<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 September 30, 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)
9130 S. Dadeland Blvd.
Suite 1602
Miami, FL 33156
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(Address of Principal Executive Offices)
(305) 670-3838
------------------------------------------------
(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 24, 2000
------ ---------------------------
Common Stock, $.001 par value 16,326,666 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, 1999
and September 30, 1999 (unaudited)...................................1
Condensed Consolidated Statements of Operations for the Three
Months ended September 30, 1999 (unaudited),
the Three Months ended September 30, 1998 (unaudited)................2
Condensed Consolidated Statements of Cash Flows for the Three
Months ended September 30, 1999
(unaudited) and for the Three Months ended
September 30, 1998 (unaudited).......................................3
Notes to Condensed Consolidated Financial Statements..........................4
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations..................9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................14
Item 3. Quantitative and Qualitative Disclosure about Market Risk......14
Item 6. Exhibits and Reports on Form 8-K...............................14
SIGNATURES...................................................................15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 425,662 $ 298,052
Prepaid and other current assets 183,262 185,216
---------------- -----------------
Total current assets 608,924 483,268
Construction in progress 5,251,396 5,251,836
Excess cost over fair value of assets acquired, net 10,014,967 9,927,099
Property, equipment and leasehold improvements, net 6,131,139 5,985,890
Other assets 632,664 675,664
---------------- -----------------
TOTAL $ 22,639,090 $ 22,323,757
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,423,923 $ 1,447,403
Notes and loans payable - current 500,000 25,000
Net liabilities from discontinued operations 203,273 119,850
---------------- -----------------
Total current liabilities 2,127,196 1,592,253
---------------- -----------------
Notes payable - long term 600,000 600,000
---------------- -----------------
Minority interest in consolidated subsidiary 89,278 308,820
---------------- -----------------
Commitments and contingencies
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; 14,014,939 and 14,181,606 shares issued and
outstanding at June 30, 1999 and September 30, 1999,
respectively 14,015 14,182
Additional paid-in capital 46,892,901 47,017,733
Accumulated deficit (27,084,300) (27,209,231)
----------------- ------------------
Total stockholders' equity 19,822,616 19,822,684
----------------- ------------------
TOTAL $22,639,090 $22,323,757
================= ==================
</TABLE>
See notes to condensed consolidated financial statements.
1
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CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Months
Ended Ended
September 30, September 30,
1998 1999
---------------- -----------------
<S> <C> <C>
REVENUES $ 422,668 $ 1,698,063
OPERATING EXPENSES:
Marketing, General and administrative 1,961,915 1,439,983
Compensation charges in connection with
issuance of options and warrants 750,000
---------------- ----------------
Total operating expenses 2,711,915 1,439,983
---------------- ----------------
INCOME (LOSS) FROM OPERATIONS (2,289,247) 258,080
OTHER INCOME (EXPENSE):
Interest income 6,595 480
Interest expense (15,213) (75,449)
---------------- ----------------
Total other income (expense) (8,618) (74,969)
---------------- ----------------
INCOME (LOSS) FROM CONTINUED OPERATIONS
BEFORE MINORITY INTEREST (2,297,865) 183,111
Minority Interest (219,542)
---------------- ----------------
LOSS FROM CONTINUED OPERATIONS (2,297,865) (36,431)
Loss from discontinued operations (58,996) (88,500)
---------------- ----------------
NET LOSS $(2,356,861) $ (124,931)
================ ================
NET LOSS PER SHARE OF COMMON STOCK:
Loss from continuing operations $ (0.18) $ (0.003)
Loss from discontinued operations (0.01) (0.006)
---------------- ----------------
$ (0.19) $ (0.009)
================ ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING 12,117,715 14,133,055
=============== ================
</TABLE>
See notes to condensed consolidated financial statements.
2
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CCA COMPANIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Months
Ended Ended September
September 30, 30, 1999
1998
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,356,861) $ (124,931)
Adjustments:
Loss from discontinued operations 58,996 88,500
Compensation expense in connection with issuance of stock options
and Warrants 750,000
Depreciation and amortization 155,342 274,542
Legal services provided by shareholder without charge 32,987
Minority interest 219,542
Changes in current assets and current liabilities:
Prepaid expenses and other current assets 160,931 (1,954)
Accounts payable and accrued expenses 573,510 23,481
-------------- -------------
Net cash provided (used) by continuing operations (625,095) 479,180
Net cash provided (used) by discontinued operations 111,813 (121,924)
-------------- -------------
513,282 357,256
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, equipment and leasehold improvements (3,088,737) (41,424)
Deposits on assets applied to purchase 422,015
Funds used for acquisitions and development (543,624) (73,342)
Cash funds acquired from acquisition 264,818
-------------- -------------
Net cash (used) by investing activities (2,945,528) (114,766)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 500,000 125,000
Construction services provided for common stock 200,250
Proceeds from notes payable 650,000 50,000
Proceeds from loans made on discontinued operations 1,000,000
Repayments of notes payable (545,100)
------------- -------------
Net cash provided (used) by financing activities 2,350,250 (370,100)
-------------- -------------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,108,560) (127,610)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,593,083 425,662
-------------- -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 484,523 $ 298,052
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
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CCA COMPANIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Note A) Basis of Presentation and the Company:
CCA Companies Incorporated was incorporated on March 6, 1996 and 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-month period ended September 30, 1999 are not necessarily indicative of
the results that may be expected for any interim period or the year ending June
30, 2000.
The balance sheet at June 30, 1999 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, 1999 filed by the Company.
The subsidiaries Sakhalin General Trading and Investments Ltd.
("SGTI"), Sakhalin City Center Ltd. ("SCC"), Dorsett Hotel & Resorts
International ("Dorsett"), Suriname Leisure Company A.V.V. ("SLC") and Roulette
Kft. ("Roulette") (majority shareholding disposed off on December 28, 1998) are
based and operating in Cyprus, Russian Federation, Malaysia, Suriname and
Hungary respectively. The statutory currencies in the countries of incorporation
are respectively the Cyprus Pound, the Russian Ruble, the Malaysian Ringgit, the
Suriname Guilder and the Hungarian Forint. The reporting currency is the U.S.
Dollar.
(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 current active business of CCA Companies
Incorporated (with its subsidiaries) is the (i) operation and 50% ownership of a
gaming casino in Suriname and (ii) pursuing the development of a casino and
hotel project in Sakhalin in the Russian Federation.
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(Note C) Summary of Significant Accounting Policies:
[1] Principles of consolidation
The accompanying consolidated financial statements include the
accounts of CCA and its subsidiaries (collectively, the "Company"). Accounts of
Roulette have been consolidated from the date of acquisition, September 1, 1998,
to the date on which CCA disposed of its majority interest, December 28, 1998.
Inter-company transactions and balances have been eliminated in consolidation.
SCC is currently generating losses. Accordingly, the minority interest
held is not reflected in the financial statements. The minority shareholders are
not obligated to fund SCC's losses.
[2] 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.
[3] 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.
[4] Foreign currency translation
The functional currency for the Company's subsidiaries, SGTI and SLC,
is the United States dollar. All assets and liabilities, materially all
contracts, transactions and normal business activities have been transacted,
conducted, negotiated and recorded in U.S. dollars. It is the Company's position
that the operations of the Company are not integrally connected to the economies
of Cyprus and Suriname.
Pursuant to Financial Accounting Standards Board Statement No. 52,
"Foreign Currency Translation" (FAS 52), the Company's Russian subsidiary is
situated in a highly inflationary
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economy. Accordingly, the Company's Russian subsidiary's functional currency
will be the U.S. dollar.
The financial statements for the Company's subsidiaries outside the
U.S. have been translated to U.S. Dollars using a methodology consistent with
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation. Assets and liabilities are translated to United States Dollars at
the rates prevailing on the balance sheet dates and the statements of operations
have been translated from the functional currencies to U.S. Dollars using
average exchange rates for the applicable years.
[5] 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.
[6] 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.
[7] 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.
[8] 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.
[9] 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
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fair value based method for employees but instead
discloses the pro forma effects of the calculation required by the statement.
[10] New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in operations
in the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company has not entered into
derivatives contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of the new standard
on July 1, 2000 to affect its consolidated financial statements.
In October 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134 "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", which is effective for the
first fiscal quarter beginning after December 15, 1998. There is no impact to
the Company's financial reporting or presentation due to the adoption of SFAS
No. 134.
In February 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 135 "Recession of FASB Statement
No. 75 and Technical Corrections", which is effective for financial statements
issued after February 15, 1999. There is no impact to the Company's financial
reporting or presentation due to the adoption of SFAS No. 135.
(Note D) SLC income taxes and import duties:
SLC has requested that the Government of Suriname grant it certain
concessions regarding the imposition of taxes and import duties. The Company's
Suriname legal counsel has advised it that based on the Suriname Investment Act,
SLC is entitled to the following exemptions.
o Temporary exemption from income for new undertakings -profits from new
undertakings are exempt from tax during the first six years of operations
subject to a maximum profit of twice the amount invested in the new
undertaking.
o Free depreciation of the first investments for new undertakings - this
facility provides that assets which represent the first investment for new
undertakings may be depreciated without restriction. Accordingly, such
assets can be depreciated when and in a fashion, accelerated basis or
otherwise, in order to offset its profits each year up to the full amount
of the assets that have been initially invested.
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o Temporary exemption from import duties for new undertakings and business
expansions - this facility provides full or partial exemption from import
duties on operating assets which will be used in the operations of the new
undertakings and also materials and goods used to generate such operating
assets.
Accordingly, no provision for income tax or import duties has been made
with regard to the activities conducted by SLC.
(Note E) 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 management division which operated the
Dorsett Regency Hotel for FEC. After a thorough independent 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 he claims is due him for past and
future services under employment and consulting agreements with CCA Companies
Incorporated ("CCA") and Dorsett Hotels & Resorts, Inc. ("Dorsett-USA"), plus
unspecified additional expenses. The Company obtained a temporary restraining
order staying the arbitration and petitioned the New York Supreme Court for a
permanent stay based on the fact that neither CCA or Dorsett-USA had any
arbitration agreement, or for that matter, any agreement with Mr. Michaelsen.
Instead, Mr. Michaelsen's arbitration agreement and overall employment agreement
was solely with the Company's Malaysia subsidiary, Dorsett Hotels & Resorts
International Sdn Bhd ("Dorsett-Malaysia"). On March 31, 2000, the Court granted
the petition of CCA and Dorsett-USA permanently staying the arbitration
initiated by Mr. Michaelsen and as a consequence, Mr. Michaelsen is not
permitted to assert in arbitration any of the claims he alleged against CCA and
Dorsett-USA.
8
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Mr. Michaelsen's company, Zamora Investments Pte Ltd. ("Zamora") which had a
separate contract with Dorsett-USA requiring Dorsett-USA to pay Zamora $80,000
for Mr. Michaelsen's services, has asserted this claim in a new arbitration
demand against Dorsett-USA and has combined such claim with a new arbitration
demand by Mr. Michaelsen against the Company's insolvent subsidiary,
Dorsett-Malaysia. The parties are seeking under these claims approximately
$240,000 in the aggregate. The Company believes, in reliance upon its counsel,
that it has no liability with respect to such claims. Further, the Company
believes that if Zamora or Mr. Michaelsen should prevail, any amount that they
are 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.
In August of 1999, Fox Haven Capital Corporation and United Resources
Partners (Collectively "Fox Haven") filed a Demand for Arbitration before the
American Arbitration Association ("AAA") demanding a payment of $250,000 from
the Company as liquidated damage fee. Fox Haven alleges that the Company
breached the letter of agreement by failing to secure adequate collateral for
the proposed loan according to the terms of the letter agreement thus invoking a
provision in the loan commitment letter entitling Fox Haven to such an amount.
The Company has denied all material allegations of the claim and has filed
counterclaims of $250,000 alleging that it was never in breach of the agreement
and in fact it was Fox Haven that breached its obligations to the Company by
refusing to provide, without good cause, $5 million of capital financing to the
Company and by misrepresenting Fox Haven's ability to make such loan. Among the
damages sought by the Company is the return of a $25,000 commitment fee paid to
Fox Haven and compensation for payments made to third parties in connection with
the proposed loan.
The legal advisers of the Company are of the opinion that Fox Havens claim's
against the Company have no merits, since it appears that the Company made a
good faith effort to comply with all the provisions of the letter agreement
including the procurement of proper collateral which was unreasonably rejected
by Fox Haven. In addition the, commitment letter provides that if the loan does
not close because the lender does not approve the collateral, the Company has no
liability and is entitled to return of its commitment fee. The parties have
chosen an arbitrator in this action, and are presently exchanging documents and
related discovery. The arbitration hearings are expected to commence in the July
2000. Consequentially the Company has not made any provisions in the financial
statements based on the uncertainty of the outcome of this arbitration.
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.
9
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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 operation of a 50% owned
gaming casino in Suriname and the development of a casino and hotel project in
Sakhalin in the Russian Federation.
The Company's original principal business was food preservation technology.
The Company continued making attempts to exploit that business through November
1999 at which time the Company's Board of Directors determined that it would
discontinue all activities and efforts with respect to the food business since
the Company could not effectively develop a sufficient market for its food
preservation technology. Additionally, on November 4, 1998, the Company reached
a settlement agreement terminating all of its hotel operating contracts and
consequently, as of such date had no active hotel management operating business.
Accordingly, the Company has currently and retroactively reported all activities
related to its food division and hotel management operations as gains or losses
from discontinued operations.
The Company began operations of its Suriname casino in October 1998 in
temporary quarters in the hotel where the Company's joint venture completed and
opened its permanent casino facility on March 31, 1999. The Company, with its
joint venture partner, provided the funds to build the 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.
In 1997, the Company began pursuing a gaming opportunity in Asia and is
currently in the planning and development stage, subject to financing, of a year
round hotel/casino resort on Sakhalin Island (the "Sakhalin Project"). Sakhalin
Island is a Russian territory located just north of Japan. This new hotel/casino
will be easily accessible for gaming activities from Japan, China, Korea, and
the Russian mainland. The Company's subsidiary, Sakhalin City Centre Limited
("SCC"), intends to develop a 450-room hotel/casino complex on a ten-acre site
in the center of the city of Yuzhno-Sakhalinsk with further development proposed
at a nearby ski mountain. It is anticipated that the related casino will
initially have 70 tables and 350 slot machines. The City and State Oblast,
currently 35% owners of the Sakhalin Project, will provide the land and an
existing ski resort under a 101-year lease, at no annual cost. The Company will
manage both the hotel resort and the casino for a management fee equal to 3% of
turnover, as well as an incentive fee of 10% of gross profits.
On June 25, 1999, the Company entered into an agreement of ownership
structure with the Arter Group Limited ("Arter") and Valmet S.A. ("Valmet"). As
per the agreement, Arter and/or Valmet were to negotiate sufficient funding for
the completion of the project as planned by the Company, such funding to
constitute 70% of the total estimated cost of the project. The remaining 30%
shall be provided as equity financing to be arranged by the Company. In
consideration the Company's wholly owned subsidiary, SGTI, is to enhance its
ownership in the Sakhalin project to 80% from 65% currently owned by it. The
remaining 20%, subject to final negotiations, will be owned by the Oblast and
the City. If fully consummated as described in the agreement, the Company would
arrange for transfer of 50% of its interest in SGTI to Arter and
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Valmet. Consequently, the Company's ownership in the Sakhalin Project will be
40% after such transfer.
As a result of the Arter/Valmet agreement, the Company submitted a
formal loan application to Sberbank - Savings Bank of the Russian Federation in
November 1999 requesting financing for $106 million dollars. The loan
application is currently being processed.
Currently, the Company has recorded assets related to the Sakhalin Project
(construction in progress and intangibles) totaling 15.8 million dollars.
Results of Operations
Comparison of Three Months Ended September 30, 1999
to Three Months Ended September 30, 1998
Loss from continued operations. The Company incurred a loss from continued
operations of $36,431, or $0.003 per share, for the three months ended September
30, 1999, as compared to a loss of $2,297,865, or $0.18 per share, for the three
months ended September 30, 1998. The substantial reduction in loss during the
current period was primarily due to increases in casino revenues and profits
combined with significant reductions in general corporate overhead expenses.
Revenues. During the three months ended September 30, 1999, the Company had
revenues of $1,698,063 generated by the Suriname Palace casino which began full
operations in October 1998 in temporary facilities and on March 31, 1999, had
its grand opening and began operating in its new larger permanent facility. For
the three months ended September 30, 1998, the Company had combined revenues of
$422,668 from its Budapest and temporary (slot machine only) Suriname casino
operations.
Marketing, General and Administrative Expenses. Marketing, General and
administrative expenses were $1,439,983 for the three months ended September 30,
1999 consisting primarily of $918,142 related to operating expenses of the
Suriname casino and $521,841 for general corporate overhead. For the three
months ended September 30, 1998 marketing, general and administrative expenses
were $1,961,915 of which approximately $1,270,000 related to general corporate
overhead and $692,000 related to casino operations. The $748,000 or 59% 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 salaries, consulting, travel, legal and professional, rent,
telephone and other general office expenses.
Compensation Charges. During the three months ended September 30, 1999,
there were no compensation charges as compared to $750,000 for the three months
ended September 30, 1998. In September 1998 the Company issued 400,000 options
to non-employee directors and reduced the exercise price of approximately 1.5
million options and warrants previously granted. As a result, a compensation
charge of $750,000 was recorded by the Company on the issuance and repricing of
options to all non-employee directors or consultants.
Interest Expense. For the three months ended September 30, 1999, interest
expense was $75,449 as compared to $15,213 for the three months ended September
30, 1998. During the
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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 which the Suriname casino began operating
in March 31, 1999. The prior period's expense primarily related to interest
charges incurred by the Suriname casino on financing provided on the casino's
gaming equipment by its vendors.
Minority Interest. The Company has management control of the Suriname
casino joint venture company in which it owns a 50% equity interest. As such,
the casino's operations are consolidated with those of the Company and a
minority interest is recorded for the 50% interest held by the Company's joint
venture partner. During the three months ended September 30, 1999, the joint
venture company generated net income of $439,083 after deduction for management
fees and interest expenses earned by the Company. As a result, the Company
recorded a minority interest equal to 50% of such amount, or $219,542. No income
was generated by the casino joint venture company during the prior years period.
Loss from discontinued operations. During the three months ended September
30, 1999, the Company incurred a loss of $88,500 primarily attributable to the
costs of winding down the discontinued food operations and legal fees associated
with the arbitration case brought by the Company's former President of the hotel
management division. For the three months ended September 30, 1998, the Company
had a loss of $58,996 which was comprised of a loss on food division operations
of $186,562 combined with a gain of $127,566 from the hotel management
operations.
Liquidity and Capital Resources
Since July 1998 the Company has actively sought to raise cash through loans
or sales of its securities in order to fund its past due obligations, current
operations and completion of its permanent Suriname casino facility which opened
March 31, 1999. From July 1998 through August 1999, the Company was successful
in raising sufficient funds from numerous private investors through the sale of
its securities enabling it to fund its ongoing operational costs during such
period and complete the construction of the Suriname casino. In October 1999,
the Company entered into a convertible loan agreement with a private investor
and received $350,000 which it used to fund current and past due obligations. On
December 22, 1999, the lender converted $185,000 of the loan amount together
with interest and received 1,481,060 shares of the Company's common stock. No
further amount of the loan may be converted and the balance of $165,000 together
with 15% interest was paid on April 30, 2000. Additionally, in January 2000, a
director of the Company advanced $300,000 which the Company also used to fund
past due obligations. The loan is due December 31, 2000 and bears interest at
the bank prime rate.
At September 30, 1999, the Company had a working capital deficit of $1.1
million and had approximately $298,000 cash or cash equivalents on hand. In late
August 1999, the Company began to receive cash distributions from the profits of
its Suriname casino joint venture. Prior to August 1999, all cash profits of the
casino had been used to first pay the remaining balance due on the casino
construction contract and then to repay a $750,000 loan previously made by the
Company's Suriname casino joint venture partner in December 1998. The Company
has received an average of approximately $300,000 per month in cash
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distributions from casino profits during the eight months of September 1999
through April 2000 and expects this to continue for the near foreseeable future.
This cash flow has and should continue to enable the Company to pay its current
corporate overhead expenses, fund its loan obligations and make payments on any
other remaining obligations.
The Company believes that the distribution of profits from the Suriname
casino will provide adequate cash flow to maintain the Company's current
operations for the next 12 months. As a result of the delinquent filing of its
Form 10-K, the Company was delisted by Nasdaq from its 12(g) SmallCap Market
Exchange in November 1999. The Company currently trades on the OTC pink sheets
and expects to have its securities traded on the OTC bulletin board shortly
after the filing of this Form 10-Q.
Subsequent Events
In October 1999, the Company entered into a convertible loan agreement with
a private investor and received $350,000 which it used to fund current and past
due obligations. On December 22, 1999, the lender converted $185,000 of the loan
amount together with interest and received 1,481,060 shares of the Company's
common stock. No further amount of the loan may be converted and the balance of
$165,000 together with 15% interest was paid on April 30, 2000. The investor
also received warrants to purchase 700,000 shares of Common Stock at an exercise
price of $.25 per share exercisable on or before October 11, 2002. Additionally,
in January 2000, a director of the Company (Mr. James V. Stanton) advanced
$300,000 which the Company also used to fund past due obligations. The loan is
due December 31, 2000 and bears interest at the bank prime rate. Mr. Stanton
also received warrants to purchase 500,000 shares of Common Stock at an exercise
price of $.25 per share exercisable on or before January 18, 2004.
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, 1999 and other
filings with the Securities and Exchange Commission.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The following information is furnished pursuant to Item 701(a)-(c) of
Regulation S-K in connection with unregistered securities sold or issued by the
Company:
On July 13, 1999, 100,000 shares of the Company's Common Stock were sold to
Anthony Bartone for $.75 per share. Mr. Bartone also received 50,000
options to purchase the Company's Common Stock at a purchase price of $1.00
per share.
On August 18, 1999, 66,667 shares of the Company's Common Stock were sold
to Anthony Gentile for $.75 per share. Mr. Gentile also received 33,334
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 September 30, 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.
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
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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 26, 2000 By: /s/ Dallas Dempster
-----------------------------------------
Dallas Dempster
Chief Executive Officer and President
By: /s/ Miles R. Greenberg
------------------------------------------
Miles R. Greenberg
Chief Financial Officer
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