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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934.
For the fiscal year ended June 30, 1998
OR
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
Commission file number 0-22191
CCA COMPANIES INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0675901
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3250 Mary Street, Suite 405
Coconut Grove, FL 33133
(Address of Principal Executive Offices)
305-444-3888
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $0.001 par value 12(g)(Nasdaq SmallCap Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 past 90
days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
----
The aggregate market value of voting stock held by non-affiliates as of
November 15, 1998 was $10,613,925.
The number of shares of Common Stock, $0.001 par value, outstanding as
of November 15, 1998 was 11,793,925.
Documents Incorporated By Reference: None
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TABLE OF CONTENTS
PART I
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Item 1. Business............................................................... 4
Company Overview....................................................... 4
Summary of Recent Business............................................. 4
Division Overviews..................................................... 6
Casino Division........................................................ 6
Hotel Management Division.............................................. 6
Sakhalin Project....................................................... 9
Food Preservation Technology........................................... 12
Insurance.............................................................. 15
Employees.............................................................. 15
Segments/foreign operations............................................ 15
Item 2. Properties............................................................. 15
Item 3. Legal Proceedings...................................................... 16
Item 4. Submission of Matters to a Vote of Securities Holders.................. 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............... 16
Item 6. Selected Financial Data................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Company Overview....................................................... 19
Change in Fiscal Year.................................................. 20
Results of Operations.................................................. 21
Liquidity and Capital Resources........................................ 24
Year 2000 Compliance................................................... 26
New Accounting Standards............................................... 27
Subsequent Events...................................................... 27
Factors That Could Affect Operating Results............................ 28
Item 7a. Market Risk............................................................ 30
PART III
Item 8. Financial Statements................................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 30
PART IV
Item 10. Directors and Executive Officers of the Registrant..................... 30
Compliance with Section 16(a) of the Securities Exchange Act of 1934... 34
Item 11. Executive Compensation................................................. 34
Summary Compensation Table............................................. 34
Employment Agreement................................................... 35
Option Grants For the Twelve Months Ended June 30, 1998................ 35
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 36
Item 13. Certain Relationships and Related Transactions......................... 39
Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K.. 41
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Financial Statements................................................... 41
Exhibits............................................................... 42
Signatures............................................................. 44
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This Annual Report on Form 10-K contains forward-looking statements.
Additional written and oral forward-looking statements may be made by the
Company from time to time in Securities and Exchange Commission ("SEC")
filings and otherwise. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income are subject
to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements due to
risks and factors identified from time to time in the Company's filings
with the SEC, including those discussed in this Report, and other risks and
uncertainties.
Item 1. Business
COMPANY OVERVIEW
Summary of Recent Business
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 (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 certified financial statements for the year ended June 30, 1998
as contained in this 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").
In September 1998 the Company acquired the fully operating casino in
Budapest, Hungary. A Suriname casino, owned by a 50% joint venture of the
Company, 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 venturer, has provided the joint
venture entity with funds to build, and to be used to complete and
begin operating, the permanent casino by February 1999. Additionally, the
Company has provided the gaming equipment to be used in the operation of
the joint venture casino. The Company is also seeking to acquire, develop
and/or operate other casinos abroad.
Until November 1998, the Company held Hotel Operating Contracts for
three open hotels with a total of about 1300 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
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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
took over 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.
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
the Company had revenues of $649,620 primarily attributable to the
commencement of its hotel management operations in January 1998 under then
existing Hotel Operating Contracts. The Company's accumulated deficit at
June 30, 1998 was $22,492,210 (which included $6,823,876 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, for accounting purposes the
Company recorded a write down of assets of $4,200,000, 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
obtain 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 Stock which, together with the three million shares
previously issued would give RNGS 51% of the Common Stock of the Company to
be thereupon outstanding. This letter of intent is described below in more
detail.
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.
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DIVISIONAL OVERVIEWS
Casino Division
The Company's subsidiary and joint venture are currently operating
one temporary gaming casino in Suriname and one open and operating
casino in Budapest, and the Company anticipates eventually operating the
casino in the Sakhalin Project, if and when that project is built. The
Company is also seeking to operate, or acquire interests in, other casinos
outside the U.S. The Company has one officer (Mr. David Hartley) and 205
employees engaged directly in casino operations.
The Company's joint venture Suriname casino currently under
construction 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. There are other casinos in the capital city,
but only one competes for the same gaming clientele. Other casinos in the
region compete with the Suriname casino for an international clientele.
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
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 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.
The Budapest casino was acquired in September of 1998 when the
Company's subsidiary Dorsett Hotels and Resorts, Inc. ("Dorsett Hotels")
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 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 November 1999. The Company 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. The Company 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 through August 1998. The Company anticipates it
will be profitable for the fiscal year ending June 1999. There are several
other casinos in Budapest that compete for the same gaming clientele.
Hotel Management Division
Until November 1998 the Company had one officer (Mr. Michaelsen) and
three employees engaged directly in hotel management and had hotel
operating contracts on three open hotels, only one of which it actively
managed (the Dorsett Regency Hotel in Kuala Lumpur, Malaysia). Through June
30, 1998, the Company had earned fees for managing these three hotels
totaling $640,000. The Company's management office was located in leased
offices in Kuala Lumpur. Mr. Michaelsen was previously employed by Dorsett
International and held an employment contract with the Company. If the
Company had undertaken further hotel management it would have required
further subordinate personnel.
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When the Company settled and terminated its Hotels Management
Agreements in November 1998 various obligations related to its hotel
management operations were taken over by others.
Initial Entry into the Hotel Managing and Operating Business Under Hotel
Management Agreements; Current Status.
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") 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. The Company's "Hotel Management Division"
held Hotel Operating Contracts, all dated January 28, 1998 and with
20-year terms for four existing hotels with a total of about 1,300 rooms.
These hotels were in Kuala Lumpur, Malaysia; Bali, Indonesia; Dallas,
Texas; and Melbourne, Australia. The Company commenced active management
only of the Dorsett Regency Hotel in Kuala Lumpur, Malaysia, and received
the regular fee rates for its management. The owners of the other hotels
did not deliver physical possession of those hotels or the practical power
to manage those hotels. Commencement of the Company's management of the
Dallas Grand Hotel, which was fully open and operating but in need of
repair, was deferred pending final plans for renovations.
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 for the Kuala Lumpur,
Dallas, and Melbourne hotels, which latter two hotels FEC has not yet
delivered for management by the Company. In July 1998 FEC paid the Company
a further $500,000, which the Company booked as a loan also to be repaid in
the future or offset against future management fees.
The Hotel Management Agreements granted management rights to four
unopened hotels. None of the unopened hotels was then under construction.
They were (i) the Dorsett Plaza Hotel, an about 180-room hotel in Edmonton,
Canada that was formerly scheduled to open in 1998, and (ii) three other
hotels in Asia with a proposed total of about 550 rooms, formerly scheduled
to open in 1999.
The status on signing the Hotel Management Agreements and, prior to
the settlement on November 4, 1998, of the three groups of hotels mentioned
above is summarized as follows:
Opened
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Dallas Grand Hotel* + Dallas, Texas, U.S.A.
Rockman's Regency* + Melbourne, Australia
Dorsett Regency* + Kuala Lumpur, Malaysia
Formerly Scheduled
To Open in 1998
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Dorsett Regency + Bali, Indonesia
Dorsett Plaza* + Edmonton, Alberta, Canada
Formerly Scheduled
To Open in 1999
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Dorsett Court x Seremban, Malaysia
Dorsett Court x Ankor Wat, Siem Riep, Cambodia
Dorsett Hotel x Phuket, Thailand
*Hotels subject to FEC Hotel Management Agreement. All others are subject
to the Dorsett International Hotel Management Agreement.
A + indicates the Company had a Hotel Operating Contract; an x that it does
not.
Prior to November 1998 the owners of all the unopened hotels advised
the Company that plans to open these hotels were under re-examination and,
more particularly, each was generally in the following status. Scheduled
conversion of an office building for the Dorsett Plaza Hotel in Edmonton,
Canada (which was to be a downtown commercial hotel) had not been
commenced, although the owners advised the Company that they were
evaluating financing proposals. Owners of the Dorsett Court Hotel in
Seremban, Malaysia advised the Company that construction of that hotel
(which is a golf resort hotel) may be soon commenced and may be completed
by the end of 1999, but plans are not definite. Owners of the Dorsett Court
Hotel at Ankor Wat, Cambodia (a resort or tourist hotel serving the famous
ruins) and of the Dorsett Hotel in Phuket, Thailand (a beach resort hotel)
told the Company that the construction of these two hotels had been
indefinitely deferred.
November 1998 Termination and Settlement
In connection with the foregoing problems, the Company had
negotiations with the owners of the hotels, Mr. David Chiu (who was
represented to the Company as having been the sole stockholder in Dorsett
International) and with representatives of the parties (the "HMA Parties")
to the Hotel Management Agreements. A successor to Dorsett Hotels and
Resorts International Ltd. was that party in the case of the four hotels in
Indonesia, (Seremban) Malaysia, Cambodia and Thailand. Far East Consortium
International Ltd. was that party in the case of the four hotels in
Malaysia (Kuala Lumpur), Australia, Canada and Texas.
On November 4, 1998 the Company entered into a settlement agreement
(the "November Settlement Agreement") with the HMA Parties, Far East
Consortium (M) Limited, their subsidiaries and Mr. Chiu. Pursuant to that
agreement the Company was paid $450,000 cash, was returned 700,000 shares
of its Common Stock and retained $1,625,000 theretofore paid the Company as
management fees or loans. Various obligations related to the hotel
management operations were taken over by the other parties. CCA and the
other parties to that agreement waived all claims and matters between them
and rescinded agreements between them. 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.
Original Acquisition of Hotel Management Division
The Company had entered into the Hotel Management Agreement ("HMA")
with Dorsett International on October 2, 1997. It was subsequently amended
through January 28, 1998 (as amended, the "Dorsett International Hotel
Management Agreement"). Under that agreement the Company (i) paid Dorsett
International $1,000,000 upon or after execution of the original Dorsett
Hotel Management Agreement, and (ii) beginning on the commencement of
management of the Dorsett Regency hotel in Bali, Indonesia under the
Company's Hotel Operating Contract, and until January 28, 2000, agreed to
grant Dorsett International "rights" to purchase up to an aggregate 800,000
shares of the Company's Common Stock. The 800,000 shares were to be issued
in the following amounts for, and upon delivery of, a duly executed and
legally enforceable Hotel Operating Contract for each of the following
hotels once opened and operating: 200,000 shares for the Dorsett Court
Hotel, Malaysia, 300,000 shares for the Dorsett Court, Cambodia, and
300,000 shares for the Dorsett Hotel, Thailand. Dorsett International
assigned to Mr. Chiu its rights to receive the cash payments and stock.
The Company had entered into the Hotel Management Agreement with FEC
on January 28, 1998. That agreement corrected and carried out aspects of
the original Dorsett International Hotel Management Agreement. The Company
(i) paid FEC $1,500,000 upon or after execution of the FEC Hotel Management
Agreement, and (ii) agreed to issue 1,200,000 shares
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of Common Stock of the Company. The 1,200,000 shares were agreed to be
issued in the following amounts upon the delivery of a duly executed and
legally enforceable Hotel Operating Contract for each of the following
hotels: 275,000 for the Dallas Grand Hotel, Dallas; 400,000 for the
Rockman's Regency, Melbourne; 275,000 for the Dorsett Regency, Kuala
Lumpur; and 250,000 for the Dorsett Plaza, Edmonton. All that stock was
issued upon delivery of related Hotel Operating Contracts except for the
stock identified to the Dorsett Plaza, Edmonton which was to be issued
contingent on the opening and operation of the hotel.
The Company thus paid a total of $2,500,000 and issued a total of
950,000 shares pursuant to the Dorsett International and FEC Hotel
Management Agreements. The fair value of the shares issued to FEC was
recorded by the Company at about $3.5 million, and the $1.5 million payment
was allocated to the hotels, including $300,000 allocated to the Edmonton
Canada hotel.
On January 30, 1998, the Company acquired from David Chiu for $500,000
all the stock in four British Virgin Islands companies, including that of
Dorsett International, as evidenced by four bearer share certificates. As a
result of the acquisitions the Company also acquired rights to use the name
"Dorsett" in the hotel business. (See "November 1998 Termination and
Settlement" above.)
Common Stock Aspects of Hotel Management Agreements
The shares issued or issuable to the HMA Parties were for three years
after issue, subject to contractual restrictions on transfer and to an
irrevocable proxy which the Company has authorized be exercised by its
Chairman, Mr. Charles Stein, and indefinitely thereafter were subject to
the Company's "first option" to purchase any of the shares, exercisable
within ten days after notice that the holder proposes to sell them. The
first option was to purchase either at the reported Small Cap Nasdaq market
price on the date of the notice of proposed sale (if the proposed sale is
to be on the market), or the price under a bona fide offer submitted with
the notice (if the proposed sale is pursuant to that offer).
Other Agreements
In August 1997 the Company entered into a two-year Casino Consulting
Agreement with Star Casinos Limited ("Star") as consultant, primarily to
obtain the services of Mr. David Hartley, who is an experienced casino
consultant. He is now the full-time President of the Company's Casino
Division. Star is owned and controlled by Mr. Hartley. The active term of
the agreement began in October 1997 at a $250,000 annual salary paid direct
to Mr. Hartley by the Company. In December 1997 the Company granted to Star
Plan options to purchase 100,000 shares of Common Stock at $6.50 per share,
reduced to $1.50 in September 1998. The options vest and become exercisable
in 2 equal installments, on each succeeding October anniversary. If it has
fully performed, at the end of the term of the Casino Consulting Agreement
Star will be entitled to a $250,000 bonus. The agreement imposes
non-compete and non-solicitation restrictions on Star for two years after
the term.
Sakhalin Project
In August 1997 the Company entered into agreements to acquire all the
stock of Sakhalin General Trading and Investments Limited ("SGTI"), a
Cyprus company that holds 65% of the stock in Sakhalin City Center Limited
("SCC"). In December 1997 the Company acquired the stock in SGTI for 2
million shares of the Company's Common Stock valued for accounting purposes
at $5.20 per share (or a total of $10,400,000) and in addition, advanced
SGTI $3,000,000 primarily to be used for clearing the construction site and
relocating the residents occupying the site. The Company's Common Stock
price was $6.50 when the relevant agreements were first entered into, as
well as when the stock was issued on December 12, 1997. SCC is a Russian
Federation company that holds construction, development and operating
rights to the Sakhalin Project. The Sakhalin Project is the construction
and operation of an about 450-room hotel and casino in Sakhalin City on
Sakhalin Island in the Russian Federation 25 miles from Northernmost Japan.
No building has yet begun, but architectural plans have been prepared, the
site has been cleared, and foundation construction bids are being
negotiated. The currently
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estimated cost of completing the Sakhalin Project is about $100 million.
The hotel and casino will be on a City-owned site (long-term leased to SCC
rent free, with the option to buy) in the center of the regional capital
City. The City and the Regional government agreed with SCC to issue it the
requisite gaming license (renewable at the same time as the lease is
renewable), not to issue a gaming license to any near-by new casino, and to
maintain the small size of the three small other local casinos. The City
and the Regional Government hold the 35% of SCC's shares not held by SGTI.
The City also (i) agreed to grant certain tax relief, including relief from
the City's 90% tax on gaming revenues, and (ii) to authorize a private
airport terminal for the hotel's arriving visitors. The hotel and casino
may accept US dollars, and may export dollars without exchange control. The
casino is planned as a magnet destination for the regional gaming
clientele. The City's international airport can be reached by direct and
indirect flights from hub airports in Japan and Asia, and by a short hop
from international airports and cities in Northern Japan. The local
Sakhalin governments are expected to use their current oil-boom revenues to
develop air and land connections so as to realize some of the Island's
potential as a gaming, tax-free shopping, and mountain and ski resort.
In view of the current conditions in the Russian Federation and Asia,
the Company believes its undertaking of the Sakhalin Project is subject to
many serious risks and contingencies. Many of these risks are inherent in a
hotel and casino construction and operation specifically in the Russian
Federation or in Sakhalin, or even in any such project abroad. Some risks
result from the Company's lack of specific experience in construction, or
from the nature of agreements or other arrangements for the Project.
Currently, the economic and political situation in the Russian Federation
appears to be even more unstable than it was last November 1997. The
so-called "Asian Crisis" has continued to be highly volatile, and Japan,
where much of the potential gaming clientele resides, has had an economic
slow-down.
In September 1998 the Company entered into negotiations with JSC
Rosneftegazstroy ("RNGS"). RNGS is a very large construction company in the
Russian Federation, generally viewed as the "privatized" main successor to
the construction arm of the former government of the USSR. On September 23,
1998 the Company and the President of RNGS, on behalf of RNGS, executed and
delivered a letter, designated a "letter of intent", expressing their
intent to negotiate and enter into definitive agreements for certain
transactions outlined in that letter. The execution and delivery of
definitive agreements are subject to extensive further negotiations and
many contingencies. The letter of intent provides for the Company and RNGS,
until one gives notice to the other that the negotiations are ended, each
to proceed in good faith and at is own respective expense to negotiate and
draft definitive agreements with the terms set forth in the letter of
intent, and such other terms as are customary for a transaction of this
nature. Neither RNGS nor CCA has given such notice.
The letter of intent provides more specifically as follows. The
Company, RNGS, Roshotel Management Limited ("Roshotel Management"), and
Roshotel International Limited ("Roshotel International") express their
respective intentions, but not their obligation, to enter into definitive
agreements for the transactions outlined below. The Company owns 100% of
the capital stock in Sakhalin General Trading and Investments Ltd.
("SGTI"), which owns 65% of the capital stock of Sakhalin City Centre
Limited ("SCC"), which in turn holds development rights to the "Sakhalin
Project", a project to build and operate a hotel and gaming casino in
Yuzhno-Sakhalinsk ("City") in the Sakhalin state ("Oblast") of the Russian
Federation. The Company needs and seeks financing for the Sakhalin Project.
The parties seek to combine their mutual expertise, opportunities and
resources (i) to complete the Sakhalin Project, and (ii) to develop a hotel
and casino management business in the Russian Federation and the Common
wealth of Independent States. Roshotel Management has been formed by RNGS
and Valmet International Limited ("Valmet") to develop that business.
Roshotel International is an affiliate of RNGS formed to hold property
interests related to that business, which RNGS will cause to retain
Roshotels Management as its exclusive hotel manager. SCC will enter into a
turnkey contract ("Turn-Key Contract") with a contractor for building and
equipping the Sakhalin Project and for its delivery, tested and fully ready
for first beneficial use. RNGS will be the favored subcontractor if its
offer of a contract is substantially equal to the best other offer, and in
any event, as guarantor of the financing, will have a right of reasonable
disapproval of any other contractor. RNGS will directly guarantee when due
on acceptance of delivery of the Project the repayment to the financing
person of (or will itself provide all or part of) 100%
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<PAGE>
of the cost of the TurnKey Contract. That financing is to be on
substantially the most favorable terms as RNGS could obtain for itself if
it stood in the place of SCC. The Company, Valmet and RNGS will jointly
cooperate to negotiate that financing, the terms of which will be subject
to the reasonable disapproval of either. No financing will be with recourse
to the Company, but can be with recourse to SCC and its interest in the
project, SGTI or its interest in SCC. When the financing of the TurnKey
Contract is firmly bound and ready, RNGS will issue to the financing person
RNGS's guarantee ("Financing Closing"). Thereupon, Roshotel International
will be, as RNGS's designee, entitled to receive from SCC 51% of the
capital stock in SCC to be then outstanding after such issuance, as full
payment for the RNGS guarantee and all RNGS financing services. However, it
is a condition to SCC's obligation to issue that 51% interest (and thus to
issuance of the RNGS guarantee) that the regional government Oblast and the
City Sakhalin agreements have agreed to reduce their combined percentage in
SCC from 35% to 17% (as SGTI reduces its percentage to 32%), all without
their changing the land lease, tax on gaming, or their other benefits
provided for the Sakhalin Project. At the Financing Closing the Company
will acquire from the stockholders in Roshotel International all the
capital stock in Roshotel Management, in exchange for three million shares
of Common Stock in CCA issued by the Company (the "Hotel Management
Shares"). The Company would then merge Roshotels into the Company's Dorsett
hotel division. At the Financing Closing a three-year put/call option will
be granted pursuant to which the Company or RNGS may elect to exchange
Roshotel International's 51% interest in SCC for such number of shares of
the Company's Common Stock to be issued by the Company, as, when combined
with the previously issued Hotel Management Shares, would equal 51% of the
Common Stock in the Company to be then outstanding after such exchange. The
Company's obligation to consummate the transactions contemplated will be
subject to, among other things, the following being acceptable to the
Company: (i) the Company's due diligence review of RNGS, Roshotel
International and Roshotel Management; (ii) approval by the SCC
stockholders of the reductions in their respective interest and the
issuance of the 51% interest to Roshotels International; (iii) obtaining
the Company stockholder and board approvals; (iv) execution of a definitive
agreement and related documents, and satisfaction of all the conditions
contained therein; (v) execution by SCC of a financing agreement with a
financing person for the Project; and (v) receipt of a guaranty issued by
RNGS to the financing person. The issuance of the guaranty by RNGS will be
subject to, among other things, the following being acceptable to RNGS,
Roshotel International, and Roshotel Management: (i) receipt of a financing
agreement with a financing person on terms and conditions (including
period, interest and amount) acceptable to RNGS; (ii) completion of an
agreed budget for the Project's construction; (iii) receipt of license and
permits that may be required under federal or local Russian law regarding
the Project; (iv) RNGS's due diligence of the Company, its subsidiaries and
SCC; (v) execution of a definitive agreement and related documents, and
satisfaction of the conditions contained therein; (vi) satisfaction that
the shares to be issued for Roshotel Management and to Roshotel
International are not subject to unacceptable dilution through option,
warrants or otherwise; (vii) agreement on management, officers and
directors of the Company. The senior management is expected to include Mr.
Dallas Dempster as President, Chief Executive Officer and Chief Operating
Officer, and RNGS nominees.
When the Company acquired the stock in SGTI, its subsidiary SCC and
Sovereign Gaming and Leisure Ltd., a Cyprus company, already had a 1994
Construction Management Agreement (for Sovereign to manage the construction
of the Sakhalin Project) and a 1994 Operation Management Agreement (for it
to operate the Project). As part of the SGTI transaction Sovereign assigned
both to the Company, along with Sovereign's other rights relating to the
Project, and received 200,000 shares of the Company's Common Stock. The
Common Stock was valued at $5.25 per share and thus the value attributed to
the shares was $1,050,000. Consequently, the Company is currently the
holder of the rights thereunder to manage the development and construction
of the Sakhalin Project, and upon its completion to operate and manage it.
Under the 1994 Construction Management Agreement, SCC is to pay to the
Company an overhead fee of 5% of the estimated cost of the Project for its
general office expenses and a management supervisory fee for overhead. The
management supervisory fee is to be paid monthly over the construction
period timetable, commencing when that timetable commences. If the
construction period were to commence, the Company would be required to
itself provide those services for those fees, to subcontract for those
services, to assign or renegotiate the 1994 Construction Management
Agreement, or take other related action or combination of actions. The
local City and Regional Governments currently hold a 35% interest in SCC,
and the Company anticipates possible broad negotiations with those
stockholders if and when the Company proceeds to negotiate terms of its
letter of intent with RNGS, or other matters. Sovereign agreed that, upon
request of the Company, Sovereign would become construction manager,
11
<PAGE>
subject to agreement on reasonable compensation, not to exceed the lesser
of 5% of construction costs or $5,000,000.
The Sakhalin Project (other than its financing) has been managed by
SCC in Sakhalin City, primarily by Mr. Valery Mozolevsky, who has had
long-term employment with SCC and is experienced in the Project. The
Company in August 1998 retained the services of an experienced project
manager that will oversee and manage the project with Mr. Mozolevsky. If
the Sakhalin Project substantially proceeds, SCC (and the Company) may have
to substantially expand relevant management and staff, and obtain
consultants and contractors in design, construction and management. Mr.
Dallas Dempster was, and still is, one of two Executive Directors of SCC.
Mr. Valery Mozolevsky was, and still is, the other Executive Director.
On December 2, 1997, the Company issued to Mr. Brian Bryce (then a
director of the Company) and Mr. Jay Haft (then a director of the Company),
respectively, Plan options to purchase 300,000 and 200,000 of the Company's
Common Stock at $6.125 per share. The options had previously been granted
to them in August 1997 conditional on the stockholders of the Company
approving the Company's entry into the new hotel and casino business,
including the Sakhalin Project. That approval was obtained at the December
1997 meeting of the Company's stockholders. The options were granted to
them in recognition of their services in obtaining the Sakhalin Project for
the Company. On December 2, 1997 the closing market price of the Company's
Common Stock was $6.50 per share. The value of these options was about $1.1
million on the Black-Scholes option-pricing model. Messrs. Bryce, Haft and
James Stanton (the latter two both then directors) had also agreed that if
the stockholders did not approve the Company's entry into the hotel and
casino business they and Jasmine Trustees Ltd., an affiliate of Mr.
Bryce's, would collectively reimburse the Company for up to $750,000 that
might be incurred by the Company for the Sakhalin Project.
Although Mr. David Chiu had not theretofore been associated with
the Sakhalin Project, in October 1997 the Company entered into a
Development Services Agreement with him for him to provide various services
to the Project. That agreement provided that he (i) may receive 38
percentage points of the 65 percentage points of the Company's stock
interest in SGTI, and (ii) grants him one share of convertible Preferred
Stock of the Company with nominal dividend rights and liquidation value.
The share of Preferred Stock was to be convertible into 1,500,000 shares of
Common Stock of the Company only if and when he timely procures loan
financing for the Sakhalin Project acceptable to the Company. The stock
interest in SGTI is also to be transferred upon fulfillment of that
condition. The shares of Common Stock would be subject to the same kind of
restrictions on transfer, irrevocable proxy and first option as the shares
issued under the Hotel Management Agreements. As of August 1998, the
Development Services Agreement has expired.
Food Preservation Technology
The Company has been developing and seeking to exploit a product that
extends the life of harvested fresh fruits, vegetables and flowers. The
product is made in granules used to absorb gases that would otherwise
accelerate ripening. The granules are in packets that are put in confined
storage or transport spaces, or are in filters that are put in the cooling
or ventilation systems for those spaces. The Company believes it has made
sufficient exploitation plans, and has done sufficient marketing studies
and testing of its current product, Preservit(Trademark), and of like
products, to have substantially completed pre-sales development for
Preservit(Trademark). The Company believes that its product is
substantially ready for initial market entry. The Company's exploitation
plans for this type of product had called for initial market entry and
continuing marketing efforts to be made by close co-operative analysis of a
particular potential customer's operations, and by specific demonstration
of the product's benefits. While use of such a product is not complicated,
these marketing plans also called for the Company to help assure its proper
on-site use by providing on-site use supervision. The Company has stopped
building these market-entry techniques and on-site capabilities for what it
had called its "Preservit(Trademark) Program" style of marketing in the
U.S. and Canada. In view of the cost of the Preservit(Trademark)Program,
the Company is reconsidering the necessity for these techniques and
capabilities. Abandonment of its prior similar product had delayed market
entry of any product. One factor formerly delaying market entry of such a
product was the need for certain regulatory action, primarily a finding by
the U.S. EPA that the incidental generation of carbon dioxide did not
classify the product as a pesticide. That finding has been substantially
12
<PAGE>
obtained. The Company has become aware that commercial use of
Preservit(Trademark) in the United States does not currently require other
material regulatory approvals.
The Company believes there are other products comparable to
Preservit(Trademark)and competitive with it. The Company has become aware
that Extend-A-Life Systems, a subsidiary of Agway, has begun some trade
advertising for a similar product. The Company does not expect to benefit
from any U.S. patent on Preservit(Trademark), and there is none. The
Company is not aware of any U.S. patent (or any other patent) infringed by
manufacture, sale or commercial use of Preservit(Trademark), and is not
relying on any patent to exclude others from manufacture, sale or use of
any such other product. The Company would not currently have the financial
resources to engage in patent litigation, which is often very prolonged and
expensive.
The Company's Preservit(Trademark)business involves substantial risk.
Preservit(Trademark)has not been accepted as commercially viable in
significant actual use, or otherwise successfully exploited. It may not be
successfully exploitable with or without supplemental services or products,
and, although tested acceptably to the Company in controlled conditions on
various food products, may not function satisfactorily in actual use in
specific applications or with specific food products.
Acquisition of Preservit(Trademark) Rights
Preservit(Trademark)replaces another similar product,
Conserver21(Trademark), which the Company had previously brought to its
market-entry stage. Problems with the packaging and pricing of the prior
product by its foreign manufacturer forced the Company to end its
exploitation plans for that product and to terminate the distribution
agreement through which it held distribution rights to that product.
Meanwhile the Company identified "Preservit(Trademark)", then manufactured
in France but without significant market acceptance there, as a replacement
product. The Company has come to the conclusion, and still believes, that
Preservit(Trademark)is commercially similar to its prior abandoned product,
that it is equally efficacious, and that it would satisfactorily substitute
in the Company's existing exploitation plans, or in adapted plans.
The Company does not currently directly hold or own any rights to
Preservit(Trademark). It holds an option to purchase the 51% interest held
by Conserver Purchasing Corporation ("CPC") in Atmos Concepts S.A.
("Atmos"), a French manufacturer and patent holder.
The Company's option is to acquire from CPC its 51% stock ownership in
Atmos for the same price CPC paid the Atmos stockholders to acquire 51% of
the Atmos stock. That price was $1,650,000, payable $650,000 in cash to
Atmos to discharge existing obligations and the balance, to the Atmos
stockholders, in the Company's Common Stock valued at $1,000,000 contingent
upon delivery of patents on the Atmos product. In October 1998, the
Company's Common Stock was issued but not delivered to the Atmos
stockholders. The Company's Common Stock is being held by the Company to
secure CPC and the Company against breach of the same warranties as were
made by Atmos and its stockholders to CPC. CPC has asserted that those
warranties have been breached because, among other things, the debt and
other obligations of Atmos exceed the limits warranted. Consequently, the
Company does not currently plan to exercise its option to acquire CPC's 51%
interest in Atmos.
In December 1997 and February 1998 the Company loaned CPC a total of
$650,000 for its use in discharging the Atmos debts and obligations, and
through June 30, 1998 loaned CPC an additional $970,000 for inventory
purchases, overhead requirements and for the discharge of additional Atmos
obligations, bringing the total loans made to CPC to $1,620,000. If the
Company does not exercise its option to acquire 51% of the Atmos stock, CPC
would likely be unable to repay these loans, except possibly from any
available proceeds from sale of its stock in Atmos or of the partially
developed business, which currently has a high level of uncertainty.
Consequently, the Company established a reserve equal to the full amount of
the $1,620,000 loans made to CPC.
Preservit(Trademark)Plant
In August 1998 the sole plant formerly manufacturing
Preservit(Trademark), together with ten tons of inventory of
Preservit(Trademark), was moved from France to a rented site in Kent,
England. A long-term lease is currently being negotiated. The relocated
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<PAGE>
plant has not been actually operated. The Company believes that attaining
normal production is not difficult, and can be promptly achieved when
needed. However, any sustained delay in normal production, any
unanticipated costs, or any material incapacity of the plant could
adversely affect market entry of Preservit(Trademark).
Previous Financings of Food Preservation Technology Division
From March to November 1996 the Company raised the capital necessary
for its initial business development in food preservation technology
through debt and equity private offerings. In June 1997 the Company
completed an underwritten initial public offering, largely on the basis of
its prospective exploitation of its food preservation technology. It
received in the offering net proceeds of approximately $10,306,000 from the
sale of 2,530,000 shares of its Common Stock at a per share price of $5.00.
At June 30, 1997, approximately $2,130,000 of the proceeds from the initial
public offering had been used for general business purposes, including a
$1,000,000 loan to the manufacturer of Conserver21(Trademark)under the
related distribution agreement, and the repayment of principal and interest
under an unrelated $1,000,000 convertible debenture of the Company. During
the year ended June 30, 1998, about $6,477,000 of the proceeds from the
initial public offering were used for general business purposes, including
payments for the retirement of all other convertible debentures of the
Company (in the amount of $385,000) and the above-noted advances of
$1,620,000, made to CPC relating to Preservit(Trademark). The Company did
not use directly for its food preservation technology business any part of
the proceeds of its subsequent November 1997 Private Offering.
Current Status of Food Preservation Technology Division
During the year ended June 30, 1998, the Company incurred a total of
$377,000 in marketing and sales expenses primarily for its food
preservation technology business. If the Company begins actual market entry
of Preservit(Trademark), the Company anticipates having to make significant
related marketing and selling expenditures during the 12 months thereafter.
These expenditures would be largely for inventory purchases, warehousing,
shipping, and hiring of additional employees and consultants, all as
Preservit(Trademark)begins and proceeds with any market entry. The Company
might experience a significant increase in the number of employees or
consultants as it implements market entry with or without its on-site
service concept. This increase and the attendant cost cannot be estimated
at this time. Management would seek to phase in such a work force increase
to coincide with such sales as appear to have the potential to generate
sufficient revenues to help offset related costs. No operating revenues are
anticipated from Preservit(Trademark)until such time, if ever, as the
Company can actually begin selling significant quantities of
Preservit(Trademark). Even if substantial sales can be made, they will be
made beyond the period in which many of the above expenditures will be
made. Right after the Company began minimal actual market entry of
Conserver21(Trademark), the Company had only nominal sales or orders for
that comparable product. Although the Company believes the pre-sales
development stage for Preservit(Trademark)has been completed and it is
substantially ready for market-entry if the Company decided to begin market
entry for Preservit(Trademark), it is not clear when or whether the Company
can reach even nominal initial sales or orders, implement its business
plans, or operate profitably with Preservit(Trademark). The Company
estimates that almost all its available cash reserves and foreseen future
cash will be allocated to other uses, and after such use would not be
sufficient to permit it to begin market entry, or to itself further
continue the Preservit(Trademark)business. Thus, any continued operation or
expansion of that business by the Company would likely be dependent on the
Company's ability to obtain additional financing specifically for the food
preservation technology business. As a consequence of the Company's current
lack of allocated funds to itself undertake market entry and development of
Preservit(Trademark), and its current limited ability to obtain financing,
the Company is considering various alternatives. These include possible
joint venture (whereby the Company might manufacture and package
Preservit(Trademark), but it would be marketed by others), other various
arrangements, and even sale of the Preservit(Trademark) partially developed
business.
In early 1998 the Company terminated its distribution agreement with
the manufacturer of the Company's former food preservation product largely
because of breaches and failures by the manufacturer. Under that agreement
the Company had loaned the manufacturer $1,000,000 and the Company believes
it might have been required to loan the manufacturer $500,000 more but for
the termination. The $1,000,000 loan was repayable over three years by
offset against the Company's purchase of the former food preservation
product over that period. The Company believes that the loans may not be
repaid,
14
<PAGE>
due to the manufacturer's financial condition and possible disputes over
the termination, none of which has yet been asserted by the manufacturer.
In May 1997, delivery of the initial $500,000 of the loan to the
manufacturer was advanced on behalf of the Company by Mr. James V. Stanton,
a director and Vice-Chairman of the Company, at an interest rate of 10% per
annum. In June 1997, the Company repaid the $500,000 loan, together with
accrued interest of $5,000, from the proceeds of its initial Public
Offering. During the ten months ended June 30, 1997, the Company
established a reserve equal to the $1,000,000 loan to that manufacturer.
Insurance
The Company currently maintains comprehensive general liability
insurance with coverage of $1,000,000 per occurrence and umbrella insurance
of $4,000,000 per occurrence. There can be no assurance that the Company's
coverage will be adequate to protect the Company from all potential losses.
Employees
As of June 30, 1998, the Company had 219 employees, including its 6
executive officers.
Segments/foreign operations
See Note 14 to the consolidated financial statements.
Available Information
The Company files reports and information with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the Securities
Exchange Act. These reports include quarterly reports (Form 10-Q), annual
reports (Form 10-K) and sometimes periodic reports (Form 8-K). The Company
also files its proxy statements and has filed a registration statement
under the Securities Act of 1993 for a June 1997 public offering of its
Common Stock. Its Commission File Number is 0-22191. The Company's June 6,
1997 Prospectus and its November 21, 1997 proxy statement contains
substantial historical information about its business and proposed business
as at the date of those documents. The public may read and copy materials
filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street,
NW , Washington, D.C. Information on the operation of that room may be
obtained by calling the SEC at 1-800-SEC-0330. Since the Company files its
material electronically, the filed material may be obtained from the SEC's
Internet site at http://www.sec.gov.
Item 2. Properties
The Company maintains its principal executive offices at 3250 Mary
Street, Suite 405, Coconut Grove, Florida 33133. This office space occupies
approximately 4,300 square feet, and is subject to a 5-year lease,
commenced October 1997, at monthly rental of approximately $7,800.
Effective September 30, 1997, the Company terminated its month-to-month
lease for its 1,000 square foot headquarters in an executive office suite
in Coral Gables, Florida, at a rental of approximately $6,000 per month.
The Company anticipated opening a small London office to replace it present
facilities. The Company also maintains an office in New York at a monthly
rental of $1,800 per month.
The Company's Sakhalin project is managed from a small leased office
space in Sakhalin city.
The Company's hotel management office was in a small leased office
space in Kuala Lumpur, Malaysia.
The Company's casino properties are described in the above Divisional
Overview for the Casino Division.
The Company believes its existing facilities are adequate to meet
current needs.
15
<PAGE>
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or to which any of their material
property is subject. The Company knows of no such proceedings contemplated
by any government authorities, or of any material legal proceeding to which
a director, officer or affiliate of the Company or any owner of record or
beneficially of more than 5% of its Common Stock (or any associate of any
of the same) is a party adverse to the Company or any of its subsidiaries
or in which any such person has a material adverse interest to the Company.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted by the Company to a vote of security
holders, through the solicitation of proxies or otherwise, during the last
quarter of the fiscal year ended 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Price Range of Common Stock. Since June 6, 1997 (the date the Common
Stock was first listed), the Common Stock has been quoted on the Nasdaq
SmallCap market under the symbol "RIPE". Prior to June 6, 1997, there was
no market for the Company's Common Stock.
The following sets forth, for the quarterly periods indicated, high
and low per share bid information for the Common Stock reported by Nasdaq
on the Nasdaq SmallCap market:
For the quarterly periods
beginning June 6, 1997
ending September 30, 1998
High Low
June 6, 1997 - June 30, 1997 $ 5 7/8 $ 5
July 1 - Sept. 30, 1997 11 5.5
Oct. 1 - Dec. 31, 1997 11 5/8 5 1/8
Jan. 1 - March 31, 1998 8 13/16 4.5
April 1 - June 30, 1998 8 4
July 1, 1998 - Sept. 30, 1998 4.125 1.25
(The above prices reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
Beginning in 1998 the Small Cap market began quoting on the decimal
system.)
Approximate Number of Security Holders. As of Novemver 15, 1998, the
Company had about 775 registered holders of record of its Common Stock.
Dividend Information. The Company has not paid any cash dividends to
date and does not anticipate or contemplate
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<PAGE>
paying dividends in the foreseeable future. It is the present intention of
management to utilize all available funds and profits, if any, in the
development of the Company's business.
Sale of Unregistered Securities; Uses of Proceeds from Registered
Securities. Information required by Item 701 of Regulation S-K (as to
unregistered equity securities sold during fiscal 1997), and by Rule 46B of
the Securities Act of 1933 (as to use of proceeds of a public offering) was
previously reported in the Company's Report on Form 10-Q for the quarterly
period ended March 31, 1998.
The following information is furnished in connection with
unregistered securities sold or issued by the Company since the filing of
the Company's March 31, 1998 Form 10-Q:
On September 14, 1998, 250,000 shares of the Company's Common Stock were
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 were
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 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) 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
direct or indirect payments to others.
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:
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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
direct or indirect payments to others.
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
March 6, 1996 (Date For the
of Inception) Ten Month Period
Through Ended Year Ended
August 31, 1996(1) June 30, 1997(1) June 30, 1998
------------------ ---------------- -------------
<S> <C> <C> <C>
Revenues $ ___ $ ___ $ 649,620
Operating expenses:
Marketing and sales ___ 115,576 376,589
General and administrative expenses 458,611 1,739,419 6,287,544
Write down of inventory ___ 355,800
Write down in value of management contracts ___ ___ 4,200,000
Compensation charges in connection with issuance
of stock options and warrants 907,201 4,995,106 921,569
Provision for bad debt ___ 1,000,000 1,620,830
------------ -------------- -----------------
Operating loss $(1,365,812) $ (8,205,901) $ (12,756,912)
Other expenses:
Interest income (expense), net (21,259) (356,166) 213,840
------------ -------------- -----------------
Net Loss $(1,387,071) $(8,562,067) $(12,543,072)
------------ -------------- -----------------
Net Loss per share of common stock - basic and diluted $(.32) $ (1.83) $ (1.37)
------------ -------------- -----------------
Weighted average number of
common shares outstanding 4,390,767 4,667,490 9,175,536
------------ -------------- -----------------
</TABLE>
- ----------
(1) The Company was incorporated on March 6, 1996 and initially
adopted a fiscal year ending August 31. During the 1997 year, the Company
elected to change its fiscal year end to June 30.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Annual Report on Form 10-K contains forward-looking statements.
Additional written and oral forward-looking statements may be made by the
Company from time to time in Securities and Exchange Commission ("SEC")
filings and otherwise. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income are subject
to risks and uncertainties that could cause actual results to differ
materially from those indicated in
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the forward-looking statements due to risks and factors identified from
time to time in the Company's filings with the SEC, including those
discussed in this Report, and other risks and uncertainties.
Company 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 (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 certified financial statements for the year ended June 30, 1998
as contained in this 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").
In September 1998 the Company acquired the fully operating casino in
Budapest, Hungary. A Suriname casino, owned by a 50% joint venture of the
company, 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 venturer, has provided the joint
venture entity with loans used to build, and to be used to complete and
begin operating, the permanent casino by January 1999. The Company is also
seeking to acquire, develop and/or operate other casinos abroad.
Until November 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 took over
other obligations of the Company's hotel management operation estimated at
about $350,000. Consequently, as of November 4, 1998 the Company
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had no active hotel management or operation business. The Company intends
to resume its hotel operating activity in the future.
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
the Company had revenues of $649,620 primarily attributable to the
commencement of its hotel management operations in January 1998 under then
existing Hotel Operating Contracts. The Company's accumulated deficit at
June 30, 1998 was $22,492,210 (which included $6,823,876 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, for accounting purposes the
Company recorded a write down of assets of $4,200,000, 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. This letter of intent is described below in more
detail.
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.
For a detailed discussion and analysis of the Company's individual
operating divisions, see "Divisional Overviews" in Item 1 of this report.
Change in Fiscal Year
The Company initially adopted a fiscal year ending August 31. 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 year ended June 30, 1998 is compared to the ten months ended June
30, 1997.
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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, 1996 to June 30, 1997 the Company
had no revenues. During the year ended June 30, 1998 the Company had
revenues of $649,620 primarily attributable to the commencement of its
hotel management operations.
Results of Operations for the Year Ended June 30, 1998
Net Loss. The Company incurred a net loss of $12,543,072 or $1.37 per
share, for the year ended June 30, 1998. Included in the net loss for the
year were (i) non-cash compensation charges of $921,569 recorded in
connection with the value attributed to stock options and warrants issued
by the Company, (ii) a $1,620,830 charge for provision of bad debt, (iii)
general and administrative expenses of $6,287,544 and (iv) $4,200,000
write-down in the value of management contracts.
Revenues. For the year ended June 30, 1998, the Company had revenues
of $649,620, almost all of which ($639,740) were attributable to its
signing in January 1998 hotel management operating contracts. The Company
generated no revenues in prior fiscal periods.
Compensation Charges. During the year ended June 30, 1998, non-cash
compensation charges were $921,569 for the issuance of stock options to
purchase 390,000 shares of Common Stock and of warrants to purchase 100,000
shares of Common Stock. The Company incurred $4,995,106 of charges for the
ten months ended June 30, 1997 for the issuance of stock options to
purchase 1,835,000 shares of Common Stock and of warrants to purchase
550,000 shares of Common Stock. This represents a decrease during the
current period in the Company's utilization of the issuance of stock
options and warrants as compensation payments.
General and Administrative Expenses. General and administrative
expenses, which included travel expenses, salaries and professional and
consulting fees, were $6,287,544 for the year ended June 30, 1998 compared
to $1,739,419 for the ten months ended June 30, 1997. This increase over
the prior period resulted from increases in the Company's business
activities for its food technology business, additional expenses incurred
as a result of the Company's status as a publicly traded entity, and
expenses incurred in exploring and entering the business of managing and
owning hotels and casinos. The increase during the current period is
primarily attributable to increases in payroll and consulting expenses of
$944,542, legal and professional fees of $777,654, travel expenses of
$798,596 and amortization of $342,578. In addition, the Company recorded a
writedown of $554,262 related to construction in progress originally
recorded on the acquisition of SGTI and the Sakhalin project.
Marketing and Sales. During the year ended June 30, 1998, the Company
incurred $376,589 in marketing and sales expense in connection with
increased marketing and sales efforts for its food technology product after
the completion of its initial public offering in June 1997. The Company
incurred $115,576 in marketing and sales expenses for the ten months ended
June 30, 1997.
Write-down in value of management contracts. Subsequent to June 30,
1998, the Company entered into a settlement agreement with FEC, Dorsett and
Mr. Chiu in which both parities withdrew from and released all of the above
mentioned Hotel Management Agreements. According to the terms of the
Agreement, FEC will keep 250,000 of the 950,000 shares
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of the Company's Common Stock originally issued to FEC. At June 30, 1998,
the carrying value of the related assets was reduced to the fair value
based on the terms of the settlement agreement, and accordingly, the
Company recorded a charge of $4,200,000 to write down the carrying amount
of the management contract agreements, trade names, and deposit on assets
to be acquired. The charge is reflected in the accompanying consolidated
statements of operations for the year ended June 30, 1998.
Provision for Bad Debt. In December 1997 and February 1998 the Company
loaned CPC a total of $650,000 for its use in discharging the Atmos debts
and obligations, and through June 30, 1998 loaned CPC an additional
$970,000 for inventory purchases, overhead requirements and for the
discharge of additional Atmos obligations, bringing the total loan made to
CPC to $1,620,000. Presently, the Company does not anticipate that it will
exercise its options to acquire 51% of the Atmos stock, and CPC would
likely be unable to repay these loans, except possibly from any available
proceeds from sale of its stock in Atmos or of the partially developed
business, which proceeds are likely to be less than the loans.
Consequently, the Company established a reserve equal to the $1,620,000 in
loans made to CPC.
Interest Income. For the year ended June 30, 1998, interest income was
$288,518, compared to $51,180 for the ten months ended June 30, 1997. This
increase was due to additional cash being available for investment from the
proceeds of the Company's public and private offerings.
Interest Expense.For the year ended June 30, 1998, interest expense
including amortization of debt discount was $74,678 compared to $407,346
for the ten months ended June 30, 1997. These amounts included non-cash
charges related to the amortization of $60,328 and $252,000, respectively,
on debt discount recorded for the value of Common Stock shares issued to
convertible debentureholders. The decrease in actual accrued interest
expenses from $155,346 during the prior period to $14,350 in the current
period was the result of the repayment of certain outstanding obligations
by the Company from the proceeds of its June 1997 initial public offering.
Results of Operations for the Ten Months Ended June 30, 1997
Net Loss. Net loss for the ten months ended June 30, 1997 was
$8,562,067, or $1.83 per share. Included in the net loss for the period
were (i) non-cash compensation charges of $4,995,106 recorded in connection
with the value attributed to stock options and warrants issued by the
Company, (ii) general and administrative expenses of $1,739,419, (iii) a
$1,000,000 charge for provision of bad debt, (iv) interest expense of
$356,166 (net of interest income), (v) a $355,800 write-down of Conserver
21(Trademark)inventory, and (vi) marketing and sales expenses of $115,576.
Compensation Charges. During the ten months ended June 30, 1997,
non-cash compensation charges were $4,995,106 for the issuance of stock
options to purchase 1,835,000 shares of Common Stock and warrants to
purchase 550,000 shares of Common Stock.
General and Administrative Expense. For the ten months ended June 30,
1997, general administrative expenses were $1,739,419 and included
expenditures consisting primarily of travel expenses, salaries and
professional and consulting fees.
Marketing and Sales. During the ten months ended June 30, 1997, the
Company incurred $115,576 in marketing and sales expenses in connection
with its preliminary marketing and sales expenses for Conserver
21(Trademark).
Write-down of Inventory. Initial purchases of Conserver
21(Trademark)packets by the Company have indicated certain manufacturing
limitations in the packaging process of the Conserver 21(Trademark)packets,
which management of the Company believes can be ultimately rectified. In
light of these limitations and the unmarketablility of the inventory
purchased, the
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Company wrote down $355,800 of its Conserver 21(Trademark)inventory during
the ten months ended June 30, 1997.
Provisions for Bad Debt. Under the terms of the Distributing
Agreement, the Company advanced $1,000,000 to Agrotech as of June 30, 1997
which was repayable over a three year period as an offset against Conserver
21(Trademark)purchases by the Company in excess of the purchase of a
minimum of $2,000,000 of Conserver 21(Trademark)products by April 1998 (the
"Initial Volume Commitment"). The Company attempted to renegotiate the
Distribution Agreement with a view to reduce the pricing arrangements
regarding the Conserver 21(Trademark)packet and manufacturing arrangements
so that all packaging is done in the United States. Due to the uncertainty
that existed as to the outcome of the renegotiations of the Distributing
Agreement, the Company's ability to exceed the Initial Volume Commitment
for Conserver 21(Trademark) products based on the pricing levels and the
anticipated renegotiated lower pricing level, and the manufacturing
difficulties, management of the Company believed that achieving the Initial
Volume Commitment necessary to offset the Company's purchases from Agrotech
against the Agrotech Loan was remote. Accordingly, for the ten months ended
June 30, 1997, the Company established a reserve equal to the Agrotech
Loan. The Company terminated its Distribution Agreement with Agrotech
during the fiscal year ended June 30, 1998.
Interest Expense.For the ten months ended June 30, 1997, interest
expense was $356,166, net of interest income of $51,180, resulting from
interest accrued on the Company's convertible debentures and non-cash
charges related to the amortization of $252,000 on debt discount recorded
for the value of Common Stock issued to convertible debentureholders.
Income Taxes. For the ten months ended June 30, 1997, the Company, for
tax purposes, did not have any operations, or net operating losses. The
Company's expenses were preoperating and therefore, are capitalized and
will be amortized starting on the date operations commenced.
Result of Operations for the period March 6, 1996
(date of inception) to August 31, 1996
Net Loss. Net loss for the period from March 6 to August 31, 1996, was
$1,387,071 or $0.32 per share. Included in the net loss for this period
were (i) general and administrative expenses of $458,611 and (ii) non-cash
compensation charges of $907,201 in connection with the value attributed to
stock options and warrants issued by the Company.
General and Administrative Expenses. For the period from March 6 to
August 31, 1996, general and administrative expenses were $458,611 and
primarily included expenditures of travel expenses, salaries and
professional and consulting fees.
Compensation Charges. For the period from March 6 to August 31, 1996,
non-cash compensation charges were $907,201 for value attributed to the
issuance of stock options to purchase 100,000 shares of Common Stock and
warrants to purchase 325,000 shares of the Company's Common Stock.
Interest Expense. For the period from March 6 to August 31, 1996,
interest expense was $21,259, net of interest income of $8,741.
Income Taxes. During the period from March 6, to August 31, 1996, the
Company, for tax purposes, did not have any operations, or net losses. The
Company's expenses are preoperating and therefore, were capitalized and
will be amortized starting on the date operations commenced.
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Liquidity and Capital Resources Summmary
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. At November 15, 1998, the
Company had funded its joint venture $4,000,000 for these purposes. In
September 1998 the other joint venturer loaned the subsidiary $600,000 at a
3% per month interest rate. It was then agreed that all loans or
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 or
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.
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 advanced $3,000,000 and issued 2,000,000 shares
of its Common Stock as part of the agreement to purchase the 100% interest
in SGTI, which in turn owns 65% of SCC, the Company directly developing the
Project. As of June 30, 1998, the Company had advanced $3,421,000 as loans
to SGTI for the development of the Sakhalin Project.
At June 30, 1998 the Company had no debt for borrowed money, and
little or no cash interest expenses. Consequently, interest payments are
not material to the Company's cash position. (In 1997, the Company had
repaid all its then outstanding debt obligations from the proceeds of its
June 6, 1997 initial public offering. A significant portion of interest
expense in the statement of operations are non-cash items for amortization
of debt discount recorded for the value of Common Stock then issued in
exchange for convertible debentures.)
The November 1998 settlement of the Hotel Management Agreements ended
all related payments, although the Company received a $450,000 cash payment
in that settlement and retained $1,000,000. In addition, on December 3,
1998, the Company received $300,000 from two individuals for the purchase
of 400,000 shares of Common Stock at the market value. The individuals were
also issued warrants to purchase 200,000 shares of Common Stock at an
exercise price of $1 per share. These cash payments were and are 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, negotiate payment terms with vendors and
attempt to obtain additional casino management contracts. However, there
can be no assurance that the Company will be successful in accomplishing
its objectives. Consequently, the report of the independent certified
public accountants covering the Company's consolidated financial statements
for the year ended June 30, 1998 contains a going concern emphasis
paragraph.
At September 30, 1998, the Company had a working capital deficit of
$1.3 million, excluding liabilities which were relieved by the termination
of the Hotel Management Agreements. The Company is seeking at least
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$3,000,000 in financing to meet the $1.5 million estimated cost commitment
($2,200,000 at June 30, 1998) 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 $495,000 cash
or cash equivalents on hand. As of that date, its only predicted (but
contingent) sources of cash were (i) 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 additional financing and cash sources, if
realized, will provide adequate cash flow to maintain the Company's
current operations for the next 12 months. As a result of the delinquent
filing of this form 10-K, the Company was notified by Nasdaq of possible
delisting from its 12(g) SmallCap Market Exchange. The Company has
consequently written the Nasdaq Listings Hearings Director to explain the
reason for delay in filing this report. If the Company were to become
delisted it would have an adverse affect on the Company's ability to obtain
the additional financing it is currently seeking.
Prior Financing
The Company was a development stage company through March 1998. The
Company's activities since its inception in March 1996 have been primarily
focused on raising both debt and equity financing (public and private),
organizing and developing its food preservation technology business, and,
since mid-1997, organizing and developing its hotel management business and
casino business. The Company has incurred losses since its inception, and ,
as of June 30, 1998, the Company has yet to derive any substantial income
from operations, except for about $640,000 from fees under hotel management
contracts that commenced in January and March, 1998. The Company's
accumulated deficit at June 30, 1998 was $22.5 million.
From March 1996 through February 1998, the Company raised capital
necessary for its business development through debt and equity private
placements. In 1996 it had a private offering of Common Stock and
convertible debentures in which it raised about $4.9 million. In June 1997,
while the Company was developing its food preservation technology business,
the Company completed an initial underwritten public offering (the "Initial
Public Offering") in which it received net proceeds of about $10,306,000
from the sale of 2,530,000 shares of its Common Stock at a per share price
of $5.00. At that time the Common Stock began being quoted on the Nasdaq
SmallCap market and is still so quoted. In November 1997 through February
1998 the Company began and completed another private offering of Common
Stock (the "1997 Private Offering") in which it received net proceeds of
about $8.9 million from the sale of 2,044,763 shares of its Common Stock
at $5.14 per share. The 1997 Private Offering was largely intended by the
Company to raise cash for its initial expenditures for its new hotel and
casino businesses. The Company's stockholders at a meeting in December 1997
approved entry into those businesses. As of June 30, 1998, the Company had
spent all proceeds of the 1997 Private Offering directly for those initial
expenditures.
The Company's accumulated deficit at June 30, 1998 included $6.8
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 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
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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
estimates that it will incur an additional $750,000 in non-cash
compensation charges in the fiscal year ending June 30, 1999.
Year 2000 Impact on Business Operations
Computers, software and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to
process accurately certain date-based information at or after the year
2000. The Company recognizes the need to insure that its operations will
not be adversely affected by Year 2000 software failures. Software failures
due to processing errors potentially arising from calculations using the
year 2000 date are a recognized risk, and the Company is addressing this
issue on several different fronts.
The Company is in contact with its suppliers to assess their
compliance. There can be no assurance that there will not be a material
adverse effect on the Company if third parties do not covert their computer
systems in a timely manner and in way that is compatible with the Company's
systems. The Company believes that its actions with suppliers will minimize
these risks.
Through June 30, 1998, the Company has not incurred material expenses
relating to Year 2000 compliance efforts and believes that the expenses
associated with completing its Year 2000 compliance plans will not have a
material adverse impact on the Company's operations and is not expected to
exceed $50,000. Internal and external expenses specifically associated with
modifying internal-use software for the Year 2000 will be expensed as
incurred. The Company's current estimates of the amount of time and
expenses necessary to implement and test its computer systems are based on
the facts and circumstances existing at this time. Nevertheless, achieving
Year 2000 compliance is dependent on many factors, some of which are not
completely within the Company's control. Should either the Company's
internal system or the internal systems of one or more significant vendors
or suppliers fail to achieve Year 2000 compliance, the Company's business
and its results of operations could be adversely affected.
The Company uses a significant number of computer software programs
and operating systems in its casino and internal operations, including
applications used in financial business systems and various administration
functions. To the extent that these software applications contain source
code that is unable to appropriately interpret the upcoming calendar year
"2000", some level of modification or even replacement of such source code
or applications will be necessary. The Company is in the process of
identifying the software applications that are not "Year 2000" compliant
and anticipates completion of this process by September 1999. Given the
information known at this time about the Company's systems, coupled with
the Company's ongoing efforts to upgrade or replace business critical
systems as necessary, it is currently not anticipated that these "Year
2000" costs will have a material adverse impact on the Company's business,
financial condition and results of operations.
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New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Number 130 (SFAS 130) "Reporting
Comprehensive Income." This statement, which is required to be adopted for
financial statements issued for annual periods beginning after December 15,
1997, establishes standards for reporting and display of comprehensive
income and its components in full set of general-purpose financial
statements. At that time, the Company will be required to report total
comprehensive income, an amount that will include net income as well as
other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting
principles have previously been reported as separate components of equity
in the Company's consolidated financial statements. SFAS 130 will not have
a material impact on the Company's financial statements since its
requirements deal mainly with financial disclosures.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 131 (SFAS 131)
"Disclosure about Segments of an Enterprise and Related Information." This
statement, which is required to be adopted for financial statements issued
for annual periods beginning after December 15, 1997, establishes standards
for the way that public business enterprises report information about
operating segments in financial reports issued to shareholders. The Company
has not yet determined the financial statement impact of SFAS 131.
In June 1998, the Financial Accounting Standards Board Issues SFAS
133, Accounting for Derivative Instruments and Hedging Activities, SFAS 133
requires companies to recognize ALL derivatives 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 operations 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 derivatives 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 consolidated financial statements.
Subsequent Events:
Subsequent events are described in Item 1 of this report, above in
this Management Discussion and Analysis and in the Company's consolidated
financial statements included herein.
27
<PAGE>
Factors That Could Affect Operating Results
This Annual Report on Form 10-K contains forward-looking statements.
Additional written and oral forward-looking statements may be made by the
Company from time to time in Securities and Exchange Commission ("SEC")
filings and otherwise. The Company cautions readers that results predicted
by forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income are subject
to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements,
due to the following factors, among other risks and factors identified from
time to time in the Company's filings with the SEC.
Food Technology Business
. The Company was, for accounting purposes, in the development stage
until March 1998. Its operations are still in fact subject to all of
the risks inherent in the establishment of a new business enterprise,
including the need to obtain financing, lack of significant revenues,
reliability of sources of supply and the uncertainty of market
acceptance of its business. The Company has not as yet derived any
significant revenues from operations and has incurred losses since
inception.
. No operating revenues are anticipated from its food technology
business until such time, if ever, as the Company can demonstrate the
commercial viability of Preservit(Trademark). There can be no
assurance whether or when the Company will successfully implement its
business plan or operate profitably.
. The Company believes that its proposed use of Preservit(Trademark)does
not currently subject it to any material federal, state, or local
regulatory approvals. There can be no assurance, however, that future
regulatory approvals will not be required in the United States or
Canada (where the Company anticipated will be the sites of any market
entry), leading to unanticipated expenses and delays inherent in the
regulatory process.
. The Company has not undertaken any investigation as to the applicable
requirements that may be imposed by regulatory agencies outside the
United States. There can be no assurance that such legal restrictions
in jurisdictions outside the United States will not result in a delay
in the Company's ability to commercially develop the
Preservit(Trademark)in those jurisdictions.
. The Company has no orders for Preservit(Trademark)products, and there
can be no assurance that potential customers will be willing to incur
the costs of Preservit(Trademark), that Preservit(Trademark)will be
contracted for by any supermarkets or other
28
<PAGE>
retailers, distributors or growers or, even if accepted by any such
entities, that it will prove profitable or attractive to potential
customers. In addition, there can be no assurance that other competing
products will not be more economical or attractive to the Company's
potential customers.
. The Company has never utilized Preservit(Trademark)under the
conditions and in the volumes that will be required to make
Preservit(Trademark)profitable, and cannot predict all of the
difficulties that may arise in connection therewith.
. The Company's ability to operate its Preservit(Trademark)business
successfully itself or with others will depend on a variety of
factors, many of which are outside the Company's control, including
competition, cost and availability of the product and changes in
regulatory requirements.
. Any market or initial marketing activities might have to be performed
by its executive officers and advisors. To varying degrees, such
persons have had prior experience in the food industry and marketing
food products and services. However, none have had any experience with
Preservit(Trademark)or in marketing that product. In order to market
and sell Preservit(Trademark), the Company may need to maintain or
retain a sales force with technical expertise in the food preservation
and food transportation industries. There can be no assurance that the
Company will be able to gain or obtain such expertise or that such
marketing efforts will be successful.
. There are several methods of food preservation commercially available
that compete directly or indirectly with Preservit(Trademark). Many of
the Company's potential competitors may have substantially greater
financial, human and other resources than the Company as well as more
experience in the marketing and selling of post-harvest life extension
products. There can be no assurance that Preservit(Trademark)will gain
commercial acceptance or establish any meaningful market share.
Furthermore, any such market share, if and when achieved, could be
lost or reduced by enhanced competition or the emergence of new and
more effective preservation technologies.
Hotel Business and Casino Business
. The Company's current and future business plans with respect to the
ownership and management of hotels and casinos are affected, in large
part, by changes in conditions which favorably or unfavorably affect
investments in those enterprises. Many of these conditions are beyond
the Company's control and affect: (i) the ability of the Company to
operate any hotels and casinos; (ii) competition from other
hospitality and entertainment properties; (iii) changes in regional
and local population and disposable income composition; (iv)
unanticipated increases in operating costs; (v) legal restrictions as
to the use of advertising typically utilized in marketing gaming
operations; (vi) restrictive changes in zoning and similar land use
laws and regulations or in health, safety and environmental laws,
rules and regulations; (vii) the inability to secure property and
liability insurance to fully protect against all losses, or to obtain
such insurance at reasonable costs; (viii) the exercise of the power
of eminent domain; (ix) seasonality; and (x) changes in travel
patterns or preferences which may be affected by increases in gasoline
prices, changes in airline schedules and fare, strikes, weather
patterns and/or relocation or reconstruction of highways, among other
factors. Given the rapid developments and changes in the hotel and
casino industries, it is impossible to accurately predict future
trends or changes in those industries or their effect on the Company.
In particular, the success of the Company's Sakhalin Project is
largely dependent on tourism from the active gaming populations of
Japan, Korea, China and the Russian Federation. Although the economic
viability of any of that project is at least in part based upon
tourist incentives which would streamline the process of tourists
entering the regions in which the Company plans to operate casinos for
gaming in such regions, there can be no assurance that restrictions
will not be imposed on gaming generally in the regions in which the
Company plans to operate and/or on tourists
29
<PAGE>
entering such regions for gambling, which may adversely impact the
Company's results of operations.
. The collection of the casino receivables with respect to the projects
from international customers could be adversely affected by future
business or economic trends or significant events in the countries in
which such customers reside. There can be no assurance that operating
cash flows and results of operations will not be adversely impacted by
any inability to collect receivables from high--end players. In
addition, gaming debts may not be legally enforced in certain foreign
jurisdictions or in certain jurisdictions within the United States on
grounds that they are against public policy. Such unenforceability may
have an adverse impact on the collectability of such receivables.
. As a result of the Company's proposed expansion into the hotel and
casino industries internationally, the Company's operations with
respect to the proposed projects will be subject to greater risks
inherent in international operations such as the possibility of the
loss of revenues, property or equipment due to expropriation,
nationalization, war, insurrection, terrorism or civil disturbance,
the instability of foreign economies, currency fluctuations and
devaluations, adverse tax policies and governmental activities that
may limit or disrupt markets, restrict payments or the movement of
funds or result in the deprivation of contract rights. The Company is
subject to taxation in a number of jurisdictions, and the final
determination of its tax liabilities involves the interpretation of
the statutes and requirements of various domestic and foreign taxing
authorities. Foreign tax authorities routinely examine foreign income
tax returns of foreign subsidiaries, unconsolidated affiliates and
related entities.
. For factors affecting the Sakhalin Project, including the current
economic climate in Russia, see Item 1, "Sakhalin Project".
There can be no assurance that any of these risks will not have an
adverse effect on the Company's results of operations.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The Company held no material market risk sensitive financial
instruments or interest therein, and held none at June 30, 1998. The
Company's loans, payables, or receivables to or from others (including
loans, payables or receivables to or from its subsidiaries or joint
ventures) and the interest thereon, are all expressed as dollar obligations
and payable in dollars.
However, the Company's routine daily foreign operations are usually
conducted in local foreign currencies. The Company is exposed to foreign
currency exchange rate risk between the time foreign gaming revenue or
other revenues are received and the time they are converted into dollars.
The Company has not entered into any exchange rate protection arrangements.
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In December 1997 the Company's principal independent accountant
Richard A. Eisner & Company LLP resigned because the Company and its
accountants believed that the Company's proposed entry into the
international hotel and casino businesses required a principal accountant
with more substantial and conveniently located international offices and
resources. In April 1998 the Company retained BDO Seidman, LLP as its
principal independent accountant. The decision to change accountants was
approved by the Audit Committee and the Board of Directors.
PART III
Item 10. Directors and Executive Officers of the Registrant
Identification of Directors
The Board of Directors is divided into three classes, the terms of
which expire successively over a three-year period. At each annual meeting
of stockholders, successors to directors whose terms expire at that meeting
are to be elected for three-year terms. The current directors of the
Company are as follows, except that in November 1998 Mr. Haft resigned as
a director:
30
<PAGE>
Class A Directors
JAY M. HAFT, 62, has served as a director of the Company since October
1996. Mr. Haft resigned in November 1998 and has not been replaced. A
practicing attorney for over 25 years, Mr. Haft also serves as
Chairman of Noise Cancellation Technologies, Inc., Extech, Inc. and
Jenna Lane, Inc. He is a Managing General Partner of Venture Capital
Associates, Ltd. and of Gen Am "1" Venture Fund, a domestic and an
international venture capital fund, respectively. From 1989 until
1994, he was a partner at Parker Duryee Rosoff & Haft, counsel to the
Company for its initial public offering, in New York, New York. He is
currently of counsel to such firm. Since 1994, Mr. Haft has been a
consultant and director to various public and private companies. He is
a member of the Florida State Commission for Government Accountability
to the People.
DALLAS DEMPSTER, 57, was elected to the Board and also elected
President and Chief Executive Officer on July 20, 1998. Since its
inception he has been one of the two executive directors of the entity
developing the Sakhalin Project, and is a founder of that project.
From 1985 to 1991 Mr. Dempster was the Chairman and Managing Director
of Burswood Resort Complex, of which he was the founder. Burswood is
the largest tourist destination resort development in Western
Australia, costing A$320 million, employing over 2,700 employees, and
with revenues in excess of A$400 million. Between 1983 and 1990 he was
Chairman of the Rottnest Island Authority on behalf of the Western
Australia government. Mr. Dempster was principal project director
and/or owner of substantial other property development projects in
Sydney and Perth, a member of the Airline Deregulation/Committee, and
a member of the Board of the Aboriginal Enterprise Company Limited. In
March 1994 Mr. Dempster was fined A$4,000 for having violated the
Australian Companies Code by counseling or procuring, or being
directly or indirectly knowingly concerned in or party to, the making,
by a bank officer, of a false book entry relating of the affairs of an
Australian merchant bank. A person so found is automatically
prohibited for five years from the management of a company in
Australia. In October 1993 an Australian Court found that in 1986 Mr.
Dempster failed to disclose to a co-venturer with his family company a
payment to be made to him upon the co-venturer's withdrawal from the
co-venture project. The co-venturer was awarded A$22 million judgment
against Mr. Dempster and his family company. The family company had
received A$50 million from the sale of the project several years after
the withdrawal. The family company paid A$11 million in settlement,
and in 1997 Mr. Dempster filed for voluntary bankruptcy in Australia,
which has since been annulled on his reaching an agreed settlement of
A$1.0 million. The Company has been provided with a legal opinion that
under applicable Australian law the effect of the annullment of Mr.
Dempter's bankruptcy is to retrospectively annihilate the bankruptcy
and its consequences at law and to treat it as if it never happened
(except that all acts done by the trustee or Court before the
annullment shall be deemed to have been validly made or done).
Class B Directors
JAMES V. STANTON, 66, has been Vice Chairman and a director of the
Company since its inception in March 1996. From 1981 to 1988 he served
as Executive Vice President of the Delaware North Company, one of the
largest privately held food companies in the United States. Mr.
Stanton has been an attorney since 1962 and a registered lobbyist in
Washington, D.C. since 1988, and represented the 20th Congressional
District of Ohio in the United States House of Representatives from
1971 to 1977, where he served on the Select Committee on Intelligence,
the Government Operations Committee, and the Public Works and
Transportation Committee.
JONATHAN M. CAPLAN, Q.C., 47, elected a director in December 1997, is
a barrister-at-law, practicing in the United Kingdom and was appointed
Queens Counsel in 1991. Mr. Caplan specializes in various areas of
work, including legal consultation and advisory work pertaining to
financial regulations, Stock Exchange regulations, international law
and media law. He practices principally in London and the Far East.
Mr. Caplan is a director of ACE Editing Ltd., a UK company providing
technical services to the television industry. He is also a member of
the Educational Board of the Journal of Criminal Law, a fellow of the
Royal Society for Arts in London.
31
<PAGE>
Mr. Caplan was formerly the Chairman of Public Affairs for the Bar
Council of England and Wales.
Class C Directors
CHARLES H. STEIN, 70, was the Chairman, President and Chief Executive
Officer of the Company since its inception in March 1996 through July
20, 1998, after which he has been Chairman. From June 1994 until March
1996, Mr. Stein was a private investor and consultant. From October
1993 until June 1994, Mr. Stein was Chairman of HMI International
Ltd., a Florida based wholesaler and retailer of resale products. From
1985 to 1987, he was President and Chief Executive Officer of Night
Hawk Resources, Ltd. (Vancouver Stock Exchange) which was engaged in
oil and gas exploration in Texas and Alaska. Prior thereto and from
1987, Mr. Stein was a private investor. Early in his career, Mr. Stein
pioneered the concept of packing fresh orange juice in "milk-type"
cartons, which concept was sold to Kraft Foods, Inc. From December
1968 to October 1983, Mr. Stein was Chairman and Chief Executive
Officer of Hardwicke Companies Inc. (Nasdaq), which built, developed,
or operated more than 50 restaurants (including Tavern on the Green,
Maxwell's Plum, and Benihana), health spas, theme parks in North
America, Europe and Asia (including Great Adventure in New Jersey),
and duty-free shops. Prior to 1968, he was President and Chief
Executive Officer of Kitchens of Sara Lee, the world's largest bakery,
as well as a director, member of the Executive Committee, and a Vice
President of Consolidated Foods Corporation (NYSE), the parent company
of Sara Lee.
The Company currently has authorized five directorships, one of which
is vacant due to Mr. Haft's resignation. In 1997 the Company amended its
Certificate of Incorporation to provide for a classified Board of
Directors. The Company's Board of Directors is divided into three classes.
Class A has two directorships, of which one is held by Mr. Dempster and one
of which is vacant was held by Mr. Haft, whose terms will expire at the
Company's annual stockholder meeting for 1998. Mr. Dempster was elected a
director in July 1998 by the Board of Directors, to replace a director who
had resigned. Class B has two directorships, now held by Messrs. Stanton
and Caplan, whose terms expire at the Company's annual stockholder meeting
for 1999. Mr. Caplan was elected a director on December 2, 1997 by the
Board of Directors to replace Mr. Brian J. Bryce, who had resigned. Class C
consists of one directorship, now held by Mr. Stein, whose term expires at
the Company's annual stockholder meeting for 2000. Except for Messrs.
Dempster and Caplan, stockholders elected all the directors in 1997 when
the Company's stockholders first approved a classified board. At each
annual stockholder meeting beginning with the 1998 annual meeting, the
successors to directors whose terms will then expire will be elected to
serve from the time of election and qualification until the third annual
meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, such class will consist of an equal
number of directors. All stockholders of the Company's Common Stock are
entitled to vote in elections for the directors of each Class.
The Company has agreed that, for a period of five years from June 6, 1997,
Janssen/Meyers Associates, L.P. ("J/M") may designate one person to be
elected to the Board of Directors of the Company or, in the alternative,
J/M may designate one person to attend all meetings of the Company's Board
of Directors and to receive all notices of meetings of the Company's Board
of Directors and all other correspondence and communications sent by the
Company to members of its Board of Directors. Such designee may be an
officer or director of J/M. If J/M's designee is elected to the Board of
Directors, such designee will sit on the Company's Audit Committee. J/M has
not designated an individual to serve in such capacity. J/M was the
Company's underwriter in the June 1997 initial public offering.
Identification of Executive Officers Who Are Not Directors
32
<PAGE>
DAVID A. HARTLEY, 51, has been President of the Casino Division since
October 1997. Mr. Hartley has spent the past 20 years in the casino
gaming industry. Originally trained as a Clinical Psychologist, he has
had extensive experience in virtually all aspects of casino
operations, from the Queen Elizabeth II cruise ship, to six
London-based casinos. After serving as the Manager of the Ritz Casino
Club in London, he was appointed Gaming Executive in charge of
management development and training. He served in several positions at
London Clubs International Ltd., where he was responsible for that
company's expansion outside the United Kingdom. This involved
researching and evaluating prospective markets, acquiring new casino
licenses, and other related activity. Subsequent to that, he joined
Regency Casinos Limited in 1992, where, until joining the Company, he
held several positions, and was most recently Chairman. In this
employment he negotiated a joint venture with Hyatt International
Corporation to establish an international casino management company,
and organized several international casinos. These included Regency
Casino Thessaloniki, a US$120 million project, including a new hotel,
which is the largest casino in Europe with gross gaming win
approaching US$140 million. Also included was a Regency Casino Baku
Azerbaijan, constructed within the Hyatt Hotel, at a project cost of
US$15 million, including the hotel, casino, restaurants and business
facilities, as well as the Mimosa Regency Casino, Philippines, with a
project cost of US$5 million. Mr. Hartley has also been responsible
for the establishment and planning and development strategy for
several other casinos, including projects in Cape Town, South Africa
and a second operation in Baku. Mr. Hartley is a hands-on manager with
the background, experience, and knowledge of the casino industry in
emerging markets.
KAI W. MICHAELSEN, 50, had been President of Hotel Division since
January 1998 until operations of that division were terminated in
November 1998. Mr. Michaelsen began his hotel industry career in
Germany. A position with Holiday Inn introduced him to main line Food
and Beverage responsibilities. Recruited by Hyatt International
Corporation, he spent several years in Asia in various operational
capacities before being promoted to Corporate Director of Projects for
Hyatt's rapid worldwide expansion in the late 80's and early 90's. He
was responsible for the implementation of stringent quality and
operation standards. He was involved in the development of the
flagship "Grand Hyatt" hotels in Hong Kong, Taipei, Bangkok, Bali and
Jakarta. From July 1991 to October 1994 he was a hotel operations
consultant to P.T. Adhygaya Budaya in Indonesia. Mr. Michaelsen joined
CDL Hotels International in November 1994 as Director of Technical
Services where he set up operational guidelines, policies and
procedures. He was part of the executive team which launched the
"Millennium Hotel & Resorts" brand and worked on the buy-out of the
Copthorne Hotels chain. In June 1996 he joined FEC to develop its
hotel business.
DOUGLAS C. RICE, 54, was appointed Vice President -- Corporate
Development upon joining the Company in May 1996 and appointed
Executive Vice President and Chief Operating Officer of the Food
Technology Division in April 1997. Prior to joining the Company and
from 1986, Mr. Rice was an independent food technologies consultant,
during which time he provided advice and guidance for six years to the
Charoen Pokphand Group, one of Asia's largest food producers, on the
operations, financing, management and distribution aspects of business
specializing in shrimp, fish and chicken products.
GERALD M. BRESLAUER, 61, had been Vice President-Administration and
Secretary of the Company since its inception until his employment
ended in November 1998. From 1991 until he joined the Company in March
1996, Mr. Breslauer was an agent of The Equitable Life Assurance
Society of the United States and the Equitable Variable Life Insurance
Company and was a registered representative of Equico Securities, Inc.
Mr. Breslauer is licensed to practice law in the State of New York.
MILES R. GREENBERG, 41, was appointed Vice President and Chief
Financial Officer upon joining the Company in September 1996 and
appointed Senior Vice President on January 18, 1997. From 1994 until
joining the Company, Mr. Greenberg served as Vice President and Chief
Financial Officer of F3 Software Corporation ("F3"), a developer and
marketer of electronic forms composition and automation software. From
1992 until assuming his positions at F3, he served as Controller of
BLOC Development Corporation (former parent company of F3), a publicly
held entity primarily engaged in the development, publishing and
direct marketing of computer software
33
<PAGE>
and hardware products. From 1985 to 1992, Mr. Greenberg served as Vice
President and Chief Financial Officer of The Levenshon Companies, Inc.
and its affiliates, a diversified financial services company. Mr.
Greenberg is a Certified Public Accountant formerly with KPMG Peat
Marwick.
Compliance with Section 16(a)
of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than
10 percent of any registered class of the Company's equity securities, to
file with the Securities and Exchange Commission (the "SEC") and the Nasdaq
Stock Market reports of ownership of the Common Stock of the Company.
Reporting persons are required by SEC regulation to furnish the Company
with copies of all such reports that they file. To the best of the
Company's knowledge, during the period twelve months ended June 30, 1998,
the initial reports and any amendments thereto of each of the Company's
executive officers and directors were timely filed.
Item 11. Executive Compensation
The following table sets forth the compensation awarded to, or paid
to, or earned by, the Company's Chairman (now former Chief Executive
Officer and former Chief Operating Officer) and one other ("Named Executive
Officers") during the period March 1996 to June 30, 1998. No other
executive officer of the Company serving as an executive officer on June
30, 1998 received a total salary and bonus of $100,000 for the periods
specified. Accordingly, no information is reported for such persons.
Summary Compensation Table
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Annual Compensation Compensation Long
Term
-------------------------------------------------------------------------------------------------------------------------
Name and Principal Fiscal Year Salary ($) Securities All Other
Position Underlying Options(#) Compensation
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles H. Stein, now June 30, 1997 to Note (1) ____ $40,000
Chairman, then Chief June 30, 1998
Executive Officer, March 6, 1996 to _____ ____ Note (2)
President and Director June 30, 1997
David Hartley, President, October, 1997 to $189,000 100,000 _____
Casino Division June 30, 1998
============================ ====================== ======================= ====================== =======================
</TABLE>
(1) As of June 30, 1998, Mr. Stein had waived merely (not deferred) his
right to any annual salary and, as of the date of this report, has
continued to waive this right. The Board of Directors has accepted Mr.
Stein's waiver, but has reserved the right to award Mr. Stein, in its
sole discretion, the amounts so waived. During the 12-month period
ended June 30, 1998 the Company recorded non-cash compensation
charges of $90,000 for services contributed by Mr. Stein.
(2) The Company purchased a life insurance policy for Mr. Stein's benefit,
paying a premium of about $40,000.
34
<PAGE>
The Company has no defined benefit plan, actuarial plan, no pension
plan and no long-term incentive plan.
After the Company acquired a 65% interest in SGTI in December 1997,
SGTI continued to pay Sovereign Gaming and Leisure Ltd. consulting fees of
$15,000 per month. Mr. Dempster was paid by Sovereign consulting fees in a
similar amount for the same services, or other services, during the same
six-month period.
Employment Agreement
Effective as of June 13, 1997 the Company entered into an employment
agreement with Mr. Charles H. Stein, then President and Chief Executive
Officer of the Company. The agreement has a three-year term which renews
for an additional year on each anniversary of the agreement, and provides
for an annual base compensation of $125,000 together with such additional
increases as the Company's Board of Directors, in its sole discretion, from
time to time determines are appropriate. The agreement also provides for
certain employee benefits including medical insurance, vacation and a car
allowance, and also contains a non-competition provision covering the term
of the agreement as well as for 36 months following termination. To date,
Mr. Stein has waived his salary.
Option Grants
The following table provides certain information regarding the stock
options granted during the 12 month period ended June 30, 1998 to the Named
Executive Officers named in the Summary Compensation Table.
Option Grants For the Twelve-Month Period Ended June 30, 1998
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options Exercise of
Underlying Options Granted to Employees Base Price
Name Granted (#)(1) in Fiscal Period $/Share Expiration Date
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles H. Stein 0 0 ----- -----
----------------------------------------------------------------------------------------------------------------------
David Hartley 100,000* 42% $6.50 October, 2000
Note (1)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* At June 30, 1998, Mr. Hartley had not exercised any options and all
100,000 remain outstanding.
(1) In October 1997, Mr. Hartley became an executive officer of the
Company. The Casino Consulting Agreement with his employer, Star Casinos
Limited, granted non-Plan options to purchase 100,000 shares of the
Company's Common Stock at $6.50 per share, with half of the options
becoming exercisable in October 1998 and half in October 1999. On the date
of grant the closing bid price for a share of Common Stock was $6.50. Based
on the Black-Scholes option-pricing model these options would be valued at
$140,000. The Company believes Mr. Hartley is the principal stockholder in
Star and may be deemed to beneficially own the options. Consequently, the
Company has included those options in the above table as being granted to
Mr. Hartley for purposes of the table. On September 14, 1998 the Board
approved a reduction of the exercise price to $1.50 as part of a more
general reduction in exercise prices of options held by officers, directors
and employees.
No other option was granted to any of the Named Executive Officers
under the 1996 Stock Option Plan, or otherwise granted to any such officer
during the year ended June 30, 1998, and no options were exercised by any
of them during that period. The unexercised options held by the executive
officers named had no value at June 30, 1998 as the exercise prices
exceeded the fair market value closing price of the common stock on such
date.
35
<PAGE>
The Company's outstanding options at June 30, 1998 totaled 3,177,500.
The Company uses the Black-Scholes option pricing model to value options
issued. See Note 12 to the Consolidated Financial Statements contained
herein.
In September 1998 the Board of Directors: (i) reduced the exercise
price of all Plan and non-Plan Options (and any warrants) previously
granted any officer, director, or employee to the then market price of
$1.50, and granted seven persons and entities new Plan and non-Plan options
to purchase 1,500,000 shares. Those reductions in price and grants are not
included in the above table because those actions were not taken during the
year ended June 30, 1998. For that same reason the Company has not included
the information and explanation provided for in Regulation S-K, Item
402(i).
On December 2, 1997 Messrs. Brian Bryce and Jay Haft were granted
options in consideration of their services in bringing the Sakhalin project
to the Company. The Company believes such services were not provided by
them as directors of the Company.
Directors Compensation
Non-employee directors receive $2,000 per month during the twelve
months ended June 30, 1998. Since August 1998 they waived the fee.
Directors who are employees of the Company receive no additional
compensation for their services rendered as directors. All directors are
reimbursed for reasonable expenses incurred in connection with their
services rendered as directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of October 15, 1998, to
the best of the Company's knowledge, with respect to each person (including
any "group" as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, known to the Company to be the beneficial owner of
more than 5% of the Company's Common Stock. The percentage of shares
outstanding is based on the Company's shares of Common Stock outstanding as
of October 15, 1998, as adjusted in each case pursuant to Rule 13-3(d)1
under the Securities and Exchange Act of 1934.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Number of Shares Percentage of Total
Name and Address of Stockholder Beneficially Owned Voting Shares *
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Stein Inter Vivos Trust (1) 1,100,000 8.82%
c/o CCA Companies Incorporated
-----------------------------------------------------------------------------------------------------------
James V. Stanton (2) 753,644 6.04%
c/o CCA Companies Incorporated
-----------------------------------------------------------------------------------------------------------
Dallas Dempster 1,000,000 7.48%
c/o CCA Companies Incorporated (3)
-----------------------------------------------------------------------------------------------------------
Far East Consortium International Limited (4) 950,000 7.68%
12th Floor, Menara Multi-Purpose
No. 8 Jalan Munshi Abdullah
50100 Kuala Lumpur
-----------------------------------------------------------------------------------------------------------
Peter Janssen (5) 999,129 7.59%
c/o Janssen Meyers Associates LP
17 State Street
New York, N.Y.
-----------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------------------------------------------
Bruce Meyers (6) 669,383 5.09%
c/o Janssen Meyers Associates LP
17 State Street
New York, N.Y.
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents 1,000,000 shares held by the Charles Stein Inter Vivos
Trust for the benefit of Mr. Stein's spouse and children. Mr.
Stein, Chairman of the Company disclaims voting and investment
power with respect to those shares. Mr. Stein currently has an
exercisable option to purchase 100,000 shares of common stock at
$1.50 per share.
(2) Includes 20,000 shares of Common Stock which are held by Mr. Stanton,
a Director of the Company, as joint tenant with his wife, Margaret
M. Stanton, currently exercisable warrants to purchase 150,000
shares of Common Stock at a price equal to $1.50 per share, and
currently exercisable options to purchase 500,000 shares and 23,644
shares of Common Stock at $1.50 and $2.00 per share, respectively.
(3) Represents currently exercisable non-Plan options granted September
1998 to purchase 1,000,000 shares at $1.50 in the name of Dabus
International Limited for the benefit of Mr. Dempster's family.
(4) Subject to an irrevocable proxy to the Company pursuant to the FEC
Hotel Management Agreement, and to other restrictions that may
result in FEC not being the beneficial owner of these shares. FEC
has neither affirmed nor disclaimed beneficial ownership.
(5) Includes currently exercisable warrants to purchase 55,000 shares at
$8.25; warrants to purchase 178,917 shares at $5.135 and Janssen
Meyers Associates, LP warrants to purchase 100,100 shares at $8.25
and warrants to purchase 325,629 shares at $5.135.
(6) Includes currently exercisable warrants to purchase 55,000 shares at
$8.25; warrants to purchase 178,917 shares at $5.135 and Janssen
Meyers Associates, LP warrants to purchase 100,100 shares at $8.25
and warrants to purchase 325,629 shares at $5.135.
The above table sets forth information as of October 15, 1998, which
is prior to the November 4, 1998 date of the November Settlement Agreement
under which Far East Consortium International Limited agreed to return to
the Company for cancellation 700,000 of the 950,000 shares listed above. If
the table set forth information as of a date after November 4, 1998, FEC
would have a percentage of total voting shares less than 5%, and thus would
not appear in the table.
If the letter of intent between the Company and RNGS, described in
Item 1 above under the heading "Sakhalin Project" and elsewhere in this
report, were consummated, then RNGS and its associates might be issued 51%
of the Company's Common Stock to be then outstanding, and, subject to any
prior agreement reached with the Company as to management, would be
entitled initially to name critical members of management and of the Board
of Directors, and possibly thereafter to elect all or most of the Board of
Directors by reason of its ownership of Common Stock.
Pursuant to the Dorsett International Hotel Management Agreement
terminated November 4, 1998, the Company might have issued to Mr. Chiu or
his associates up to 800,000 shares of Common Stock upon delivery of
certain Hotel Operating Contracts, and pursuant to the FEC Hotel Management
Agreement terminated November 4, 1998 the Company might have issued to FEC
250,000 more shares for delivery of one Hotel Operating Agreement. Pursuant
to the Development Services Agreement with Mr. Chiu, the Company might have
issued to him 1,500,000 shares of Common Stock if and when he procured loan
financing for the Sakhalin Project.
In acquiring SGTI the Company issued 2,000,000 shares to the former
stockholders in SGTI. The Company does not know the ultimate beneficial
ownership of these shares.
37
<PAGE>
As described in Item 1 above under the heading "Common Stock and Hotel
Management Agreements" and elsewhere in this report, the shares held by Far
East Consortium International Limited, and further shares that might be
issued pursuant to the two Hotel Management Agreements, are subject to
contractual restrictions on transfer to an irrevocable proxy, and to a
"first option."
The following table sets forth information as of October 30, 1998, to
the best of the Company's knowledge, with respect to the Company's Common
Stock, including, (i) the ownership of Common Stock by each then current
director and nominee, (ii) the ownership of Common Stock by the Named
Executive Officers named in the "Summary Compensation Table" and (iii) the
ownership of Common Stock by all then current directors and executive
officers of the Company as a group. Except as otherwise provided in the
footnotes to the table, the beneficial owners are believed by the Company
to have sole voting and investment power as to all securities. The
percentage of shares outstanding is based on the Company's Common Stock
shares outstanding as of October 30, 1998 as adjusted in each case pursuant
to Rule 13-3(d)1 of the Securities and Exchange Act of 1934.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Number of Percentage of
Name Shares Total
Beneficially Voting
Owned Shares
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles H. Stein - formerly Chairman, President and Chief Executive Officer, 1,100,000 8.8%
currently Chairman (1)
----------------------------------------------------------------------------------------------------------------------
James V. Stanton - Vice Chairman and Director(2) 753,644 6.0%
----------------------------------------------------------------------------------------------------------------------
Dallas Dempster, now President, Chief Executive Officer, Chief Operating Officer, 1,000,000 7.5%
Director (3)
----------------------------------------------------------------------------------------------------------------------
Douglas Rice - Vice President-Food Division (4) 53,333 *
----------------------------------------------------------------------------------------------------------------------
Miles R. Greenberg - Senior Vice President-Finance, Treasurer and Chief Financial 123,333 *
Officer(5)
----------------------------------------------------------------------------------------------------------------------
David A. Hartley - President - Casino Division(6) 50,000 *
----------------------------------------------------------------------------------------------------------------------
Gerald M. Breslauer - Vice President - Administration and Secretary(7) 75,000 *
----------------------------------------------------------------------------------------------------------------------
Kai K. Michaelsen - President-Hotel Management Division *
----------------------------------------------------------------------------------------------------------------------
Jonathan Caplan - Director(8) 100,000 *
----------------------------------------------------------------------------------------------------------------------
Jay M. Haft-Director(9) 450,000 3.5%
----------------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group (10 persons) 3,705,310 24.6%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) Represents shares held by Charles Stein Inter Vivos Trust for the
benefit of Mr. Stein's spouse and children. Mr. Stein disclaims
voting and investment power with respect to the shares. Includes
currently exercisable options granted September 1998 for 100,000
shares at $1.50 per share.
(2) Includes 20,000 shares of Common Stock which are held by Mr. Stanton
as joint tenants with Mr. Stanton's wife, Margaret M. Stanton,
currently exercisable warrants to purchase 150,000 shares of common
stock at a price equal to $1.50 per share, and currently
exercisable options to purchase 500,000 shares and 23,644 shares of
Common Stock at $1.50 and $2.00 per share, respectively. Does not
include 30,000 shares of Common Stock issued to Mr. Stanton's adult
children.
(3) Represents currently exercisable non-Plan options granted September
1998 to purchase 1,000,000 shares at $1.50 per
38
<PAGE>
share in the name of Dabus International Limited for the benefit of
Mr. Dempster's family.
(4) Represents currently exercisable options to purchase 50,000 shares of
Common Stock at $0.50 per share and 3,333 at $1.50 per share.
(5) Represents currently exercisable options to purchase 123,333 shares of
Common Stock at $1.50 per share.
(6) Represents currently exercisable options to purchase 50,000 shares at
$1.50 per share. Does not include options for an additional 50,000
shares becoming exercisable in October 1999.
(7) Represents 50,000 shares held by Mr. Breslauer and currently
exercisable options to purchase 25,000 shares at $1.50 per share.
If the above table set forth information as of November 15, 1998 it
would reflect as of November 4, 1998 the return by FEC of 700,000 shares,
and the respective percentages of Messers Stein, Stanton, Dempster and Haft
would be 9.25%, 6.04%, 7.82% and 3.69%, and of all then 10 executive
officers and directors as a group would be 25.88%.
(8) Represents a currently exercisable option to purchase 100,000 shares
at $1.50 per share.
(9) Includes warrants to purchase 150,000 shares of Common Stock at a
price equal to $1.50 per share and options to purchase 300,000
shares of Common Stock at $1.50 per share. Mr. Haft resigned as
director in November 1998.
As used in the tables above "beneficial ownership" means the sole or
shares power to vote or direct the voting or to dispose, or direct the
disposition of any security. A person is deemed to have "beneficial
ownership" of any security that such person has a right to acquire within
60 days of the date of the above table. Any security that any person named
above has the right to acquire within 60 days is deemed to be outstanding
for purposes of calculating the ownership of such person but is not deemed
to be outstanding for purposed of calculating the ownership percentage of
any other person. Unless otherwise noted, each person listed is believed by
the Company to have the sole power to vote, or direct the voting of, and
power to dispose, or direct the disposition of all such shares. The amount
of outstanding shares of Common Stock is the amount actually outstanding
plus shares deemed outstanding pursuant to Rule 13d-3(d)1 under the
Securities and Exchange Act of 1934.
Item 13. Certain Relationships and Related Transactions
During the year ended June 30, 1998, the Company entered into the
Dorsett International and FEC Hotel Management Agreements respectively with
Dorsett International and FEC, and into Hotel Operating Contracts with
hotel owners, all as described above in Item 1 of this report. The Company
believes that Mr. Chiu was then the beneficial owner of the stock in
Dorsett International. These agreements were settled and terminated, as
described in Item 1 of this report, by the November Settlement Agreement
dated November 4, 1998. Dorsett International has received $1,000,000 cash
but no shares of Common Stock under its Hotel Management Agreement and
would have received 800,000 shares upon delivery of the Hotel Operating
Contracts, as described above in Item 1. FEC is a publicly held company
based in Hong Kong. The Company believes that Mr. Chiu is Deputy Chairman
of FEC, and believes that he with his family and relatives, with their
associates, own substantial interests in it. FEC has received $1,500,000
and 950,000 shares of Common Stock under the FEC Hotel Management Agreement
and, might have received another 250,000 shares upon delivery of Hotel
Operating Contracts described above in Item 1. FEC paid fees under certain
Hotel Operating Contracts and made loans as described
39
<PAGE>
above in Item 1. Mr. Chiu is also party to the Development Services
Agreement, described above in Item 1, relating to the Sakhalin Project. The
Company believes Mr. Chiu was a beneficial owner of stock in Dorsett
International when the Company acquired it and its subsidiaries for
$500,000, as described above in Item 1. He was the assignee of certain of
Dorsett International's rights under that agreement. The Company believes
FEC, Mr. Chiu, his relatives or their associates may hold interests in
hotel owners with whom the Company had or might have entered into Hotel
Operating Contracts.
Mr. Dallas Dempster was a paid consultant to Sovereign Gaming and
Leisure Ltd., which assigned to the Company its 1994 Construction
Management Agreement and 1994 Operation Management Agreement with SCC. The
Company believes that he held, and currently holds, no beneficial interest
in stock in Sovereign. In September 1998 Mr. Dempster's nominee, Dabus
International Limited, for the benefit of his family, was granted non-Plan
options to purchase 1,000,000 shares of the Company's common stock at $1.50
per share. As described above in Item 1, Sovereign was a consultant to
SGTI. Mr. Dempster was a consultant to Sovereign and received $15,000 per
month from January through June 1998 as described in Executive Compensation
in Item 11.
As described above in Item 1, the Company issued options to purchase
300,000 and 200,000 shares of Common Stock to, respectively, Mr. Bryce and
Mr. Haft for services in bringing the Sakhalin Project to the Company.
During 1998 the Company made payments of $70,000 and $91,000 for two
properties in New York City and London owned by Mr. Stein which were used
as offices by the Company. During the fiscal year ended June 30, 1998, the
Company paid a life insurance premium for the benefit of Mr. Stein in the
amount of $40,000.
The Company believes Mr. David Hartley controls Star Casinos Limited
and holds substantial interests in it. Star is a party with the Company to
the Casino Consulting Agreement described above in Item 1, and was granted
options as described above.
Janssen/Meyers Associates, L.P. ("J/M") was the placement agent in the
Company's November 1997 Private Offering, and it was the underwriter in the
Company's June 1997 initial public offering. Messers Janssen and Meyers
are principals in J/M and received their warrants from J/M. Pursuant to the
placement agreement relating to the November 1997 Private Offering, the
Company agreed to pay to J/M as placement agent a fee equal to 10% of the
"gross proceeds" of that Offering. In addition, the Company agreed to pay
J/M a non-accountable expense allowance equal to 3% of the "gross proceeds"
from the sale of shares in that offering and to reimburse certain
accountable expenses of J/M. The Company also granted J/M, for a period of
one year after the final Closing Date, a right of first refusal to
purchase, or to sell for the account of the Company, any securities of the
Company which the Company may seek to sell through an underwriter,
placement agent or broker dealer. Certain principal stockholders in the
Company granted J/M a similar right in any such sought sale by certain
principal stockholders of the Company, its subsidiaries and successors. In
June 1997 and from December 1997 through February 1998 the Company issued
to Janssen/Meyers Associates, L.P. for nominal consideration the
Underwriter's Warrant and 1997 Placement Agent's Warrants, respectively to
purchase 220,000 shares at $8.25 and 715,668 shares at various prices based
on the market price in 1997-1998. These warrants were issued in connection
with, respectively, the Company's initial public offering completed in June
1997, and the Company's private offering began in November 1997 and
completed in February 1998. They are exercisable for a period of four years
from issue. Sale of shares by the Company at less than the then current
average market price or less than the exercise price will trigger
anti-dilution provisions in all the Warrants held by J/M. No anti-dilution
adjustment is made under any series of such warrants for issuance of
securities (i) in the same offering as the Warrant series was issued, or
(ii) upon exercise of Warrants of that series or of any other warrants or
options outstanding on the date that series of Warrants was issued. In the
case of the 1997 Placement Agent Warrants, no adjustment is made for
issuance of securities (i) in contemplated transactions described on the
related Private Placement Memorandum, but not in excess of 5,500,000
shares, (ii) under the 1996 Stock Option Plan as it may be amended from
time to time, or (iii) upon merger or acquisition with unaffiliated third
parties. The Company has been advised that Mr. Peter Janssen and Mr. Bruce
Meyers, principals of J/M, purchased an aggregate of 58,422 shares in the
1997 Private Offering. In connection with the Company's June 6, 1997
initial public offering the Company also agreed not to, without the prior
written consent of J/M, issue, sell, agree or offer to sell, grant an
option for the purchase or sale of, or otherwise transfer or dispose of any
of its securities prior to June 6, 1998. The Company also agreed to
indemnify J/M against certain liabilities incurred under
40
<PAGE>
the Securities Act in connection with the November 1997 offering in which
J/M was Placement Agent. In connection with the Company's initial public
offering the Company entered into an agreement whereby it (i) agreed to
employ J/M as its investment banker and financial consultant for three
years for an aggregate fee of $100,000 paid at Closing of the Offering; and
(ii) for a period of five years, agreed to pay J/M a fee equal to five
percent of the amount up to $5 million, and 2 1/2% of the excess, if any,
over $5 million, of the consideration in any transaction consummated by the
Company with a party J/M introduced to the Company. During the year ended
June 30, 1998 the Company paid J/M $1,430,000 in fees for services as the
Company's investment banker.
Item 14. Exhibits, Financial Statements & Schedules, and Reports Form 8-K
(a)(1) Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Certified Public Accountants........................F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997...................F-4
Consolidated Statements of Operations for the year ended June 30, 1998,
for the ten month period ended June 30, 1997, and for the period from
March 6, 1996 (inception) through August 31, 1996........................F-6
Consolidated Statements of Stockholders' Equity for the year
ended June 30, 1998, for the ten month period ended June 30,
1997, and for the period from March 6, 1996
(inception) through August 31, 1996......................................F-7
Consolidated Statements of Cash Flows for the year ended June
30, 1998, for the ten month period ended June 30, 1997, and
for the period from March 6, 1996 (inception) through
August 31, 1996..........................................................F-9
Summary of Significant Accounting Policies.................................F-11
Notes to Consolidated Financial Statements.................................F-17
</TABLE>
41
<PAGE>
Exhibit
Number Description of Exhibits
2. - Contract on the Extension of the Concession Period for the Operation
of a Casino dated 21 July 1997 issued by the Minister of Finance in
favour of Roulette; Loan Agreement dated 9 April 1998 between
Roulette and Dorsett providing for a US $420,000 loan to Roulette;
Amendment No.1 dated 5 June 1998 to the Agreement dated 3 April
1998 between CBC, Juste and Dorsett (incorporated by reference to
the Company's Form 10-Q for the period ended September 30, 1998).
3.1 - Certificate of Incorporation and amendments thereto (incorporated
herein by reference to the Company's Registration Statement on Form
S-1 (File No. 333-16571)).
3.2 - Amendment to Company's Certificate of Incorporation (incorporated
herein by reference to the Company's Registration Statement on Form
S-1 (File No. 333-16571), Amendment No. 5).
3.3 - Amendment to Company's Certificate of Incorporation (incorporated
herein by reference to the Company's Proxy Statement dated November
27, 1997).
3.4 - By-law of Company (incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 333-16571).
4.2 - Form of certificate evidencing shares of Common Stock (incorporated
herein by reference to the Company's Registration Statement on Form
S-1 (File No. 333-16571), Amendment No. 2).
4.3 - Form of Underwriter's Warrant Agreement between Company and the
Underwriter Janssen-Meyers Associates L.P. (including form of
Underwriter's Warrant) (incorporated herein by reference to the
Company's Registration Statement on Form S-1 (File No. 333-16571),
Amendment No. 5).
4.5 - Amendatory Agreement dated November 6, 1996 between the Company and
the SES Family Investment and Trading Partnership, L.P.
(incorporated herein by reference to the Company's Registration
Statement on Form S-1 (File No. 333-16571)).
4.6 - Form of 10% Debenture dated September 1996 (incorporated herein by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-16571)).
4.7 - Form of 10% Convertible Debenture dated November 1996 (incorporated
herein by reference to the Company's Registration Statement on Form
S-1 (File No. 333-16571)).
10.1 - 1996 Stock Option Plan, as amended and restated (incorporated herein
by reference to the Company's Registration Statement on Form S-1
(File No. 333-16571)).
10.2 - Form of Stock Option Agreement (incorporated herein by reference to
the Company's Registration Statement on Form S-1 (File No.
333-16571)).
10.3 - Distribution Agreement dated October 9, 1996 between Company and
Agrotech 2000, S.L. (incorporated herein by reference to the
Company's Registration Statement on Form S-1 (File No. 333-16571),
Amendment No. 4).
10.4 - Employment Agreement between Charles H. Stein and the Company,
effective as of June 13, 1997.
42
<PAGE>
10.5 - Form of $5.00 Warrant Agreement dated August 1996 (incorporated
herein by reference to the Company's Registration Statement on Form
S-1 (File No. 333-16571)).
10.6 - Loan Agreement dated October 9, 1996 between Company and Conserver
Purchasing Corporation ("CPU"), as amended by Letter Agreement dated
December 31, 1996 between Company and CPC (incorporated herein by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-16571), Amendment No. 2).
10.7 - Form of Financial Consulting Agreement between Company and
Underwriter (incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 333-16571), Amendment
No. 5).
10.8 - Agreement dated as of August 12, 1997 by and among the Company,
Sakhalin Trading and Investments Limited ("SGTI") and Sovereign
Gaming and Leisure Limited ("Sovereign") (incorporated herein by
reference to Exhibit 10.8 to the Company's Form 10-K for the fiscal
year ended June 30, 1997)
10.9 - Amendment dated as of August 12, 1997 by and among the Company, SGTI
and Sovereign (incorporated herein by reference to Exhibit 10.9 to
the Company's Form 10-K for the fiscal year ended June 30, 1997)
10.10- Development Services Agreement dated as of October 2, 1997 between
the Company and Dato David Chiu (incorporated herein by reference to
Exhibit 10.10 to the Company's Form 10-K for the fiscal year ended
June 30, 1997)
10.11- Consulting Agreement effective as of August 14, 1997 between the
Company and Star Casino Limited (incorporated herein by reference to
Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended
June 30, 1997)
10.12- Proposed form Pledge Agreement by and among the Company, Brian J.
Bryce, Jasmine Trustees, Ltd., Jay M. Haft and James V. Stanton
(incorporated herein by reference to Exhibit 10.12 to the Company's
Form 10-K for the fiscal year ended June 30, 1997)
10.13- Hotel Management Agreement dated as of October 2, 1997 between the
Company and Dorsett Hotels and Resorts international Ltd.
(incorporated herein by reference to Exhibit 10.13 to the Company's
Form 10-K for the fiscal year ended June 30, 1997)
10.15- Heads of Agreement dated October 3, 1997 between the Company and
Parbhoe's Handelmij N.V. (incorporated herein by reference to
Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended
June 30, 1997)
13.2 - Form 10-Q for the Quarterly Period ended March 31, 1998
(incorporated herein by reference)
16.1 - Letter re change in certifying accountant (incorporated herein by
reference to the Company's Form 8-K dated December 18, 1997 and Form
8-K dated June 16, 1998)
27.1 - Financial Data Schedules
(b) Reports on Form 8-K
One report on Form 8-K, dated June 16, 1998, was filed during the fourth
quarter ended June 30, 1998 (incorporated by reference). It related to the
retention of the Company's current accountants.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CCA COMPANIES INCORPORATED
By: /s/ Miles R. Greenberg
----------------------------
Miles R. Greenberg
December 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Dallas R. Dempster Chief Executive Officer, Chief Operating December 15, 1998
---------------------- Officer and President (Principal
Dallas R. Dempster Executive Officer), Director
/s/ Miles R. Greenberg Chief Financial Officer (Principal December 15, 1998
---------------------- Financial Officer and Chief Accounting
Miles R. Greenberg Officer)
/s/ Charles H. Stein Chairman and Director December 15, 1998
----------------------
Charles H. Stein
/s/ James V. Stanton Vice Chairman and Director December 15, 1998
----------------------
James V. Stanton
/s/ Jonathan M. Caplan Director December 15, 1998
----------------------
Jonathan M. Caplan
</TABLE>
44
<PAGE>
CCA Companies Incorporated
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Certified Public Accountants........................F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997...................F-4
Consolidated Statements of Operations for the year ended June 30, 1998,
for the ten month period ended June 30, 1997, and for the period from
March 6, 1996 (inception) through August 31, 1996........................F-6
Consolidated Statements of Stockholders' Equity for the year
ended June 30, 1998, for the ten month period ended June 30,
1997, and for the period from March 6, 1996
(inception) through August 31, 1996......................................F-7
Consolidated Statements of Cash Flows for the year ended June
30, 1998, for the ten month period ended June 30, 1997, and
for the period from March 6, 1996 (inception) through
August 31, 1996..........................................................F-9
Summary of Significant Accounting Policies.................................F-11
Notes to Consolidated Financial Statements.................................F-17
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
CCA Companies Incorporated
We have audited the accompanying consolidated balance sheet of CCA Companies
Incorporated and subsidiaries as of June 30, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CCA Companies
Incorporated and subsidiaries as of June 30, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's dependence on outside
financing, recurring losses since inception and significant outflows of cash
from operations, raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Miami, Florida
BDO Seidman, LLP
December 15, 1998
F-2
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
CCA Companies Incorporated
Coconut Grove, Florida
We have audited the accompanying balance sheet of Conserver Corporation of
America (now known as CCA Companies Incorporated) (a development stage company)
as of June 30, 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the period from March 6, 1996 (date of
incorporation) through August 31, 1996 and for the ten months ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Conserver Corporation of America
(now known as CCA Companies Incorporated) at June 30, 1997 and the results of
its operations and its cash flows for the period from March 6, 1996 (date of
incorporation) through August 31, 1996 and for the ten months ended June 30,
1997 in conformity with generally accepted accounting principles.
The Company is currently renegotiating a Distribution Agreement with Agrotech
2000, S.L. to reduce its cost of purchasing the Conserver 21 (Trademark)
packets and to modify the manufacturing arrangements. Should a favorable outcome
of such negotiation not be achieved or the agreement were to terminate as a
result of a material breach, the Company could be without its current line of
business of marketing Conserver 21 (Trademark) and its results of operations
would be adversely affected.
Richard A. Eisner & Company, LLP
New York, New York, August 28, 1997
With respect to Note 6, September 24, 1997
With respect to Note 2, October 2, 1997 and October 3, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,699,028 $7,715,460
Accounts receivable 342,987 -
Prepaid and other current assets 520,181 213,748
- ---------------------------------------------------------------------------------------------------
Total current assets 2,562,196 7,929,208
- ---------------------------------------------------------------------------------------------------
Loans receivable-long term, net of allowance of $2,620,830 and
$1,000,000 at June 30, 1998 and 1997, respectively
(Notes 2 and 3) 667,085 -
Deposits on gaming equipment 422,015 -
Excess cost over fair value of assets acquired, net of
accumulated amortization of $177,874 at June 30,
1998 (Note 2) 10,366,442 -
Property, equipment and leasehold improvements, net
(Notes 2 and 5) 7,366,879 21,986
Management contract agreements, net of accumulated
amortization of $90,020 at June 30, 1998 (Note 2) 2,228,245 -
Other assets 344,300 -
- ---------------------------------------------------------------------------------------------------
$23,957,162 $7,951,194
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
CCA Companies Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 346,224 $ 292,524
Accrued expenses and other 1,284,581 239,078
Convertible debentures (net of $60,328 discount at
June 30, 1997) (Note 6) - 689,672
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 1,630,805 1,221,274
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
Stockholders' Equity: (Note 12)
Preferred stock, par value $.01; 5,000,000 and 5,000
shares authorized in 1998 and 1997, respectively,
1 junior preferred stock issued and outstanding at
June 30, 1998, none issued in 1997 (Note 2) - -
Common stock, par value $.001; 50,000,000 and
30,000,000 shares authorized in 1998 and 1997,
respectively; 11,996,048 and 6,385,404 shares
issued and outstanding at June 30, 1998 and 1997,
respectively 11,997 6,386
Additional paid-in capital 44,806,570 16,672,672
Accumulated deficit (22,492,210) (9,949,138)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 22,326,357 6,729,920
- -----------------------------------------------------------------------------------------------------------
$ 23,957,162 $ 7,951,194
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-5
<PAGE>
CCA Companies Incorporated
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from
March 6, 1996
Ten month (inception)
Year ended period ended through
June 30, June 30, August 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 649,620 $ - $ -
- --------------------------------------------------------------------------------------------------------
Operating Expenses:
Marketing and sales 376,589 115,576 -
General and administrative 6,287,544 1,739,419 458,611
Write-down of management
agreement contracts 4,200,000 - -
Write-down of inventory - 355,800 -
Provision for bad debt 1,620,830 1,000,000 -
Compensation charges in connection
with issuance of stock options and
warrants 921,569 4,995,106 907,201
- --------------------------------------------------------------------------------------------------------
Total operating expenses (13,406,532) (8,205,901) (1,365,812)
- --------------------------------------------------------------------------------------------------------
Loss From Operations (12,756,912) (8,205,901) (1,365,812)
Other Income (Expense):
Interest income 288,518 51,180 8,741
Interest expense (74,678) (407,346) (30,000)
- --------------------------------------------------------------------------------------------------------
Total other income (expense) 213,840 (356,166) (21,259)
- --------------------------------------------------------------------------------------------------------
Net Loss $(12,543,072) $(8,562,067) $(1,387,071)
- --------------------------------------------------------------------------------------------------------
Net Loss Per Share of Common Stock- Basic and
Diluted $ (1.37) $ (1.83) $ (.32)
- --------------------------------------------------------------------------------------------------------
Weighted Average
Number of common shares
outstanding 9,175,536 4,667,490 4,390,767
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
<PAGE>
CCA Companies Incorporated
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
Par Value $.001 Subscrip- Additional Junior
--------------------- tions Paid-in Preferred Accumulated
Shares Amount Receivable Capital Stock Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash of
$2,140 and subscriptions in March 1996 4,880,167 $ 4,881 $(2,741) $ - $ - $ - $ 2,140
Issuance of common stock for cash from
April through August 1996 ($5.00 per
share) 331,400 331 1,656,679 1,657,010
Compensation charges in connection with
issuance of options 450,000 450,000
Compensation charges in connection with
issuance of warrants (Note 12) 457,201 457,201
Compensation charge in connection with
officer's salary (Note 11) 65,000 65,000
Net loss for the period from March 6,
1996 (date of inception) through August
31, 1996 $(1,387,071) $(1,387,071)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - August 31, 1996 5,211,567 5,212 (2,741) 2,628,880 (1,387,071) 1,244,280
Repurchase and cancellation of shares
originally issued (Note 13) (1,366,667) (1,367) 1,367 (1,800,000) - (1,800,000)
Shares issued and treated as debt
discount (Note 6) 62,504 63 312,437 312,500
Sale of common stock ($5.00 per share)
from September 1 to November 7, 1996 303,000 303 1,514,697 1,515,000
Legal services provided by stockholder
without charge (Note 10) 60,000 60,000
Collection of subscriptions receivable 1,374 1,374
Compensation charges in connection with
issuance of options and warrants 4,995,106 4,995,106
Compensation charges in connection with
officer's salary (Note 11) 105,000 105,000
Net proceeds from issuance of common
stock in initial public offering (Notes
4 and 12) 2,200,000 2,200 8,856,527 8,858,727
Common stock contributed to treasury and
cancelled including an adjustment of
5,000 shares (25,000) (25) 25 -
Net loss for the period from September
1, 1996 through June 30, 1997 (8,562,067) (8,562,067)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1997 6,385,404 $ 6,386 $ - $16,672,672 $ - $(9,949,138) $ 6,729,920
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7
<PAGE>
CCA Companies Incorporated
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
Par Value $.001 Subscrip- Additional Junior
--------------------- tions Paid-in Preferred Accumulated
Shares Amount Receivable Capital Stock Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 6,385,404 $ 6,386 $ - $16,672,672 $ - $ (9,949,138) $ 6,729,920
Net proceeds from exercise of over
allotment option (Note 4) 330,000 330 - 1,447,239 - - 1,447,569
Conversion of debentures (Note 6) 73,000 73 364,927 365,000
Issuance of common stock in exchange
for professional services 5,000 5 26,245 26,250
Issuance of common stock in
connection with the Sakhalin
business acquisition 2,000,000 2,000 10,398,000 10,400,000
(Note 2)
Issuance of common stock in
connection with the Sovereign
project management agreement (Note 2) 200,000 200 1,049,800 1,050,000
Issuance of common stock in
connection with the Far East
Consortium Management Agreements 950,000 950 3,490,300 3,491,250
(Note 2)
Sale of common stock ($5.14 per
share) from December 1997 to
February 1998 2,044,763 2,045 - 8,952,625 - - 8,954,670
(Note 4)
Exercise of options at $2.00 7,881 8 15,754 15,762
Options issued in connection with
Sakhalin business acquisition (Note 1,091,820 1,091,820
2)
Compensation and consulting charges
in connection with issuance of 921,569 921,569
options and warrants (Notes 2 and 12)
Options issued in exchange for legal
services (Note 10) 285,619 285,619
Compensation charges in connection
with officer's salary (Note 11) 90,000 90,000
Issuance of junior preferred stock
(1 share outstanding) (Note 2) -
Net loss for 1998 (12,543,072) (12,543,072)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 11,996,048 $11,997 $ - $44,806,570 $ - $(22,492,210) $22,326,357
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-8
<PAGE>
CCA Companies Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Ten month Period from
period March 6, 1996
Year ended ended (Inception) through
June 30, June 30, August 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net loss $(12,543,072) $(8,562,067) $(1,387,071)
Adjustments to reconcile net loss to net cash used in
operating activities, net of effect of acquisition:
Compensation expense in connection with issuance
of stock options and warrants 921,569 4,995,106 907,201
Impairment of inventory - 355,800 -
Write-down of assets 4,200,000 - -
Write-down of property and equipment 554,262 - -
Provision for bad debt 1,620,830 1,000,000 -
Depreciation and amortization 16,168 253,849 487
Compensation expense for officer's salary 90,000 105,000 65,000
Legal services provided by shareholder 171,000 60,000 -
Consulting services provided for common stock 26,250 - -
Amortization of goodwill 177,874 - -
Amortization of tradename 12,500 - -
Changes in current assets and liabilities:
Accounts receivable (342,987) - -
Prepaid expenses and other current assets (152,695) (151,439) (31,631)
Accounts payable and accrued expenses 1,156,463 415,607 105,317
- -----------------------------------------------------------------------------------------------------------------
Total adjustments 8,451,234 7,033,923 1,046,374
- -----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,091,838) (1,528,144) (340,697)
- -----------------------------------------------------------------------------------------------------------------
Investing Activities:
Property, equipment and leasehold improvements (2,250,193) (19,285) (4,865)
Deposits on assets (1,722,015) - -
Funds used for acquisitions and development (4,308,637) - -
- - Funds used for loans and notes receivable (2,497,915) (1,375,800) -
Acquisition of tradename and other assets (844,300) - -
Cash from acquisition, net of funds acquired 544,632 - -
Acquisition of management contracts (1,149,495) - -
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,227,923) (1,395,085) (4,865)
- -----------------------------------------------------------------------------------------------------------------
Financing Activities:
Subscriptions receivable - 1,374 -
Subscription funds (returned) received - (90,000) 90,000
Repurchase of shares of common stock - (1,800,000) -
Net proceeds from initial public offering 1,447,569 8,858,727 -
Proceeds from sale of common stock 8,970,432 1,515,000 1,659,150
Proceeds from notes payable - 1,250,000 1,000,000
Repayments of notes payable (114,672) (1,500,000) -
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,303,329 8,235,101 2,749,150
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,016,432) 5,311,872 2,403,588
Cash and cash equivalents, beginning of period 7,715,460 2,403,588 -
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,699,028 $ 7,715,460 $ 2,403,588
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
CCA Companies Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Ten month Period from
period March 6, 1996
Year ended ended (Inception) through
June 30, June 30, August 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ - $129,864 $ -
- ---------------------------------------------------------------------------------------------------------------------
Noncash transactions:
Issuance of common stock in connection with
convertible debt $ 365,000 $312,500 $ -
- ---------------------------------------------------------------------------------------------------------------------
Common stock contributed to treasury and cancelled
(includes a $5 adjustment) $ - $ 25 $ -
- ---------------------------------------------------------------------------------------------------------------------
Cancellation of loan receivable in exchange for
inventory $ - $375,800 $ -
- ---------------------------------------------------------------------------------------------------------------------
Cancellation of subscription receivable in
exchange for shares of
common stock $ - $ 1,367 $ -
- ---------------------------------------------------------------------------------------------------------------------
Issuance of common stock in connection with the
Sakhalin Business Acquisition $10,400,000 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
Options issued in connection with the Sakhalin
Business Acquisition $ 1,091,820 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
Issuance of common stock in connection with the
Sovereign Project Management Agreement $ 1,050,000 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
Issuance of common stock in connection with the
Far East Consortium Management Agreements $ 3,491,250 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
Cancellation of convertible debentures against
loan receivable $ 210,000 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
CCA Companies Incorporated
Summary of Significant Accounting Policies
The Company CCA Companies Incorporated, formerly known as
Conserver Corporation of America, (the "Company") is
a company incorporated under the laws of the State of
Delaware on March 6, 1996 and initially adopted a
fiscal year ending August 31. Subsequently, the
Company elected to change its fiscal year end to June
30. During the fiscal year ended June 30, 1998, the
Company changed its name to CCA Companies
Incorporated. The Company was considered a
development stage company until March 1998.
Subsidiaries, Joint The subsidiaries, Sakhalin General Trading and
Venture and Investments, Ltd., Sakhalin City Center, Ltd.,
Basis of Presentation Dorsett Hotels and Resort International, (m)Snd.
Bhd., Dorsett Hotel & Resorts, Inc. and Suriname
Leisure Company A.V.V. (Joint Venture) are based and
operating in Cyprus, Russian Federation, Malaysia,
United States and Suriname, respectively. The
functional currency for statutory purposes is the
U.S. Dollar, Russian Ruble, Malaysian Ringgit, U.S.
Dollar and Suriname Guilder, respectively. The
reporting currency is the U.S. Dollar.
These financial statements have been translated to
United States Dollars (U.S. $) using a methodology
consistent with Statement of Financial Accounting
Standards (SFAS) 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. As of June 30, 1998, the cumulative foreign
currency translation adjustment was insignificant and
therefore not disclosed as a separate component of
stockholders' equity. Exchange gains (losses) of
approximately ($79,000) 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 periods ended June 30, 1997 and August
31, 1996.
F-11
<PAGE>
CCA Companies Incorporated
Summary of Significant Accounting Policies
Principles of The accompanying consolidated financial statements
Consolidation include the accounts of CCA, the subsidiaries and the
joint venture (collectively, the "Company"). The
Company consolidates its 50% joint venture, since it
controls the board of directors, is responsible for
the management of the casino operations and is
required to fund the operations. Intercompany
transactions and balances have been eliminated
in consolidation.
Minority interest related to the subsidiaries and the
Joint Venture is currently not reflected in the
financial statements due to the fact that the
minority shareholders are not required to fund losses
of the companies or Joint Venture.
Use of Estimates in the The preparation of financial statements in conformity
Preparation with generally accepted accounting principles
of Financial requires management to make estimates and assumptions
Statements 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.
Impairment of Long-Lived The Company adopted the Statement of Financial
Assets Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" during 1996.
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 the long-lived assets are not
sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values.
F-12
<PAGE>
CCA Companies Incorporated
Summary of Significant Accounting Policies
During the year ended June 30, 1998, the Company
recorded a charge of $4,200,000 as a result of a
financial impairment of several of its long-lived
assets (See Note 2).
Cash and Cash Equivalents The Company considers investments with original
maturities of three months or less at the time of
purchase to be cash equivalents. At times, cash
balances in the Company's account may exceed
federally insured limits.
Property, Property and equipment is recorded at cost.
Equipment and Depreciation and amortization is computed by the
Leasehold straight line method based on the estimated useful
Improvements lives (3-5 years) of the related assets. Leasehold
improvements are amortized over the shorter of the
life of the asset or the lease.
Excess Cost over Fair The excess of cost over fair value of assets acquired
Value of of Sakhalin General Trading and Investments, Ltd.
Assets Acquired ("SGTI") is amortized on a straight-line basis, over
the estimated future periods to be benefited (30
years). (See Note 2). On an annual basis, the Company
reviews the recoverability of the excess cost over
the fair value of assets acquired and makes
adjustments if required.
Income Taxes For the purpose of these financial statements the
Company has adopted the provisions of 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.
Preferred Stock The Company is authorized to issue up to 5,000,000
shares of $0.01 par value junior preferred stock with
such additional designations, powers, preferences,
rights, qualifications, limitations and restrictions
as may be designated by the Company's Board of
Directors from time to time.
F-13
<PAGE>
CCA Companies Incorporated
Summary of Significant Accounting Policies
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.
Basic 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
common shares equivalent 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
(Note 12).
Options amounting to 3,177,500, 1,970,000 and 135,000
and warrants amounting to 2,260,678, 1,225,000 and
325,000 for the year ended June 30, 1998, for the ten
month period ended June 30, 1997, and for the period
from March 6, 1996 (inception) through August 31,
1996, respectively, have not been included in the
computation of net loss per common stock - diluted
because of their anti-dilutive effect.
Stock Based In October 1995, FASB issued SFAS No. 123,
Compensation "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
will disclose the pro forma effects of the
calculation required by the statement.
Future Accounting Statement of Financial Accounting Standards (SFAS)
Pronouncements No. 130, "Reporting Comprehensive Income,"
establishes standards for reporting and display of
comprehensive income, its components
F-14
<PAGE>
CCA Companies Incorporated
Summary of Significant Accounting Policies
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. SFAS No. 130 will not have a material
impact on the Company's Financial Statements since
its requirements deal mainly with financial
disclosures.
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.
This new standard is effective for financial
statements for periods beginning after December 15,
1997 and require comparative financial information
for earlier years to be restated. Due to the recent
issuance of this standard, management has been
unable to fully evaluate the impact, if any, they may
have on future financial statement disclosures.
In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives
contracts as either assets or liabilities in
F-15
<PAGE>
CCA Companies Incorporated
Summary of Significant Accounting Policies
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 operations in the period of change.
SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into
derivatives 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 consolidated financial
statements.
Reclassifications
Certain prior year balances have been reclassified to
conform with the 1998 presentation.
F-16
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
1. Liquidity The accompanying consolidated financial statements
have been prepared assuming the Company will continue
as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and
the satisfaction of its liabilities in the normal
course of operations. Since inception, the Company
has been developing its food technology product and
exploring new lines of business in the hotel and
casino industry. The Company's ultimate ability to
attain profitable operations is dependent upon
obtaining additional financing adequate to complete
its construction activities, and to achieve its
budgeted level of operations. Through June 30, 1998,
the Company incurred losses totaling $22,492,210
which raises substantial doubt about its ability
to continue as a going concern.
The Company is in the process of discussing with
various potential investors and/or lenders the
possibility of obtaining additional funds of $2 to $3
million. The Company is currently seeking capital or
debt financing in order to enable it (i) to continue
its operation in the casino and hotel business; (ii)
to complete the Suriname Casino (Note 2) so as to
realize that casino's cash flow potential; and (iii)
to pay any material expenses of continuing
negotiations for the Sakhalin project (Note 2) and
for maintaining its position in that project.
However, there can be no assurance that the Company
will be successful in consummating its plans, or that
such plans, if consummated, will enable the Company
to attain profitable operations or continue as a
going concern.
2. New Line of In August 1997, the Company announced that it was
Business and diversifying beyond its sole line of business of
New Business marketing, distributing and otherwise commercially
Opportunities exploiting its food technology product and was
exploring a 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 on December 2, 1997, the Company's stockholders
voted on and approved various proposals regarding the
New Line of Business and New Business
F-17
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
Opportunities as described herein:
A. Sakhalin Agreement.
The Company entered into a stock purchase agreement
dated October 24, 1997, (the "Sakhalin Agreement")
with SGTI and Sovereign Gaming and Leisure Limited
("Sovereign"), each a limited liability company
organized under the laws of Cyprus, pursuant to which
the Company would acquire: (i) all of the outstanding
shares of SGTI, which includes (a) all of SGTI's
rights and interest in a project to develop the
Sakhalin Project, and (b) SGTI's ownership interest
in 65% of Sakhalin City Centre Ltd. ("SCC"), a closed
joint stock company incorporated under the laws of
the Russian Federation, which, in turn, holds certain
rights, including a guarantee by the city of
Yuzhno-Sakhalinsk to issue a gaming license to SCC
and (ii) all rights and interest to or in the
Sakhalin Project held by Sovereign, including certain
operating and project management agreements with
respect to the Sakhalin Project (collectively, the
"Shares and Rights").
On December 12, 1997, the Company, (i) completed the
acquisition of 100% of the shares of SGTI, and thus
acquired an indirect interest of 65% of SCC, (ii)
acquired all rights and interests of Sovereign in
certain operating and project management agreements
related to the Sakhalin Project, and (iii) issued
2,000,000 shares of its Common Stock to the owners of
SGTI. In addition, as required by the Sakhalin
Agreement and in consideration of the Shares and
Rights, the Company made advances of $3,000,000,
which have been eliminated as an intercompany to
SGTI. The Company's Common Stock was valued at $5.20
per share on the date the acquisition was completed
and as such, the value attributed to the 2,000,000
shares of the Company's Common Stock issued to the
owners of SGTI was $10,400,000. In addition, options
to purchase 300,000 and 200,000 shares of Common
Stock at an exercise price equal to $6.125 per share
were issued to two directors. These options were
F-18
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
valued at $1,091,800 based on the Black-Scholes
option pricing model and capitalized as part of the
purchase price of SGTI. In connection with the
Sovereign project management agreement, the Company
issued 200,000 shares of its common stock. The
Company's common stock was valued at $5.25 on the
date the agreement was entered into. Thus the value
attributed to the shares was $1,050,000. Mr. Dallas
Dempster, the Company's president, chief operating
officer and chief executive officer, was a paid
consultant to Sovereign Gaming and Leisure Ltd.,
which assigned to the Company its 1994 Construction
Management Agreement and 1994 Operation Management
Agreement with SCC. The Company believes that he did
not hold and currently holds no beneficial interest
in stock in Sovereign. In September 1998 Mr.
Dempster's nominee, Dabus International Limited, for
the benefit of his family, was granted non-Plan
options to purchase 1,000,000 shares of the Company's
common stock at $1.50 per share.
The aquisition has been accounted for as a purchase
and accordingly the results of operations of
SGTI have been included in the Company's consolidated
financial statements since the date of acquisition.
The excess of the aggregate purchase price over the
fair market value of net assets acquired of
$10,544,300 is being amortized on a straight line
basis over 30 years.
The transaction was recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Common Stock and options issued $11,491,819
Construction in Progress Acquired 3,638,957
Liabilities Assumed (3,340,925)
Other Assets 843,356
Acquisition Costs 193,885
Fair value of Net Assets Acquired (1,141,388)
-----------
Purchase Price $11,685,704
===========
</TABLE>
The following unaudited pro forma summary presents
the results of operations of the Company as if the
acquisition had occurred on September 1, 1996:
<TABLE>
<CAPTION>
Ten month
Year ended period ended
June 30, 1998 June 30, 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 649,620 $ -
Net loss $ (12,716,676) (9,180,487)
$
Net loss per share $ (1.26) $ (1.38)
$
Weighted Average - Number of common
shares outstanding $ 10,074,166 $ 6,667,490
</TABLE>
The unaudited pro forma assumes the amortization of
goodwill amounting to $10,544,300 over 30 years.
The Sakhalin Agreement provides that, upon request of
the Company, Sovereign agrees to become project
manager during the construction phase of the Sakhalin
Project, subject to an agreement on reasonable
compensation for such services, which shall not
exceed 5% of the construction cost of the Sakhalin
Project or $5,000,000, whichever is less.
B. Development Services Agreement.
On October 2, 1997, the Company entered into an
agreement (the "Development Services Agreement") with
David Chiu ("Chiu"), pursuant to which the Company
would, as described below, transfer to Chiu 38.46%
of
F-19
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
the share capital of SGTI and would issue to Chiu one
share of convertible junior preferred stock of the
Company (the "Convertible Preferred Stock Share")
which would convert, under specified conditions and
certain circumstances, into 1,500,000 shares of
Common Stock of the Company. The Development Services
Agreement provides that Chiu will provide certain
development services to the Company in connection
with the Sakhalin Project, including using his best
efforts to procure or secure the necessary debt
financing and guarantees for the complete turnkey
construction of the Sakhalin Project which financing
is to be on mutually acceptable terms. Construction
costs for the Sakhalin Project are currently
estimated at $100 million. The shares of Common Stock
underlying the Convertible Preferred Stock Share and
the shares of SGTI to be issued to Chiu in
consideration for his services will be issued on the
date of mutual execution by the Company or its
nominated affiliate of a legally enforceable and
binding agreement from a lender, the terms of which
are acceptable to the Company, SGTI and SCC, to
provide the financing. In the event Chiu is unable to
procure or secure the necessary financing and
guarantees acceptable to the Company in accordance
with the Development Services Agreement, the
Convertible Junior Preferred Stock Share issued to
Mr. Chiu would not convert into 1,500,000 shares of
Common Stock of the Company.
Currently, no effect to the 38.46% interest Chiu
would receive of the Company has been reflected in
the financial statements, since he has not been able
to procure the necessary financing.
The Company currently does not believe that Chiu will
be able to procure the necessary financing and thus
is currently exploring other financing options.
Furthermore, the Development Services Agreement
provides that, in the event that Chiu wishes to sell
all or any part of the shares
F-20
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
after the three year period described above, the
Company shall have the first option to purchase all
or any part of the shares from Chiu. 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 Chiu 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 Development Service Agreement expired in August
1998.
C. Consummation of Sakhalin Agreement and Development
Services Agreement.
Assuming consummation of each of the transactions
contemplated above, the Company and Chiu would own
through their respective shares in SGTI, a 40% and
25% interest in SCC, respectively, and the remaining
35% of the interests would continue to be held 20% by
the City of Yuzhno-Sakhalinsk and 15% by the Sakhalin
Oblast (the regional government).
D. Sakhalin Casino Consulting Agreement.
On August 14, 1997, the Company entered into an
agreement (the "Casino Consulting Agreement") which
commenced December 2, 1997 with Star Casinos Limited,
(the "Consultant"), whereby the Consultant has agreed
to provide consulting and technical services to the
Company and any affiliated entities for a period of
two years with respect to the development and ongoing
operations of the Sakhalin Project casino. Under the
terms of the Casino Consulting Agreement, the
Consultant will receive (i) a fee of $21,000 per
month plus reimbursement of reasonable expenses for
the term of the agreement, adjusted pro rata for any
partial month of service and (ii) options to purchase
100,000 shares of the Company's Common Stock, at
$6.50 per share, with 50% of the options becoming
exercisable on each of the first and second
anniversary
F-21
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
dates of the commencement date and expiring on the
third anniversary date. Based on the Black-Scholes
option pricing model, these options were valued at
$140,000. The Company has recorded a consulting
charge of $140,000 in connection with the issuance of
these options. At the end of the term of the
agreement, provided that the Consultant is not in
breach of the Casino Consulting Agreement, the
Consultant will also be entitled to receive a
$250,000 bonus. The Company paid to the consultant
$189,000, $42,000 of which was paid prior to entering
into the agreement, plus reimbursement of reasonable
expenses during the year ended June 30, 1998. The
agreement also binds the Consultant to a two-year
non-compete, non-solicitation provision. Currently,
the Consultant has been appointed as president of the
Company's casino division.
E. Hotel Management Agreement.
On October 2, 1997, the Company entered into an
agreement (the "Hotel Management Agreement") with
Dorsett Hotels and Resorts International, Ltd.
("Dorsett"), a company 100 percent controlled by
Chiu, pursuant to which the Company acts as exclusive
operator and manager of certain hotels owned by
Dorsett. The Hotel Management Agreement provides for
twenty year exclusive operating agreements with
respect to the management of eight hotels.
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, Seremban; 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
F-22
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
granted the shares of the Company's Common Stock
since the conditions precedent to such issuance have
yet to be satisfied.
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 October 2, 1997 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 at a price of $3.675. The 1,200,000
shares of Common Stock to be granted to FEC are to be
granted upon the delivery of a duly executed and
legally enforceable hotel management contract
relating to the following hotels, 275,000 shares
allocated to the Dallas Grand Hotel, 400,000 shares
allocated to the Rockman's Regency, 275,000 shares
allocated to the Dorsett Regency and 250,000 shares
allocated to the Radisson Plaza. 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 at a price of $3.675. The fair
value of the shares granted was $3,491,250.
F. Tradename.
On January 30, 1998, the Company entered into an
agreement with Chiu to acquire all the outstanding
common stock of Dorsett Hotel and Resort
International Ltd. Dorsett has the rights to the
trademarks, tradenames and license rights of the
"Dorsett" tradename as well as provides hotels and
resorts
F-23
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
management services. The purchase price of the stocks
was $500,000, which was allocated by the Company to
the tradename and is being amortized on a
straight-line basis over a 20 year period.
Amortization expense related to tradename was $12,500
during the year ended June 30, 1998.
G. November 1998 Termination and Settlement
In connection with problems encountered with the
Hotel Management Agreement and the FEC Hotel
Management Agreement, the Company had negotiations
with the owners of the hotels, Chiu (who was
represented to the Company as having been the sole
stockholder in Dorsett International) and with
representatives of the parties (the "HMA Parties") to
the Hotel Management Agreements. A successor to
Dorsett Hotels and Resort International Ltd. was that
party in the case of the four hotels in Indonesia,
(Seremban) Malaysia, Cambodia and Thailand. Far East
Consortium International Ltd. was that party in the
case of the four hotels in Malaysia (Kuala Lumpur),
Australia, Canada and Texas.
On November 4,1998 the Company entered into a
settlement agreement (the "November Settlement
Agreement") with the HMA Parties, Far East Consortium
(M) Limited, their subsidiaries and Mr. Chiu.
Pursuant to that agreement the Company was paid
$450,000 cash, was returned 700,000 shares of Common
Stock and retained $1,625,000 theretofore paid the
Company as management fees or loans. Various
obligations related to the hotel management
operations were taken over the other parties. The
Company and the other parties to that agreement
waived all claims and matters between them and
rescinded agreements between them.
At June 30, 1998, the carrying value of the related
assets was reduced to the fair value based on the
terms of the settlement agreement, accordingly, the
Company recorded a charge of
F-24
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
$4,200,000 to write down the carrying amount of the
management contract agreements and tradenames.
The charge is reflected in the accompanying
consolidated statement of operations for the year
ended June 30, 1998.
Therefore, the remaining balance in the management
contract agreements after reflection of the above
termination and settlement is as follows:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------
<S> <C>
FEC Hotel Management Agreement $ 4,991,250
Dorsett Hotel Management Agreement 1,000,000
Tradenames 500,000
Acquisition Costs and Other 27,015
------------
Total 6,518,265
Write-off attributed to Hotel
Management Termination Agreement (4,200,000)
----------------------------------------------------
2,318,265
Less accumulated amortization (90,020)
----------------------------------------------------
$ 2,228,245
----------------------------------------------------
</TABLE>
H. The Suriname Project.
On April 30, 1998, the Company entered into an
agreement with Parbhoe Handelmij NV, a Surinamese
limited liability company, to create a 50-50 percent
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 entered
into a "Casino Management Agreement" with the Company
to manage the casino. According to the terms of the
agreement, as of June 30, 1998, the Company has
invested approximately $2,566,000 for this project,
of which approximately $2,399,000 is included in
property, equipment and leasehold improvement.
Pursuant to the agreement, the Company maintains
title to the property and equipment. Once the joint
venture reimburses the Company for the costs of the
property and equipment, the title will be transferred
to the joint venture. Total
F-25
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
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 $3,200,000 including working
capital advances to cover initial operating expenses.
I. Casino Management Agreement.
On April 30, 1998, the
Company entered into an agreement (the "Casino
Management Agreement") with Suriname Leisure Company
A.V.V. (Joint Venture) related to the operations of
the Suriname project. The Casino Management
Agreement provides for fifteen years exclusive
operating agreements with respect to Suriname Palace
Casino. The Company pursuant to the terms of the
Casino Management Agreement is entitled to a base fee
equal to three percent of revenues, as defined,
calculated on an annual basis and payable monthly,
plus an incentive fee of ten percent of gross
operating profits, as defined.
Additionally, pursuant to the terms of the agreement,
the Company leased the Casino premises from Parbhoe
under a fifteen year period ending on February 28,
2013, for a yearly amount of $200,000 subject to
increase based on changes in the Suriname Consumer
Price Index.
J. Budapest Casino Project.
On April 3, 1998, the Company's wholly owned
subsidiary, Dorsett Hotels & Resorts Inc. ("CCA
Dorsett") 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 has paid
$100,000, included in prepaid and other current
assets and has
F-26
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
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 is 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 is 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 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.
The acquisition will be accounted for by the purchase
method. 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.
3. Description of In March 1996, the Company entered into a
Initial Line of distribution agreement with certain of the Groupe
Business Conserver entities for the exclusive marketing and
distribution rights to Conserver 21(Trademark)
products in the United States and Canada. Conserver
21(Trademark) products are designed to preserve food
and flowers. Groupe Conserver had obtained such
rights from Conserver XXI (see Note 12) in May 1995.
The
F-27
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
agreement was amended in October 1996. Upon learning
of a dispute between Conserver XXI and Groupe
Conserver, which threatened the Company's supply of
Conserver 21(Trademark), the Company entered into an
agreement with Conserver Purchasing Corporation
("CPC") an unaffiliated Delaware corporation, whereby
the Company, through CPC would have been able to
acquire substantially identical marketing and
distribution rights from Conserver XXI in the event
Groupe Conserver could not deliver the product.
Pursuant to the agreement between the Company and CPC
dated October 9, 1996, and subsequently amended on
December 31, 1996, the Company lent CPC up to
$375,000 for the purpose of enabling CPC to acquire
inventory of Conserver 21(Trademark). These loans,
which were payable on demand, bearing interest at a
rate of 8% per annum were collateralized by a lien on
CPC's inventory of Conserver 21(Trademark). In June
1997, the Company accepted inventory as full payment
on the loans.
Due to the establishment of insolvency proceedings in
Brussels regarding Conserver Investments, S.A., the
controlling entity of Groupe Conserver and Groupe
Conserver's loss of its rights from Conserver XXI,
the Company terminated its distribution agreement
with Groupe Conserver in March of 1997.
In March 1997, the Company entered into a
Distribution Agreement with Agrotech 2000, S.L.,
("Agrotech"), a company whose principal shareholder
controlled Conserver XXI, establishing the Company as
the exclusive licensee of the right to import,
promote, distribute, market and otherwise
commercially exploit Conserver 21(Trademark) products
in the United States and Canada through March 2022,
subject to extension. The Company also holds the
option and a right of first refusal to exercise such
exclusive rights throughout the world. Pursuant to
the terms of the Distribution Agreement, if the
Company fails to purchase a minimum of $2,000,000 of
Conserver 21(Trademark) products between April 1997
and April 1998, or fails to meet the minimum annual
F-28
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
purchase goals, when established, Agrotech may sell
Conserver 21(Trademark) to other customers in the
United States and Canada. The Company failed to meet
the Initial Purchase Commitment or the subsequent
purchase commitments under the Distribution
Agreement, thus the Company could lose its exclusive
rights to sell Conserver 21(Trademark) in the United
States and Canada.
Pursuant to the Distribution Agreement, Agrotech has
the right to borrow up to $1,000,000 from the Company
as of May 1, 1997 and up to an additional $500,000
commencing ninety days after the initial public
offering (Note 4). In connection with such rights, a
director of the Company advanced $500,000 to Agrotech
on behalf of the Company in May of 1997. The Company
repaid the advance to the director and interest
thereon at 10%, out of the proceeds from the public
offering. An additional $500,000 was advanced from
the Company in June 1997, resulting in a $1,000,000
loan balance at June 30, 1997. The Company has
provided a full reserve against the receivable
balance. Under the terms of the Distribution
Agreement the Company may be obligated to extend an
additional loan of $500,000 to Agrotech.
The Company experienced problems with respect to the
pricing and packaging of the Conserver 21(Trademark)
product and in conjunction with discussions to
resolve these issues with Agrotech, the Company
commenced efforts to identify alternative sources of
products similar to Conserver 21(Trademark). After
extensive research, the Company identified one other
product that, from independent tests, the Company
believes is as efficacious as Conserver
21(Trademark). With this product identified and as a
result of unsuccessful efforts to negotiate a viable
business arrangement with Agrotech, the Company
notified Agrotech of its intention to terminate their
distribution agreement.
Because of the situations experienced with Agrotech,
the Company
F-29
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
entered into a loan agreement with CPC due to CPC's
identification of a similar product.
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 the Atmos shares from
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, 1997, and agreed to advance an additional
$250,000 to Atmos which it did during fiscal 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,
(see below) and in February 1998, advanced the
additional $250,000 to CPC for the remaining payments
required under the first agreement. The Company
through June 30, 1998 advanced to CPC an additional
$970,000 for inventory purchases, overhead
requirements and to discharge additional existing
obligations, bringing the total advances to CPC for
funding Atmos to an aggregate amount of $1,620,000,
included in loans receivable-long term. According to
the loan agreement between the Company and CPC, if
CPC is unable to repay any of the loans made to it by
the Company, the Company has the right to
F-30
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
exercise the option to acquire Atmos in order to
recoup the value of its loans to CPC. Because of the
current economic conditions of Atmos, the Company has
provided a $1,620,000 reserve against the receivable
balance from CPC and currently does not plan to
exercise its option to acquire Atmos.
The Company's option is to acquire from CPC its 51%
stock ownership in Atmos for the same price CPC paid
the Atmos stockholders to acquire 51% of the Atmos
stock. That price was $1,650,000, payable $650,000 in
cash to Atmos to discharge existing obligations and
the balance, to the Atmos stockholders, in the
Company's Common Stock valued at $1,000,000
contingent upon delivery of the patents on the Atmos
product. In October 1998, the Company's Common Stock
was issued but not delivered to the Atmos
stockholders. The Company's Common Stock is being
held by the Company to secure CPC and the Company
against breach of the same warranties as were made by
Atmos and its stockholders to CPC. CPC has asserted
that those warranties have been breached because,
among other things, the debt and other obligations of
Atmos exceed the limits warranted. Consequently, the
Company does not currently plan to exercise its
option to acquire CPC's 51% interest in Atmos.
The Atmos product, like Conserver 21(Trade Mark),
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(Trade Mark) faces.
F-31
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
Loans receivable long-term is made up of the
following at June 30:
1998 1997
-----------------------------------------------------
CPC $ 1,620,830 $ -
Roulette (Note 2) 667,085 -
Agrotech 1,000,000 1,000,000
-----------------------------------------------------
3,287,915 1,000,000
(2,620,830) (1,000,000)
-----------------------------------------------------
$ 667,085 $ -
-----------------------------------------------------
4. Initial Public Since inception through November 1996, the Company
Offering raised capital necessary for its business development
and Private through debt and equity private placements.
Placements
In June 1997, the Company completed its initial
public offering in which it received net proceeds of
approximately $8,859,000 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 underwriters obtained, Underwriters'
Warrants to purchase 220,000 shares of Common Stock
exercisable for a period of four years at $8.25 per
share.
During the year ended June 30, 1998, proceeds from
the IPO were used to retire the convertible
debentures in the amount of $175,000 (Note 6).
In November 1997, the Company commenced efforts to
raise additional capital to fund its New Line of
Business and New Business Opportunities (Note 2). The
Company completed its private placement offering in
February 1998 and received net proceeds in the
aggregate of approximately $8,955,000 from the
F-32
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
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 agent obtained warrants to purchase
715,678 shares of Common Stock exercisable for a
period of four years at $5.14 per share.
F-33
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
5. Property, At June 30, 1998 and 1997 property, equipment and
Equipment and Leasehold improvements consist of the following:
Leasehold
Improvements
<TABLE>
<CAPTION>
June 30, 1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Office equipment $ 243,151 $ 24,150
Slots equipment 1,010,644 -
Computer equipment 18,964 -
Vehicle 6,500 -
Leasehold improvements 1,322,190 -
Construction in progress (Note 2) 4,783,333 -
-------------------------------------------------------------------
7,384,782 24,150
Less: accumulated depreciation (17,903) (2,164)
-------------------------------------------------------------------
$ 7,366,879 $ 21,986
-------------------------------------------------------------------
</TABLE>
6. Convertible In September and November 1996, the Company issued
Debentures one-year 10% convertible subordinated debentures in
the aggregate amount of $750,000. The debentures and
accrued interest are convertible into common shares
at $5.00 per share. During the year ended June 30,
1998, the holders of $175,000 of debentures were
repaid, $210,000 of debentures were cancelled against
a loan receivable and holders of $365,000 of the
remaining debentures elected to convert their notes
to shares of common stock. In connection with the
sale of the debentures, the Company issued 62,504
shares of its common stock valued at $312,500 which
was accounted for as debt discount and charged to
expense.
7. Loan to D & M In August 1997, the Company made a $210,000 loan to
Investments D&M Investments, Inc. due September 24,1997 and
bearing interest at 10% per annum. This loan was
subsequently paid by the cancellation of
debentures.
F-34
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
8. Income Taxes At June 30, 1998, the Company had net operating loss
carryforwards (NOL) of approximately $1,601,329 which
expire through 2013. In the event of a change in
ownership of the Company, the utilization of the NOL
carryforward will be subject to limitation under
certain provisions of the Internal Revenue Code.
Deferred income taxes are comprised of the following
at June 30, 1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------
<S> <C>
Start-up expenses capitalized for tax purposes $ 2,693,602
Compensation changes in connection with issuance
of options and warrants 2,593,073
Bad debt reserve versus write-off method 995,915
Write-down of management contracts 456,000
Net operating loss carryforward 608,505
Other (1,425)
----------------------------------------------------------------
Gross deferred tax asset 7,345,670
Deferred tax asset valuation allowance (7,345,670)
----------------------------------------------------------------
Net deferred tax asset $ -
----------------------------------------------------------------
</TABLE>
Realization of any portion of the Company's deferred
tax asset at June 30, 1998 is not considered to be
more likely than not and accordingly a $7,345,670
valuation allowance has been provided.
Until June 30, 1997 the Company, for tax purposes,
does not have any operations, or net operating loss,
as its expenses are preoperating and accordingly
were capitalized and amortized when operations
commence.
9. Financial The carrying amounts of financial instruments
Instruments including loans receivable, accounts receivable,
accounts payable and debt approximates fair value.
10. Related Party The Company incurred approximately $546,000, $149,000
Transactions and $75,000, in legal fees to a related party during
the year ended June 30, 1998, during the ten month
period ended June 30, 1997 and from March 6,
(inception) through August 31, 1996, respectively,
including free legal services amounting to $60,000,
in the ten month period ended June 30, 1997 which
amounts were recorded as additional paid-in capital.
No such services were provided for
F-35
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
the year ended June 30, 1998.
During the year ended June 30, 1998, the Company
issued 187,500 options valued at $285,619, based on
the Black-Scholes option pricing model to two of its
legal counsels in lieu of a cash payment. The value
of the options is being amortized as legal expense,
$171,000 for the year ended June 30, 1998 as counsel
renders services.
During 1998 and 1997, the Company made payments of
$91,000 and $70,000, respectively, for two properties
owned by the Chairman of the Board of Directors which
are used as offices by the Company in New York and
London.
Additionally, during the year ended June 30, 1998,
the Company purchased a life insurance policy for the
benefit of the Chairman of the Board. The premium of
approximately $40,000 has been charged to operations.
11. Commitments The Company rents office space and facilities under
and non-cancelable leases through February 2013. The
Contingencies minimum future rental commitment for leases in effect
at June 30, 1998 approximates the following:
Years ending June 30,
-------------------------------------------------------
1999 $ 324,500
2000 303,200
2001 300,700
2002 299,200
2003 224,800
Thereafter 1,933,300
-------------------------------------------------------
$ 3,385,700
-------------------------------------------------------
Rent expense for the year ended June 30, 1998, for
the ten months ended June 30, 1997 and from March 6
(inception), through August 31, 1996 was $238,478,
$127,574 and $9,552, respectively.
During the year ended June 30, 1998, the Company
entered into a
F-36
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
commitment for the construction of the Suriname
Palace Casino (Note 2). The commitment is for
leasehold improvements related to the casino. At June
30, 1998, the Company has open commitments related to
this project for approximately $2,200,000.
Employment Contract. The Company entered into a
three-year employment contract with Charles H. Stein,
President and Chief Executive Officer of the Company
which took effect upon the consummation of the
Company's initial public offering of securities. Mr.
Stein is also a member of the Board of Directors. The
contract provides for an annual salary of an amount
not less than $125,000 and a three-year noncompete
clause upon termination.
During the year ended June 30, 1998 and during the
periods ended June 30, 1997 and August 31, 1996, Mr.
Stein did not receive a salary. Accordingly, the
Company recorded compensation charges in those
periods for an amount based upon his employment
agreement and as contribution to capital. Salary
expense recorded for the year ended June 30, 1998,
for the ten months ended June 30, 1997 and for the
period from March 6 (inception) through August 31,
1996 was $90,000, $105,000 and $65,000, respectively.
12. Stock Options The Company has a fixed stock option plan and
and Warrants non-plan options which are described below. The
Company applies APB Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations in
accounting for employee stock options. Under APB
Opinion 25, because the exercise price of the
Company's employee stock options equals or exceeds
the market price of the underlying stock on the date
of grant, no compensation cost is recognized.
The Company's 1996 Stock Option Plan (the "Plan") was
adopted in November 1996, and amended in December
1996, April 1997
F-37
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
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. As of June 30, 1998,
2,272,500 options to purchase shares of common stock
had been granted under the Plan.
During fiscal 1998, for the ten month period ended
June 30, 1997 and for the period from March 6 to
August 31, 1996, the Company granted 240,000, 660,000
and 25,000 options respectively to consultants for
services rendered or to be rendered. Exercisable
price for these options range from $5.19 to $6.50 per
share. These options expire four years after their
issuance. In connection with these options the
Company has recorded a charge to consulting fees with
a corresponding credit to additional paid in capital
in the amount of $386,000, $513,000 and $112,000,
respectively.
In connection with the private placements done by the
Company during the ten month period ended June 30,
1997, the Company issued to investors 500,000
options. The exercise price for these options was
$2.00 and they expire in April 2001.
Generally, options granted have maximum terms of not
more than four years and are not transferable.
Options are exercisable, one-third on the first
anniversary of such grant, one-third on the second
anniversary and the final one-third on the third
anniversary of such grant. However, options granted
under the Plan shall become immediately exercisable
if the holder of such options is terminated by the
Company or is no longer a director of the Company, as
the case may be, and subsequent to certain events
which are deemed to be a "change in control" of the
Company.
The Plan provides for adjustments in the number and
type of shares covered by the Plan and options
granted thereunder in the event of any
reorganization, merger, recapitalization or certain
other transactions involving the Company.
In fiscal 1998 and 1997, the Company granted a total
of 350,000
F-38
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
and 550,000 options to directors, respectively. These
options vest one-third upon the date of grant and one
third each upon the next two anniversaries of the
date of grant and are exercisable from $5.00 to
$6.50. These option expire four years after their
issuance. In connection with these options the
Company has recorded a charge to operations with a
corresponding credit to additional paid in capital in
the amounts of $386,000 and $700,000 respectively.
Additionally, in fiscal 1998, 1997, and for the
period from March 6 to August 31, 1996, 140,000,
125,000 and 110,000, options were issued to employees
respectively. These options vest one-third upon the
date of grant and one-third each upon the next two
anniversaries of the date of grant, which options are
exercisable from $5.19 to $6.13.
FASB Statement 123, "Accounting for Stock-Based
Compensation," requires the Company to provide pro
forma information regarding net income (loss) and net
income (loss) per share as if compensation cost for
the Company's employee stock options had been
determined in accordance with the fair value based
method prescribed in FASB Statement 123. The Company
estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing
model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
June 30, June 30, August 31,
Period ended 1998 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6% 7% 6%
Expected life 3-4 years 4-6 years 3 years
Expected volatility .5 .3 .3
Dividend yield 0.0 0.0 0.0
</TABLE>
Under the accounting provisions of FASB Statement
123, the Company's pro forma net loss and loss per
share would have been as follows:
F-39
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
June 30, June 30, August 31,
Period Ended 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss
As reported $ (12,543,072) $ (8,562,067) $ (1,387,071)
Pro forma (12,770,747) (8,599,459) (1,395,993)
-----------------------------------------------------------------------------------------
Pro forma net loss per common share
basic and diluted
As reported $ (1.37) $ (1.83) $ (.32)
Pro forma (1.39) (1.84) (.32)
-----------------------------------------------------------------------------------------
</TABLE>
A summary of the status of the Company's fixed stock
option plan and non-plan options as of June 30, 1998,
1997 and August 31, 1996, and changes during the
periods then ended is presented below:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 August 31, 1996
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning 1,970,000 $ 4.02 135,000 $ 1.67 - $ -
of period
Granted 1,217,500 5.85 1,835,000 4.18 135,000 1.67
Exercised (7,881) 2.00 - - - -
Forfeited (2,119) 2.00 - - - -
-----------------------------------------------------------------------------------------------
Outstanding at end of 3,177,500 4.72 1,970,000 4.02 135,000 1.67
period
-----------------------------------------------------------------------------------------------
Options exercisable at
end of period 1,803,333 4.18 1,408,333 3.92 - -
Weighted-average fair
value of options granted
during the period - $ 2.08 - $ 3.75 - $ 1.30
-----------------------------------------------------------------------------------------------
</TABLE>
The following table presents information relating to
stock options outstanding at June 30, 1998:
F-40
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted- Average Weighted-
Range of Average Remaining Average
Exercise Exercise Life in Exercise
Price Shares Price Years Shares Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ .50-$2.00 625,000 $ 1.70 2.65 575,000 $ 1.80
$ 5-$6.50 2,552,500 5.45 3.05 1,228,333 5.29
---------------------------------------------------------------------------------
3,177,500 $ 4.72 2.97 1,803,333 $ 4.18
-----------------------------------------------------------------------------------
</TABLE>
As of June 30, 1998, 2,727,500 options are available
for future grant under the Plan.
Subsequent to year end 6,000 options were exercised
at a price of $.50.
Warrants
At June 30, 1998, the Company had warrants amounting
to 2,260,678 outstanding. No warrants have been
exercised. All warrants are exercisable on the day
of grant.
During the year ended June 30, 1998, the Company
issued to a consultant four year warrants to purchase
100,000 shares of the Company's common stock at $6.50
per share. The warrants were valued at $272,500 based
on the Black-Scholes option pricing model and were
charged to operations for the year ended June 30,
1998.
In August 1996, the Company issued to Directors and
consultants three-year warrants to purchase 325,000
shares of the Company's common stock at $5.00 per
share. The warrants were valued at $457,201 and were
charged to operations for the period ended August 31,
1996.
In connection with a $1,000,000 note which was
subsequently repaid, the Company issued warrants to
the debt holder and an affiliate for the purchase of
550,000 shares of common stock at $2 per share. The
warrants were valued at approximately $2,040,000 and
were charged to expense at the completion of the
public
F-41
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
offering. At the time the warrants were issued,
20,000 shares of previously issued common stock were
surrendered to the Company.
During the periods ended June 30, 1998 and 1997, the
Company issued 715,678 and 220,000 warrants to
purchase shares of the Company's common stock at
exercise prices of $5.14 and $8.25 per share, in
connection with its public offering and private
placement, respectively, (See Note 4).
In June 1997, the Company issued to consultants
warrants to purchase 350,000 shares of common stock
at $5.75 per share. The warrants were valued at
approximately $705,000 and were charged to operations
for the ten months ended June 30, 1997.
Common Stock
The Company has reserved 5,438,178 shares of common
stock for exercise of options and warrants.
13. Stockholders' On December 2, 1997, at a special meeting of the
Equity stockholders, an amendment was approved to the
Company's Certificate of Incorporation which increase
the number of (1) authorized common stock from
30,000,000 shares to 50,000,000 and (2) authorized
preferred stock from 5,000 shares to 5,000,000
shares.
In connection with the organization of the Company,
1,666,667 shares of common stock were subscribed to
by Conserver Investments, S.A. (Note 3) which
together with certain of its affiliates are referred
to hereinafter as the "Groupe Conserver."
The Company, in a series of negotiated transactions
repurchased 1,366,667 shares of such common stock for
an aggregate sum of $1,800,000. The remaining 300,000
shares of common stock were transferred in November
1996 to two persons designated by the Company, each
of whom are nonaffiliates of both the Company
F-42
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
and Groupe Conserver or any of their directors,
officers or employees.
In November 1996, the Board of Directors approved a
2.128874 for 1 stock split. In December 1996, the
Board of Directors approved a 1.066194 for 1 stock
split. Subsequently, in April 1997, the Board of
Directors approved a reverse stock split to cancel
the effect of the aforementioned two stock splits.
All of the above splits have been retroactively
reflected in the accompanying consolidated financial
statements.
14. Business Segment The Company's operations have been classified into
Information three business segments:
Food preservation, hotel and management agreements
and casino operations. The food preservation
includes the development, selling and marketing of
the product. The hotel and management agreements
include the management and exclusive operations of
certain hotels. The casino operations include the
development and management of certain casinos.
Operating loss by segment is total operating
revenue less expenses which are deemed to be
related to the unit's operating revenue.
Identifiable assets by segment are those assets
that are used in the operation of that unit.
Corporate assets consist principally of cash and
equivalents, prepaid expense and leasehold
improvements related to the corporate unit.
As further disclosed in Note 2, the Company
diverted its operations during fiscal 1998.
Summarized financial information by business
segment for the year ended June 30, 1998 are as
follows:
F-43
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year ended
June 30, 1998
----------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Food preservation $ 9,900
Hotel and management agreements 639,700
Casino operations -
Corporate -
----------------------------------------------------------------------------
Total revenues $ 649,600
----------------------------------------------------------------------------
Operating Loss:
Food preservation $ 2,878,800
Hotel and management agreements 5,558,500
Casino operations 1,374,900
Corporate 2,944,700
----------------------------------------------------------------------------
Total operating loss $ 12,756,900
----------------------------------------------------------------------------
Depreciation and Amortization:
Food preservation $ -
Hotel and management agreements 225,200
Casino operations 120,000
Corporate 32,800
----------------------------------------------------------------------------
Total depreciation and amortization $ 378,000
----------------------------------------------------------------------------
Capital Additions:
Food preservation $ -
Hotel and management agreements 2,734,900
Casino operations 5,111,100
Corporate 86,800
----------------------------------------------------------------------------
Total capital additions $ 7,932,800
----------------------------------------------------------------------------
Identifiable Assets:
Food preservation $ -
Hotel and management agreements 28,301,400
Casino operations 26,085,500
Corporate 1,578,900
Eliminations (32,008,600)
----------------------------------------------------------------------------
Total assets $ 23,957,200
----------------------------------------------------------------------------
</TABLE>
The Company's main operations are located in the
following foreign geographic regions: Cyprus,
Russian Federation, Suriname and Budapest.
At June 30, 1998, Identifiable assets by
geographical region are as follows:
<TABLE>
<S> <C>
Russian Federation $ 16,033,589
Suriname 2,877,204
Other (net of eliminations in the
amount of $25,772,554) 5,046,407
-----------
$23,957,200
===========
</TABLE>
15. Schedule of Valuation accounts during the year ended June 30,
Valuation 1998 and for the ten month period ended June 30,
Accounts 1997 are as follows:
<TABLE>
<CAPTION>
Year ended Ten month period
Allowance for Loans Receivable June 30, 1998 ended June 30, 1997
------------------------------ ------------- -------------------
<S> <C> <C>
Beginning balance $1,000,000 $ -
Provision 1,620,830 1,000,000
---------- -----------
Ending balance $2,620,830 $ 1,000,000
========== ===========
</TABLE>
F-44
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
16. Subsequent On September 10, 1998, the Company entered into an
Events agreement with Parbhoe's Handelmij N.V. in which the
Company borrowed $600,000 from Parbhoe for working
capital purposes. Interest rate on this loan is at 3%
per month and the loan shall be payable out of the
net operating income (as defined) of Suriname Leisure
Company. In connection with this credit agreement,
the Company issued 250,000 shares of its common stock
for cash which were valued at $2.00 per share, having
a restricted lock-up period of six months.
Additionally, the Company issued one year warrants
for the purchase of 25,000 shares of common stock at
$2.00 per share. The warrants are exercisable at any
time within the one year period.
On September 14, 1998, the Company's Board of
Directors agreed to reprice the exercise price of
1,907,500 stock options and warrants previously
granted to directors, officers and employees at
prices ranged from $5.00 to $6.50, to $1.50.
Additionally, the Board of Directors also approved
the issuance of 1,500,000 options to acquire shares
of common stock at a price of $1.50 per share. These
options will expire four years, from the grant date.
These options will be issued to:
Dallas Dempster, President and
Chief Executive Officer $1,000,000
Charles Stein, Chairman of the Board 100,000
Jay Haft, Director 100,000
Jonathan Caplan, Director 100,000
James Stanton, Director 100,000
Miles Greenberg, Chief Financial Officer 75,000
Consultants 25,000
Also 35,000 options issued to a consultant were
repriced from $5.00 to $1.50 and the exercise date
was extended from August 16, 1998 to August 16, 1999.
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, (Note 2)
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
F-45
<PAGE>
CCA Companies Incorporated
Notes to Consolidated Financial Statements
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.
On September 30, 1998, 89,000 shares of the Company's
Common Stock were issued to Maritime Services
Corporation, the building contractor for the Suriname
casino currently under construction (Note 2). 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 Joint Venture.
On December 3, 1998, the Company received $300,000
from two investors for the purchase of 400,000 shares
of the Company's Common Stock at market value ($0.75
per share). In addition, the Company agreed to issue
warrants to purchase 200,000 shares of the Company's
Common Stock, at $1.00 per common share. Once issued
the warrants are exercisable immediately and will
expire four years from the issuance date.
F-46
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,699,028
<SECURITIES> 0
<RECEIVABLES> 342,987
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,562,196
<PP&E> 7,366,879
<DEPRECIATION> (17,903)
<TOTAL-ASSETS> 23,957,162
<CURRENT-LIABILITIES> 1,630,805
<BONDS> 0
0
0
<COMMON> 11,997
<OTHER-SE> 22,314,360
<TOTAL-LIABILITY-AND-EQUITY> 23,957,162
<SALES> 649,620
<TOTAL-REVENUES> 649,620
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,406,532
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,678
<INCOME-PRETAX> (12,543,072)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,543,072)
<EPS-PRIMARY> (1.37)
<EPS-DILUTED> (1.37)
</TABLE>
