<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-22191
CCA COMPANIES INCORPORATED
- --------------------------------------------------------------------------------
(Exact Name of Registrant)
Delaware 65-0675901
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3250 Mary Street
Suite 405
Coconut Grove, FL 33133
----------------------------------------
(Address of Principal Executive Offices)
(305) 444-3888
--------------
(Registrant's Telephone Number, Including Area Code)
N/A
--------------
(Former Name, Former Address and Former Fiscal Year,
if changed Since Last Report)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes /X/ No. / /
State the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date.
Class Outstanding at February 5, 1999
- ----------------------------- -------------------------------
Common Stock, $.001 par value 12,748,125 shares
<PAGE>
CCA COMPANIES INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1998 (unaudited)........................................................................1
Condensed Consolidated Statements of Operations for the Three and Six Months
ended December 31, 1998 (unaudited), and
the Three and Six Months ended December 31, 1997 (unaudited).............................................2
Condensed Consolidated Statements of Cash Flows for the Three
and Six Months ended December 31, 1998 (unaudited), and
the Three and Six Months ended December 31, 1997 (unaudited).............................................3
Notes to Condensed Consolidated Financial Statements..............................................................4
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations......................................................9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..........................................................17
Item 3. Quantitative and Qualitative Disclosure about Market Risk..........................................17
Item 6. Exhibits and Reports on Form 8-K...................................................................17
SIGNATURES ...................................................................................................18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1998 1998
----------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,699,028 $ 586,610
Accounts receivable 342,987
Prepaid and other current assets 520,181 300,098
----------------- ------------------
Total current assets 2,562,196 886,708
Investments 629,833
Loans receivable 667,085
Deposits on assets to be acquired 422,015
Construction in progress 5,107,333 4,325,648
Excess cost over fair value of assets acquired, net 10,366,442 10,190,705
Property, equipment and leasehold improvements, net 2,583,546 5,593,153
Management contract agreements, net 2,228,245
Other assets 20,300 20,300
----------------- ------------------
TOTAL $ 23,957,162 $ 21,646,347
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 1,335,805 1,890,257
Notes and loans payable - current 295,000 125,000
----------------- ------------------
Total current liabilities 1,630,805 2,015,257
Notes payable - long term 1,100,000
Other liabilities 40,440
----------------- ------------------
1,630,805 3,155,697
----------------- ------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, 5,000,000 shares
authorized, 1 share issued and outstanding
Common stock, par value $.001; 50,000,000 shares 11,997 12,595
authorized; 11,996,048 and 12,594,925 shares issued and
outstanding at June 30, 1998 and December 31, 1998, respectively
Additional paid-in capital 44,806,570 45,884,721
Currency translation adjustments (1,564,023)
Accumulated deficit (22,492,210) (25,842,643)
----------------- ------------------
Total stockholders' equity 22,326,357 18,490,650
----------------- ------------------
TOTAL $ 23,957,162 $ 21,646,347
================= ==================
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three For the For
Months Months Six Months the
Ended Ended Ended Six Months
December 31, December 31, December 31, Ended December
1998 1997 1998 31, 1997
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 1,867,783 $ 2,558 $ 2,653,752 $ 8,028
OPERATING EXPENSES:
Marketing and sales 168,515 61,695 254,647 164,007
General and administrative 2,614,575 1,111,218 4,847,656 2,223,876
Compensation charges in
connection with issuance of options
and warrants
551,000 750,000 779,000
----------------- ---------------- ---------------- ----------------
Total operating expenses 2,783,090 1,723,913 5,852,303 3,166,883
----------------- ---------------- ---------------- ----------------
(LOSS) FROM OPERATIONS (915,307) (1,721,355) (3,198,551) (3,158,855)
OTHER INCOME (EXPENSE):
Interest income 2,272 73,415 8,867 176,967
Interest expense (79,947) (1,400) (160,160) (74,678)
----------------- ---------------- ---------------- ----------------
Total other income (expense) (77,675) 72,015 (151,293) 102,289
----------------- ---------------- ---------------- ----------------
NET (LOSS) $ (992,982) $ (1,649,340) $ (3,349,844) $ (3,056,566)
================= ================ ================ ================
NET (LOSS) PER SHARE OF
COMMON STOCK $ (0.08) $ (0.21) $ (0.28) $ (0.42)
================= ================ ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS
OUTSTANDING 12,217,414 7,752,181 12,131,419 7,248,459
================= ================ ================ ================
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the For the Three For the For the
Three Months Months Six Months Six Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($ 992,982) ($1,649,340) ($3,349,844) ($3,056,566)
Adjustments:
Compensation expense in connection with issuance
of options and warrants 551,000 750,000 779,000
Depreciation and amortization 381,775 2,650 603,855 64,471
Compensation expense for officer's salary 30,000 60,000
Legal services provided by shareholder (5,000) 100,137 28,000 151,587
Consulting services provided for common stock 26,250
Changes in current assets and current liabilities:
Accounts receivable 701,163 (77,092) 342,987 (86,423)
Prepaid expenses and other current assets 68,006 12,223 220,083 3,870
Accounts payable and accrued expenses (48,852) (21,661) 554,452 188,260
----------- ----------- ----------- -----------
Total adjustments 1,097,092 597,257 2,499,377 1,187,015
----------- ----------- ----------- -----------
Net cash (used) by operating activities 104,110 (1,052,083) (850,467) (1,869,551)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment and leasehold improvements (841,393) (19,928) (3,125,599) (53,571)
Deposits on assets applied to purchase 422,015
Funds used for acquisitions and development (44,676) (2,923,482) (677,994) (3,438,128)
Proceeds from termination of management contracts 1,810,000 1,810,000
Funds used for loans and notes receivable (502,400) (512,190)
----------- ----------- ----------- -----------
Net cash (used) by investing activities 923,931 (3,445,810) (1,571,578) (4,003,889)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds form public offering 1,447,569
Proceeds from sale of common stock 500,000 3,708,937 1,000,000 3,708,937
Construction services provided for common stock 200,250
Accounts receivable paid with return of common stock (701,163) (701,163)
Currency translation adjustments (16,200) (119,460)
Proceeds from notes and loans payable 575,000 2,225,000
Repayments of notes payable (1,295,000) (1,295,000) (385,000)
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities (937,363) 3,708,937 1,309,627 4,771,506
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 90,678 (788,956) (1,112,418) (1,101,934)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 495,932 7,402,482 1,699,028 7,715,460
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 586,610 $ 6,613,526 $ 586,610 $ 6,613,526
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CCA COMPANIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Note A) Basis of Presentation and the Company:
CCA Companies Incorporated was incorporated on March 6, 1996 and
initially adopted a fiscal year ending August 31. Subsequently, in June 1997 the
Company elected to change its fiscal year end to June 30.
The accompanying unaudited condensed consolidated financial statements
include the accounts of CCA, its subsidiaries and joint venture (collectively,
the "Company"). Intercompany transactions and balances have been eliminated in
consolidation. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
three and six month periods ended December 31, 1998 are not necessarily
indicative of the results that may be expected for any interim period or the
year ending June 30, 1999.
The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the audited financial
statements and footnotes thereto included in the Form 10-K for the year ended
June 30, 1998 filed by the Company.
CCA's subsidiaries, Sakhalin City Centre, Ltd., Dorsett Hotels &
Resorts (M) Sdn. Bhd. and Suriname Leisure Company A.V.V. are based and
operating in the Russian Federation, Malaysia and Suriname, respectively. The
functional and reporting currency in those countries is the Russian Rouble,
Malaysian Ringgit and Suriname Guilder, respectively.
These financial statements have been translated to United States
Dollars (U.S. $) using a methodology consistent with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation. Assets and
liabilities are translated to U.S. $ at the rate prevailing on the balance sheet
dates and the statements of operations have been translated from the functional
currency to U.S. $ using an average exchange rate for the applicable period.
Results of this translation process are accumulated as a separate component of
stockholders' equity. As of December 31, 1998, the cumulative foreign currency
translation adjustments resulted in a reduction of stockholders' equity in the
amount of $1,564,023. Exchange gains (losses) for the period ended June 30,
1998, are included in general and administrative expenses in the accompanying
consolidated statements of operations. There were no exchange gains and losses
for the three and six month periods ended December 31, 1998 and December 31,
1997.
4
<PAGE>
(Note B) The Company:
CCA Companies Incorporated was incorporated under the laws of the
State of Delaware on March 6, 1996 as Conserver Corporation of America and
changed its name on December 2, 1997. The active business of CCA Companies
Incorporated (with its subsidiaries) now is (i) operation and ownership of a
temporary gaming casino in Suriname, where a permanent casino is nearly
completed, (ii) equity interest in a gaming casino in Budapest, Hungary, and
(iii) pursuing the development of a casino and hotel project in Sakhalin in the
Russian Federation.
The Company is currently seeking capital or debt financing in order to
enable it (i) to continue its basic operation; (ii) to complete the Suriname
Casino so as to realize that casino's cash flow potential; and (iii) to pay any
material expenses of continuing negotiations for the Sakhalin project and for
maintaining its position in that project.
(Note C) Summary of Significant Accounting Policies:
[1] Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[2] Impairment of Long-Lived Assets
The Company adopted the Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Under the provisions of this statement,
the Company has evaluated its long-lived assets for financial impairment, and
will continue to evaluate them as events or changes in circumstances indicate
that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the assets are adjusted
to their fair values.
[3] Property, Equipment and Leasehold Improvements
Property and equipment is recorded at cost. Depreciation and
amortization is computed by the straight line method based on the estimated
useful lives (3-5 years) of the related assets. Leasehold improvements are
amortized over the shorter of the life of the asset or the lease.
5
<PAGE>
[4] Excess Cost over Fair Value of Assets Acquired
The excess of cost over net fair value of assets acquired of Sakhalin
General Trading & Investments, Limited ("SGTI") are amortized on a straight-line
basis, over the estimated future periods to be benefited (30 years). On an
annual basis, the Company reviews the recoverability of the excess cost over the
fair value of assets acquired.
[5] Income Taxes
For the purpose of these financial statements the Company has adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," for all periods presented. Under the asset and
liability method of SFAS 109, deferred taxes are recognized for differences
between financial statement and income tax bases of assets and liabilities.
[6] Earnings Per Share
Effective December 31, 1997, the Company adopted Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which simplifies the computation
of earnings per share requiring the restatement of all prior periods.
Net loss per share of common stock is based on the weighted average
number of common shares outstanding during each period. Diluted loss per share
of common stock is computed on the basis of the weighted average number of
common shares and diluted securities outstanding. Dilutive securities having an
anti-dilutive effect are excluded from the calculation.
The weighted average number of common shares outstanding for all
periods presented retroactively reflects the effects of the Company's stock
split.
[7] Stock Based Compensation
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company did not adopt the fair value based method for employees but instead
discloses the pro forma effects of the calculation required by the statement.
[8] Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
6
<PAGE>
[9] Business Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information, supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 does not require interim reporting of segment information
during the first year of its application to the reporting entity. The Company
has therefore not included such information in this report.
[10] Future Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on July 1, 1999 to affect
its financial statements.
(Note D) Budapest Casino:
On April 3, 1998, the Company's wholly owned subsidiary, Dorsett Hotels
& Resorts Inc. entered into an agreement as amended with Casino Bahia De Cadiz
S.A. ("Cadiz") and Mrs. Teresa Juste Picon, ("Juste") to purchase (i) their 95%
interest in the equity of Roulette Kft. ("Roulette"), a Hungarian limited
liability company that owns and operates the Orfeum Casino in Budapest, and (ii)
receivables of $1.5 million due to Cadiz and Juste under loan agreements and
lease agreements with Roulette (the "Budapest Project"). Pursuant to the
agreement, as of June 30, 1998, the Company had paid $100,000, included in
prepaid and other current assets and had loaned $667,000 to Roulette, included
in loans receivable-long term. The agreement provided for CCA Dorsett to manage
the Orfeum Casino during the period from April 3, 1998, up to the closing of the
acquisition. The purchase was subject to (i) the approval of the Hungarian
Gaming Supervisory Board (ii) warranties about the business and operations of
Roulette and (iii) other normal legal conditions.
7
<PAGE>
At the closing CCA Dorsett was required to deliver to Cadiz and Juste
$125,000 of CCA Common Stock calculated at $7.00 per share, which equates to
17,857 shares of CCA Common Stock. The sellers are not permitted to sell the
Company's common stock for a period of six months following the effective date.
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.
On September 16, 1998, the Company completed the acquisition of
Roulette. In addition to the above, the Company agreed to pay $45,000 and issued
7,143 of its common stock to a consultant for services performed in connection
with the acquisition. The acquisition was accounted for using the purchase
method of accounting. The purchase price approximated the book value of the net
assets of the acquired company.
Subsequent to the acquisition of Roulette, in December 1998 the Company
entered into an agreement with A.G.M. International LTD ("AGM"), a major Israeli
junket operator experienced in organizing junket and premium player groups,
whereby AMG was granted 50% ownership of Roulette by agreeing to (i) fund
$100,000 to increase the operating float of the casino, (ii) fund $50,000
required for general improvements to the casino, (iii) pay to the Company
$100,000, (iv) pay to the Company an additional $100,000 no later than November
15, 1999 if Roulette receives a new license from the Hungarian Gaming Board
allowing it to operate as a casino for a period in excess of one year commencing
November 1, 1999, the date the current license is due to expire, and (v) provide
for the management and operation of the casino through November 1999.
(Note E) Termination of Hotel Management Agreements:
As a result of the failure of Far East Consortium International Ltd.
and Dorsett Hotels and Resorts International Ltd, the other parties to the Hotel
Management Agreements (as defined below), to deliver to the Company physical
control and practical management power over two of the three 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 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 agreed to assume other obligations of the
Company's hotel management operation estimated at about $350,000. For further
discussion, see "Overview" in "Management Discussion and Analysis of Financial
Condition and Results of Operations" below.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of significant factors affecting
the Company's operating results and liquidity and capital resources should be
read in conjunction with the accompanying financial statement and related notes.
Overview
CCA Companies Incorporated was incorporated under the laws of the
State of Delaware on March 6, 1996 as Conserver Corporation of America and
changed its name on December 2, 1997. The active business of CCA Companies
Incorporated (with its subsidiaries, the "Company") now is (i) operation and
ownership of a gaming casino in Suriname, where a permanent casino is nearly
completed, (ii) equity interest in a gaming casino in Budapest, Hungary, and
(iii) pursuing the development of a casino and hotel project in Sakhalin in the
Russian Federation.
The Company needs cash (i) to continue its basic operation; (ii) to
complete the Suriname Casino so as to realize that casino's cash flow potential;
and (iii) to pay any material expenses of continuing negotiations for the
Sakhalin project and for maintaining its position in that project. The Company
recently has been unable to raise adequate cash for all those needs by a sale of
its securities or by other financing on terms acceptable to it. Largely as a
result of the Company's need for cash, the report of independent certified
public accountants covering the Company's consolidated financial statements for
the year ended June 30, 1998 as reported in the Form 10-K contains a going
concern emphasis paragraph. However, the Company believes it can meet its cash
needs under certain conditions. For further discussion of the Company's cash
needs and how it proposes to meet them, see "Liquidity and Capital Resources
Summary" below.
The Company's original principal business was food preservation
technology. At this time, it is not anticipated that the Company will pursue
exploitation of that business or development and market entry of the principal
product in that business. Instead, the Company is seeking a sale or joint
venture of that business and has recently commenced discussions with interested
parties whereby the Company would sell its food technology business in exchange
for cash and an interest in the purchasing entity or a royalty on the future
sales of the product.
After mid-1997 the Company entered into various agreements (i) to
acquire and operate gaming casinos in Hungary and Suriname; (ii) to obtain (over
about two years) eight hotel management operating contracts, mostly for hotels
in Asia; and (ii) to build during the next two years and then to own and
operate, a hotel and casino in Sakhalin, a Russian Federation island just North
of Japan (the "Sakhalin Project").
The Budapest casino was acquired in September of 1998 when the
Company's subsidiary Dorsett Hotels and Resorts, Inc. acquired the 95% interest
in the equity of Roulette Kft. ("Roulette"), the local company that owns rights
to the casino, and various obligations of Roulette to others. On the September
1998 closing of the acquisition the Company issued to the Roulette stockholders
17,857 shares of the Company's Common Stock (at a nominal value of $7 per
share), subject to additional shares being issued to make up any then short-fall
in value from $125,000 if the market price for shares in February 1999 is less
than $7.00. Further shares with a market value
9
<PAGE>
of $225,000 will be issued when the gaming license is renewed when it expires in
November 1999. The Company also issued 7,143 shares and agreed to pay $45,000 to
a consultant. At June 30, 1998, the Company had paid $100,000 to the former
stockholders as a deposit towards the purchase, and had loaned $667,000 to
Roulette. These amounts were reclassified as part of the consideration paid for
Roulette at closing.
The Company'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.
In December 1998, the Company entered into an agreement with A.G.M.
International LTD ("AGM"), a major Israeli junket operator experienced in
organizing junket and premium player groups, whereby AMG was granted 50%
ownership of Roulette by agreeing to (i) fund $100,000 to increase the operating
float of the casino, (ii) fund $50,000 required for general improvements to the
casino, (iii) pay to the Company $100,000, (iv) pay to the Company an additional
$100,000 no later than November 15, 1999 if Roulette receives a new license from
the Hungarian Gaming Board allowing it to operate as a casino for a period in
excess of one year commencing November 1, 1999, the date the current license is
due to expire, and (v) provide for the management and operation of the casino
through November 1999.
The Company pursuant to an agreement with a local company that owned
the casino license is constructing the Suriname casino. The casino license is
now held by a local joint venture company owned 50% by the Company. The joint
venture company entered into a 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.
A Suriname joint venture is now operating as a small casino in
temporary quarters in the hotel where the Company is completing the permanent
casino for operation. The Company, with its joint venture partner, is providing
the joint venture entity with funds to build the permanent casino. The Company's
permanent Suriname casino will occupy two leased floors, totaling about 20,000
square feet, in the Plaza Hotel, which is a downtown hotel in the capital city.
The casino will have about 20 gaming tables, 161 slot machines and a 50-seat
restaurant. The temporary casino there is currently fully operating, and the
permanent one is projected to be completed and operational by March 1999.
To make its initial entry into the hotel management and operating
business, from mid-1997 and into early 1998 the Company entered into two
agreements (as amended, the "Hotel Management Agreements"). One was with Dorsett
Hotels and Resorts International Ltd. ("Dorsett International"), a company
represented to be owned and controlled by David Chiu, and one with Far East
Consortium International Ltd. ("FEC"). Under the agreements the Company was
granted the right (directly or through a subsidiary) to be exclusive manager and
operator of three particular hotels then open, and five others then to be
opened, and to do so pursuant to long-term contracts ("Hotel Operating
Contracts") to be entered into with the owners of the various hotels.
10
<PAGE>
In July 1998 FEC paid the Company $500,000, which the Company treated
as a loan to be repaid in six months together with interest at a rate of prime
plus 1%. In the alternative the principal and interest could have been repaid by
way of offset against management fees. In July 1998, David Chiu paid the Company
a further $500,000 which the Company also recorded as a loan.
Until November 4, 1998 the Company held Hotel Operating Contracts for
three open hotels with a total of about 1200 rooms, one of which was being
actively managed by the Company. The Company had entered into Hotel Management
Agreements providing for the Company to enter into future Hotel Operating
Contracts to operate five other hotels. The Company had received operating fees
for one of the open hotels since January 1998 and for two of the open hotels
since March 1998.
As a result of the failure of the other parties to the Hotel
Management Agreements to deliver to the Company physical control and practical
management power over two open hotels, and their notice to the Company that
renovation or construction of five other hotels was deferred and being reviewed,
the Company began negotiations with those parties over the status of the Hotel
Management Agreements. In November 1998 the Company reached a settlement,
described below, terminating the Hotel Management Agreements and all then
existing Hotel Operating Contracts, and exchanging mutual releases of related
obligations. The Company received $450,000 cash, was returned 700,000 shares of
its Common Stock, retained $1,625,000 in payments of management fees and loans,
and the other parties agreed to assume 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. The Company has incurred losses since
inception. From March, 1996 to June, 1997 the Company did not have any revenues.
During the year ended June 30, 1998 and the six months ended December 31, 1998,
the Company had revenues of $649,620 and $2,653,752, respectively, primarily
attributable to the commencement of its hotel management operations in January
1998 and its casino operations in August 1998. The Company's accumulated deficit
at December 31, 1998 was $25,842,643 (which included $7,573,876 of non-cash
compensation charges related to the value attributed to stock options and
warrants issued by the Company). Furthermore as a consequence of the settlement
of the Hotel Management Agreements, the Company recorded a write-down of assets
of $4,200,000 during the fiscal year ended June 30, 1998, including a $2,400,000
loss relating to (i) the difference between the stock price on the date the
stock was issued and the stock price on the date of the settlement and (ii) the
value of the stock retained by FEC as part of the settlement.
The casino and hotel project in Sakhalin requires the Company to get
substantial financing to progress further. The Company continues to explore
various alternatives of financing, including discussions with numerous Russian
companies, foreign and domestic financial and investment firms and Asian
contractors. To date, no definitive agreements have been reached.
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
11
<PAGE>
having significant economic problems. Some are having significant political,
social and governmental problems. The situation in the Russian Federation has
delayed and might further delay, or even prevent, financing, construction and
operation of the Sakhalin Project.
Changes in Fiscal Year
The Company initially adopted a fiscal year ending August 31, when it
incorporated on March 6, 1996. During the 1997 calendar year, the Company
elected to change its fiscal year end to June 30.
Results of Operations
The Company has a limited operating history upon which an evaluation
of its performance and prospects can be made. During the period from March 6,
1996 to March 31, 1998, the Company's activities were primarily limited to
organizational efforts and raising public and private capital to defray its
organizational expenses and the development and initial implementation of its
business plan for its food technology business. Commencing in August 1997, the
Company's activities also included organizational and fund raising efforts
relating to its entrance into the business of managing and owning hotels and
casinos. From March 6, 1998 to June 30, 1997 the Company had no revenues. During
the year ended June 30, 1998 and the six months ended December 31, 1998, the
Company had revenues of $649,620 and $2,653,752, respectively, primarily
attributable to the commencement of its hotel management operations in January
1998 and its casino operations in August 1998.
Comparison of Three Months Ended December 31, 1998
to Three Months Ended December 31, 1997
Net Loss. The Company incurred a net loss of $992,982, or $0.08 per
share, for the three months ended December 31, 1998, as compared to a net loss
of $1,649,340, or $0.21 per share, for the three months ended December 31, 1997.
The reduction of net loss was primarily due to a decrease in compensation
charges in connection with the issuance of options and warrants and increases in
revenues attributable to the commencement of the Company's casino operations
during the current period.
Revenues. During the three months ended December 31, 1998, the Company
had revenues of $1,867,783 attributable to the commencement of its casino
business, including revenues of $481,660 generated by the recently purchased
Budapest casino and $1,386,123 generated by the casino in Suriname recently
opened and currently operating in temporary facilities. For the three months
ended December 31, 1997, the Company had nominal revenues of $2,558 from the
preliminary sales of its then sole business of marketing its food technology
product.
Marketing and Sales. The Company incurred marketing and sales expenses
of $168,515 for the three months ended December 31, 1998, primarily related to
its recently commenced casino operations. During the three months ended December
31, 1997, the Company incurred $61,695 in marketing and sales expenses in
connection with its preliminary marketing and sales efforts for its food
technology product.
12
<PAGE>
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $2,614,575 for the three months ended December 31, 1998
compared to $1,111,218 for the three months ended December 31, 1997. This 135%
increase over the prior period was primarily the result of costs associated with
the Company's business activities in its hotel and casino operations which did
not exist during the prior period. These costs during the current period totaled
approximately $1,660,000, a substantial portion of which related to the
operating expenses of the Budapest and Suriname casinos. In addition, included
in general and administrative expenses for the current period is $381,000
related to amortization and depreciation as compared to $2,650 during the prior
period.
Compensation Charges. During the three months ended December 31, 1998,
there were no non-cash compensation charges as compared to $551,000 for the
three months ended December 31, 1997. This decline during the current period
resulted from a decrease in the Company's utilization of the issuance of stock
options and warrants in lieu of cash compensation payments.
Interest Income. For the three months ended December 31, 1998 interest
income was $2,272 compared to $73,415 for the three months ended December 31,
1997. The greater interest amount in the 1997 period was due to a significant
portion of cash being available for investment from the proceeds of the
Company's Initial Public Offering completed in June 1997.
Interest Expense. For the three months ended December 31, 1998,
interest expense was $79,947 compared to $1,400 for the three months ended
December 31, 1997. During the current period, interest expense was primarily
attributable to loans made by the Company's Suriname joint venture partner to
the joint venture owning the casino for use in constructing the permanent
facility in which the casino will operate once completed.
Comparison of Six Months Ended December 31, 1998
to Six Months Ended December 31, 1997
Net Loss. The Company incurred a net loss of $3,349,844, or $0.28 per
share, for the six months December 31, 1998, as compared to a net loss of
$3,056,566, or $0.42 per share, for the six months ended December 31, 1997. The
increase in net loss resulted from increases in general and administrative
expenses related to the Company's hotel and casino operations, which did not
exist during the prior period. These expenses were however offset substantially
by the operating revenues generated by these new business activities. In
addition, interest expense increased while interest income decreased during the
current period.
Revenues. During the six months ended December 31, 1998, the Company
had revenues of $2,653,752 of which $363,301 was attributable to its hotel
management business, $669,260 was generated by the recently purchased Budapest
casino and $1,621,191 from the recently opened temporary casino in Suriname. For
the six months ended December 31, 1997, the Company had nominal revenues of
$8,028 from the preliminary sales of its then sole business of marketing its
food technology product.
13
<PAGE>
Marketing and Sales. The Company incurred marketing and sales expenses
of $254,647 for the six months ended December 31, 1998, of which $63,965 was
attributable to marketing and sales efforts for its food technology product with
the remainder primarily attributable to its casino operations. During the six
months ended December 31, 1997, the Company incurred $164,007 in marketing and
sales expenses all in connection with its preliminary marketing and sales
efforts for its food technology product. The Company is currently reevaluating
its food technology division and all marketing efforts have been suspended.
General and Administrative Expenses. General and administrative
expenses, which include travel expenses, salaries and professional and
consulting fees, were $4,847,656 for the six months ended December 31, 1998
compared to $2,223,876 for the six months ended December 31, 1997. This 118%
increase over the prior period was primarily the result of costs associated with
the Company's business activities in its hotel and casino operations which did
not exist during the prior period at which time the Company was solely in the
food technology business. These costs during the current period totaled
approximately $2,709,000, a substantial portion of which related to the
operating expenses of the Budapest and Suriname casinos. In addition, included
in general and administrative expenses for the current period is $604,000
related to amortization and depreciation as compared to $64,000 during the prior
period.
Compensation Charges. During the six months ended December 31, 1998,
non-cash compensation charges were $750,000 compared to $779,000 for the six
months ended December 31, 1997.
Interest Income. For the six months ended December 31, 1998 interest
income was $8,867 compared to $176,967 for the six months ended December 31,
1997. The greater interest amount in the 1997 period was due to a significant
portion of cash being available for investment from the proceeds of the
Company's Initial Public Offering completed in June 1997.
Interest Expense. For the six months ended December 31, 1998, interest
expense was $160,160 compared to $74,678 for the six months ended December 31,
1997. The increase during the current period was primarily attributable to
interest on loans made by the Company's Suriname joint venture partner to the
joint venture owning the casino for use in constructing the permanent facility
in which the casino will operate once completed.
Liquidity and Capital Resources
Due to its lack of available cash, its limited ability to obtain
financing and its transition to a gaming and leisure company, the Company has
suspended its market entry for PreservitTM, its food technology product. 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. At this time, the Company is seeking a sale or
joint venture of that business and has recently commenced discussions with
interested parties whereby the Company would sell its food technology business
in exchange for cash and an interest in the purchasing entity or a royalty on
the future sales of the product. 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.
14
<PAGE>
The Company's joint venture is expected to soon complete the permanent
facility where the Suriname Casino will operate upon completion. The Company
projects that as of January 31, 1999, the permanent facility requires about
$500,000 further cash over the next 3 months to complete it, which is to be
funded by either the Company, its joint venture partner, the operations of the
temporary casino, or a combination thereof. Through January 31, 1999, the
Company has funded approximately $4,100,000 for these purposes. In September
1998, the other joint venturer loaned $600,000 at a 3% per month interest rate.
It was then agreed that all loans and investments made or to be thereafter made
by the venturers would be repaid, together with interest, from the joint
venture's cash available from net operating income and on a basis pro rata to
the total of such loan and investment balances and accrued interest. In December
1998 and January 1999, the other joint venturer loaned an additional $500,000
and $250,000, respectively, at a 3 1/2% per month interest rate. These loans
were used to fund the ongoing construction of the permanent facility
In September 1998 the Company purchased 95% of Roulette Kft., the
Hungarian company operating that Budapest casino. That casino has generated cash
losses from April 1998, when the Company assumed 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.
In December 1998 the Company entered into an agreement with A.G.M.
International LTD ("AGM"), a major Israeli junket operator experienced in
organizing junket and premium player groups, whereby AMG was granted 50%
ownership of Roulette by agreeing to (i) fund $100,000 to increase the operating
float of the casino, (ii) fund $50,000 required for general improvements to the
casino, (iii) pay to the Company $100,000, (iv) pay to the Company an additional
$100,000 no later than November 15, 1999 if Roulette receives a new license from
the Hungarian Gaming Board allowing it to operate as a casino for a period in
excess of one year commencing November 1, 1999, the date the current license is
due to expire, and (v) provide for the management and operation of the casino
through November 1999. The Company anticipates that the junket and premium
player groups that AGM will bring to the casino will soon produce some cash
distributions for the Company.
At September 30, 1998 the Company had $1,295,000 in debt for funds
borrowed from FEC and David Chiu. As part of the November 1998 settlement of the
Hotel Management Agreements, the Company received a $450,000 cash payment and
was relieved of its $1,295,000 debt obligation. That $450,000 cash payment was
applied primarily to urgent cash payment obligations arising from the overall
operation of its businesses.
In December 1998, the Company sold in three separate transactions
800,000 shares of its Common Stock at prices of $.50 and $.75 per share for an
aggregate purchase price of $500,000. The Company also issued 400,000 warrants
exercisable at $1.00 per share as part of these transactions. The $500,000 cash
received has been applied primarily to urgent cash payment obligations arising
from the overall operation of its businesses.
In January 1999, the Company received a notice from NASDAQ that it had
failed to meet the minimum bid requirements as of November 30, 1998 and was
being granted a temporary exception from this standard subject to the Company on
or before April 5, 1999, evidencing a closing day bid price of at least $1.00
for a minimum of ten consecutive trading days. The Company believes that it will
meet this condition, however, there can be no assurance that it will do
15
<PAGE>
so. If at some future date the Company's securities should cease to be listed on
the NASDAQ SmallCap Market, they may continue to be listed on the OTC-Bulletin
board.
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
current and future business prospects all have impaired the Company's ability to
borrow or otherwise raise capital other than on disadvantageous terms. If the
Company is not successful in obtaining additional financing for its operations,
it will undertake to reduce its operating overhead and negotiate payment terms
with its vendors. However, there can be no assurance that the Company will be
successful in accomplishing its objectives, which could have a material adverse
effect on the Company.
At December 31, 1998, the Company had a working capital deficit of
$1.1 million. The Company is seeking at least $3,000,000 in financing to meet
the $.5 million estimated costs to bring the Suriname Casino to full operation,
to discharge current payment obligations, and for working capital. At December
31, 1998 the Company had cash of approximately $587,000 on hand. As of that
date, its only predicted (but contingent) sources of cash were about $250,000 to
$300,000 per month anticipated from the operating profits of the temporary
Suriname Casino. A significant portion of these funds together with the other
joint venturer's loans are being applied towards completing the construction of
the permanent Suriname Casino which is projected to be open and operating by
March 1999. It is impossible to reliably predict what distributable cash flow
that casino will generate.
The Company believes the financing it is seeking and its other cash
sources, if realized, will provide adequate cash flow to maintain the Company's
current operations in the immediate foreseeable future.
Subsequent Events
In January 1999, James V. Stanton, Vice-Chairman of the Company,
converted $75,000 of loans he made to the Company in October 1998 together with
interest thereon into shares of the Company's Common Stock at a price of $.50,
the then market price of the shares. Mr. Stanton or his designees received a
total of 153,200 shares of Common Stock.
Other
Certain statements in this Quarterly Report on Form 10-Q are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 and involve known and unknown risks, uncertainties and other
factors that may cause the Company's actual results, performance or achievements
to be materially different form the results, performance or achievements
expressed or implied by the forward looking statement. Factors that impact such
forward looking statements include, among others, risk factors included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998 and other
filings with the Securities and Exchange Commission.
16
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information is furnished pursuant to Item
701(a)-(c) of Regulation S-K in connection with unregistered securities sold or
issued by the Company:
On December 3, 1998, 133,000 shares of the Company's Common Stock were
sold to Peter Janssen for $.75 per share, the then market value of the
shares. Mr. Janssen also received 66,667 options to purchase the
Company's Common Stock at a purchase price of $1.00 per share.
On December 3, 1998, 266,000 shares of the Company's Common Stock were
sold to William Rouhana for $.75 per share, the then market value of
the shares. Mr. Rouhana also received 133,000 options to purchase the
Company's Common Stock at a purchase price of $1.00 per share.
On December 21, 1998, 400,000 shares of the Company's Common Stock were
sold to William Rogers for $.50 per share, the then market value of the
shares. Mr. Rogers also received 200,000 options to purchase the
Company's Common Stock at a purchase price of $1.00 per share.
In completing the above transactions, the Company relied upon section 4(2) of
the Securities Act of 1933, as amended, with respect to such transactions.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company held no material market risk sensitive financial instruments or
interest therein, and held none at December 31, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Documents
27 Financial Data Schedule
(b) Reports on Form 8-K
N/A
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CCA COMPANIES INCORPORATED
Dated: February 5, 1999 By: /s/ Dallas Dempster
------------------------------------------
Dallas Dempster
Chief Executive Officer and President
By: /s/ Miles R. Greenberg
------------------------------------------
Miles R. Greenberg
Chief Financial Officer
18
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<PERIOD-START> JUL-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 586,610
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