 1998 interest
income was $6,595, compared to $103,552 for the three months ended September
30, 1997. The greater interest amount in the 1997 period was due to a
significant portion of cash being available for investment from the proceeds
of the Company's Initial Public Offering completed in June 1997.
Interest Expense. For the three months ended September 30, 1998,
interest expense was $80,213 compared to $73,278 for the three months ended
September 30, 1997.
Liquidity and Capital Resources
Due to its lack of available cash and its limited ability to obtain
financing, the Company has been forced to suspend its market entry for
Preservit(Trademark). The suspension of market entry plans for
Preservit(Trademark) suspends the prospective substantial research, development
and start-up expenditures that would have been required for such market entry.
No substantial expenditures are associated with the suspension. Although the
Company is considering seeking a joint venture or other transaction for
resumption of that business, with another party financing the transaction, it
has not identified any other such party. If the Company were able to sell the
business, then the sale might produce some cash. The amount of such cash, if
any, cannot be predicted.
The Company's joint venture may soon complete the Suriname Casino, which,
once fully open, is anticipated to provide cash distributions to the Company.
The Company anticipates that as of November 30, 1998, the Suriname Casino will
require about $1.5 million further cash over the next 3 months to complete it,
which is to be funded by either the Company, its joint venture partner, or both.
The Company has already funded $4,000,000 for these purposes. In September 1998,
the other joint venturer loaned $600,000 at a 3% per month interest rate. It was
then agreed that all loans and investments made or to be thereafter made by the
venturers would be repaid, together with interest, from the joint venture's cash
available from net operating income and on a basis pro rata to the total of such
loan and investment balances and accrued interest.
The fully operating small Budapest casino should soon provide some cash
distributions. In September 1998 the Company purchased 95% of the Hungarian
company operating that Budapest casino. That casino has generated cash
losses from April, when the Company undertook its management, to August
1998. However, by the end of August the casino had begun to operate near
breakeven. The Company has received no cash distributions from the Budapest
casino.
13
<PAGE>
While the Company has entered into a letter of intent with RNGS dated
September 23, 1998 relating to the Sakhalin Project, that project is not
expected to produce operating income for at least 18 to 24 months from that
date. The negotiation of, and any favorable progress toward, definitive
agreements under that letter of intent might increase the Company's ability
to obtain cash for incidental interim financing, which might be secured by
the Company's interests in the Project. Such progress would probably require
the Company to make expenditures for travel, accounting, legal, expert and
other related charges, and possibly substantial expenditures to bring the
budget, design and construction plans to more final stages. If the agreement
with RNGS is consummated, the Company's need for most or all of the cash for
the construction phase might be fulfilled or obviated. In December 1997, the
Company paid-out $3,000,000 cash (as well as Common Stock) on account of the
purchase price for its 100% interest in SGTI, which in turn owns 65% of SCC,
the Company directly developing the Project. As of September 30, 1998, the
Company had advanced $4,128,000 as loans to SGTI for the development of the
Sakhalin Project.
At September 30, 1998 the Company had $1,295,000 in debt for funds
borrowed from FEC and David Chiu. As part of the November 1998 settlement of
the Hotel Management Agreements, the Company received a $450,000 cash
payment and was relieved of its $1,295,000 debt obligation. That $450,000
cash payment was and is being applied primarily to urgent cash payment
obligations arising from the overall operation of its businesses.
Since July 1998 the Company has actively sought to raise cash through
loans or sales of securities. It has been unable to do so on terms
acceptable to it, but is continuing its efforts. The current financial
condition of the Company, the current market price of its stock, the
unresolved prospects of its business and future business prospects all have
impaired the Company's ability to borrow or otherwise raise capital other
than on disadvantageous terms. If the Company is not successful in obtaining
additional financing for its operations, it will undertake to reduce its
operating overhead and negotiate payment terms with its vendors. However, there
can be no assurance that the Company will be successful in accomplishing its
objectives.
At September 30, 1998, the Company had a working capital deficit of
$1.3 million, excluding liabilities which were relieved by the November 4, 1998
settlement of the Hotel Management Agreements. The Company is seeking at
least $3,000,000 in financing to meet the $1.5 million estimated costs to
bring the Suriname Casino to full operation, to discharge current payment
obligations, and for working capital. At September 30, 1998 the Company had
approximately $496,000 cash or cash equivalents on hand. As of that date,
its only predicted (but contingent) sources of cash were about $150,000 to
$200,000 per month anticipated from the operating profits of the temporary
Suriname Casino. If funds can be made promptly available for remaining work,
the permanent Suriname Casino might be open and operating by late February
1999. It is impossible to reliably predict what distributable cash flow that
casino will generate. Nevertheless, the Company has previously projected for
internal planning purposes a distributable cash flow of $300,000 in the
first month after full operation, a 10% increase each month thereafter for 4
months, and then a leveling off.
The Company believes the financing it is seeking and its other cash
sources, if realized, will provide adequate cash flow to maintain the Company's
current operations in the immediate foreseeable future.
The Company's accumulated deficit at September 30, 1998 included $7.6
million of non-cash compensation charges related to the value attributed to
stock options and warrants issued by the Company. The Company has
historically made extensive use of options granted under its 1996 Stock
Option Plan (the "Plan") and of non-Plan options and warrants. By November
30, 1998
14
<PAGE>
the closing bid market price of the Company's Common Stock had fallen from a
1998 high of $8.813 to a new low of $.469 on November 10, 1998. On September
14, 1998 the Board of Directors and its Compensation Committee expressed
their concern that during future critical times the Company might face
problems with maintaining the loyalty and diligence of key personnel. The
Board voted on such date to reduce the exercise price to $1.50 of all Plan
and non-Plan options and warrants held by any then-current directors,
officers or employees of the Company, and of persons associated with
principal London counsel on such date. About 80,000 non-Plan options,
325,000 warrants and 1,502,500 Plan options for Common Stock were so
affected. In addition, the Board voted to grant non-Plan and Plan options at
market price to seven officers or directors to purchase 1.5 million shares.
As a result of effecting the reductions and grants the Company recorded
$750,000 in non-cash compensation charges during the three months ended
September 30, 1998.
Subsequent Events
As a result of the failure of the other parties to the Hotel Management
Agreements to deliver to the Company physical control and practical
management power over two open hotels, and their notice to the Company that
renovation or construction of five other hotels was deferred and being
reviewed, the Company began negotiations with those parties over the status
of the Hotel Management Agreements. In November the Company reached a
settlement, described below, terminating the Hotel Management Agreements and
all then existing Hotel Operating Contracts, and exchanging mutual releases
of related obligations. The Company received $450,000 cash, was returned
700,000 shares of its Common Stock, retained $1,625,000 in payments of
management fees and loans, and the other parties assumed other obligations
of the Company's hotel management operation estimated at about $350,000.
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, 1998.
15
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information is furnished pursuant to Item 701(a)-(c)
of Regulation S-K in connection with unregistered securities sold or issued
by the Company:
On September 14, 1998, 250,000 shares of the Company's Common Stock
was sold for $2 per share to Parbhoes Handelmij NV, the Company's
joint venture partner in its Suriname casino.
On September 16, 1998, the Company issued unregistered shares of
its Common Stock to the shareholders of Roulette Kft., ownership
company of the Budapest casino, in accordance with the terms and
conditions of the purchase agreement with Roulette. The following
is a list of the shares issued:
Casino Bahia De Cadiz SA 16,917
Teresa Juste Picon 940
Domosthenis Nassopoulos 7,143
On September 30, 1998, 89,000 shares of the Company's Common Stock
was issued to Maritime Services Corporation, the building
contractor for the Suriname casino currently under construction.
These shares were issued at a price of $2.25 per share or $200,250,
which Maritime agreed to accept as consideration and payment
towards its construction contract with the Company.
The following information is furnished pursuant to Item 701(f) of
Regulation S-K in connection with the Company's Initial Public Offering:
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)
16
<PAGE>
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: $2,344,000.
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 $ 109,000
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
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 Conserver Purchasing Corporation $1,621,000
Acquisitions and General Business Purposes $6,102,000
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Documents
----------- ---------
27 Financial Data Schedule
(b) Reports on Form 8-K
N/A
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.
CCA COMPANIES INCORPORATED
Dated: December 15, 1998 By: /s/ Dallas Dempster
------------------------------------------
Dallas Dempster
Chief Executive Officer and President
By: /s/ Miles R. Greenberg
------------------------------------------
Miles R. Greenberg
Chief Financial Officer
18
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