<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 March 31, 1999
[ ] 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 May 10, 1999
--------------- ---------------------------
Common Stock, $.001 par value 13,231,459 shares
<PAGE>
CCA COMPANIES INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1999 (unaudited).......................................1
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended March 31, 1999 (unaudited), and
the Three and Nine Months ended March 31, 1998 (unaudited)...........2
Condensed Consolidated Statements of Cash Flows for the Three
and Nine Months ended March 31, 1999 (unaudited),
and the Three and Nine Months ended March
31, 1998 (unaudited).................................................3
Notes to Condensed Consolidated Financial Statements...........................4
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations...................8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................17
Item 3. Quantitative and Qualitative Disclosure about Market Risk.......17
Item 6. Exhibits and Reports on Form 8-K................................18
SIGNATURES ...................................................................19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, March 31,
- ------ 1998 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,699,028 $ 219,665
Accounts receivable 342,987
Prepaid and other current assets 520,181 344,453
----------------- ------------------
Total current assets 2,562,196 564,118
Loans receivable 667,085 608,311
Deposits on assets to be acquired 422,015
Construction in progress 5,107,333 4,172,115
Excess cost over fair value of assets acquired, net 10,366,442 10,102,836
Property, equipment and leasehold improvements, net 2,583,546 6,218,591
Management contract agreements, net 2,228,245
Other assets 20,300 20,300
----------------- ------------------
TOTAL $ 23,957,162 $ 21,686,271
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,335,805 $ 1,835,624
Notes and loans payable - current 295,000 800,000
----------------- ------------------
Total current liabilities 1,630,805 2,635,624
Notes payable - long term 600,000
Other liabilities 21,248
----------------- ------------------
Commitments and contingencies 1,630,805 3,256,872
----------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, par value $.001; 50,000,000 shares
authorized; 11,996,048 and 12,948,125 shares issued and
outstanding at June 30, 1998 and March 31, 1999, respectively 11,997 12,949
Additional paid-in capital 44,806,570 46,060,967
Currency translation adjustments (1,621,803)
Accumulated deficit (22,492,210) (26,022,714)
----------------- ------------------
Total stockholders' equity 22,326,357 18,429,399
----------------- ------------------
TOTAL $ 23,957,162 $ 21,686,271
================= ==================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 1,553,412 $ 178,466 $ 4,207,164 $ 186,494
OPERATING EXPENSES:
Marketing and sales 91,375 74,657 346,022 238,664
General and administrative 1,510,082 1,562,120 6,357,738 3,785,996
Compensation charges in
connection with issuance of options and
warrants 197,000 750,000 976,000
----------------- ---------------- ---------------- ----------------
Total operating expenses 1,601,457 1,833,777 7,453,760 5,000,660
----------------- ---------------- ---------------- ----------------
(LOSS) FROM OPERATIONS (48,045) (1,655,311) (3,246,596) (4,814,166)
OTHER INCOME (EXPENSE):
Interest income 2,176 70,868 11,043 247,836
Interest expense (134,202) (294,362) (74,678)
----------------- ---------------- ---------------- ----------------
Total other income (expense) (132,026) 70,868 (283,319) 173,158
----------------- ---------------- ---------------- ----------------
NET (LOSS) $(180,071) $(1,584,443) $(3,529,915) $(4,641,008)
================= ================ ================ ================
NET (LOSS) PER SHARE OF
COMMON STOCK $(0.01) $(0.15) $(0.29) $(0.55)
================= ================ ================ ================
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES AND
COMMON SHARE
EQUIVALENTS
OUTSTANDING 12,776,161 10,648,690 12,344,111 8,381,867
================= ================ ================ ================
See notes to condensed financial statements.
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CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($180,171) ($1,584,443) ($3,529,915) ($4,641,008)
Adjustments:
Compensation expense in connection with issuance
of options and warrants 197,000 750,000 976,000
Depreciation and amortization 195,737 131,994 799,592 196,465
Compensation expense for officer's salary 30,000 90,000
Legal services provided by shareholder 14,013 28,000 165,600
Consulting services provided for common stock 26,250
Changes in current assets and current liabilities:
Accounts receivable (171,615) 342,987 (182,715)
Prepaid expenses and other current assets (44,355) 155,634 175,728 (125,829)
Accounts payable and accrued expenses (54,633) (120,146) 499,819 69,542
-------------- --------------- --------------- ---------------
Total adjustments 96,749 236,880 2,596,126 1,215,313
-------------- --------------- --------------- ---------------
Net cash (used) by operating activities (83,422) (1,347,563) (933,789) (3,425,695)
-------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment and leasehold improvements (733,306) (741,985) (3,875,036) (799,091)
Deposits on assets to be acquired (2,449,864) (2,449,864)
Deposits on assets applied to purchase 422,015
Funds used for acquisitions and development 99,783 (2,306,633) (562,180) (4,909,285)
Proceeds from termination of management contracts 1,810,000
Funds used for loans and notes receivable (326,704) (838,894)
-------------- --------------- --------------- ---------------
Net cash (used) by investing activities (633,523) (5,825,186) (2,205,201) (8,997,134)
-------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds form public offering 1,447,567
Proceeds from sale of common stock 175,000 5,208,912 1,175,000 8,917,850
Construction services provided for common stock 200,250
Accounts receivable paid with return of common stock (701,163)
Currency translation adjustments (119,460)
Proceeds from notes and loans payable 250,000 2,475,000
Repayments of notes payable (75,000) (1,370,000) (385,000)
-------------- --------------- --------------- ---------------
Net cash provided (used) by financing activities 350,000 5,208,912 1,659,627 9,980,417
-------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (366,945) (1,963,837) (1,479,363) (2,442,412)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 586,610 7,236,885 1,699,028 7,715,460
-------------- --------------- --------------- ---------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $219,665 $ 5,273,048 $219,665 $ 5,273,048
============== =============== =============== ===============
</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 has
adopted a fiscal year ending 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 nine month periods ended March 31, 1999 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 March 31, 1999, the cumulative foreign currency
translation adjustments resulted in a reduction of stockholders' equity in the
amount of $1,621,803. 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 nine month periods ended March 31, 1999 and March 31, 1998.
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(Note B) The Company:
CCA Companies Incorporated was incorporated under the laws of the
State of Delaware on March 6, 1996 as Conserver Corporation of America and
changed its name on December 2, 1997. The active business of CCA Companies
Incorporated (with its subsidiaries) now is the (i) operation and 50% ownership
of a gaming casino in Suriname, (ii) 45% equity interest in a 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 to enable it
to (i) pay its current obligations and continue its basic operation; (ii) repay
high interest bearing loans made by its joint venture partner for the
construction of the Suriname Casino; and (iii) to pay any material expenses of
continuing negotiations for the Sakhalin project and for maintaining its
position in that project.
(Note C) Summary of Significant Accounting Policies:
[1] Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[2] Impairment of Long-Lived Assets
The Company adopted the Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Under the provisions of this statement,
the Company has evaluated its long-lived assets for financial impairment, and
will continue to evaluate them as events or changes in circumstances indicate
that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the assets are adjusted
to their fair values.
[3] Property, Equipment and Leasehold Improvements
Property and equipment is recorded at cost. Depreciation and
amortization is computed by the straight line method based on the estimated
useful lives (3-5 years) of the related assets. Leasehold improvements are
amortized over the shorter of the life of the asset or the lease.
[4] Excess Cost over Fair Value of Assets Acquired
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
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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.
[7] Stock Based Compensation
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company did not adopt the fair value based method for employees but instead
discloses the pro forma effects of the calculation required by the statement.
[8] Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
[9] Business Segment Reporting
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
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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) Commitments and contingencies:
As a result of the failure of Far East Consortium International Ltd.
("FEC") and Dorsett Hotels and Resorts International Ltd ("DHRI"), parties with
the Company to the Hotel Management Agreements (as defined below), 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 terminating the Hotel Management
Agreements and all then existing Hotel Operating Contracts, and exchanging
mutual releases of related obligations. As part of the settlement, the Company
received $450,000 cash, was returned 950,000 shares of its Common Stock with the
obligation to reissue back 250,000 of such shares, retained $1,625,000 in
payments of management fees and loans, and FEC agreed to assume any and all
future financial obligations with respect to the employment and consulting
agreements the Company had with Kai Michaelsen, then President of the Company's
hotel management company. Both the employment and consulting agreements were
scheduled to expire in May 2000.
Subsequent to the November 1998 termination agreement, FEC corresponded with
the Company questioning and making numerous allegations regarding the authority
and reasonableness of operating decisions made by Mr. Michaelsen while he was in
charge of the Company's hotel
7
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management division which operated the Dorsett Regency Hotel for FEC. After a
thorough review of Mr. Michaelsen's performance as the President of the
Company's hotel management division including an extensive investigation into
the allegations made by FEC, Mr. Michaelsen's employment was officially
terminated in April 1999.
On April 9, 1999, Mr. Michaelsen filed a Demand for Arbitration with the
American Arbitration Association ("AAA") requesting a lump sum payment of
approximately $240,000 representing the amount Mr. Michaelsen is claiming to be
due him for past and future services under his employment and consulting
agreements with the Company. The Company has been notified by the AAA that it
has until May 23, 1999 to respond with its defense and to file a counterclaim.
The Company will vigorously defend its position and is currently determining
whether to file a counterclaim against Mr. Michaelsen. At this time, no
assessment can be made as to the likelihood of the outcome from this case and
therefore no liability has been accrued. If Mr. Michaelsen should prevail, any
amount that he is awarded will be the responsibility of FEC under the terms of
the November 4, 1998 termination agreement with the Company. The Company is
currently holding back on delivery of the 250,000 shares to be reissued to FEC
pursuant to the November 1998 termination agreement until such time as this
matter can be settled.
For further discussion, see "Overview" in "Management Discussion and
Analysis of Financial Condition and Results of Operations" below.
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 the (i) operation and
50% ownership of a gaming casino in Suriname, (ii) 45% 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 and pay its
current obligations; (ii) repay high interest bearing loans made by its joint
venture partner towards the construction of the Suriname Casino; and (iii) to
pay any material expenses of continuing negotiations for the Sakhalin project
and for maintaining its position in that project. Although negotiations are
continuing, 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
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Form 10-K contains a going concern emphasis paragraph. 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 stated 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 average market price of the shares during the 10-day
period preceding March 1, 1999 was less than $7.00. The 10-day average price
preceding March 1, 1999 was $.93 and consequently, the Company is currently
obligated to issue to the previous shareholders of Roulette Kft. an additional
116,813 shares of its Common Stock. 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 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.
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.
A Suriname joint venture has operated a small casino since October
1998 in temporary quarters in the hotel where the Company completed and opened
its permanent casino facility on March 31, 1999. The Company, with its joint
venture partner, provided the funds to build the
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permanent facility. The Company's Suriname casino occupies two leased floors,
totaling about 20,000 square feet, in the Plaza Hotel, which is a downtown hotel
in the capital city. The casino has 20 gaming tables, 161 slot machines and a
50-seat restaurant.
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. ("DHRI"), a company represented to be
owned and controlled by David Chiu, and one with Far East Consortium
International Ltd. ("FEC"). Under the agreements the Company was granted the
right (directly or through a subsidiary) to be exclusive manager and operator of
three particular hotels then open, and five others then to be opened, and to do
so pursuant to long-term contracts ("Hotel Operating Contracts") to be entered
into with the owners of the various hotels.
In July 1998, FEC paid the Company $500,000, which the Company treated
as a loan to be repaid in six months together with interest at a rate of prime
plus 1%. In the alternative, the principal and interest was repayable by way of
offset against management fees earned by the Company. 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 FEC and DHRI pursuant 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 950,000 shares of
its Common Stock with the obligation to reissue 250,000 shares, retained
$1,625,000 in payments of management fees and loans, and FEC agreed to assume
any and all future financial obligations with respect to the employment and
consulting agreements the Company had with Kai Michaelsen, then President of the
Company's hotel management company. Both the employment and consulting
agreements were scheduled to expire in May 2000. Consequently, as of November 4,
1998 the Company had no active hotel management operating business.
Subsequent to the November 1998 termination agreement, FEC corresponded
with the Company questioning and making numerous allegations regarding the
authority and reasonableness of operating decisions made by Mr. Michaelsen while
he was in charge of the Company's hotel management division which operated the
Dorsett Regency Hotel for FEC. After a thorough review of Mr. Michaelsen's
performance as the President of the Company's hotel management division
including an extensive investigation into the allegations made by FEC, Mr.
Michaelsen's employment was officially terminated in April 1999.
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On April 9, 1999, Mr. Michaelsen filed a Demand for Arbitration with the
American Arbitration Association ("AAA") requesting a lump sum payment of
approximately $240,000 representing the amount Mr. Michaelsen is claiming to be
due him for past and future services under his employment and consulting
agreements with the Company. The Company has been notified by the AAA that it
has until May 23, 1999 to respond with its defense and to file a counterclaim.
The Company will vigorously defend its position and is currently determining
whether to file a counterclaim against Mr. Michaelsen. At this time, no
assessment can be made as to the likelihood of the outcome from this case and
therefore no liability has been accrued. If Mr. Michaelsen should prevail, any
amount that he is awarded will be the responsibility of FEC under the terms of
the November 4, 1998 termination agreement with the Company. The Company is
currently holding back on delivery of the 250,000 shares to be reissued to FEC
pursuant to the November 1998 termination agreement until such time as this
matter can be settled.
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 nine months ended March 31, 1999,
the Company had revenues of $649,620 and $4,207,164, 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 March 31, 1999 was $26,022,714 (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 major
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), all have had significant economic problems, but
which now appear to be improving. 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.
11
<PAGE>
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 nine months ended March 31, 1999, the
Company had revenues of $649,620 and $4,207,164, 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 March 31, 1999
to Three Months Ended March 31, 1998
Net Loss. The Company incurred a net loss of $180,071, or $0.01 per
share, for the three months ended March 31, 1999, as compared to a net loss of
$1,584,443, or $0.15 per share, for the three months ended March 31, 1998. The
reduction of net loss was primarily due to increases in revenues attributable to
the commencement of the Company's casino operations in the latter half of 1998.
Revenues. During the three months ended March 31, 1999, the Company had
revenues of $1,553,412 which were generated by the casino in Suriname opened in
October 1998 in temporary facilities. On March 31, 1999, the Company's joint
venture opened the new fully operating permanent casino. For the three months
ended March 31, 1998, the Company had revenues of $178,466 from the commencement
during such period of the Company's hotel management business, which has since
been discontinued.
Marketing and Sales. The Company incurred marketing and sales expenses
of $91,375 for the three months ended March 31, 1999, primarily related to its
recently commenced casino operations. During the three months ended March 31,
1998, the Company incurred $74,657 in marketing and sales expenses in connection
with its preliminary marketing and sales efforts for its food technology
product.
General and Administrative Expenses. General and administrative
expenses were $1,510,082 for the three months ended March 31, 1999 consisting
primarily of $733,000 related to operating expenses of the Suriname casino and
$663,000 for general corporate overhead. For the three months ended March 31,
1998 general and administrative expenses were $1,562,120 of which approximately
$1,211,000 related to general corporate overhead. The $548,000 or 45% decrease
in the general corporate overhead during the current period is attributable to
the Company's cost cutting program, which produced significant reductions in
expenses including travel, legal and professional, rent, telephone and other
general office expenses.
Compensation Charges. During the three months ended March 31, 1999,
there were no non-cash compensation charges as compared to $197,000 for the
three months ended March 31,
12
<PAGE>
1998. 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 March 31, 1999 interest
income was $2,176 compared to $70,868 for the three months ended March 31, 1998.
The greater interest income amount in the 1998 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 and subsequent Private
Placement Offering completed in February 1998.
Interest Expense. For the three months ended March 31, 1999, interest
expense was $134,202. The Company had no interest expense for the three months
ended March 31, 1998. During the current period, interest expense was
attributable to loans made by the Company's Suriname joint venture partner for
use in completing the construction of the permanent facility in which the
Suriname casino began operating on March 31, 1999.
Comparison of Nine Months Ended March 31, 1999
to Nine Months Ended March 31, 1998
Net Loss. The Company incurred a net loss of $3,529,915, or $0.29 per
share, for the nine months March 31, 1999, as compared to a net loss of
$4,641,008, or $0.55 per share, for the nine months ended March 31, 1998. The
decrease in net loss resulted from increases in revenues related to the
Company's hotel and casino operations which did not exist until January 1998,
and decreases in corporate overhead expenses.
Revenues. During the nine months ended March 31, 1999, the Company had
revenues of $4,207,164 of which $363,301 was attributable to its hotel
management business, $669,260 was generated by the Budapest casino and
$3,174,603 from the temporary casino in Suriname. For the nine months ended
March 31, 1998, the Company had revenues of $186,494 from the commencement in
January 1998 of the Company's hotel management business, which has since been
discontinued.
Marketing and Sales. The Company incurred marketing and sales expenses
of $346,022 for the nine months ended March 31, 1999, 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 nine
months ended March 31, 1998, the Company incurred $238,664 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 were $6,357,738 for the nine months ended March 31, 1999 compared to
$3,785,996 for the nine months ended March 31, 1998. This 68% increase over the
prior period was primarily the result of costs associated with the Company's
casino operations, which did not exist during the prior period when the Company
was primarily in the food technology business and was just commencing its hotel
management business in January 1998. The costs attributable to the casino
operations during the current period totaled approximately $2,727,000.
13
<PAGE>
Compensation Charges. During the nine months ended March 31, 1999,
non-cash compensation charges were $750,000 compared to $976,000 for the nine
months ended March 31, 1998. 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 nine months ended March 31, 1999 interest
income was $11,043 compared to $247,836 for the nine months ended March 31,
1998. The greater interest income 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 and subsequent
Private Placement Offering completed in February 1998.
Interest Expense. For the nine months ended March 31, 1999, interest
expense was $294,362 compared to $74,678 for the nine months ended March 31,
1998. The increase during the current period was primarily attributable to
interest on loans made by the Company's Suriname joint venture partner for use
in completing the construction of the permanent facility in which the Suriname
casino began operating on March 31, 1999.
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 Preservit(Trademark), 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.
The Company's joint venture has recently completed the permanent
facility where the Suriname Casino now operates. Through April 30, 1999, the
Company had funded approximately $4,100,000 for the casino's construction and
equipment and the other joint venturer had loaned $600,000 and $750,000 at per
month interest rates of 3% and 3 1/2%, respectively. The parties have agreed
that all loans and investments made by the Company together with the first
$600,000 loan made by the joint venture partner would be repaid, together with
interest, from the joint venture's cash available from net operating income and
on a basis pro rata to the total of such loan and investment balances and
accrued interest. The $750,000 loaned by the joint venture partner is payable by
the joint venture in June 1999.
In September 1998, the Company purchased 95% of Roulette Kft., the
Hungarian company operating that 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
14
<PAGE>
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. A.G.M. has since made
substantial improvements to the casino facilities and equipment and has
indicated to the Company that although the Kosovo/Serbian war has effected
business, it anticipates bringing junket and premium player groups to the casino
which the Company anticipates will in turn produce some cash distributions.
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, 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.
In March, April and May 1999, the Company sold in three separate
transactions 483,334 shares of its Common Stock at prices of $.50 and $.75 per
share for an aggregate purchase price of $300,000. The Company also issued
666,667 warrants exercisable at $1.00 per share as part of these transactions.
The $300,000 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 was notified by
NASDAQ on April 22, 1999 that it had complied with the terms of the exception
and accordingly, resumed normal trading on April 26, 1999.
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.
15
<PAGE>
At March 31, 1999, the Company had a working capital deficit of $2.1
million. The Company is currently seeking $3.5 to $4 million in financing to
discharge current payment obligations, and for working capital. At March 31,
1999 the Company had cash of approximately $220,000 on hand. As of that date,
its only predicted (but contingent) sources of cash were about $300,000 to
$400,000 per month anticipated from the operating profits of the Suriname
Casino. A significant portion of these funds is being applied towards the
balance due the construction contractor of the permanent Suriname Casino
facility, which at April 30, 1999, is approximately $150,000. Additional funds
are being used to make payments on the joint venture partner loans. It is
currently 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
On April 9, 1999, 150,000 shares of the Company's Common Stock were
sold to Peter Janssen for $.67 per share. Mr. Janssen also received 350,000
options to purchase the Company's Common Stock at a purchase price of $1.00 per
share.
On April 12, 1999, Murry Zaroff and Nicholas Agriogianis were each
issued warrants to purchase 50,000 shares of the Company's Common Stock at an
exercise price of $1.00 per share. Messrs. Zaroff and Agriogianis will be
providing financial and business consulting services for the Company and are
being compensated solely by and with the warrants issued.
On May 3, 1999, 133,334 shares of the Company's Common Stock were sold
to Charles Reynolds for $.75 per share. Mr. Reynolds also received 66,667
options to purchase the Company's Common Stock at a purchase price of $1.00 per
share.
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 January 25, 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.
On March 1, 1999, 200,000 shares of the Company's Common Stock were
sold to Peter Janssen for $.50 per share. Mr. Janssen also received
250,000 options to purchase the Company's Common Stock at a purchase
price of $1.00 per share.
On April 9, 1999, 150,000 shares of the Company's Common Stock were
sold to Peter Janssen for $.67 per share. Mr. Janssen also received
350,000 options to purchase the Company's Common Stock at a purchase
price of $1.00 per share.
On April 12, 1999, Murry Zaroff, who has agreed to provide financial
and business consulting services for the Company was issued warrants to
purchase 50,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share.
On April 12, 1999, Nicholas Agriogianis, who has agreed to provide
financial and business consulting services for the Company was issued
warrants to purchase 50,000 shares of the Company's Common Stock at an
exercise price of $1.00 per share.
On May 3, 1999, 133,334 shares of the Company's Common Stock were sold
to Charles Reynolds for $.75 per share. Mr. Reynolds also received
66,667 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 March 31, 1999. 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.
17
<PAGE>
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
18
<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: May 10, 1999 By: /s/ Dallas Dempster
--------------------------------
Dallas Dempster
Chief Executive Officer and
President
By: /s/ Miles R. Greenberg
--------------------------------
Miles R. Greenberg
Chief Financial Officer
19
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 219,665
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 564,118
<PP&E> 6,439,671
<DEPRECIATION> 221,080
<TOTAL-ASSETS> 21,686,271
<CURRENT-LIABILITIES> 2,635,624
<BONDS> 0
0
0
<COMMON> 12,949
<OTHER-SE> 18,416,450
<TOTAL-LIABILITY-AND-EQUITY> 21,686,271
<SALES> 4,207,164
<TOTAL-REVENUES> 4,207,164
<CGS> 0
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<OTHER-EXPENSES> 7,453,760
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<INTEREST-EXPENSE> 294,362
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